iRadimed Corp. (NASDAQ:IRMD) Q4 2018 Earnings Conference Call February 6, 2019 11:00 AM ET
Roger Susi - Chief Executive Officer
Brent Johnson - EVP of Worldwide Sales and Marketing
Chris Scott - Chief Financial Officer
Conference Call Participants
Larry Solow - CJS Securities
Scott Henry - ROTH Capital
Ladies and gentlemen thank you for standing by. Welcome to the iRadimed Corporation Fourth Quarter 2018 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 today, February 6, 2019 and contains time-sensitive information that is accurate only as of today.
Earlier, iRadimed released final results for the fourth quarter 2018. 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 and can be found at sec.gov. This call is being broadcast live over the Internet and the Company's website at iRadimed.com, and a replay of the 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 Brent Johnson, iRadimed's Executive Vice President of Worldwide Sales and Marketing will discuss customer orders; and finally, Chris Scott, iRadimed's, Chief Financial Officer will summarize the Company's financial results before opening the call up for questions.
Some of the information to be furnished 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 those focused on the future performance, results, plans and events and include the Company's expected results for 2019.
iRadimed reminds you that the future results may differ materially from these forward-looking statements due to a number of 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 report filed with the Securities and Exchange Commission, which again may be obtained from the free from SEC website at sec.gov.
And it's my pleasure to turn the call to Roger Susi. Please go ahead.
Thank you and good morning. We are very pleased this morning to report fourth quarter 2018 revenue of $8.3 million, GAAP net income of $0.14 per diluted share and non-GAAP income of $0.16 per diluted share. As compared to the fourth quarter of last year, revenue increased 24.4% with both our GAAP and non-GAAP earnings significantly higher than last year. On a sequential basis, the revenue increased 9.5%. For full year 2018, revenue increased by 31.9% with approximately 65% of that growth coming from higher sales of our patient monitoring system and approximately 12.4% coming from higher sales of our IV pumps. I find these results very gratifying and demonstrative of the viability of our product offerings, as well as the powerful collective efforts of everyone at iRadimed.
Before briefly reviewing the progress we have made relative to our new product pipeline, I would like to review our recent announcement regarding expiration of our EC Certificate published January 22nd of 2019. As was apparent from that press release, we certainly were surprised to have a lapse in our ability to CE label the 3880 MRI monitoring system. The usual and past efforts as we periodically renewed our CE listing via our notified body have always been straightforward and uneventful.
Discussion and negotiation regarding necessary documentation and requirement scope with our notified bodies has always reached a positive conclusion prior to each expiration date. Unfortunately this time, rather confused communications regarding a complex new and as yet still future product follow-up review method, clouded this effort and led to not being able to meet the deadline. Recently, however, we have had discussions with those of authority within our notified body, and now have better understanding of the expectations giving us a clear path forward. Thus as noted in the press release, we do expect to once again include 3880 in our certification before the end of the second quarter and return to using the CE marking with shipments into the EC countries soon thereafter. Just to be clear, only shipments of 3880 into EC countries are being held by this lapse in CE marketing. The hang-up is not due to any safety concern, and there is no effect to selling or shipping our other devices and disposables, and this does not impact 3880s that are already in the field or for that matter in EU itself -- in the EU countries.
With regard to new product development, now strong progress was made in 2018 on our significantly enhanced next generation IV pump and I continue to maintain our project calendar without adjustments. At this time, I still expect to release that next generation pump in early 2021. Additionally, we have also made progress in 2018 on our magnetic detection device, the FMD, and remain on track for a late 2019 launch. As a reminder, the magnetic detection product is not a medical device and accordingly we do not require an FDA clearance prior to commercialization.
Now I'd like to outline our financial guidance for the full year and the first quarter of 2019. For the full year 2019, we expect revenues of $38.5 million to $39.5 million, GAAP earnings per share of 60% to 64% and non-GAAP diluted earnings per share of $0.69 to $0.73. For the first quarter 2019, we expect revenue of $8.3 million to $8.5 million, GAAP earnings per share of $0.10 to $0.11, and non-GAAP diluted earnings per share of $0.12 to $0.13. Our full year and first quarter guidance includes the impact of the CE Mark issue, which we believe will negatively impact our full year revenues by less than 2%.
And now, I'd like to turn the call over to Brent for discussion of our sales and customer orders.
Thanks Roger, and good morning everyone. The fourth quarter was another great booking quarter for the sales team and capped-up a strong year of increases in both the domestic and the international parts of our business. On the domestic side, we saw another solid quarter of increased bookings at both IV pumps and patient monitors when compared with the prior quarter and a great close to a strong year of growth. The continued growth in both IV pumps and patient monitors is a good indicator that the sales team has fully come up to speed on the sale of the patient monitor and they're now able to balance their efforts between the two products and successfully grow both areas of the business.
The international team had a record booking year with big increases on both the IV pump and the patient monitor. Patient monitoring orders were particularly strong internationally, which shows that the market and our customers are recognizing the unique patient safety and workflow advantages of the new monitor and highlights our continued ability to take market share away from our competitors. We believe this sustained growth in our second full year with a product in international market is a good predictor of the kind of sustained growth we're expecting in our second full year with a product in the US in 2019.
We continue to have success with bundling our new patient monitor with our IV pump and sales opportunities and we're seeing this strategy succeed in both the domestic and the international areas of our business. As we previously discussed, by bundling our IV pump and monitor into a combined sale, we really differentiate our product offering, as iRadimed is the only Company in the world with the capability to provide hospitals with a truly mobile care system that allows for transporting patients to the MRI and back without having to make multiple time-consuming equipment changeovers. This safety and enhanced workflow concept really resonates with our customers and it's a key differentiator between iRadimed's product offering and anything else in the market.
Our strategy of targeting multiple hospital departments with our IV pumps continued to drive increased demand for multiple pump channels and it follows more IV pump orders. By targeting the critical care areas of the hospital and educating them on the benefits of our MRI IV pump versus their workaround solution, we're not only driving demand for increased purchases of pumps, but we're also driving demand for increased pump channel as critical care patients are often on multiple IV medications that must be continued during an MRI procedure.
We're also seeing great interest in critical care in the new MRI patient monitor, due to the patient safety and workflow benefits it offers and see great potential for our unique transportable solution to expand the market with sales to critical care, as well as the traditional sales to MRI. As we begin 2019, we're continuing to expand our sales team to better penetrate the marketplace. On the domestic side we've added a fourth area director and have plans to add an additional six territory sales managers to our existing team of 24 to give us a total of 30 direct sales managers before the end of the year.
We also plan to add one additional clinical applications specialist to give us a total of six on our clinical support team. On the international side, we've hired an Asia Pacific, Middle East sales Director based in Singapore to continue to expand the growth that we've experienced in those areas of the world.
Now, I'll turn it over to Chris to summarize the financial results.
Good morning. I'll 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. Infrequent tax items are considered based on their nature and excluded from provision for income taxes as these costs are not indicative of our normal or future provision for income taxes.
We believe the presentation of these non-GAAP measures, along with our GAAP financial statements can be helpful in providing a more thorough analysis of our ongoing financial performance. You can find a 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 fourth quarter revenue of $8.3 million compared to $6.7 million for the same quarter last year. Fourth quarter 2018 domestic revenue was $6.7 million, compared to $5.3 million for the same quarter last year. Revenue from international sales was $1.6 million for the current quarter compared to $1.4 million for the 2017 quarter. Revenue from devices was $5.9 million for the fourth quarter 2018, compared to $4.7 million for the same quarter last year. Included in revenue from devices for the fourth quarter of 2018 is $2.1 million in sales of our MRI compatible patient vital signs monitor, compared to $0.9 million for the 2017 period. Revenue from disposables and services was $2 million for the current quarter, compared to $1.7 million for the 2017 quarter.
And lastly, revenue from the amortization of our extended maintenance contracts was $0.4 million and $0.3 million in the 2018 and 2017 quarters respectively. The average selling price of IV pumps recognized in revenue during the fourth quarter 2018 was approximately $35,000, compared to approximately $33,900 for the same quarter last year. The increase in ASP is a result of a higher ratio of domestic pump unit sales to total pump unit sales and a favorable product mix as we sold more pump accessories in the 2018 quarter when compared to the 2017 quarter.
ASP for our patient vital signs monitoring system was approximately $34,900 for the fourth quarter 2018, and approximately $29,400 for the 2017 quarter. This increase in ASP is also due to a higher ratio of domestic monitor unit sales to total monitor unit sales when compared to the 2017 period. As a reminder, sales of the monitor in the US commenced in the fourth quarter 2017 after receiving FDA 510(k) clearance.
Gross margin was 76.2% for the current quarter and 75.5% for the 2017 quarter. The increase in gross margin percent is the result of favorable overhead variance adjustments and higher domestic revenue as a percent of total revenue, when compared to the fourth quarter 2017. Operating expenses for the fourth quarter 2018 were $4.6 million or 54.7% of revenue, compared to $4.1 million or 60.6% of revenue for the fourth quarter last year.
On a dollar basis, operating expenses increased due to higher payroll expenses from higher headcount, higher sales commissions from higher sales and higher legal and professional expenses, partially offset by lower stock compensation expense. Our effective tax rate for the current quarter was 9% compared to 82.2% for the 2017 period. The lower effective -- lower effective tax rate is primarily due to a lower federal statutory rate, resulting from the Tax Cuts and Jobs Act. Additionally, the Tax Cuts and Jobs Act negatively impacted the effective rate during the 2017 quarter, as we were required to revalue our deferred taxes causing us to recognize a one-time charge of approximately $474,000 during that period. On a GAAP basis, net income for the current quarter was $0.14 per diluted share, compared to $0.02 for the fourth quarter last year. And on a non-GAAP basis, net income was $0.16 per diluted share for the current quarter compared to $0.10 for the fourth quarter last year.
For the year-ended December 31st 2018, cash provided by operations was $7.4 million compared to $3.4 million for the same period in 2017. This increased primarily the result of higher net income, partially offset by higher cash outflow for income tax payments. For the year ended December 31st 2018 and 2017, our free cash flow, a non-GAAP measure, was $7.1 million and $2.6 million respectively. As of December 31st 2018, we had $34.4 million of cash in investments and exited the year with a backlog of approximately $2.6 million.
With that, I'll turn the call over for questions.
Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And our first question is from Larry Solow with CJS Securities. Your line is now open.
Great, thanks. Appreciate the color on the quarter and the outlook. Can you maybe just give us a little more color on maybe the breakout or what your expectations are either for the pump or just the monitor or both so we can sort of get an idea where the growth is coming from?
Larry, for the 2019 period or the 2018 period?
I mean, typically we haven't given guidance by product launch.
Well, I know you have guided to the monitor in the last couple -- I guess it's the first year and I know you -- so I guess any color on that? I know you had said, I mean when the monitor was first launched sort of expected to reach, I think $22 million run rate over the next couple of years. Is that sort of still in play, and I think some of those sales are expected to be from sort of not just to replace them, but sort of expanding the market, maybe some color on that. Anything would be great, just on the monitor.
Well, Larry, this is Roger. Yeah, maybe I'll step in on this one. So you can see that we grew both strong, both the pump and the monitor business in the past year. And as Brent said, we're pleased that the sales force domestically has been able to balance that out now. We were worried earlier in the life of starting to sell the patient monitor that the sales force would gravitate the due course the new shiny monitor and we have a little bit of a fallback in that introductory year being last year of selling that patient monitor versus IV pumps, which took them also to yield half to them. Turned out that, we see that that was rather pleasantly in the right direction. We grew both businesses. And as Brent said that just demonstrates that our sales force has been able to come up to speed at selling both products and they did in fact not for sake one for the other and they find that works together, it's the same call point. And so all that stuff is fitting right in the pocket just as we had hoped.
In the coming year, we see that getting better if anything, but certainly not weakening, and don't forget part of our goal, this five year goal that we introduced last spring, this $100 million five-year goal, it soon, eventually starting in 2021 as I pointed out, has a -- has this new pump. And we think that by that year, then you'll probably start to see where the growth in the pump business maybe starts to parallel or overshadow the short-term growth we're now having with the newly launched patient monitor.
So both things are hitting and our strategy over this period -- this long period to get to that $100 million involves growth -- good growth in both and we see that happening, that at least met, if not exceeded our expectations so far and we expect that to continue. Hope that answers your question.
Yes, sure. And what about just sort of the -- it seems like the outlook is a little bit back-end loaded. I realize a small piece of that, less than $1 million obviously, is just from the impact of the temporary drop -- loss of the ability to sell the monitor in Europe. But it looks like you have about 20% growth or so at the midpoint of guidance for Q1, but your full year outlook is up to, close to 25% to 30% growth. So is it just a function of the return of the monitor? Do you expect any of this -- I don't believe you have any of the magnetic detector sales in your guidance this year. So is it just more of that or is there anything else sort of driving that sort of back-end loaded nature?
I think that back-end nature is same as we did in 2018, it's a similar story, right?
And Larry, I think if you look at it, of course, Q1 is going to be greatly impacted because -- more impacted than the rest of the year because that's when the issue is affecting us in the CE Mark area. So we expect that to, as Roger said, mediate in the second quarter. And so, yeah, I mean any effect of that you're looking at front-end loaded, so that really, most of that is just the effect of that and otherwise, would be a pretty balanced approached to the year.
Okay, fair enough. Just a quick question on the cost side for Chris. Gross margin sort of seems to be held fairly constant this year in and around 76%, it looks like. Is that sort of what you expect it going forward or any possibility you got a little bit of over absorption or improved efficiencies that drove a little bit higher margin?
We do expect some efficiencies to come in to the equation this year as we pump out more units, new products to help absorb some of the overhead costs, but certainly more units on the pump side and on the monitor side. So we do expect a little bit of creep.
Thank you. [Operator Instructions] Okay, we have a follow-up from Larry Solow. Please go ahead.
Great. Thanks. In terms of just on the monitor side, any actions by your competitor in terms of pricing, anecdotally? I guess two questions. Have you -- as your price was on domestic side, are you sort of realizing that $50,000-ish number that you had at least on the -- before discounts domestically? And is your competitor -- has their reactions increased over the last couple of quarters?
Larry, I mean, again if you're talking about the overall selling price, remember there is different future options with each version of the monitor. So some sell for significantly more than that number you just mentioned and a few sell for a little bit less. But yeah, I mean we are tracking basically to where we thought we would be as far as an average selling price domestically. And yeah, I mean again I think it's a little bit north of that $50,000 number you mentioned. And in terms of our competition and their reaction to us, again there hasn't been any measurable difference than there been the whole time. I mean they haven't -- again, aggressively dropped their pricing. It's really where we pretty much expected to be as far as a difference between our selling price and their selling price.
Okay. And you mentioned on the pump side, obviously a little bit more focused outside the MRI suite into some of the -- into the critical care and perhaps the ER department. Has that -- has traction continued to improve on that -- with that focus? And in terms of -- are you seeing larger orders or orders remains sort of constant on the last two quarters?
Yeah, I answered yes to all of the above. I mean the critical care strategy as we call it, again it's continuing to drive more and more demand for the product. Those critical care areas as I've talked about in the past are the ones that own the patient, so to speak. The ones that when they see the differences between the workaround solutions that they've been using and using our MRI compatible IV pump that drives the demand -- that drives demand in radiology. So as we've talked about a lot of those purchases are still made out of the radiology department, but that interest or that demand drives more purchases.
And as we've talked about before, when you're in critical care, you're dealing with typically with patients that need upwards of three, four, sometimes even more lines that are -- that they can't come off of and need to be continued when they go to the MRI. So it drives more pump channels, it drives that demand for more pump channels, which again results in the demand for more pumps.
So the final answer to that question is, yes, we're seeing more and more multi-pump which we define as three pumps or more and also dual pumps, two pumps or more, are significantly increasing as well from those previous single pump sales that we saw in the past. So again, we really see the strategy as being effective and continuing to drive IV pump sales growth.
Okay. Just a question for Chris. Chris, on the SG&A side, it looks like you guys are expecting a pretty nice increase on the direct sales side going from 24% to 30%, which I would take that as a positive sign. SG&A, I assume not going up 25%, but I assume it should as you add more guidance throughout the year, I guess it will incrementally rise as quarters progress.
That's correct. I mean, I've got, I mean, for the most part to breakout OpEx line I got most of the growth, most of the increase in OpEx coming from the sales and marketing line. Just as you mentioned higher headcount, higher sales pushes, higher sales commissions things like that. So that's where the bulk of the growth is coming through on the OpEx.
Right. And then in terms of the tax rate, you obviously have gotten some benefit from stock comp and other things this year. What sort of incorporated in your guidance for '19 on the tax rate?
For modeling purposes, I tend to be a little more conservative, I do model it's around 26.5% and 27% rate.
Okay. And then just last question for Roger on the next generation pump that's expected out in a couple of years. Without tipping your hand for competitive reasons, anything you can share with us on what kind of features or enhancements it might have? And will customer sort of that they will be required to switch over or it will be as they desire?
Good questions. So yeah, I mean it's a, in a word, it's going to be sexier. It's going to be attractive and it's going to be smaller and lighter and so forth. But the real, I'd say the real thing to highlight that why we're doing this pump and why we think people will want to change over to it and new people will want to adopt it quicker is. I think we've addressed this over time, in the current pump the Achilles heel is that the hospital doesn't convert the whole system to this pump. They typically buy you know for the 400, 500, 600 pumps that they're going to equip an entire facility with, they'll buy from one of the big three players, I call them and then a few of our pumps.
And so if, they get very accustomed the users that is, the clinicians get very accustomed to using those pumps that are in every patient's room and in every ICU and on every floor. And then when they use the few that they have of ours in MRI, they have to think, they have to stop and think a bit about what the buttons do and what the screens mean and that sort of thing. So the biggest thing we did with this pump I'd have to say, the biggest target in the design goal is that we want the screen, we want the display to be an interactive sort of coach and walk the user through how to use itself. Rather than having to refer to manuals and hang tags and other written instructions we're putting graphics into the unit. We've used a higher, much higher resolution displays, we can do fancier graphics and we think that, we think that, it sounds simple, but we think that almost like with a phone today, right, you don't read a manual to use your iPhone or your fancy Samsung or whatever phone. The graphics on the phone just have to be somewhat intuitive to take people through it. The operator's manual for today's telephone will be, it'd be probably as thick as the New York City phonebook. And yet, people learn how to walk through with the graphics, so that's a parallel to what we're doing with this new pump.
Got it. That's helpful. Great, thanks.
Yeah. And then the replacement is people just naturally do like to replace their equipment when it gets, these things are scheduled in typically hospital device hardware on a five year kind of replacement schedule. So we'll have 1,000s, 1,000s of pumps that are older than five years that will be subject to updating.
Thank you. [Operator Instructions] And next question is from Scott Henry with ROTH Capital. Please go ahead.
Hi, thank you for taking the questions. Just a couple things. First with regards to the FMD product, the magnetic detection device, could you just talk about that product a little bit? And just give me a sense of the revenue potential for that product, and how we should think about that ramp? Thank you.
Sure. It's pretty simple. It's, think of it somewhat like those gates that you walk through at the airport to screen for weapons, right. In this case, it's similar to that, it's going to be a gateway that we build into the doorway going into the MRI rather than a freestanding arch looking thing, just in the middle of the room. But its purpose is to detect. In our case, we're only looking for ferrous metal, whereas the kind at the airport look for anything metal. So technology is a little bit different than the ones in, used in an airport. But that's the purpose of it and that's what it looks like, it's a gateway built into the door jam around a MRI entry way and we want to pick up hazardous size ferromagnetic particles that somebody may have on their purse and they could be carrying in there or device like a wheelchair, something like that. So that's the purpose of it. And the size, unlike IV pumps, which are used in, as I have laid out, a segment of the market that has an MRI scanner, whether they're doing the more high acuity sorts of cases. These screening devices to keep magnetic things form getting, hazardous size magnetic things from getting inside a room. This is something that every MRI, whether they're in a high acuity hospital or in a freestanding imaging center, they're all being guided and they all have liability incentives to put these things around their doorway.
So it's the broader market, but it's the same market we call on. It's just that rather than sort of ignore some of these lesser acute centers for this purpose, we'd be reaching out to them to sell this device. So the quantities sellable are quite a bit larger than in number than we have for either of the monitor opportunity or the IV pump, but it's all scanners.
Okay. And how would you kind of estimate that addressable market size? And how should we think about penetration if you could?
It's all the scanners, it's what 36,000 of them around the world, they're all potentially needing these kinds of devices. There are a couple of small proprietorship kind of businesses that are in this area now, and we think the penetration so far has been relatively light, order of a couple of thousand, 4,000, 5,000. So there is a long runway to go yet.
Okay, great, thank you for the color on that program. And just a quick modeling question for Chris. With regards to ASP, how should we think about the outlook for 2019? Do you expect much pricing benefit for either the monitors or pumps or should we think about a similar pricing?
I think sticking with the full year ASPs that we spoke about it's a pretty safe bet for looking at 2019.
Okay, great. Thank you for taking the questions.
Thank you. And I'm not showing any further questions in the queue. I would like to turn it back to iRadimed for any final remarks.
Thank you again, operator. So again from my viewpoint the company is performing well, and I believe that we have both the correct sales and product development strategies in place to ensure our long-term growth while we ever keep our $100 million goal clearly in our sights. Thank you for participating in today's call and we look forward to reporting back to you after the first quarter.
Thank you. And this concludes the call. You may now disconnect.