Iridex Corp Q4 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the Fourth Quarter 2022 IRIDEX Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Philip Taylor, Investor Relations.

Thank you, and thank you all for participating in today's call. Joining me are David Bruce, Chief Executive Officer; and Fuad Ahmad, Interim Chief Financial Officer. Earlier today, IRIDEX released financial results for the quarter ended December 31, 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 live broadcast today, March 9, 2023. And with that, I'll turn the call over to Dave.

Thank you, Philip. Good afternoon, and thank you all for joining us. Today, I'll provide updates on our recent business progress and discuss our 2023 outlook. Then Fuad will provide details of the 2022 fourth quarter and full year financial results. Then we'll open the call for questions. As we preannounced on January 10, for the full year 2022, we generated revenue in line with our guidance of $57 million, representing an increase of 6% compared to 2021. Beyond the financial results, 2022 was highly productive for IRIDEX. We achieved regulatory clearance to market and sell the Cyclo G6 platform in China, introduced sweep management software for the Cyclo G6, maintained a strong presence at Glaucoma Society meetings, and published the two-part expert consensus to raise awareness of the clinical benefits of MicroPulse TLT. Despite a soft first half to the year, from COVID and international challenges of dollar strength and inflation, these activities meaningfully advanced G6 adoption and G6 pro growth in the second half of 2022, and we continued to experience solid growth this quarter to date. Additionally, we received FDA clearance for the next generation Iridex Pascal scanning laser platform in November and are today announcing clearance of the Iridex 532 and 577 single spot laser platform received in February. We've already begun the US launch for Pascal and will begin the single spot platform launch at midyear. We expect all these achievements to build momentum for our business in 2023. Turning to the fourth quarter, revenue totaled $15.2 million in line with the prior year period, driven by growth from the Cyclo G6 product family, US retina sales, and other revenue being offset by declines in some retina products internationally. We also reduced our cash used in operations by half to under $1 million in the quarter. Looking closer at the Glaucoma business, Cyclo G6 revenue increased by 9% year-over-year to $4.2 million in the quarter. We achieved record international G6 probe unit sales and sold a worldwide total of 16,400 probes, representing growth of 8% compared to the fourth quarter of 2021. G6 system sales decreased slightly compared to the prior fourth quarter, but results were at the midpoint of our overall annual guidance. We see significant opportunities to increase G6 probe volume and adoption by staying focused on four key initiatives. First, continuing our advanced physician education, keying on proper dosing and broader patient selection criteria. Second, targeting comprehensive ophthalmologists who see the most moderate stage pre-incisional patients. Third, adding users at surgery centers that already have G6 systems, and fourth, expanding clinical evidence supporting adoption of MicroPulse TLT. The main components of our education strategy are peer-to-peer discussions on dosing recommendations based on clinical study evidence and sharing updates on MicroPulse TLT use on a broader patient population. In particular, earlier in the glaucoma treatment continuum at the AGS just completed in Austin, Texas, Dr. Syril Dorairaj presented his early results from a prospective randomized dose escalation study demonstrating 31% to 44% intraocular pressure reductions with greater treatment efficacy resulting from slower probe sweep speed while still providing the same consistently excellent safety profile. It's becoming clear that the key to consistently high IOP reduction is proper sweep speeds and that this technique maintains the very benign safety profile. To facilitate excellent treatment technique, we launched and promoted our Sweep Management Systems software upgrade. This software helps guide users to select and execute proper sweep speeds during treatments according to best practices developed by our Clinical Consensus Panel. It's working, users are reporting this helps reduce variability of technique and helps them deliver more consistently strong results to meet their outcome expectations. The next component of our growth strategy is to increase awareness of the benefits of MicroPulse TLT earlier in the glaucoma treatment continuum as an effective pre-incisional intervention. About 50% of the 2022 proctored cases supported by our field team were pre-incisional patients treated by both glaucoma specialists and increasingly with targeted comprehensive ophthalmologists who typically diagnose and treat patients with earlier stages of glaucoma. This targeted cohort of clinicians and patients has the potential to meaningfully expand G6 penetration in the continuum of glaucoma care. Internationally, we initiated the G6 launch in China in the second half of last year alongside our distribution partners with 15 key opinion leader pilot sites and approximately 120 patients. While China's COVID policy lockdowns in 2022 slowed the initial adoption ramp, patient flow is increasing again, and we believe this can drive growth in 2023. In addition, last year we increased our international commercial team to provide more expert resources in support of our distribution partners and customers. And finally, we have great confidence that we have the right probe design and clinical proof of efficacious and very safe dosing guidance executed through user software supporting proper treatment protocols. We believe we have a stable procedure ready to design and launch a larger scale, multicenter prospective trial. The study will target demonstrating the safety and substantial effectiveness of MicroPulse TLT for moderate stage glaucoma patients. Active discussions on proper study design and protocol are underway with key opinion leaders. Once we've determined the optimal protocols for the study, we can begin to recruit participating centers. We are making this investment in 2023 and hope to begin enrolling patients in the study by year-end. We have high conviction in our ability to grow the glaucoma business over the long term. We're excited to provide this on a larger scale and ultimately capture a substantial role in the continuum of care for glaucoma sufferers. Altogether, as we look ahead to 2023, we expect to increase the growth rate of our Glaucoma business. We expect probe revenue growth of 9% to 12% compared to 2022. We expect to sell 65,000 to 67,000 probes and grow the installed base by 225 to 250 glaucoma laser systems. Now turning to our retina business; for the fiscal year 2022, product revenue increased by 2% to $31.7 million compared to 2021, despite some softness in international markets, leading to a decrease of 11% in the fourth quarter compared to the prior year period. On our last call, we announced we had received US FDA clearance for our new Pascal laser scanning platform. We began shipments to US customers in the fourth quarter, and we anticipate regulatory filings and approvals internationally throughout 2023. The new Iridex Pascal platform offers the ultimate combination of the leading pattern scanning engine endpoint management technology, pattern scanning laser trabeculoplasty which is a glaucoma treatment for early stage patients. And now with IRIDEX's proven MicroPulse technology, it provides physicians with expanded treatment capabilities in an integrated system with one half the footprint of the prior platform. And today we're pleased to announce that we received FDA clearance in February for our single spot platform, consisting of the Iridex 532 green laser and the Iridex 577 yellow laser. We'll share more details as we launch them in the US around midyear. We believe both updated laser platforms can drive replacement cycles for the significant installed base of older equipment reaching end of life. The improvements we've made not only include technology updates that will produce clinical benefits, but also provide manufacturing efficiencies that will translate to pricing flexibility for share gains or improved margins. Our investments over the last couple of years have resulted in material improvements to our retina business and is now operating from a significantly stronger competitive position in both product and sales channel potential.

Good afternoon, everyone, and thank you for joining us today. I would like to begin by reviewing our financial performance for the fourth quarter and full year fiscal 2022, starting with revenue. Our total revenue for the fourth quarter was $15.2 million, which was in line with the fourth quarter of last year. Our total revenue for 2022 increased by 6% to $57 million compared to $53.9 million in 2021. Moving on to product revenues, the overall revenue from the Cyclo G6 product family in the fourth quarter was $4.2 million, up 9% compared to the same period in 2021. We are pleased to report that we sold a quarterly record 16,400 Cyclo G6 probes in the fourth quarter, an increase of 8% from the prior period and an increase of 20% quarter-over-quarter. We sold 79 Cyclo G6 systems in the quarter, compared to 90 in the prior year period. Total Glaucoma product revenue for 2022 was $14.7 million, up 5% from 2021. Our retina product revenue in the fourth quarter was $8.1 million, a decrease of 11% compared to the prior period. For the full year 2022, our retina product revenue was $31.7 million, up 2% compared to 2021. Other revenue, which includes royalties, services, and other legacy products, increased 26% to $2.9 million in the fourth quarter compared to the same period in 2021. For the full year 2022, other revenue grew 20% to $10.6 million, compared to $8.8 million in 2021 on higher service, royalty, Topcon distribution and legacy product revenue. Our gross profit for the fourth quarter of 2022 increased to $6.7 million, up 11% for the same period last year. Gross margin was 43.9%, compared to 39.3% in the fourth quarter of 2021 on revenue mix that favored US revenue. Gross profit for the full year was $25.4 million, up 11% from the prior year. Gross margin was 44.5% in 2022, compared to 42.3% gross margin during the same period last year. Operating expenses for the fourth quarter were $8.1 million, compared to $8.4 million in the same period of the prior year. Total operating expenses for 2022 were $32.9 million, compared to $30.4 million in 2021. Our net loss in the fourth quarter was $1.1 million, or a net loss of $0.07 per share compared to a net loss of $2.4 million or $0.15 per share for the same period in 2021. For the full year, we recorded a net loss of $7.5 million or $0.47 per share compared to a net loss of $5.2 million or $0.34 per share in 2021. Cash and cash equivalents as of December 31, 2022 totaled $13.9 million. Cash used in operations was down $900,000 in the fourth quarter, while the total cash reduction in the quarter was only $2 million. The cash reduction during the year of $10 million included approximately $3.5 million increase in inventory and related preorders to mitigate supply chain issues. However, we expect such inventory to substantially unwind over the course of 2023. Finally, I will now provide our guidance for the full year of fiscal 2023. We anticipate Cyclo G6 probe unit sales of 65,000 to 67,000, which represents a growth of 9% to 12% over the prior year. We expect to expand the Cyclo G6 systems installed base by 225 to 250 units. Total revenue for the year is expected to be $57 million to $59 million. Please note that the full year 2023 total revenue guidance represents a growth of approximately 3% to 6% after adjusting for an approximate $1.5 million reduction of other revenue royalty income resulting from the expiration of licensed patents. Implicit in our guidance for fiscal 2023 is a full recovery from any lingering COVID-19 related pressures. However, currency fluctuations, inflation, and supply chain may continue to represent headwinds, albeit manageable. We are confident in our ability to address those issues and continue to execute on our core strategy centered around increasing growth in our Glaucoma treatment adoption and rolling out our new retina platform.

Our first question comes from Scott Henry with ROTH Capital.

Thank you and good afternoon. I just had a couple questions largely on the modeling front. First, any thoughts on how we should expect the cadence of the year to go as far as revenues? Any guidance, or should we expect historical trends?

Hi, Scott. How are you? I think it's shaping up to be more of a typical. As you know, we're not linear. We have typically seen strongest in the fourth quarter, some softness in the third quarter. Maybe the second strongest is the second quarter. And that's from where we sit today. I don't see that changing dramatically.

Okay. And then should we expect the operating expenses to be similar in 2023 as in 2022? And also, would gross margins be similar, or might we get a little bit of gross margin expansion? How should we think about that?

I think let me address the gross margin first. I think we should see some marginal expansion of gross margin in 2023 relative to 2022. I think ‘22 was still a period in which we have supply chain issues and we're making payments in advance and sometimes paying a premium for some parts. I think that should subside in 2023. So we should expect some expansion. We're not going to see the expansion that we were hoping for in ‘22, just given there's still some lingering supply chain issues that we have to deal with. But overall, you should see the expansion. Also, I think as you know, a lot of our gross margin depends on both geographic mix as well as the product mix. So with the Glaucoma becoming a bigger part of the business, we should see naturally gross margins expand from that as well. So yes, I think the answer to your question, the simple answer is we should see some expansion in ‘23. As for the OpEx, I think for the most part we expect R&D to G&A to kind of remain flat. We do expect sales and marketing where our clinical spend is to grow. I think we are going to be investing more dollars into the clinical spend with a view towards growing the adoption rates, and that's been our mantra for the last couple of years and it's expected to continue.

Okay in the new Pascal product. Should that grow revenues for that line, or is it more of a substitute of extension?

I think there's two elements of that. One is it's a more capable system and a smaller footprint. And so a lot of institutions who may not have bought it in the past because of the size now could be attracted, and it's got MicroPulse capability as well, which it never had in the past. So I think that expands the pool. But I think as a new platform, it may be the catalyst for some older sites. We have a significant percentage of Pascal systems in the installed base that are old and some even past the end of service date, meaning if they wanted to send it in for repairs, essentially, we can't do it. So that can potentially trigger somewhat of a replacement cycle. And so we look for some modest growth because of that piece. And I think internationally still remains to be seen because we have to roll out approvals. It's primarily a US phenomenon for the early part, and as a percentage for most of the year 2023.

Okay. So Dave, follow-up question and the last question, I mean it sounds like 2023 is going to look a lot like 2022. A little bit more revenues, a little bit more expenses, going to lose between a little more than $5 million in the year, pulling out stock comps. The question is, I mean, you're kind of at a fork in the road. Either you grow faster to get profitable, or you cut expenses to get profitable. And you're not losing a lot of money, but you're still losing money. So of those two pathways, I mean it sounds like your idea is to invest in the clinic and try to get the top line growing faster. But I just wanted to give you an opportunity to perhaps shed some light on what direction you'd like to take the company in.

Yes, we think that there is a very large growth opportunity in Glaucoma. We view the ‘22 activities as really rebuilding the foundation there and proving out the elements that we believed were in place. And I think by investing in the broader, larger clinical study, that we will prove that out further and create a real adoption evidence base that can drive us from, say, early adopters or use at the margin when other things aren't working into the mainstream. And that's just a very large opportunity. So we're focused on that big growth piece. The decision to maintain the level of investment in sales and marketing and clinical is really driven by that. We do see a tailwind from unwinding the inventory builds and prepaids because we think the supply chain can soften and get back towards normal in 2023. So we were up $3.5 million in cash usage in ‘22 because of that. And if we unwind that, that turns into a cash tailwind. So comparable usage of cash with the tailwind of cash coming from the balance sheet puts us still with a substantial amount of cash and the runway to execute that growth trajectory.

Our next question comes from Tom Stephan with Stifel.

Great. Hey, guys, thanks for the questions. I'll start with the G6 probe growth guidance of 9% to 12%. Dave, can you just talk a bit about the different dynamics at play between the US and outside the US? I know in the outside the US there's maybe been some volatility, but just for 2023, how are you thinking about growth between each region?

Hi, Tom. Yes, we do anticipate, I'll say continued volatility in the international space. And so as much as we're focused on very specific activities to drive that growth and working with our distribution partners, it can still ebb and flow and we don't have direct contact to sell into customers. And so we may be a little bit more conservative on how much we can grow internationally. Domestically, we're starting to see the impacts of renewed confidence, I'll say, or broader confidence, given our treatment parameters, as well as coupling that with a sweep management software methodology to assure that the intended techniques are actually followed through and have talked about the challenges or opportunities to standardize that treatment. So we think that we can be a little stronger in the US compared to outside the US in terms of probe growth. And as I commented, we're starting to see that follow through here, at least in the first quarter to date, and we're encouraged that we're going to accomplish that.

Got it. That's helpful. And, Dave, if I can push you a bit, just looking at the model, I believe it implies flat utilization year-over-year in 2023. And again, outside the US was challenging in ‘22 as well. So the comp isn't overly difficult on that front, I guess big picture, what gives you confidence you can re-accelerate growth in the Glaucoma business more broadly? You gave the four key initiatives, which make perfect sense, but I guess what really gets us going again and maybe what's the timing of when we'll start to see those signs trickle through in the numbers.

Yes, thanks for that. I think we see, as I mentioned, we see the signs that it's working in the sense that when people select the right treatment parameters and then execute those that they are pleased with the results, and they're substantial. The study that I was referring to that was presented, at least the early results presented at the American Glaucoma Society, 30% and 40% IOP reductions are at the top end of what can be achieved with other technologies. So we're really pleased that we can do that with a non-incisional procedure and get the durability which, when you get those high IOP reductions in the three to six month period, it tends to carry on for durability. So we'll see what the particular study data demonstrates, but we expect that to bear out. And as you get those kinds of results in the hands of users, they tend to gain confidence and start to select a broader set of patients. And that's what we're really focusing on for 2023. Our sales reps are very focused on targets and taking those targets down that pathway of proctored cases and recognizing the results on a representative sample of their patients. And as you look at the opportunity in the space, there's just a dramatically large number of potential procedures if we can achieve that adoption in the moderate stage pre-incisional patient. I've talked about the analogy with SLT, the early Stage Laser Glaucoma treatment that's been around for 20 years and is clinically mature and has penetrated about 20% of the mild stage patients in the US. So that's the opportunity we're pursuing in about 2 million moderate stage patients. And it will take time, but if you have efficacy, you have safety, and you have a way to demonstrate to clinicians that they can achieve that in their hands. We're very confident that will drive adoption. The challenge is what rate? And to a certain extent, that's part of the frustration. But at the same time, medical device adoption is always well considered, I'd say, by the mainstream community. And it takes a little bit longer, but when you get that critical mass, the growth rates go up. And we're not trying to predict where that critical mass point and increasing growth rate occurs. We do our guidance based on what we think we can execute through the team, given the current situation. So I know that doesn't identify exactly where that need occurs, and it really starts to accelerate, but I think all the pieces are in place to get us there.

That makes perfect sense. Thanks for that, Dave. And then just to pivot to retina for my last question, there might be some unknowns around the G6 Asps, but to reach the midpoint of your guidance I'm arriving at roughly flat retina growth. But you do have a lot of new products coming into the field. So I guess for what am I thinking about that growth correctly and then, Dave, can you talk a bit about kind of what headwinds might be suppressing potential positive growth in the retina business. Thanks.

I believe that we expect the retina market to grow, generally in line with market trends, around 3% to 4%. There is potential for additional growth due to the launch of new products, particularly the GenM and Pascal, as well as a new platform introduction. We aim to at least maintain the market growth rate, which is around 3%, possibly slightly higher. Additionally, it’s important to note that we are facing about $1.5 million in headwinds from some royalty income as a result of expiring patents, which will become apparent in the second half of next year. When considering the overall growth rates, we project mid to low double-digit growth for Glaucoma and approximately 3% growth for the retina segment. Regarding challenges, we experienced headwinds from a stronger dollar during most of fiscal ’22, which affected sales outside the US for both Retina and Glaucoma, and this remains a challenge heading into ’23. Overall, I think the primary obstacles for the business are related to currency fluctuations and inflation risks we're encountering. However, I want to highlight that we have managed our supply chain effectively and have not missed significant revenue due to shortages, although it still presents a concern for the business.

Thank you. And this concludes the Q&A session. I'd now like to turn the call back over to Dave Bruce for any closing remarks.

Thank you, operator. Thank you all for joining us. We're looking forward to a strong 2023 performance and reporting to you in upcoming quarterly results.

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