IRIDEX Corp (IRIX) 2022 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the IRIDEX Second Quarter 2022 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Leigh Salvo, with Investor Relations. Please go ahead.

Thank you, Carmen, and thank you all for participating in today's call. Joining me are David Bruce, Chief Executive Officer; and Fuad Ahmad, Interim Chief Financial Officer.

Earlier today, IRIDEX released financial results for the quarter ended July 2, 2022. A copy of the press release is available on the company's website.

Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact, including but not limited to statements concerning our strategic goals and priorities, product development matters, sales trends and the markets in which we operate. All forward-looking statements are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place reliance on these statements. For a discussion on the risks -- of the risks and uncertainties associated with our business, please see our most recent Form 10-K and Form 10-Q filings with the SEC.

IRIDEX disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 15, 2022.

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

Good afternoon, and thank you all for joining us today.

Following our Topcon collaboration and capital infusion in March of last year, IRIDEX as enjoyed a multi-quarter trajectory tracking significantly higher top line revenue. In this year's second quarter results, we experienced a plateau with total revenue growth leveling to 2% [year-over-year]. The context is important here. Last year's quarter was particularly strong and this year's summer slowdown appears to be short term and attributable to a combination of factors.

Macro headwinds from inflationary pressure in U.S. dollar strength relative to foreign exchange rates has dampened our OUS retina capital system sales during the quarter, and increasing pricing pressure on our international customers from high inflation across many segments, we've driven up customers' total spending and has led them to assess their capital purchase appetites.

In the glaucoma market segment, we experienced relative procedure volume weakness in the second quarter. This is largely due to strong comparable results in the prior year second quarter. But on top of this, we did experience headwinds from continued COVID impacts to (inaudible) center capacity and patient procedure volumes. Surprisingly, vacations by doctors, staff and patients ran unusually high and, as a result, added to reduce the delayed procedures. These combined to deliver some procedure softness in late May and June.

We believe these headwinds are temporary, and our team has maintained a steady focus on expanding our market and building the physician adoption of our non-incisional approach to treating glaucoma and retinal disease. Clinicians have proven receptive to our enhanced dosing guidance and are monitoring patient outcomes over time as they build experience toward expanded usage on a wider indication of patients. While this process is taking longer than we like, our confidence remains high that we're demonstrating improved outcomes that will lead to broader adoption.

Glaucoma probe sales volume increased 2% quarter-over-quarter but declined 6% versus the prior year. As I discussed, the decline stems from second quarter 2021 OUS probe sales that were particularly strong as departing distributors placed and sold final orders before Topcon took over distribution for over half of our OUS territories. Despite these challenges, we're pleased that second quarter probe sales obtained our second highest quarter ever, only behind last year's second quarter.

In Japan, we completed distributor transition at the beginning of the second quarter, marking the last of our large international market transitions. As part of the transition, Topcon received product inventory from the prior distributor and therefore placed minimal orders in the quarter. We anticipate renewed contribution from this region in the latter half of the year and going forward.

In June, we are pleased to receive our long-awaited regulatory clearance to market and sell our Cyclo G6 Glaucoma platform in China. This important milestone opens up a significant new market for IRIDEX, and estimated 9.4 million adults in China are afflicted with glaucoma. That's a market scale comparable to that of the U.S. We sold the initial systems and probes to begin the launch. And together with our distribution partners, Topcon and Clinico, we conducted clinical launch meetings with over 70 physicians, significantly exceeding our expectation of 15 to 20 from our initial launch sites.

Together with our partners, will support pilot sites and patient experience to build a strong initial presence in China that we can then leverage to penetrate the broader market.

To support the growing awareness of [TLT] and our China launch, we expanded our commercial team with the addition of a Vice President of Marketing as well as new sales team members, 2 in the U.S. and 3 internationally. Increasing our sales team enables us to continue broadening the geographic reach and focus of our sales efforts.

Lastly, our capital position remains secure. Though again, this quarter, we deployed some cash to mitigate potential supply chain impacts and we continue investing in initiatives to secure our long-term growth. Year-to-date cash reduction is approximately $5.9 million, with about $3.1 million of that shifted from in current assets and cash to inventories and prepayments to mitigate lingering supply chain challenges.

On the clinical front, we had several notable updates that (inaudible) the work on over the previous quarters. Clinical presentations and industry articles supporting the dosing impact on outcomes and the importance of sweep speed technique, our increasing awareness of methods to secure optimal results. The first clinical paper from our TLT consensus committee has been published and the group is finalizing the submission for the second half of the guidance paper, which will be published in the same journal. We expect these papers to serve as critical proof point as we continue to drive adoption of TLT and introduce this technology to more and more physicians.

Turning to product launches. We're excitedly preparing to launch a new suite of laser systems at the upcoming AAO conference beginning September 30. This launch will include new platforms for the 3 main laser products within our retina treatment portfolio. Not only will the platforms deliver modernized architecture and ultimately connectivity capability. But they provide IRIDEX a lower cost of manufacturing, which we can use to drive share gains and improve margins. We expect initial shipments in the U.S. to begin in Q4, followed by OUS approvals over the next several quarters and will roll out international market launches as those come.

As we look at the full year '22, we assessed our performance year-to-date and the impact from extended prevalence of COVID plus the macro headwinds affecting our expectations for the second half of the year, and conclude that it's prudent to lower our revenue and probe guidance for the year. Our updated full year 2022 outlook is as follows: total revenue of $56 million to $58 million, reflecting growth of 4% to 8% year-over-year. And we now expect probe sales of $61,000 to $63,000, a growth of 5% to 8% over 2021. Our expectation for glaucoma system sales remains unchanged at 225 to 250 units. We'll continue to focus on executing our growth catalysts. And when combined with typically stronger second half of the year sales, we have confidence in our ability to build momentum through the remainder of 2022.

In summary, we perceive the current challenges as impacting the fiscal year '22, but we're confident that we have in place an energized commercial team, high-quality distribution network, enhanced product portfolio and a multiyear capital runway that will allow us to succeed in our long-term growth strategy and position IRIDEX as the leading provider of non-incisional laser-based treatments in the ophthalmology market.

With that, I'd like to turn the call over to Fuad.

Thank you, Dave, and good afternoon, everyone.

I will now review our financial performance for the second quarter of fiscal 2022, starting with revenue. Total revenue for the second quarter of -- second quarter was $13.8 million, up 2% from $13.4 million in the second quarter of last year. We sold 15,000 Cyclo G6 probes in the second quarter, a decline of 6% from the prior period and a 2% increase quarter-over-quarter. As Dave noted earlier, the year-over-year decline was primarily a result of the prior period, including final orders by distributors in advance of our move to Topcon's exclusive distribution.

Moreover, we're also experiencing some headwinds from a stronger dollar as vast majority of (inaudible) revenue is priced to USD. We sold 48 Cyclo G6 systems in the quarter compared to 47 in the prior period. Year-to-date, we have sold 104 Cyclo G6 systems, tracking our initial expectation for the full year and validating our worldwide installed base expansion goals for 2022. It also highlights the broadening adoption of [TLT] for the treatment of glaucoma.

Total product revenue from our Cyclo G6 product family was $3.5 million, down 3% compared to the second quarter of 2021.

Turning to our retina business. Product revenue was $7.5 million, flat compared to the prior year period. Strength in our legacy IRIDEX retina products was offset by relative softness in PASCAL revenue. Recall that last year, in Q2 and Q3, we shipped extra units to start building inventory in Japan ahead of a shipment blackout as we registered IRIDEX as the manufacturer of record for PASCAL.

Other revenue, which includes royalties, services and other legacy products increased 22% to $2.7 million in the second quarter of 2022 compared to the same period in 2021. The substantial increase resulted from higher service revenue and higher amortized revenue recognition from the sale of distribution rights to Topcon. We expect to sustain this level for the balance of the year.

Gross profit of $6.3 million in the quarter reflected gross margin of 45.6% compared to 45.5% in the second quarter of 2021. We expect that further margin expansion will come from increased probe volumes and sale of our new laser platforms as they take the place of existing systems in the future.

Operating expenses for the second quarter were $8.4 million compared to $7.2 million in the same period of the prior year. The increase was a result of higher R&D spend on planned investments in new product development and additional R&D capability from the acquisition of the PASCAL product line. Additional planned investments in the sales organization as well as expanded marketing and clinical activities also contributed to the higher operating expense in the period versus the same period last year. Higher R&D and sales and marketing expense was partially offset by lower G&A expense in the period.

Net loss in the second quarter of 2022 was $2.2 million or a net loss of $0.14 per share compared to an income of $0.09 per share for the same period in 2021. Please note, second quarter of 2021 included a onetime gain of $2.5 million from forgiveness of our PPP loan.

We ended the quarter with cash and cash equivalents of $18 million, representing cash usage of $2.7 million during the quarter. Cash usage included approximately $1.1 million investment in inventory in related preorders. We believe these investments in materials and inventory are necessary to mitigate potential supply chain bottlenecks in the future. We expect to start bringing down inventory starting in the fourth quarter of fiscal 2022 and into fiscal 2023. We reiterate that these shifts in our current assets are an essential part of the supply chain management strategy in the current environment.

In conclusion, I'll provide an update to our guidance for 2022. As Dave mentioned, we now expect total revenue for fiscal year 2022 to be $56 million to $58 million compared to $57 million to $59 million previously. G6 probe sales are now expected to range from $61,000 to $63,000 compared to a range of $67,000 to $70,000 previously. And finally, our expectations for growth for Cyclo G6 Glaucoma Laser Systems installed base growth remains unchanged at 225 to 250 units.

With that, Dave and I would like to turn the call over to the operator for questions. Operator?

(Operator Instructions) Our first question comes from the line of Tom Stephan with Stifel.

If I can just start on G6 guidance. You maintained the systems placement guide which I would think would be the impacted portion from inflation in macro, which I think on the retina side, you said may be impacted. But then with G6, I think the probe shipments is where guidance came down somewhat meaningfully for 2H. So I guess on the probe side, what else are you seeing beyond macro? Because I guess wouldn't that [lease] procedure volumes be a bit more resistant to macro? Just trying to make sense of this dynamic. Is it competition? Just any color there, Dave, would be helpful.

Sure, Tom. Yes, I would say that macro is a factor and then (inaudible) has shifted distribution, some of the softness in the second quarter was inventory shifts, for example, in Japan, as I mentioned. Going forward, we think we'll recover on those items and reestablish the growth trajectory. Our original guidance was about 18% probe growth through the course of the year, and we've been relatively flat year-to-date versus last year. So as we start to grow again, in the second half, we've got that lack of growth in the first half to carry. And that's why the numbers are down. So we're going to grow at a rate, but we're starting at a lower base than we would have expected for the second half of the year.

So I think when you do that math, you see it's sounding lower than you would expect. We're actually pretty pleased with the guidance of system sales. It indicates the appetite is there to adapt. And our visibility is such that we're feeling comfortable that there's still demand there. Those price points for that capital equipment are not too high. They're in the $20,000, $25,000 range. So that's easier capital purchase to continue forward with than retina laser system that might be between $50,000 and $100,000, depending on the feature set. Does that clarify things for you a bit?

Yes, that's helpful. I actually think that's a really good segue into my second question. Just on kind of the medium term for G6. I'm not going to ask you to guide for 2023, but I'm curious how we should be thinking about next year at this stage? It sounds like some of the current headwinds are transitory. What is your medium-term outlook? Because I do think guidance implies flattish utilization in 2022 versus 2021, but again, you do think, it sounds like, you'll get back on the normal growth trajectory of that business. So for 2023, is it fair to think about G6 kind of getting back to the 15% to 20% plus growth rates as we enter next year?

I think so. We thought that was going to be the case this year, and I think COVID persisted longer than I think many of us anticipated. And it kept us at a level as opposed to growth in this first half of the year. We established growth in the second half of the year, and I think that continues. But there are a couple of nice catalysts to accelerate that growth. We really have high confidence that our newer dosing and sweep speed communication coming from papers, KOLs and our sales teams calling on customers is really going to take -- capture traction and start to, number one, give very consistent and durable results and cause our clinicians to start to broaden the patient base on, which they use it. For the longest time, we've talked about expanding to the more moderate [space] patient. But before you get that, you've got to get that confidence in the durability and especially the safety profile, and we think we're building that now.

So I think those things will come out as we move along in the second half of the year. There are also some studies that are ongoing that will demonstrate the current dosing with the current probe and the outcomes and safety profile from that. So as that emerges, I think it gives greater and greater confidence of existing users to broaden the patient selection and newer users to come on board. So yes, we think '23, we should be on a higher growth trajectory, barring any other exogenous events that start to affect the usage and ability to do procedure volumes and those kinds of things.

Got it. That's helpful. Maybe last one for me. Just on the sales force. Can you remind us how large it is now between each segment? And just talk about the strategy and the rationale here and kind of where these new reps will be focused between the different businesses?

Sure. So in the U.S., we have a team of 6 territories plus the support team that adds up to about 10 on the retina side of the business. And so that's a capital business. It's primarily a replacement business, although there is some expansion in facilities that want to have a satellite facility and have the same kind of equipment in that facility. But overall, the doctor base is -- everyone has a laser. And it's really an opportunity for our new platforms to have some growth as we replace older systems with newer systems. So that's the retina side in the U.S.

And then the glaucoma side in the U.S., we have 14 territories. So we just brought us up from 12 to 14. We have some clinical support team members as well as for management and (inaudible) support. And so that team totals about -- just about 20 people. And that's focused on glaucoma exclusively in the U.S. And then internationally, we expanded by 3 in -- both in Asia Pacific as well as in Europe to put more support in place to help Topcon and their distributors drive the business in their channels. So we added what we call area sales manager as well as clinical specialists to help support cases and train sales reps in the territories. And so that international team now totals about 7 people covering, with roughly [60] distributors and including the sub-distributors under Topcon.

Great. That's helpful. And if I can squeeze in one more. Just going back to glaucoma. Obviously, there's a lot of new entrants from a product perspective recently and even more so on the horizon. Dave, can you just talk about your view on the competitive landscape? And to what extent maybe it's factored into the revised guidance? And I guess, just more broadly, how are you thinking about ramping competition and the extent that, that might affect kind of G6 utilization?

Sure. We think that our non-incisional approach is relatively unique. We can treat the moderate stage to the later stage. And we don't need an incision and we don't need the clinician to decide to make incision in order to treat, for example, a MIGS stand-alone. And what we're hearing from the clinicians is their preference if they can avoid it, is to not make an incision and use our technique if they're satisfied that it delivers the results in the safety profile.

That said, I think there is a lot of interest in understanding it and potentially trialing some of the newer entrants and new approvals for stand-alone. And so I think it's taking some mind share. I don't know at this point that it's really affecting. We don't hear that, oh, I'm doing a bunch of these other things now. so I'm using yours less. We just did not hear that.

So I think it's out there. I think it's a distraction. I think that, that space has so many competitors and all of them with a large number of sales reps. There's just a thunderous noise in that space targeted at glaucoma specialists and comprehensives who are doing (inaudible) and so we're one of the voices in one sense that they're hearing. So we think from a product standpoint, we're well differentiated. But from a communication standpoint, we think it's a challenge to be heard with all the other noise.

Internationally, I think there's less of that because I think mix is less eagerly adopted or at least in the percentages internationally. And so we don't feel that is challenging. There are a couple of competitors out there attempting to do what we do in our non-incisional probe approach. But as we've detailed, there's so much work that has gone into getting the right configuration of the probe, the right clinical and dosing and technique and the training and support that we think we have a relatively dominant position in the actual procedure volumes going on and that we can maintain that.

One moment for our next question, please. Our next question comes from the line of Scott Henry with ROTH.

Just a couple of questions. Dave, I guess, first, and I know you've talked about it in the prepared remarks and probably in the last question as well. But I just wanted to flesh it out one more time. So the G6 came in below expectations. And I've heard a lot of different things, capacity constraints. What are you -- what do you think was the main driver why it came in below expectation? And if you don't want to put it on just one thing, maybe if they're like -- how would you -- if you're just trying to simplify it as much as possible. What do you think happened in 2Q that made things not turn out as much as you thought they would?

I think it's 2 things that you can look to that are very straightforward. Number one, the COVID persistence continued to dampen procedure volume, at least, in our facilities with our procedures. And secondly, it was very visible to us that the latter part of May and into June, there was just procedure volume softness. And I was quite surprised when we canvased that this concept of vacations kept coming up. So I at first didn't necessarily believe it. But I've heard that other conference calls, people have observed the same phenomenon. So I think that's a very short-term focus thing. I think it's hard to extrapolate, we hate to look at week by week or month by month and call it a trend, but we did see recovery in July that made us more comfortable that, number one, there was some truth to that. And number two, that people did actually come back from their vacations.

So when you say -- Dave, when you say procedure volume softness, it sounds like you're speaking about the market, not market share as much as the denominator in the equation, is that correct?

Look, it's notoriously hard to get market share indications. But it's pretty clear that our sites were saying, yes, we're doing many fewer procedures, our clinicians are on vacation or staff is on vacation or sick, or patients don't want to come in because they know 5 people who had COVID and they just don't want to be exposed. And those are the indicators for us. We don't really have good macro visibility on what would happen into cataract procedures and those kinds of things. So that's the basis of our belief that procedure volumes were significantly softer or significant enough softer to kind of leave us flat to down.

Then the second piece is really in the international space, and it's something that I have been talking about since the beginning of the collaboration with Topcon is that we will see these quarterly periods where we'll have volume shifts of orders from one quarter to the next quarter, just based on the timing of when they placed their stocking or orders for their sub-distributors or end customers. And I think we saw some of that internationally, and I used the example of Japan, where that distribution shift occurred really at the end of Q1, beginning of Q2 and with that final shift over in inventory and probe inventory. So the normal flow of orders from that region didn't come to us, and we expect that to come in the future. But that is a significant market for us, Japan, and it affects the (inaudible). So I think those are probably the 2 biggest. They're clearly short term.

I think the macro, if I would give you a third is that, even though people are quite receptive and users understand the importance of dosing and sweep speed on outcomes, our procedure does take a while to see that outcome and durability. So typically, they will evaluate at 30 days, but then they also want to see 3 and 6-month outcomes, both from reduction of intraocular pressure, percentage reduction, also safety profile. So like I said, it took -- in the comments, it's taking longer than we anticipate, but the results seem to be there. And so we're quite confident that, that adoption will be confirmed and we'll get that broadening. And so as that plays through, I think that we can accelerate our growth and have recovery from those short-term factors from the quarter.

Yes. I mean, I guess what I was trying to flesh out is all of this seems temporary, and glaucoma is not going away. Barring some sort of contraction from the economic cycle where perhaps people just see the doctor less for a period of time, that should reverse at some point. You should expect to see growth return to trend perhaps in 2023. Is that a fair assumption?

Yes, that's a very fair assumption. It's our expectation. We've continued hiring. We're pushing our marketing programs and clinical programs to get back to that base. And look, you can't exceed every quarter -- expectations every quarter. You're either under-projecting or have a rabbit to pull out of your hat at a time. We -- this is one of those quarters where it became clear that these factors didn't cause significant declines, but they prevented the growth that we were expecting to achieve. And look, I think it's very short term in the sense that the specific quarter elements were clear.

That said, we still have work to do to drive adoption, engagement with clinicians and expand both the clinical and the study base so that the evidence build and the comfort level is there, and that's what drives adoption. So it's a multi-quarter event. We're comfortable that we're going to recover from these headwinds. And we're still quite optimistic on the capital equipment opportunity as well. When you look at the reduction of our guidance was really related to the glaucoma probe reduction. We really haven't put a significant reduction in for capital equipment in the second half of the year. And that's partly because we've got new products and some excitement [coming in] because we feel like we've got the value proposition to continue to drive that business.

Okay. Great. And just another question. No real reason to ask it now, but it just seemed -- was on my mind. On the R&D side, the company spends a good amount, $2 million a quarter on research and development. The question is, I don't know if some of that may be sales related, but what products is the company working on? And what -- where is the return from that investment? Not that there isn't one, I'm just curious if you want to highlight any of the stuff you are working on.

Yes. Some of the focus -- a significant part of the focus of R&D right now has been getting our new platforms, in particular, the PASCAL platform through the production cycle and launch. And it's a next-level platform as opposed to an improvement of the current platform, so it entails a higher level of investment in a longer period of time. And we're coming to the end of that. And the opportunity really is to redeploy those to other areas of opportunity and look at the spend that we should be having given those opportunities.

There's a whole wave of connectivity and connectivity to various clinicians and bringing images into the field. There are some smattering of offerings out there. Our Topcon partner is quite strong in that space, between their diagnostic equipment, communicating between, say, (inaudible) and then we think there are advances to be made in the way we deliver energy for glaucoma and other applications in the front of the eye. Delivering energy to create a therapeutic or some type of a clinical effect and have a delivery device that may or may not be disposable but drives incremental revenue for the company as procedure volume grows. And so we will invest in those things going forward. I'm not ready to disclose. It's a competitive space and no point in disclosing those things to our competitors.

And with that, we end our Q&A session for today. I will turn the call back to David Bruce for final remarks.

Thank you, and thanks, everyone, for joining the call. We will continue to work on behalf of growth and strong shepherding of the assets and look forward to reporting to you next quarter.

And with that, ladies and gentlemen, we thank you for participating in today's program. You may now disconnect. Everyone, have a great day.