Iridex Corp Q1 FY2023 Earnings Call

Thank you for joining us for IRIDEX's First Quarter 2023 Earnings Conference Call. All participants are currently in listen-only mode. After the presentations, there will be a question-and-answer session. I will now turn the call over to Trip Taylor from Investor Relations. Please proceed.

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 April 1, 2023. 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, May 11, 2023. And with that, I'll turn the call over to Dave.

Thank you, Trip, and good afternoon. Thanks for joining us today. I'll provide updates on our business progress, then Fuad will provide details on the first quarter financials, and we will open the call for questions. In the first quarter of 2023, we generated $13.7 million in total revenue, growth of 2% compared to the prior year period. Growth was driven by our Cyclo G6 glaucoma laser platform and offset by a slight decline in the retina sales. In our glaucoma business, Cyclo G6 revenue increased by 4% year-over-year to $3.7 million. We continue to experience solid adoption of G6 technology worldwide. 61 systems were sold in the quarter compared to 56 in the first quarter of last year. In the U.S., we were pleased to have achieved a 19% increase in G6 probe revenue, driven by ASP increases and a 7% volume growth. Worldwide glaucoma probe revenue grew by 6% despite a decline in units to 13,800 probes in the quarter, a 6% decrease from the prior year. Quarterly, international probe volumes remained volatile. So this first quarter dipped following record high volumes in the fourth quarter. Embedded in this volatility is a relatively flat multi-quarter volume trend. International opportunity for MP-TLT, that’s MicroPulse transscleral laser therapy, adoption is very large, and we believe its safety and efficacy will drive long-term penetration. We're focused on returning to solid growth internationally through our partners. We saw the Cyclo G6 rollout in China benefit from the COVID reopening with order activity increasing late in the first quarter. Underlying demand in international markets remains strong, as shown by continued strength of international system sales, and we expect to return to probe growth for the rest of the year. We continue to have confidence we will execute on the significant growth opportunity for G6 in the moderate severity glaucoma patient. To propel G6 utilization and adoption, we continue to focus on four key initiatives. First is advancing physician education by increasing awareness of proper dosing and patient selection. Second is identifying and targeting comprehensive ophthalmologists to see most of the moderate-stage preincisional patients. Third, adding users at surgery centers by capitalizing on those that already have G6 systems. And the final initiative is expanding clinical evidence to drive adoption of MP-TLT. These initiatives are targeted to address the current barriers to greater adoption and growth. User variability in technique and procedure protocols can lead to suboptimal results, forming the perception that the technology and procedure have a limited role. Since MicroPulse TLT originally evolved from the late-stage treatment methodology of cyclophotocoagulation intended to reduce production of aqueous fluid, there’s still a perception that this is the appropriate patient profile. To address these views, we sponsored the clinical consensus panel and are educating the market on the conclusions around dosing and applicable patient recommended by the group. Another challenge we found is that surgeons' natural inclination is to sweep too fast during procedures, which leads to underdosing and is counter to the best long-lasting outcomes. So we launched and continue to roll out our suite management software for G6 systems to aid in proper and consistent technique that can be reproduced across any user. Surgeon feedback on the simplification and clinical outcomes generated using our software is very positive. We're confident improved sweep speed optimization will generate improved clinical outcomes and durability, ultimately leading to greater utilization of our procedures. Additionally, we continue to focus on educating providers on the benefits of MicroPulse technology use within a broader patient volume, specifically as it pertains to preincisional, moderate-stage patients and post-cataract surgery patients who may or may not have had a concomitant MIGS device used to treat their intraocular pressures. It happens with all treatments in this progressive disease; eventually, pressures rise requiring additional treatment. MicroPulse TLT durability and repeatability enables avoidance or significant deferral of more aggressive, higher-risk surgical glaucoma interventions. Another opportunity for further penetration in the market is to drive G6 adoption by comprehensive ophthalmologists. This group of providers typically diagnose and treat patients with earlier stages of glaucoma. There are five times more comprehensive ophthalmologists than glaucoma specialists and ten times more moderate than advanced stage glaucoma patients. This past week, we had a very productive conference at the American Society of Cataract and Refractive Surgery Meeting in San Diego, engaging with key opinion leaders, customers, and prospective customers. We were encouraged by the many comprehensive ophthalmologists at our booth, and wet-lab training sessions where we introduced and educated them on the benefits of the IRIDEX product portfolio. The early clinical experience using appropriate treatment parameters guided by suite management software has given us confidence to design and launch a larger-scale multicenter prospective trial to prove the safety and substantial effectiveness of MicroPulse TLT for moderate-stage glaucoma patients. For example, a recent single-center prospective study with three arms of escalating dosing achieved very strong early results of 31% to 44% in direct pressure reduction with excellent safety in all three arms. We're looking to build on these results to generate more substantial data that can validate our true clinical value proposition. We're conducting a series of meetings with our KOL guidance group to identify the preliminary study protocol and identify appropriate research centers interested in participating. Our target is to begin enrolling patients in the study by year-end and we look forward to sharing the details of the study once formalized. We believe a definitive multicenter study on the right targeted moderate-stage patient profile would significantly support increased G6 adoption and utilization by a broad range of clinicians treating these patients. As we look at the remainder of 2023, we expect to improve the growth rate of our glaucoma business and increase utilization. We are reiterating our guidance and continue to expect to sell 65,000 to 67,000 probes, representing growth of 9% to 12% compared to 2022. And we expect to grow the G6 installed base by 225 to 250 systems. Turning to our Retina business, in the first quarter, retina performance was largely in line with our expectations on sales of $7.2 million, a slight dip compared to the prior year, with U.S. retina growth offset by modest international weakness. Internationally, our distributors are managing inventory more tightly, which has introduced more quarter-to-quarter volatility. As we've broadened promotion from the limited launch of our new PASCAL platform, customers are responding, and we are seeing strong interest in the new platform. Incorporating MicroPulse technology in the integrated PASCAL system with half the footprint offers clinicians expanded treatment capabilities that can fit in nearly any sized office. While interest is solid, we have seen signs of lengthening decision cycles in the challenging macro environment, causing customers to be more methodical with their capital purchasing decisions. Our plans are progressing to achieve additional international regulatory approvals throughout the year to expand the commercial launch globally. FDA clearance for our other major platform, the single spot IRIDEX 532 laser and IRIDEX 577 laser, keeps us on track to commercially launch the platform midyear in the U.S., and we look forward to sharing updates on that progress. To summarize, the start of the year was productive for IRIDEX highlighted by 19% first quarter year-over-year growth of U.S. glaucoma probe revenue, and we continue to build the foundation for further glaucoma market adoption and sustained long-term Cyclo G6 growth. It's hard work, requires focused selling and clinical support activities, increased marketing communication of our clinical benefits in the treatment paradigm, and our investments in the larger scale multi-center prospective trial to further our clinical evidence base. Looking ahead, we expect to increase our growth rates and remain confident our current cash balance is sufficient to execute our multi-year growth initiatives. On that note, we believe cash usage in the first quarter was a high watermark for the year and not reflective of the quarterly cadence in 2023. Fuad will detail more specifics of cash management expectations later in the call. Now I'd like to turn the call over to Fuad to cover the financial results.

Thank you, Dave. Good afternoon, everyone, and thank you for joining us today. I would like to begin by reviewing our financial performance for the first quarter of fiscal 2023. Starting with revenue. Our total revenue for the first quarter of 2023 was $13.7 million, representing a growth of 2% compared to the first quarter of last year. Moving on to product revenues. Total revenue from the Cyclo G6 product family in the first quarter was $3.7 million, up 4% versus the same period in 2022. We sold 13,800 Cyclo G6 probes in the first quarter, a decrease of 6% from the prior year. Note that this decline is driven by ordering volatility of our international distributors following a record fourth quarter. We sold 61 Cyclo G6 systems in the quarter compared to 56 in the prior year. Our retina product revenue in the first quarter was $7.2 million, a decline of 1% from the prior year period. Other revenues, which include royalties, services, and other legacy products increased 11% to $2.8 million in the first quarter of 2023 compared to the same period in 2022, on substantially higher revenue from our other legacy products. Our gross profit for the first quarter of 2023 was $5.9 million, relatively unchanged from the same period last year. Gross margin was 43.3% compared to 44.6% in the first quarter of '22, on slightly lower overhead absorption in the current period. Operating expenses for the first quarter were $8.3 million, flat compared to the same period last year. Our net loss in the first quarter of 2023 was $2.1 million or a net loss of $0.13 per share compared to a net loss of $2.4 million or $0.15 per share for the same period in 2022. We ended the quarter with cash and cash equivalents of $11 million, representing cash usage of $2.9 million during the quarter. The cash usage in the first quarter includes inventory purchases of approximately $1 million related to the rollout of new product launches, including our newly launched product and certain nonrecurring capital expenditures. As you may recall, last year, we increased inventory by $4 million to proactively manage the tighter supply chain, thus avoiding manufacturing interruptions. This year, we plan to unwind a good portion of that inventory build into cash and onto the balance sheet. Additionally, following the completion of our new retina product development cycle, cost efficiencies in the cost of goods from the introduction of the new products and certain cost reduction programs, we expect to meaningfully reduce our quarterly cash usage. We believe the inventory reductions, along with lower quarterly expenses should result in significantly lower cash usage through the second half of 2023. But in terms of numbers, we expect these planned cost reductions to deliver $1.5 million of savings in the second half of '23, thereby reducing our cash usage from operations from an average of $1.3 million per quarter in 2022 to approximately $750,000 per quarter in the second half of 2023. Additionally, we also expect to release approximately $1.5 million of cash from the inventory reductions in the second half of fiscal 2023. In conclusion, we reiterate our guidance for 2023. We continue to expect total revenue for fiscal 2023 to be $57 million to $59 million. G6 probe unit sales are expected to range from 65,000 to 67,000, and Cyclo G6 glaucoma laser system installed base is expected to expand by 225 to 250 units. With that, Dave, I would like to turn the call over to the operator for questions.

Our first question comes from Tom Stephan of Stifel.

Great. I'll start with G6 system shipments, continuing to post solid numbers there. Dave, can you talk about maybe the types of accounts you're selling into, their profiles and what utilization looks like in these more recent additions to the installed base?

Sure, Tom. Categorizing international sales based on those parameters can be challenging. As you know, we primarily sell to distributors, some of whom have sub-distributors, and then to end customers. Generally speaking, new capacity is usually sold to surgery centers and some hospitals, with about 80% of sales going to surgery centers compared to hospitals. We're primarily seeing new adoption in the market. At this point, we haven’t observed a significant number of second units being added at sites that already have a unit, and average utilization is still in the single digits per month. Consequently, the available capacity remains quite high. For instance, in the United States, larger systems that may have a central office and satellite locations are adding units to enhance capacity at those sites. Overall, the primary demand is driven by new adopters of the technology and sites that previously had no access. Additionally, we're also working on increasing usage at sites that already have a laser system, which contributes to our growth but may not be reflected in system placements.

Got it. That's helpful. And then if I can stick with G6. I wanted to ask about the probe growth guidance. Great to see it left unchanged and your high level of confidence, but U.S. probe growth in the quarter, I think you said was up only 7% year-over-year and OUS clearly down a decent clip, and I get that there's some volatility there. But within the context of your full year guidance of the 9% to 12% growth, where does the U.S. stand in that versus the OUS? And I'm just wondering how high above that range I'm assuming the U.S. is and maybe how achievable that is given 1Q in the U.S. only grew 7% year-over-year.

Yes. In our guidance, we expected to see usage increase throughout the year. While it would have been preferable to report higher than the 7% growth in the U.S., we believe we will see growth as the year progresses. There is some back-end loading expected, leading to significantly higher usage in the later quarters. Internationally, there is some volatility, which can be frustrating and challenging to predict. However, there are no fundamental issues with usage or our end customers. The variability we are experiencing can be attributed to the different inventory levels at our distributors. For instance, one of our largest distributors has their fiscal year-end at the end of the first quarter, which means many companies, including them, aim to minimize inventories and receivables while maximizing cash, resulting in the volatility we've observed. In brief, we believe that all the factors we are focusing on to promote adoption and growth are on track, and we expect to achieve our targets.

Got it. That's helpful. I wanted to ask about competition. Dave, can you discuss your view on the competitive landscape in glaucoma, particularly in the MIGS space? There's a stand-alone stent available on the market and a drug delivery implant potentially coming. How are you considering the potential long-term impacts on G6, if any?

Yes. There are many companies offering various MIGS devices. From our interactions with customers, it appears that most usage is still alongside cataract procedures, where no new incision is needed for the MIGS device. We haven't noticed an uptick in stand-alone usage. While other companies are promoting their devices, which makes the competition intense, they are encouraging customers to use their devices in situations where we believe our approach is more suitable. The distinction between making an incision and not is crucial for both patients and physicians. We consistently hear a strong preference for the safety and efficacy associated with a non-incisional method, so we are confident in our position. The flow of competitive information in this sector is vigorous, with many companies typically having more representatives than we do. Consequently, the number of representatives discussing any MIGS device compared to our team's outreach is substantial. This presents a challenge that we tackle by concentrating on our target audience in each territory and guiding them through their process of building confidence and adopting the procedure. We believe that with this targeted approach and the growth we anticipate from these customers, we will achieve the probe growth guidance we have established for the year.

Our next question comes from the line of Scott Henry of Roth Capital.

I have a couple of questions. I'll start with G6. Dave, we've discussed this before, but I think it's a good time to revisit it. You have a substantial number of systems in place, but to reach compounded growth rates in the double digits or high double digits, we need to see an increase in probes per system. This metric must rise because it contributes to the compounding of new systems along with greater utilization of existing systems. It didn’t increase in Q1, but there were some fluctuations, and it appears to be trending upward for the remainder of the year. How do you view probe utilization per system? Do you believe you can drive that in a positive direction? Recently, it's been relatively flat, which still allows for growth, but it hasn’t reached the exceptional levels we've observed in the past.

Our focus is on encouraging doctors to adopt the procedure among the appropriate patient group. Initially, we are targeting a smaller segment of patients in later stages. As confidence in the procedure and its safety grows, we can broaden our reach to include more patients in moderate stages. This will also involve collaborating with a larger number of comprehensive ophthalmologists who typically handle most moderate-stage patients, which is essential for increasing overall usage. We've encountered some frustration from customers who don't adhere to the procedure guidelines, which affects their outcomes and the long-term effectiveness. If they aren't seeing the desired results, they tend to decrease their usage. This situation creates mixed signals that ultimately lower the usage rate, and we believe we can address this issue. We are concentrating on accounts that have decreased their usage to understand the reasons behind it, while also targeting our efforts to stimulate adoption among a wider range of patients, instead of just those in late stages. We believe that the combination of these strategies will lead to higher growth rates, but we know it is a gradual process. It takes time for doctors to treat enough patients and monitor their progress to build confidence in the outcomes and long-term results. We are committed to this process, recognizing that it's not an overnight change, and we are seeing positive responsiveness from our customer base, although it requires time to develop.

Okay. Shifting gears to retina. When you think about that segment, I guess, two-part question. One, how do you think about the long-term growth? I mean is that a 5% category grow? Or how do we think about that? And then in the short term, it might be a little slower with the economic environment and perhaps some challenges in capital equipment. Do you see the short term a little tougher than the long term? And where is that long term?

Yes. We think long term, while the industry growth rate worldwide is, some of the research publications that look at that kind of thing, they keep it in kind of the low single digits, mid- to low single digits. We think we can grow at that rate and potentially a little higher as we get our new platform proliferated across the worldwide market opportunity. We're in the U.S. with the platform, the PASCAL scanning laser, about to get the second platform into the U.S. And then second half of the year, we'll start receiving some of the clearances on the PASCAL platform to broaden that usage. So we think that there are opportunities to grow maybe above market rate. But we're a substantial share and leader in that marketplace. So that's generally governed by the overall growth of the marketplace. And then in terms of the short-term economic, I'll call it, uncertainties, I think we are seeing people be more deliberate in their process. But what we are not seeing is people saying, 'yes, we've changed our capital budgeting for the year, and we're not going to buy as much as we had intended before.' That's not happened yet. And we're just seeing the cycles, the selling cycle extend and people being a bit more thorough and deliberate in how they do their purchasing. And then internationally, we're seeing the distributors really try to lean out on inventory. And so that kind of puts a bit of a dampener if you've got some inventory drawdown in the distributor base, along with their sales to end customers maybe being a little slower.

Okay. Great. And then you talked about that other line and about we were going to get this kind of hit, but the numbers look pretty good. I mean it looks about as strong as it's ever been. Should we expect that to roll over at some point? Or how do we think about that?

Yes, that's mostly expected in the second half of the year. You're referring to the guidance we provided regarding revenue, specifically about the decline in royalty income as a patent expires. This decrease will primarily occur later this year. We mentioned it in our comments because it's a significant part of our annual results. In the other category, however, we did notice some strength in various products. Some of these are legacy products that we anticipate will diminish over time, while others have been discontinued. Notably, one of these products is a probe used in glaucoma treatment, which helps balance out the disappointing sales of our other glaucoma probes outside the U.S. Overall, this category related to glaucoma remains relatively stable, and this positive development offsets some of the negative impacts from inventory shifts we faced in the first quarter.

Okay. Great. Final question. It looked like G&A was a little high in the quarter. Any trend there or any noise? How should we think about that?

Yes. No, there was certain one-time legal expenses just on the corporate side, proxy-related stuff to get ready for that and some IP-related expenses that typically come in at the beginning of the year. So essentially that, I don't expect that trend to continue. I think we should be closer to a $2 million run rate on G&A going forward.

Thank you. I would now like to turn the conference back to David Bruce for closing remarks. Sir?

Thank you, operator, and thank you for the questions, and thanks to everyone for participation in the call this quarter. Thank you.

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