IRIDEX Corporation (IRIX) Q4 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the IRIDEX Corporation Fourth Quarter and Year-End Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. Will Moore, CEO of IRIDEX Corporation. Please go ahead.

Thank you, operator. Good afternoon, and thank you for joining us to discuss the results of the fourth quarter of 2014. My name is Will Moore, and I am the CEO of IRIDEX. I’m joined today by Jim Mackaness, our COO and CFO. Jim and I will be delivering some prepared remarks related to the quarter and to the business, and then we’ll open the floor for questions. Before we get started, Susan Bruce will read the required Safe Harbor statement. Susan?

This conference call will contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended, relating to global and domestic market conditions; demand for the company’s products and market acceptance of the company’s new products such as MicroPulse enabled laser devices, TxCell delivery devices and the XR probe, and the impact of these new products of the company’s business; trends in the global healthcare marketplace with respect to the treatment of eye diseases, such as diabetic macular edema and glaucoma; development of new products and new applications for existing products; the company’s growth strategy and growth opportunities, including acquisitions; technology investments and strategic relationships; pricing of the company’s products; the company’s operating expense controls and cost reduction programs; and the impact of these controls and programs on the company’s financial results; the company’s share repurchase program; the company’s financial outlook and performance in the first quarter of 2015, fiscal year 2015 and future periods; regulatory developments and approval for company’s products and the impact of sales cycles; international currency fluctuations and other industry like factors affecting the company’s business. These statements are not guarantees of future performance and actual results may differ materially from those described in these forward-looking statements as a result of a number of factors. Please see a detailed description of these and other risks contained in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013, filed with the Securities and Exchange Commission. Forward-looking statements contained in this conference call are made as of this date and will not be updated. I’ll turn the call back now over to Will.

Thank you, Susan. I’m very pleased to say that 2014 was an extraordinary year for IRIDEX, and we finished the year with a very good fourth quarter. We delivered on one of our most important goals, double-digit revenue growth, for the year and generated a record 11.8 million of revenue in the fourth quarter. Total revenue for the year was 42.8 million, also a record. Over the past 18 months, we have proven our ability to grow while maintaining operational discipline even while developing and introducing products into a new and exciting market. We see the opportunities for additional revenue becoming even greater in the coming 18 months. During 2014, we made strategic inroads into China, India, Africa, Latin America and Europe. We were particularly excited about the expansion into emerging markets, which we believe strongly validates our theme of value-based medicine, particularly around our proprietary MicroPulse laser technology. I’m also pleased with our U.S. sales strategies, the expansion of the independent channel, which has produced increased disposal revenues and the ability of our direct channel to increase the value of MicroPulse in the minds of an increasing number of physicians. I’m also pleased to say that 2015 promises to be even more exciting than 2014. As you’ve heard me say before, glaucoma represents a huge part of our strategic and growth future at IRIDEX. I’ll talk a good deal about that today. We received clearance from the FDA in February to market our new Cyclo G6 laser system featuring our proprietary MicroPulse tissue-sparing technology designed especially for the glaucoma market. This new product gives us three things; a platform to introduce a series of additional proprietary delivery devices this year, a new recurring predictable revenue stream and it expands the reach of MicroPulse into a broader group of ophthalmologists all over the world. During 2015, we plan to introduce the substantial product line for glaucoma that will give physicians the ability to treat multiple stages of glaucoma. Glaucoma is a progressive disease leading to blindness in its final stage. Last week, I attended the American Glaucoma Society’s annual meeting and I’m very excited by the reception from doctors of our new Cyclo G6 platform. Early indications are that the doctors grasped the safety profile in MicroPulse and welcomed the potential of a new early treatment regimen when they see a patient’s compliance with meds is likely to become an issue. This is the first step towards widespread adoption. The Cyclo G6 laser platform will ultimately support a variety of intuitive single use probes to treat varying stages of glaucoma and has the potential to significantly alter the revenue growth profile of the company. We believe our growth in 2014 is a validation of our strategy and our technology. We have become the kind of agile, commercially oriented company that can identify the needs of the ophthalmology markets and respond fast enough to develop new products to fill those needs. MicroPulse is a great example of that as is the Cyclo G6 laser system. Now I’d like to turn the call over to Jim who will go over the financials in more detail. I will return afterwards for some more discussions of MicroPulse and our exciting opportunities in glaucoma. Jim?

Thanks, Will. As we noted in our press release and in Will’s comments, our revenues for Q4 2014 of 11.8 million were a record for our fourth quarter and were up 11% from Q4 2013 revenues. The business continued to display underlying strength in both domestic and overseas markets. Total system sales in Q4 2014 were 6.7 million, up 12% from 6.0 million in Q4 2013. For 2014, we saw overall system sales increase 4.2 million or 22% compared to 2013. And we can see that this growth is being driven by demand for our MicroPulse lasers. In 2014, we saw 30% more MicroPulse lasers than we did last year, and currently 40% of our visible wavelength lasers we sell are MicroPulse lasers. In addition, the demand for MicroPulse lasers pulls with it the demand for the TxCell Scanning delivery devices. And currently slightly more than 50% of our MicroPulse lasers are sold with the TxCell Scanning delivery device. Recurring revenues were 5.1 million in Q4 2014 compared to recurring revenues of 4.6 million in Q4 2013, an increase of more than 11%. And we saw growth both domestically and internationally and in both our EndoProbe and G-Probe business. This was a very good result and the recent addition of our patented XR Adjustable & Intuitive probe is proving a strong addition to our product portfolio. Gross margin in the 2014 fourth quarter came in at 50.1% compared to 48.6% for Q4 2013. This was a very good result and the continued improvement in our gross margin percentage is particularly noteworthy because our gross margin is impacted by our strong system sales, especially via international distributors where margins are more constrained. We continue to reap benefits of the IQ cost reduction program in which we’ve been investing. Our gross margin for the year was 50.0%, up from 48.6% for 2013 and right on our target. For 2015, we see opportunities for margin improvement for volume efficiencies with anticipated revenue increases, ongoing benefits from the IQ cost reduction program and anticipated increased consumable sales associated with the launch of the Cyclo G6 system. Although we are launching the Cyclo G6 system with a disruptive pricing model and may choose to absolve some gross margin compression in the short term. And the impact of the recent foreign currency movement is likely to have a negative impact on our gross margin. Operating expenses for Q4 2014 were 4.9 million, up from 4.6 million in Q4 2013. The growth over last year reflects a variety of investments both commercial and product development aimed at both near and long-term strategies to continue growing our market share and to take advantage of opportunities both retina and glaucoma markets. Operating income in 2014 fourth quarter was 1.0 million compared with operating income of 0.6 million in the prior year’s fourth quarter, representing a 77% increase. Now the two unusual items you will see in our fourth quarter results. Firstly, we continue to generate revenues from our RetinaLabs acquisition and anticipate generating revenues from our Ocunetics transaction. Both of these deals were structured with an earn-out component. Because our expectations of future revenues to be generated from these deals has increased, we now anticipate increasing our payments under the earn-out conditions. We have increased the contingent liability on the balance sheet by 1.0 million, which resulted in a fourth quarter charge to interest and other expense of 1.0 million. This is a non-cash item. Secondly, as I’ve made reference to a number of times in the past, we have been carrying a deferred tax asset on our balance sheet primarily as a result of net operating losses that we’ve been carrying forward. The deferred tax asset has historically been recorded at net $0 balance on the balance sheet, because we will also be carrying a valuation allowance for the full amount of the deferred tax asset. Based on the continued strong performance of the company, notably three years of profitability and nine consecutive profitable quarters, management believes it is more likely than not that the company will realize the deferred tax asset. This has resulted in us booking a credit to income tax expense of 8.8 million and recognizing a current deferred tax asset of 1.6 million and a long-term deferred tax asset of 7.2 million on the balance sheet. Again, this is a non-cash item. The end result is that we show net income for the quarter of 8.8 million or $0.86 per share diluted. If you remove the impact of these two unusual items I’ve just mentioned, our net income for the quarter would have been 1.0 million or $0.09 per diluted share, and would offer a more reasonable comparison to the 0.4 million net income reported in Q4 2013 or $0.04 per diluted share and this represents an increase of 125%. Our full year results helped provide a broader illustration of the progress we’ve made in 2014. Revenues for the full year 2014 were 42.8 million, up 12% over 2013. Gross margins improved from 48.6% to 50.0%. Operating expenses were 18.8 million compared to 15.9 million, although 2013 operating expenses benefited from a 0.5 million credit representing money is received from our insurance carrier as a result of it decided to [indiscernible]. Operating income for the full year was 2.6 million compared to operating income of 2.6 million in 2013 or 2.1 million for 2013 if you remove the impact of the insurance credit. Net income for 2014 was 10.0 million or $0.97 per diluted share. Please remember this includes the 1.0 million expense of continued liability write-up and the 8.8 million credit to the release of the deferred tax valuation allowance. Net income for 2013 was 2.2 million or $0.22 per diluted share. Looking ahead to 2015, we’re projecting revenues between 48 million to 51 million, although we, like many others, have our eye on the impact to our business with the recent strong currency movement. For the 2015 first quarter, we anticipate revenue of 10.8 million to 11.2 million. Gross margin is anticipated to come in between 49% to 51%. And operating expenses are expected to be between 5.0 million to 5.2 million. We will be booking a tax provision in 2015, although with 13.6 million in NOLs we anticipate our cash tax payment to be negligible for the year. Changing topics, during the quarter we purchased 156,000 shares at an average price of $8.03 per share and for the year we purchased 562,000 shares at an average price of $8.29 per share. We have 0.9 million left to invest under the current program. With that, I’ll turn the call back over to Will.

Thank you, Jim. As I said earlier, last week we introduced our new G6 laser platform at the annual meeting of the American Glaucoma Society. The introduction was supported by multiple physician posters providing data on the success rate of the MP3 probe used with the Cyclo G6 for early to mid-stage glaucoma. We believe the physician data begins to show why the Cyclo G6 presents an exciting new treatment option for the global glaucoma market. Glaucoma is a degenerative optic nerve condition that affects more than 50 million people. It’s incurable, can cause blindness, in the current treatment it presents enormous cost of healthcare systems all over the world. This issue was highlighted during the AGS meeting by a poster from Mexico, by Dr. Lazcano-Gómez entitled the economic burden of a glaucoma over a five-year period. In his presentation, Dr. Gómez presented evidence of the devastating economic impact experienced by glaucoma sufferers from a loss of income, loss of independence and burdens pledged upon their family and society. Based on our talks with doctors who treat glaucoma patients, there’s a deep dissatisfaction with currently available treatment options and a strong feeling that new and better solutions are required. While the current standard of care pharmaceuticals delivered via eye drops has the potential to be effective, in practice too many patients prove unable to comply with the daily or multiple times daily regime. Doctors feel helpless as they observe their patients’ conditions and eyesight steadily decline until surgical intervention becomes necessary. And even that cannot reverse the damage caused by this progressive disease. We believe our MicroPulse laser technology fits into this space between the drops and the more aggressive surgery or implants. MicroPulse is safe, durable and minimally invasive and the treatment may provide months of improved IOP. This is a great new option for the physicians and their patients and presents an enormous opportunity for IRIDEX. Instead of the earlier laser procedures; the [indiscernible] and the trabecular meshwork, the less intense application of energy in MicroPulse actually serves to just cleanse the network to promote the passage of fluids back and forth. It does not destroy tissue. We anticipate a limited launch plan throughout the coming 12 months during which time we will deliver the technology into the hands of experienced practitioners that will help to perfect both the technique and the protocols for performing various procedures. Once these early users have given us the feedback and driven optimization, we will progress to a full launch most likely in the back half of the year or possibly early 2016. Over the past few years, MicroPulse has become an established part of the ophthalmology landscape. Physicians are using MicroPulse as their first-line treatment for a variety of disorders, in particular diabetic macular edema or DME, a serious retinal disorder. We believe 2015 will see an expanded adoption of technology including physicians using MicroPulse as an important glaucoma treatment even at early stages of the disease. 2015 promises to build on the very strong foundation laid down in 2014. We have increased the size of the U.S. sales force. We have a broader product portfolio. The international distribution channel has been rationalized. We now have products that provide predicable, recurrent revenue streams and we have the kinds of innovative laser technologies that fit the worldwide demand for value-based medicine. Although, as Jim said, I do believe as well we will experience some headwinds due to the currency volatility. Healthcare systems, especially those in developing countries but in established countries as well, have huge needs for new innovative products that are cost effective and improve outcomes. We can deliver those kinds of products and that’s why we believe 2015 presents such a compelling opportunity. I would like to thank you employees and our distribution partners around the world for all their hard work and dedication. Now, I’d like to turn the call over for questions. Operator?

Thank you. [Operator Instructions]. Our first question comes from Raymond Myers from Alere Financial Partners.

Thank you. Good evening. Can you hear me?

Yes, we can.

Yes, we can.

Great. Well, congratulations for a nice quarter topping off a good year, so congratulations to start.

Thank you.

My first question is approximately how many retinal doctors are using MicroPulse now?

I’ll just say the U.S. to begin with. That’s an easier one to deal with. I’ll say around 250.

And that’s out of approximately how many in the U.S.?

The number is between 1,500 to 1,800.

Will mentioned the number of retinal specialists. They’ll typically visit between two to four clinics as well. So if you’re trying to come up with an addressable market, I’d multiple the two together.

All right. I’m trying to understand the percentage penetration, so it is 250 out of 1,500 to 1,800. Is that the right way to think of it?

I’d say 250 out of 5,000.

Okay, great. Thanks. What proportion of the revenue in the fourth quarter was from international tenders?

It was China.

Yes, we only had one large tender in the fourth quarter that was China. As we noted in a press release, around $650,000.

Okay, great. And if I do the math on your guidance, you’re calling for a growth of 12% to 19% revenue this year over 2014. That’s a little higher than the 12% that you had in 2014. So what gives you visibility to accelerating revenue growth in 2015 and what part of that is driven by the international tenders that you pre-announced?

I think there’s a few things, Ray. One, the accelerating fourth quarter was positive. I think when we put out the guidance for Q1, it would only be the second time we’ve reached this number around 11 million. Q4 was the first time. The process that we put in place through digital marketing is attracting more physicians and making our sales people more efficient, especially in the U.S. By that I mean the number of times we reach and talk to a doctor from inside before we turn the lead over to the outside has increased, therefore, the number of times that outside sales personnel have to talk to the doctor has been decreased before we get the order. The second part is we’re seeing more and more multiple site orders. For example, one clinic may order one IQ, TxCell laser and then within the next 6 to 12 months they order a couple more. So we’re seeing that and those don’t take a lot of, I’ll say, effort. And then the other part, we do see an increasing number of tenders on a worldwide basis as governments are investing into their infrastructure for healthcare. So countries like India, Brazil, China, et cetera, we see those continuing and those tenders generally go for a substantial dollar amount. But that makes our business somewhat lumpy. I think it’s one of the reasons why we gave you a year on guidance versus just a quarter.

Sure. And maybe this touches on that, the lumpiness. You talked about the G6 having a disruptive pricing strategy. Can you delve in about a little bit more what is the strategy around the pricing? And considering it’s such an innovative product, why do you feel the need to price it lower at the beginning?

Yes. So a couple of reasons that we’re trying to hit on there, Ray. As we’ve talked about, the beauty of the Cyclo G6 for us will be the ability to get into the procedural side of the equation. And so what we’re looking to do is to offer an introductory bundle for the physician where they can basically load up with a number of instruments for the procedure, so let’s say 60 probes for 60 procedures. And by basically investing on the procedure side, we’re looking to provide the laser at a very, very reduced price point. Our strategy here is to try and make sure that we get the lasers into these store bases quickly as possible, because we see that as the best way to stimulate the procedural base, the recurring revenue stream coming from the probes as it becomes a more comfortable and commonplace practice within their clinics. So that’s what we’re looking at on the introductory side. You can always go à la carte, which is to buy the laser at a more normative price and buy at lower volumes on the probes. But as I said, the idea to stimulate that installed base is to look at some disruptive pricing in a bundled format.

Okay, that makes sense. Thank you. And then could you also touch on the new delivery devices that will be introduced this year? Have you discussed what those are, the cadence of their launch and how impactful they might be to results in the long term?

Are you thinking about delivery devices in other delivery devices along with the Cyclo G6 platform, was that --?

Yes. I think that’s what I think Will was talking in his comments about how there will be more G6 delivery devices launched throughout this year. And it sounds like the launch will be in a measured rate until those devices are available?

So, Ray, the name G6 is simply an indication of the number of types of probes we already have in mind. We’re delivering the first – so initially that releases a G2, if you will, there’s two probes. There’s four more on the drawing board that are working their way through the system that will come out during the course of the year. But it’s all designed for varying stages of the glaucoma disease from the very early stage to the late stage. We’ll be the only company in the world that will be able to do so. The product release really has to do from the standpoint that we know the science works, there’s a little bit of technique or art. And when you’re introducing a brand new product that has this amount of potential for the company, you want to make sure that the technique is perfect before you start releasing it to the general population. Therefore, I would like to have 30, 40, 50 teaching hospitals type people using it in a routine manner, having good results versus having a few hospitals in the rural areas using it and don’t have the technique down. So I think this is a controlled release. I don’t know if it will take us all year to get to that part. I would expect that by the fourth quarter, we’ll be introducing it on a global basis.

That makes a lot of sense. Once you’ve gotten to the point where you have the kinks out and you feel like you’re really ready to go for a full store-on launch. Do you have the sales force capabilities to take full advantage of the opportunity? Would you be hiring more sales people?

We said our sales force is expanding. We have 10 full-time direct reps. We’re looking for another one now and we have moved our independent channel up to 20 and they are predominately glaucoma type specialists. So that was through the Peregrine acquisition of a year and a half, two years ago with anticipation of this release.

Excellent. Okay. I’ll get back into queue. Thank you.

Thank you. Our next question comes from Larry Haimovitch from HMTC.

Good afternoon, Jim. Good afternoon, Will.

Hi. Good morning, Larry.

Congrats on a strong end to a very, very good year. Actually Ray has asked some of my questions. I was going to ask about the sales force. So you’re adding one now. Is that during the fourth quarter [ph] you’ll add for the year, Will, or would you add more as you go through the year?

Well, I’ll put it this way. Right now that’s all we have. Let’s get this ongoing. What’s happened over the last couple of years, Larry, is we started out with territories doing a little over 1 million each. We’ve had four territories reach almost – three reached the 2 million and one is 1.9 million, and so we’re starting to reach the point where we need to divide those. We keep them above 1.5 million that they pay for themselves. So we’ll keep doing that.

Okay. Will, I know there were two papers at the AGS, I had intended to go down there and it didn’t work out for me, but I wonder if you could give us just a little color on what you saw or read from those two papers that were significant to the launch?

Well, I’m going to correct you a little bit. There was two papers on the G6 launch. We had another paper that showed up on MLT, plus the other paper that I didn’t even know anything about on the glaucoma cost issue [ph]. I think the two papers we’re talking about, one was from Wills Eye in Philadelphia and the other was from Dr. Radcliffe out of the New England area. Basically what they’re saying is in a very inexpensive simple process they are repeating and getting the same type of results that we’ve had from the physician that was doing the longer term study in Singapore. And what we saw and Jim can speak about this as well, because he spent time in that poster session as well, is the trials were pretty substantial. And what excites me there is these doctors’ looking at us and going through it and they understood MicroPulse, they were safe. They didn’t really understand how it worked, because it’s a different group of doctors with whom we’ve talked about, but they understood the safety profile and were very much excited about having some treatment modality as the patient reaches into this stage of noncompliance to be able to transfer him over to a safe, easy method to give him IOP reductions for an extended period of time.

Okay. Jim, a couple of questions for you. What was the cash flow for the year?

EBITDA was about 3.9.

3.9 positive of course.

Yes.

And then I thought I heard you say that fourth quarter disposal revenue had had a nice quarter. Did I hear that correctly, because I know there were a couple of quarters earlier in 2014 when disposal revenue was flat? Could you elaborate on that please?

Yes. No, you’re right. I know that you’ve been tracking us for a long time, so yes, it was very good to see that our recurring revenue in disposables did tick up at the end of the year and that was both on the EndoProbe and the G-Probe and again, both domestically and internationally, so that was very good. On the international side, obviously, we anticipate some of the tenders into places with various lasers into these developing markets can start to pull through probes and that looks as though that’s playing out. On the domestic side I think they continued to – Will made reference to this, it continues sort of both on the direct and now with the independent team just gives us a much broader recovery. And then the topper, if you like, is by adding in the extended reach and that’s given us something that is a unique differentiator in the market and that’s quite a competitive product for us.

So should we be thinking about 2015 disposal revenue more in line with Q4 or perhaps falling back to kind of flat with previous quarters?

It is a little seasonal we see on the probes and then obviously a little bit of – the visibility gets a little harder because our distributors tend to sort of, if you like, bulk buy. But let’s put it this way. Whereas in the past, it’s been sort of a little bit of leakage occurring. This time I think we’re sort of looking and just saying, hey, flat to modest growth is where I think we compared it for this year.

Okay. The reason I’m asking, Jim, is because there were a couple of quarters, I think it was second and third quarters where the capital equipment sales were spectacularly good, the disposal revenue, which is I guess about a half of the business was flat or even down, so we didn’t see the full benefit and the capital equipment very strong performance. If the disposal business decides to show some life, obviously that will give the top one some extra – to use the financial term, oomph?

Right. As you know, Larry, it’s one of the reasons why we’ve been pushing so hard on the Cyclo G6 as well, which is to get the thing out. I mean one of the bugger boos that we’ve had within the dynamic of what we do is our G-Probe is a single using product. But if you talk – we’re well aware that it’s actually more common to use it multiple times. And so transitioning – putting a product out that has RFID technology to basically support the single use clearance that we get from the regulatory body is going to allow us to sort of see we hope substantial growth in the per procedure base business.

Okay, very good. Thanks, gentlemen.

Thank you.

Thank you.

Thank you. [Operator Instructions]. Our next question comes from Paul Fitz [ph] who is a private investor.

Yes. Thank you. Thank you to the management for steady progress. How many full-time employees in Q4?

Yes, we ended up the year with about 106, 107.

And if I understand the numbers correctly, without the credits, the year-over-year comparison was actually been down in earnings?

Operating income, we were flat. I suppose if you’re taking the contingent liability write-up on a quarterly basis and netting that out, we may have ended up with a net income that was slightly lower than last year.

And to help us a little bit with understanding the razorblade characteristics and financial impact of the probes, how are the probes priced relative to the laser itself in terms of what portion just roughly are the probe cost?

Are you talking about margins? I’m not sure I understand --

No, in terms of revenue.

Well, the probes we sell are around $100 to $200 and the lasers we sell from 20,000 to 30,000.

And I’m sure I must have mistakenly heard this at the beginning. There are six probes you’re targeting not 60?

That’s six. We’re targeting six new probes on the glaucoma side.

I think the bit you were confused on was the bundle, the key opinion leader bundle for selling to the doctor in the first batch, so the concept of the bundle would be a laser with 60 probes for them to use for 60 procedures. So that’s the bundle.

I see. So these are recurring of the same types.

Yes, exactly.

I got it, all right, thank you.

All right.

Let me pass it on from here.

Thank you. [Operator Instructions]. We appear to have no further questions. I would like to turn the call back over to management for closing comments.

Thank you, operator. Thank you all for listening in to our conference call today. We look forward to speaking with you again at the end of Q1 with positive results as well. Thank you very much and talk to you next quarter.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.