IRIDEX Corp (IRIX) 2014 Q2 法說會逐字稿

Greetings and welcome to the second-quarter 2014 earnings call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Will Moore. Thank you, Will. You may now begin.

Thank you, operator. Good afternoon and thank you for joining us to discuss the results of second quarter of 2014. My name is Will Moore, and I'm the CEO of IRIDEX. I'm joined today by Jim Mackaness, our CFO and COO. Jim and I will be delivering some prepared remarks related to the quarter and to the business and then open the floor for questions.

Before we get started, Susan Bruce will read the required Safe Harbor statement. Susan?

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 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; trends in the global healthcare marketplace with respect to the treatment of eye diseases such as diabetic macular edema and glaucoma; development of new products and new applications for existing products; the Company's growth strategy and growth opportunities, including acquisitions, technology investments, and strategic relationships; pricing of the Company's products; the Company's operating expense controls and programs relating to such controls; the Company's share repurchase program; anticipated new product releases; and the Company's financial outlook and performance in the remainder of fiscal 2014 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 28, 2013, 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.

I will return it now back over to Will.

Thank you, Susan. The second quarter and first half of 2014 again showed strong commercial progress as we achieved our ongoing goal of double-digit revenue growth in both periods over the prior year. We generated $10.6 million in revenues, up more than 15% from the second quarter of 2013. We continue to see growing demand for our core products both in the US and internationally as value-based alternative to the current regimen of drug therapy.

Looking at the geographic mix, IRIDEX had a very strong system sales in the US, which was more than offset -- a weaker international result that included no major tender awards during the second quarter and some disruption in South America as the World Cup activities caused a pause in our robust Brazilian product flow. We also continue to see some level of disruption in the Middle East due to geopolitical issues.

MicroPulse, our proprietary tissue-sparing laser technology, is undoubtedly now becoming an established part of the landscape as physicians are gaining confidence using it as a first-line treatment for a variety of ophthalmology disorders, both retina and in the front of the eye. Domestic system sales were particularly strong in the second quarter, led by ramping sales of both TxCell and laser systems with MicroPulse.

We have now been talking about MicroPulse for several years as a commercial platform and having discussions about when and how a tipping point might come about. In response, I've always indicated that while I couldn't predict when it would come, I thought that it was close. I'm still not sure what a tipping point looks like, but I feel very good about a quarter in which we grew our revenues by more than 80% in domestic system sales.

Tipping point or not, as adoption grows and more physicians are exploring the various uses of MicroPulse tissue-sparing laser energy, we are gaining confidence that our strategy and product platform in the vast glaucoma markets warrants additional investment.

First, let's focus on the retinal market. Globally, physicians, healthcare systems, and payers are today struggling with the impact of aging populations and dramatic growth of diabetes. Diabetes and the debilitating visual effects of diabetic retinopathy are reaching epidemic levels, especially in countries where Western diet and lifestyle are a relatively new phenomenon and obesity is a chronic problem.

Up to 30% of all diabetics will develop some form of diabetic retinopathy during their lifetime. As we have stated, evidence indicates the current approach of treating this condition -- expensive drug treatments via injections every six to eight weeks -- is unsustainable. The cost is prohibitive and logistics impossible for literally millions of patients seeking treatment in both the developed world and the developing world. Clearly, the requirements of value-based medicine in this area is resonating around the world.

MicroPulse, with its single treatment efficacy and positive outcomes, represents a more efficient and a more cost effective alternative.

In addition, the safety profile established in retina is also leading to additional opportunity in the marketplace, including glaucoma. As new technologies such as MicroPulse are proven to be safe, physicians tend to begin exploring new uses, building on the work of their peers and looking to new clinical areas where they foresee a benefit. This is exactly what is happening with MicroPulse.

Each month we get word about or are contacted by top ophthalmologists looking to do work in a range of conditions from DME to glaucoma. While we need to be cautious about maintaining robust regulatory controls over how we support these requests and activities, we see this phenomenon as very positive and just one more data point showing progress and opportunity.

Now a few words about glaucoma, an up-and-coming area for IRIDEX and one we believe may rival DME as our biggest growth opportunity in the coming years. In 2013, we began promoting our IQ 532 MicroPulse Laser as an alternative to SLT. Now we are focused on making further inroads in the therapeutic treatment of glaucoma, which is one of the reasons we gave you the heads up last quarter that you would be seeing an increase in the R&D investment.

Now, to be fair, the R&D spend was a bit higher than we had planned in Q2, but we think that investment is delivering great results and will be translated into commercial activity very soon. Most of the glaucoma-centered work has been focused on the development of what we are calling the G-6 system, a laser with MicroPulse and a family of captive disposable probes for the treatment of glaucoma. The first disposable probe will address the late stage glaucoma; the second probe will address earlier stages.

Our clinical investigators have an opinion this earlier stage probe will most likely be used prior to invasive surgeries. Many of you may know that glaucoma is a progressive disease and the efforts of medicine focus on slowing that progression. We believe and the early data show that our MicroPulse probe can be an effective tool to assist with and/or reset the natural drainage mechanisms in the eye.

I will stop here in talking about glaucoma as I want to save some of the details for upcoming announcements and, of course, the commercial launch. But we will have plenty to say going forward, and Jim and I both agree that the investments we are making look to have great early returns.

Stepping back to the organization as a whole, IRIDEX is better prepared commercially and operationally to take advantage of the global opportunity MicroPulse and all our other products present. Jim and I and the rest of our team have for the past 18 months been focused on making IRIDEX an agile, market-oriented, and commercially driven company. Our partnerships and distribution relationships allow us to develop and test products quickly, getting them to market in a reasonable time and then to commercialize more broadly than possible working with just a direct sales force. We believe we are ready to make the next big steps to grow and prosper the Company.

With that, I will turn the call over to Jim to discuss the financials in more detail. Jim?

Thanks, Will.

As we noted in our press release and in Will's comments, our revenues for Q2 2014 reached $10.6 million, up 15% from Q2 2013 revenues. In addition, we saw sequential growth of approximately 2.5% over Q1 of this year. The business continues to display an underlying strength in both domestic and overseas markets and across systems and consumables.

Overall system sales in Q2 2014 were $5.8 million, up 34% from $4.3 million in Q2 2013, with a year-over-year increase both domestically and internationally.

On a sequential basis, system sales were up more than 5% from the $5.5 million reported in Q1 2014. Domestic systems sales rebounded strongly from a slow start to the year, capitalizing on the momentum established early in the spring. International system sales continue to be very strong throughout the second quarter. We continue to see sales of our MicroPulse-enabled IQ products become a larger portion of our product sales as sales of our TxCell delivery device outstripped our ability to supply.

Recurring revenues were $4.8 million in Q2 2014, consistent with recurring revenues of $4.8 million in Q2 2013 and $4.8 million in Q1 2014. Overall gross margins in 2014's second quarter continue to move in the right direction, and we achieved our stated near term goal of 50% as compared to 48.9% in Q1 and 48.7% margin in the last year's second quarter. We view the continued increase to be a positive result, particularly as gross margins continue to be impacted by our strong system sales, especially the international distributors where margins are somewhat more constrained.

Our long-term goal has our product mix including a higher percentage of consumable products, and Will gave a flavor of the anticipated consumable products to come in his opening remarks. This rebalancing towards consumables and increased production efficiencies associated with the revenue growth are part of our plan to achieve our longer-term target of 55% or better.

Operating expenses for Q2 2014 were $4.9 million, up from $4.0 million in Q2 2013. That growth reflects a variety of investments, both commercial and product development, aimed at both near- and long-term strategies to continue growing our market share and opportunities in both retina and glaucoma markets.

Specifically, as we noted last quarter, R&D expenses have increased due to our commencements of various programs.

Will mentioned the cost of the new glaucoma programs impacting R&D, and one additional program has also had a notable impact. The cost reduction program for the IQ platform is fully underway, but the spend is finite. We've spent about $350,000 on the program to date and anticipate that we'll invest approximately $250,000 more between now and the year end. The goal was to reduce $2000 of costs per unit from the product platform, and that is on track. Based on today's volumes, this would generate approximately $0.5 million in additional gross profit annually.

The benefit from this program are expected to be -- come online at beginning of next year. On the glaucoma front, we are working hard to have this ready for a limited commercial launch by the end of this year. Although we recognize there may be some concern over our increased expenditures, we believe these investments to be prudent because they are bounded, and the potential returns are significant and near term.

I'm giving a bit more detail this quarter on R&D costs because I want to make certain that everyone understands that these programs will provide near-term leverage on margins on the bottom line in the case of the cost reduction program and both on the topline and gross margin in the case of the glaucoma program.

In addition, R&D costs included the necessary efforts and expenses to ensure our products are RoHS compliant, which is a European directive that became effective July 22, and our G&A costs included the necessary efforts and expenses to ensure we were able to make our Conflict Minerals Declaration, as mandated by Congress.

With all of that factored in, operating income for Q2 2014 was $0.4 million compared with operating income of $0.5 million for Q2 2013. Net income was $0.3 million or $0.03 per diluted share for the second quarter of 2014 compared to net income in last year's second quarter of $0.4 million or $0.04 per diluted share.

Looking ahead to the third quarter of 2014, we're projecting revenues between $10.0 million to $10.3 million, representing growth of 5% to 8% over last year's third quarter. Gross margin is anticipated to come in between 48% and 50%, and operating expenses are expected to be between $4.6 million to $4.8 million.

During the quarter, we purchased 220,000 shares at an average price of $8.62 per share. Subsequent to the quarter end, we have continued buying shares and have exhausted the share repurchase program established by the Board of Directors in February 2013. In total, we repurchased 377,000 shares under that program for an average price of $7.97. Today the Board established a new share repurchase program, allowing the purchase of up to $3 million worth of the Company's common stock sold over the next 12 months.

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

Thank you, Jim. To summarize my earlier remarks, we believe we are positioned to take advantage of the current macro and demographic trends in the global healthcare marketplace. We are pleased with the results, but we would like to remind folks that we are still a small company with significant upside with significant exposure to international and system sales cycles. The impact of those factors will continue to create lumpiness in our revenue line, but also accentuate the importance of our growing reoccurring sales opportunity in glaucoma and other new clinical areas.

We have a unique, disruptive technology in MicroPulse that is clinically proving itself on a daily basis as a safe and effective treatment for very large and rapidly growing healthcare issues in ophthalmology today, diabetes and DME, and absolutely enormous global issue, and for glaucoma, which are becoming significant global issues given the fast-growing post-65 age demographic.

We will invest in our future when it makes financial economic sense, such as the cost reduction program, with a finite cost and time structure enable us to prove margins. We will invest in product development, especially when M&A assets are expensive, and a share buyback program when we believe our stock is undervalued.

We have created the kind of company that can address these exciting opportunities. That's been our goal since I became CEO, and I believe we have made huge strides in our ability to be successful in these efforts.

Before I turn the call over to the operator for questions, I would like to let you know that we will be participating in the Wedbush Life Sciences Management Access Conference in New York City on August 12, as well as the Robert W. Baird Health Care Conference in New York City on September 3 and 4. For those of you unable to attend, we encourage you to listen to the webcast presentations, which will be available through the Investor Relations section of our website.

I want to thank our employees and our distribution partners around the world for their hard work.

With that, I will turn the call over for questions. And please, one question with a follow-up question, then requeue. Operator?

(Operator Instructions). Larry Haimovitch, HMTC.

Congrats on a nice quarter.

Thank you, Larry.

So, I have a few questions. For either of you, perhaps Will more than Jim, I recently watched a video that was sourced on your website from a doctor in Washington, DC, from DC Retina. And he was talking about his very happy results and success with MicroPulse for diabetic macular edema, but he also made some reference to the fact that he thought it had some applications for macular degeneration. And Will, your prepared remarks talked about growing uses, and I wonder if you could comment on that? I was quite intrigued with that idea because macular degeneration would represent another huge opportunity for IRIDEX if you were to make any headway there.

Okay. So, Dr. Adams at DC Retina, that was a newscast in Washington, DC, that went on maybe six weeks ago, I think, something like that. And I think that's a perfect example of what I had in my prepared remarks. When medical technologies or devices are really proved to be safe and there's disease states that are similar, doctors are going to tend to try to explore or try something new. And I think that's what he's saying, is I've used this on my DME patients, but I think it has application, and his comment is, it does.

At this stage, we've heard from a couple other doctors that have done similar things, but we're remaining highly focused on retina and beginning to open the aperture in glaucoma because that's the same type of thing we're hearing about MicroPulse in glaucoma. And we'll let that percolate along a little while and see how the other doctors come up with the answers. But I think the diseases are similar enough that there's probably some use for MicroPulse in that area, but we will continue to explore and look at it over time.

Great. Okay. Second question for either of you, your guidance for Q3 is conservative. We all understand that it's better to under promise, over deliver, but 5% to 8% would strike me as being quite conservative. Do you see something in the trends of the business at this point after a month that makes you concerned, or is it just the fact that you do have, as you've said many times in this call, it's a lumpy business? There are geopolitical risks, etc., etc., that just make you want to guide more conservatively?

I'll take first crack, Larry. It's Jim here. I think, yes -- I think to your point, the challenge we face on the guidance side for Q3, it's the vacation season on a global basis in the month of August. And the month of August is ahead of us right now when we're talking, so we have to be a little bit cautious about what that means and whether, as we would typically expect, a little bit of slowdown in August and how much we ramp up in September.

So, you are saying conservative. I think we are saying we think that's a realistic band that we are aiming for and just trying to factor in how August plays into our business.

Okay. I've got a couple of other questions. Let me jump back in the queue and let a couple people go, and then I'll come back in.

Thank you.

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

Real quick, the growth in the quarter, can you give us a breakout of what was unit growth versus price increases?

Well, we don't get into that level of detail, but I would say, to try and give you some color, there was definitely unit growth, for one. The other element that I think is the system ASP went up, and by that I mean that we've been selling laser consoles. And with the introduction of TxCell as a delivery device, we now have a situation where we have a laser console and TxCell being sold, which has taken the overall system price up.

And then the third component within it is we have been and we do continue to look at the pricing of the MicroPulse as a full value, add-on option, and we continue to basically get an increasing ASP on that. So, it's a combination of all three.

Okay. But I'm just trying to get a sense of where the bulk of the growth occurred. Is it skewed more on the price side, or was it more skewed on the unit growth side? The only reason I'm asking is because following with Larry's question on the guidance for the third quarter, I'm trying to get a sense of the disconnect. Even though you said that August is a vacation month, last year at this time you put up 21% growth. So I'm just trying to get a sense of what's going on.

No, understood. Obviously the issue is, as you said, 21% last year, and now we have to grow above that rate this year. So we have the compounding challenge going through August. I would just say it's been a combination of increased units and increased system ASP would be the two drivers.

Okay. I'll hop back in the queue.

(Operator Instructions). Larry Haimovitch, HMTC.

Two more questions. One, Jim, you referenced the disposable revenue, and it looks like you've had a couple of flat quarters in a row. I'm kind of surprised, given that systems sales are so strong, that the disposables aren't picking up a little bit more momentum. Is there anything going on in the disposable business that would shed a little bit of light on that?

Well, I do think to your point, Larry, on the system sales, we should remember that the penetration and the focus of MicroPulse-enabled systems, and particularly MicroPulse-enabled systems with TxCell, would be clinic, so in the office side of the equation. So, from our perspective, it's not necessarily surprising that the success of those system sales has not led to an increase in EndoProbe consumption.

Okay.

So the stability in the EndoProbe continuous wave surgical site and growth in the office.

Weren't you going to be launching a couple of new products, the Scraper and there was a couple of other new disposable products which I thought looked quite promising? Have they been into the market yet, or is that still coming later this year, Jim?

The Scraper has recently gone in. I think the one that we'd like to see, because there's a fair amount of excitement from the sales channel, is a product that we are actually putting in in August in a limited release, which is the extended reach EndoProbe. And we know from a number of our customer sites that the adjustable intuitive probe that we have is somewhat criticized because it doesn't have the reach that the doctor would really like. So I know there's quite a lot of enthusiasm in the channel to be able to get their hands on the -- we call it the [ANI XR], which is literally being put into their hands in August.

Okay. And then one more follow-up question, Jim. On the buyback, the additional $3 million buyback, is that a 10b5-1, or is that -- which means you just buy it, of course, at regular intervals, or is that a more opportunistic, more normal buyback, but more limited by the fact of how much trading volume there is, etc., etc.?

From the Board approval perspective, it was basically to allow the $3 million to be invested. The decision of whether we do it under a 10b5-1 is in front of us. We typically have used that mechanism, but we have to make that decision coming up in the open window.

Okay. And when does your window open? Is it two days after today?

Tuesday.

Tuesday, yes.

Tuesday, okay.

And Larry, whether you are on -- I think this is correct -- whether you are on a 10b5-1 or in the open -- or just a regular purchase, you are still restricted by the number of shares you can buy by the trading volume on an average weekly basis.

I guess the advantage of the 10b5-1 is you don't get restricted with quote inside information or significant information in trading. And you wouldn't get closed out, for example, I guess, in September for the last 30 days or 15 days of the month when typically insiders can't buy or sell.

Yes, that's correct, and that's why historically we have made use of that. Because to Will's point about with the volume restrictions and if we were only to do our activities during the open window, it would be a fairly restrictive program.

Right.

So, to your point, we've made advantage of the 10b5-1 in the past.

And that would seem to make the most sense again, wouldn't it, Jim?

Yes.

Okay. Great. One plus one equals two, right? Thanks, guys.

Thank you. We would now like to turn the call over to the speakers on line to proceed with any closing comments.

All right. Well, I'd like to thank you for attending today's conference, and we look forward to providing additional information as we go forward around the glaucoma initiatives. And hopefully we'll see you at the AAO and on the next conference call. Thank you.

This concludes today's teleconference. We thank you all for your participation, and you all have a great day.