IRadimed Corporation (NASDAQ:IRMD)
Q1 2016 Earnings Conference Call
April 29, 2016, 11:00 ET
Roger Susi - President & CEO
Chris Scott - CFO
Chris Lewis - ROTH Capital Partners
Larry Haimovitch - HMTC Capital
Ladies and gentlemen, thank you for standing by. Welcome to the IRadimed Corporation First Quarter 2016 Financial Results Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded, April 29, 2016 and contains time-sensitive information that is accurate only as of only today.
Earlier today IRadimed released financial results for the first quarter 2016. A copy of this press release announcing the company's earnings is available under the heading, News, on their website at iradimed.com. A copy of the press release was also furnished to the Securities and Exchange Commission on Form 8-K. A copy of the Form 8-K can be found at sec.gov.
This call is being broadcasted live over the internet on the company's website at iradimed.com. And a replay of this call will be available on the website for the next 90 days. The agenda for today's call will be as follows. Roger Susi, President and Chief Executive Officer of IRadimed will present opening comments; then Chris Scott IRadimed's Chief Financial Officer will summarize the company's financial results before opening the call up to your questions.
Some of the information to be furnished in today's session that will constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those focused on future performance, results, plans, and events, and include the company's expected results for 2016.
IRadimed reminds you that future results may differ materially from these forward looking statements, due to a number of risk factors. For a description of the relevant risk 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 for free at the SEC's website at sec.gov.
I would now like to turn the call over to Roger Susi, President and Chief Executive Officer of IRadimed Corporation.
Good morning and thank you all for joining us. Our first quarter results released earlier this morning reported revenues of $9 million as compared to $7 million last year, a 28% increase. We also reported non-GAAP diluted earnings of $0.21 per share, and increase of 49% as compared to $0.14 in the first quarter of last year. I'm very pleased with these results especially considering comparison with the first quarter on 2015 which of course was stellar following the resumption of our domestic shipments that have been held for those last four months of 2014. And though pleased with the quarter, revenue came in just slightly lighter than we had expected, and this was due to an international shipment that failed to clear customs which was the result of improper import documents supplied by our distributor and the importer, more on that later. This matter is being cleared up and we expect that shipment will clear customs during the second quarter.
From an operations perspective, our sales force expansion is progressing. And while it is early, our initial take is positive and that strategy is working. We see continue momentum in the demand for our pump systems and bookings with the quarter came in at a pace and level as we expected, and this trend has carried forward through April. Our goal was to increase our sales managers by four during the first half of the year, and within the coming days we look to achieve that goal. Our full year's sales force expansion plan remain intact and we will continue to build a sales team in the second half of the year as originally planned.
Production output continues to rise at a closely measured pace and while not yet there fully, we have made further progress toward bringing our backlog down to industry accepted lead times of approximately six to eight weeks. We will continue to work towards achieving this goal to insure that we are meeting the expectations of our customers.
From a regulatory perspective, as we previously announced, we were notified by the FDA in a letter dated March 23, 2016 that are 510(k) application for our pump system was denied citing non-substantial equivalence. This finding was largely based upon FDA's conclusion that a lack of human factor status sufficiently demonstrated that their system was adequately validated. The FDA advised that we may submit a new 510(k) application with data showing our infusion pump is substantially equivalent to similar devices on the market. But specifically the agency stated that two of 56 test subject in the human factors test had unintentionally bypassed the DERS feature thus avoiding the DERS hard dose limit that healthcare institutions can program into our pump systems.
On April 1 shortly after receiving this letter we announced our intention to appeal this determination to a higher level within the FDA, and on April 7 we filed that appeal. The FDA has responded and we have a face to face meeting scheduled with FDA this coming Monday, May 2. The intent of this meeting is to review our appeal and the documents used to support our position. We do not expect resolution of the matter at the end of the meeting, but we do understand that it can take anywhere from 30 to 90 days to receive a final determination on an appeal.
FDA's NSE letter did not withdraw their consent to continue marketing of our infusion pump with the DERS system. Though we can no guarantee they will not change their position. However, this is the only MRI compatible IV infusion pump and FDA in the past agreed with us that the public health need justifiably the availability of our pump. As for the warning letter, we have discussed previously the need to undergo a facility inspection, and we've had communications with our local FDA office but today no date for the inspection has been established.
And now for a brief update on the patient's vital sign monitor. I just returned from Japan where I helped facilitate the import documentation efforts of our importer and distributor as well as attended a trade show. Taking up that opportunity to show off the patient monitor for the Japanese market, there was much interest in this monitor and it created a real sense of excitement and demand. The reaction is similar to that scene at the two previous U.S. based trade shows we attended in the fall of last year. And further validates our confidence in the successful launch of the monitor. There is a market void created by the discontinuous of the Medrad Veris monitor in Japan which had delivered approximately 100 systems last year alone.
When we last reported to you we indicated that we are preparing a 510(k) pre-submission that will assisted with the formal 510(k), and I'm happy to report that we filed that pre-submission and have actually received comments from the FDA to act upon. We are on track for the full 510(k) submission in the second quarter and we'll include the items discussed during the pre-submission process. We continue to expect to launch this product internationally in the third quarter and likely U.S. launch during the fourth quarter.
As a final point of information, there have been several changes to our board of directors over the past few months. Very recently we were saddened by the loss of my long-time friend and confidant, Serge Novovich, and while we mourn his unexpected loss we have begun and search for a qualified replacement. Additionally, we announce the appointment of [ph] to the board. We were fortunate to find Tony and looking-forward to tapping into his vast experience and knowledge as we grow in all areas of the organization. And finally we announce that Jim Hawkins having provided over ten years of board service will not stand for re-election at this year's annual meeting. While Jim is formally departing from his board role, he will remain involved with IRadimed's establishment of an advisory board where we will continue to enjoy the benefits of his guidance.
Again, I'm very pleased with our first quarter financial result and the progress we're making in all areas of the company. And now I'd like to turn over the call to Chris for a summary of our first quarter financial results.
Good morning, everyone. Today I will be discussing our financial results on a GAAP basis as well as on a non-GAAP basis.
Our non-GAAP operating results excludes stock-based compensation expense and the related tax effects. Our free cash flow measure is cash flow from operations, less cash used for purchases of property and equipment. We believe that the presentation of these non-GAAP measures along with our GAAP financial statements providing more thorough analysis of our ongoing financial performance. You can find it reconciliation of these non-GAAP measures to the nearest GAAP measure on the last page of today's press release.
As Roger stated, we reported first quarter revenue of $9 million, a 28% increase from the first quarter last year. Revenue from domestic sales was 88% of total for the current quarter compared to 90% for the same quarter in 2015. Revenue from devices was 81% of the total revenue for the current quarter compared to 84% in the same period last year, and revenue from IV sets and services was 19% and 16% of total revenue for the respective periods.
We recognize revenue on 263 IV pumps this quarter compared to 217 pumps in the first quarter last year. Our average selling price for the 2016 quarter was approximately $28,000 compared to approximately $27,000 for the 2015 quarter.
Gross margin was consistent at 81% for both periods and is primarily the result of higher sales leverage during the current quarter offset by higher international sales and inventory cost adjustments during this quarter.
Operating expenses for the first quarter 2016 decreased to approximately 42% of revenue compared to 49% in the prior year quarter. This decrease primarily relates to sales leverage and lower legal and professional expenses largely offset by higher payroll and employee benefits including stock compensation related to the increase and the number of employees, higher corporate franchise taxes and higher sales and trade show expenses.
Our effective tax rate for the current quarter was 35% compared to 35.6% for the 2015 quarter. The lower effective tax rate is primarily due to a higher research and development credit during the current quarter. On a GAAP basis, net income for the current quarter was $0.19 per diluted share compared to $0.12 per diluted share in the 2015 period.
On a non-GAAP basis, net income was $0.21 per diluted share for the first quarter of 2016 compared to $0.14 for the prior year quarter. Weighted average diluted shares outstanding increased by 348,000 shares compared to the 2015 quarter.
Moving on to the cash flow statement and the balance sheet, for the 2016 quarter, cash provided by operations increased to $2.4 million compared to $1.1 million for the same period last year. Our free cash flow, a non-GAAP measure was $2.2 million for the first quarter of 2016 as we increase our CapEx spend related to and anticipation of the patient monitor production runs. We also repurchased approximately $5.5 million of company stock during the quarter. As of March 31, 2016 we had $23.6 million of cash and investments. With that I'll turn it over to the operator for questions.
[Operator Instructions] Our first question comes from Chris Lewis of ROTH Capital Partners. Your line is now open.
Hey, good morning guys. How are you doing?
Great. Good morning, Chris.
Good, good. Roger, I wanted to start on the FDA update. Obviously the meeting scheduled on Monday here. A couple of things, I guess first, is that sooner maybe than you guys had expected just given kind of the three or four weeks since you submitted the appeal? And I guess any commentary you can provide around the dialogue with the agency since you submitted that appeal and maybe some granularity on your expectations heading into the meeting would be helpful. Thanks.
When we talk about this filing this appeal earlier in the month, I think I indicated two things. Number one, I haven't personally done an appeal for an FDA issue, but we had understood that they typically take on the order of 60 days to respond. So yes, they responded in one week flat. So yes, that was a surprise. I don't really have any input into why that may be the case, but we were surprised that they did get such a quick response to us having an input that would lead me to expect it was going to take much more than one week. As far as the dialogue with them since then it's been just simply who's going to be at the meeting and the time of the meeting and that's what -- there's no actual pre-discussion about the substance of the meeting or the appeal letter that prompted it. So we'll be having that meeting, I think at 11:00 or 11:30 on Monday and we're looking forward to being able to present our case and hopefully convince them that this 510(k) is substantially equivalent and get it passed.
Okay, that's helpful. Thanks. In terms of the kind of the quarter you talked about new bookings, trending positively, I was hoping you could kind of elaborate on that and perhaps compare kind of the drawdown of the backlog and what the backlog was at the end of the quarter versus how the new bookings trended.
Well we have a sales plan for the year and that's how we build the rewards, commissions and such for the sales force, and so when we say we were pleased that meant that they're meeting their plan and finding the business as we expected it. So that's simply that. It's our own internal goals set up for the sales force and they're attaining them, so that's a good thing. Of course, I don't have the back log number just here in front of me, but the back log as I mentioned has not come down to where we're trying to get it to over the course of this year. Our plan is to get it six to eight weeks. I think I mentioned in previous calls that that's our plan for the course of this year. It's not going to happen all in one quarter and it certainly didn't happen yet, but we are moving in the right direction as we had even last year trying to bring that back log down in line with industry expectations and our historical levels. So I say we're on track for that to coordinate by years end, and when I say coordinate there's essentially two moving parts to it as we ramp up production at the targeted rate to hit that target of six or eight weeks of lead time by the end of the year coinciding with the rate in which the sales plan are laid out to ramp up. We hope and we expect by the end of the year to be able to report that we met that goal.
Understand, and with the sales force I think you ended 2015 with about 14 reps. The plan was to add six or seven this year. It sounds like the plan for the first half of this year was that four and you're closing in on that over in the next couple of weeks. So maybe, how big was the sales force at the end of the first quarter. How should we expect those to start contributing to the growth this year?
At the end of the first quarter it was the same size as it was at the end of the fourth quarter. I think we've had two folks, I believe both of our new people have already started, and when they started it was in, the quarter had already turned. And then we've got, I believe its two additional folks that are starting, I know that there's at least one starting on Monday and it maybe they're both starting on Monday. So we'll achieve that first half goal early on here in the first half, and then like we've talked about in the past it does take a period of time for them to become effective in our way of thinking. So we would anticipate that this second quarter new hires would become effective by the fourth quarter of this year.
Okay, thanks. Roger, on the patient monitor. Can you talk about the type of feedback that was received on the pre-submission from the FDA and I guess what needs to still be done in terms of development and getting the application ready before submitting it?
Well they point out this test data they'd like to see, and specific standards. They named a few standards and they cite examples of the sort of test reports they want on various specific items. It's a five-parameter patient monitor. So in total, each parameter involves a number of tests and test reports that can be generated. So you talk about each vital sign and associated test and you add all of them up together and it creates a pretty good size file that's going to end up being supplied as test data to support the 510(k) and prove its efficacy. Technological, this time we're, technology's pretty much all identified. We are now sourcing parts and we're actually in that mode, so some of the components are very specified and very specific. They were essentially custom-made parts so that we can achieve our non-magnetic goal of this monitor and so there's potentially some learning curves for some of those suppliers to make sure they can make a good quality part yet, but those parts are coming in and going through first article inspections. And so I'd have to say that we're past the development mode, we're actually in sourcing mode.
All right, great. Maybe just one more for me and then I can hop back in queue. Just in terms of the guidance for the year. The EPS rate is obviously you had a nice first quarter beat on earnings of $0.03. You raised that the annual outlook for earnings up by $0.05. So beyond just the first quarter beating reaffirmed revenue outlook. I guess where, can you talk about where the additional earnings up side over the remainder of the year is expected to come from? Thanks.
Yes, sure. Maybe Chris can speak to it very well.
Well a lot of it is just derived from margin and higher revenues we're expecting throughout the year. The first quarter beat, I think when we modeled the first quarter we hadn't yet approved the buyback and that had a small piece to it, that only accounted for about two-tenths of a penny. That have a larger impact in the second quarter, couple that with the higher revenues that we had always expected in our first forecast and cost are coming in reasonably well, and I think when we look at all of that we put our model back together at the end of each quarter. We saw that we're able to raise our earnings a bit. So that's what we did.
I think in short it means that as we roll the business out forward and it ramps itself up, I mean we are able to keep our pricing very favorable and as well as keep our cost in a very favorable light. So though we are spending more money bringing in more sales people it's all balanced, quite balanced and leading to our ability to give sort of estimate increase.
All right, thanks. I'll hop back in queue.
[Operator Instructions] And I'm showing we have a follow up question from the line of Chris Lewis. Your line is now open.
Hey, guys. Just a couple of follow ups. Roger, you've kind of introduced the strategy of going deeper within the hospital and cross-selling to ER and I see departments outside of radiology. Have you seen that strategy start to take hold and I guess how the hospitals reacted towards this cross-selling strategy?
Yes, definitely. I mean we saw it start to work as we head out with just a couple of the sales territories, a limited roll out, even at the end of last year. So it's the right way to go and it's being accepted and I mean I can't say that we were the geniuses for identifying this and pushing this. Our customers actually showed us this was what they wanted. So it is not a big surprise that as we apply some efforts via the sales force to go and find that business and follow up on that business in those different wards of the hospital that it is working. So yes it's what we hope, we'll start to in a measurable way, move the needle on that multiplier number we talk about sometimes where we have multiple pumps per MRI scanner. We see that is going to be moving forward and hopefully in a measurable way, and that helps the affectivity of the sales force quite a bit too and reflects in our bottom line because you get a lot more productivity out of the sales call when you don't sell them just one pump per MRI scanner but multiple ones. Definitely working.
Good to hear. And can you just provide an update on what you're seeing there and your appetite for potential acquisition at this point?
Our appetite is high, but we don't have anything to report this time.
Understood, and Chris, just a couple for you. How should we think about OpEx trying going forward obviously? It sounds like you're going to have a couple of new sales reps come on board. Just kind of how should we think about OpEx from first quarter levels?
I think the biggest increase you're going to see is on that sales and marketing line. I think we're projecting a pretty healthy increase there, related to the new hires, related to higher sales commissions, sales activities and then travel expenses and things like that that are all incurred associated with just a bigger sales team. So I think if you're modeling out, that's the biggest change that you're going to see. From the line I expect to be flat and maybe you noticed that it was down to only about maybe 2.5% of revenue for the quarter after running probably get closer to the 5% level and that was a GAAP change there. You reach the technological feasibility associated with a new monitor, a new product, and GAAP requires that you begin to capitalize certain costs. So that's what we did there. I would anticipate that we'll continue capitalize those costs through the second quarter. So I don't anticipate much growth on the line and I expect G&A to remain relatively flat to the first quarter levels. So I think you're looking at a larger sales and marketing spend is the biggest piece that will impact OpEx.
All right, and then just for the guidance both for the second quarter and full year earnings guidance. What should I assume in terms of share count and buyback activity? How should we think about the buyback going forward? Thanks.
We think that we'll remain active, I mean at this point we think we'll remain active with the buyback. You see we use over half of it already in the first quarter. So I think we remain active but my model, I did just for the sake of confidence in the guidance that I gave, I did assume about 170,000 share increases in diluted shares outstanding, and of course the buyback would work in the opposite direction there. So again we'll wait and see once the window opens back up, of course I think we'll probably be active again with the buyback.
All right, thanks for the time.
All right, Chris.
Thank you. And the next question comes from Larry Haimovitch of HMTC Capital. Your line is now open.
Good morning, gentlemen. Congrats on another good quarter. I must say Chris has asked all the great questions. I was going to ask about the share buyback and he just asked it. So I'll just wish you a wonderful day and continued great success.
Thanks a lot, Larry. Take care.
Okay, talk to you soon.
Thank you, and at this time I'm showing there are no further participants in the queue. I would like to turn the call back to management for any further remarks.
Thank you, operator. I'll close the call today by saying that we are off to a solid start to the year and fully expect that 2016 will be exciting from the continued focus on regaining clearance of our IV pump to growing the company and the launch of the new product. We look forward to reporting back to you the progress we are making in all areas throughout the year. Thank you for participating in today's call and for your interest and support of IRadimed.
Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program. You may now disconnect. Everyone have a great day.
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