IRIDEX Corporation (NASDAQ:IRIX) Q1 2023 Earnings Call Transcript May 11, 2023

IRIDEX Corporation misses on earnings expectations. Reported EPS is $-0.13 EPS, expectations were $-0.12.

Operator: Thank you for standing by, and welcome to IRIDEX First Quarter 2023 Earnings 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. [Operator Instructions] I would now like to hand the call over to Trip Taylor, Investor Relations. Please go ahead.

Trip Taylor: 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.

David Bruce: 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 the 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 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 software are 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, usually diagnose and treat patients with earlier stages of glaucoma. There are five times more comprehensive ophthalmologists than glaucoma specialists and 10 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, 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 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 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 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, or 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 multiyear growth initiatives. On that note, we believe cash usage in the first quarter was a high watermark for the year and not reflected 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.

Fuad Ahmad: 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 period. Note that this decline is driven by ordering volatility of our international distributors following a record fourth quarter. We sold 61 Cyclo GC systems in the quarter compared to 56 in the prior year period.

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 quarter of — 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 [Gen M] 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. Operator?

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Tom Stephan of Stifel.

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

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

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

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.