IRadimed Corporation (NASDAQ:IRMD) Q1 2023 Earnings Call Transcript May 8, 2023

Operator: 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. It released, a press release copy was also furnished to the Securities and Exchange Commission on Form 8-K and can be found at the 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.

Roger Susi: Good morning and thank you all for joining us in today’s call. Once again, I have to put in task of reporting that IRadimed has had yet another excellent and exceptional quarter 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. As reported in this morning’s release 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 hard efforts of our team was 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 have those supply concerns have become a constant. The team continues finding ways to overcome these rather frequent obstacles which continue to mitigate supply issues from impacting upon 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 as compared 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 then 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 is been much solid work putting forth. We have written three rather detailed intricate Q-sub request documents and received two confirmations so far of appointment dates that will occur in these next 6 weeks for meetings. We plan yet the fourth Q-sub regarding human factors testing, which should be in the FDA hand 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 as to the content and our methods, we propose to supply regarding 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 AI or additional information requests.

With these Q-sub meetings, we hope to now present FDA with our approach to answering their AI issues and obtain as clearly as possible. FDA is okay with our approach, and our indication is exactly what more they would be expecting. I am 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 AI issue 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 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?

Jack Glenn: Thank you, Roger, and good morning everyone. As in the past, our results are reported on a GAAP basis and 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 a $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 inherently lower ESPs 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 and 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 second quarter of 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 with a 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?

Q&A Session

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

Frank Takkinen: 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. Being, I just kind of walk through what you are thinking for, roughly speaking, growth rates from each of those line items, and really trying to get at pumps was obviously disproportionately strong here and monitors, maybe it was a little bit below, or it has been in previous quarters, but sounds like it is not a demand thing. And it is more supply related to maybe me to kind of talk through the different factors you are thinking about in the growth of those two line items in 2023?

Roger Susi: Sure. Frank, it is Roger. Good to have you on the call. So, I will just go over again, when you look at revenue in Q1, the pump revenue was large, because of a hole back in pump shipments in Q4, due to some parts shortages. So, that doesn’t – 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. But let us answer now your question more directly, what do we expect for, how we are going to book business and bring business in over the coming year, the rest of this year. Monitors are going to be, the story, it’s getting a lot of our attention from the sales team. I alluded to this last call. Basically, we have one competitor in that space being Philips.

And they are highly pre-occupied with other difficulties there. And they have been slashing their sales force that was in that group that sells their MRI patient monitor quite a bit. And so that’s put a lot of wind in our sail here as we went through last year, we started to see it. And it continues to be giving us a lot of let’s call it low hanging fruit opportunities as they seem to be not as present in the marketplace, and certainly not as much of a competitive obstacle. So, of course the sales team gravitates to that. As hunters, they are going, where the – where it’s, the shooting is easy, and that opportunity is going to continue to unfold here throughout this year, we expect. So, you will probably see the monitors in this next couple of quarters really be a, the higher growth story with the pump being, much, much less since it’s in these monitors are drawing attention.

And we are going to pick up that more low-hanging fruit as we can. Having said that there is still growth in the pump business, of course, but the monitor will be the story. Hope that gives you some color.

Frank Takkinen: No. That is good context and directly related to that. Can you maybe speak to your manufacturing capacity specific to the monitoring line and talk to the manufacturing expansion initiatives?

Roger Susi: Yes, sure. Yes. While we are still running, we are getting busy here, but we are still running just a single shift. I don’t think the capacity will get tight here in the next quarter or two quarters to where we will be even looking at the second shift. But the new building, which gives us manufacturing space wise, I think about triple the manufacturing space, that won’t be ready until late in 2024. As we approach that time, during 2024, if the – if our opportunities continue to be so great in growing this monitor business, we will surely be looking at extending work hours maybe go into a second shift and so forth, but not the very near-term.

Frank Takkinen: Okay. That’s helpful and last one for me, appreciate the updated commentary on a 3870 IV pump. Can you talk to the timelines that you are thinking related to maybe submission and response from the FDA after submission?

Roger Susi: Yes. So, we are getting the two sub-questions on the way, so we hopefully have a smoother path once we do file. We would anticipate filing in this fourth quarter. And spending, the next three quarters or four quarters, dealing with subsequent, the hopefully smaller list of questions, there is always more and ultimately having the clearance sometime in the latter part of 2024.

Frank Takkinen: Okay. Perfect. I will stop there. Thanks for taking the questions and congrats again on all the progress.

Roger Susi: Thanks.

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

Scott Henry: Thank you. And good morning, gentlemen, another strong quarter. I just have a couple of sort of follow-up questions to the prior questions. First, on the competitive landscape for the monitors, everything you said seem to indicate that it’s just as favorable today, as it was a month ago, and perhaps even a little more favorable, competitive. Am I interpreting that correct? There is no signs of that competitor, changing the momentum in any way?

Roger Susi: No, just the opposite, if you are talking about some sort of increasing competitive momentum, it’s decreasing. If anything, so yes, it’s – yes, let’s say, yes, over these last few quarters, we have just continued to see it become much more open field for us to go into hunting.

Scott Henry: Fantastic, I appreciate that update. And then you may – it seems like you are pretty much selling everything you can make. And with regards to how much you can make? It doesn’t sound like capacity is the issue. But is it more of, are there some bottlenecks on some certain parts that you can only make so many so fast or maybe everything. It sounds like that was an issue in fourth quarter with the pumps, but maybe not anymore? Just could you talk about, the individual parts are there any bottlenecks there…?

Roger Susi: Yes. That’s a good question. Good question. So, yes, the, the real constraints are, as I have said, we have heartburn on a weekly basis with some part, either used in a pump or a monitor. And that continues, they have just – yes, that’s a pretty much a cost. And so, we are – we set a course here as we ended up, ended last year, and we are planning for this year’s 2023. With procurement, we set a course to buy over our targets, as far as our target revenue would be, by a good margin, right. So, we could start to build if anything, safety stock, and of course, get more visibility to any problem coming. So, that’s the plan. And so, what we are seeing though is still some parts very hard to get. Last quarter the pump issue was, I believe that was castings, that was metal, the chassis itself castings.

So, not electronic, but a material issue is nonetheless. And we have in this quarter, we had an obsolescence part with the monitor, and so we had to hustle around and redesign some new componentry into part of the monitor the base station for the monitor. And so that was a pretty big effort, and a lot of white knuckle flying there, but we solved it. And so I guess I am giving you the caller that yes, if not for, I guess to say it this way, right. Supply issues and getting adequate components as you have sort of alluded to when you started your question that does keep us from, just going crazy with what we can build. So, we are building, as you have said, all we can build, not because of the physical capacity of the plant. But as we get material, that’s really the throttling thing.

Scott Henry: Okay. Great. Thank you for that color Roger. As well, the FMD device generated a bigger number this quarter I think it was around 300,000. How should we think about the trend there? Is that an upward trend, or is that just going to be lumpy? Just trying to get my arms around that?

Roger Susi: Yes. Now, we think that’s going to be quite an upward trend. So, I believe I have mentioned this last call as well the sale of the FMD is quite different. So, our sales force is learning how to deal with it, tight They are used to going in and pull on a pump out of – out of their case rolling with or a monitor, they are small devices. They set that’s what generates interest and ultimately gets orders. Well, an FMD is a sort of a set it and forget it device, it doesn’t directly excite the clinician. And so they go in, and they talk about it to the same clinical people. And everybody nods their heads, smiles, yes, that’s great, we got to have one of those. But who is going to – who is in-charge in making the order, they are sorting through, what seem like pretty simple issues they are.

But it takes a group of 26, 20 of our reps that are out there a while to get their hands around all of that, they are. And they are learning how to deal with those things. And because of that learning, you will see the orders start to follow. And one thing we did to give them a little tool is we created a little demo ability. It’s hard to demo the whole thing, right. You don’t take it out of a case, it’s got to be installed on a doorway, so that gives them the curveball. So, we have given them a tool where they do have something now they can pull out of their hat and turn it on and walk through the display of the rally box that comes with the system. And it has demo modes in it. And we think that will get our guys more comfortable to sell in the way they like to and they are learning how to find out who finally makes the decision.

And as those things progress through the year, will it be lumpy, I mean it probably won’t be a straight vertical line, but we think the trend will be definitely upward.

Scott Henry: Okay, great. And then pricing, how would you kind of categorize the pricing environment stable, improving, worsening just in a big picture center, how do you think about pricing?

Roger Susi: Pricings, pricing has been improving these last four quarters actually. That rate of – that rate of increase, we are backing off a little bit too. I think we have done – we put in motion the biggest changes, and some of them are yet to roll out, in effect what you will see is revenue, which you will continue to see throughout the rest of the year. But yes, pricing is still it’s a positive trend.

Scott Henry: Okay, great. And maybe a good one for Jack, so he could participate, the G&A and sales, it looked like G&A was a little higher than I expected in the quarter and sales a little lower than I expected in the quarter. Is that noise, or is there a shift going on? Just how should we think about those line items?

Jack Glenn: Yes, Scott. So the big reason that primarily for on the G&A increase was in the first quarter as we did have some additional headcount. And some of that has been focused on the regulatory side. But also in the first quarter sort of has some expenses that are sort of inherent to Q1 and that would be, we have some legal professional and audit and also just, with the higher payroll taxes etcetera. So, those are kind of the reasons for on the G&A side. And the sales side is just a little bit as, early in the year with the sales plan and so forth, the commissions were a little bit last, but I would expect overall, the OpEx will probably trend down just a little bit in the upcoming quarters.

Scott Henry: Okay, great. Thanks again, gentlemen, for taking the questions and really strong quarter.

Roger Susi: Thank you, Scott.

Jack Glenn: Thank you.

Operator: Thank you. I would now like to turn it over to Roger Susi for closing remarks.

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

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