IRadimed Corp (IRMD) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the IRadimed Corporation First Quarter 2018 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded today, April 30, 2018, and contains time-sensitive information that is accurate only as of today.

Earlier, IRadimed released financial results for the first quarter 2018. A copy of this press release announcing the company's earnings is available under the heading News on their website at iradimed.com. A copy of the press release will also be furnished to the Securities and Exchange Commission on Form 8-K this afternoon. Once furnished, a copy of the Form 8-K can be found at sec.gov. This call is being broadcast live over the Internet on the company's website at iradimed.com, and a replay of the call will be available on the website for the next 90 days.

The agenda for today's call will be as follows: Roger Susie, President and Chief Executive Officer of IRadimed, will present opening comments; then Brent Johnson, IRadimed's Executive Vice President of Worldwide Sales and Marketing, will discuss customer orders; and finally, Chris Scott, IRadimed's Chief Financial Officer, will summarize the company's financial results before opening the call up to questions.

Some of the information to be furnished in today's session will constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those focused on the future performance, results, plans and events and includes the company's expected results for 2018. IRadimed reminds you that future results may differ materially from these forward-looking statements due to a number of risk factors. For a description of the relevant risks and uncertainties that may affect the company's business, please see the Risk Factors section of the company's most recent reports filed with the Securities and Exchange Commission, which may be obtained for free from the SEC's website at sec.gov.

I would now like to turn the call over to Roger Susie, President and Chief Executive Officer of IRadimed Corporation. Mr. Susi?

Thank you, and good morning, everyone. This morning, we reported first quarter 2018 revenue of $7.1 million, GAAP net income of $0.07 per diluted share and non-GAAP net income $0.10 per diluted share. The Q1 2018 revenue increased nearly 38% over the first quarter 2017, with GAAP and non-GAAP earnings also meaningfully higher than last year, both metrics exceeding prior guidance. Compared with Q4 2017, revenue grew by nearly 7%. I am very pleased with these results and believe they illustrate the strength of our business and positive customer response towards our device offerings, which now include our new MRI patient monitor.

Operationally, the company is performing well. During the first quarter, the sales team made significant progress towards integrating the new patient vital signs monitor into the sales process, while remaining focused on generating orders for IV pumps. Manufacturing is running smoothly, meeting demand for all of our products and has fully integrated production of the new patient monitoring to their processes, and engineering is making progress on multiple projects simultaneously as we continue to execute on our product pipeline. These development efforts are progressing nicely and tracking to my expectations around the timing of commercialization.

These operational bright spots are not new developments, or rather they are a continuation of the momentum that has been building for several quarters, and we look to carry this momentum into the future, which is what I'd like to discuss right now.

I'd like to take a step back from the quarter-to-quarter details and share with you my vision of what we are driving towards over the next 5 years. With the new monitor having FDA clearance, along with approvals in several major international markets, coupled with our progress developing new products, I'm seeing an exciting and clear picture of IRadimed's future potential. Based on that vision, I've established an aspirational goal of achieving annual revenue of $100 million in 5 years, with corresponding operational margins of between 35% and 40%. Of the $100 million in revenue in 5 years, I see it approximately as 47% coming from IV pumps, 28% from our new patient monitor, 16% from disposables and services and 7% from ferromagnetic detection devices, which are currently under development, with another 2% from the thermal management device. This breakup can be found in the company presentation located on our website.

While there is much work to be done, however, when considering the composition, strengths of our products that will drive us towards this goal, I have great confidence in our ability to achieve this level of revenue in 5 years, although we can't expect the path to be a straight line.

First, the IV pump. Cornerstone of the $100 million goal, is comprised of our IV pump technology and clearly, we have tremendous experience with this device and this market. We are well underway with development efforts actively designing the next-generation IV pump system, which I expect will facilitate deeper penetration of this market and quicker adoption rates by hospitals that have not yet moved from running along lines.

Additionally, the next-generation IV pump will create a replacement opportunity from existing customers that want and need to replace their aging MRI IV pumps. And so I expect the combination of these factors may ultimately result in elevated growth rates and further solidify our leadership in MR fluid delivery.

Second, our new patient vital signs monitor. This revolutionary device that was just introduced to the market late last year is becoming a welcome alternative to many customers that feel they have been restricted by limited historical innovation from other product offerings. I'm proud to report sales of our new monitor thus far have been as anticipated and given the continued positive customer feedback, we expect sales to grow as we hone our selling skills and as more customers adopt our solution. Ultimately, I'm hopeful that my expected revenue contribution from the patient monitor towards the $100 million goal may prove conservative.

The third largest portion of our $100 million goal comes from the sale of disposables and services, which are primarily driven by the IV pump system. With the expectation of accelerating growth from the next-generation IV pump and supported growth from an expanding market share in MR patient monitoring -- in the MR patient monitoring business, I foresee corresponding increases in sales of our disposables and services.

Finally, the remaining portion of my $100 million goal comes from ferromagnetic detection and thermal management devices. We have already begun development of the ferromagnetic detection product and look to begin commercialization within the next 12 to 18 months. Thermal management is a longer-term project that I anticipate beginning to contribute late in the 5-year period.

Though the $100 million in 5-year goal is a goal, not guidance, my clear vision of this path is what has led me to make our stakeholders aware of this exciting anticipated outcome. With the core being predominantly the devices and technology that we possess, along with development of our sales capability and size, we see that the steps that we have taken to continue to press forward with will enable attainment of this 5-year goal.

Now before passing the call over to Brent, I'd like to review our financial guidance for the second quarter and full year 2018. As we announced earlier, today we expect second quarter revenue of $7.2 million to $7.3 million with GAAP earnings per share of $0.07 to $0.08 and non-GAAP diluted earnings of $0.10 to $0.11.

Additionally, we have increased our full year 2018 earnings guidance and now expect GAAP diluted earnings per share of $0.30 to $0.33 and non-GAAP diluted earnings per share of $0.40 to $0.43. Our previous guidance was GAAP earnings of $0.22 to $0.27 and non-GAAP earnings of $0.33 to $0.38. For now, our full 2018 revenue guidance remains at $29.3 million to $30 million.

And so now I'd like to turn the call over to Brent for a discussion of our customer orders.

Thank you, Roger, and good morning, everyone.

First, I'll address the IV pumps and then move on to the new patient monitor. As Roger said, the sales team had a good quarter, which was a continuation of our strength that's been building for several quarters now. Booking of IV pumps and sets for this quarter exceeded our expectation. The composition of U.S. orders for our pump system in the first quarter remain consistent with recent quarters, with approximately half of the orders coming from first-time adopters and the other half coming from our existing customers.

Multi-pump orders were another bright spot for us this quarter, with a 40% increase over the first quarter of last year. These multi-pump orders accounted for 1/3 of our total domestic units sold for the period. And again, we define multi-pump orders as 3 or more IV pumps on a single order, and they are typically heavily influenced by the critical care departments of the hospitals.

These now well-established customer order trends for the IV pumps give us confidence that our strategy of targeting multiple departments continues to gain traction.

We are experiencing greater rates of success with our critical care strategy by stimulating the demand for MRI-safe pumps in those departments. And while changing hospital process is often difficult and time consuming, we are beginning to see success in converting customers' long-standing practice of using conventional pumps with long IV lines extending into the MRI room or just waiting until patients are stable enough to go to MRI or a diagnostic scan without IV medications. As we've discussed before, both of these workaround solutions have negative patient risks associated with them.

As for our new 3880 MRI compatible patient vital signs monitoring system, hospitals are impressed by what they see during demonstrations of this device. The compact form factor resonates with them as they visualize the additional utilization and efficiencies made possible by IRadimed's design. While customer orders for the period were a little below our original aggressive forecast, we're not reading too much into that considering this is the first full quarter we were able to market this device in the U.S., and there's a certain amount of price discovery that's occurring as we compete for deals. We remain encouraged about the future of the 3880 and anticipate increasing demand from customers as they move forward to realizing the additional utilization and driving efficiencies in their operations.

Bundling of our IV pump and monitor into combined sale remains a great opportunity for us and only us as IRadimed is the one company in the world with a capability to provide hospitals with a truly mobile patient care system that allows for transporting patients to the MRI and back without having to make multiple time-consuming equipment changeovers. Having the ability to bundle our products into a single transport package is an advantage that I believe makes us highly competitive throughout the world.

As for the sales team itself, our expansion plans remain on track for the year, and we're currently searching for 2 additional U.S. sales manager expansions bringing us to a total of 22 direct sales managers, which are supplemented by our 3 area directors and growing clinical nurse and customer service teams. We remain committed to the expansion plans that I talked about on the last call and growing our sales teams in both the U.S. and international markets during 2018.

Now I'll turn it over to Chris to summarize our first quarter financial results.

Thanks, Brent. Today, I'll be discussing our financial results on a GAAP basis as well as on a non-GAAP basis. Our non-GAAP operating results excludes stock-based compensation expense and the related tax effects. Our free cash flow measure is cash flow from operations, less cash used for purchases of property and equipment. And lastly, infrequent tax items are considered based on their nature and excluded from the provision of income taxes, as these costs are not indicative of our normal or future provision for income tax. We believe the presentation of these non-GAAP measures along with our GAAP financial statements can be helpful in providing more thorough analysis of our ongoing financial performance. You can find a reconciliation of these non-GAAP measures to the nearest GAAP measure on the last page of today's release.

As already stated, we reported revenue -- first quarter revenue of $7.1 million compared to $5.2 million for the same quarter last year. Domestic revenue was $6 million for the current quarter compared to $4.3 million for the first quarter last year. Revenue from international sales was $1.1 million for the current quarter compared to $0.9 million for the 2017 quarter.

Revenue from devices was $4.8 million for Q1 2018 compared to $3.4 million for the same quarter last year. Included in revenue from devices for the first quarter of 2018 was $1.1 million in sales of our new MRI compatible patient vital signs monitor compared to $0.4 million for the same period last year.

Revenue from disposables and services was $1.9 million for the current quarter compared to $1.6 million for the 2017 quarter.

And finally, revenue from the amortization of our extended maintenance contracts was $0.3 million for the current quarter compared to $0.2 million for the prior year quarter.

The average selling price of our IV pumps recognized in revenue during the first quarter 2018 was approximately $33,300 compared to approximately $34,500 for the same quarter last year. A decrease in ASP is the result of an unfavorable sales mix from international sales. Gross margin was 76.2% for the current quarter and 73.1% for the prior year quarter. The increase in gross margin percent was a result of favorable inventory cost and unit adjustments.

Operating expenses for the first quarter of 2018 were $4.3 million or 61% of revenue compared to $4 million or 77.7% of revenue in the first quarter 2017. The increase in operating expenses on a dollar basis is due to higher expenses for payroll and employee benefits due to higher headcount, higher commissions due to higher sales, partially offset by lower expenses for consulting costs.

Our effective tax rate for the current quarter was 25.4% compared to negative 11.7% for the 2017 period. The higher effective tax rate is primarily due to higher taxable income in the current period compared to the prior year period. Additionally, the lower U.S. federal tax rate included -- or the higher U.S. federal tax rate on percentage basis -- tax rate includes the Tax Cuts and Jobs Act, which is reflected in our first quarter 2018 results.

On a GAAP basis, net income for the current quarter was $0.07 per diluted share compared to a loss of $0.02 for the first quarter last year. On a non-GAAP basis, net income was $0.10 per diluted share for the current quarter compared to breakeven for the first quarter last year.

For the 3 months ended March 31, 2018, cash provided by operations was $1.6 million compared to a net cash outflow of $0.2 million for the 2017 period. The increase is primarily the result of higher net income and higher net cash inflows related to accounts receivable and lower net cash outflows related to accounts payable, accrued income and inventory.

Our free cash flow, a non-GAAP measure, was $1.5 million for the current period compared to negative $0.4 million for the first quarter last year. As of March 31, 2018, we had $27.9 million of cash and investments.

I'll now turn the call over for questions. Operator?

(Operator Instructions) And our first question comes from Larry Solow from CJS Securities.

Just on the -- first one, just real briefly on your changing guidance, I know you haven't changed your sales outlook at all. Is it -- and a little bit lower SG&A at least compared to my expectations this quarter. Is that sort of -- what's the driver of the sort of improvement in earnings outlook for the year?

All right. Yes, lower SG&A is part of that, Larry, I think. And also, we're being -- we did pretty well with our cost controls or spending habits in the first quarter. I think that was very helpful. And also the further suspension of the medical device excise tax, which didn't happen until after when we had released our guidance. So I think it's a combination of all those things.

Got it. Okay. And just on the SG&A side or the headcount plans, is it -- do you guys expect to add 2 more bodies to the sales force? I thought last call, you had said you expect to be at 24 target -- 24 by year-end and not 22?

Yes, Larry, this is Brent. Yes. We're adding 2 this quarter and we plan to add 2 more next quarter, which would bring us to 24.

Got it. So you got 20 today, you actually expect to add 2 this current quarter and then 2 more in the back half of the year. Got you. And just on the bookings, I know you didn't quantify or give exact numbers there, but on the pump side, can you just speak to, I think Q1 is normally a little bit of a slower quarter anyhow. But can you just speak to that? And then that -- and maybe just a little comment on why do you think monitor sales were maybe a little bit less than expected or the orders?

Sure. First for your question, the pump sales. So pump orders were -- yes, if you look at Q4, Q4 is typically one of our strongest quarters. Q1 is usually a little bit of a weaker quarter. So quarter-to-quarter, we had about the same amount of sales. But once again, Q4 is usually our strongest quarter. And so I don't see that as any kind of an issue because we typically see a little less in sales in Q1. So on the pump side, like we said, the results exceeded our expectations a little bit. On the patient monitor side, well -- with the patient monitor, again, we don't have a lot of history here to talk about. So the first quarter was -- we put some pretty aggressive expectations on ourselves for Q1 and again, we came in a little bit below those expectations. But again, we see this as a -- excuse me, on the domestic side, we're speaking domestically here. We had a strong quarter internationally on patient monitors. But in the domestic -- so on the domestic side, again, it's just, again, ramping up with the new product and training the sales force, training the sales teams and again, it's one quarter results. We've already in April off to a great start domestically and a little bit ahead of plan.

Got you. And then just lastly, maybe question to Roger on the sort of the 5-year target and the -- about $47 million, $48 million in pump sales would imply about 15% annual growth from today. I don't know if you mentioned it, but could you sort of give us a time line or rough time line on when you expect the new product out there? And would it drive -- would it be more replacement, more new sales, combination of the 2? Any other color there would be great.

Yes. Well -- yes, the change in slope towards the $100 million plan, you'll see a definite marked change in that slope once that new pump is available. We're expecting to see that in about the third year of this plan. So -- and if I mentioned, we think the real afterburner kicks in because of the replacement business, which we don't really have any of right now.

Right. And what will drive the replacement? Will be that the current product becomes obsolete relative to new one? Or is it just that you will need a new one because it won't last as long? Or will the new product have features that they can't miss? What was sort of any...

You're right, Larry. All of the above.

And our next question comes from David Solomon from Roth Capital Partners.

Just want to start off on the pumps. So you said 40% increase in multi-pump orders. Were those more from first-time users or those from experienced users that they're now trying to double and triple down?

David, yes. I don't have the granularity on this quarter's sales. But I can tell you, in general, it really once again follows those guidelines what we'd talked about in my previous remarks where it's typically pretty much 50-50. I mean, we have new installations where we do that, we have some existing installations where we may have broken in and gotten one into the MRI area and then once we get a beachhead in there like that, we go after the ICU and we try to bring them on board with buying pumps for their department or buying multiple pumps so that they can bring their patients down.

Okay. And then on the pumps again, so higher international sales. Is that people that now have gotten your monitor and are interested in the pumps on the international side that weren't aware of the company? Can you share a little bit more color on that shift to the pumps?

So well, we had higher sales on pumps and monitors internationally. And international business is a little different than the domestic business. It has more -- larger orders tend to influence that and it tends to be more up and down in the international business. But this is the second quarter in a row where we're seeing some strong sales. And I think -- again, I think we are becoming more and more known in the international area with our efforts. And the patient monitor is a big part helping us do that because that is something that's, like we said in previous calls, is an established market where we're starting to get some major recognition out there as a player in that area.

Excellent. And just on the monitor side, you said that international grew, did U.S. grow? Or can I get a rough breakdown, the U.S. versus international for the monitors?

Well, we really don't go into that granularity as far as the unit counts and things like that. I think you could see from the financials that Chris has spoken about and Chris has this -- you can see revenue-wise what that level was.

And maybe I should add a little something. I might have not been clear about that in my previous comment when I mentioned that the FDA clearance happened and we have these international approvals as well. Don't forget, international has been at this now for really about 15 months. And domestically, we only began to sell this thing in November of last year. So there is a difference in when the starting gun went off for the 2 areas, and it's quite a difference.

Absolutely. And on that in the U.S. side, are you seeing -- I know -- so capital equipment purchase is probably heavy towards the back half of the year, if not the fourth quarter, are you seeing some conversations where -- or can I get a little bit more color on how it's going when you approach these health-care systems and maybe they are saying, "Oh, we love it, but we don't want it," to make them order until November? Anything like that, that you're seeing right now. Or is it kind of you do not have those kind of indications yet?

Well, sure. And that's a natural process too when you introduce a product. Unfortunately, we're not able to quote products in the U.S. until we have the 510(k). And as Roger talked about, we didn't get that until first part of November last year. So as a natural order of sales, as you put out more and more quotations and quotations age out there in the market, you typically glean more and more orders. Now this is different than the pump. It's not a market that we're pioneering. It's not a market where it's not a sale taking place unless we're out there selling it. So we do get involved in a lots of deals that are -- in deals that are going down right now. But yes, I mean, as a natural progression of things, we've got lots of customers that are budgeting for our systems that have made, again, verbal commitments to us about buying the system, but sure those purchases don't take place until sometime later in the year. So as time goes on and we put more and more quotations out in the field on qualified opportunities, we're going to be bringing in more and more of those deals.

Great. And then just on the bundling side, have you guys had any official orders that have been bundled or nothing where you've done that specifically? Or is that just something a plan for the future?

Yes. We have gotten some orders. We bundled pumps and monitors. Sometimes that actually comes at 2 separate orders just because the hospital is purchasing them that way, but we have gotten orders that are combined like them.

Great. And then last question, just on whether or not there is any response from the competitor on the monitor side in regards to pricing or anything else you're hearing out there?

Yes, we have seen it. And I will tell you, I mean, we've experimented a little bit with our price up and down. And one thing we have seen is we have seen our competitor really come in and aggressively discount. I guess, you can look at it 2 ways. I would like to look at it is that we've got an intense competitor out there that got basically 100% of the market and has the "market-leading product," yet they are in deals coming down aggressively -- coming down in price to try to beat us in price on deals, which, to me, is a good thing in my book because they've taken us seriously as a competitor. And they're not necessarily trying to sell on the merits of what they've done, the reputation and everything else. They're coming down to try to compete with us price for price on deals. So again, that's pretty much what we've seen out there thus far. But again, we're early into this and don't have a lot of months of experience doing this yet. So we'll be able to give you more information on that as we go along.

(Operator Instructions) And our next question comes from Larry Haimovitch from HMTC.

All my other questions have been answered by the previous questioners. I just had one. Brent, you mentioned in your prepared remarks the term price discovery. I thought that might be an interesting euphemism and wanted to hear what you really meant by that.

Maybe I'll take it first, Larry, so -- because I'm basically pushing the experimentation. So when we first got approval in the U.S. market, we've been pricing this thing, we priced it one way for the international stuff, more than a year ago. But as we got to the approval point in the U.S. market late last year, the sales had a plan on how to price the device. And we did that. And frankly, I felt that we did really, really well with that price, possibly showing that we could raise it a bit. So we pushed it up in the first quarter. And I might have overtorqued that a little bit. And so that's what we mean by price experimenting. So we're feeling our way through exactly where the pricing shall be here long term.

And also Roger, it sounds like your competitors are reacting with lower prices.

Yes, they -- well, sure. I mean they've got a long way to go. They've been used to quoting and occasionally getting numbers that are well into the $100,000 area. We see quotes out there as much as $120-plus thousand. And with us around now, we're seeing them come in -- they're cutting it down to the 70,000s and even a little bit in the low 70,000s, I think we've seen, right?

Depending upon the configuration, of course.

So yes, that's a big haircut for them and our list prices are under that. So yes, they got to go a long way to push us underwater price-wise.

What do you guess your ASP will be for the year, ballpark or give me a range for the new monitor?

Well, that's the titration of this pricing network doing, so...

And the other thing, Larry, it depends on the configuration, because when you fully configure a patient monitor, it sells for a lot more than if you buy a basic monitor. Whereas with the IV pump, there's really not as much variance there, right? I mean, there is not as many options there to speak of and so it's a little easier to forecast that. On the patient monitors, we're still kind of feeling our way through what is going to be the average of those configurations.

So a fully loaded new monitor vis-à-vis a bare bones new monitor, what's the difference in price approximately? How much are we talking about, $10,000, $20,000?

Oh, no, no, it's bigger range than that.

Yes. I mean, the range is probably on the top end to the low end, Larry, is probably about $30,000. That is the difference. That's the delta.

Yes.

Okay. And then one another question, I'm assuming there are no manufacturing capacity issues if the monitor does do better than you even have expected.

Right. We're -- as I mentioned, operational-wise here, we're not only up to speed, but we've got good capacity. Larry, we don't plan to takeover 100% of this -- 100% of the this market. Our ambitions aren't quite that high as you can probably tell from my sharing of the $100 million plan. Even over the next 5 years, we're only showing ourselves taking not even 30% of that market. So to exceed our production capacity and have to go out and rent more space would be great, but yes, we can do very, very well meeting our goal, especially given this $500 million -- $100 million goal over the next 5 years with the space that we have.

What is the 5-year compounded annual growth rate if you were to hit $100 million in 5 years? What does the average annual rate turn out to be?

But won't happen, like the average, but...

Yes. It's about 34%.

34%. Okay. So if things go according to your plan, over the next 5 years your top line will grow 34% on a compounded annual basis?

Average.

Right. No, obviously, you're going to vary year by year. And what does that imply for operating margins or earnings? I'm assuming that the earnings rate would be even higher than 34% compounded?

Well, that is on the year of achievement of $100 million, we're talking about 35% to 40% operating margins on a GAAP basis.

And what does that turn out to be, Chris, in terms of compounded annual growth rate of operating income?

I don’t know if I have that with me right now, Larry.

But more than 34%?

Yes, well, you'll get some leverage out of it.

Yes. So it could be -- just to pick a ballpark number, you could grow -- if you achieve your goals, you could grow 34% compounded average growth rate for 5 years on the top line and on the operating income line could be, call it, just 40% just to pick up a number that's above that for the term.

That's greater than the revenue CAGR.

Thank you. And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Roger Susi for any closing remarks.

Again, I'm very pleased with our financial results and how we are performing in all areas of the business. Our aim is to continue this momentum throughout 2018 and to make positive and deliberate steps towards achieving the goal of $100 million in revenue in the 5 years coming. Thank you for participating in today's call and for your continued support of IRadimed.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.