IRIDEX Corp (IRIX) 2015 Q2 法說會逐字稿

Greetings, and welcome to the IRIDEX Corporation 2015 second-quarter results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. William Moore. Please go ahead, Mr. Moore.

Thank you, operator. Good afternoon, and thank you for joining us as we discuss the results of second quarter of 2015. My name is Will Moore. I am the CEO of IRIDEX; and I am joined by Jim Mackaness, our CFO and COO. Jim and I will be delivering some prepared remarks, and then we will 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 the effect of currency exchange rates and other global and domestic market conditions on the Company's business; the product mix composing sales in future periods; demand for the Company's products, and market acceptance of the Company's new products; the timing and outcome of any steps that the Company may take to address supply chain issues; the launch date and adoption of the Company's iClip closure device; the adoption, continued development, pricing model, and contribution to earnings in future periods of the Company's Cyclo G6 product platform; the impact of these and other new products on the Company's business; trends in the global healthcare marketplace with respect to the treatment of eye diseases such as diabetic macular edema and glaucoma; 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 cost reduction programs, and the impact of these controls and programs on the Company's financial results; the Company's changes in personnel; the Company's share repurchase program; the Company's financial outlook and performance in the second quarter of 2015, fiscal year 2015, and future periods; changes in the Company's margins in future periods; regulatory developments and approval for Company products; and the impact of sales cycles, tax rates, and cash requirements related to tax obligations in future periods; and other industry-wide factors affecting the Company's business.

These statements are not guarantees of future performance, and actual results may differ materially from those described in these forward-looking statements as a result of a number of factors. Please see a detailed description of these and other risks contained in our annual report on Form 10-K for the fiscal year ended January 2, 2015, 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 now turn the call back over to Will.

Thank you, Susan. I would like to begin today with an update on our revenue pre-announcement. If you did not see the announcement a few weeks ago, we notified investors that IRIDEX felt the need to delay or halt a number of distributor shipments due to dislocation in the supply chain caused by some quality issues. I will make two general points in addition to what was in the announcement, and we will be happy to answer questions on this topic later on in the call.

First, the issues causing a disruption in quarter-two revenues were not on the demand side. I want to make that very clear. The demand for our products remains robust. And in fact, the buzz around our recently introduced laser system for the treatment of glaucoma continues strong, and is very encouraging. Second, there is no safety issue. Our lasers and all of our ophthalmology devices are built for safety, and that has not changed.

I would characterize the issue we face in the second quarter as straightforward growing pains. The IRIDEX success with MicroPulse has taken us from a company generating around $8 million per quarter to a Company generating $11 million-plus per quarter. Until our decision to slow things down in the second quarter, we had delivered 10 successive quarters of record revenues.

It's not an excuse, and we ought to do, and will do better. I'm pleased to say we have identified the causes of the issues that arose and are well into the process of taking corrective action. The issues include an RFID antenna, a software glitch, and a small motor malfunction. We see fixing these items as a short-term production issue in terms of internal controls and making sure we avoid these issues in the future. We are taking extra steps and adding to our bench strength in engineering and quality control.

We're implementing additional quality protocols to screen products before we ship to be sure we catch any problem before they go out the door. This means we are going a little slower and adding a little extra expense in the short term. The great news is that we are continuing to ship, and our new customers are happy. Also, there have been no cancelled orders.

We expect in a matter of weeks to be back to 100% in filling our growing stream of orders. Our run rate remains very strong. I feel comfortable saying, by Q4, we will be back in growth mode with another uptick in our numbers.

Jim will go over the financial details, including revenue breakdowns, margins, and an update on the stock buyback plan in a moment.

But a highlight of the quarter has been our staged launch, or controlled launch, of our glaucoma product platform, the Cyclo G6 featuring MicroPulse. We had a very strong start right out of the gate, and it has continued. We launched the Cyclo G6 in February with two poster presentations at the American Glaucoma Society meeting. We spent some time populating the direct salesforce with their demos for the Cyclo G6. As of June 30, we had delivered a total of 25 systems, including 16 in the second quarter. We are targeting 100 by the year end.

What is gratifying to us is how physicians are responding. They are seeing the utility of the G6, and many are performing multiple cases. Our original projections of $75 million to $100 million annual US market opportunity anticipated being able to achieve an average of 10 procedures per month, per laser, with two to three lasers being purchased by each surgery site. We already have a number of our early adopters achieving these monthly procedural volumes, and the two of the initial sites are in the process of purchasing their second laser. This is all very early data that gives us strong confidence in the opportunity.

The G6 represents a great example of our product innovation and development capabilities. It's a substantial product for glaucoma specialists and enhances our reach into a broader group of ophthalmologists, both within the US and around the world. It is also a great example of how we are shaping our business model to increase the sale of follow-on consumables under a razor/razor blade model. Our goal is to develop a reliable, durable, recurring revenue stream with this and other systems.

We have sold both capital equipment and consumables, but the G6 is our first truly integrated platform, and our first laser system designed specifically for glaucoma. At the moment, it includes a dedicated laser and two single-use probes, including the patented MicroPulse P3 disposable. Our intention is to introduce another probe for the G6 in 2016, and continue to add to our consumable product line on top of the G6 platform.

I would also like to add that we continue to actively look for strategic opportunities in the marketplace. We're talking to new potential partners and other small companies that may be synergistic fits for us.

Before I turn the call over, I would want to briefly comment on the news from earlier in the week. I would like to offer Jim Mackaness a few words of thanks for all he has done for IRIDEX. Jim came to IRIDEX when the Company was struggling. He has played a huge role in rebuilding IRIDEX into the commercially oriented company we are today and in creating a tremendous amount of value for our shareholders. Obviously, we hate to see him go. Jim has been a great partner for me, a great steward for the Company; and all shareholders owe Jim some measure of gratitude.

That said, the business moves on. And we have already commenced the search to find a world-class CFO to fill his shoes. We look forward to filling the role and to moving towards our goals and continuing to scale this business.

With that, I will turn the call over to Jim. Jim?

Thanks, Will. As we noted in our press release and in Will's comments, our revenues for Q2 2015 were $9.0 million compared to $10.6 million in Q2 2014. Overall system sales in Q2 2015 were $4.3 million compared to $5.8 million in Q2 2014. Domestic system sales were $2.2 million compared to $2.9 million in the second quarter of last year, while international system sales were $2.1 million, down from $2.9 million in the 2014 second quarter.

The shipment delays we noted in our pre-announcement impacted overall revenues, with international distributor shipments particularly impacted due to our decision to slow the business down until we had resolved the production challenges we experienced. International system sales also continue to be impacted by the movement in exchange rates, although to a lesser extent than we reported last quarter.

Recurring revenues were $4.8 million in Q2 2015, consistent with recurring revenues of $4.8 million in the year-earlier period. The launch of the Cyclo G6 system had a positive impact on this year's second-quarter recurring revenues, and we expect this to continue as we build on the momentum and carry on with the staged rollout.

Gross margins in the 2015 second quarter came in at 46.7% compared to 50.0% for Q2 2014. Margins were impacted by the lower overall revenues during the quarter and reflect the challenges we faced, and with the foreign currency movement creating some downward pressure on international systems pricing. We see opportunities for margin improvements during the second half of this year through volume efficiencies, with anticipated revenue increases and anticipated increases in consumable sales associated with the launch of the Cyclo G6 system.

Initially, we launched the Cyclo G6 system with a very disruptive pricing model with the thought of accepting some gross margin compression as we built up the installed base of the Cyclo G6 lasers. However, due to the reception we have received so far, we have increased the starter package from $14,500 to $18,500, and this is anticipated to largely mitigate any effect on overall gross margin.

Operating expenses for Q2 2015 were $5.0 million, up slightly from $4.9 million in Q2 2014. The growth over last year reflects a variety of investments, both commercial and product development, for near- and long-term strategies to continue growing our market share and to take advantage of opportunities in both retina and glaucoma markets. Consequently, we reported an operating loss in 2015 second quarter of $0.7 million compared with operating income of $0.4 million in the prior year's second quarter. The net loss for this year's second quarter was $0.7 million or $0.07 loss per share compared to net income of $0.3 million or $0.03 per diluted share for the prior-year period.

For the 2015 third quarter, shipments will still be impacted as we complete the fixes and make certain that the outgoing products are free from issues. However, we anticipate revenues to improve over Q2, and come in between $9.7 million to $10.0 million.

Gross margin is anticipated to be between 47% and 49%. And operating expenses are expected to be between $4.9 million to $5.1 million. And we anticipate that the fourth quarter should be free of any residual impact from the shipment interruptions, and back to a more normative pace.

Turning our attention to the stock repurchase program, as of July 20, 2015, we had satisfied our share repurchase program established a year ago, buying approximately 367,000 shares at an average price of $8.17. Effective today, the Board established a new share repurchase program, allowing the purchase of up to $2 million worth of the Company's common stock over the next 12 months.

Finally, I would like to thank Will, the Board, all of the employees, and all of you for the kind sendoff I have received following Tuesday's announcement on my impending departure. It has been a pleasure working with and serving all of you in my roles at IRIDEX over the last 7 1/2 years. I am very confident in the plans and opportunities at IRIDEX. I think the Cyclo G6 is going to be a great growth catalyst. And I am certain there are many good things to come in the future for the Company and its stakeholders.

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

Thank you, Jim. I would like to conclude by reiterating that the challenges that arose in the second quarter, and our response that will take us through the third quarter, have nothing to do with demand of our products. We are disappointed that we had to break our string of 10 successive record revenue quarters. Fortunately, we are not seeing competitors take business away from us. Demand remains strong, and we continue to see a growing rate of orders.

That said, we are in no way taking anything for granted, and know we need to maintain our track record of the highest quality and dependability in the field. We have identified the specific issues that affected our production, and are only a short time away from being back to 100%.

We continue to make inroads with our value-based medicine approach from emerging markets, which is additive to our growth in the US. We continue to develop new products and product platforms like the Cyclo G6 that show a huge potential in the growing glaucoma marketplace. Our products are a natural fit for this market, and we are focused on capturing large part of it as we continue to build a recurring revenue stream that will remove the lumpiness from our results.

With that, I will turn the call over to the operator for questions. Operator?

(Operator Instructions). Sam Bergman, Bayberry Asset Management.

Best of luck, Jim, on your new endeavors.

Thank you, Sam.

Will, a couple questions on the product issue. Can you tell us how you decided the issues at hand are going to be fixed? And how do we know those issues won't come up in the future? What do you have for protection against all those issues?

Well, the first thing we had is our Vice President of Operations formed a steering committee to identify the issues that came up. We categorized them and then began to attack them. We have hired two new individuals, one of which is an RFID expert; and within a very short period of time, we discovered what the problem was on the RFID antenna issue. And that's really not a scientific issue; it's simply that the antenna and the tags must work in harmony. And when their peak performance values drift a little bit, you can -- it's kind of like a cell phone, if you will. If you start to lose package, and you lose communication. And Howard, the new gentlemen, discovered that, went back to the vendor; and they tightened up the spec. And that's what we are seeing improvements there.

In regards to software things, that's just working your way through it. You find a little bug, and you go back and deal with it.

And the last one, I'd say the malfunction on the motor -- that was simply using trim pods that for some reason would drift in shipment. We can change that to fixed resistors, and that puts us back in place.

I don't think these specific problems will arise again. But any manufacturing business can have little glips here and there. But I think the big piece is procedures and policies have been put in place to prevent us from letting those kind of vendor issues drift and cause us some problems in the supply chain.

(technical difficulty).

No, no; that's it.

So going through all these -- the 10 quarters that you had all this growth, none of these quality issues arose at all, at that point, or at any point during the 10 quarters. I'm just wondering, who lost the eye on the ball to have those happen? It just doesn't make a whole lot of sense; you had all those issues in one quarter.

I think it's that it's like the perfect storm. And I don't think anybody really took their eye off the ball in that regard, Sam. My interest is fixing the problem and solving it, and then putting corrective action in place.

I'll give you some examples of what can happen. You have a vendor shipping you something on a regular basis for years. And I think it just drifts a little bit out of spec. Okay, you catch it and you solve it. If it drifts a little bit, you don't catch it, and there's where it happens.

But the problem that happened -- we have issues, and we have had since the day I've been here, little problems that come and go. You never know about them. Okay? But what happened approximately 6 weeks ago is we watched what the -- what I'll call the complaint ratio go from the 2% to 3% range -- jumped overnight. And all that means is something got in the production line and there was a problem. And that's when we said, hold back. Let's identify it, and let's fix it and deal with it. And that's what was done.

Okay. Going to the second (technical difficulty), let me ask you -- that product line, the G6, how many modules do you have of that now?

We delivered, through the quarter, 25 to new customers. These are not our investigative customers; these are new customers. And we've put our demos into the US. The US salesforce now is totally outfitted with demos. So we have revenue of $25 million and demos of another, I'll say, $18 million or something of that nature because we've got some within the independents. There's nothing outside the US on that product at this point in time.

How much of a market is there outside the US at this -- even though you haven't put any out there?

A general rule of thumb in the medical device business, you look outside the US and you say, it's equivalent to the US market.

So if you look at what you do with your other products, it seems like the ratio of 60/40 or 55/45, overseas/US -- when should we expect some overseas in terms of alliances with partners to bring that product there?

I think that has more to do with our ops department. Every time you bring out a brand-new product, you are going to run into little glitches or bugs when you start. So as Ron, our VP of ops, goes through this deal, he will give me the green light that says we can produce any -- going from 20 or 30 a month to 100 is relatively straightforward. But going from 0 to 20 or 30 is the difficulty. Once he says green light, then we will deliver. I suspect that's some time towards the end of the year/first of the year.

The other part of that is, Sam, we have to create -- we know the science in this works well. But there's a little bit of art or technique on how you use it. And you want to make sure that the doctors get into using it correctly, so that if it doesn't give them the results they want, they know that it's their issue, not the product's issue. And as we build that community, and Ron tells us that he's got the ability to gear up, we will expand to do the same thing outside the US.

I see. So it will become a terrific product, once you start reaching those 100-plus numbers?

Well, I know you are great model builder; you can look at it and say at how many sites. There's roughly 1,500 to 1,800 sites in the US that are doing this type of treatment; each one doing 1 to 3 lasers, and each laser doing 10-plus probes per month, at a price point between $150 and $200 each probe. You can see how it works.

Right. And the last question is on R&D. What is your expectations on R&D the rest of the year?

I don't understand the question. What do you mean by expectations?

In terms of no growth, increase in R&D? Do you have any numbers for us on that?

Expenditures-wise?

Expenditures-wise, right.

Sam, I'll jump in. I think probably we've got two mitigating forces, which means probably end up at a little bit level. In other words, having finished off the Cyclo G6, we have got a couple of the other programs that we are looking to ramp up; because, ultimately, we want more probes. That will see a little bit of diminishment in the expenditures. But at the same time, back to one of Will's earlier comments, we are looking to increase a little bit of the bench strength. And it gets back to your comment about how we're going to make sure that we don't end up with these types of spec issues on our products going forward. So the net of it is probably it will be somewhat flat through the next couple of quarters.

And just the glaucoma product with illumination -- when is that expected to be out?

It's really awaiting FDA clearance. In other words, we have all of the componentry. We're just finishing up on the illuminated probe, one of the illuminated probes. But we really think the gating item with that is with the FDA. And as you know, that's a little bit difficult for us to forecast. But we anticipate putting our submission in very shortly, and then just seeing how long the review process is to get it out. We don't think it's a high risk because it is just really getting the clearance on the illumination concept. But we do have to go through that process to make sure we've got everything lined up.

Thank you very much.

Larry Haimovitch, HMTC.

Hey, Jim, all the best in your new position.

Thank you, Larry.

We're going to miss you. Hey, Will, in checking with some of the doctors, the feedback I've been receiving on the glaucoma initiative is very positive. I'm wondering if you can share some of your own experiences. I know you get out in the field; I know you talk to doctors pretty regularly. What kinds of feedback are you getting, both good and/or bad, regarding the product itself at this point?

Okay. Larry, I'm going to answer that in two parts. One is just a general statement from a physician, and then I'll give you three different patient data points.

A local physician here has said from the beginning he has achieved a success rate of approximately 70% to 75% reduction in IOPs to a level that he is satisfied with, and that has improved to about 80% as his experience has gone up. And he says this is compared to about a 50% success rate with SLTs over a six- to 12-month period. That's pretty exciting for me, on one side.

Now, if I look at patients, just to give you an array of patients, patient one was a patient that had a risk of incisional surgery. It was a 52-year-old man in New York; presented with IOP of approximately 32 on max meds. He was prone to heavy bleeding; thus, the risk with the surgery. Perform the MP3 and pressure has decreased to 19 and reduced to two meds.

Another female patient presented herself with excessive eye pain caused from high pressure. She was from Poland, Ohio, presented with an IOP of 38, in massive pain on max meds. Performed the MP3; IOP reduced to 23 on the first day, and she felt much better and was reduced of pain from the pressure in her eye.

The third patient had had a cornea donor. The patient in New York presented with an IOP of 44 on three meds, previous cataract removal, and penetrating donor cornea. Performed the MP3; pressure decreased significantly to 18 without disturbing the donor cornea, nor creating any intraocular inflammation.

I think those kind of responses are just a sample, and I could go through a number of them. But I think that's what gives me the excitement. The product works. The product delivers results, and the doctors seem to be very happy.

And as you get more mature in that product line, the disposables become a much bigger part of the mix. And I'm assuming those disposables would carry considerably better margins, gross margins, manufacturing margins than you do on your capital equipment.

Well, I think the first part of that question is absolutely correct. We have a few customers now that are in excess of the 10 probes per month. So I believe that that is working fine.

I will let Jim answer the question on the margins.

Yes. Larry, you are absolutely correct. The advantage we have is, on the probes side, is we have very healthy -- they would come in at the top end of our range on our margin products. So that makes it very exciting for us.

So this product line, as it grows in importance over time, will lift up overall corporate gross margins.

Yes. And you've seen them -- if you have seen any of our investor presentations, you will notice that within the financial goals we have always stated the idea of being able to get ourselves to a target of greater than 55% on the long-term gross margin. And the drivers have always been, first and foremost, the volume. Recently, up until the last quarter, we saw the benefit of that. We've done a little bit of cost reduction, which is helping. And the third component was always the growth on the consumable part of the business. And I think now we are starting to be able to show to the external world what we meant by that statement.

And so, Larry, to your comment, yes; one would anticipate that that would drive us to a more heavier mix on the consumables to capital. In the same presentation, it kind of looked to the 60/40 mix. And the net-net of that is -- it's pretty self-apparent; if you grow the highest-margin contributing product line, you would anticipate your overall average margin to continue to move up.

Great. I have one more question, and I will jump back in the queue. Will, you're going to ship 100 this year; that's the target. I'm assuming that next year you could do better than that, given that you wouldn't be in a controlled launch. Is that a reasonable assumption, that you could easily do much better than 100 next year; and by the end of next year, you could have well over 200 installed base? Am I thinking correctly here?

You are thinking correctly.

Yes? And?

Are you working for our guidance number? The idea --.

Well, no, but it was a very terse answer. Do you want to give a little more color on that?

Okay, I'll try to answer your question.

I knew [you would give] a little here.

Okay. I think we're going to do 100 units within the US, with our salesforce here. And we should be in full operation early, early 2016, on a global basis. I don't see why the US can't duplicate what they are doing this year. And I don't see why we can't be equivalent on an international basis for 2016.

Okay. And the international business model would be the same? It would be [exterior] the disposable of capital equipment first, followed by an ongoing consumable?

That's correct. Now, we haven't talked about it, but the issue with the probes -- in the past we have produced very high-quality probes that would last -- for example, the G probe, they would use it 10, 15, 20-plus times. These new probes have a life to them that would assure us that they can only use them a few times before they are discarded, and they get another one.

Okay. So, in fact, it's not just a one-time use. In thinking about my model, I was thinking 10 probes per month would be 10 procedures. But you are saying that it could actually be more than 10 procedures.

Yes. I think it's possible, Larry. I think what's going to -- this is conjecture and opinion -- is that physician A is going to buy them and treat patients one at a time, and throw them away one at a time. And then he or she is going to say, you know what? I'm going to have an IRIDEX G6 day, and I'm going to line patients up. And that probe has a life of 90 minutes before it dies.

Oh, I see.

I could do three or four patients that day that want to do another one.

I see. Okay. That is how could get more than one use out of the probe, is you line up several patients, and go from patient to patient and do it.

That's the only way you're going to get it. And I think doctors will try to figure out ways to do so.

Sure.

Yes. I hope they don't. But that's my belief what's probably going to happen.

Well, we will keep it a secret. We won't tell anyone.

All right. Well, you made me tell you.

Okay. But doctors don't read the transcript, so we are okay. Thanks.

[Paul Svets], Private Investor.

Half a dozen questions, but brief answers will be fine. You folks stress the fact that there were no safety issues involved. Does that also mean that there was no requirement to notify the FDA of whatever recall you did?

First of all, we did not do a recall. And the reason I say there's no safety issues is because the instruments performed as described. And if they did not receive appropriate communication, they would not turn on.

Got it. And the second thing is, the expenses for replacement of units in the field already are -- and I'm just looking for just a rough ratio -- most of them in this quarter? Will there be some expenses in next quarter? How should we look at it?

They have been bleeding through -- so most of the impacted units have already come back in and been repaired. One way of looking at your question, and one way we looked at it here, is with regards to the warranty reserve. The good news with all of this, within that context is, because of the nature of what the issue is, it's a relatively low-cost fix (multiple speakers) component parts and the labor involved are very, very minimal. So we have really been working through with any customer complaint real-time. And as you can see, to date, we've really not seen any really material impact on the cost side.

So you treated this as a repair issue.

Yes.

Okay. And the third question is -- and I was going to ask this relative to international sales, but it looks like you haven't gotten there yet; and that was the impact on the quarter of the strength in the dollar.

Well, the strength of the dollar has impacted us. Jim mentioned it on his remarks, that quality had bigger impact, that the currency exchange rate had a lesser impact. But the issue comes from a variety of things. One, we all know about the euro getting closer and closer to parity to the dollar, which gave our European competitor a pricing advantage of 25%-plus or so. The yen is doing the same type of thing, and we have a Japanese competitor that also is enjoying a little bit of a benefit.

And we have an Australian competitor. And when the commodity issues took place, and China began to buy less or [say] less, then the Aussie dollar, the Canadian dollar -- they all dropped. So it has an impact. And I will feel better next quarter, when we have the quality issue behind us, to give you a better understanding of what that impact is, because it's kind of hidden into this quality issue. But it does have an impact.

So you feel your differential advantage in the marketplace will overcome the additional expense people are looking at?

I think there's a couple answers to that, Paul, one of which is: when we talk about MicroPulse, yes, I do believe that. When we talk about legacy lasers, that's a difficult answer. When it comes to our existing customers buying probes, it's not a factor.

I understand. And the other and the last question has to do with the new probes, because I haven't had an opportunity to really look and understand about them. But if they are going to be reused, are these devices that need to be sterilized each time they are reused?

No, they are -- so the probes on the Cyclo G6 are FDA-approved for single use. So they are in the single-use, and there is no IFP or any concept with the idea of how to sterilize (technical difficulty).

Got it.

The comment Will alluded to a little bit, based on Larry's question, was the way we, if you like, facilitate the single-use is we have a 90-minute expiration clock on the probe. But it's all set up with the idea of allowing the doctor sufficient time to be able to take and treat one patient.

Well, Jim, thank you for your service here. I know you guys made a very good team, and I appreciated the communication over time.

Well, thank you, Paul. That's very kind.

Stan Mann, Mann Family Investors.

I have several questions. One, cash on hand -- I don't have the sheet in front of me. Is it $9 million, $10 million?

It should be 12 point -- I'm looking at it right now -- $12.2 million.

Okay. Can you give me a frame on plans for usage other than stock buybacks?

Stan, it's going to be the same as we've said. That's one part. I'm very predictable. We will use it as a buyback, as you said, when we think it's undervalued. Otherwise, it's there, and it will be used for development and it will be used for opportunistic acquisitions if they come about.

My second question is -- Jim has done a great job. And we don't have great depth, so my question is how do you plan to handle the transition and keeping the accounting and everything going with Jim leaving, I think, after this call?

Well, I'll answer the question in a couple ways. One, we have great depth in the financial department. Jim has done a great job in his group. And our Controller has been with us for quite a while. I don't want to take anything away from Jim, but Romeo produces the Qs, the Ks and the proxies, and everything comes out on time without issue.

Where I will have a hole is on the forward-looking planning session, the financial modeling, and that area. We had an individual in this week. He's coming back to see Jim next week. And he will be a temp to deal with that part of the modeling side. I have no issues with his ability to do so. And it will be a short-term fix while we go through the CFO search.

Now, Jim may have another comment. I'll let him respond if he has.

I just want to say, thank you, Stan.

Okay. I have a couple more questions. One, we are thinking of a larger company. And it seems to me, we need to add some depth to our team, and experience. Can you talk to that, Will, what you see as the building of a team so we have backup and we can grow to $100-million plus?

Sure. We don't disagree. Howard came in. He's a PhD out of Caltech, worked for research in Bell Labs, has been in a few other medical device companies. And he joined us six weeks ago.

In R&D, Will?

Engineering R&D. And he will be responsible for the continuation of advancement in our current laser systems. He's a systems engineer, RFID expert. And so -- then we have recently hired a fellow by the name of Jeff Smith who has become the head of our software development team. And as you know, in our products there's always a lot of embedded software. And he has been in the medical device business for quite a while.

So we have been adding bench like that. We've added to the sales department. We have gone from having -- we're up to 11 direct. And now I think we are 19 independents, so we're nearly 30 people in the field. And we have added people in marketing. So the OpEx goes up for a reason. And there is new bench strength, one of them, is we have been adding --.

Well, I'd like to see the OpEx move up more to get our sales and products. I have one other comment. It may disturb you. But my experience investing is that for some reason, laser companies -- even ones with good products, like Syneron or Elos -- do not get high P/Es. And the ones that have devices -- and I think I have communicated with you [a like stance] there are very few companies with devices for glaucoma.

So can you talk to us about what you see in your vision on expanding us into an area that will get us a better value? Is that the way to put it? So you know what I'm talking about because I sent you --.

Yes. So I think our value in our P/E was pretty darn good before we stubbed our toe. And I would agree with you on the comments about the P/E on laser companies. But the ones you are talking about are in aesthetics or in dental. The big issue with laser products is you build something; you sell it once to the doctor; the doctor gets tremendous value that day, and it gets better for him or her as you go over time, because they keep using it more and more and more. And we receive none of that residual value.

We have changed the model. And Jim has said in his piece that we're going to get the margins up because we're going to keep developing more and more high-margin disposables. The glaucoma is a perfect example of that. And where you will start to see that P/E, or that valuation metric, increase is when we can show that we have exponential growth caused by the use of those probes on an ever-increasing installed base.

What has happened over the years at IRIDEX -- we had a small -- I shouldn't say small. We had a reasonable disposable business. But every year, we had to start over, and start selling hardware again. And what we need to do is increase the number of disposable products that are predictable at high margin, and augment that with hardware versus the other way around.

Okay. So you don't see an opportunity with all our cash to do anything in spreading beyond lasers and the model you have? That's a long ask.

No, that's not what I'm -- I'm sorry if I left you with that impression. No; we have made the change here from being a laser company to an ophthalmology company; it's not clear to the outside world yet, but to an ophthalmology company that works in both retina and glaucoma. It's very different than just being a laser company trying to find new markets for lasers. We have come out with the green tips. We sell $2 million a year of those.

We continue to find ways to expand and deliver new products to those two customer bases. We're not looking for new customers. We are looking for -- we're not looking for new markets and new customers. We are looking for new customers in our existing markets. And we're looking for widgets, gadgets, and small, inexpensive hardware that we can sell to that customer.

And you can envision us over $100 million near-term, in a reasonable term, your vision?

Give me what reasonable is.

Well, I don't know. I'm just trying to see what you think we can be. That's all. (multiple speakers)

Some of you may know me from a previous life. I just don't think $100 million is enough.

Okay. So I just have one other question. And I think you have done an amazing job -- both of you -- Jim, and you, Will, as a team. So what do you do with this Australian and Japanese competition, since we both know there are no borders anymore worldwide?

Well, I think that the issue is on our legacy lasers, we will see some margin compression due to the currency issues and pricing; and, therefore, you have to come out with newer products that have defensible niches that you can get your margins back.

So you think that your products are more innovative, better, and can hold market share worldwide? I mean in Japan, and the --.

Yes. I can tell you G6 is innovative, and no one is doing what we are doing. MicroPulse is innovative, and we are able to maintain our position on that. Old-line continuous wave lasers that we have been making for 20 years -- there's a number of people fighting it out on a daily basis for those customers. And we will do what we can to maintain that business because it does -- and generates disposable revenue. But we're going to focus on finding newer little technologies in newer markets, or newer products to take into our markets. But it's defensible; it's high margins.

We operate in a business where there's a couple of really giant people -- I know Jim and I talk about, as we try to operate between the elephant's toes -- with highly defensible, high-margin niches. We will continue to do that.

Okay. Thank you. And thank you, Jim, for the great job you have done over a long period of time. Thanks to you, Will. Have a good one.

(Operator Instructions). Raymond Myers, Benchmark.

Thanks, gentlemen. And Jim, I'd like to reiterate what others have said. Thank you for your service. It is been good talking with you over the years.

Thank you, Ray. Thank you very much.

So a question that is discussing two related factors -- one was the visibility to customer demand following this interruption in production. And I don't know if, Will, maybe you can talk about that in terms of some sort of an order backlog or something, and how that relates to the currency issue and the potential for softer demand due to that. So let's start with visibility to customer demand.

I'm trying to formulate that question, Ray. I think I have it. But I like to -- let me answer, get the currency thing out of the way first. I don't know that I agree with you on software demand and currency. What I think I see is a demand remains, but pressure on us to reduce prices to be able to stay in there. So I don't think -- it's not a software demand.

Now, when it comes to visibility on how that affects us going forward, as I said earlier, I will be better able to say that once the quality issue is completely out of the picture. Now, when it comes to timing of when we saw the problem -- is that what you were asking?

The crux of it is making sure that we are not missing a loss of whether it's customer demand or the pricing issues, where customers may take their business elsewhere, but you may not see it because of the interruption in manufacturing. Do you have visibility that those orders are firm and in place?

Yes, I don't -- we always lose some business here or there to a competitor. I haven't seen an uptick on that. Our guys are really good. And our distributor -- these are -- many of them have been with us for quite a while. And they -- first of all, in the US, there's only a few thousand doctors. And you have 30 people roaming the streets and talking to them. You know real fast when something changes.

So I'm not worried about what you are talking about. Sure, we lose a few here or there to QUANTEL or Nidek or LX or something; that's just kind of normal operation. We stay in that 28% kind of market share range on legacy stuff. That has been the same for years.

Okay, that sounds good. Just checking. Next, on the other side of this margin point, you're increasing price of the Cyclo G6 starting pack. And can you elaborate a little as to why the increased price? Is that because the demand is there to support a higher price? Or you just need the higher margin due to currency or other factors?

No. I'll take a swing at that, Ray. The whole premise coming down with the Cyclo G6 was to launch this with a compelling bundle package opportunity. You can buy the laser as a standalone, and you would be paying typical laser prices. But the idea was, given that we really value the recurring business stream, the decision was, hey, let's not make the purchase of the laser necessarily be that much of an impediment to get into the recurring procedural side.

So right out of the gate, we thought, okay, how low basically can we get the laser price to make sure we're stimulating that demand? Hence, we went out with $14,500. And in all honesty, we were marginally covering the cost of the laser, which is why in the package it wasn't too bad. But it was, overall, still a little bit lower than our norm, which is why we said, hey, if we stay here, we may end up seeing some gross margin compression.

We were very pleasantly surprised by the strength of demand. And we continue to see that. I was just over with talking to the sales guys last night. One guy who has just got his demo unit has 10 demos lined up, coming up in the upcoming month. And that's just one of the sales guys.

So recognizing that we seem to have a pretty strong demand coming in from the customer, we said, okay, we still want to stay with the philosophy, which is we really don't want to make the laser that much of an impediment to the buying decision. But let's take $14,500 up to $18,500 because by doing that we have now got ourselves into a little bit more normative margins, and the package itself start to look healthy.

So that's where we have moved it to. It doesn't seem to have impacted anything with regards to customer demand, so we seem to have nailed that. And as I said, there are ongoing discussions about whether we should move it up even further. But I think at the moment, the bias that's winning is, again, why we would want to get an extra couple of thousand dollars up front on the laser when the real name of this game is to get lasers out there in and generating the procedure volume? So $18,500 is where it is, and we think that's the right place for it, for now.

Good. Well, that sounds like a positive dynamic. Thank you. And then finally, maybe I'll just -- it's may be nitpicking, but I have to ask. The share buyback is about the same as it has been, roughly, in prior years. And with the stock where it is, it begs the question: why not do something more dramatic?

Well, I think it has been like it is. And I understand your question about being more dramatic. But I think when you go through these discussions, our viewpoint came to the point -- we had the discussion around whether we do a tender again. That was one discussion. And you know what? We just came back to the point of saying, look, we've got a plan. Let's just keep extending it. It's very simple. You don't have to do any more SVP stuff, you don't have to do anything else, just add an addendum or amendment to it and you just keep going. And I think where Jim and I are at this point in time -- our focus is -- the buyback is great. But our focus is on getting the quality behind us and the growth going. And that's where our head is.

That's good. Yes, thanks. You know what? I did have one other question, which was: the old legacy lasers, where you do see the margin compression -- I understand those are really not your focus. But can you help us to quantify what proportion of your revenue is in that more commoditized bucket?

I'm just trying to think. I look at so many numbers, it's a little hard to pull that one off. I would say -- let me just give some coloring. I think what we see is particularly in the US, it's a relatively small component. What we're seeing obviously is that technology refresh opportunity with MicroPulse. But I think where we stay there and we focus because we like it -- but is, if you like, the poster child of this dynamic -- is the tenders on the international side. Because typically the tenders are coming in where you've got a health system that is looking for just getting in the game, if you like. So it's looking for a fully featured old-style laser, and looking for a good price. So that has historically made up a reasonable proportion of the international business. And that is probably where we see the challenge the most.

I think, Ray, if you look at just -- I agree with Jim on looking at all these different numbers, and we've got lots of SKUs. But take it in rough things, it is a small portion of our US business, which is about half our business. But maybe it's 10% in the US. And then the other half, outside the US is -- it could reach as much as maybe 25% of that. So you probably, on an overall basis, maybe 15%, maybe 20% at most, I think.

That helps. That's great. Thanks, guys.

I would now like to turn the call over to management for any closing remarks.

Thank you, operator. I appreciate everybody's time and attention today. And we hope that we continue to earn your trust, and we will be back on the record string of quarters, going forward. Look forward to talking with you on the next call. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.