Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the 4Q11 earnings release conference call. [Operator Instructions] This conference is being recorded today, Thursday, March 1, 2012. I would now like to turn the conference over to Dominik Beck. Please go ahead, sir.

Welcome to IRIDEX Corporation's Fourth Quarter 2011 Conference Call. I am Dominik Beck, President and Chief Executive Officer. I am joined by Jim Mackaness, our CFO. Before we get started, Susan Bruce, our Executive Administrator, will read the required Safe Harbor statement and then I will begin with a recap of our progress to date and an outline of the good things we see ahead of us. 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 company's growth strategy including acquisition technology investments, and the strategic relationship, global and domestic market conditions, healthcare spending, market direction and trend, product demand and market acceptance of new products, gross margins, operating expense control, 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 contained in our annual report on Form 10-K for the fiscal year ended January 1, 2011, and the quarterly reports on Form 10-Q for this quarterly period ended April 2, 2011, July 2, 2011, and October 1, 2011, each of which are 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 the last quarter's call, I had just arrived at the company. Since that time, I have been able to spend a large part of my time with employees, customers, partners and suppliers in an effort to get a read on where we need to improve our services and focus our efforts. While that work has never completed, the past weeks and months had been valuable in validating and refining our strategic plans. And most importantly, we executed on a number of key elements. Specifically, by selling our Aesthetics Laser business, we can now focus solely on our ophthalmology business. By entering into a distribution agreement with Alcon, we have taken the next big step in making consumable products a key part of our growth plan. And since the American Academy of Ophthalmology, when we first introduced MicroPulse as an upcharge option for all our laser platforms, we have fast-growing affirmation that vision-preserving MicroPulse laser therapy is the way of the future beyond treatment of diabetic macular edema. It makes more economic sense to healthcare systems, it is more profitable for physicians and healthcare providers, and it has improved clinical outcomes for the patient compared to the current standard care. We now have 10 year data and a pronouncement from the UK's National institute of Health and Clinical Excellence to support our assertion. With those initiatives behind us, it is time to focus solely on growth and efficiency. And I will begin to outline those plans today and will continue to drive those 2 areas as essential focus of IRIDEX. This afternoon we presented the fourth quarter results for our continuing ophthalmology business. Before reviewing those results, I want to spend a moment explaining our rationale for the sale of our Aesthetics business. As you can see…

Thanks, Dominik. As Dominik mentioned, you will notice that we presented our fourth quarter results from our continuing Ophthalmology business. I want to draw your attention to the fact we did include a supplemental schedule in the press release for your reference showing the results of our continuing Ophthalmology business for all 4 quarters of 2011 and for the year 2011. Turning back to this quarter, revenues for the fourth quarter 2011 from continuing ophthalmology operations were $8.6 million up 4% from $8.3 million from Q3, but down 5% from $9.0 million reported for the fourth quarter 2010. Our recurring revenues were $4.1 million representing 47.6% of October revenues. This was up $0.2 million sequentially from Q3 and level with the $4.1 million reported in Q4 2010. Gross margins have reset as a result of carving of our Aesthetics business. Gross margins for Q4 2011 was 49.6%, improved from 48.3% for Q3 2011 and from 49.4% for Q4 2010. Operating expenses, including the credit for Alcon were $3.1 million, adding back the Alcon impact, the expenses were $4.4 million. Operating expenses were $3.7 million for Q3 and $3.9 million for Q4 2010. We added 2 key employees with the Ocunetics acquisition, focused on marketing and product development. We do traditionally have higher expenses in our fourth quarter due to our attendance with the American Academy of Ophthalmology, which occurred in October. We use this event as an opportunity to invest in additional sales collateral and marketing programs in support of the launch of MicroPulse on our green laser platform, and we accelerated certain product development program. In addition to the $1.3 million credit to operating expense for the Alcon agreement, we also recorded $0.3 million of other expense because we increased the amount of the earn out we anticipate paying…

Thank you, Jim. I am excited by the opportunity that we have. Our target markets of retinal diseases primarily diabetic retinopathy, and glaucoma, are large growing markets demanding improvements in the therapy, improvement in the clinical outcomes of the patience and improvement in efficiencies and cost savings of the physicians, as well as improvements in the overall costs to healthcare systems. The company's focus is to leverage the existing product portfolio through targeted marketing programs and to introduce product line extensions to capture more share in these markets, while working determined on the paradigm shift that MicroPulse brings to laser therapy. As we expand our market focus to include comprehensive and glaucoma specialist, we are all -- we're also enlarging our total addressable market opportunity by threefold. Let me briefly address how we are simulating growth in probe sales going forward. As we speak, we are developing new sales programs which will be put in place in the short term designed to leverage our key product discriminators in both the OR and ASC. For those programs and our program with Alcon, we're determined to defend our market share and gain additional momentum in consumable probe sales in the near term, while at the same time addressing our market manufacturing capabilities to drive better margin. These internal efforts will be supplemented by additional Business Development activities. We have concluded 2 acquisitions, one sale and one distribution alliance for the last 2 years and intend to remain active in this area. In summary, our goal is to grow the company as a pure player in ophthalmology and increase shareholder value by rolling out a steady stream of new products and services while implementing internal programs to improve efficiencies and productivity. Success for us will be to grow revenues to above $50 million by the end of 2014, with gross margins larger than 55% and an income before taxes of about 15%. I will now open the lines up for questions. Operator?

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

Dominik, you referenced manufacturing changes or cost potentials, could you discuss that a little more?

I can give you an example. If you look at our current probe manufacturing, we touch those probes with in and out of the factory about 4 to 5 times too often. So by reducing those touches, we will eventually enhance our efficiency and productivity, reduce our cost and therefore grow our margin.

And so I'm assuming there are some studies and initiatives underway to figure out the best way to do that?

It is correct, yes.

Okay. And then right at the end of the call, you mentioned something which I thought was very interesting that concern your goals for, I think it was for 2014?

Right.

Was it $50 million in revenue?

This is correct. Target is beyond $50 million, 5-0 million in 2014.

Okay. And then but I think it was 15% net after taxes?

Before taxes.

Okay. So a 15% pretax margin?

Correct.

Okay. So that would imply growing roughly 50% in the next 3 years it's accumulatively. That -- so roughly being the company being 50% larger in 2014 versus 2011, if my math is correct?

Yes.

Okay. And does that include the benefit of acquisitions? Or is that all internal growth?

It has both components included, but predominantly internal growth.

Okay, fair enough. And then question both for you or Jim, I guess. On the repurchase, $4 million repurchase has been authorized by the Board, that would be about 1 million shares, at current -- roughly current prices and -- but I'm assuming, Jim, that you couldn't get anywhere near doing 1 million shares this year unless the trading volume significantly ticked up?

That's correct. Until we are able to take blocks.

You are. Okay. And then finally Jim, with the closing of the Cutera deal, my understanding was that there would be a fairly significant tax loss carry forward that you could employ now that, that asset has been disposed of? Do you have any more detail on that?

Yes, and we're still refining it. But to your point, we had created in the past an intangible tax asset of about $7 million. And as a result of the disposal, that will effectively rollover to be a net operating loss. So the advantage is that we would be able to use it for cash tax purposes for about - to shelter 100%.

So are you saying the net credit is -- net tax loss credit for future use is only $7 million? Because that -- my understanding was it was going to be in the mid to high teens?

Well, mid to high teens in the sense of the amount of income if you like. The actual cash benefit. Tax affects that.

Okay. So your tax is affecting the benefit? So the pretax benefit is what, something in the high teens then?

$15 million.

Our next question comes from the line of Greg Cole [ph].

Couple of quick questions. First, were the legal expenses related to Cutera buying the Aesthetics unit -- are those in discontinuing operations?

The direct legal costs, yes, they're included in the discontinued ops line.

Okay. So there's no -- there are no onetime items in quarter four that are kind of skewing anything in one direction other than the Alcon settlement or payment?

Correct to that, yes.

Okay. And -- all right. So I guess -- or can you give me a little bit of an idea of, kind of a, cost from switching over to a little bit more than lean manufacturing in I guess these first couple quarters and, I guess, how long you expect that transition to take?

Some of the programs will have immediate impact, however the extent of the impact is very difficult to calculate at that point. As I point out, I believe we will move beyond the 50% margin through those plans within this year. Their impact however is sustained. So year-by-year we'll have the benefit of those plans eventually and they will grow in size as well. To give you an idea initially, we will target more our disposable and consumable product line and eventually we will look into our console manufacturing as well.

Okay. And so with the consumable, I assume that's different than your systems which are a lot of that is outsourced and then you compile it. Do you do pretty much all of the consumables internally?

No. There is actually a large amount of the value created outside IRIDEX's doors, at this point. Part of the lean program is to identify what additional value can be either brought in or brought under control.

Okay. All right. And I guess from what I'm looking at kind of the capital equipment market. There seems like there was a lot of spending in December to try and meet a tax deadline. And you mentioned that U.S. sales were pretty strong internally. Is there -- I guess do you -- did you see that? And did you see that kind of weakening in this first quarter?

The $71 -- $79 million tax, is -- was a very strong closing tool in the year end. So far, we have just seen a little bit of an impact eventually on Q1 on that. Nothing to worry about on our end.

Okay. So it wasn't that big of an impact, but just a small, a little bit? Okay. All right. And then with the consume -- the recurring revenue, I think you mentioned it was $4.1 million and I think it was $3.9 million last quarter. Is most of that increase from Alcon? Or was there -- I guess can you -- from organically, can you talk a little bit about the changes there?

There was a little bit of impact from Alcon, not much doesn't really come on stream until this quarter. So the rest was just the regular set of ebbs and flows that we see. We do often see international because it goes through distribution, tends to buy in bulk, so the timing of particular distribution orders can improve things back support. But it was up, but I don't know that it's indicative necessarily of specific items other than just timing.

Okay. So that, I guess -- so do you see a lot of that the million dollars potentially in -- is that for this year?

It should play up through 2012, correct.

Okay. So do you see that more in the back half -- than the next quarter or 2?

Well, we'll see how it plays out. We think it should come on stream pretty quickly.

Okay. And I guess, do you have the manufacturing capability to, I guess to fully handle them yet?

The way the deal was structured is the initial deal calls for a royalty. And then there's a transition to IRIDEX branded GreenTips as we come up to production capacity. So that's the thing that may just have a timing on how the revenue flows in. But we will be receiving royalties in the get-go.

Okay. And just as a quick question on the, I guess, their royalty payment. Was that taxable? I was just trying to see if there's anything kind of effecting the tax rate and going forward with that, should that stay around 13% or so?

It is taxable income. The tax for us gets a little -- Larry touched this growth, it's going to get a little bit interesting as we're through. So where we were in 2011 was we would be if you like in the P&L we have 2 impacts. We had a regular tax rate that we've been mitigated by a reduction in the valuation allowance on the deferred tax assets, so you saw a net 13% in the P&L. Going into 2012, as Larry identified as well, we anticipate that a large part of that deferred tax asset now becomes a net operating loss. So the moment I'm thinking is the fact that on a cash tax payment for federal, we may be able to get to effect a zero payment. While we're able to maintain the valuation allowance against that, as we grow the tax -- deferred tax asset down our P&L rate will similarly benefit. So going into next year we could be -- we should have a low tax rate in the P&L and it may be as low as 0. But we’re still working through all the permutations.

Okay. All right. And I guess can you talk a little bit about, I guess, how well you've been received with the, I guess, with your green laser -- or sorry your yellow laser, what's the most recent one to come out?

We have seen an increase in yellow laser sales, although we do not go into detail there, we see that retina physician quite like the idea. And specifically off the combine in MicroPulse, we have had quite a few successes here and we see a growth in our yellow sales.

Our next question comes from the line of Richard Lynn.

Couple of clarifying questions and a one more broad question. So on -- first of all, I really appreciate you giving a 2014 guidance, that's very much appreciated. Is that a run rate at the end of 2014? Or your number for the end of calendar year? Or the beginning run rate of 2014? Can you just clarify those?

I think that's a year-end number.

Okay, a year end number. So at the end of 2014, in terms of run rate, it should be somewhat higher than what you're guiding to that, is that fair?

Yes.

Okay. And then on the buyback, you said $4 million, is that additional $4 million or have some of that been spent in the past?

Some of that has been spent. So we will try -- we originally announced the plan as of May of this year -- 2011. And it was a $2 million authorization. And the Board approved up to $4 million. We have bought probably under the plan itself, something in the order of 90,000 shares. So 90 x 4 will get you the number of dollars we spent out already.

Okay. But it sounds like you -- a big bulk of that you still can spend?

Correct. Yes.

Okay. And then on the operating expenses you announced it was $3.7 million a few quarter ago, $4.4 million last quarter, what's the right number to model for the next couple of quarters, assuming -- now that you don't have the conference and stuff? Can you give us some guidance on that?

Well, we don't want to get into too much specific guidance, but we said, we kind of anticipate, and we do want to keep those investments in R&D and marketing and sales to some extent going forward. So for us, somewhere in the getting towards the $4.4 million would not be unreasonable on average. It's going to move quarter-to-quarter, as you said sometimes you have sometimes you have AAO in your counter sometimes we have less marketing programs that will move in and around there. But just to give you some sort of feel of quantity, that's the way we're targeting on average.

Okay, great. And then the last question is more a general question on the MicroPulse. Is there any where -- way to -- or can you point to any metrics -- well, I guess first question is of your revenue, is there any way to know what percent is due to MicroPulse? And are there any metrics to kind of follow that adoption curve in the market floor at all? Or how you're doing in terms of that specific category?

At this point there is none and we are not breaking that out either. And we might look at changing that approach in the future.

All right. Would you be -- is it fair to say that is helping drive a lot of your assumptions going forward? Or what's really driving the organic growth, I guess in your mind? Or is it more of the Alcon kind of relationship?

There's multiple elements too, and MicroPulse is one important one of them. In terms of capital equipment sales, it's been eventually a metric that will somehow be tied into how we did with MicroPulse as well, because every MicroPulse unit will pull a new laser console through as well.

Our next question comes from the line of Stan Ennie [ph].

I'm trying to understand the -- in the future where we're going between -- is the growth really going to be in consumables or in a MicroPulse machine -- machinery units, in your opinion?

That is both. And the consumable as we said, we want to grow our current 50% contribution of consumables to our top line to a more 60% number. So, therefore, it will participate a little bit faster in top line growth than capital equipment.

Okay. The Alcon deal, I know you probably can't talk about the size of the deal, but can you talk about the potential for the Alcon product distribution, what potential is out there, U.S. and outside U.S.?

Well, I think, perhaps to help you understand, we mentioned that we're currently -- we're just talking about the one real product, the GreenTip, and as Dominik referenced it, it goes for about a $20 ASP. We think that through the Alcon channel that we -- once we get up to full rate, expect the north of $1 million coming our way on an annual basis.

$1 million. And that's the potential for them. Will you be selling that product?

We will sell IRIDEX branded GreenTips as well, yes, different skews, different sizes and different variations. That's the opportunities for platform extensions around that, sort of singular product that they are currently offering.

Do you think that sequential of the equivalent size, in your opinion, the potential?

It's hard for us to match Alcon's channel muscle. So we would -- I would anticipate that we would, success for us will be some discount off their number. But given that is, again, a relatively small straightforward piece of our overall product portfolio, we'll be very excited by that type of result.

Okay. A question on the Alcon. The yield that Alcon drove was -- were competitive Synergetics involved an upfront payment for the goods will save them once again or shift against it and supposedly deleted. Is your deal different than that with Alcon?

Yes. The payment you saw at Q4 was recognized for settlement due to historical items. No, there is no -- if you like, there's no balance sheet item for any prepayments. We're now just on a -- ultimately our goal is to -- it'll start up as a royalty, but the ultimate goal is for it to transition to a very classic distribution relationship where they would buy from us and sell through the distributor and they'd be buying an IRIDEX branded product.

Okay. [indiscernible] will be competing against you on your branded product?

Yes.

Okay. Second question, on consumables again, our consumable line, the potential and growth through 2014, is that going to be significant? What I'm trying to get at just you know is to understand is there going to be new consumables of a major contributor or our existing line of consumables sold in an improved marketing mode, et cetera?

We see that this is probably also a 50-50 new consumables, that are currently on a drawing board or targeted to be on the drawing board. Some might be completely new. And we look at acquisition, this is definitely a target for us as well, but also any strategic alliance or distributor agreements consumables. And then there is internal growth of our current products that we see eventually grow as well. Maybe not at the same pace, but definitely growth in there.

Okay. Are consumables higher gross margin than machines?

In general, yes.

In general, yes. Okay, just a last question is, you talked about growing through acquisitions and product growth and the Alcon deal. Would you say that you could see acquisitions in the -- in this year, 2012, have you been looking -- can you give us a little more color on where you stand on acquisitions and size that you're looking at?

We do -- in terms of growth with Alcon, Alcon is opening doors for additional growth in the consumable fees, but just fast as Alcon. and in terms of acquisition targets, they're anywhere between IP and the low number, million number of sales of our revenue eventually. But in 2012, I do see that we focus on smaller tuck-ins.

Meaning several million is your smaller tuck-in?

At maximum.

Okay. And that would be for acquisitions that would add product sales?

That's correct. For several million, we would expect sales.

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

I just wanted to follow up on Stan's questions and my earlier question. So I just did a little back of the envelope, and if my math is correct, and I'm not too terribly jet lagged, it looks like you're looking for roughly 14% compounded annual growth over the next 3 years, getting you to roughly $15 million. I don't know if that sort of fits with your Math, but that's kind of what I came up with just literally back of the envelope.

That's my number.

Okay, great. So as you well know, Dominik, although I know you haven't been on board a long time, as you well know that is considerably faster than the company has grown in the past. And I want to understand that a little bit more. I mean, would you want to give us a little more help in understanding how much you think comes out accelerating internal growth versus acquisitions? You touched on it a little bit with Stan. Any other color or any other thoughts on that would be helpful.

In the past, we guided that internal will be just above 10%, and that will continue to be so.

Well you haven't been growing really 10% recently have you?

This is correct.

Okay. But you view the business as now, particularly with Aesthetics out of the way, as kind of a 10% growth on its own without any acquisitions?

Correct.

Okay. And the difference between 14% and 10% thus would be the acquisition side?

Correct.

Okay. So obviously you're very bullish that internally things can really, really pick up because you just haven't -- you have not been doing that recently?

Without a doubt, Larry. I'm also very excited and convinced that we have a very good technology on hand that's now ready. And if we do execute in our commercialization plans as we build them up, I do see that 10% is achievable.

At this time, I show no further questions in the queue. You may continue with any closing remarks.

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. Goodbye.

Ladies and gentlemen, this concludes the 4Q11 earnings release conference call. If you'd like to listen to a replay of this conference, please dial 1 (800) 406-7325 and enter the code 4517801. We would like to thank you for your participation, and you may now disconnect.