STAAR Surgical Company (NASDAQ:STAA) Q3 2023 Earnings Call Transcript

STAAR Surgical Company (NASDAQ:STAA) Q3 2023 Earnings Call Transcript November 1, 2023

STAAR Surgical Company beats earnings expectations. Reported EPS is $0.3, expectations were $0.2.

Operator: Good day ladies and gentlemen. Thank you for standing by. Welcome to the STAAR Surgical Third Quarter Financial Results Conference Call. During today’s presentation, all parties will be in listen-only mode [Operator Instructions] This call is being recorded today Wednesday, November 1, 2023. At this time, I would like to turn the conference over to Mr. Brian Moore, Vice President Investor Relations and Corporate Development for STAAR Surgical.

Brian Moore: Thank you, operator and good afternoon everyone. Thank you for joining us on the STAAR Surgical conference call this afternoon to discuss the company’s financial results for the third quarter ended September 29, 2023. On the call today are Tom Frinzi, President and Chief Executive Officer; and Patrick Williams Chief Financial Officer. The press release of our third quarter results was issued just after 4:00 p.m. Eastern Time and is now available on STAAR’s website at www.staar.com. Before we begin let me quickly remind you that during the course of this conference call the company will make forward-looking statements. We caution you that any statement that is not a statement of historical fact is a forward-looking statement.

This includes remarks about the company’s projections, expectations, plans, beliefs and prospects. These statements are based on judgment and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risks and uncertainties associated with the forward-looking statements made in this conference call and webcast are described in the safe harbor in today’s press release as well as STAAR’s public periodic filings with the SEC. Except as required by law STAAR assumes no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to be so.

In addition to supplement the GAAP numbers, we have provided non-GAAP, adjusted net income adjusted income for ICL, the corresponding adjusted earnings per share and sales in constant currency. We believe that these non-GAAP and adjusted numbers provide meaningful supplemental information and are helpful in assessing our historic and future performance. A table reconciling the GAAP information to the non-GAAP information is included in today’s press release. For brevity, all references to growth rates on today’s call refer to year-over-year growth unless otherwise stated. Following our prepared remarks, we will open the line to questions from publishing analysts. We ask analysts limit themselves to two initial questions then re-queue with any follow-ups.

Finally, we intend to use our website as a means of disclosing material nonpublic information and for complying with our disclosure obligations under Regulation FD. Such disclosures will be included on our website in the Investor Relations section. Accordingly, investors should monitor our investor website in addition to following our press releases, SEC filings and public conference calls and webcast. And with that, I would now like to turn the call over to Tom Frinzi, President and CEO of STAAR.

Tom Frinzi: Thank you, Brian. Good afternoon everyone and thank you for joining us on today’s call. For the third quarter, we achieved net sales of $80.3 million and ICL sales growth of 13% which was consistent with the outlook we provided on our last earnings call, despite a declining market for refractive peers. We are also reporting another quarter of positive earnings for STAAR, which puts us on track in 2023 for our sixth straight year of double-digit ICL sales growth and GAAP earnings profitability. We’re also on the path to deliver 15% to 20% compound annual growth over the next three years. The combination of high growth and profitability is a rarity for medtech companies our size. We continue to engage our surgeon customers and prospects, raise ICL consumer awareness and make progress on the initiatives I spoke to you about on our last earnings call and at our recent Investor Day.

As you will have seen in our earnings release, we now expect to come in at the low end of our previously provided fiscal 2023 outlook for ICL sales of $320 million to $325 million due to macroeconomic weakness in certain regions and potential disruption to our sales in the Middle East. The Middle East represents sales of approximately $2 million in the fourth quarter. Returning to our financial results, for the third quarter of 2023, ICL units globally were up 14% and global ICL sales of $81.1 million were up 13% as reported and 13% in constant currency. By region, APAC ICL sales were up 13%. EMEA ICL sales were up 14%. And in the Americas region ICL sales were up 5%. India which overtook China earlier this year as the world’s most populous country was a standout market for us in the third quarter.

Currently, India represents less than 3% of our global ICL sales, but it is a market where we are making investments in both resources and distribution and one which we believe represents an attractive opportunity for our future growth. In Europe, where the refractive market is down our two largest markets Spain and Germany grew 9% and 8% respectively. Turning to the two largest refractive markets, in China ICL sales grew 14% in the third quarter. We remain confident in our long-term growth prospects in China, bolstered by comments at our Investor Day from our largest customers, Chief Medicine Officer that EVO ICL has a long runway for growth. Recent actions by the Chinese government, including additional [indiscernible] should support consumer demand as well.

In the U.S., Refractive Surgery Council reports that industry procedure volumes declined 15% in the third quarter continuing an eight-quarter negative trend. Our ICL sales in the U.S. grew ahead of the market, up 6% in the third quarter. EVO ICL was launched in the U.S. in the second quarter of 2022. On an apples-to-apples basis U.S. EVO ICL sales growth totaled 13% for Q2 and Q3 2023, compared to a 15% decline in refracted industry procedures for that same period. Year-to-date industry procedures are down 13%. Also, we are achieving solid growth, despite a less certain economic and geopolitical environment. The pace of our growth is well ahead of the industry due to our market-building initiatives including, elevating ICL awareness and we are taking share as a result of our best-in-class lens-based technology and its benefits including removability, no dry eye syndrome and excellent night vision that ICL surgeons and their patients tell us they greatly value.

I talked to you on our last earnings call about my current state assessment of our business, and the actions we have been taking to accelerate EVO adoption. We shared more details in September at our Investor Day. And today, I am pleased to report additional progress. First, with respect to making our company even easier to do business with we are in the final stages of developing the EVO standard, which is a comprehensive set of enhanced training, education and practice development tools and processes that we will use to support our surgeon customers and their staff. We are also supporting several investigator-initiated studies, designed to increase surgeon comfort and confidence in measurement and lens size selection. The first study is nearing completion.

And we anticipate the study will be published in a Peer-reviewed Journal in the first quarter of 2024. Second, we are introducing and advancing new and novel products. We received 510(k) clearance from FDA in late September for The ACCUJECT single-use injector for our EVO family of lenses in the U.S. The new customized user loaded injector for EVO is designed to increase ease of use and efficiency. We are introducing this delivery device to a subset of surgeon customers through the end of the year and anticipate making it more broadly available in the U.S. and other markets beginning in 2024. Turning to our extended depth of focus lens, EVO VIVA for the early Presbyopia with myopia ages 45 to 55. We are expanding the rollout of the product following the Annual Meeting of the European Society of Cataract and Refractive Surgeons in September.

We have identified protocols to assist with surgeon and patient satisfaction and we are supporting our Viva surgeons to help set proper patient selection expectations and outcomes. Third, we are leveraging new analytic tools implemented in 2023. In conjunction with our new organizational structure and leadership in the US we have segmented our US customers and identified one group we were calling US Highway 93. US Highway 93 is a group of 93 US practices approximately 20% of our total practices and 50% of our US sales that have favorable parameters for EVO adoption and where we will focus our efforts on driving growth through tailored programs. One early example of our success is a new alliance agreement with a multicenter practice in the Southeast.

We signed the agreement in September and the customer is moving quickly down the diopter curve with utilization of lower diopter lenses between minus three diopters and minus six diopters up 300% compared to his prior year-to-date utilization and also compared to all customers in the US. The alliance agreement offers attractive pricing and support to the customer while maintaining solid gross margins for STAAR. US Highway 93 is consistent with our stated goal of going deeper with our existing customer base. Alliance agreements with other US Highway 93 customers are in process. And finally, we launched the patient call center partnership linked to our Doctor Finder in two cities in October. The call center is intended for surgeon referral and EVO patient education.

Today, we expanded our call center to several additional cities including Los Angeles, Chicago, and Boston. While still in the early stages we have a lot of enthusiasm around our ability to answer patient questions and create a closed loop process for our Doc Finder website aimed at increasing the return on our sales and marketing investments. Patrick?

Patrick Williams: Thank you, Tom and good afternoon everyone. As a reminder all of my references to growth and comparisons will refer to year-over-year growth relative to the prior year period unless otherwise stated. Also please note that we have provided a geographic sales table with today’s press release to match the three major regions we showed during our September Investor Day and also provide key country breakout of our ICL business. Total net sales for Q3 2023 were $80.3 million, up 6% compared to net sales of $76.1 million a year ago. The increase in net sales was attributable to a $9.1 million or 13% increase in ICL sales, which was mostly offset by a $4.9 million decrease in other product sales. We are nearing completion of the previously announced exiting of our low-margin noncore other products Cataract IOL business.

Gross profit for Q3 2023 was $63.6 million or 79.2% of net sales compared to gross profit of $60.5 million or 79.5% of net sales a year ago and $70.7 million or 76.6% of net sales for Q2 2023. The 30 basis point decrease in gross margin as compared to Q3 2022 is primarily due to increased sales return reserves and period costs associated with manufacturing projects partially offset by product and geographic sales mix. The 260 basis point sequential increase in gross margin from the second quarter is due to an other products Cataract IOL reserve that did not recur in the third quarter. Normalizing our Q2 2023 gross margin results in a 60 basis point decrease sequentially for the third quarter, which is related to geographic and product mix. We continue to expect gross margin will be approximately 79% for Q4 and approximately 78% for the full year.

Moving down the income statement. Total operating expenses for Q3 2023 were $57.3 million, up from $46.8 million in the year ago quarter and down sequentially from $62.1 million in Q2 2023. The components of total operating expenses were as follows; G&A expense for Q3 2023 was $19.3 million compared to $14 million a year ago and $18.1 million for Q2 2023. The year-over-year increase in G&A is due to increased compensation-related expenses, outside services, and facility costs as we position the company for future growth. For fiscal 2023, we continue to expect G&A expense will be approximately $19 million in the fourth quarter. Selling and marketing expense was $26.6 million for Q3 2023, up from $23.1 million a year ago and down from $32.3 million in Q2 2023.

The increase in selling and marketing expense for the prior year was due to increased advertising and promotional expenses and compensation-related expenses partially offset by lower trade show costs. The sequential decrease in selling and marketing expense was due to decreased marketing promotion and advertising expenses, trade shows and meetings and timing. We now expect approximately $1.5 million of expense will shift to Q4 due to timing of investments resulting in approximately $28.5 million of selling and marketing expense in Q4. Research and development expense was $11.5 million in Q3 2023 compared to $9.6 million, a year ago and $11.8 million for Q2 2023. The year-over-year increase in R&D is due to increased compensation-related expenses and US EVO, post-approval clinical trial expenses associated with the three-year study.

For Q4, we continue to expect R&D expense will be approximately $12 million. Operating income in Q3 2023 was $6.3 million or 7.8% of net sales as compared to $13.7 million or 18% of net sales for Q3 2022. For fiscal year 2023, we continue to expect operating margin will be approximately 5% and we anticipate expanding operating margins in future years while continuing to make investments across the business, in order to support the 15% to 20% three-year sales CAGR outlined at our Vision 2026 Investor Day in September. Net income in Q3 2023 was $4.8 million or $0.10 per diluted share compared to net income of $10.3 million or $0.21 per share in Q3 2022. On a non-GAAP basis, adjusted net income for Q3 2023 was $15 million or $0.30 per diluted share compared to adjusted net income of $18.1 million or $0.37 per diluted share in Q3 2022.

A table reconciling the GAAP information to the non-GAAP information is included in today’s financial release. We continue to expect our effective tax rate will be approximately 35% in Q4, subject to no significant change in our valuation allowance. Turning now to our balance sheet. Our cash, cash equivalents and investments available for sale as of September 29 2023, totaled $201.7 million as compared to $225.5 million at the end of the fourth quarter of 2022. The decrease in overall cash is due to the timing of accounts receivable. Based on current forecasted payments, we do expect our AR balance to move down by year-end to our Q2 2023 levels and even further down in Q1 2024. We invested $9.2 million in CapEx during the third quarter and $15.1 million total year-to-date through the end of the third quarter.

We now expect full year fiscal 2023 CapEx will be approximately $21 million, down from our previous $26 million estimate due to manufacturing projects, which will move into 2024. As Tom said, due to the economic environment in certain geographies and recent world events, we now expect to be at the low end of our previously announced revenue range, which would result in net sales of approximately $74 million in the fourth quarter. One, additional item. On October 25, we began a voluntary recall of approximately 300 EVO and EVO+ lenses distributed in the US beginning of September 2022, with a measurement deviating plus or minus half a diopter from the ad labeled power. We have identified and fixed the problem and we do not expect any material operational costs related to this matter.

STAAR will be attending the Stephens Conference on November 16 in Nashville, and BTIG’s virtual Ophthalmology Day on November 27. We will also be conducting in-person investor meetings in New York, Boston and Hong Kong with Mizuho, William Blair and Jefferies respectively in November and December. Tom?

Tom Frinzi: Thank you, Patrick. 10 months in the Chair of Chief Executive Officer, I can tell you the world has changed. The war in Europe continues. Inflation and higher interest rates are exacerbating broad economic challenges and now a new war and our refractive industry has not been immune, yet STAAR continues to grow. We continue to take market share, grow the overall refractive market and generate earnings and cash. As I mentioned before, our technology is without peer and our opportunity remains large. The epidemic of myopia that impacts more than two million people globally. Today our growth opportunity is led by China, the largest market in the world for refractive procedures and other APAC geographies. But as we look to the future, we see many other markets representing a more meaningful contribution to our growth.

Our vision remains to become the first choice for those doctors and patients seeking visual freedom, and I am confident with our growing momentum we will achieve that vision. This concludes our prepared remarks. Operator, we are now ready to take questions.

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Q&A Session

Operator: Thank you ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions] Your first question comes from Anthony Petrone from Mizuho. Your line is already open.

Anthony Petrone: Thank you. Good afternoon to everyone. Maybe Tom, I’ll start off with just a commentary on geographic weakness, when you think of the major regions, the Americas, EMEA and APAC, how should we be thinking about that across the geographies? And is there any geography in particular where you’re seeing more early pressures here just as it relates to economy? And then I’ll have a couple of follow-ups. Thanks.

Tom Frinzi: Yes, sure. Thanks, Anthony. Good to hear from you. Again we had a solid quarter. I think we continue to grow in the Asia Pacific regions. China was solid, India had a very good quarter, other Asia Pacific geographies were favorable. As I mentioned in the prepared remarks, in Europe, certainly our two biggest direct markets Spain and Germany had good quarters. And in the US, despite a continued declining refractive market we showed good growth. But again, we’re mindful of what we read in the newspapers as you do as well. And we’re constantly monitoring those factors and keeping our air to the ground with our people in all those markets globally.

Anthony Petrone: That’s helpful. And maybe just a quick one on China. There’s a lot on the anticorruption campaign. It doesn’t seem like there was any notable impact in the quarter. And when you think about where that’s really being focused, it seems like it’s more hospital based and I’m not sure your largest customer Iyer [ph] has any exposure there. But can you just speak to the dynamics on China anticorruption and how that relates to ICL volumes? And I’ll leave it at that and hop back in queue. Thanks again.

Tom Frinzi: Yes. Sure, Anthony. Thank you for the question. And again, just as you stated, we agree. It is predominantly geared towards the public hospital system versus the private hospital system. The majority of our business close to 80% is on the private side 20% to 25% on the public side. But we’re constantly monitoring that situation. To date it really hasn’t been material but we’re keeping close tabs on it.

Anthony Petrone: Thanks, again. I’ll hop back in.

Tom Frinzi: Sure.

Operator: Thank you. Your next question comes from Mr. Xuyang Li. Your line is already open.

Xuyang Li: Thank you so much for taking our question. I guess to start maybe just on the US, you highlighted US Highway 93- and then give an example on the multicenter practice alliance. I guess I’m wondering how big is that practice? What’s driving the move down the diopter curve to minus three and minus six? Is it patient demand? Or are they getting better at selling the procedure to patients? Maybe you can talk a little bit about the economic arrangements offered and as you’d be expanding that to other US practices?

Tom Frinzi: Sure. Yang, again, thank you for the question. The practice we referenced is a big multi-location cataract practice based in the Southeast part of the country. They do a lot of cataract surgery. They do a lot of corneal based refractive surgery and certainly have a very nice growing lens-based refractive surgery practice. I think in terms of what’s driving the move down the diopter curve, I think, it’s a little bit of both of what you mentioned. We certainly continue to increase consumer awareness through our investments in terms of digital marketing. But I also think internally the practice has done enough procedures that their confidence level is extremely high and they’ve made an absolute commitment that anyone minus three and above that falls within our treatment range. EVO is going to be part of that discussion. And I think as consumers hear more and more about the benefits of EVO ICL surgery they’re opting for it versus laser-based vision correction.

Patrick Williams: Yes. And just to add to the last part, I would say that we did know that this specific practice has made the price of LASIK that they offer in their practice or EVO as well a little bit more on parity. We still start charging a slight premium, but certainly down from prior maybe six months to nine months ago when we was charging for EVO.