Iradimed Corp Q1 FY2023 Earnings Call

Welcome to IRadimed Corporation First Quarter of the 2023 Financial Results Conference Call. Currently, all participants are in a listen-only mode. And at the end of the call, we will conduct a question-and-answer session. As a reminder, this call is being recorded today, May 4, 2023, and contains time-sensitive information that is accurate only as of today. Earlier, IRadimed released its financial results for the first quarter of 2023. A copy of this press release announcing the company’s earnings is available under the heading News on their company’s website at iradimed.com. A copy of the press release was also furnished to the Securities and Exchange Commission on Form 8-K and can be found at sec.gov. This call is also being broadcast live over the internet on the company’s website at iradimed.com, and a replay of the call will be available on the website for the next 90 days. Some of the information in today’s session will constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Looking forward statements focus on future performance results, plans, and events and may include the company’s expected future results. IRadimed reminds you that future results may differ materially from those forward-looking statements due to the severe risk factors. For a description of the relevant risks and uncertainties that may affect the company’s business, please see the Risk Factors section of the company’s most recent reports filed with the Securities and Exchange Commission, which may be obtained free from the SEC website at sec.gov. I will now turn the call over to Mr. Roger Susi, President and Chief Executive Officer of IRadimed Corporation. Mr. Susi, please go ahead.

Good morning and thank you all for joining us in today’s call. Once again, I have to report that IRadimed has had yet another excellent and exceptional quarter with revenue and earnings growth. As we reported in this morning’s release, Q1 2023 was our top revenue quarter ever and our seventh consecutive quarter of record revenues. First quarter 2023 revenue was $15.5 million, representing a 26% increase over the first quarter of last year. GAAP diluted earnings per share for the first quarter were $0.27 with non-GAAP diluted earnings per share for the first quarter ‘23 at $0.30 per share, a 36% increase over the first quarter of 2022. These results make for a very proud CEO and validate the efforts of our team for such a stellar start to the year, having growth at record levels. We feel comfortable in raising our guidance for the year, but more on that in just a little bit. Still, the supply concerns have become a constant. The team continues to find ways to overcome these obstacles which continue to mitigate supply issues from impacting revenue and earnings growth. Looking at bookings, our sales team continues to perform exceptionally well, increasingly driving customer demand for our products. The total backlog built through Q1 bookings continues to be at record levels. Strong backlog provides excellent visibility and allows us to maneuver and reallocate resources as supply issues may arise. For example, the relatively large pump revenue in comparison to monitor revenue in Q1 was not due to order intake differences but rather a catching up of pump shipments that could not be made in Q4 due to part shortages, which was rectified in Q1. Now I would like to touch upon our FDA efforts regarding the new 3870 MR IV pump. Since last quarter, we have expanded our IRA team and there has been much solid work being put forth. We have written three detailed intricate Q-sub request documents and received two confirmations so far of appointment dates that will occur in the next 6 weeks for meetings. We plan yet the fourth Q-sub regarding human factors testing, which should be in the FDA's hands by the end of this quarter. As background, a Q-sub is FDA speak for a meeting to clarify and hopefully obtain a sort of buy-in from the FDA regarding the content and our methods we propose to supply in relation to clearance information to FDA for coming, in our case that 510(k) application. As discussed in previous emails, I have indicated that the FDA had given us several letters and follow-up calls regarding issues that need to be explained and/or supported, which we generally consider as additional information requests. With these Q-sub meetings, we hope to present to the FDA our approach to answering their requests and obtain clarity on what they would expect. With more clarity from these Q-sub meetings, we will push ahead with increased confidence that our information we subsequently file will affirmatively answer each request and pave the way for expeditious clearance. Now, I would like to recap our performance and given the great level of business performance in Q1, our confidence that this upward trend will continue, plus increasing our outlook for revenue and earnings in 2023. We now expect revenue of $62 million to $63.5 million, GAAP diluted earnings per share of $1.12 to $1.20 and non-GAAP diluted earnings per share of $1.25 to $1.34. For the second quarter 2023, we expect to report revenue of $15.6 million to $15.8 million, GAAP diluted earnings per share of $0.27 to $0.29, and non-GAAP diluted earnings per share of $0.30 to $0.32. Now, I will turn the call over to our CFO, Jack Glenn, to review the financial results for the quarter in more detail. Jack?

Thank you, Roger, and good morning everyone. As in the past, our results are reported on a GAAP basis and a non-GAAP basis. You can find a description of our non-GAAP operating measures in this morning’s earnings release and a reconciliation of these non-GAAP measures to the GAAP measure on the last page of today’s release. As we reported earlier this morning, revenue in the first quarter of 2023 was $15.5 million, an increase of 26% compared to the first quarter of 2022. Domestic sales increased 20% to $11.9 million, and International sales increased 50% to $3.5 million. Overall, Domestic revenue accounted for 77% of total revenue for Q1 2023 compared to 81% for Q1 of 2022. Device revenue increased 24% to $10.5 million. This was driven by a 69% increase in pump revenue as we shipped a large percentage of the strong bookings of pump orders received in Q4 of last year. Revenue from disposables and services increased 34% to $4.4 million for the first quarter of 2023, while our maintenance contracts were consistent at $0.5 million for both periods. The gross margin was 75.7% for the 2023 quarter compared to 76.2% for the 2022 quarter. The decrease in gross margin is primarily due to the geographic mix, as International sales, with their lower prices, represented a larger portion of total sales in the quarter as compared to the first quarter of last year. Operating expenses were $7.7 million or 49.7% of revenue, compared to $6.3 million or 51.2% of revenue for the first quarter of 2022. On a dollar basis, this increase is primarily due to higher general and administrative expenses for additional headcount and higher legal professional expenses. As a result, income from operations grew 30% to $4 million for the 2023 first quarter. We recognized a tax expense during the first quarter of 2023 of approximately $944,000, resulting in an effective tax rate of 21.7% compared to a tax expense of approximately $573,000 with an effective tax rate of 18.7% in the first quarter of 2022. This increase in the effective tax rate is largely due to the higher taxable income in the quarter as compared to the same period last year. On a GAAP basis, net income was $0.27 per diluted share compared to $0.20 for the 2022 quarter. On a non-GAAP basis, adjusted income was $0.30 per diluted share for the 2023 first quarter compared to $0.22 for the same period in 2022. Cash from operations was $4.6 million for the 3 months that ended March 31, 2023, up from $1.4 million for the same period in 2022. For the 3 months ended March 31, 2023, our free cash flow, a non-GAAP measure, was negative $1.9 million, which was due to the purchase of land for our future office and manufacturing facility of $6.2 million in the quarter. And with that, I will now turn the call over for questions. Operator?

Wonderful. Our first question comes from the line of Frank Takkinen from Lake Street Capital. Go ahead, Frank.

Great. Thanks for taking the questions and congrats on all the progress in the quarter. We wanted to start with one related to the pumps and monitors expectations for 2023. Can you walk through what you are thinking for roughly speaking, growth rates from each of those line items, really trying to get at pumps which was disproportionately strong here and monitors, maybe it was a little bit below or has been in previous quarters, but it sounds like it is not a demand thing. Can you talk through the different factors you are thinking about in the growth of those two line items in 2023?

Sure. Frank, it is Roger. Good to have you on the call. When you look at revenue in Q1, the pump revenue was large because of a hold back in pump shipments in Q4, due to some parts shortages. So, that doesn’t equate to bookings at all, as we mitigate supply chain issues by picking and choosing different product lines off of our backlog. To answer your question more directly, we expect monitors will be the story, as they are getting a lot of our attention from the sales team. I alluded to this in the last call. We have one competitor in that space, Philips, and they are highly pre-occupied with other difficulties and have been slashing their sales force in that group which sells their MRI patient monitor. This has created a lot of wind in our sails, and we expect this opportunity to continue throughout the year. Thus, we anticipate monitors to show higher growth in the next couple of quarters, while pump growth will be much less significant. However, there is still growth to be had in the pump business.

That's good context. Can you speak to your manufacturing capacity specific to the monitoring line and discuss the manufacturing expansion initiatives?

Yes, sure. While we are still running just a single shift, I don’t anticipate capacity will become tight in the next quarter or two to the extent where we would look at a second shift. However, our new building will triple our manufacturing space and won’t be ready until late in 2024. If our opportunities continue to be significant in growing this monitor business, we will consider extending work hours into a second shift during 2024, but not in the very near term.

That’s helpful! Lastly, I appreciate the updated commentary on the 3870 IV pump. Can you talk about the timelines you are thinking related to submission and response from the FDA after submission?

Yes. We are getting the two sub-questions on the way, so we hope to have a smoother path once we file. We anticipate filing in this fourth quarter and spending the next several quarters dealing with subsequent smaller lists of questions. We expect to have clearance sometime in the latter part of 2024.

Thank you. Our next question comes from the line of Henry Scott from ROTH Capital. Go ahead, Scott.

Thank you. And good morning, gentlemen! Another strong quarter. I just have a couple of follow-up questions related to the prior questions. First, on the competitive landscape for the monitors, everything you said seems to indicate that it’s as favorable today as it was a month ago and perhaps even more favorable. Am I interpreting that correctly? Are there no signs of that competitor changing the momentum in any way?

No, just the opposite. If you are talking about some sort of increasing competitive momentum, it’s actually decreasing. So, yes, over these last few quarters, we have just continued to see it become much more open field for us to pursue.

I appreciate that update. It seems like you are almost selling everything you can make. Is capacity really the issue? Are there bottlenecks on certain parts that restrict how much you can produce?

Yes, that's a good question! The real constraints are that we have ongoing challenges with some parts used in both pumps and monitors. We had considerable heartburn over parts, which continues to be a concern. While we have set a course to buy above our target revenue, which allows us to start building safety stock, we still encounter difficulties in sourcing some parts. The pump issue last quarter was due to castings, which are material issues rather than electronic. This quarter we dealt with an obsolescence part related to the monitor, which required us to redesign some componentry. This has been a significant effort, but we believe we have solved it. Therefore, while we are building all we can, supply issues primarily dictate our production capabilities rather than physical capacity.

The FMD device generated a bigger number this quarter. Should we expect an upward trend there or will it be lumpy?

We believe there will be quite an upward trend. The sales force is learning how to deal with the FMD since it is different from our traditional products. It takes time for our representatives to adjust to this and find out who is in charge of the ordering. Though we expect there will be some lumpiness, the overall trend should definitely be upward.

How would you characterize the pricing environment? Stable, improving, or worsening?

Pricing has been improving over the last four quarters, though the rate of increase is backing off a little bit. We have implemented the biggest changes, and while some are yet to roll out, you will continue to see revenue reflect this effect throughout the rest of the year. Overall, the pricing trend remains positive.

The G&A and sales figures looked a bit surprising. Can you explain the higher G&A and lower sales performance?

Yes, Scott. The G&A increase in the first quarter primarily resulted from additional headcount, some focused on regulatory. The first quarter also has inherent expenses like legal and audit costs along with higher payroll taxes. As for sales, early in the year, we have a few timing issues with commissions. Overall, I expect OpEx to trend slightly down in the upcoming quarters.

Thanks for taking the questions, gentlemen! Another strong quarter.

Thank you, Scott.

Thank you.

I would now like to turn it over to Roger Susi for closing remarks.

Well, thank you, operator. And again, thanks everyone for joining the call today. It’s a great pleasure to report yet another quarter of great growth, and we expect to continue to see strong performance as the year progresses. I look forward to having the new pump 510(k) filed later this year but more so to continuing to generate stronger revenue and earnings results with our existing product lines. I look forward to reporting our future successes as the year progresses. Thank you very much.

Thank you. This concludes the call. You may now disconnect.