IRIDEX Corporation (IRIX) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the IRIDEX Third Quarter 2022 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, [ Regan Tally ] with Investor Relations. Please begin.

Thank you, Operator, 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 October 1, 2022. 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, November 10, 2022. And with that, I'll turn the call over to Dave.

Good afternoon, and thank you all for joining us today. On this call, I'll provide updates on our business and commercial progress, then Fuad will cover the third quarter financials and we will open the call for questions. Third quarter was highly productive for IRIDEX, highlighted by a 29% increase in placements of Cyclo G6 systems globally, the launch of Cyclo G6 in China and the U.S. soft launch of our next-generation retina laser systems at the American Academy of Ophthalmology. We expect these developments to be growth drivers for the business over many quarters to come. Turning to our results in the third quarter, revenue totaled $14.6 million, growth of 10% compared to the third quarter of 2021 and, importantly, 6% sequential quarterly growth despite elevated foreign exchange headwinds and typical summer seasonality. Growth in the quarter was led by the retina business growing 13% year-over-year and the Cyclo G6 product family growth of 10% year-over-year. In the glaucoma market, G6 system placements grew 29% compared to the prior year period with 54 systems shipped, representing a strong appetite for adoption of our non-incisional approach to treat glaucoma, both in the U.S. and internationally. On the probe utilization front, we experienced an improved operating environment relative to second quarter. In Q3, G6 probe unit sales in the U.S. grew 6%, while probe revenue grew 10%, as ASP increased compared to the third quarter of 2021. Outside the U.S., G6 probe revenue did not meet our expectations and was down slightly, resulting in overall G6 probe growth of only 2%. The expanding growth rate in the U.S. is encouraging. However, the OUS return to growth has lagged expectations, but we're starting to see signs of improvement. To drive increased G6 adoption, we're focused on educating clinicians on the updated dosing recommendations and the benefits of MPTLT used earlier in the treatment continuum as a pre-incisional intervention, as published by our clinical consensus panel, plus expanding adoption among comprehensive ophthalmologists and adding users at surgery centers that already have Cyclo G6 systems. Our top initiative has been training clinicians on the updated dosing recommendations that have been shown to improve TLT efficacy and durability, a crucial aspect for building the foundation for increased utilization. We believe this effective clinician-led dosing guidance is demonstrating improved consistency of patient outcomes. And to facilitate this method, we're rolling out our suite management software upgrade designed to better guide clinicians' technique and help achieve desired outcomes. This process will take time, but our confidence remains high that physician recognition of improved outcomes and consistent durability will lead to much broader adoption. Looking ahead, as we more closely align with our distributors we believe the international opportunities, especially Japan and China, can drive significant incremental growth. In collaboration with our distribution partners in China, the Cyclo G6 launch in the region is underway. The launch initially focused on 10 to 15 key opinion leader pilot sites to build a strong experience and outcome foundation for future adoption within China. These early sites are treating their initial patient cohorts who are evaluated at 30 days post treatment and regular increments thereafter to confirm efficacy, safety and durability results. We expect more meaningful contribution from this new market, going forward, as results emerge and site expansion begins. As we mentioned on our last call, we've added to our international commercial team to increase our geographic footprint and resources to support the needs of our distribution partners and end customers. While we expect growth to return internationally and increase domestically, third quarter lags caused us to expect G6 probe sales for the year of about 60,000, versus guidance of 61,000 to 63,000. This still implies strong fourth quarter probe sales of about 16,000 units. We are focused on the large opportunity for increased procedure adoption from moving earlier in the treatment continuum, and our confidence in the strong growth potential and differentiated competitive position of MicroPulse Transscleral Laser Therapy remains high. Now turning to our retina business, strong third quarter execution drove revenue growth of 13% year-over-year. U.S. PASCAL sales were particularly strong. As a reminder, in the comparable period a year ago we were transitioning the technology into our portfolio. In September, at the American Academy of Ophthalmology, we held showings of our new laser platforms in a private technology suite. We're launching our next-generation versions of our 3 mainstream laser projects for retina treatment. Their reveal generated strong engagement and positive feedback from clinicians. We are also announcing today that we have received U.S. FDA clearance for our new IRIDEX PASCAL platform and are excited to begin shipments to customers in the U.S. this quarter. Regulatory approvals beyond the U.S. are expected to be achieved throughout 2023. The new IRIDEX PASCAL platform combines leading pattern-scanning precision and speed pioneered by PASCAL with clinically proven tissue-sparing MicroPulse and endpoint management capabilities plus pattern-scanning laser trabeculoplasty for early-stage glaucoma treatment, providing incredible versatility and proven clinical power in half the footprint. We believe combining this fast and broadly capable system with the emerging need for combined laser and anti-VEGF drug protocols will drive higher laser procedure volumes and can trigger a replacement motive for older, less capable scanning laser systems. As a reminder, these new platforms also have manufacturing cost advantages, which can enable pricing flexibility for share gains or improved margins. At the AAO, we also invited multiple speakers to present their findings at our booth to highlight clinical and practice advantages. Presentations covered combined laser and anti-VEGF therapy for diabetic macular edema, MicroPulse TLT glaucoma experience with dosing and broad patient selection, MicroPulse TLT adoption experienced by a comprehensive ophthalmologist practice and progress made in the ongoing MPTLT dose escalation study. We're excited to share the full readout, including developing durability data, as it becomes available. This will serve as an important guide for MPTLT users, demonstrating the specific outcomes, safety and durability from cohorts receiving escalated levels of parameter dosing. While we've experienced our challenges this year, we're confident in our efforts to drive further adoption and utilization of our glaucoma procedures and continue to grow our broad retina product line across key market distribution channels and build off the momentum of our new product launches and geographic expansion opportunities. Finally, we continue to carefully manage our capital to provide sufficient operating runway for us to execute these growth initiatives. With that, I'd like to turn the call over to Fuad.

Thank you, Dave, and good afternoon, everyone. I will now review our financial performance for the third quarter of fiscal 2022. Starting with revenue. Total revenue for the third quarter was $14.6 million, up $1.4 million, or 10%, from $13.3 million in the third quarter of last year and nearly $900,000 sequentially, despite Q3 being seasonally weakest quarter of our fiscal year. We sold 13,700 Cyclo G6 probes in the third quarter, an increase of 2% from the prior year period and a decrease of 9% quarter-over-quarter. As Dave noted earlier, the sequential decrease in the third quarter was a result of expected normal seasonality and continuing operating environment headwinds. We sold 54 Cyclo G6 systems in the quarter, compared to 42 in the prior year period. Year-to-date, we have sold 158 Cyclo G6 systems, tracking our initial expectation for the full year and validating our worldwide install base expansion goals for 2022. It also highlights the broadening adoption of TLT for the treatment of glaucoma. Total product revenue from our Cyclo G6 product family was $3.5 million, up 10% compared to the third quarter of 2021. Turning to our retina business. Product revenue was $8.8 million, an increase of 13% compared to the prior year period. Broad strength across retina products were offset by relative softness in OUS PASCAL revenue. Recall that last year, in Q2 and Q3, we shipped extra units to start building inventory in Japan ahead of a shipment blackout as we registered IRIDEX as a manufacturer of PASCAL. Other revenue, which includes royalties, services and other legacy products, increased 4%, to $2.4 million, in the third quarter of 2022 compared to the same period in 2021. Gross profit of $6.5 million in the quarter reflected gross margin of 44%, up 50 basis points compared to the same period last year. As we have stated in the past, we continue to face headwinds on the supply chain side and inflationary pressures on parts and materials. Therefore, the improvement in gross margin, albeit modest, is a testament to durability of our long-term supplier relationships and tireless efforts of our operations team. We expect meaningful margin expansion will come from increased probe volume and sales of our new laser platforms as they take the place of existing systems in the future quarters. Operating expenses for the third quarter were $8.2 million, compared to $7.9 million in the same period of the prior year. The increase was a result of investments in the sales organization as well as expanded marketing activities. Net loss in the third quarter of '22 was $1.8 million, or a net loss of $0.11 per share, compared to a loss of $0.14 per share for the same period in 2021. We ended the quarter with cash and cash equivalents of $15.9 million, representing cash usage of $2.1 million during the quarter. Cash usage includes approximately $500,000 investment in inventory and related preorders. We believe these investments in materials and inventory are necessary to mitigate potential supply chain bottlenecks in the future. We expect to start bringing down inventory starting in the fourth quarter of fiscal 2022 and into fiscal 2023. We reiterate that these shifts in our current assets are an essential part of supply chain management strategy in the current environment. In conclusion, I'll provide an update to our guidance for 2022. We confirm total revenue for the fiscal year of 2022 of $56 million to $58 million, our expectations for growth of our Cyclo G6 Glaucoma Laser System install base to remain unchanged at 225 to 250 units, and we expect G6 probe sales to be about 60,000 units. Our OUS result in G6 probe sales has lagged our expectations for a rebound similar to that in the U.S. However, we are confident that the previously outlined initiatives can accelerate our growth into 2023, starting with the expectations for a strong fourth quarter probe sales. With that, Dave and I would like to turn the call over to the operator for questions. Operator?

[Operator Instructions] Our first question comes from Scott Henry with ROTH.

It sounds like the quarter was pretty much as expected, aside from a little OUS weakness, which sounds pretty good after a tough prior quarter. So I guess, do you agree with that statement? And then a couple of just small questions. First, the new PASCAL machine, how should we think about that impacting revenues? Should that increase the growth rate? Or is it just a typical update? Just any thoughts on that.

So this is a completely new platform. Scott, by the way, it's good to hear from you. This is a new platform. So it's reengineered. It's in a much smaller footprint, integrated. It's a more capable system. So we think this actually increases our competitive strength, and we can use it to drive gains. It's a competitive marketplace and capital equipment challenges in an interest rate-rising environment with potential recession headwinds flowing around and on people's minds may affect the overall demand, but we think this will really help us to gain share and maintain or possibly even increase the growth that we've been able to accomplish on the retina side of things.

And when do you think you'd start to see the impact of this? Probably first quarter of next year? Or perhaps even a little bit at the end of this year?

We'll sell a few systems this year. It's part-way through the quarter already. So we'll exercise our commercial systems. We'll start actively promoting it. And we think the biggest impact will come next year. The U.S. is a little bit below 40% or so of our unit volume. So U.S. will come first, and this will generally substitute and, therefore, give us that competitive strength and cost position improvement for a high percentage, I'll say, of the 2023 systems. And then we'll gradually receive our clearances around the world and increase the total percentage of systems to, I'd say, a reasonably high percentage of all systems by the end of 2023.

Okay. And then you spoke about the opportunity for G6 in Japan and China. How should we think about the magnitude of that opportunity relative to, say, a $15 million to $20 million base in the U.S.? How material is it relative to that base?

I'll start with Japan. So Japan is really recovering from a lull in the transition from one distributor to another distributor, the shift of manufacturer, which puts you out of the marketplace for a period of time. And so that recovery will occur through the course of the next couple of quarters and really recover that strength and start growing. Japan is our biggest market for Cyclo G6 outside the U.S. So that's an important impact on the business. And then China is an extremely large opportunity. When we first got the clearance, we talked about there being 9 million glaucoma patients in China, versus 6 million in the U.S. So the scale is tremendous. And so we think that's going to be a long-term growth driver. The short-term quarters are still in the initial launch phases, as I described in my comments. We need to really seed a good experience and then lever that, those key opinion leaders, across the other potential adopters across. So that will continue to pick up steam and, we think, ultimately become a nice driver of OUS growth.

And our next question comes from Tom Stephan with Stifel.

It's John on for Tom. Dave, maybe I'll start on G6 probes and utilization. Can you just talk about how the quarter progressed and how some of the headwinds in 2Q that I think you alluded to from COVID and vacations, maybe how that played out over the course of the third quarter of '22?

Sure. We saw the U.S. recover reasonably, even starting in July. And I think we even made the comment on the conference call of the questions in the middle of August we had seen the U.S. recover. OUS, less so. It's probably a combination of still working through the distribution channel and getting that newer set of sales reps fully up to speed and driving business in the different countries and regions. And I think the typical vacationing and other things that happen in the third quarter internationally. And that has stayed on a relatively flat track, as the macro numbers demonstrate. In the U.S., we did see that recovery in July, and it carried on through the quarter. It's not to the level that we want to see it yet, but it's encouraging versus where we were in the first half of the year. And so we feel like that's building and the activities we've been doing are starting to pay off. So we're seeing more and more clinicians confirming their satisfaction, even happiness with the dosing and the durability of that new dosing and understanding the importance and really starting to broaden their usage. And as the unit sales numbers for the systems demonstrate, there's still quite a significant appetite to get the capability in place and to adopt TLT and buy Cyclo G6 systems as well. And we're seeing that continue into the fourth quarter in our experience so far.

Okay. And you might have just touched on this at the end of that answer, but just to be clear, so on the capital equipment side in both glaucoma and retina, when we look to the field, you still see a solid consistent appetite for capital equipment. The selling conversion cycles are stable and haven't really lengthened of late?

No, we haven't seen any lengthening. Well, you could argue there's been a lengthening, but it's coming to fruition. But we think what's driving this is the desire to have the capability. It's not the same as a decision to maybe replace your retina laser system. That's -- you have the capability in place and you may in more economic challenging times, say, "Oh, I can make it another year before I have to do something." Getting the capability seems to still be a strong motivation. And so we've not seen a significant reduction in that. In fact, it's been a recovery for -- the third quarter numbers are pretty strong.

Okay. Okay. And just the last one. Looking out to 2023, just high level from a revenue perspective, maybe if you could just talk about the key puts and takes, what we should be taking into consideration on both sides of the business. And more specifically, for G6, are you comfortable with sort of the 15% to 20%-plus growth potential specific for G6, looking ahead?

So the strength of bringing out new platforms and rolling them out across the globe on the retina side we think is going to continue to drive interest and improve our competitive position. A little hard to handicap what interest rates and potential recession can do against capital equipment. So we have successfully taken retina from a decliner as a product line in our quarterly and annual revenue progression to a gainer, and we think we can continue that, but I think there's a lot of variability in what the future holds. So our expectation is growth in the retina side and continuing recovery toward growth in the glaucoma side. We think that the OUS growth can recover. We think we can reach higher growth rates in the U.S. We think it will build. It's hard to have step-functions in this business, but we think it can build and head back in that direction. Not giving you guidance, but that's the general expectation and belief. And we're seeing day-in and day-out physicians recognizing that the right dosing is important to their outcomes and the driver of their outcomes, as opposed to a reaction to the overall technology that, "I didn't get the results, so that technology must not be as effective as people represent." I think that message is starting to go through, and we'll continue to do clinical studies that demonstrate that, and we're looking to drive a broader and larger-scale study next year as well to really cement the clinical evidence as well as the individual evidence clinician by clinician.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.