IRIDEX Corporation (IRIX) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2017 IRIDEX Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Ms. Leigh Salvo Investor Relations. Ma'am, you may begin.

Thank you, Candice. And thank you all for participating in today's call. Joining me are William Moore, CEO; and Atabak Mokari, CFO. Earlier today, IRIDEX released financial results for the quarter and nine months ended September 30, 2017. A copy of the press release is available on the Company's website. Before we begin, I'd like to remind you that management will make statements during this call that includes forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact, including statements concerning the amount and timing of revenue and Cyclo G6 unit and disposable sales and shipments, the development of our sales and marketing model medical, medical retina and surgical retina projections, timing and benefits of our Cyclo G6 product initiatives, future sales and product launch activities, future operating expenses, changes in personnel, product development and intellectual property-related matters, the adoption and effect of the Company products on its results, the market in which the Company operates, usage and efficacy of the Company's products, the Company's future financial results, our clinical study plans and the Company's strategic plans and objectives should be deemed to be forward-looking statements. All forward-looking statements are based on our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a fulsome description of the risks and uncertainties associated with our business, please see our filings with the SEC. IRIDEX disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 7, 2017. And with that, I'll turn the call over to Will.

Thank you, Leigh. Good afternoon, everyone, and thank you for joining us. Positive third quarter results demonstrated continued progress towards making our G6 platform the global standard of care used to treat glaucoma patients across all stages of the disease. On the financial front, we reported third quarter revenues of $10.9 million versus $9.8 million in the comparable quarter last year. These results represent a record third quarter for IRIDEX, which is typically a seasonally slower quarter due to summer holidays. Revenues in the quarter benefited from an increase in G6 sales in the U.S. and a global increase in medical retina sales over the prior year. Although, we are still in early stages of the G6 adoption, I believe our growth investments, such as hiring and onboarding new reps and building out our marketing organization, are beginning to demonstrate potential for our long-term success and shareholder value. I'd like to take the next few minutes to review the performance of each of our business segments in the third quarter and cover highlights relative to our commercial infrastructure and product development goals us we laid out earlier this year. As a quick reminder, we have three primary business segments: first, our Cyclo G6 system for the treatment of glaucoma; second, our medical retina product line for the treatment of Diabetic Macular Edema, or DME, third our surgical retina line for products used for the treatment of retinal tears and detachments. Starting with our Cyclo G6. As I've noted in prior calls, we believe that G6 business is truly transformational for us, and I remain as confident as ever in the opportunity to address the shortcomings of existing treatment alternative in the $5 billion market. Our G6 platform offers a lower-cost laser system and a portfolio of disposable probes to deliver solutions for early to late-stage glaucoma patients. Since our launch in March 2015, we have shipped 741 G6 systems and approximately 56,000 G6 probes. In the U.S., our team is continuing to make progress with target customers in large hospital networks, ophthalmology clinics and ambulatory care surgery centers. In the quarter, we were successful in adding new customers as well as increasing the number of institutions that have purchased multiple systems, resulting in a record quarter of G6 systems in the U.S. In addition the G6 system growth, we saw pockets of improved probe utilization in the form of reorders. I believe we still have meaningful opportunity to grow this segment of our business. We believe that customer follow-up after a system sale is key to driving improved probe utilization and reorder rates. We are taking steps towards supplementing a more high-touch model that will enable us to leverage our large installed base, which I will highlight in a minute. Internationally, the G6 is currently sold in more than 50 countries, and we are making progress at further penetrating targeted countries. Two countries that have recently come online that I would like to highlight. One, in Japan, where we recently received regulatory clearance, we are making progress with our controlled launch activities. At the recent JCO meeting in Tokyo, we had a podium presentation from a leading Japanese KOL regarding their experience with the G6 and a podium presentation from a long-time user of the G6 at UCSF. These activities generated substantial interest in the G6, and we're working with our distributor to close these opportunities. And in Germany, where we made the decision to change from a distributor model to a direct sales earlier this year, we participated first time at the DOG conference in Berlin. And our new sales manager is gaining traction building relationships in leading glaucoma institutions. In summary, we have made nice progress in a short time, developing relationships with KOLs in these two markets. And are opportunistic about their potential, particularly as we go into the next year. The continued cadence of our support of G6 technologies is especially encouraging. At the recent ESCRS symposium held in Lisbon, our session of standing-room-only crowd with more than 200 physicians highlighting the growing awareness and interest we're seeing globally. Next week we also plan to have a significant presence at the AAO conference in New Orleans, with numerous presentations at our booth by leading physicians regarding their experience with the G6. As more of our new sales personnel comes up to speed and awareness of the benefits of our MicroPulse technology growth, I believe we will be able to move from the early adopter customers towards mainstream care, standard of care. In order to realize this expanded opportunity, we plan to focus on several things. First, we intended to continue to improve our marketing outreach, including presence at many of the key industry events worldwide and developing additional KOL support in targeted regions. Second, we plan to add several clinical specialists to work with our sales team to improve our customer service, which we believe will help to deliver consistent treatment outcomes, and we will be – and will be key to increasing the adoption of our procedure. And third, we plan to continue to seek opportunities to communicate the clinical and economic value of our procedure to the marketplace as we believe that we offer compelling value-based medicine solution for the treatment of glaucoma. This will be accomplished by improving our clinical education programs and the execution of a series of clinical studies. In closing on the G6, our goal remains the same, to make the G6 platform the global standard of care to treat glaucoma patients. Turning to our medical retina products for the treatment of DME. We saw substantial increase in revenues on a global basis during the third quarter, which was driven by a number of factors including, our new sales reps coming up to speed in the U.S., improved marketing programs and a continued market acceptance of MicroPulse as a treatment alternative. We continue to anticipate quarter-to-quarter lumpiness in this product line given the capital equipment nature of this business. Lastly, turning to our surgical retina business, which delivers treatment for retinal tears and detachments. We saw overall revenues relatively flat in the third quarter with growth at OUS offset by a decline in the U.S. at a rate consistent with our expectations. The market dynamics were consistent with the prior several quarters, with ongoing competitive pricing pressure in a mature segment. Before I turn the call over to Atabak to review the financials, I'd like to make a few additional comments regarding recent highlights related to our execution goals for 2017. As we laid out at the beginning of the year, there were two primary components to our current strategy. First, to expand our commercial infrastructure and second, to develop new products. I'd like to take the new next few minutes to highlight the recent progress we've made. Starting with our commercial infrastructure. The growing market demand for our G6 platform enabled us to continue to constantly focus on expansion of our commercial infrastructure to address this transformational opportunity we see for our business. On the sales side, our new reps are coming up to speed in the U.S. and beginning to make meaningful contributions. As I noted earlier, we are also in the process of hiring clinical specialists to support our sales follow-up initiatives, provide additional training and ensure consistent outcomes. Our new marketing team is already having an impact on raising our visibility in the field. We have had a significant ramp up in participation in industry events and educational webinars and have been able to further leverage these activities through replays and webcast that have received widespread attention. We expect to continue this approach to build awareness of the benefits of our MicroPulse technology in treating eye disease. Regarding our new product development initiatives, we are continuing R&D activities around advancing our glaucoma and retina product line by repurposing existing technologies that are expected to improve the features and benefits of our products as well as improved product quality and reliability while reducing costs. We are making steady progress and look forward to sharing more information when appropriate. We are delighted that George Marcellino, a medical laser and ophthalmic care veteran who is current member of our Board of Directors, has agreed to join us as VP of Clinical Affairs. Dr. Marcellino was a Co-founder at OptiMedica, an ophthalmic laser company, which was acquired by Abbott in 2013. He also served in various senior executive roles at Coherent and Lumenis, a leader in the field of lasers for surgical ophthalmology and aesthetic markets. In his new role at IRIDEX, he will oversee our clinical studies and new clinical specialist team. He will also work with our team to get a customer feedback to support product development and drive initiatives to improve customer training and utilization of our products. I'm confident that his strong background in both laser technology and ophthalmology will enable us to better serve the needs of our growing customer base. With that, I'd like to turn the call over to Atabak for more financial information.

Thank you, Will. I will begin with an update on our G6 business and then review the financials. In the third quarter of 2017, we shipped 111 G6 systems and approximately 7,800 G6 probes. The improvements we saw in G6 system sales was primarily driven by a record quarter in the U.S. On the G6 probe side, we realized that we have a significant opportunity to improve our probe utilization with the initiatives that Will discussed. Revenues for the third quarter of 2017 were $10.9 million, compared to $9.8 million in the prior year, representing a record third quarter and a year-over-year increase of 11%. Revenue in both G6 and medical retina improved while surgical retina remained relatively flat. In the third quarter of 2017 domestic system sales increased 12% to $2.5 million and $2.2 million in the third quarter of 2016 while our international system sales increased 40% to $3.0 million from $2.1 million in the comparable quarter. Our business generates recurring revenues through sales of consumable products, predominantly single-use laser probe devices and other instrumentation as well as repair, servicing and extended service contracts for our laser systems. Recurring revenues in the third quarter of 2017 was relatively flat at $5.4 million as growth in our G6 probe was offset by decline in our legacy probes. Gross margin in the third quarter of 2017 was 40.3% compared to 43.4% in the third quarter of 2016. Gross margin was primarily impacted by an unfavorable shift to lower-margin products due to product and geographic mix, partially offset by a decrease in manufacturing overhead spending. Operating expenses for Q3 2017 were $7.4 million, up from $5.5 million in Q3 2016. The level of our operating expenses reflects our growth investments to support our expanding commercial infrastructure, including increased sales and marketing expenses. Consequently, our operating loss in the third quarter of 2017 was $3.1 million compared with operating loss of $1.2 million in the prior year's third quarter. From a balance sheet perspective, we ended the third quarter with $22.8 million in cash and no debt. In terms of our financial expectations, we are reiterating our previously provided guidance range for revenues G6 systems and G6 probes. With that, I'll turn the call back over to Will.

Thank you, Atabak. We are making meaningful progress each and every day towards the worldwide commercialization of our G6 and building awareness for the benefits from our MicroPulse technology. Physicians and surgeons around the world are recognizing the value of our G6 platform, and we are committed to making our product the standard of care in treatment of glaucoma. We truly have a transformational opportunity on our sites, and I'm confident we have on the right path, and we have the right people to get there. Looking ahead, our near-term focus is to drive improved G6 probe utilization. I’m confident that our initiatives to improve our marketing outreach and customer follow-up in the body of clinical evidence will lead to a greater adoption of our procedure. I want to thank you all of our employees for your hard work during this time of transformation. With that, I'd like to turn the call over to the operator for questions. Operator?

Thank you. [Operator Instructions] And we do have a question from the line of David Solomon from ROTH Capital. Your line is open.

Hey, guys. Congrats on the strong quarter. I was just curious if we can learn a little bit more about the geographic mix of the G6 systems and probe sales.

So the geographic mix on the probe sales, predominantly, we're talking about in the U.S. Globally, we've got our probe sales where we concentrate on just a few countries where we have positive reimbursement rates. So that's mostly in U.S. and a little bit on the OUS side. I'm not sure I'm answering your question, David but…

Yes, just – well, we may need to wait for the K – the Q for specific numbers, but I'm just trying to understand exactly how much more it grew in the U.S. and what the growth rate was ex-U.S.?

Yes. So on the G6 side with the systems and probes, we haven't disclosed a breakout between U.S. versus OUS. But as we talked about on the call that the U.S. side was particularly strong this quarter on the system side, and it was actually a record quarter. And on the probe side, as Will talked about, that's consistent since launch that the U.S. has been stronger probe market for us, as – particularly since a lot of markets outside of the U.S. have different reimbursement profile than in the U.S. so we have at our current cost structure had a different utilization dynamics.

That’s very helpful. Thanks. If I could ask another question, regarding the pricing. Where do you see it going for the G6 and then for the medical retina? I believe you said the surgical retina is going to be relatively flat, correct?

Correct. I don't see any real differentiation or decrease in the pricing of the G6 glaucoma system at this time. I think what Atabak was talking about was we call it price mismatches in certain countries around the world. That's really more on what I talked about on the new product development side, will be with that. But I don't see pressures on pricing on G6 at this time. Medical retina is a different animal, and we'll continue to see pricing pressures around the world on that product. But I don't think we're talking about any major changes. You want to add any more?

Yes. I mean, the only color I would add is on the G6 side. We've been able to maintain pricing and then glaucoma markets actually improved pricing since its launch.

Great. That’s very helpful. Thank you, I’ll hop back on the queue.

Ladies and gentlemen, I'd like to turn it back over. I'm sorry.

Are there no other questions?

I’m showing no other questions at this time.

All right. Well, I want to say thank you to all for your participation, and we look forward to speaking with you next quarter. Thank you, operator.