IRIDEX Corporation (IRIX) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to today's conference call to discuss IRIDEX Fourth Quarter and Full Year 2018's Financial Results. My name is Soni [ph] and I'll be your operator on this call. After the presentation we'll conduct the question-and-answer session instructions will be provided at that time. [Operator Instructions] As a reminder, this call is being recorded today Tuesday, March 5, 2019 and will be available on the Investor Relations section of IRIDEX website at www.iridex.com. I would now like to turn the meeting over to Leigh Salvo.

Thank you and thank you all for participating in today's call. Joining me are Will Moore, Chief Executive Officer and Romeo Dizon, Vice President and Controller. Earlier today, IRIDEX released financial results for the quarter and year ended December 29, 2018. 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 include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements made during this call that are not statements of historical fact, including but not limited to statements concerning our strategic goals and priorities; product development matters; sales and marketing matters including our presence at future industry events; sales trends, our efforts to drive adoption using key opinion leaders, planned increases in our clinical specialists team, the markets in which we operate, including South Korea and China; plans with respects to our retina business, our ability to convert backlog orders, our guidance and priorities for 2019 including expectations for overall product line revenues, and G6 system and probe shipment levels; and our plans to provide public updates on any of these matters. 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 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, March 5, 2019. And with that, I'd like to turn the call over to Will.

Thank you, Leigh. Good afternoon, and thank you all for joining us. Looking back on 2018 I'm pleased with the many accomplishments our team made in taking the steps necessary to grow our market share and future opportunity in the treatment of Glaucoma. As we entered the year, we set two priorities. One; to improve G6 utilization for existing installed base while continuing shipments at new G6 is around the globe. And two; to develop and introduce new products that have potential to improve, the quality, the reliability and manufacturing cost for our entire portfolio. We made progress on each of these objectives consistently through the year. Briefly, highlights including, an increase in G6 product revenue by approximately 34% year-over-year as result of investments we made in building out our commercial team to increase awareness and acceptance of our G6 platform and MicroPulse technology. Consistent with our guidance range for the full year, we shipped 463 G6 laser systems and 45,900 G6 probes. During 2018, we expanded our market with the approval of the G6 laser system in South Korea bringing the total number of countries where our G6 is sold to 60. We saw significant [indiscernible] in the clinical data supporting our G6 and MicroPulse technology including six new peer review publications covering 412 eyes and 22 presentations by physicians at major society meetings. On the product development front, we've advanced several exciting working prototypes of the next generation laser system and probes that are approaching release the market this year. And in September, we completed a public offering of common stock with net proceeds of $10.5 million that will enable us to continue executing on our growth plans and expand our market opportunity. On the financial front, total revenues for the full year 2018 were $42.6 million slightly above the guidance provided in our pre-announce in January. I'm proud of our progress and confident we'll continue the momentum in 2019. I would like to take the next few minutes to briefly summarize our recent progress and offer some thoughts on priorities for 2019. Then I'll turn the call over to Romeo to review our fourth quarter financial performance and provide guidance for 2019. Starting with our G6 in the fourth quarter, we shipped 122 G6 systems and a record 12,300 probes. Our G6 continues to gain momentum in treating late stage Glaucoma patients and I'm confident we're the leader in this segment of the market. Importantly, we're starting to see growing awareness and support among comprehensive ophthalmologist advocating for the use of our G6 in treating moderate disease stage patients, signaling the versatility of the procedure to extend treatment to patients with earlier stage glaucoma. For example, an article in February issue of ophthalmology management a position from the Eye Clinic of Florida noted that in more than 300 patients he has treated with our G6 laser system, 95% are successful, six weeks and 82% are successful at two years in resisting with medication. These patients typically have a mild-to-moderate glaucoma and not end stage disease. We further highlighted in the article that it is possible to successfully control glaucoma without diminishing the patients quality of life or prospects for future treatment. As we gain traction in earlier stage treatments we expect this not only to provide tremendous market expansion opportunities, but to drive utilization in our installed base. Looking at our G6 business geographically, in the US productivity within our commercial teams suddenly improved in 2018 as our sales force gained tenure and our new clinical specialist were deployed to provide enhanced training and support. Where our sales reps and clinical specialists work together to improve our service and follow-up with our existing G6 customers, we experience greater adoption of our technology and increased probe utilization. As a result of these early indications of improvement, we anticipate hiring additional and clinical step to our team in 2019. Increasing G6 probe revenues in US through improved sales execution and leveraging our clinical specialist team continues to be a high priority. While I'm encouraged by the consistent improvement in G6 possible sales achieved through 2018 we plan to further build and leverage KOL relationships to expand awareness through presentations and posters and as I mentioned, we expect to increase our clinical specialists team to further target large hospital networks and key accounts where they can have the greatest impact on enhancement customer service and training to ensure more consistent outcomes. Internationally, Japan, with the strong reason for G6 sales throughout the year, generating a solid cadence of KOL support and probe reorders and serving as a model for expansion in other OUS countries. In Germany, we've seen great progress with our KOL strategy similar to the progress we saw with our Japanese distribution relationship. Our direct sales force in Germany is making progress in selling to KOL's and large hospitals which we believe sets the foundation for further penetration into this market. South Korea where the G6 was approved in mid-2018 saw an impressive ramp up in the second half of the year and we're encouraged by the level of early interest already demonstrated. In summary with our G6 approved and sold in most of the major global medical device markets. We're well positioned as a dominant player on a growing stage of the treatment for glaucoma. From a clinical data perspective, we continue to see an excellent cadence of studies, papers and posters that support the value of proposition of the G6. As evidenced of the growing momentum and awareness of the benefits of MicroPulse. In 2018, we saw more clinical studies presented and published in peer review journals than in the prior eight years combined. One recent study in the Journal of Cornea and External Disease was conducted to assess the outcomes of MicroPulse for intraocular pressure or IOP controlled and Keratoplasty eyes. In the study, 61 eyes and 57 patients received laser treatment and the average follow-up was 21 months. Results demonstrated that at 12 months after last treatment the number of eyes IOP data was 38 and the mean IOP was 15 plus or minus 5. The study concluded that MicroPulse provides a non-evasive alternative to Glaucoma filtration surgery for IOP reduction in Keratoplasty eyes. It also further demonstrate use of MicroPulse an early stage disease treatment and growing opportunity we see to expand use of our unique laser system into new markets. On the marketing front, we continue to maintain a high profile at key industry events around the world that were successful in raising awareness that benefits of MicroPulse on our non-invasive treatment for all stages of glaucoma. As noted on our last call, we had a strong presence of the American Academy of Ophthalmology which also marks the inclusion of MicroPulse as part of the events official glaucoma curriculum in their Glaucoma skill transfer course. We recently hosted at Formal [ph] Wetlab at international society of glaucoma surgery in Geneva Switzerland with participation from physicians around the world and further expand awareness of MicroPulse we launched a new website on eyetube.com the leading educational video resource for ophthalmologist. This year we're continuing the pace with participation in several influential events at major congresses. Most notably the upcoming World Glaucoma Conference in Asia Pacific Academy of Ophthalmology where we plan to participate in multiple clinical presentation and in booth educational events. We've also initiated a three-prong marketing strategy to enable heightened utilization. First we're implementing a multiple channel marketing campaign design to educate our installed base of clinical evidence supporting MicroPulse. Second, to weigh the physician staff in identifying potential patients we launched a program that includes patient education, community PR and referring position outreach tools design to assist the medical staff and walking their patients through their decision process. Lastly we introduce MD [ph] certification program in which physicians can formally record the completion of IRIDEX's didactic training. Turning to our retina products, fourth quarter revenues benefited from the fulfillment of several large orders from our international distributed customers relating to the introduction of our updated TruFocus LIO Premiere. Sales in both the US market and OUS market improved slightly year-over-year. Our retina business remains a meaningful contributor to current revenue and we expect will remain so. However, as we continue to focus primarily on G6 product sales for the treatment of Glaucoma sales of retina products have not been a growth driver for overall business. During 2019, we intend to continue to work towards stabilizing this line of business longer term and plan to address opportunity in retinal disease through active participation in global industry events through key relationships with KOLs in this sector. Turning to product development, this was another investment priority for 2018 and I'm pleased with the progress made throughout the year. More specifically we're nearing completion on a new G6 probe that we believe will improve safety, consistency of outcomes and ease of use in Glaucoma procedures at a reduced production cost. We also are making meaningful progress on a new laser platform and migrating into the verification and validation process. This new laser platform has multiple lasers for both Glaucoma and retina. We expect to file FDA, 5-K, 10-K applications for these products throughout 2019. Product types have already been built and we anticipate launches later this year and early next year. Lastly I would like to make a few comments on recent resolution of patent and trademark, infringement dispute with Quantel Medical. We place a high priority defending our intellectual property and I'm very pleased with the swift outcomes of the US lawsuit and intellectual property claims in Europe, our MicroPulse technology and its brand recognition protective for misuse and misrepresentation. We're now able to confidently move forward in devoting our resource to further developing and marketing our proprietary laser technology for treating sight threatening eye diseases. In summary, we enter 2018 with a commitment to making additional investments necessary to secure our position and opportunity in the Glaucoma market. I'm encouraged by the increasing revenue contribution of our glaucoma business which now accounts for more than third of our total revenue. As we began in 2019, I believe we're in a stronger position and many years our priorities for this year include continued commercialization, execution and further expansion of our clinical field to support sales organization. Ongoing initiatives to expand awareness of MicroPulse for the treatment of early stage glaucoma and the introduction of new products that will enable us to better support our customers and expand our market share. At this point, I would like to turn the call over to Romeo to provide further detail on our financial results for the quarter full year 2018 and guidance for 2019. We'll then open the call for questions, Romeo?

Thank you Will. I'll begin an update on G6 business. In the fourth quarter 2018 G6 revenues increased approximately 16% compared to the fourth quarter of 2017. We shipped 122 G6 systems in the quarter compared to 133 in the prior year period. G6 systems ASPs decreased slightly relative to the third quarter due to a higher portion of our sales coming from distributor package orders. On the G6 probe side, we shipped a record 12,300 probes in the fourth quarter of 2018 compared to 10,600 in the prior year period, an increase of 16%. Probe ASPs decline somewhat in a global basis compared to the third quarter due to the higher portion of our sale being in the OUS. From a geographic perspective in the fourth quarter approximately 33% of our G6 systems shipped in the US and approximately 60% of our shipment of G6 probes were also in the US. Total revenues for the fourth quarter 2018, were $11.5 million an increase of 12% compared to the fourth quarter of 2017 as growth in our G6 revenues was complemented by similar growth in our retina product revenues. As noted in our last call, we received FDA clearance in late August to introduce our updated TruFocus LIO Premiere laser accessory to the US market. This clearance in August to fulfill our US backlog related to the voluntary LIO recall and to take and fulfill new orders. In the fourth quarter 2018, domestic systems sales increased 47% to $2.2 million and our international systems sales increased 6% to $3.5 million. That increase in domestic systems sales were primarily fueled by an increase in our retina product sales. In our international system sales also increased primarily due to an increase in our G6 system sales. Recurring revenues in the fourth quarter 2018 increased 7% up to $5.8 million and [indiscernible] in our G6 probes was partially offset by a decline in our legacy probes. Gross margin in the fourth quarter 2018 was 41% compared to 21.2% in the fourth quarter of 2017. The improvement in gross margin was due primarily to the release from additional cost related to our voluntary product recall, we recorded in the fourth quarter of the prior year. Operating expenses for Q4, 2018 were $7.6 million up from $7.4 million in Q4, 2017. The level of operating expenses reflects our growth investments to support our expanding our commercial infrastructure including increased sales and marketing expenses. Consequently our operating loss in the fourth quarter of 2018 was $2.9 million compared with operating loss of $5.2 million in the prior year's fourth quarter. For our balance sheet perspective, we ended the fourth quarter of 2018 with $21.2 million in cash and equivalents and we continue to carry no debt. Turning to our guidance for 2019, we're projecting G6 probe shipments of between 58,000 to 63,000 probes which represents growth of approximately 32% year-over-year at the midpoint and G6 systems shipments of between 475 to 525 systems. Total revenue for the full year is expected to be between $43 million and $46 million with anticipated historical season patterns throughout the year. With that I'd like to turn the call over to the operator for questions. Operator?

[Operator Instructions] our first question comes from John Block of Stifel. Your line is now open.

Will, the first one might be for you. So I guess just at a high level, how do we think about the guidance? And let me take a step back, so struggles in 2017 and the guidance. 2018 a much better job, upside beats and raises. And so you came in line with where we were our level of thinking for 2019. But again, do you think you carry forward the conservatism that we saw into 2018 numbers and is at the same thought process heading into 2019?

I would agree with that, the answer is yes.

Okay and I'll just sort of jump a little bit all over the place and Romeo, the one thing I didn't hear and I don't know if you're willing to give it. But along with a guidance is there a level of cash burn or range of cash burn that we should be thinking about for 2019 to accompany the top line guidance?

Basically according to plan is we've been burning about $2.5 million per quarter and like I said, we got sufficient cash to support the 2019 plan.

And Will, can you - maybe put any numbers so you talked about G6 is getting more front and center with the comprehensive ophthalmologist. When I look at your base of roughly 1,300 and worldwide basis, is there a way of again quantifying in other words, to-date what percent. I know there is some gray areas but to-date what percent of your systems are owned or predominantly used by glaucoma specialist. And when we think about the incremental boxes going out the door, how has that changed and shifted over to the comprehensive guys?

Okay, so I'm going to a little tangential on this for a moment.

Okay.

On an OUS side it's predominantly comprehensive ophthalmologist, they do a little bit of everything, so it gets a little fuzzy. In the US, we have the glaucoma specialist and in the US - I'm going to give you rough numbers I haven't validated - I would say we're probably in the 75% to 80% of our sales have been to glaucoma specialist - smaller and 20%, 25% to the comprehensive over the last few years. OUS wise, they're all going to general ophthalmologist and wherever they are specialist they were early on adopters. So my view point is, I think the market is substantially larger as we move forward both in the use of probes and certainly with the sale of boxes as well.

Okay, maybe last one and change from May. I'm just sort of going down in my nose some of your new products and certainly one thing you talked about was, the probe. Any specifics on the timing later this year and then sort of the tack onto that? Is there anything that we should be cognizant of is - as that probe gets rolled out to your user base just sort of winding down their old [indiscernible] and toward before they go ahead and stock up on the new probes. Thanks guys.

At this stage we'll roll it out in a process to hospitals that predominantly that deal with well I call it, we'll say Asian eyes and get to the ease of use because of the tight eyelids. And so then it will be when we call it, bled into the system. There's no reason to think that the current probe is no value, so as we go through the launch plan, there's no reason to worry about having those product. The advantage of the new one is better coupling to the eyes, so you get better full time distribution of the light source into the eye and it slides around the eye a little bit easier. The main thing is the coupling piece that's directional flow of the energy. I don't see a problem with inventory management at this time now to answer the other part of the questions. When it comes out, it's always dependent upon regulatory bodies like the FDA as you go through trying to find out 5-K, 10-K letter to file and more likely where it will be a 5-K, 10-K. we finish the clinical studies with it, so we've already been out with our doctors and on the KOL path to see how it works. We're initiating the first line of probes into our multi-center study, so that will happen. And I would expect you to see these probes second half of the year, maybe a little bit before but that's about when we'll start getting them out.

Okay and very last one, I promise just an add-on to that. I think you specially called out an opportunity on COGS with the new probe. Well they're also being opportunity on the ASP as well as we think about as going in towards similar price to what's growing in the market.

I think you'll see it as similar price, we should see an improvement in COGS going from having a machine part to an injection moulded part. You'll see it - reduction on our side.

Fair enough. I'll follow-up offline. Thanks guys.

Thank you. And our next question comes from Scott Henry of ROTH Capital. Your line is now open.

Just a couple questions, as I sort of digest the guidance and try to put it in as best I can. It appears that we should think about the non-G6 business is kind of flattish to down in 2019, is that fair assessment or just trying to think of how organically you think about the non-G6 business in 2019?

I think the word we use in our facility Scott, is we would like to stabilize the retina business while we're utilizing our sales force to capture more and more glaucoma business. The demand still remains there and the other part to that question was relatively straightforward. I'm giving you more answer than you need the other part of that is, as I said in the call. We are developing new laser systems that will work in both retina and glaucoma and the margin that we receive off of our current retina business is not that great. So we're just focused on the glaucoma and stabilized the retina until we're trying the new retina products come out.

Okay and then post stabilization with new products, you do expect this could be a growth business again, is that fair?

Yes I do believe that. Retinal disease has affected the ageing population just like glaucoma and it's a growing market. MicroPulse has taken over a fairly substantial piece of that business on a global basis and I expect that to continue back to the days when we were 10%, 12% lower in that space.

Okay, great. And then, in the G6 business obviously a good systems outlook for 2019. The probe utilization is also a key part of that model and kind of the back of the envelope it looks like probe utilization is kind of staying around that 35 number in 2019 versus 2018, maybe that's just being a little conservative or just trying to get your sense. When should we expect that probe utilization number to start ramping again and what sort of magnitude and not necessarily in 2019, could we anticipate kind of longer term?

I think that when you saw the number 35, you're talking about probes per year on a laser?

I'm talking about total probes in the year divided by the installed base.

Okay, yes. I know people have talked about the probe utilization. We use the term utilization as well, but not so much on the exact number and the reason for that is that, when we're selling a device they always get a package of probes and how long it takes them to get to device in to the hospital and people train before they start using, it is always a number. So your probe number can be calculated by using a laser box account that was like six months ago, is one way to look at it. I think the long-term answer that I'm comfortable with - I'm not giving guidance with as a goal as we still believe that a laser system should be consuming some place between six to eight probes per month as we move forward and move into the earlier stage as I said earlier on the call, the majority of our sales are in late stage, which is the usage is a little bit less than that number and I think it's been reflected to what our sales have been, but as we move forward I expect the overall piece to, when we stabilize on our hardware sales. I think the goal for us is try to get up to that six to eight probes per month, per installed laser.

Okay, thank you that's helpful. And then just with regards to 2019, should we think about pricing has been stable and I guess spending [indiscernible] I would expect just modest inflationary growth or should we think about more inflationary growth, just trying to get a sense of 2019.

Okay, so on the pricing sector. The pricing has remained consistent and been slightly up in the US and it's been fairly consistent in the OUS as well, but those prices are lower because we're - a distribution network versus direct. And the only things we really have in play and I think when you're talking about spend, you're talking about our spending versus customer trends spending. Our spending is going to be pretty consistent with what it's been, we don't need to hire more folks, we've got people in place where we will be hiring some clinical folks, but the investments we've made on the product development side where you would see the biggest increase already been made and so I don't - as Romeo said earlier the burn I think is going to consistent and it will continue to drop as the probes continue to take a higher and higher percentage of our business.

Okay great and just the final question. I didn't quite catch it. But what percent of systems were placed in the US market versus OUS?

Romeo, do you want to grab that one?

I think it was - can I get back with you on that? I don't have [indiscernible].

Yes that's fine, we can catch up offline. Thank you guys for taking the questions.

Thank you. And ladies and gentlemen. This does conclude our question-and-answer session. I would now like to turn the call back over to Will Moore for closing remarks.

Thank you operator. I would like to thank - sorry I just. Thanks again for joining the call today. I'm pleased with our solid performance the IRIDEX is making and would like to thank them as well as our shareholders for your continued support. We also look forward to seeing many of you during our upcoming conferences and marketing trips. Please have a great evening.

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.