Q4 2020 IRIDEX Corp Earnings Call

Ladies and gentlemen, thank you for the standing by and welcome to the Iridex Q for a full year 'twenty 'twenty conference call. At this time, all participants are in listen only mode.

After the Speakers' presentation there'll be a question and answers fashion. The ask the question of that time. Please press Star then one when you touched on the telephone.

As a matter of todays conference call is being recorded.

I would now like to turn the conference of the host Ms. Leigh Salvo with Investor Relations Ma'am you may begin.

Thank you and thank you all for participating in today's call. Joining me are David Bruce Chief Executive Officer, and flood Ahmad interim Chief Financial Officer.

Earlier today Iridex released financial results for the quarter and year ended January 2021 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 the federal Securities Law, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 interest.

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 occur.

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 form 10-Q filings with the SEC.

Iridex disclaims any intention or obligation except as required by law, the update or revise any financial projections of 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 of the day March 'twenty 2021 and with that I'll turn the call over to Dave.

Thank you Lee and good afternoon, everyone. Thanks for joining us.

On today's call I'll provide a brief review of Iridex is 'twenty 'twenty progress.

Where our business stands today, and our fourth quarter and full year results.

Then I'll touch on our continuing growth initiatives and outlook for 2021.

After that <unk> will provide additional color on our financial results for the quarter in the year.

And then we'll open it up for calls and questions.

Yeah.

So clearly 2020 was an extraordinary and difficult year for many companies at Iridex, we saw our second quarter revenues fall by 40%, but over the course of the remainder of the year with focus from the entire Iridex team. We adjusted how we operate and sell and ended 2020, delivering one of our strongest quarters in years.

Yes.

In addition, we achieved several important milestones, including launching improved products and enhancing our market position and we exited the year with solid momentum that will help drive several exciting catalysts in 2021 and beyond.

I am pleased to report the Iridex had a great fourth quarter <unk>.

Despite continuing COVID-19 impacts year over year revenue increased by 5% to $12 3 million of multi year quarterly high.

Plus gross margin improved by four percentage points, while operating expenses were reduced by 9%, resulting in nearly breakeven net income.

Returning to the highlights of the.

Progress in 2020 the.

The year was of course dominated by managing and responding to challenges created by the pandemic. However, we also continued to execute on our longer term strategic objectives.

First we implemented structural changes to reduce operating costs and preserve cash to extend our financial runway and the success of these measures allowed us to limit cash usage to only $1 million for all of 2020, we finished the year with $11 6 million of cash.

Second we adjusted our sales and marketing processes to improve market awareness and expand adoption of our non <unk> micro pulse trans clear of laser therapy or T. L T and.

Engaging new customers and re engaging our significant installed base, we began the year launching a revised micro pulse <unk> probe.

Then mid year successfully shifted to virtual and web based sales activities supporting customers.

Although midyear procedure volume declined significantly starting in April as offices, and Surgicenter closures, where strictest we.

We strongly recovered U S glaucoma probe volumes in Q3, and Q for both exceeding 2019 pre COVID-19 levels.

And third we continued rolling out product enhancements that strengthened our competitiveness and improved gross margins.

We updated our textile scanning laser module launched both an updated and the new <unk> delivery device and.

<unk> made substantial progress on our new lower cost of laser platform, receiving FDA clearance and readying. The first of the family for a launch in 2021.

Our progress on these initiatives during the challenging environment in 2020 makes us very confident for 2021.

I'd like to take the next few minutes and share some additional highlights from the fourth quarter.

Topline revenue in the quarter exceeded the pre COVID-19 revenue in the prior year period, improving 5% to $12 3 million.

Adoption of our cyclo <unk> probes reached a record quarter in the U S with 8% growth over 2019.

Outside the U S continued impact from Covid restrictions caused small reductions in probe usage.

In the fourth quarter, we announced that our micro pulse DLT has been included in the European Glaucoma Society is <unk>.

Terminology and guidelines for glaucoma.

These new guidelines were presented at the annual Society meeting this past December.

In addition, nine new micro pulse <unk> studies were presented exemplifying the continued global expansion and potential for this treatment.

We're very encouraged by the results in the fourth quarter from our retina business as well, which had been severely impacted in the third quarter down 23% versus the prior year.

In the fourth quarter of this segment rebounded strongly posting 11% year over year of growth.

We expect the strength to continue in 2021, particularly as we execute the top gun collaboration elements.

And finally, we are pleased with our success in fourth quarter, managing our capital resources similar to the third quarter, our web based sales and marketing activities enabled us to limit operating expenses, while at the same time exceeding revenue from the prior year.

I'd like to briefly highlight our continued progress on product development circling back to the launch of our new laser indirect ophthalmoscope the L L plus in the third quarter.

The positive feedback we received from our users following that launch has translated to adoption and strong order flow in the fourth quarter we.

We expect this enthusiasm to continue in 'twenty, one is the ophthalmic business landscape recovers from the deferrals and cancellations that resulted from Covid.

We also have our new laser system platform, well underway with the <unk> system launching soon and the $5 32, and $5 77 frequency lasers expected later in the year.

In addition, with the acquisition of the Pascal scanning laser line, we plan to combine the key features from Pascal and our micro pulse and tech sell products into a single leading platform.

Lastly, let me recap the exciting strategic collaboration with top Con that we announced just a few weeks ago.

Via press release, and a conference call both of which can be found on the investor section of our website.

Top kind of the Japanese based manufacturer and distributor with approximately $1 3 billion annual revenue in 2019, including $430 million from its global eye care business.

This new collaboration enhances our value proposition on three fronts.

First of provides significant additional capital to drive new growth initiatives in retina and glaucoma.

Second it expands our distribution network throughout Asia Pacific and key.

Amir regions, Europe, Middle East and Africa.

And third it increases revenue and scale by combining combining top cons Pascal line with Iridex is micro pulse and textile products, creating leader in technology and in market share.

For retinal scanning laser products.

The transaction is expected to net $19 $5 million of cash to Iridex.

And this allows us to fund strategic growth initiatives, such as expanded sales teams clinical studies and market development programs, all designed to drive faster market adoption of our glaucoma therapy products.

As part of the collaboration <unk> will assume exclusive distribution rights in Asia Pacific and key EMEA markets for both our retina and glaucoma products in total this will account for approximately 60% of our international revenue.

And the remaining portion will continue to be sold through our current distributor network.

And assuming exclusive distribution rights.

Both of Iridex and top Khan will benefit from a broader offering of diagnostic and treatment products for both glaucoma and retina customers.

And finally, combining the acquired Pascal product line with Microsoft, Microsoft Micro pulse and textile platform products.

Will result in a leading market share in the in.

In the marketplace.

As well as the greater scale to generate design manufacturing and marketing efficiencies.

So in summary.

We believe our fourth quarter results demonstrate the momentum created by the hard work of the Iridex team over the past 18 months.

We've seen sales growth in retina, thanks to new products and we've seen increased market uptake of our unique micro pulse TLC glaucoma treatment all despite significant COVID-19 headwinds.

This gives us the confidence to increase our investments to grow both retina and glaucoma segments as we anticipate the ophthalmic market returning to normal as the year progresses.

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

Thank you, Dave and good afternoon, everyone.

I will now go over our financial performance for the fourth quarter of fiscal 2020, starting with revenue.

Total revenue for the fourth quarter was $12 3 million up 5% from $11 8 million in the fourth quarter of last year and up 40% from $8 8 million sequentially.

We sold 13500 cycle of <unk> probes in the quarter same volume sold in the fourth quarter of last year, but up 18% over the 11400 probes sold in Q3.

We saw probes volumes approaching the pre pandemic levels with the pricing levels at or above last year.

We sold 57 fact logistics systems in the quarter compared to 107 in the prior year period, and 37 sold in Q3 of this year.

The reduction compared to the fourth quarter of fiscal 2019 was primarily due to the COVID-19 related capital purchase deferrals by customers.

However, consistent with our sales practices for most of the fiscal 2020, we have maintained good pricing discipline in our system pricing remains steady in fact for.

Third quarter of 2020 saw a modest uptick in system pricing sequentially on higher volumes.

A positive indicator for fiscal 'twenty one.

Okay.

Overall revenue from <unk> product family of $3 5 million.

Although down 5% compared to the fourth quarter of 2019 because of lower sales system. The system sales. It was 25% improvement from $2 8 million in Q3 of 2020.

Our retina revenue revenue.

<unk> net revenue improved significantly in the fourth quarter and posted an increase of 11% compared to the prior year period, and 56% compared to the third quarter.

To recap our retina products includes lasers, various delivery devices, which we define as capital equipment and Endo probes, which are a single use per procedure product.

The results in our retina product line were helped by the release of improved products and capturing previously deferred capital equipment purchases by customers in light of improving COVID-19 related outlook, both in the U S and <unk>.

Other revenue, which includes royalties services and other legacy products increased 3% to $1 9 million in the fourth quarter of 2020 compared to 2019.

Gross margin in the fourth quarter of 2020 was up 420 basis points to 45, 4% compared to 41, 2% in the fourth quarter of 2019.

Gross margin improved significantly as a result of solid pricing discipline and improvements in manufacturing cost structure.

As previously reported gross margin enhancements.

Have been and will continue to be an area of focus for the company.

Operating expenses for the fourth quarter of fiscal 2020 were $5 9 million compared to $6 5 million in the same period of the prior year of 9% decrease.

The decrease was the result of our continuing efforts to reduce our operating expenses. Both in response to the pandemic and of careful reassessment of our cost structure during fiscal 2020.

Okay.

As a result of meaningful gross margin and operating expense improvements, we reduced our net loss in the fourth quarter of two 179000 or a net loss of <unk> <unk> per share.

And the improvement an improvement of nearly $1 4 million.

Or <unk> 10 per share from last year.

Okay.

We ended the year with cash and cash equivalents of $11 6 million down approximately $1 million from the end of 2019 inclusive of the PPP loan.

We are very pleased with our year end liquidity. Despite an overall decline in 2020 of revenue.

Our recently announced transaction of the top gone further bolsters, our liquidity and gives us additional resources to accelerate our growth plans, while retaining our focus on prudent cost structure and revenue growth.

Which brings up the guidance.

Given the continuing variability in product demand due to COVID-19 combined with variability introduced by top on collaboration effecting the revenue recognition sales transition.

<unk> and integration costs for the past scale product line Iridex cannot provide a meaningful financial guidance for 2020 at this time.

With that.

David and I would like to turn the call over to the operator for questions operator.

Thank you again, ladies and gentlemen, if you'd like to ask the question. Please press Star then one on your Touchtone telephone.

One moment please.

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

Great. Thanks, guys, good afternoon, Dave and flawed of ball as well.

First question I'll, just pick up where you left off I know youre not going to give explicit.

2021 guidance, but it seems like the business has good momentum you exited for Q and a very strong fashion.

Just think about sequentially. The for Q2 of once you stepped down the Iridex has usually experienced its been a little bit balance sheet, but maybe 10% of show.

Of millions of dollars and change is that the right neighborhood to be in or is there any sort of maybe goalposts.

<unk> posted you can put up when we think about how the how to think of it for Q 'twenty 2021 a sequential move.

Hey, John it's Dave Thanks for joining the call. This afternoon.

Yes.

Typically we do see a reduction from the fourth quarter to the first quarter.

The fourth quarter's often of big capital equipment purchase quarter per.

Probes also though experienced some reduction into the first quarter as well.

The health plan deductibles are met at the end of the quarter and people aren't as aggressive in going to get procedures early on so so that's the typical profile.

We did say, we're seeing continued momentum from capital equipment success in the fourth quarter and I think relatively we can you can anticipate that as well and then.

It's it's always back loaded on quarters for capital equipment. So we do have a couple of quarter a couple of weeks left in this quarter and.

Introduce some variability, but but typically we're comfortable with the.

The more standard.

<unk> function now that said, we closed the transaction with top gun and we are now manufacturing the Pascal product line and anticipate some revenue from that product line added into the quarter as well.

Okay, great that was actually going to be one of my questions, but you clarify that you think about maybe a couple of quarter sorry, a couple of week contribution from the <unk>.

Scale of specific to your <unk> 20 of our results.

Alright, and then I'll just pivot all stay within the P&L. The gross margin I thought it was certainly a highlight in the quarter mid 40% range.

I think one of the stronger results in several quarters in some time, how do we think about the gross margin cadence if I go back to the announcement of the top call. It I think you said expect some maybe pressure only or on in the year and in strengthening throughout 2021. So do we think about the mid 40 range, maybe taking a step back in the first half, but maybe still.

All of them for the full year the mid Forty's is a good place to be.

Yes, I think thats generally the right way to think about it I think as we talked about.

On our I'm, calling the announced the drop down transaction.

The first quarter or so it's going to be somewhat choppy given.

The distribution.

Move over to two top con as well as the integration costs associated with.

Taken on the Pascal product line. So we expect are going to be some compression.

On the on the overall.

Corporate margin and then as.

As those of integration costs of trade away I think we feel like we will get back to the the more mid forties beginning in Q3.

And then certainly into Q4.

And I think just to kind of highlight what happening in Q4 really was that really a function of.

The higher revenue so certainly there was.

More overhead absorption, but also of the company has been.

And im working diligently over the last year or so.

Fine.

Find efficiencies in the manufacturing processes. So those will obviously continue from that perspective, but there is some overhang from the the transaction side.

I'll just add to that John.

Capital equipment is typically.

At a lower gross margin than the.

Then disposables.

And as we've added a chunk of capital equipment revenue on average Thats, a higher percentage of our revenue. So that just by itself will pull down a bit the total average gross margins for the company.

That's offset by obviously higher revenue that comes in as well and as we continue to grow the pro business that should drive.

That should drive gross margins up.

And as you said earlier.

Going to take a quarter of couple of quarters too.

The clean up the integration and get the overhead in line as well as operating costs were just starting to integrate and we'll have some opportunities too.

To have a better view of where we can go as we operate for a period here.

Got it and maybe last one or two for me.

Dave You mentioned should we saw on the press release for a while ago, but my proposal included in the European guidelines I think on this call you also talked about maybe.

The other new papers that are out there is there anything that we should be on the lookout for in 2021 opportunities with additional guideline, maybe even something here in the U S or other critical papers that you expect on the come that could help drive.

The greater adoption of <unk>.

Well theres been a steady stream of papers at the various glaucoma focused meetings.

Some.

Relatively large samples I think one quarter last year, we highlighted a 400 patient study by a group from Toronto.

Led by buyer group from Toronto, and those of the kinds of papers that have been coming out I think the.

The continued publication of evidence on the more moderate stage patients.

The publications around experience with dosing profiles and the mechanics of procedures and outcomes associated with that those of the kind of things that investigators are.

Are working on right now and one of the things that we want to focus on is expanding our support of.

Appropriate clinical studies to give the medical community just of greater confidence in particular subsets of of patient.

Patient types, specifically moderates and looking at concomitant.

Procedures with cataract.

Theres been some publications of that but a broader set of experience would be desirable. So we look for those kinds of things through the course of 2021.

Got it very helpful. Thanks, guys I'll take the rest offline. Thanks for your time.

Thank you.

Thank you I'm showing no further questions at this time I'd like to turn the call back over to Dave Bruce for any closing remarks.

Thank you operator.

That concludes our conference call for today. Thank you for joining and we look forward to updating you in future quarters.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.

Okay.

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Yes.

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