IRIDEX Corporation (IRIX) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to today's conference call to discuss IRIDEX first quarter 2019 financial results. My name is Delane, and I'll be your operator on this call. After the presentation, we will conduct a question-and-answer session, and instructions will be provided at that time. [Operator Instructions]. As a reminder, this call is being recorded today, Thursday May 2, 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 of Finance. Earlier today, IRIDEX released financial results for the quarter ended March 30, 2019. 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 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, including our ability to secure orders from hospitals, clinics and ambulatory surgery centers, the markets in which we operate; including South Korea and China and the recall of our LIO product, its impact on our business and results; our guidance for 2019, including expectations for overall and product line revenues and Cyclo G6 system and probe shipments and our plans to provide public updates on 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, May 2, 2019. And with that, I'll turn the call over to Will.

Thank you, Leigh. Good afternoon, and thank you all for joining us. On our last call, I highlighted our main priorities for 2019 which included: continued commercial execution and further expansion of our clinical field team to support our sales organization, ongoing initiatives to expand worldwide awareness of MicroPulse for the treatment of earlier stages of glaucoma and the introduction of new products that will enable us to better support our customers and expand our market share. Today, I'm pleased to report in the first quarter we made important progress on all fronts. I'd like to start the call with a brief review of our first quarter performance and recent highlights. Romeo will then provide detail on our Q1 financials, we then like to open the call for your questions. Starting with highlights in our Cyclo G6 business for the treatment of glaucoma, Q1 2019 Cyclo G6 product revenue grew by approximately 9% year-over-year to $3.1 million and represented 29% of our total revenue. This improvement was largely due to the investments we made in building out our commercial and clinical teams to increase awareness and acceptance of our Cyclo G6 platform and MicroPulse technology. Our Cyclo G6 platform continues to garner market share in treating late-stage glaucoma, and I'm confident we are the leader in this segment of the laser treatment market. During the first quarter of 2019, our Cyclo G6 systems continued to ship at a relatively consistent pace with 114 Cycle G6 laser systems shipped in Q1. Cyclo G6 probe shipments reached approximately 14,000, a quarterly record. Importantly, for the first time, we saw sequential growth of 13% in Cyclo G6 probe shipments in Q1 versus the preceding Q4. Historically, Q4 represents our strongest quarter for probe shipments, and we believe the momentum we are now gaining highlights in combination of positive market factors. This includes increasing global market awareness as well as expanding probe consumption by existing customers, especially large hospital networks. I'm encouraged to see an increasing number of repeat orders coming from our installed base, and we believe we have a significant opportunity to grow within this segment of our business while continuing to add new customers. And as I noted last quarter, we are gaining more awareness and support among comprehensive ophthalmologist advocating for the use of our Cyclo G6 laser treating moderate disease staged patients, signaling the versatility of the product to extend treatment to patients with early-stage glaucoma. We expect this to not only provide tremendous market expansion opportunity, but also drive utilization in our installed base. Looking at our Cyclo G6 business geographically, in the U.S., I believe, we are in our strongest competitive position to-date. And as a result, our commercial team has a meaningful opportunity to grow probe consumption on expanding installed base of Cyclo G6 customers. As I noted earlier, further expansion of our clinical team to support our sales organization is a priority this year and based on early success we saw in 2018. Where our sales reps and clinical specialists work together to improve our service and follow up with our key accounts in large hospital networks, we experienced greater adoption of our technology and increase probe reorders. We are working towards expanding our clinical team in order to broaden our customer outreach and frequency to follow up. At the same time, our marketing organization is making great progress in expanding awareness, the benefits of MicroPulse technology and treating it earlier-stage glaucoma patients. And lastly, our sales organization continues to make traction adding new physicians, ophthalmology centers and hospitals to our customer list. Internationally, Japan and South Korea were strong regions in the first quarter, largely driven by positive KOL influence. We saw material increase in existing high-volume accounts placing probe reorders. I believe we can leverage this model as we expand in other countries outside the U.S. We are also gaining exciting traction in Germany. At the recent ARGO conference, posters presented were from German KOLs that highlighted the positive results they achieved in treating their patients. I am confident that our Cyclo G6 is benefiting from a similar successful approach to the market as we used in Japan and South Korea. In China, I'm pleased with the progress we have made in obtaining regulatory clearance for our Cyclo G6 system. At this point, it has passed all safety and other critical path tests and is now in the final review by the CFDA. I am confident that product registration is eminent in China, pending any extraordinary circumstances beyond our control. From a clinical perspective, I'm delighted to see the increasing recognition we are gaining from the global scientific community as evidenced by the swell of studies, papers and posters that support the value proposition of Cyclo G6. In the first quarter of 2019, we had an exceptionally strong presence at the American Glaucoma Society and World Glaucoma Congress, including 22 posters and podium presentations, matching the company's 2018 total in 1 quarter. At the recent ARGO annual meeting and the upcoming ASCRS conference, an additional 20 scientific presentations took place who were scheduled on MicroPulse laser therapy predominately for treating glaucoma. This scientific data combined with the data presented at the AGS and the World Glaucoma Conference brings the total IRIDEX-related data sets this year to more than 40, demonstrating the significant and meaningful increase in available efficacy data for our MicroPulse technology. Encouragingly adds increasing number of studies on MicroPulse treatment are addressing earlier stage of glaucoma, which we believe points in emerging paradigm shift in the market image of our technology. As I have noted before, MicroPulse is our nonincisional treatment for broad range of glaucoma diseases severity. We are excited to see more and more KOLs and physicians, utilizing the treatment for patients with earlier-to-moderate glaucoma and publish their successful results. On the marketing front, as I mentioned earlier, we have made great progress in building global awareness, maximizing our reach and driving brand awareness. We have been successful in maintaining a high profile at key industry events around the world with unprecedented physician interest in our clinical presentations in-booth education events and wet labs. We look forward to ASCRS in a few days where, in addition to the significant clinical presence I just highlighted, we will have 6 physicians sharing their experiences with the Cyclo G6 at our booth in a breakfast seminar. In summary, our visibility in the industry is at the highest level to-date, and we're seeing growing lead generation in the glaucoma market as well as improving levels of customer conversions, resulting in these initiatives. Turning to our retina business. We saw normalization in the first quarter with year-over-year revenue improvements in both the U.S. and OUS markets, largely due to a voluntary recall of our LIO laser accessory that impacted revenues in the comparable quarter last year. In the first quarter of 2019, revenues for our retina products were $5.6 million or 53% of total revenue, representing an increase of approximately 14% year-over-year. We believe our retina business has normalized at the voluntary LIO recall which had negatively affected Q1 in 2018. We expect retina products to remain a material contributor to our business. Turning to product development. I'm delighted to announce that we've secured initial product to begin shipping our new MicroPulse P3 probe in a limited launch. The updated probe is more intuitive and ergonomic. It also reduces the cost and complexity of manufacturing and allows probe use with or without a lid speculum. We're evaluating the least burdensome regulatory pathway worldwide and plan to capitalize on existing OUS device registrations where possible. We are on track to begin manufacturing the updated probe in Q4 2019. We also move closer towards the launch of our new laser platform, which promises to allow us to move from a legacy product to a more cost-effective approach as it can carry multiple laser sources from both glaucoma and retina. Prototypes have been built, and we anticipate launches later this year and early next year, which will allow us to move from a legacy product to a more cost-effective platform. In summary, we've had a very encouraging start to 2019. With the progress made in each of our objectives for the year, while at the same time improving operational efficiencies. To discuss our financial results in more detail, I'd now like to turn the call over to Romeo. We'll then open the call for questions. Romeo?

Thank you, Will. Total revenues for the first quarter of 2019 were $10.6 million, an increase of 11% compared to the first quarter of 2018, as growth in our Cyclo G6 revenue was complemented by normalization of our retina product revenues, following introduction of our updated TruFocus LIO Premiere laser accessory to the U.S. market in August 2018. In order to improve the transparency of our disclosures, I'd like to offer additional breakdown of our revenues by product family. Turning to the Cyclo G6 product family. The first quarter of 2019, Cyclo G6 product revenue was $3.1 million, an increase of approximately 9% compared to the first quarter of 2018. During the quarter, we shipped 114 Cyclo G6 systems and approximately 14,000 probes compared to 99 systems and 11,600 probes in the prior year period. Revenues for the retina business were $5.6 million, an increase of approximately 14% compared to the first quarter of the prior year. The increase is primarily due to the normalization of our retina business after the voluntary LIO recall that negatively impacted the first quarter of the prior year. Looking at our first quarter 2019 revenues geographically, approximately 53% of our Cyclo G6 revenue was in the U.S. and 47% was OUS. In our retina business, approximately 47% was in the U.S. and 53% was outside of the United States. In the first quarter of 2018, approximately 61% of our Cyclo G6 revenue was in the U.S. and 39% outside of the U.S. In our retina business, approximately 45% was in the U.S. and 55% was OUS. Other revenues, which includes royalties, services and other legacy products, were $1.9 million, an increase of approximately 8% compare to the comparable quarter of the prior year. The increase in other revenues is due primarily to an increase in legacy G probes, service and royalty revenues. Gross margin in the first quarter 2019 was 40.2% compared to 41.2% in the first quarter of 2018. The lower gross margin was primarily due to geographic and product mix. Operating expenses for Q1 2019 declined to $7.3 million from $7.5 million in Q1 2018. This decrease is attributable to lower R&D and G&A expenses and continues to reflect growth investments and expanding our commercial infrastructure. Our operating loss in the first quarter 2019 was $3.0 million compared with operating loss of $3.6 million for the comparable period of the prior year. Turning to the balance sheet. We had cash and cash equivalents of $17.2 million, no debt and working capital of $25.4 million. During the quarter, we had made an anticipated onetime payment of $1.4 million on bonuses and related payroll taxes. This nonrecurring expense was for bonus earned for accomplishment of certain corporate targets and personal performance objectives and was accrued for in fiscal 2018. As we are now beginning to realize the savings on outsourcing and other cost containment activities we took during latter part 2018, coupled with a continued growth in our top line, we anticipate reaching cash flow neutral within the next 4 to 5 quarters. Moreover, we believe our existing cash and cash equivalents, working capital and our available line of credit will be sufficient to meet our anticipated cash requirements over the next 12 months. Turning to our guidance for 2019. We continue to anticipate Cyclo G6 probe shipments of 58,000 to 63,000 which represents growth of approximately 32% year-over-year at the midpoint. Cyclo G6 system shipments are expected to range from 475 to 525 in 2019. Total revenues for the full year is expected to be between $43 million to $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 Jonathan Block from Stifel.

Will, first one for you. It's a little bit of a long one, so let me try to get through it. Is there a way to think of your installed base of almost 1,500 G6 lasers in terms of the percent of accounts above utilization trend those in line and those below? Sort of break them apart those three ways. And then the follow-up would be, where the clinical reps spending their time? In other words, is it getting the well below planned up and running? Or is it moving in line slightly higher and adopting the mild-to-moderate procedures?

Okay. Jon, and thanks for calling in. [indiscernible] we look at our accounts in a variety of ways, as you described. Currently, the clinical specialists go after accounts that are either large accounts and are underperforming, if you will, accounts that have podium speakers or presenters that will be talking to - at society meetings and making sure they're up to speed. I think what we look at is roughly, I'll say, maybe 290 type of accounts are performing at a level we're not really satisfied with, meaning they're below the utilization rate which we think is fair. And so for those, we're sending the clinical specialists to those as well as what the ones I just mentioned. And I would say as of now through this date, we've taken 46 of those accounts that were not performing at the level we wanted and got them to the level we would like from January to now. We'll continue on that pace, and the clinical specialists do most of that work. Although, the sales reps have been certified to train doctors today and they help as well. We expect on go forward, Jon, that the new accounts coming on will be less likely to be lower users of the probe than what they were in the beginning. As you recall when we first started talking, we were after, what we call, the land grab. We had no idea at that time of anybody else was developing any kind of products similar or where the MIGS strategy was going. So we went after as many as accounts as we could. Once we understand and been along with the FDA that no one is producing a product similar to what we're doing, we went more to the utilization rate. And I think that itself has a huge opportunity for us, just increasing utility in our existing customers. So that was a long winded answer for your question, and I hope I didn't confuse you.

No, it was better answer than the way I posed it. Just to pivot over to China. Well, I haven't heard you comment there for a couple quarters, so it seems like good news. And if approved, that I realize there's still a big if. But if approved, can you just comment on how quickly you could turn around with your commercialization strategy and launch plans and partner up to get that out in the field?

Sure. So I want to just touch base a little bit. So the CFDA process is, there's a series of safety tests that we have to go through, and we finally made it through that. Then they create what is called the dossier, where the final inspector goes to and checks all the boxes of every test that has been done and that's when the approval happens. So we anticipate that happening fairly soon, but with geopolitical issues and thing going on, who knows, but I believe it's going to be soon. Now to answer your question more specifically about introduction in the China, our partner in China has 27 offices throughout China and more than 600 employees. We've been in China for over 25 years. We have more than a 1,500 lasers already in the country. So I think that part is relatively straightforward. And by the way, at ARVO, there was a study from Mainland China along with Hong Kong at the ARVO's meeting this past week. Now the second part, and you've heard me talk in the past about the outsourcing of our production, the ability to reach to a full up speed, if you will, to handle China because of its size. It's relatively straightforward for us because the outsourced manufacturer for the G6 can handle an increase of the numbers we're talking about. How soon will it happen? My guess is it's the next few months we'll have an order from our Chinese distributor shortly that would begin to prepare them for their training materials and things of that nature. So I'm feeling quite good. It's the outsourcing and that was put in line for just this type of situation to expand rapidly.

Got it. And last one for me, maybe one part for Romeo and one for you, Will. The revs were ahead of our estimates but the gross margins were a little bit below. I guess, for the quarter where the lower gross margins relate to our estimate at least but just specific to, call it, one side of the business or the other. And then looking forward, do we think about these current GMs remaining in place and then maybe they start to rise, Will, as you alluded to the new probe. And once that launched, obviously, that seemed to be either more of an ease of use in COGS phenomenon rather than an ASP.

Yes, for the margins just - we expect them to be a little higher. But like I - we had more OUS sales this quarter, which can be typically lower margins. As far as the margins getting better, obviously, as Will alluded to earlier, the more probes that we sell, those are higher margins. So we expect that to increase and flow to the bottom line

And, Jonathan, I'd touch one thing on the new probes, you're absolutely correct on the rationale. Where we get into full production as we go into the latter part of this year has to do with finishing up the injection molding process, so we can make those in large quantities at a substantially better price.

Our next question comes from Scott Henry from Roth Capital.

I guess, for starters with volume in the placement for G6 was really strong and just a quick run through the model, I typically would have thought G6 revenues would have been even higher. So it - I would expect the delta is due to perhaps lower pricing in the quarter. I just want to get your thoughts on that, is that kind of - is there any reason why it was a little lower? And should we expect pricing to bounce back going forward?

Yes, sure. Scott, this is Will. I'm going to let - I'll answer a little bit and then Romeo can touch on it a little bit more. The placements were fairly strong. We do about 22% of our business on an annualized basis in the first quarter. So we're very pleased with where we were given that ratio going forward. The other part on pricing, and I'll let Romeo explain how this works, but there was a program we had in place which is called - we call it LAP, and that LAP program is the placement of the hardware the G6 laser system with the requirement to purchase a certain number of probes over a period of time. And I'll let him handle the accounting answer that - the rest of that - the statement.

Okay. So basically, Scott, like Will said, the LAP program typically, if it wasn't for that, you would expect our U.S. revenue to be higher. But due to that I think, I believe 50% of our U.S. shipments of systems were LAP versus sales. So as such, we had to defer basically 60% of the revenues that we bill for the probes. So when the - there's a requirement they purchase additional probe, I believe it's 13 to 14 boxes of probes we sell at the ASPs are fairly high than they would really turn over the pile for those - for the consoles to that customer.

Okay, great. I appreciate that color. So I guess, the second half of the year, we should see pricing improve significantly. The next question, the Q1 numbers were very strong, anyway you look at it. I understand maintaining guidance, the only question, would it be fair to say that you're more comfortable in your guidance today than you were prior to Q1 in a fair statement?

Well, I'd say I'm more comfortable the situation with the guidance. I may have mentioned that we look at our business and there's some seasonality, some lumpiness to it both because of the season and the distributors. But we do, as I said a minute ago, about 22% of our overall business in Q1. And then if it works its way up, drops down a little bit and by the time we hit the fourth quarter, we're in 26% to 27% of our business. And when you're dealing with hardware versus disposables that becomes a little more of a hockey stick type of a game. So we track it, and we're comfortable. And I think my answer is I'm very satisfied with our current guidance. I know where you're going with your question, and we'll continue to look at it. And as the confidence continues to grow, we'll continue to decide whether we want to move it one way or the other.

Okay, great. In - as well in your prepared remarks, the comment about approaching cash flow neutral in 4 to 5 quarters would certainly imply either - if I don't - if I assume revenue growth is in line with your guidance and whatnot that there's sort of a new focus on cost savings. Can you talk about the Q1 run rate for sales and for G&A and how reflective they should be going forward? Because certainly expenses were lower in Q1 than any quarter in the prior year, is that kind of the new normal that we should expect expenses lower? And how are you achieving that?

Well, basically we're thankful that top line is basically a little higher than what we had planned and estimated. So that's definitely one of the main contributors of reducing net cash burn. And like as you alluded to earlier, our expenses have been reduced. And although there - the plans are to continue to spend to continue to grow the infrastructure, Will and I basically look at if the top line is not coming in, we definitely take cost containments to cut back expenses. But another couple of major parts in our cash - in our net cash burn management are: a, the collections. The collection this quarter somewhat was degraded. So - and another part is the managing our inventory which this quarter we dropped, so it added - it reduced the cash burn from stand point.

And Scott - this is Will, again. I think what you're alluding to, there is a couple of things that we've been doing over the past year. I mentioned it in the remarks and a little on comment - on my comments, the outsourcing of our production delayed the ability to reduce our overhead, our headcount The reduction of people along with the getting finished goods, as Romeo just talked about, where inventory sits elsewhere versus in our facility, in our books, has a major impact. The other pieces with - we're getting closer and closer to the new products introducing into the marketplace. And we talk about a laser platform where we can reduce the cost of all of our lasers that includes the G6 with a fairly substantial amount, which would improve the margins substantially and improve that cash flow as well. So I think those things have been put in place for the last couple of years, and we've been working out at. And as they come on line and we start seeing more volumes with the revenue, we're seeing fewer people, cash management that Romeo was talking about, it all starts to add up.

This concludes our Q&A session. At this time, I'd like to turn the call over to Mr. Will Moore, CEO, for closing remarks.

Thank you, operator, and thank you, once again, for joining the call today. I'm proud of the solid performance of the IRIDEX team and would like to thank them as well as our shareholders for your continued support. We look forward to seeing many of you during the upcoming conferences and marketing trips. Please have a great weekend, and thank you, again, for tuning in.

Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.