IRIDEX Corporation (IRIX) Q1 2012 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, thank you for standing by. Welcome to the IRIDEX First Quarter Earnings Release Conference Call. [Operator Instructions] I’d now like to turn the conference over to Mr. Dominik Beck. Please go ahead.

Good afternoon and welcome to IRIDEX Corporation’s First Quarter 2012 Conference Call. I’m Dominik Beck, President and Chief Executive Officer. I’m joined by Jim Mackaness, our CFO. Before we get started, Susan Bruce, our Executive Administrator, will read the required Safe Harbor statement.

This conference call will contain forward-looking statements within the meaning of section 27-A of the Securities Act of 1933, as amended, and section 21-E of the Securities Act of 1934, as amended, relating to the company’s growth strategy including acquisitions, technology investments and strategic relationships, global and domestic market conditions, healthcare spending, market direction and trends, product demand and market acceptance of new products, gross margins, operating expense, controls and the company’s 2012 financial outlook. 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 as contained in our annual report on form 10-K for the fiscal year ended December 31, 2011, which is filed with the Securities and Exchange Commission. Forward-looking statements contained in this conference call are made as of this date and will not be updated.

Thank you, Susan. On last quarter’s call, I spent time outlining the opportunities that I see for IRIDEX, and at the end of this call I will return to these themes so that you can gain a better understanding of the opportunities and what we are doing to capitalize on them. For my opening remarks, I will focus on our most recent quarter. We continue to make progress. We closed the sales of our aesthetics business to Cutera for 5.1 million, and now have close to 14 million cash in the bank. This provides us with a very good platform from which to take the company forward with a single focus in ophthalmology, which has always been the core expertise of the company, and I will contain my remarks to our continuing ophthalmology business. Our revenues increased compared to last year’s Q1, also marginally, we recorded 8.3 million up from 8.2 million. We did end the quarter with approximately 100,000 in backlog and consumables. Early in the year, we launched a couple of marketing programs to reposition certain consumable products in the glaucoma market because we felt we had identified some good near and long-term opportunities for our current products. As it turns out, our expectations were accurate and the market responded favorably. The corresponding increase in demand outstripped our planned Q1 supply of these products. We will be looking to build on that momentum going forward. On the capital equipment side of the business, we did see some softening in orders for domestic systems, which we attribute to customers’ uncertainty and lingering reluctance to commit to capital purchases. We anticipate that the equipment business will in part be driven by macroeconomic factors until the technology paradigm we are driving gets more traction, at which point we believe we can accelerate the replacement cycle and grow the market independent of its natural or historic cycle. Our gross margins were 48%, and I feel confident that with a modest increase in revenues we will meet our short-term goal of 50%. As part of our internal efforts to increase efficiencies, we did hire a new V.P. of Operations, Ron Steckel. The position had been vacant, and we had been looking for the right person to bring on board to ramp up manufacturing of our new products and drive internal manufacturing efficiencies as we fought our way forward, achieving our long-term goal of gross margins above 55%. I believe Ron is an excellent addition to our management team and will play an important role in the future performance of the company. I mentioned on the last call that we planned to continue investing strategically in R&D programs as well as marketing and sales initiatives, and consequently our operating expenses were likely to increase to approximately 4.4 million, with our Q1 coming in close to break-even. Our operating expense in fact came in at 4.2 million, but we did produce a small loss from continuing operations of $300,000, or $.03 per share. During the quarter, I’m pleased to announce that we did complete the sale of our aesthetics business, and I’m going to let Jim cover this further in his comments on this continued operation. We are well into the process of reorienting the company to a more commercial focus, to take advantage of opportunities driven by strong new market trends in ophthalmology. We were at the American Academy, the American Society of Cataract and Refractive Surgeons last month, and I was impressed by the direction and speed of new developments in glaucoma surgery and the steady output of new technologies that aim to enhance outcomes in cataract surgery. In glaucoma, for example, several current technologies include the use of surgical drainage devices. These devices have attracted much attention, but thus far have not produced clear data indicating safety and effectiveness and are difficult to implant. Safe and easy-to-apply surgical options will always have greater appeal to physicians, and at least 10 companies are currently developing advanced glaucoma implants and devices targeting either the comprehensive ophthalmologists for office space procedures or the cataract surgeon who will place an implant while performing cataract surgery. This field is gaining traction and is driven by the goal to reduce medication. IRIDEX is already participating in this field and we are aggressively developing technologies that will advance in-office laser procedures and devices that will fill the need of a larger segment of primary users. As part of our growing commercial focus, we have recently taken a number of steps that we consider to be just the beginning of numerous market-facing initiatives. For example, we launched a new noninvasive in-office glaucoma procedure using MicroPulse, targeting the glaucoma specialists and comprehensive ophthalmologists. We also introduced marketing programs to reposition our G-Probe device for use in trans scleral cyclo photocoagulation treatments. There is mounting evidence that this minimally-invasive glaucoma surgical procedure can be safely used in patients much earlier in the disease state, and that our G-Probe is an excellent tool to achieve excellent outcome. We introduced a bridge-to-buy program targeting new users who want to enter the market and perform noninvasive glaucoma surgeries in their office. And finally, we launched a physician and patient education website for the treatment of diabetic macular edema patients with MicroPulse, and conducted webinars, one taking place tonight, with live physician Q&A sessions to improve communication within the physician community. These programs are representative of a range of activities that are in place or planned in the coming months. Although there are no guarantees that all these programs will produce the anticipated results, I am confident that the range of activities and initiatives will begin to impact our top line and further establish IRIDEX as an active driver of technology in the ophthalmic market. In addition, we are also making progress in optimizing MicroPulse technology for broader market adoption. The outcomes being produced and recorded continue to be very compelling, and as that effort demands, we plan to have products that can be adopted by the entire range of practitioners, from the specialists to the general eye care practitioner. Now we will turn the call over to Jim to go over more of the details of our financial results, and then I will have some concluding remarks. Jim?

Thanks, Dominik. As Dominik mentioned, we sold our aesthetics business unit to Cutera in February for 5.1 million, and therefore our financial statements reflect the results from our aesthetics business’s discontinued operations, and the results for our ophthalmology business’s continued operations. Most of my following remarks will relate to our ongoing ophthalmology business. Revenues for the first quarter 2012 were 8.3 million, up from 8.2 million for Q1, but down 3% from 8.6 million reported for the fourth quarter 2011. Our fourth quarter is typically exceedingly high for us for system sales, because system sales are affected by our customers’ annual budgeting cycle. System sales for Q1 2012 were 3.9 million, compared to 3.9 million for Q1 2011 and 4.4 million for Q4 2011. Recurring revenues for the first quarter 2012 were 4.4 million, representing 52.7% of our total revenues. This was up 0.2 million, or 5%, from Q1 2011, and also up sequentially 0.3 million, or 7%, from Q4. For retinal consumables, we are benefiting from a ramp-up in sales from our distribution and licensing partner Alcon, although we need to do more to address the challenges we face in the rest of the retinal consumable product portfolio, and we are benefiting in the increase in sales of our glaucoma consumables and in fact ended up the quarter with $100,000 in backlog. This uptake may be the result of early returns on specific glaucoma marketing initiatives we launched in Q1, although it’s a bit too early to tell for sure. Gross margins were 48.0% for the first quarter 2012, compared to 49.8% for Q1 2011 and 49.6% for Q4 2011. Overall, direct margins on products improved slightly, and there was an increase in manufacturing expenses due to rebalancing of reallocated costs as a result of carving out of the aesthetics business. Our near-term target remains 50%. Operating expenses were 4.2 million for the quarter, up from 3.8 million for Q1 2011 and down from 4.4 million, which represents Q4 2011 operating expenses excluding the 1.3 million settlement credit we booked in Q4. The increase in expenses year-over-year is in product development, as we look to accelerate the flow of new products, and marketing, as we embark upon new commercialization programs. In addition, we incurred 100,000 in severance payments in G&A related to non-aesthetic employees who were terminated following the sale of the aesthetics business. Taking all of these items into consideration, we did report a loss from continuing operations for the quarter of 0.3 million, or $.03 per share, compared to net income of 0.2 million, or $.02 per share, for Q1 2011, and net income of 0.8 million, or $.08 per share, for Q4 2011. The Q4 results includes the 1.3 million settlement credit. Overall net income, including discontinued operations, was 1.6 million for the quarter, or $.18 per share, compared with 0.6 million, or $.06 per share, for Q1 2011 and 0.8 million, or $.08 per share, for Q4 2011. With regards to discontinued operations, we booked a book gain on the sale of 1.1 million. However, for tax purposes, the sale created a tax loss of 18.5 million. We were able to carry the tax loss back to 2010 and 2011, to reclaim taxes paid in those periods, so we booked a tax benefit of 0.6 million in anticipation of filing and receiving a tax refund. We’ve also booked an additional tax benefit of 0.3 million because we were able to reduce our FIN 48 tax liability for those years, and recovered 0.5 million in other credits. We have approximately 14.5 million of NOLs to carry forward to use against current year and future year profit. Looking to the second quarter for fiscal 2012, we’re anticipating revenues between 8.5 million to 8.8 million, gross margins between 49% and 51% and operating expenses between 4.2 million and 4.4 million. In closing, the company continues to execute its share repurchase program, although we are limited by SEC regulations in how active we can be in the market. During the quarter, we purchased approximately 47,000 shares at an average of $4.10, and the Board of Directors has approved an extension of the program through March, 2013, and an increase in the amount of cash available for the program to a total of 4 million. And with that, I’ll turn the call back over to Dominik.

Thank you, Jim. I have received a lot of feedback from the investor community, curious about our plans to invest in people and projects necessary to grow the company. We know the replacement market we serve grow on average in the single digits, and we know from our past performance that we are able to participate well in those replacement markets and grow in the single digits, managing ourselves to be profitable and cash flow positive. We also understand that driving shareholder value will require more than that. Fortunately, the markets we serve are very large and very dynamic because of the diseases in question; retinal diseases and glaucoma currently have no long-term cures. Those markets are poised for next-generation therapies and surgeries, and we have key solutions for key clinical challenges in those areas. Therefore, we fundamentally believe that there are opportunities for IRIDEX to generate a growing footprint in these markets and, as a result, grow on average by more than 10% organically on a regular basis. To do this, we must reorient the company to a more commercial focus and invest in people and programs to execute upon the opportunities. To provide a specific example, IRIDEX offers the aforementioned G-Probe as a single-use disposable delivery device that allows the glaucoma specialist to treat the patient in the office for glaucoma. Historically, this procedure has been relegated to final-stage glaucoma. That is, all other options have been tried first and this is the last stop. However, there is no medical reason why the G-Probe is used last. In fact, if you talk to physicians and discuss the use of the G-Probe, they quickly come to the realization that the procedure can be very beneficial to the patient and should be introduced much earlier in the disease progression. Since the G-Probe is a single-use device, a small uptake in number of early use procedures could increase that high margin revenue stream by a couple million dollars per year. As a result of this and other similar opportunities, we think it makes sense to invest. Historically, on a carved out basis our operating expenses were approximately 3.8 million per quarter. Our plans call for us to make additional quarterly investments of approximately $600,000 a quarter in the following areas. First, in the majority and product development marketing in support of our glaucoma initiatives, including the G-Probe I’ve mentioned, and to bring additional glaucoma consumable products to the market. This was the underlying reason for making our investment in the Ocunetics in the fourth quarter of last year. Second, an ongoing investment in development of delivery devices to accelerate market adoption of MicroPulse. And third, investments in our sales channel to capture the additional revenue from the additional products and programs. We have added 1 salesperson in Q1, and will be adding 1 to 2 new salespeople to the field between now and the year-end. While such additions rarely make immediate impact, we believe that a shifting equipment paradigm and gaps in our current sales coverage represent an opportunity worth investing. We will continue to report on our progress as we grow the commercial team. I am convinced that these investments are measured and the expected returns on each will be significant. We will keep you posted on these programs’ progress as they bear fruit in the marketplace. In addition to these internal initiatives, the strength in our balance sheet and our current cash position will help us to identify and execute on new commercial alliances in licensing and M&A opportunities that the company did not have just a few quarters back. We are assessing a number of such opportunities and will continue to entertain solid ideas going forward. I’m very enthusiastic about the opportunities that lie ahead, and I am impatient, as I’m sure you are, to see these opportunities show up as revenue growth. I will now open the line for questions. Operator?

[Operator instructions] Our first question comes from the line of Larry Haimovitch of HMTC.

Can you hear me? Okay, sorry. Dominik, question for you. My understanding is that the patent on selective laser trabeculoplasty will come off in about 15 months. To the extent you’re comfortable talking about it in a public sense, what can you tell us about Iridex and the opportunity to enter SLT?

So with our recent ISRS show in Chicago, we did actually launch a MLT program, which is a MicroPulse Laser Trabeculoplasty procedure, together with our IQ 532 green laser. This is a new approach we just launched, which we feel quite comfortable will actually fill some of that market that will open up.

So does that, I’m assuming, Dominik, that that means you don’t have to worry about the SLT patent, by doing MLT rather than SLT, you’re going around the patent so to speak?

That’s pretty much our approach, yes.

Okay. And Jim, I missed the share buyback. I thought you said the board authorized an additional 4 million, did I catch that right?

Authorized up to 4 million, took it from 2 million up to 4 million, yes.

And that’s, so theoretically if you could buy as much as 4 million this year, you would. Is that what you’re saying?

Correct, yes.

Thank you, and our next question comes from Stan Mann [ph] of Mann Family Investors [ph].

First, I have some questions on just the numbers reported. I’m puzzled by the share count moving down from 10 million something to 8.9 million something, and I’m wondering if that’s correct.

The reason on this quarter was because we have a loss in the continued operations. We actually have to use the basic share number, both in the basic calculation and in the diluted calculation. So that’s a GAAP requirement that we have to do it that way.

So our outstanding real shares are the 10 million, as reported, 10 million something as reported last year?

Yes, 10.2 is what you and I would normally refer to as the fully-diluted number, correct.

Okay. The other thing is, in your fourth quarter report you had a buyback of seemingly more than you had in total buyback this year, and I’m puzzled. You had 168,000 and now you have 157,000. I’m just trying to understand, these are not my major questions, I’m just trying to figure out why.

No, that’s a good point there. The 168,000 included 76,000 shares before we put the stock purchase plan into place. When we made reference to the 157,000 on this earnings release, we excluded, because we were trying to refer to just shares bought under the stock purchase. The easiest way to think about it is currently we’ve bought in total 233,000 up through the end of April. And I apologize for the confusion.

Okay, just one other, cleaning up the sheet. You have current assets that are aesthetics of 1.398 million. I assume that’s receivables you’ve kept?

Correct. Predominantly receivables, yes. We didn’t sell the receivables.

Okay, so those are collectable, and really those are collectable?

Yes, at this date, we did go through them to make sure that we put what we thought was a sensible reserve against any doubtful accounts and the remainder are ones that yes, we think we should be collecting and turning into cash.

Okay, so you really have close to 15 million in cash when you collect those.

Yes.

Okay. Now my real questions. I’m trying to understand how you’re going to sell all of these new programs. How many current salesmen direct do we have?

In the U.S., there’s 12 direct salespeople.

Okay, and OUS? Europe?

Well, we’re dealing with 4 area sales managers OUS, that serve in the order of 70 distributors. We don’t have an actual count of how many sales individuals are within those distributors, but assuming that there’s at least 1 per country, so there’s at least another 70 individuals out there.

Okay, and your plan to add is strictly U.S.-direct, the 1 you’ve added, 12 includes the one you added this quarter?

That is correct. Twelve includes the 1 individual that I added in quarter 1, and the 1 to 2 does include another in-U.S., and eventually an additional OUS.

Okay so you could, is that 1 to 2 per quarter, or 1 to 2 for the rest…?

For the rest of the year.

Okay, so that would expand us not a lot. So my basic question is how are you going to move significant volume through that small a sales group, and one that’s not expanding rapidly?

The products that we’re looking at, and the programs that we’re looking at, can actually, in terms of capital equipment, very well be moved to our current channels and current direct sales force. The consumable pieces, there is one aspect of additional products in the consumable product range where we eventually will have to pick new channel partners or additional channel partners to the existing ones. So for example, also with Alcon, as we did in Q4, where we signed our distribution agreement, part of the consumable piece and the growth in the consumables is relying on partners such as Alcon.

Okay. So you feel you can grow double digits with the plan you have in place?

Correct.

Okay. Outside, are you satisfied with your distribution model outside the U.S.? I ask that…

With the model moving forward, I’m satisfied. With the model I currently have existing, I definitely have identified gaps and we do have plans to expand our direct footprint eventually as well.

In like Germany or U.K., where you have…?

I wouldn’t go into specifics at this point, but pointing in the right direction.

Okay, domestic, what’s our split, domestic and OUS, just I’m sure everybody’s interested.

It’s about 50-50.

Is it 50-50?

Yes.

And growing similarly?

Yes, it’s been around 50-50 for the last couple of quarters.

Okay, so they’re the equivalent performance.

Yes.

Okay. Last question is, on your acquisition program, and I think we’ve talked, Dominik, that I think using the money to try and accretively add, is a better way than buying back stock, but that’s your call and the board’s. Do you see near-term acquisitions that you’re far enough along to say in the fiscal year will see something significant?

I have one relationship in mind which I’m very excited about, and we’re working hard to make it happen in this fiscal year.

You are. And it would be sizeable or significant?

In regards of our targets, growth targets, it will have a significant impact.

It would have, so it is, unlike prior recent acquisitions, it could, it would add sales?

Correct. This would add sales.

It would. And my other part of that is, would it be accretive, since the acquisitions a long time ago, that you didn’t have anything to do with, nearly destroyed the company? So would you consider these accretive, or safe or balanced?

Balanced is a good word.

Balanced is a good word. Okay. That’s good.

[Operator Instructions] We do have a follow-up question from the line of Larry Haimovitch with HMTC.

This is for Jim. Jim, I’m just following up on Stan’s question. The public release for the Cutera deal said 5.1 million in cash. It sounds to me, from what I’ve just heard, that did not include the receivables which would in fact make the purchase price 5.1 plus the receivables. Is that logical?

Yes, we received 5.1 from Cutera for the assets they bought, and they did not buy the receivables.

So you get to keep the receivables, which thus becomes cash?

Correct. But we did also have some exiting costs, again, because it wasn’t as though, it wasn’t a share purchase, if you like, so the 5.1, we used something like about $800,000 in cash to extinguish the liabilities related to the aesthetics business, but we also got the receivables to keep, to collect going forward.

So what is the net of all that, Jim? I mean, is there a way to net it out? Is it really more than 5.1, or how would you net it out?

I would say it comes out right around 5.1, with the receivables we’ve got offset the liabilities we had to pay.

Okay, so 5.1 is a good round number then.

Yes.

Okay. Dominik, you have I have talked about this of course in the past, and to the extent that you’re comfortable expanding at all on acquisitions, strategic alliance opportunities, have you had much opportunity of late to start focusing on that? You mentioned, you just mentioned the one deal you’re working on, but can you give us sort of an update on where you stand there?

The first quarter was difficult for me to really go out and explore a lot. There was more efforts following that, but there was one, at least that one relationship we strengthened that seems to have followed a very good, timely path, and I’m looking forward to getting that done here in the near future. Besides that, if we look at our -- and I alluded to that earlier, the need to grow adoption for MicroPulse is dependent on additional technologies. And those technologies have been more or less identified, so we have now at least a good understanding, what are we targeting in those technologies, and we have identified targeted technology carriers. So that’s the extent that I can talk to you in regard of MicroPulse and adoption of MicroPulse. The next move we’re doing is clearly catering towards the consumable and recurring revenue piece.

Okay, and those are things you’re actively looking at?

Correct, yes.

And we have a follow-up from the line of Stan Mann [ph] from Mann Family Investors [ph].

Gentlemen, just a last question. On your quarterly report, what part of what’s reported is non-recovering one-time, so that we can actually assess the statement as it would be without the non-recurring events?

Are you particularly focusing perhaps, you mean on the operating expense line item, is that where you’re focusing in on, Stan?

Wherever you think there’s non-recurring. I’m trying to take your reported quarter and look at it with just the expenses that are normal quarter-to-quarter.

Right. So for the continued operations, we came in with a margin of 48%, we said we think that should be able to get up to 50% in the near-term, that’s our target there. So there’s, as Dominik mentioned, primarily driven by revenue growth, there’s not really much that we see non-normative in our expense side. On the operating expenses, we had 4.2. There was $100,000 we referenced in severance costs in the 4.2. But our target is looking to be somewhere between the 4.2 and the 4.4 going up, so those are kind of our steady-state goals.

Okay, and the only other part of it, of course, the gain on the sale of the aesthetics business.

Yes, and that’s all put down in the discontinued, we called that out in the discontinued operations.

Okay, and the severance costs are all done?

All done, yes.

And the new operating individual, is he new?

Yes, he’s new.

[indiscernible]

You added an operations manager.

Well, we added a VP of Operations, and that was a vacant position for quite some time now. Prior to vacating this position, the prior VP of Operations was actually operating from a remote location, so now we brought one in that has a tight focus on efficiency and productivity improvements and increases, and on internal programs also, addressing our probe manufacturing and assembly.

Okay, so there are not 2 individuals, you said somebody was from remote. Is that person or individual gone?

Yes, this individual is terminated.

Okay, so it’s a balance. You’ve got…

Right, it’s a wash.

Thank you. There are no further questions. I’d like to turn it back over to management.

Thank you for participating in this call, and for your interest in IRIDEX. We look forward to sharing our progress with you at our next call.

Ladies and gentlemen, that does conclude our IRIDEX first quarter earnings release conference call. If you'd like to listen to today's replay, the phone number is (800) 406-7325 and the access id 4533749. Thank you for your participation. You may now disconnect.