Q3 2020 IRIDEX Corp Earnings Call

Ladies and gentlemen, please standby your conference call will begin momentarily. Thank you for your patience and please standby.

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Ladies and gentlemen, thank you for standing by and welcome to the Iridex third quarter 2020 earnings Conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone keypad.

If you acquire any further assistance during the conference. Please press star zero and an operator will be happy to assist you.

I would now like to turn the conference over to your host Hunter copy Investor Relations. Thank you. Please go ahead.

Thank you and thank you all for participating in todays call. Joining me are deep Bruce Cheapening, Chief Executive Officer, and Jim Mackaness interim Chief Financial Officer.

Earlier today you'd actually these financial results for the quarter ended September 26, 2020, a copy of the press release is available on the company's website.

Before we begin I'd like to remind you that means you will make statements. During this call that include forward looking statements within the meaning of the federal Securities laws, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act 90 95.

Any statements made during this call that are not statements of historical facts, including but not limited to statements concerning.

Treat your goals and priorities.

Development matters sales trends in 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, not placed realizing these statements.

For a discussion of the risks and uncertainties associated with our business. Please your most recent form 10-K and form 10-Q filings with the FCC.

Your next 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 why broadcast today November nine 2020.

Now I'll turn the call over to Dave.

Thank you Hunter good.

Good afternoon, and thank you all for joining us.

First lets acknowledge that these past quarters dealing with COVID-19 had been challenging for everyone.

I appreciate your continued support and interest in Iridex.

I'd like to start our call with a brief review of our strategic priorities for the year.

And highlight some recent progress towards those goals and Jim back in as our interim Chief Financial Officer will provide additional color on our financial results for the quarter. After that we'll open the call for questions.

[noise] admin 2019, we identified several key strategies, we were confident could lead us to significant improvement in our business for 2020 and beyond at that time no. One four saw the dramatic and widespread impacted the COVID-19 pandemic.

And while we necessarily made a number of adjustments to our operations in short term resource allocation.

We have continuously kept an eye on our longer term growth plan not wavered from those initial goals.

In short hills goals included the implementation structural changes to reduce operating costs and cash preservation measures to extend their financial runway.

Also adjustments to our sales and marketing process just to expand adoption of our non incisional micropulse transcranial laser therapy.

With new customers and by Reengaging or significant installed base.

And lastly to pursue judicious product development investments that would strengthen our competitiveness and improved gross margins.

I'm encouraged by the progress we've made on each of these objectives, while we reacted to and mitigated the challenges presented by cold at 19.

And I would like to take the next few minutes to share with you some of our recent highlights.

Overall, the positive recovery trends, we began to see as we exited Q2 persisted Q throughout Q3, well we continue to experience some impact some capacity restrictions from reduced report about the helmet practices and surgery centers, our business substantially improved from the trough we experienced in.

Early second quarter.

Top line revenue improved sequentially to 8.8 million from 6.2 million, a 42% increase over Q2 20.

We experienced the strongest rebound in our glaucoma probes to the point that we exceeded sales in last year's third quarter by 6%.

It over 10% outperformance in the U.S.

We're seeing a slower bounce back and capital systems sales, particularly with international customers as they largely remain financially conservative throughout the duration of the pandemic.

To mitigate the inevitable revenue impacts from deferred or delayed procedures and capital purchases. We made it a top priority to significantly reduce spending with a shift to web based sales and marketing activities and gradually increased direct to customer contact to the access opened in the third quarter.

This enabled us to limit operating losses to be in line with our third quarter 2019 results. Despite the lower revenue this quarter.

These shifts coupled with improved balance sheet management led to a sequential increase in our cash position at the end of the third quarter by approximately $300000.

And year to date, our cash balances declined by only about $700000. This is a meaningful accomplishment by our team in a volatile environment and sets us well positioned with operating runway as we work toward full recovery of our business to pretty cold bid levels and beyond.

As you recall in the second half of 2019, we redirected our sales and marketing focus to drive adoption of our unique non incisional glaucoma therapy, both with new users and with our large installed base of cyclo Gsix system owners.

Prior to the onset of the pandemic, we saw renewed customer engagement with improving topline results in the fourth quarter 2019, and the first two months of 2020.

In March as I noted.

Our team responded quickly to the challenges that emerged as a result of the pandemic.

Since then Weve continued to maintain full organizational capacity through a combination of work from home capabilities and wherever possible daily onsite operations for those groups that work from our facilities.

And the use of virtual online tools to facilitate sales marketing initiatives and provide clinical support and training to our customers.

Our teams have adapted well to the new environment, and we've been able to support our operations and our customers well keeping everyone's sake, we're proud of what's been accomplished by Iridex.

Under extraordinary circumstances.

We experienced favorable improvement month to month in the third quarter as our surgeon customers in hospitals continue to reopen in patients scheduled procedures.

In terms of geography sequentially, U.S. sales improved 66% and outside the U.S. increased 16%.

On a year over year quarter basis, our U.S. business recovered to within 10% of 2019.

And our outside the U.S. business within 27%.

Reflecting the impact of slower recovery and Cobrand resurgence in some regions around the world.

Throughout this new business landscape. The biggest beneficiary has been U.S. glaucoma probe adoption with growth driven by increased recognition of our T. LT.

Non incisional effective I O P reduction benefits and conversion to our revised Micropulse Petri probe.

That continues to be very supportive.

Customers, praising its improved ease of use which we believe will continue as a catalyst for increasing utilization.

I'd like to shift now to highlight the continued progress of our product development program.

This quarter, we launched a new laser indirect ophthalmoscope or El <unk> Oh boy.

Sure the retina market.

And feedback from our newest users say, it's a major improvement over our prior offering.

In October we received FDA clearance for a new 810 nanometer laser the first from a new platform Weve been co developing with our partner in China. So this platform development suffered delays due to cobot impacts we continue to make progress toward launches in 2021.

As we've discussed before one key benefit of the new laser platform will be reduction in manufacturing costs. Once we have completely rolled out the anticipated three lasers on this platform.

That gross margin improvement in north of $1.5 million in the capital equipment side of our business leading to several percentage points of improvement in our overall gross margin.

I'm encouraged by the business, we have seen so far in the fourth quarter and anticipate that trajectory will continue through the remainder of the year as we shift our focus from reacting to the pandemic keep executing our longer term growth strategy.

With adjustments as needed due to the uncertainty remaining in play given the recent surges in co bid infection rates.

In summary, we continue to make meaningful progress on the strategic objectives, we established coming into this year. Despite the significant short term operational adjustments needed in the wake of Cove at 19.

The third quarter showed strong improvement in the second quarter, enabling us to exit the quarter at better than 80% of precluded levels.

We were able to drive quarterly probe sales that exceeded the previous year in the midst of a partial recovery.

And our revised probe and virtual sales and training processes have driven renewed interest from government customers as well as attracted new customers.

Back in March we reacted quickly to manage our costs and balance sheet closely and as a result, our cash position has declined by only 700000 since the start of the year.

I'm proud of our team's success in weathering and recovering in a tough year for the ophthalmology market, but even more so in setting us up to succeed once the impact of the COVID-19 pandemic diminishes.

Before I turn it over to Jim Mac Ines.

I'd like to thank Jim for his service with us as he transitions to another assignment.

Particularly for his help in managing through a very turbulent situation over the past eight months.

I'd also like to introduce and welcome to odd Ahmad.

Another partner from the F.L.G. team, who is taking over the interim CFO role.

Wads broad CFO experience and recent assignment with an aesthetic laser and disposables company will provide seamless and strong financial leadership for Iridex.

With that I'd like to turn the call over to Jim.

Thanks, Dave and good afternoon, everyone.

Total revenue was 8.8 million down 17% from 10.7 million in the third quarter last year, but up 42% from 6.2 million last quarter Q2 2020.

Like all the product lines recovering nicely, we sold 11400 cyclo gsix probes in the quarter, an increase of 6% from the 10800 probes sold in the third quarter of last year and up 44% over the 7900 probes sold in Q2.

The increase in probes sold in Q3 of this year compared to Q3 of last year resulted in an increase of 0.1 million in glaucoma probe revenue.

We sold 37 cyclo Gsix systems in the quarter compared to 82 in the prior year period, and 42 units sold in Q2 of this year the reduction compared to last years quarter. It was primarily due to a change in sales approach in the U.S. and ongoing capital purchase to Phil's, resulting from coated.

Cross selling approach you, both bundling to laser with probes and offering a deep discount on the laser the new sales strategy does away with this branches and we have seen a significant uptick in the a speech for the Liza.

Mobile revenues for the psychology, six product family was 2.8 million, although down 6% compared to the third quarter of 2019. This was a 31% improvement from 2.1 million in Q2 2020.

Alright, no product line continues to be the most impacted we'd revenue was down 23%.

There isn't the products include laces, various delivery devices, which we define as cash equipment and Endoprobes, which are single use the procedure product sales of Catholic equipment tends to be backend loaded in the quarter and the subject to being delayed at the last minute in any particular quarter the impact of COVID-19 increases this volatility.

Other revenues, which include royalties services and other legacy products decreased 17% to 1.6 billion in the third quarter Twentytwenty compared to 29 <unk>.

Gross margins in the third quarter of Twentytwenty was 41.5% compared to 14.2% in the third quarter of 2019 gross.

Gross margin percentage improved despite the lower sales volume as a result of the shifting product mix towards the higher margin per procedure products and improved pricing cycle of G. Six legs that councils both.

Both the rights and continued execution of sales strategy, we introduced in the second half the 29 <unk>.

And an increased weighting of U.S. sales that is sold with a higher gross margin through our direct sales force compared to international sales. So good the lower gross margin through distribution.

Operating expenses for the third quarter Twentytwenty decreased 10% to 5.5 million compared to 6.1 billion in the same period. The prior year. The decrease was the result of cost saving measures implemented in the second half the 2019 and a reduction in variable expenses is COVID-19 resulted in continued reduced business activity.

In the third quarter.

Consequently, the revenue reduction in the quarter was offset by our prudent expense management resulted in a loss of 1.7 million or a net loss of 12 cents per share an improvement over the loss of 1.8 billion or a net loss of 13 cents per share in the prior year.

For the first nine months of Twentytwenty, although revenues were down 24% compared to 2019 due to the impact. This focus on expense management, we were able to reduce our net loss by 1.1 million to 6.2 million from 7.3 million.

Our cash balance ended at 11.9 billion for the quarter. After approximately 300000 from Q2 2020 and down only 700000 for the year and 2019 as Dave noted earlier, we're very pleased with the management of our capital resources. During these tough times and believe this together with our expense management puts us on a film for sure.

Whether the existing cobot headwinds and to execute on our business strategy for the long term.

Which brings us to guidance, we continue to find that COVID-19 outbreak and related uncertainties create a broadly variable business environment for us and as a result, we remain unable to provide a meaningful guidance range could 2020.

With that Dave and I would like to turn the call over to the operator for questions operator.

Ladies and gentlemen, if you have a question at this time, Please press star and the number one and you touched on telephone. If your question has been answered or you wish to move yourself from the queue. Please press the pound key.

Our first question comes from the line of John Block with Stifel. Your line is open.

Hey, guys. This is Tom on for John Thanks for taking my questions. Once begin with trends I'm just for clarification to start off.

You noted in the prepared remarks that you exited the quarter at better than 80% pre Tobin levels was that for.

Total company sales for G. Six probe shipments and it was total company sales could you maybe talk to GE six trends in the corner.

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Sure Tom This is Dave yes.

Yes, so the overall number was down 17% compared to last year and I think we just summarized it is within.

80, or 80% of pre co bid.

The trends are more reflected in the comments around.

Improvement in the G. Six glaucoma probes those were actually up against the third quarter last year and up significantly against the trough in the second quarter. So we're seeing that disposable probe business recovering quicker than the capital equipment business. So.

Strongest in the U.S.

And and secondly, and outside the U.S. capital equipment was hit in both segments, a little harder and so that brought the overall average EUR recovery down to closer to that.

80% level, a pretty Kobe <unk> so that's.

Something that we see continuing here as were partly through the fourth quarter and and seeing some resurgence in co but around the world, which is affecting certain areas and.

In terms of their access and you know.

We'll see at the end of the quarter, but yes, it may affect their appetite as well. So you know, we're a little more circumspect in and forecasting that recovery.

Got it okay that was a super helpful and maybe just sticking with.

Trends you didn't know international has been impacted.

By some of the recent surge isn't cobot any causes and recovery recently in specific U.S. markets that maybe experienced second waves.

It's always hard to draw conclusions in the short term on order flow in any given week or you know to a certain extent even a month.

And there have been times for example in the third quarter, Texas had some restrictions in place in the major metropolitan areas.

And in several other sections of the country and you know when you when you try to bore in on that you can see possibly see some effect, but in general.

It was transient and we haven't seen anything significant in the short term given you know the new highs that or are being experienced in and yeah.

In daily cases.

So it's a little early to predict that that said our customers have told us they.

I intend to try to continue.

Continue to provide services in a safe manner.

And you know unless truly instructed that capacity will not be restricted significantly.

Got it Okay, and then shifting gears a bit congrats on receiving clearance of the new laser platform I think the press release no. David you said in the prepared remarks that family would be introduced next year any additional color around the timing there and.

Maybe when we could expect more meaningful contribution to the top line and margins and maybe I can tack on a follow on there.

Gross margins were solid a bit above our estimate and I think you have a good amount of champions in the near term just from a mix perspective, and then also from the benefits of the new laser family. So how should we be thinking about potential gross margin expansion.

Maybe throughout 2021, just coming off this latest quarter's a 42% figure thanks guys.

Sure I'll I'll talk about the the newer products for 2021.

And then maybe Jim can comment on how the gross margin ultimately can impact us and then potentially roll out next year. So why.

We've been developing and talking about a a platform that would be the basis for three different laser frequency products for use in both glaucoma and in retina and.

On a common platform that basically has the modification specific to the applications that are that are the different frequencies are used for.

That gives us a nice commonality and higher volume on the platform plus working with our partner and a lower cost production environment like China gives us the opportunity to improve.

The cost position on those and.

Realize it in gross margin or in pricing I'm that drives higher potential volume. So we're very encouraged by that we're not being particularly specific about exactly when were going to roll out or exactly what the feature set is primarily for competitive reasons.

And secondly.

You know you whenever you are introducing new versions of products, you can end up having customers defer and and wait to see.

The new product before they make decisions and you know that you don't you don't necessarily want it frees up the marketplace and in those situations.

So, but we see the three rolling out over the course of 2021.

And getting the full impact of those gross margin improvements and.

You know call it in 22.

Jim do you want to add some yeah I think tell me I didn't if I did it there. We are we do feel there's a number of things that are working to our favor I think as you identified obviously the G. Six probes continue to become a bigger part of.

As part of the product portfolio. So that's a positive inc.

Increased volumes will also help rebound the margins because we'll have better overhead absorption a there.

There is a little bit of irony in the sense. We are looking for would have an international capital bounced back and although that will increase in the sense of absolute gross margin dollars you would actually come with a little bit of gross margin compression. So we just had to be a little bit sensitive to that.

And then ultimately she said I think we'll transition as Dave said towards those margin Incretion projects will come on stream sort of right at the end of 2021 and really start to come full bore and 2022, so sort of normalizing around where we are right now and then perhaps over that period of time, you started to see some some uptick.

Great. Thanks.

And our next question comes from the line of Scott Henry with Roth Capital. Your line is open.

Thank you and good afternoon.

Strong results, given the challenging times or Dave.

A couple of questions.

First you know I know, you're not looking to give guidance but.

Would you say you're comfortable that based on current trends you would expect to see a sequential increase from Q3 to Q4.

And revenue.

Well, so seasonally Q3 is weaker than Q4, so you know all things being equal the answer to that and easy yes.

Uh huh.

I would say that you know were we were pleased with the bounce back and recovery in Q3.

But the idea that okay. You know for example capital equipment Oh, the all clear has not been so.

Sounded and so you know we're a little.

Hesitant to forecast, how the end of year capital equipment.

No deal close cycle goes, we'll certainly be ready to ship product, but you know.

I think Jim noted in his comments.

Most of this capital equipment or a good portion of the capital equipment is backend loaded and it's easy to make the decision to defer it and so that's why we're a bit circumstance that that's that's true in any environment and might be a little more true yeah.

We're in the cobot environment, but but in general we're feeling yes that you know the fourth quarter should be sequentially better than the third quarter.

Okay, great and looking through the numbers at least kind of the raw numbers till we get to 10-Q I it looks like probes per system.

Jumped pretty pretty strongly off the queue too low.

In almost reaching normalize levels would you expect probes per system to continue towards that kind of normal steady state that you know if I think back to the second half of last year, Although I know you're.

You didn't have an even higher just trying to get a sense of the trend in utilization.

Yeah, as we shifted from pushing systems to more and more locations.

And you know potentially going back and figuring out usage later to a model, where we're actually focusing on those customers whether they already have a system or are looking to buy a new system real.

Really to adopt the procedure and do more and more patients. Both you know towards the late stage, which were were our volume is pretty strong and later stage severity of glaucoma patients.

But even into the moderate stages, where the combination of our safety profile and significant reductions in intraocular pressure may should make it a preferred procedure safe non incisional with good production.

And so as we go to customers and educate them on on the papers supporting this in and appears that are practicing this word driving usage first and system placements second so as we're successful driving usage, we get higher average per site or the new.

You cited that come on have a higher average then and the older sites in that helps drive the increase in average over the the total we still have a a portion of our systems installed base that our users right now and so as we go to them and bring them back on line and increase their volume.

James obviously that helps the overall average usage as well.

We see ourselves is a very small.

Degree of penetration into the big pool of patients with moderate to severe.

Coma, and so we think that there's quite a large upside for adoption and ultimately revenue and disposable probes for us and so that's that's how we're thinking about driving it. So our intent is to significantly increase the average usage and also obviously increased the tone.

Total installed base.

Okay. Thank you for that color.

And then right no well down was still a pretty good number.

I <unk> higher than Q1, and well off the lows of Q2.

Do you think you can maintain that level of sales or what was there anything unique that happened in Q3.

Well, we think we're improving our competitiveness so the launch of the L.A.O. product.

As a significant and we've done some improvements to performance in some of the other.

We call them delivery devices, but they're the ancillary equipment that attaches to the laser system and delivers.

Laser energy into the eye, whether it's through a scanner type product or a a headset that the ophthalmologists wears so that they can do these treatments on the retina and so as we improve our competitiveness.

We think that those those numbers should improve and you know that's our intent now historically weve seen a slow decline in that segment combination of capital equipment competitiveness.

Increasing around the world price competitiveness, increasing around the world and just you know for example, just holding share but suffering a price compression can can lead to a decline. So we think we're improving our competitive position will improve our gross margins with the newer systems in the retina space whether.

We choose that ER to be just pure gross margin and profitability or we choose to.

Use some of that cost improvement to be.

To be more aggressive in pricing and get a higher share Oh.

We think we can be well positioned to compete more strongly in the future and that's why we that's why we've been spending on on development space.

Okay, Okay and final question I in the prepared remarks that there were some comments about A.S.P. going up in the D. Six.

If I recall the system ASP increased in Q2, a substantially versus Q1. The here. He did it increase even further from Q2 to Q3 or is that kind of just a Q3 over Q3 comparison and in house ASCII in probes trending. Thank you.

Yeah. Tom This is Jim so get kept the significant uptake when you go year over year for sure.

And actually we did see a little bit of a pricing increase between Q2 and Q3. This year. So both both are very positive trend.

As far as pricing in general pricing is generally held very well.

And there hasn't been too much fluctuation on the pro pricing.

Really from over the last couple of quarters.

Okay, great. Thank you for taking the question.

Thank you and our next question comes from the line of Paul Nouri with Noble equity Your line is open.

Hi, I was wondering if you could talk about capital equipment sales, whether it's the G. Six on its own or the company as a whole.

The the trend this quarter weather in Q4, we should expect on the whole something like we saw this quarter or if capital equipment sales might have been accelerating and the later months of the quarter.

[noise] Hi, Paul its Dave it's.

It's just difficult to forecast now what we're seeing is a nice recovery in Q3 from Q2 and the trough of Q2. It was a Q3 was solid when you compare it to Q1, which we did see some impacts from cove it toward the end of the quarter and again.

Like a lot of medical capital equipment products, you know a significant percentage of the sales in any quarter for capital equipment tends to come.

Come toward the end of the quarter the industry's I guess trained the buyers to to wait out for the best deal.

That said going into Q4, but you know we were currently comfortable with the flow of business that is a potential to occur out there.

But were mindful that a you know in in countries around the world the restrictions have been increasing and.

And you know you don't know how long that's going to last and you don't know if it's gonna broaden to.

A bigger percentage of the you know the world market.

Ed or potentially a in the U.S.

And so it's you know it's tough to forecast the quarter, but where we sit today capital is I'll call. It consistent with the recovery we have seen in the third quarter in terms of.

Activity and potential demand you know for a for a reasonable quarter.

Okay that was my only question. Thank you.

Sure.

Thank you and I'm not showing any further questions I'll now turn the call back over to you for closing remarks.

All right. Thank you Bridget I'd like to thank everyone for joining the call and for your continued interest in Iridex and we look forward to talking with you.

In future quarters.

Thanks, everyone.

Goodbye.

Ladies and gentlemen, this does conclude the program you may now disconnect everyone have a great day.

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