IRIDEX Corporation (IRIX) Q1 2023 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to IRIDEX First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Trip Taylor, Investor Relations. Please go ahead.

Thank you, and thank you all for participating in today's call. Joining me are David Bruce, Chief Executive Officer; and Fuad Ahmad, Interim Chief Financial Officer. Earlier today, IRIDEX released financial results for the quarter ended April 1, 2023. 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 trends and the markets in which we operate. 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 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 11, 2023. And with that, I'll turn the call over to Dave.

Thank you, Trip, and good afternoon. Thanks for joining us today. I'll provide updates on our business progress, then Fuad will provide details on the first quarter financials, and we will open the call for questions. In the first quarter of 2023, we generated $13.7 million in total revenue, growth of 2% compared to the prior year period. Growth was driven by our Cyclo G6 glaucoma laser platform and offset by a slight decline in the retina sales. In our glaucoma business, Cyclo G6 revenue increased by 4% year-over-year to $3.7 million. We continue to experience solid adoption of the G6 technology worldwide. 61 systems were sold in the quarter compared to 56 in the first quarter of last year. In the U.S., we were pleased to have achieved a 19% increase in G6 probe revenue, driven by ASP increases and a 7% volume growth. Worldwide glaucoma probe revenue grew by 6% despite a decline in units to 13,800 probes in the quarter, a 6% decrease from the prior year. Quarterly, International probe volumes remained volatile. So this first quarter dipped following record high volumes in the fourth quarter. Embedded in this volatility is a relatively flat multi-quarter volume trend. International opportunity for MP-TLT, that's MicroPulse transscleral laser therapy, adoption is very large, and we believe its safety and efficacy will drive long-term penetration. We're focused on returning to solid growth internationally through our partners. We saw the Cyclo G6 rollout in China benefit from the COVID reopening with order activity increasing late in the first quarter. Underlying demand in international markets remains strong, as shown by continued strength of international system sales, and we expect to return to probe growth for the rest of the year. We continue to have confidence we will execute on the significant growth opportunity for G6 in the moderate severity glaucoma patient. To propel G6 utilization and adoption, we continue to focus on four key initiatives. First is advancing physician education by increasing awareness of proper dosing and patient selection. Second is identifying and targeting comprehensive ophthalmologists to see most of the moderate-stage preincisional patients. Third, adding users at surgery centers by capitalizing on those that already have G6 systems. And the final initiative is expanding clinical evidence to drive adoption of MP-TLT. These initiatives are targeted to address the current barriers to greater adoption and growth. User variability in technique and procedure protocols can lead to suboptimal results, forming the perception that the technology and procedure have a limited role. Since MicroPulse TLT originally evolved from the late-stage treatment methodology of cyclophotocoagulation intended to reduce production of aqueous fluid, there's still a perception that this is the appropriate patient profile. To address these views, we sponsored the clinical consensus panel and are educating the market on conclusions around dosing and applicable patient recommended by the group. Another challenge we found is that surgeons' natural inclination is to sweep too fast during procedures, which leads to underdosing and is counter to the best long-lasting outcomes. So we launched and continue to roll out our suite management software for G6 systems to aid in proper and consistent technique that can be reproduced across any user. Surgeon feedback on the simplification and clinical outcomes generated using software are very positive. We're confident improved sweep speed optimization will generate improved clinical outcomes and durability, ultimately leading to greater utilization of our procedures. Additionally, we continue to focus on educating providers on the benefits of MicroPulse technology use within a broader patient volume, specifically as it pertains to preincisional, moderate-stage patients and post-cataract surgery patients who may or may not have had a concomitant MIGS device used to treat their intraocular pressures. It happens with all treatments in this progressive disease, eventually pressures rise requiring additional treatment. MicroPulse TLT durability and repeatability enables avoidance or significant deferral of more aggressive, higher-risk surgical glaucoma interventions. Another opportunity for further penetration in the market is to drive G6 adoption by comprehensive ophthalmologists. This group of providers, usually diagnose and treat patients with earlier stages of glaucoma. There are five times more comprehensive ophthalmologists than glaucoma specialists and 10 times more moderate than advanced stage glaucoma patients. This past week, we had a very productive conference at the American Society of Cataract and Refractive Surgery Meeting in San Diego, engaging with key opinion leaders, customers and prospective customers. We were encouraged by the many comprehensive ophthalmologists at our booth, wet-lab training sessions where we introduced and educated them on the benefits of the IRIDEX product portfolio. The early clinical experience using appropriate treatment parameters guided by suite management software has given us confidence to design and launch a larger-scale multicenter prospective trial to prove the safety and substantial effectiveness of MicroPulse TLT for moderate-stage glaucoma patients. For example, a recent single-center prospective study with three arms of escalating dosing achieved very strong early results of 31% to 44% in direct pressure reduction with excellent safety in all three arms. We're looking to build on these results to generate more substantial data that can validate true clinical value proposition. We're conducting a series of meetings with our KOL guidance group to identify the preliminary study protocol and identify appropriate research centers interested in participating. Our target is to begin enrolling patients in the study by year-end and look forward to sharing the details of the study once formalized. We believe a definitive multicenter study on the right targeted moderate-stage patient profile would significantly support increased G6 adoption and utilization by a broad range of clinicians treating these patients. As we look at the remainder of 2023, we expect to improve the growth rate of our glaucoma business and increase utilization. We are reiterating our guidance and continue to expect to sell 65,000 to 67,000 probes, representing growth of 9% to 12% compared to 2022. And expect to grow the G6 installed base by 225 to 250 systems. Turning to our Retina business. In the first quarter, retina performance was largely in line with our expectations on sales of $7.2 million, a slight dip compared to the prior year, with U.S. retina growth offset by modest international weakness. Internationally, our distributors are managing inventory more tightly, which has introduced more quarter-to-quarter volatility. As we've broadened promotion from the limited launch of our new PASCAL platform, customers are responding, and we are seeing strong interest in the new platform. Incorporating MicroPulse technology in the integrated PASCAL system with half the footprint offers clinicians expanded treatment capabilities that can fit in nearly any sized office. While interest is solid, we have seen signs of lengthening decision cycles in the challenging macro environment, causing customers to be more methodical with their capital purchasing decisions. Our plans are progressing to achieve additional international regulatory approvals throughout the year to expand the commercial launch globally. FDA clearance for our other major platform, or the single spot IRIDEX 532 laser and IRIDEX 577 laser, keeps us on track to commercially launch the platform midyear in the U.S., and we look forward to sharing updates on that progress. To summarize, the start of the year was productive for IRIDEX highlighted by 19% first quarter year-over-year growth of U.S. glaucoma probe revenue, and we continue to build the foundation for further glaucoma market adoption and sustained long-term Cyclo G6 growth. It's hard work, requires focused selling and clinical support activities, increased marketing communication of our clinical benefits in the treatment paradigm, and our investments in the larger scale multi-center prospective trial to further our clinical evidence base. Looking ahead, we expect to increase our growth rates and remain confident our current cash balance is sufficient to execute our multiyear growth initiatives. On that note, we believe cash usage in the first quarter was a high watermark for the year and not reflected the quarterly cadence in 2023. Fuad will detail more specifics of cash management expectations later in the call. Now I'd like to turn the call over to Fuad to cover the financial results.

Thank you, Dave. Good afternoon, everyone, and thank you for joining us today. I would like to begin by reviewing our financial performance for the first quarter of fiscal 2023. Starting with revenue. Our total revenue for the first quarter of 2023 was $13.7 million, representing a growth of 2% compared to the first quarter of last year. Moving on to product revenues. Total revenue from the Cyclo G6 product family in the first quarter was $3.7 million, up 4% versus the same period in 2022. We sold 13,800 Cyclo G6 probes in the first quarter, a decrease of 6% from the prior year period. Note that this decline is driven by ordering volatility of our international distributors following a record fourth quarter. We sold 61 Cyclo GC systems in the quarter compared to 56 in the prior year period. Our retina product revenue in the first quarter was $7.2 million, a decline of 1% from the prior year period. Other revenues, which include royalties, services and other legacy products increased 11% to $2.8 million in the first quarter of 2023 compared to the same period in 2022, on substantially higher revenue from our other legacy products. Our gross profit for the first quarter of 2023 was $5.9 million, relatively unchanged from the same period last year. Gross margin was 43.3% compared to 44.6% in the first quarter of '22, on slightly lower overhead absorption in the current period. Operating expenses for the first quarter were $8.3 million, flat compared to the same period last year. Our net loss in the quarter of -- first quarter of 2023 was $2.1 million or a net loss of $0.13 per share compared to a net loss of $2.4 million or $0.15 per share for the same period in 2022. We ended the quarter with cash and cash equivalents of $11 million, representing cash usage of $2.9 million during the quarter. The cash usage in the first quarter includes inventory purchases of approximately $1 million related to the rollout of new product launches, including our newly launched [Gen M] product and certain nonrecurring capital expenditures. As you may recall, last year, we increased inventory by $4 million to proactively manage the tighter supply chain, thus avoiding manufacturing interruptions. This year, we plan to unwind a good portion of that inventory build into cash and onto the balance sheet. Additionally, following the completion of our new retina product development cycle, cost efficiencies in the cost of goods from the introduction of the new products and certain cost reduction programs, we expect to meaningfully reduce our quarterly cash usage. We believe the inventory reductions, along with lower quarterly expenses should result in significantly lower cash usage through the second half of 2023. But in terms of numbers, we expect these planned cost reductions to deliver $1.5 million of savings in the second half of '23, thereby reducing our cash usage from operations from an average of $1.3 million per quarter in 2022 to approximately $750,000 per quarter in the second half of 2023. Additionally, we also expect to release approximately $1.5 million of cash from the inventory reductions in the second half of fiscal 2023. In conclusion, we reiterate our guidance for 2023. We continue to expect total revenue for fiscal 2023 to be $57 million to $59 million. G6 probe unit sales are expected to range from 65,000 to 67,000, and Cyclo G6 glaucoma laser system installed base is expected to expand by 225 to 250 units. With that, Dave, I would like to turn the call over to the operator for questions. Operator?

[Operator Instructions] Our first question comes from the line of Tom Stephan of Stifel.

Great. I'll start with G6 system shipments, continue to post solid numbers there. Dave, can you talk about maybe the types of accounts you're selling into, their profiles and what utilization looks like in these more recent additions to the installed base?

Sure, Tom. The international sales are harder to specifically categorized in terms of those parameters. As you know, we sell to distributors first, some sub distributors below them and then end customers. But in general, to characterize its new capacity in a center typically sold to surgicenters, some hospitals, but probably -- I'd say we're probably 80% surgicenters versus hospitals. And it's new adoption in general. We are not yet seeing a significant addition of second units at a site that has a unit. The utilization is still in single digits per month on average. So the capacity requirement is -- the capacity available is still quite high. We do see, for example, in the United States, larger systems that might have a central primary office and then satellite offices, either in suburbs or different parts of cities, add units to put the capacity in those locations. And in general, we're seeing the primary demand coming from new adopters of the technology and new sites where it hasn't been available. Just as an aside, we're also focused on adding users at sites that have a laser system already, and that's a piece of our growth that doesn't show up in systems placements but can show up in utilization.

Got it. That's helpful. And then if I can stick with G6. I wanted to ask about the probe growth guidance. Great to see it left unchanged and your high level of confidence, but U.S. probe growth in the quarter, I think you said was up only 7% year-over-year and OUS clearly down a decent clip, and I get that there's some volatility there. But within the context of your full year guidance of the 9% to 12% growth, where does the U.S. stands in that versus the OUS? And I'm just wondering how high above that range I'm assuming the U.S. is and maybe how achievable that is given 1Q in the U.S. only grew 7% year-over-year.

Yes. Well, in our guidance formulation, we anticipated that we would build that usage over the course of the year. So while it would have been nice to have had a higher number than the 7% growth in the U.S., we feel like we will build over the course of the year. And so there's some degree of back-end loading to that, that we build over the course of the year, and we see significantly higher usage in the later quarters. International volatility is -- it's a little frustrating, but it is what it is. It's a little harder to predict. There are no core issues with usage or end customers, and we feel like the challenge there has been the varying levels of inventory at distributors -- and for example, one of our largest distributor has their fiscal year-end at the end of the first quarter. So most companies, them included, target minimizing inventories, receivables, maximizing cash, and that can lead to the kind of volatility that we see. So the short answer is, we think all of the elements that we're focusing on to drive adoption and growth are progressing, and we think we can hit those numbers.

Got it. That's helpful. And then last one for me. I wanted to ask just about competition. Maybe, Dave, can you discuss your view on the competitive landscape in glaucoma, most notably the MIGS space. Now there's a stand-alone stent out there on the market and the drug delivery implant potentially coming. So how are you thinking about the potential long -- I guess, longer-term impacts on G6, if any?

Yes. We think -- well, first of all, there are a lot of different companies selling a variety of MIGS devices. From what we've seen and heard from our customers, the vast, vast majority remains in the concomitant with cataract procedure, where there's no new incision needed for the MIGS device. We're not hearing an increase in stand-alone usage. We know that companies are out promoting it. And in that sense, it's competitive because they're asking customers to use their device in a patient where we think were more appropriate. The difference between making an incision and not making an incision is significant, both to the patients as well as to the physicians. And we continue to hear a strong preference for the same safety and efficacy to end up with a nonincisional approach. So we're comfortable with that positioning. But the competitive information flow in this space is intense. There's a lot of companies. They have, on average, more reps than us. So the number of reps speaking about some type of a MIGS device versus the contacts from our group is quite large. So that's a challenge, and we address that by focusing on our specific cohort of targets per territory and taking them down their pathway and working with them through their process of gaining confidence and adopting the procedure. And we think with those kinds of targeted execution and the increases that we should be able to achieve with those customers, that leads us to the probe growth guidance that we settled on for the year.

Our next question comes from the line of Scott Henry of Roth Capital.

A couple of questions. I'll start with G6. Dave, we've talked about this before, but I think it's a good time to bring it up again. You got a good number of systems out there. But to get to the kind of compounded growth rates of -- to get to double digits and high double digits, we need to see probes per system, that metric has to go up because then you get the compounding of new systems plus the current systems are being utilized more. Obviously, it didn't go up in Q1, but some noise there, and it looks like it's going to trend upward in the rest of the year. But how do you think of that probe utilization per system? And do you feel like you can get that going in a positive direction? Lately, it's been going kind of flat, which still grows, but not to the hyper levels that we've seen in the past?

Right. So our focus is on the adoption by doctors across the appropriate patient base. So I commented a bit about how the initial -- I'll say the initial application is a smaller group of patients in the later stages. And then people gain confidence in the procedure, the safety profile and can expand toward more moderate stage where there are many, many more patients. And then in combination, adding a higher cohort of comprehensive ophthalmologists who see most of those moderate-stage patients, is the avenue to grow the average usage. We also have seen, I'll say, some frustration from customers if they're not following the parameters and effectively conducting the procedure that they're not getting the outcomes and the durability -- safety profile has been excellent, but if they're not getting the outcomes and the ability then they back away from usage. And so those crosscurrents lead to a net lower usage rate, and that's what we think we can combat. We focus on those accounts who may have declined and understand what may have driven that. And we focus on our target accounts to grow and really drive that adoption in the broader set of patients than really the late stage, well, what else are we going to do with this patient. And we think the combination of those two things will get us up into these higher growth rates. But it's a process. It takes time. It takes time for them to do enough patients and then follow them for a period of time to gain confidence and outcomes and durability. So we focus on that, recognizing that it's not a step function. And that's going well in terms of the responsiveness of the customer base, but it takes time to build.

Okay. Shifting gears to retina. When you think about that segment, I guess, two-part question. One, how do you think about the long-term growth? I mean is that a 5% category grow? Or how do we think about that? And then in the short term, it might be a little slower with the economic environment and perhaps some challenges in capital equipment. Do you see the short term a little tougher than the long term? And where is that long term?

Yes. We think long term, while the industry growth rate worldwide is, some of the research publications that look at that kind of thing, they keep it in kind of the low single digits, mid- to low single digits. We think we can grow at that rate and potentially a little higher as we get our new platform proliferated across the worldwide market opportunity. We're in the U.S. with the platform, the PASCAL scanning laser, about to get the second platform into the U.S. And then second half of the year, we'll start receiving some of the clearances on the PASCAL platform to broaden that usage. So we think that there are opportunities to grow maybe above market rate. But we're a substantial share and leader in that marketplace. So that's generally governed by the overall growth of the marketplace. And then in terms of the short-term economic, I'll call it, uncertainties, I think we are seeing people be more deliberate in their process. But what we are not seeing is people saying, "yes, we've changed our capital budgeting for the year, and we're not going to buy as much as we had intended before." That's not happened yet. And we're just seeing the cycles, the selling cycle extend and people being a bit more thorough and deliberate in how they do their purchasing. And then internationally, we're seeing the distributors really try to lean out on inventory. And so that kind of puts a bit of a dampener if you've got some inventory drawdown in the distributor base, along with their sales to end customers maybe being a little slower.

Okay. Great. And then you talked about that other line and about we were going to get this kind of hit, but the numbers look pretty good. I mean it looks about as strong as it's ever been. Should we expect that to roll over at some point? Or how do we think about that?

Yes, that's more of a second half of the year phenomenon. So you're referring to the reference we made in the guidance portion of revenue where we do have a royalty income and that patent is expiring and the royalties will go down. And that will happen in really more in the second half of this year. But we included that comment because the guidance is annual. So we -- that's obviously going to be a component of the annual result. And so that's the nature of that. And then in the other category, we did see some strength there in our other products which are the -- there's a number of things that are either legacy that we expect to subside over time or some items that are discontinued and those types of -- those are the kinds of products that are in other in addition to the royalties and the deferred revenue recognition items. So we did see some strength in some of those products, which is quite encouraging. And one of those products is a probe that's actually used in glaucoma. And so we think that really offsets somewhat the significant -- the disappointment that we had in total units of OUS glaucoma probes. But in general, that's a relatively stable external category to the glaucoma business. And so this happened to have a positive divergence on that one, maybe slightly offsetting the negative in inventory shifts that were experienced in the first quarter.

Okay. Great. Final question. It looked like G&A was a little high in the quarter. Any trend there or any noise? How should we think about that?

Yes. No, there was certain onetime legal expenses just on the corporate side, proxy-related stuff to get ready for that and some IP-related expenses that you typically come in at the beginning of the year. So essentially that, I don't expect that trend to continue. I think we should be closer to a $2 million run rate on G&A going forward.

Thank you. I would now like to turn the conference back to David Bruce for closing remarks. Sir?

Thank you, operator, and thank you for the questions, and thanks to everyone for participation in the call this quarter. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.