Iradimed Corp Q3 FY2024 Earnings Call

Welcome to the IRadimed Corporation Third Quarter of 2024 Financial Results Conference Call. As a reminder, this call is being recorded today, October 31st, 2024, and contains time-sensitive accurate information only today. Earlier, IRadimed released its financial results for the third quarter of 2024. A copy of this press release announcing the company's earnings is available under the heading News on our 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 being broadcast live over the Internet and on the company's website at iradimed.com, and a replay 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. Forward-looking statements are focused on future performance, results, plans and events that may include the company's expected future results. IRadimed reminds you that the future results may differ materially from those forward-looking statements due to several 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's website at sec.gov. I would like to turn the call over to Roger Susi, President and Chief Executive Officer of IRadimed Corporation. Mr. Susi?

Thank you, operator. Good morning, and thank you all for joining us today. I'm pleased to announce another record quarter, marking our 13th consecutive record quarter. This quarter, we achieved revenue of $18.3 million, up from $17.9 million in the previous quarter, demonstrating ongoing growth at IRadimed. Our gross profit remains strong at 77.4%, with diluted earnings reaching $0.40 per share. Pump orders continue to be robust, and revenue reflects that strength as seen in the previous two quarters. Later, I will turn the call over to Jack, our CFO, for more detailed insights on revenue and earnings. Now, I’d like to discuss an important matter for us, which is the progress on the new pump. The key goal is obtaining FDA clearance, and as promised, we made the necessary filing on September 11. We received some follow-up questions from the FDA shortly after our submission, mostly procedural inquiries. I can't characterize these as strictly positive or negative at this point. Recently, we were informed that the FDA will produce the initial additional information letter for us to review. By the time of our next quarterly call, I expect to provide more updates on that front. Securing the 510(k) is crucial, and we still anticipate this to happen in the second quarter of 2025. Given that timeline, we expect a small amount of revenue to start in the fourth quarter of 2025. Additionally, regarding our new headquarters, we’ve faced some challenges due to storms in Florida, but we’ve only lost about four days of construction. The building is progressing well with walls up, ceilings being installed, and painting underway. The structure is expected to be dried in before Thanksgiving, after which we will focus on the interior. We are on track for a move-in around May next year, which will align with our need for more production space for the new pump. Looking ahead to Q4, we estimate revenue between $18.8 million to $19.2 million, with GAAP diluted earnings per share projected between $0.39 and $0.42 and non-GAAP diluted earnings per share between $0.42 and $0.45. Therefore, we expect to report total revenue for the year between $72.7 million and $73.1 million. We are also raising our guidance for GAAP diluted earnings per share to between $1.49 and $1.52 from the previous range of $1.37 to $1.47, and for non-GAAP diluted earnings per share, we are raising it to between $1.64 and $1.67 from $1.52 to $1.62. With that, I will turn the call over to Jack Glenn. 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 third quarter of 2024 was $18.3 million, an increase of 11% compared to the third quarter of 2023. This increase was due to the continued strength of our IV pump product in the third quarter as our end-of-life replacement program continues to drive exceptional growth for our pumps. Domestic sales increased 9% to $15.2 million and international sales increased 22% to $3.1 million. Overall, domestic revenue accounted for approximately 83% of total revenue for Q3 2024 compared to 84% for Q3 2023. Device revenue increased 10% to $13 million, driven by a 78% increase in pump revenue. Revenue from disposables and services increased 12% to $4.7 million for the third quarter of 2024, while our maintenance contracts remained stable at $600,000. The gross margin was 77.4% for the third quarter, slightly below the 77.8% for the 2023 quarter. The higher mix of domestic versus international revenue contributed to the continued strength in our gross margin. Operating expenses were $8.4 million or 46% of revenue compared to $6.9 million or 42% of revenue for the third quarter of 2023. On a dollar and percentage of revenue basis, this increase is primarily due to sales and marketing expenses for higher sales commissions and increased sales activity, along with higher regulatory and quality expenses and payroll and benefits expenses. The noted increase in sales commission expense resulted in operating income slightly down from $5.9 million in Q3 of last year to $5.8 million for the 2024 quarter. We recognized a tax expense of approximately $1.4 million during the third quarter of 2024, resulting in an effective tax rate of 21.3% for the quarter, slightly higher than the effective tax rate of 20.9% in 2023. On a GAAP basis, net income for the quarter was $0.40 per diluted share, the same as for the 2023 third quarter. On a non-GAAP basis, adjusted income was $0.43 per diluted share for the third quarter of 2024, the same as for the 2023 third quarter. Cash from operations was a very strong $9.1 million for the three months ended September 30, 2024, up from $1.4 million for the same period in 2023 as we were able to drive efficiencies in our working capital management, particularly in accounts receivable and inventory. For the three months ended September 30, 2024, our free cash flow, a non-GAAP measure, was $5.1 million, up from $954,000 for the same period in 2023. In the quarter, the capital expenditure of $4 million was primarily for the construction of our new building. And with that, I will turn the call over for questions.

Thank you. Our first question comes from the line of Frank Takkinen with Lake Street Capital Markets. Your line is now open.

Great. Thanks for taking the questions. I want to maybe start with one related to how we should think about growth by business line item. Obviously, IV pumps has been the standout growth driver this year. Monitor is a little bit softer. How should we think about that normalizing through both the fourth quarter of this year as well as into 2025 prior to the new pump being approved?

Roger here. Good to hear from you. Maybe I'll take that one. We've mentioned this a bit in previous calls. As we get closer to the transition between the old pump and the new pump, given that we get the clearance in May, we've been anticipating that and we're going to start deemphasizing, in fact, the sale of the older pump. So tap on the brakes on that. So we should expect that there will be a slowdown in that segment. Meanwhile, for the last couple of months, we've been modifying our plans, basically the compensation plans that we'll be putting in place beginning with 2025 to really emphasize the monitor. Therefore, we expect a dip in the old product as we start to transition to the new pump product. To fill that gap, we plan to increase efforts on the monitor to maintain revenue to what you're used to seeing us do, but the mix will change. We think this will occur briefly, but it may span two quarters. When the new pump starts to kick in, the narrative will once again focus on the new pump. As I recap, into 2025 by mid-2025, yes, we do expect a dip in the revenue from the pump that will be supplanted by increased revenue from the monitor. By 2026, as the new pump becomes widely utilized, we expect a quick turnaround.

Got it. That's helpful. You mentioned in the press release that the backlog provides good visibility for at least the next quarter, if not a little longer. Can you discuss the current composition of the backlog? Is it mainly IV pumps, a bit of monitors, or what does it look like today?

Yes, sure. Frank, this is Jack. Yes, I think our backlog has been very strong over the last probably 1.5 years or more, and it continues into the fourth quarter. A good portion of that is due to the strength in the pump. However, I would also say that the monitor continues to represent a good portion of that backlog as well. So that provides us pretty good visibility into Q4, as we mentioned in the press release.

Perfect. And then maybe just for my last one, I was hoping to ask a little bit about OpEx. I think typically, you've been seeing the bottom line outpace the growth of the top line and sometimes rather significantly. It looks like this quarter that was a little bit different, with 11% growth on the top line and 1% growth with non-GAAP net income. Can you just talk about the OpEx a little bit more? Was there anything in there that was kind of onetime in nature or an anomaly? And how should we kind of think about that profile returning with nice bottom line leverage?

Yes, I'll take that one. The biggest difference between the quarters comes down to the sales side and the commissions that were paid or accrued for in that quarter. In Q3 of last year, we likely had a more aggressive sales plan for quotas, resulting in a very low commission expense in that quarter. In the current quarter, we're reflecting more of our overall spend going forward as a percentage of sales on the sales side, about 20% of revenues. That was the key difference. It presents a challenge with sales plans, ensuring there is a proper balance. So that's the biggest difference. But going forward, I believe we will see the overall OpEx spend as a percentage of sales align with what this quarter was.

Okay. Thanks for taking the questions.

Thank you. Our next question comes from the line of Jason Wittes with ROTH Capital Partners. Your line is now open.

Hi, thank you for addressing the questions. It seems that the FDA can be unpredictable, but it appears you are making progress. If you happen to receive approval before the second quarter, could that potentially lead to an earlier impact from the new pump? For example, if it were approved in the first quarter, could we expect to see the impact in the third quarter?

Not really. All the planning, the materials, the processes, and all of these things, even if it came in a month or two earlier, wouldn’t meaningfully allow us to bring in the rest of the plans for the launch.

That makes sense. And then in terms of the monitor, maybe if you could outline your plans for future products and what you might do to expand the monitor business beyond where it is today?

Well, there are many small things. But the big point is how you compensate the sales team. A year ago, when we noticed our pump business slowing, we took measures to address that, which worked better than planned, as evident this past year. Consequently, the sales team focused on that significant potential in the pump, somewhat relaxing their pursuit of monitor business. Therefore, monitor revenue did grow, but not as much as it could have. The answer lies in compensation; we will adjust to emphasize the monitor strongly. We'll start deemphasizing the pump, which translates to a greater focus on the monitor. We've been discussing and preparing for this strategy for a couple of months, so our sales team will be ready when we start next year’s plan.

That's helpful. It also explains how next year might flow in terms of the mix of monitor versus pump. It also raises the question of your sales force setup. With big expectations for the new pump and an installed base anticipating a major upgrade cycle, will your sales force be set up to focus on both the new pump and the monitor?

That's the challenge of organizing the sales team and territories. We have 27 territories. With growth and increased revenue from the new pump, the opportunity exists to grow our sales team and create more territories. The balancing act is deciding when to begin this process. If we act prematurely, we risk misallocating resources. Conversely, if delayed, some opportunities could be overlooked. Initially, it requires a couple of quarters for hiring and onboarding new sales staff. As we approach the pump launch, we will evaluate how best to expand our sales territories and talent.

Got it. Thank you for the insights. I’ll jump back in the queue.

Thank you. I would now like to turn the call back over to Roger Susi for closing remarks.

Well, thank you, operator. Once again, it's been a pleasure to report our Q3 2024 performance. As you see by our guidance, we plan to end the year very strongly. We look forward to next year, and despite the discussed ups and downs, we have our plans made, and we will manage it. We very much look forward to clearing the new 3870 pump and handling the challenges of the explosive growth we expect that to bring. So with that, we'll talk again next quarter.

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