IRIDEX Corporation (IRIX) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 IRIDEX Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Leigh Salvo, Investor Relations. Ma'am, you may begin.

Thank you. And thank you all for participating in today's call. Joining me are William Moore, Chief Executive Office; and Atabak Mokari, Chief Financial Officer. Earlier today, IRIDEX released financial results for the quarter and year ended December 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 federal securities laws, which are made pursuant to the Safe Harbor provisions of the State Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact, including statements sales, churns and initiative, including our plans to grow in certain non-U.S. markets and to expand our customer base, the recall of our LIO product and its impact on our business and results, the development of our sales, and marketing organization including hiring clinical specialists and extension of our sales team in Germany, our manufacturing plants including outsourcing plants, the markets in which we operate including our plants to obtain regulatory clearance in China for the G6, product development and intellectual property related matters, including those related to next generation platform, clinical study plans, future operating expenses, changes in personnel, our strategic plans, and our guidance for 2018 including overall and product line reviews and G6 system and probe shipment levels should be deemed to be forward looking statements. All forward-looking statements are based upon 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 discussion of the risks and uncertainties associated with our business, please see our most recent form 10-K and form 10-Q with the filings, with the Securities and Exchange Commission. 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, March 8, 2018. And with that, I’d like to turn the call over to Will.

Thank you, Leigh. Good afternoon, everyone, and thank you for joining us. Well our fourth quarter and full year 2017 financial results were disappointing. We believe that the 2017 year was marked by significant progress in our transformation towards the glaucoma market. While this transition has come with some expected and unexpected hurdles I’m very proud of the efforts our team has made. As many of you know our business historically target niche retinal disease. Today we are beginning to see traction in addressing the 5 billion glaucoma market. This is a material shift in our target markets, also came as material shift in our business model to focus on driving volume and utilization over onetime capital equipment sales. This strategic shift not only affords us with a significantly larger and more predictable revenue growth opportunity but the potential to meaningfully expand our margins and move towards sustainable profitability. We entered 2017 with a strong base of clinical data, Cyclo support in early adapted customers for our G6 products. This gave us the confidence to move ahead with the commercialization and commit to the significant investments necessary to ensure we have the foundation in place to realize the opportunity. I’m proud of our progress towards these goals in 2017 which includes substantial enhancements to our infrastructure including, an increasing new sales force by over 50% in new, an expanded marketing team significant higher presence in glaucoma-oriented trade shows and digital media. We also added two key leadership roles a VP of Clinical Affairs and a VP of Regulatory Affairs. And we transition to our fully outsourced model of our G6 systems and probes which improves our production capacity and lowers our cost. Internationally we established a direct selling operation and launched the G6 in Germany. We also received G6 regulatory clearance and launched in Japan. both Germany and Japan are core target countries for outside of the U.S. Clinical data support of G6 grew with 28 new studies of over 1800 clinical pit of glaucoma patients presented at major society meetings in 2017. And finally, we completed the development of several exciting work in product types of next generation platforms that we plan to discuss in more details in the coming quarters. I’m encouraged by the early traction we are gaining in the G6 business and confident that we will continue to see greater returns from our investments in 2018. I’d like to take the next few minutes to review our fourth quarter and full year 2017 results in more detail. Starting with our financial results. We reported fourth quarter 2017 revenues of 10.2 million versus 12.5 million in the comparable quarter last year. Revenues in the quarter benefited from an increase in G6 sales but were more than offset by several issues in our retinal business that prevented us from meeting demand and I will discuss this in more detail shortly. For the full year 2017, total revenues were for 41.6 million compared to 46.2 million in 2016. G6 revenues were flat, while our medical retinal revenues decreased in mid-single-digits and surgical retina revenues decreased in double-digits. Turning to our business highlights, as a quick reminder, we have three primary product lines, first, our Cyclo G6 for the treatment of glaucoma, second our medical retina product line, for the treatment diabetic macular edema or DME and third our surgical retina line of products used for the treatment of retinal tears and detachments. Starting with G6 we shipped a 133 G6 systems and approximately 10,600 probes in the fourth quarter, a record quarter for both and reflective of expanded demand in the U.S. Since our launch in March 2015 we've shipped 874 G6 systems at more than 66,000 G6 probes. In the first half of 2017, we made significant infrastructure changes in process improvements to support our focus on G6 sales. In the second half of the year we began to see the benefits of those investments. In particular the number of G6 systems shipped in the second half of 2017 nearly doubled over the first half of the year. This was largely driven by several factors. Progress we made in onboarding our new US sales team, improved lead generation, repeat orders from larger customers, and innovative pricing model helped shorten the sales cycle. We also saw a meaningful uptick in G6 probes shipments in Q4. In addition to the fourth quarter being seasonally higher several factors contributed to our improved U.S. probe utilization. This included increasing productivity from our sales reps improved customer targeting and benefits of better customer service and follow-up. Last quarter I highlighted several strategies we are pursuing to drive awareness, adoption and utilization of our G6 platform. I am encouraged by the notable progress we have made, first as I noted earlier we are improving our marketing outreach, including presence at many key industry events worldwide and developing additional scale support in targeted regions. So far, this first quarter we are off to a fast start with four G6 symposia held in Hong Kong, France, UK and Italy, which in aggregate attracted over 500 doctors. At the recent American Glaucoma Society meeting in New York City we had two main podium presentations and the audience of about 600 doctors. The first presentation was made by our KOL from UCSF and the second was voted the best presentation at the conference. Continued cadence to support for our G6 products and MicroPulse technologies at these events is encouraging and we expect to continue the pace to build awareness. Second, we are adding clinical specialists to work with our customers to help deliver consistent and positive treatment outcomes. We believe customer follow-up after system sale is key to driving improved probe utilization and reorder rates. This is an area where we are keenly focused. During the fourth quarter with our VP of Clinical Affairs onboard we began recruiting for manager and specialists to fill these important new roles. We were fortunate we have hired a manager in early January to lead this group. He has been working with us on a consulting basis since the middle of 2017. So, we are able to make an immediate impact. We also recently added two clinical specialists to serve on his team. And third, we are seeking opportunities to communicate the clinical and economic value of our procedure for the treatment of glaucoma through clinical education programs and the execution of series of clinical studies. We have recently submitted a mechanism action study for IRB review and hope to begin enrollment in the near term. We have also made progress with our lead investigators regarding our global, multicenter clinical outcome study to establish protocols and keep us study parameters. Looking at our G6 opportunity geographically, we currently see the greatest momentum in the U.S. where our sales team is making progress with target customers in large hospitals and networks, ophthalmology clinics, and inventory 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. Internationally the G6 is currently sold in more than 50 countries and we're making progress further penetrating targeted countries. In addition to our controlled launch activities in Germany and Japan are proceeding nicely. In closing on the G6, our overall goal remains the same, to make the G6 platform the global standard of care used to treat glaucoma patients. With a large and expanding patients population we have multiple opportunities to grow our installed base and increase utilization. Turning to our medical retina products, we continue to see solid underlying demand, however this business is expected to experience quarter to quarter lumpiness given its capital equipment nature. As an example, in the fourth quarter we experienced much higher than anticipated orders from one of our core product lines, which put us in a backwater situation and prevented us from fulfilling those orders. This business is also impacted by our sales team's focused on the G6 throughout 2017 as well as a recall of one of our laser accessories, I'll cover this in a moment, as it impacts both our surgical and medical retina businesses. Next turning to our surgical retina business. We continue to see the dynamics of the mature market. We also experienced the regulatory issue on one of largest countries outside of the U.S. that prevented us from shipping its specific product into that country. We have addressed the regulatory issue and expect orders to return in the coming quarters. Lastly, I’d like to make a few comments on the voluntary recall of our TruFocus LIO premiere laser accessory that we announced a few weeks ago. The accessory is used in both surgical and medical retina procedures. Our team made the decision to remove the affected products from the marketplace and remedy the situation as quickly as possible. This issue impacted our fourth quarter revenues for medical and surgical retinas in two ways. One, product orders were booked in Q4, but could not be shipped while we investigated the issue and two, our sales returns reserve increase given the voluntary recall. The time being we do not have an LIO that we can sell with our retina laser systems, so this issue continues to impact our business. We are actively working on a solution including potential adjustments to the existing product and third-party alternatives. The timing is unclear given the uncertainty of the regulatory process, in their interim they have a plan in place to minimize impact on our business by offering alternative laser accessories. At this point I’d like to turn the call over to Atabak to provide further detail on our financial results for the quarter and guidance for 2018. I’ll then conclude our prepared remarks with goals, our goals, and outlook for the year. With that Atabak?

Thank you, Will. Revenues for the fourth quarter of 2017 were 10.2 million compared to 12.5 million in the prior year period representing a year-over-year decrease of 18%. G6 revenues in the fourth quarter increased by approximately 17% while medical and surgical retina revenues decreased due to the issues that Will described. In 2017 our G6 revenues were relatively flat year-over-year at approximately 9 million. G6 system revenues declined were more than offset by an increase in our G6 probe revenues. In 2017 we shipped 377 G6 systems, compared to 384 systems in 2016. System revenue was impacted by new pricing programs that we introduced in mid-2017 to facilitate the sales process and shorten our sales cycle. On the G6 probe side, we shipped 32,000 probes in 2017 compared to 27,000 probes in 2016, an increase of approximately 18%. Probe revenue also benefited from a modest increase in ASP in 2017. From a geographic perspective approximately 60% of our G6 system installed bases in the U.S. while approximately 75% of our G6 probes is in the U.S. In the fourth quarter of 2017 domestic system sales decreased 48% to 1.5 million from 2.9 million in the fourth quarter of 2016 while our international system sales decreased 20% to 3.3 million from 4.1 million in the comparable quarter. Recurring revenues in the fourth quarter of 2017 decreased 2% to 5.4 million from 5.5 million in the prior year period as growth in our G6 probes was offset by a decline in our legacy probes. Gross margin in the fourth quarter of 2017 was 21.2% compared to 44.4% in the fourth quarter of 2016. Gross margin was primarily impacted by costs associated with our voluntary recall and pricing pressure in the retina business, which offset the benefit of higher margin G6 revenues. Our G6 contribution margin in 2017 was approximately 65% and is expected to improve as the mix of G6 probes increased. Operating expenses for Q4 2017 were 7.4 million up from 6.6 million in Q4 '16. 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 fourth quarter of 2017 was 5.2 million compared with operating loss of 1.1 million in the prior year's fourth quarter. From the balance sheet perspective throughout 2017 we improved our working capital management with significant decreases to our inventory and accounts receivable and we ended 2017 with 21.7 million in cash and no debt. Turning to our guidance for 2018. We expect G6 probe shipments of 40,000 to 45,000 which represents growth of approximately 32% year-over-year at the midpoint and expect shipments of 350 to 400 G6 systems. We expect total revenue for the full year to range from 37 million to 41 million. With that, I'll turn the call back over to Will for some closing remarks on our 2018 goals.

Thank you, Atabak. We are making meaningful progress each and every day towards the worldwide commercialization of our G6 and building awareness of the benefits of our MicroPulse technology. Physicians and surgeons around the world are recognizing the value of our G6 platform and we are committed to making the center of care the treatment of glaucoma. As we look towards 2018 I’m more confident than ever in the option we haven’t had and the strategy we laid out in 2017 remains on track. Our top two priorities of 2018, first to improve the G6 probe utilization from our existing installed base while continuing to sell base expansion across the globe. Second, to introduce new products they have the potential to improve the quality, reliability, and manufacturing cost of all our products. In order to achieve this, we plan to drive probe utilization in the U.S. to improve sales execution and building out our clinical specialist team. Internationally, we intend to obtain regulatory clearance in China and Korea for the G6 and continue to build out our sales team in Germany. We also expect to begin enrollment of IRIDEX sponsor G6 clinical studies. We anticipate an increase in clinical studies by independent physicians to be president throughout the year at major society meetings. And lastly on the product development front we plan to launch at least one of our next-generation platforms. And lastly, I look forward to updating you on our progress in the coming quarters. With that I’d like to turn the call over to the operator for questions. Operator?

[Operator Instructions] And our first question comes from David Solomon with ROTH Capital Partners. Your line is now open.

Just want to start with LIO. So, you talked about two alternatives the internal development for some third-party. Which way do you think this is going to be going? And I know you can't give specific guidance but could it be midyear or do you expect it to be something that will take longer than three to six months?

This is Will. I think there's two alternatives there as you have talked about one, is fairly short, depending on how the FDA response to our response to them. And the second one could take a little bit longer period of time. And could be three to six months yes.

And so, you're waiting to hear back from them, okay, that’s helpful and then you mentioned some accessories. Can you give a little bit more color on what those alternatives laser accessories to be?

Sure, it depends on whether they are in medical retina, surgical retina, pattern scanners endo probes, SOAs there is in an array of products that are used that. How you get the laser energy to the spot you want in the eye. and the LIO is one of those.

Let’s just switch gears and want to talk a little bit about G6. How many of the systems were actually less there for installed through the quarter, over the 133.

For the G6s as we talked about, about 60% of our install base is inside the U.S. and for the quarter it was roughly with that, it was consistent with those numbers.

And just wanted to get an update on the clinical specialist, I know you mentioned few were hired on top of the managers, how many can we expect in the next year and then what do you see this number becoming over time domestically?

That's an -- answer that we are -- and a question that we are monitoring on a regular basis. We want to get these two onboarded, see how they work, there will be -- we've said in previous calls that we believe that the field force could be as many as 24 or more. And it's a mix between sales people and clinical people. And I don’t have the right answer -- I don’t have an answer right now that would be the exact number, but I think you'll see a mix and more than likely the next number of hires would probably be clinical people. David in the remarks we've said that there's basically an increase in install base which comes from the sales department but increase in utility comes from better education of the sales department and clinical specialists.

Do you see these people focusing more on larger centers or do you see them going around to the private clinics that are using your devices?

We see them focused on large volume people whether that's the university based or a high-volume ASC. The main focus is to get the KOL, the podium speakers, the people that move markets and make sure they're trained to use the device specifically and get -- they get consistent positive results, which will in turn provide us with a better coverage and better utilizations on a global basis.

And just one more question I just wanted to talk about the current sales force, I know there's a learning curve for the ability to sell these products and how has it been -- I know you have mentioned it briefly but can we get a little bit more color on certain lessons that have been learned and things that have been adopted because of those lessons?

The definition of the sales force has -- personnel has changed over the last year or so, well its two years now since we have been in the G6. We have transitioned from a series of people that were predominantly retinal specialist, and we moved into -- which is a transactional type sale, and we moved into a glaucoma business, which is predominantly a relationship type sale with a frontend transaction if you will, and the lesson learned is people that have an understanding of relationships and that can teach and educate someone how to use the device, becomes far more important all the technology and how to put a close on a $70,000 piece of equipment versus that continued use of probes.

I just have one more, on the skills acquired and the consensus of how to use the devices, is that shifted with the recent presentations or recent clinical studies where there's becoming more of a consensus on how to use the G6?

A little bit, but in my earlier comments we talked about the art of this, and we want to get to the point where it's -- the art becomes more consistent, by that I mean how fast you go around the eye, how you hold your hand and so that training of fine-tuning that art if you will, will enhance and get better results, and in turn begin the increased utility.

Thank you. I’m not showing any further questions at this time. I’d like to turn the call back to William Moore CEO for any further remarks.

I thank you once again for joining the call today, and we thank you all for and all our employees for ongoing dedication and stronger as just to be together. We look forward to valuable contributions in 2018 and beyond. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.