IRadimed Corporation (NASDAQ:IRMD) Q1 2020 Earnings Conference Call April 30, 2020 11:00 AM ET
Leslie McDonnell - President and CEO
Chris Scott - CFO
Conference Call Participants
Scott Henry - Roth Capital
Lisa Springer - Singular Research
Welcome to the IRadimed Corporation First Quarter 2020 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, April 30th, 2020, and contains time-sensitive information that is accurate only as of today.
Earlier, IRadimed released financial results for first quarter 2020. 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 will also be furnished to the Securities and Exchange Commission on Form 8-K and can be found at sec.gov. This call is being webcast 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.
The agenda for today's call will be as follows. Leslie McDonnell, 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 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 may include the company's expected results for 2020. 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 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 again may be obtained on the SEC's website at sec.gov.
I would now like to turn the call over to Leslie McDonnell, President and Chief Executive Officer of IRadimed Corporation. Ms. McDonnell?
Thank you and good morning. Earlier today, we announced first quarter revenue of $8.7 million, which is an increase of 2.8% over the first quarter last year. We also reported GAAP net income of $0.14 per diluted share and non-GAAP net income of $0.18 per diluted share.
These results were negatively impacted by the COVID-19 pandemic and similar to the current discussion being had across much of the medical device industry, we expect to continue to feel the impact in some form for the remaining portion of 2020.
Regarding our ability to sell our products in the current environment, much of the sales cycle for products recognized in revenue during the first quarter was completed in fourth-quarter 2019.
Additionally, as we progress through first quarter 2020 and the impact of COVID-19 continue to spread throughout the world, we experienced an acceleration in the decline of orders for our products as our customers focus their efforts on preparing for and treating those infected with the virus and deferring decisions to purchase our products into the future.
Also during this time, many of our hospital customers began restricting access to healthcare workers only, diminishing our ability to generate sales, which may delay the timing of future orders.
We may be further impacted if hospitals choose to maintain their restrictions on hospital entrants and limit their capital spending plans until their operations have stabilized. So, despite the significant uncertainties created by COVID-19, we believe that this is a shorter term dynamic and that higher demand for our products will return.
During the quarter, there were several bright spots for us to focus on. The first is revenue from our international channels exceeded our initial forecast, and total international revenue grew almost 73% over the first quarter last year.
Second, we received COVID-related orders for our IV pumps for some customers because of its remote control capabilities and its use as the primary infusing device in an isolation room configuration. We're really proud to be able to contribute to the overall treatment efforts for this virus.
And third, revenue from sales of our IV sets also exceeded our initial forecast in part due to COVID-related demand. During the quarter, we learned that some customers were using one version of our IV tubing set to infuse patients located in an isolation room utilizing a pump that is positioned outside that room.
With the current shortages of critical care supplies, IRadimed wanted to do more to help healthcare providers combat the increased demands that COVID-19 has placed on them.
So, we are using our clean room and IV set manufacturing expertise to build standard extension tubing that can be substituted for any IV extension tubing our customers are having trouble finding. It is just a simple IV tube using the same quality materials and components we use in our regular tubing and we expect sales of this new tubing to begin within the next few days.
During Q1, we filled key leadership roles in sales, regulatory affairs, and quality assurance and R&D as part of succession planning and to continue building out our capabilities that will help support the growth we anticipate in the years ahead.
We also continue making progress on our product roadmap and have not seen any significant changes to time lines at this point. However, I will point out that there are steps in the new product testing phase that require the use of third-parties.
And given the stay-at-home restrictions implemented by many government authorities, there may be shifts to our original testing schedules. Now from a supply chain standpoint, we are not experiencing any delays in obtaining the materials for our products at this time.
Overall, we are experiencing significant changes to our business due to COVID. During this time, we are focusing on the things that we can control and continuing to make investments in the company that are supportive of its longer term health with the goal of emerging from the pandemic even stronger.
In our efforts to manage through this environment, we are looking through four lenses. The first one is product innovation for future growth. As mentioned, we have recently filled key technical leadership roles and continue to make progress on our product roadmap.
The second one is serving our customers, whether through modifying a version of our IV tubing to facilitate infusions from outside an isolation room or supplying our IV pumps for its remote control capabilities or providing virtual product training, we stand ready to support our customers' delivery of critical care for COVID-19 patients.
The third lens is taking care of our employees. We have a highly trained workforce and have implemented several policies that support their health and well-being during this time. These range from enhanced cleaning procedures at our headquarters facility to remote working arrangements where feasible.
The fourth is cost containment. We've already taken several steps to contain costs, including implementing reduced hours in some departments and complying with travel and entry restrictions by our field sales and clinical support teams. We will continue to look through these four lenses as the situation develops, and we'll evaluate taking additional steps if needed.
Now, I'll turn it over to Chris to summarize the financial results.
Thank you and good morning. As always, I'll be discussing our financial results on a GAAP basis as well as on a non-GAAP basis. Our non-GAAP operating results exclude stock-based compensation expense and the related tax effects. Infrequent tax items are considered based on their nature and excluded from our provision for income taxes as these items are not indicative of our normal provision for income taxes.
Free cash flow is cash flow from operations less cash used for purchases of property and equipment. 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 we reported this morning, the first quarter 2020 revenue increased by 2.8% over the first quarter last year. Revenue from domestic sales decreased by 10.6% to 6.3 million during the current quarter, while revenue from international sales increased by 72.7% to 2.4 million for the current quarter. The decrease in domestic sales was primarily driven by lower pump sales, and the increase in international sales was driven by higher pump and monitor sales.
Revenue from sales of our devices decreased by 6.8% to $5.6 million for first quarter 2020. This decrease was driven by a 36.4% decline in IV pump revenue that was partially offset by a 63.5% increase in revenue from our monitoring systems.
The average selling price of our MRI-compatible IV infusion pump system during the first quarter of 2020 was approximately $29,900, compared to approximately $35,800 for the same period in 2019. The decrease in ASP relates to higher international sales of our infusion pumps recognized in revenue when compared to the first quarter last year.
The average selling price of our MRI-compatible patient vital signs monitoring system during first quarter 2020 was approximately $35,400, compared to approximately $37,400 for the same period in 2019. The decrease in ASP relates to higher international sales of our monitoring system recognized in revenue when compared to the first quarter last year.
Revenue from sales of our disposables, services, and others increased by 30.7% to $2.7 million for first quarter 2020 from $2 million for the same quarter in 2019. And lastly, revenue from the amortization of extended maintenance contracts increased 4.5% to $0.5 million for the current quarter.
Gross margin was 74.5% for the 2020 quarter and 75.7% for the 2019 quarter. The decrease in gross margin is a result of higher international sales as a percent of total revenue, partially offset by unfavorable inventory costing adjustments recognized during the first quarter last year.
Operating expenses were $5.7 million or 66% of revenue, compared to $4.9 million or 57.8% of revenue for the first quarter last year. On a dollar basis, operating expenses increased due to higher expenses for payroll, benefits, and stock compensation due to higher headcount, higher employee recruiting costs, and higher legal and professional fees, partially offset by lower sales commissions.
Our effective tax rate for the 2020 quarter was negative 111.7% compared to negative 14.9% for the 2019 quarter. The lower effective tax rate is primarily due to discrete items related to stock compensation and U.S. state tax benefit.
Additionally, we recognized a benefit resulting from the CARES Act that allowed us to carry back our net operating loss to years prior to the enactment of the Tax Cuts and Jobs Act, which increased the benefit to the previously enacted federal tax rate of 35% versus the current federal tax rate of 21%.
Net income on a GAAP basis was $0.14 per diluted share for first quarter 2020 compared to $0.15 for the 2019 quarter. On a non-GAAP basis, net income was $0.18 per diluted share for the current quarter compared to $0.13 for the first quarter last year.
From a cash flow perspective, we generated $1.2 million of cash from operations, compared to $700,000 for the 2019 quarter. For the three months ended March 31st, 2020, cash provided by operations was positively impacted by cash inflows from accounts receivable and deferred revenue and negatively impacted by prepaid income taxes, inventory, and accrued payroll and benefits.
For the three months ended March 31st, 2020 and 2019, our free cash flow, a non-GAAP measure, was $1 million and $600,000, respectively. And lastly, we exited the quarter with a combined cash and investment balance of $47.4 million and no third-party debt or other restrictive covenants.
And with that, I'll turn the call over for questions. Operator?
Thank you. [Operator instructions]
Your first question is from Scott Henry with Roth Capital.
Thank you and good morning. A couple of questions. I guess, first, just a big picture question. I recognize you don't want to give guidance, but can you talk qualitatively about how we should think about 2Q relative to 1Q given COVID-19?
Well, Scott, this is Leslie. I'll maybe start off by providing a little of that qualitative context for the kind of short to medium term and then Chris can add to my comments.
When we think about how that has returned to growth, what's it going to look like, the timeframes, which just happens, is going to be uncertain. But when we think about our portfolio, it really is well-positioned with its remote capabilities, MRI safety and transportability.
We have a nice mix of equipment and critical care disposables. We're geographically diversified, so in different countries around the world, recover from this pandemic at different rates. We will see benefit from that and be able to participate in that. And probably finally, we believe the need to do MRIs on critical patients and those needing sedation will absolutely continue.
In fact, there's accumulating evidence suggesting that patients with severe COVID-19 may be at risk for encephalopathy, which is actually causing an increase in critical care patients needing MRI exams. So, these are just a few thoughts to kind of put some qualitative context around that path back to higher growth.
And I guess just to kind of follow up, and I know you don't want to get too granular, but I mean, is it reasonable to think of business being down 40% to 50% in 2Q? Just trying to get a sense of the magnitude.
And along that line, could you give me a sense of how your business typically performs? And if there's a recessionary environment, I would think it would be relatively defensive but curious of your take.
So, Scott, I mean, I think you're hitting on a lot of the uncertainties that really caused us to withdraw our financial guidance in the beginning. And to Leslie's point, the duration that was impacted or the duration of the pandemic itself, when is the country going to reopen, how is that going to look, when are other countries going to reopen and how does that play out. I think there's a lot of the uncertainty exists around and trying to quantify that is quite challenging at this point.
To your question, could revenue be down 50%? I'm assuming you're talking about 50% from the first quarter. That would put us somewhere around, I don't know, call it, $4.3 million, $4.4 million. And I mean my sense is that's a pretty drastic move, but certainly not out of the realm of possibilities. But it's challenging trying to answer your question specifically.
Okay. No, Chris. That's actually really helpful. I appreciate just kind of the context behind that. And then I just want to ask, in first quarter, the monitor sales were very strong relative to expectations. I mean, they were strong in Q4.
Typically Q1, maybe we drop back down, but it was a really solid number, particularly given the background. But then pumps got hit a little more, not totally unexpected, but can you talk a little bit about those trends between the strong monitor sales and a little more weakness in the pump sales in Q1?
I think -- part of this goes back to just our international channel performed very well with both pumps and monitors. Domestically, we struggled a little bit more on the pump side than, I would say when compared to the international side. But I think part of this goes to how the hospital restrictions were rolled out. The March -- or I would say the third month in every quarter is always the most important month for us when it comes to bookings.
And, really, we started to see restrictions on our ability to access hospitals in mid to late February, where those rumors were starting to float around and isolated instances of hospitals really shutting their doors to vendors.
And then, of course, as we progressed throughout the month of March, that really became the norm. And it impacted our ability domestically. So, there wasn't anything out of the ordinary related to pumps, but other than the impact from COVID and hard to put a finger on anything else other than COVID.
Okay. And just a final question, can you just clarify? It looks like the tax gain in was not excluded from non-GAAP EPS, is that correct?
It wasn't -- meaning it wasn't pulled out?
It wasn't pulled out. That's right.
Okay, great. All right. Thank you very much for taking the questions.
Thank you, Scott.
The next question is from Lisa Springer with Singular Research.
Good morning. During your remarks, you mentioned that COVID-related orders for IV sets. I was wondering if you -- do you have a sense of how much of the increase in disposables was related to COVID-19 type demand?
So Lisa, this is Leslie McDonnell. We're not -- we don't have a good enough sense of that to be able to break that out. We saw the biggest surge in the IV set business in what we call our extension typeset. Now, those are typically used in critical care environments. So, I think there was definitely a positive impact from customers buying ahead as well as seeing an opportunity to use that tubing for patients who were in isolation room settings, and they wanted to control the pump from outside that room.
Okay. And also during in your remarks, you mentioned cost containment is one of the legs of the company going into 2020. Could you give us a little more detail around what areas you might be looking at? And have you set specific goals for cost containment?
Well, I think at this point, we're looking at a lot of things. We've taken some steps already regarding reducing hours, where possible, restricting travel, things like that. We're sort of play-booking a lot of different options. But at this point, it's too early to carry out any of those plans so soon.
Okay. And do you have any sense in terms of the mix between domestic versus international going into the second quarter? Is it going to be stronger internationally again or do you have a sense of that?
I mean Lisa I think that really will depend on how fast the U.S. hospitals open up to manufacturing partners coming in, in supporting them. We're seeing into that, reports of that in different places in the United States. It's kind of hard to gauge that relative to the pace of recovery in other countries. I think our international business will continue to stay strong. The comment I made before about that geographically diversified revenue base, I think it's going to play in our favor because of all that uncertainty.
Okay. Thank you.
At this time, there are no further questions. I'll hand the call over to Ms. McDonnell.
I would like to thank everyone for listening and participating in the call. These are unpredictable times, and we are taking steps that come out of this pandemic stronger than ever.
To manage through this, we are focusing on the things in our control and being vigilant in the areas of product innovation, serving our customers, taking care of our employees, and assessing the impact of COVID on our cost structure. Wishing you all continued good health, and we look forward to speaking with you again after Q2.
Thank you. This concludes the call. You may now disconnect.