STAAR Surgical Company ($STAA)

Hi. My name is John Young, and I'm a medical technology research analyst here at Canaccord. Thank you for joining us today for a call with management of STAAR Surgical following their Q1 results. I'm happy to introduce Warren Foust, Interim Co-CEO and President and COO; and Deborah Andrews, Interim Co-CEO and CFO. Participants who'd like to ask questions, please use the Q&A feature through the webcast. I'll do my best to include those in our discussion today. Warren and Deborah, thank you so much for being here today.

Perhaps we could start with a high-level question about STAAR's technology before we jump into some more detailed questions about the business. So can you start by reminding investors what differentiates EVO ICLs from laser vision correction? And why you believe lens-based refractive surgery is gaining share perhaps both globally and then also in the U.S.

Yes, John, happy to. First of all, thank you for having us. Thanks to you, and thanks to Canaccord. It's a pleasure to be here with you. Look, EVO ICL is the child of ICL -- STAAR ICLs that have been around for -- in eyes for 30-plus years. And so we're very proud of the history that we have, but we're also proud of the future going forward. And relative to ICLs different from laser vision correction procedures, those require the removal of corneal tissue, where an ICL is simply adding something to the natural lens system in your body. So that's the first distinction. And then some of the things that come after that may be relative to it. For example, when you take corneal tissue, you often induce dry eye. So if a person who could become a patient already has dry eye symptoms, using a laser vision correction technology often induces more dry eye. EVO ICLs do not. So that's an important component. Then polymer. Polymer is the material. It is collagen infused with monomers, which become this unique material. It's very soft and is very elegant inside the eye, and it acts -- we say very quietly in the eye, meaning nothing in the body is reacting to it. So it's very bio-friendly, and it seems to be a big difference maker in ICL technology versus other ICLs that have come in the past because many have tried, but many of those technologies that have come that were made out of plastics, acrylic materials, those have not continued.

I still wouldn't let it in my eye, but I could definitely sing it praises for it. I think we'll move to China. China revenue, $47.4 million was the standout in Q1. How much of that strength was true end market procedure recovery versus EVO+ launch benefit versus channel normalization?

Yes. Deborah and I have taken a really strong approach at looking at inventory on an every week, if not every day basis. And so we understand much better what's happening downstream, particularly with our 2 importers as they ship products to the hospitals and to sub-distributors. So we keep close tabs on inventory. So we feel really good about the fact that it was end market sales that were driving the procedures for the Q1. Now candidly, it's a better quarter than we expected. And some of that is, I think, relative to the excitement around EVO+ that exists in the market. We launched EVO+ in very, very small quantity at the end of Q4, and then we began to roll that out to more facilities here in the first part of 2026 in Q1. And so I think the combination of EVO+ with clean inventory because even as recently as September of 2025, we got back to contractual levels of inventory, and we've made sure that we've maintained that as we've gone forward.

And just as a follow-up to that of an investor question, just asking, how do you gain those insights into the inventories in China, making sure they stay at those contractual levels? What services do you use? And how real time is the data that you guys are able to see when you go through it week by week?

Yes. Our importers are providing us with their logistics data. So we know what we sold to the importers, of course, and they provide us with their logistics data. So we're able to see when they ship product out to third parties. So they ship them to hospitals, they ship them to subdistributors. And in many instances, they'll ship them to medical supply companies, which are holding companies in between the hospitals and their downstream other hospitals. So we see all that data. So when we say end market sales, we don't have procedural data. We can't see the procedure happening as an implant. We hope to at some point in the future. But today, we don't have that visibility. What we see are the shipments out of our importers minus the returns that come back from those same entities that transact with our importers. And so in times when we had elevated inventory, we've known what that number is. If we see that come down now to contractual levels, we describe that as around 6 months. And we know we exited 2025 at that level. And we know at the end of Q1, we're actually there or maybe even slightly less than the 6-month level.

And our importers provide that information to us on a weekly basis. And then every month, at the end of the month, we get their inventory levels to make sure we're able to track their inventory as well.

Great. Deborah, I want to revisit some comments made yesterday at a competitor conference that, I think, it might be worth revisiting around Q2 in China, particularly about the possibility that Q1 benefited from some pull forward related to military procedures possibly. And setting some stage here, China historically has seen a pretty strong seasonal ramp from Q1 to Q2 has been pretty widely discussed. It sounds like yesterday, you're expecting maybe more flat sequentially given some of these changes in seasonal dynamics. Could you just go over them? And then maybe taking a step back, are those comments you made yesterday, are they based on something new that you're seeing? Or would you characterize those comments yesterday as being the continued caution that you had that mindset going into the Q1 print?

Yes. I believe I discussed this to a certain extent on our Q1 call, whether it was in Q&A or otherwise. But Q1 was exceptional for us this year. It was beyond what we were even expecting. And if you recall last year in Q1, although we didn't have any sales to the market, our in-market sales were also exceptionally strong as told by our distributors. Now the reason we were told they were exceptionally strong was because of this military pull forward of procedures from summer season, summer months to the first quarter. I was skeptical last year that, that was real and that really impacted STAAR because we don't -- those procedures are LASIK procedures generally. And of course, we don't participate in that market. So I was skeptical about whether or not that was a real phenomenon and whether we would actually see that again this year. But indeed, with the results that we saw in Q1, we think that probably is likely the case that we are seeing a pull forward of procedures. So I am guessing, as you said, typically, historically, '22, '23, '24, you would have seen a nice ramp between Q1 and Q2. I'm guessing that's not going to be the case as a result of this change in trend and that it will be similar, maybe a little bit more than what you saw in Q1. And then I'm guessing Q3 maybe even a little bit less than what we've seen historically, still high, but more of a flattening out amongst those quarters.

That makes sense. And what are you seeing so far in Q2 relative to that new pattern?

Look, I guess what I would say is just maybe a little bit of history is important. The 2024 time frame feels like it was near the bottom because we had such a decline in the end market procedures. Again, this is the logistics shipments that we saw our importers shipping downstream and coming back. '24 was double-digit decline at [indiscernible]. '25, we saw some recovery. We described it as mid-single-digit level by the time we exited the year, but that included the high first quarter, sort of modulated Q2 and Q3, and then not great at the end of Q3. But Q4 was okay. We came into '26 in that same way for Q1. So when we think about procedures in Q1, which is important to your question around Q2, procedures were probably in that same range. Maybe they're mid-single digits. I think when you listen to ZEISS, they talked about it being a stable market, but not necessarily growing. When you listen to Aier and Huaxia, they grew revenue in the 9% or 10% range, Bright Eye about half of that. But that's not speaking to procedures. That was their revenue. And they talked about getting a lift from ASP. We know we benefited from that. So we know we're taking some level of share. But if you think about that Q1 mid-single digit, Q2 is probably not too different. We'll see. As we get into the high season, then we expect procedures to start to increase, but we've got to wait and see that come through.

Got it. And Warren, how should I think about the mid-single-digit market growth and then also the premium you're likely to get from EVO+ and the ongoing launch there in China?

Yes. I mean we're proud of the premium we're getting. Customer excitement is real around EVO+. In fact, it was more than we expected in Q1. We didn't plan to launch 100 units in Q1, and we saw more demand than we expected. You know we're scaling our Nidau, Switzerland facility to be able to provide that. That's going well, and that is something we need to continue to scale to meet the demand for EVO+. We think around about the middle of the year, we should be in a place where we can supply at least the demand and then be able to start building some safety stock. We're excited about doing that. I would say that we got a lift in premium from ASP, no doubt. That's helping us with share from a dollar standpoint. But it's clear that from an even end market unit standpoint, there was a lot of excitement around this earlier version, we call that V4c, so EVO. Maybe that's a halo effect because patients were running EVO+ and they were waiting. I don't know the dynamic there, but it sure feels like we were able to take some share. And then we're hopeful that as the market comes back itself and we see more easing of geopolitical tensions around the world, and in China, we see less macroeconomic pressures when we see the market continue to grow or get back to real growth, then that share gain will help us be even better, we think.

And could you just remind us in China, just where ICL share is relative to LASIK refractive procedures?

Yes. I don't know if we've given that number explicitly. So I won't say now. But what I'll say is we have markets around the world in Japan where it's north of 50% or 60%, some even cited at 70%, depending on how you count it to some markets like the U.S., where we've only launched EVO here in the last -- since 2022, really in 2023 to commercially launch where we have a share of 3% to 5% and you have everything up to maybe 15% or 20%. I think China is somewhere in that range between 10% and 20%.

Makes sense. And then moving to the U.S., Q1 was another great result, growing 22% year-over-year, exceeding $6 million quarterly sales for the first time. Love to go through what drove that inflection? Was it new surgeon adoption, higher utilization among existing surgeons, better marketing or broader patient awareness?

Yes. It's all of that, I think. And in a lot of ways, there's pieces of it. Look, what we know is the last several years have been a mess for laser vision correction in the U.S. in particular, but in other markets around the world. And so procedures that [ pain ] corneal tissue and patient awareness through platforms like Instagram and TikTok and so on, there's a truth through a never-LASIK crowd. There are folks that -- we've surveyed around 1,800 folks and found out that 50% of them, they're not interested in LASIK ever. And then of the 50% that are, half of them still have fear, but almost all of them were open to an alternative. And we think that's where we're starting to really see opportunity because we're now -- we've always been clinically aligned, I think, with our customers. They recognize that ICL is good treatment, particularly for mid to high myopia. They've known it's good for lower levels of myopia. But what we have now is we have more economic alignment with our customers. They're looking. They tell us they're looking for ways to improve their practice economics because of the decline in LASIK, because of the declining reimbursement they're getting for high-volume procedures like cataracts. And so the cash-pay elective procedure that doesn't remove corneal tissue, that seems to be a real excitement for our customers. So you're seeing new adoption as a result of it. You're seeing increase in offering that leads to patients at lower-diopter as a result of it. And then clearly, our marketing team and our U.S. field organization, they've really done a great job in execution. So I think it's a little bit of all of the things that we said.

Yes. Going to marketing, when you first launched, you had a pretty broad strategy, I think we could say in the U.S. But I think now you really transitioned to specific marketing around centers that are EVO-first centers, perhaps you can call them. What are you seeing there in terms of engagement and driving patients to these practices that are willing and able to offer EVO to patients?

Yes. We held an EVO masters course in Austin, Texas, I don't know, a month or so ago, and had 150 surgeons highly engaged talking about marketing programs and how they're engaging their patients. When the campaign was launched back in 2023, late '22, early '23, it was a broad campaign, as you described. And it was great because it builds some awareness. In fact, we hear about it now. Our surgeons 3 years later are telling us they like that campaign. But the reality is it might have driven a person who could have become a patient into a practice, but the practice wasn't really ready. And so they converted them to what they knew and what their practice was tooled to be able to convert them to, which was LASIK. Now 3 years later, where you have many more practices, which are actively engaged in EVO, they're actively trained, their staffs are ready to talk about the benefits that EVO offers, they still may offer LASIK and that's fine, it's still a good treatment, but they're talking to their patients or potential patients around EVO, that's having a real impact. So those customers that are willing to offer EVO and mid and low diopters, those customers that are already trying to attract refractive patients, if they have interest, we partner with them in a much more targeted marketing approach to try and appeal to people in their geography that can come in for that stated purpose. And we're just finding that as shared buy-in from the customer and a lot of impact on a potential patient.

And do you guys have any data in terms of taking share from LASIK versus attracting patients who maybe would have been on the sidelines otherwise at this point in the U.S.?

It's hard to say. We know we're getting both types of patients because you're still offering or our customers are still offering EVO with doctors that lasers can't even touch. So when you get into minus 10, 11, 12, you shouldn't, I don't think, be touching those patients with lasers in most instances. So they don't. They use -- they often use first-line therapy IPL. What we're seeing now, though, is lower diopters that are offering it and it's a patient preference in many instances. They know neighbors or friends or family members that are -- that have had the procedure, and they'll see EVO and customers are starting to choose it there. So we don't really have the data on what's happening in market share. But what I will say is EVO now, in the quarter, you saw we posted the 22% growth in the U.S. It's a couple of quarters in a row now where we've got high double-digit growth against the backdrop of pretty high double-digit decline in LASIK. And so they're on a little bit of an inverse from one another's trajectory as it is ICL versus LASIK.

And the FDA recently expanded EVO's labeled age to 21 to 60. I think it added about 8 million patients to your TAM. How quickly can that translate into additional commercial opportunity for STAAR?

Look, it's immediate and maybe small doses. It's a hard thing to estimate. And the reality is, as patients start to get up closer to the age 60, then refractory lens exchange becomes an option for that person through a cataract replacement. But this -- our surgeons are telling us they're really excited to be able to offer that 40- to 60-year-old where they've not really had great confidence around the technology that they should choose. This just gives them another data point for them to be able to suggest to their patients. So this is, to me, less about the 8 million TAM in the U.S., and it's more about a committed strategy that we have on a global basis to open up EVO ICL opportunities to more patients. Global labeling in Brazil, which happened recently; the approval in Taiwan, which happened last year; the new labeling for the U.S., it's part of a strategy that we'll continue to try to get more EVO demand.

And beyond LASIK, what remains the biggest bottleneck in the U.S. in terms of adoption in your view?

Look, there's a lot of infrastructure around lasers. These things have been bought and paid for many years ago, and it's a profitable procedure, particularly for customers that own them. What they're finding though now is those lasers that are aged, they cost a lot to maintain them. It costs a lot to have a technical service agreement with them. And when the patient load slows, then that's why I think you're seeing them look for more opportunities. But that's still a bottleneck. It's still a place where the customer has to have the awareness, they need to have a refractive stream of patients coming in. Most of those now, we've got reasonable relationships, and I think we're starting to make great progress illustrated by the Q1 results.

Deborah, if we could maybe touch on this guidance. STAAR continues to not provide formal '26 revenue guidance despite strong Q1. What specific milestones or visibility would you need before becoming comfortable issuing guidance again?

Well, first of all, let me say we're in this for the long term. And so that's where our focus is. We think it was very important for us. We knew we were going to increase our revenue significantly over last year. We also thought it was very important to achieve profitability, which we did with nice increases in our operating margin and our EBITDA margins. But we need to have predictability. If we were to give guidance, we need to have predictability so that we have confidence to accurately and responsibly give guidance. And as you saw with Q1, that was above our expectations. So now the question is, okay, what happens in Q2, what happens in Q3. Q4, I think will follow similar trends to what we've seen historically. But we just don't feel that it's responsible to give guidance until we have more certainty around those numbers.

And without asking for guidance, our model assumes revenue $321 million, and consensus is the $332 million, so 34% year-over-year growth. Are you comfortable the Street is? And maybe just walk us through the swing factors that would drive upside or downside to those numbers today?

Yes. We don't really comment on the consensus numbers. But again, Q1 was excellent for us. So we're really pleased with that result and what that purviews for the rest of the year, I hope. The biggest swing factors include the continued strength in China demand, of course, and EVO launch, the adoption -- continued adoption of EVO+, which was really strong in the first quarter. That carries a premium price, of course, and potential downsides to this are the macroeconomic and geopolitical issues that we face internationally, particularly in the Middle East and in India. And that could expand throughout other regions of the world where we sell our products. So that gives us a little pause.

And maybe moving to the P&L. Gross margin was 73.6% in Q1, and you said that 75% is now more of an exit target for the year. What are the key levers for STAAR to get back towards that 75%?

Yes. Well, as you said, that's an exit target for us, which we hope to achieve. But the key levers are significantly increased manufacturing volumes in our Swiss facility, which we're on target to achieve. This will improve our overhead absorption and reduce our unit costs. We expect to sell through high unit cost product somewhere in the -- by the second half of this year. And we also expect increased ASPs as we fully launch our EVO+ in China. And also as we -- now that we have -- we're able to fully manufacture EVO+ in our Swiss facility, we will begin manufacturing our EVO product in our Swiss facility. And as a result, we will not have any import tariffs on that product. So that will improve our margins additionally.

Okay. Great. And I'm not sure if this applies here or not. I know a lot of med tech companies have been talking about refunds for previously paid tariffs. Would you fall under that category of possible refunds from tariffs in the U.S. and say China?

No. I think, the refunds that the U.S. is giving for tariffs that companies have had to pay or companies that have been charged tariffs locally in the U.S. versus we're paying tariffs to the Chinese government. They're not going to give a refund.

I understand. Okay. You reiterated on the call to the $225 million operating expense target for 2026. Where are you still investing in the business? And where have you permanently reset the cost structure?

Yes. I think where we're still investing is primarily in technology and innovation for this year, including our ERP system, continued investments in ERP and our online ordering platforms. And we're also looking at opportunities to invest in AI solutions for the business overall. Where we've reset the cost structure is in areas that are not ROI driven. So we've been disciplined about removing spend that doesn't support our growth, our value creation. And you can see that in the reduction in our operating expenses, which were down 18% year-over-year. Where we need to invest, we will invest, and -- but we need to make sure it has payback. We would expect, as the year -- as revenue recovers, we expect to see additional operating leverage with a leaner cost base and disciplined spending, additional incremental sales, we expect to support our path towards a double-digit operating margin continuing.

Okay. Great. And just one from the audience, too. Just any idea on long-term target margins and any additional incremental investments that would be needed to be made in either sales or marketing or operations?

Yes. I mean, generally, we -- a company like ours, I would say, should be targeting double-digit operating margins, and we're about there. But like I said, where we need to make investments. And the biggest investment, as I said, are in technology and in our innovation platform, where we're going to want to launch -- have a cadence of innovation that we launch over time. It's very expensive as you enter into clinical trials and that kind of thing. So -- but we'll definitely make those investments as needed.

Great. And we can to jump to that. Longer term, what are the biggest product innovation opportunities beyond EVO+ for STAAR? It comes to mind, I think of optics, sizing, toric matrix, presbyopia, we have the EDOF lens that you guys have been working with a little bit, workflow tools or indications. Could you just walk us through that?

Yes, sure. So innovation is an important one. And you mentioned, we've been very overt about our efforts on revenue growth and profitability. Innovation, we've said less about, but it's one of our core strategies. And so there's a lot of work in the background going on around innovation. So we can address some of this that you ask, but it is important. Innovation comes in a lot of different ways. And so we don't want to underestimate the impact that the new ERP system can make on the organization. That's innovative in its own right because it's going to allow us to work differently. It hardens the organization for the long term. So this is about creating infrastructure that helps sustain this company many, many years into the future. So we're excited about that. We're talking about innovation in manufacturing and operations that can do those things and serve that goal. Look, we've talked about the interest in presbyopia. Presbyopia is sort of a [ soda ] word, if you will, for a bunch of different brands that can happen. These are things like extended depth of focus, which we have interest in. We have a foray into with EVO Viva, but that's a very nuanced and more of a niche product for specific patients, maybe 45 to 55, minus 5, minus 6 and above myopia. We can take the learnings from that platform and look at other opportunities around extended depth of focus, presbyopia improvement, multifocality is an option. All of these things are within our capability and within our material capabilities. I think that's really important. We can take the existing EVO material polymer, and we can do different things inside the eye, potentially outside the eye, but our focus is ophthalmic inside the eye to do things in the focus or even in the capsular bag. Those things stay within our opportunity set from an innovation standpoint. Things like extending our shelf life. These are things that are important. We need to look at how do we manage, for the long term, our existing portfolio to make sure that we get the most out of investor capital. So that's on the table. Not to mention all of the other iterative things that we can do relative to size, relative to diopters. All of these things are on a portfolio road map, and we look forward to talking about those more as we get closer to the end of the year.

I know we just have a minute left. So just maybe a final big picture question for you both. Just if STAAR executes well over the next few years, what should the company look like from a geographic standpoint, financially and strategically versus where it is today?

I mean, look, we -- from my perspective, we have to build on the incredible foundation that we have operating in 80-plus countries, a user base that is avid. They love EVO ICLs. When a patient has been exposed to it -- and here's an example, John. When patients have been exposed, they become ambassadors for us, so do our surgeons. And so you think about the fractional penetration that we have in a market where myopia is growing sadly, and it's creating an epidemic, 50% of the population will soon be myopic. That's -- in some markets, it's already that way. And so the ability to build on that, I think, is really important. So you should see a broadly penetrated multi-continent penetration of technology that doesn't remove corneal tissue, that's additive to a patient, that's removable and doesn't induce dry eye. So I think you're going to see continued adoption from our perspective.

Great. Thank you so much, Warren and Deborah, for today. It was really informative, and I appreciate the time.

Thank you, John.

You got it. Thank you.

Thanks.