Staar Surgical (STAA) Q4 2022 earnings call transcript

Thank you, Operator. 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 fourth quarter and fiscal year ended December 30, 2022. On the call today are Tom Frenze, Chair of the Board, President, and CEO, and Patrick Williams, Chief Financial Officer. The press release of our fourth The quarter quarter results was issued just after 4 p. m. Eastern Time and is now available on STAAR's website at www. star. 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 risk of uncertainties associated with the forward-looking statement made in this conference call or webcast are described in the Safe Harbor Statement in today's press release, as well as STAAR's public periodic filings with the SEC.

Except as required by law, STAAR seems no obligation to update these forward-looking statements to reflect future events or actual outcomes and does not intend to do so. In addition, to supplement the GAAP numbers, we have provided non-GAAP adjusted net income and adjusted earnings per share and sales in constant currency. We believe that these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in today's press release. Following our prepared remarks, we will open We ask analysts to limit themselves to two initial questions, then re-queue with any follow-ups. We thank everyone in advance for their cooperation with this process.

And with that, I would now like to turn the call over to Tom Frenzy. Tom?

Thanks, Brian, and good afternoon, everyone, and thank you for joining us. I will begin with an overview of our results for the fourth quarter and fiscal year before turning my commentary to my first 50 days as CEO and our priorities for 2023. Patrick will then provide additional details on our financial performance and outlook for 2023. We will then open the call to questions. I am pleased to report that once again in fiscal Until 2022, STAAR achieved a multi-quarter track record of market-leading top-line growth. ICL sales grew 27% year-over-year and in constant currency, 32%. ICL units grew 33%. We continue to maintain our position as one of the few high-growth, publicly traded medical device companies with positive gap earnings while also increasing our investments in key areas to continue future growth.

STAAR is also a company that generates strong operating cash flow. In fiscal 2022, we increased cash on our balance sheet by over $25 million through internal generated funds, ending the year with over $225 million of cash and investments. Fourth quarter sales results also increase. ICL unit growth was up 20% year-over-year, and ICL sales were up 21% in constant currency year-over-year. In the fourth quarter, year-over-year ICL sales growth was led by our APAC and North America regions, while EMEA sales were up slightly on a sequential basis. Year-over-year ICL unit growth by country in the fourth quarter was as follows. In China, units up 18%. Japan, units up 33%. India, units up 19%. And the U. S. , units up 109%.

I know top of mind for many of you is the state of the market in China and our progress in the U. S. So let's begin with China. During the fourth quarter, refractive procedures, including EVO, in China were impacted by COVID, first beginning with the change in consumer behavior that STAAR called out on the November 2, 2022 earnings call. Later, protests and the lifting of the country's COVID zero policy followed. Then, a subsequent rise in COVID infections further impacted the level of refractive procedures in the fourth quarter. Against these operating backdrops, we are proud to deliver 18% ICL unit growth in China for the fourth quarter of 2022. Through the first seven weeks of the first quarter of 2023, we see encouraging signs of market stabilization, restoration, and resilience.

Weekly sales results and in-market procedural volumes in China are in line with our expectations. So while we consider it premature to declare that the China market has fully normalized, we do have greater confidence today that the market in China will further normalize as we approach the peak summer implant season for ICL procedures. The strong Evo commitments from our larger customers in China, the largest refractive market in the world, and many of the 1,200-plus surgeons in China that implant our lenses bolsters our confidence at this time that we can meet our sales outlook for the full year fiscal 2023.

Turning to the U. S. , ICL unit growth exceeded the outlook we previously provided, up 55% year-over-year in fiscal 2022 and up 109% year-over-year in the fourth quarter. We exited the fourth quarter with more than 600 surgeons certified to implant Evo lenses in the U. S. While we continue to train and certify surgeons in the U. S. , our focus for 2023 is increasing surgeon comfort, confidence, and commitment to EVO by surrounding our surgeon customers with sales, clinical, and marketing support as they work to add EVO to their practices and or transform their practices for a more lens-based refractive standard. From a marketing perspective, we're receiving positive feedback from U. S. surgeons that our marketing is raising Evo brand awareness and consumer desirability.

The data also illustrates that our marketing is having a positive impact on sales. As an example, in our targeted cities during the fourth quarter of 2022, we achieved greater sales growth where we activated advertising compared to key cities where we did not advertise. During the fourth quarter when we launched the Joe Jonas advertising campaign, we saw sales growth almost double in targeted cities where we advertised as compared to key cities where we did not advertise. Activity on our doctor finder has also increased. Doctor finder visits in the U. S. were up approximately 600% year over year in the fourth quarter.

We are also surrounding our U. S. surgeons with clinical and sales support to demonstrate the medical and economic promise of EVO, no matter the surgical setting. As many of you already know, the predominant procedure in our industry, laser vision correction, has been experiencing challenges. At the same time, increased compression and reimbursement for cataract IOLs and other ophthalmic procedures has more and more doctors showing interest in EVO. The refractive surgery industry has been looking for the next big technology. We believe it is EVO. My meetings in recent weeks with surgeon customers confirmed the growth opportunity for EVO in the U. S. In one meeting, I met with an individual surgeon increasing his commitment to EVO from 100 lenses per year to 500 plus.

In another instance, I met with a laser vision correction chain that is increasing its commitment to EVO from 500 lenses to 2,000 plus annual lenses in 2023. I am also encouraged by EVO's increasing presence in clinical papers, on podiums, and industry panels. Next week, as part of the American-European Congress of Ophthalmic Surgeons, ACOS, and their winner's symposium, STAAR's Chief Medical Officer, Dr. Scott Barnes, will participate in a panel with other key opinion leaders and speak to the benefits of EVO. The panel is titled Life After LASIK As I reflect on my first 50 days as CEO I have been able to more closely assess STAAR business people and overall strategy Our international business is well-established and will continue to show growth.

We are now uber-focused on realizing the tremendous potential that the U. S. market represents. As a direct result of STAAR's prudent fiscal management over the last several years, we are now in a position of financial strength and stability. We plan to take full advantage of STAAR's financial strength to build the U. S. market, particularly given the refractive surgery market dynamics I described earlier. To accelerate consumer awareness, surge in confidence, and EVO adoption in the U. S. , STAAR will move forward with even greater intent and purpose. In 2023, this will include investments in additional sales, practice development, and clinical applications personnel, as well as doubling our spend on EVO digital marketing campaigns. It's time. It's lens-based refractive surgeries time, which means it's EVO's time.

Patrick?

Thank you, Tom, and good afternoon, everyone. Total net sales for Q4 2022 were $64 million, consistent with our January 9th pre-announcement, as compared to net sales of $59 million in Q4 2021. The $5 million year-over-year increase in Q4 2022 net sales is attributable to a 15% or $8.1 million increase in ICL sales, partially offset by a $3.1 million decline in other products, which primarily consists of Cataract IOL. The company announced on November 2, 2022, that we will no longer support our non-core, lower-margin Cataract IOL business after 2023. ICL sales represented 96% of total company net sales in Q4 2022. U. S. sales normalized for allowance for sales reserves were $4.5 million in Q4 2022, up 94%, compared to Q4 2021 sales of $2.3 million.

Evo was approved on March 25, 2022. Therefore, the year-ago period includes both Vizion ICL and Evo ICL sales. We have posted a U. S. ICL sales supplement to our investor website under Latest Quarterly Results. For Q4 2022, reported net sales included a $3.8 million negative impact from changes in constant currency, primarily the yen and euro, and the impact of the transient headwinds in China that Tom discussed earlier. For fiscal 2022, reported net sales of $284 million include a $12.9 million negative impact for changes in constant currency, as outlined in the constant currency table in today's earning release. Our outlook for fiscal 2023 net sales is for ICL sales of approximately $340 million, representing 26% growth over fiscal 2022 ICL sales of approximately $270 million.

We anticipate the calendarization of sales in fiscal 2023 will be weighted toward the second half of the year as transient headwinds subside. As a reminder, Q1 and Q4 have historically represented our seasonally lowest quarters. We expect Q1 2023 net sales will be up sequentially from Q4 2022 and in the range of $65 million to $67 million. U. S. sales in the first quarter are expected to be approximately $5 million. which represents approximately 100% year-over-year sales growth.

Turning back to Q4, gross profit for Q4 2022 was $49.8 million, or 77.7% of net sales, as compared to gross profit of $45 million, or 76.3% of net sales for Q4 2021, and $60.5 million, or 79.5% of net sales for Q3 2022. The 140 basis point year-over-year increase in gross margin is due mainly to product and geographic mix, partially offset by increased period costs associated with manufacturing projects.

The sequential decrease in gross margin of 180 basis points from Q3 2022 is primarily due to product and geographic mix. For fiscal 2023, we expect gross margin will be approximately 80% for the full year and each quarter. Moving down the income statement, total operating expenses for Q4 2022 were up 30% year-over-year to $48.8 million as compared to $37.6 million in Q4 2021 and $46.8 million for Q3 2022. Taking a closer look at the components of operating expenses, G&A expense for Q422 was $14.8 million, compared to $11.5 million for Q4 2021, and $14 million for Q3 2022.

The year-over-year increase in G&A is due to increased compensation-related expenses, facilities costs, and outside services. The sequential increase in G&A is due to higher facility costs associated with our expanding corporate and manufacturing operations. For fiscal 2023, we expect G&A expense will be approximately 18% of net sales for the full year. For Q1 2023, we expect G&A expense will be approximately $13 million and increase slightly for each subsequent quarter.

Selling and marketing expense was $24.2 million for Q4 2022, compared to $17.1 million for Q4 2021 and $23.1 million for Q3 2022. The increase in selling and marketing expense from the prior year is due to increased advertising and promotional activities, trade shows and sales meetings, travel expenses, and compensation-related expenses. The sequential increase in selling and marketing expense from 2-3-2022 is due to increased marketing, promotion, and advertising expenses, partially offset by decreased trade shows and sales meetings. For fiscal 2023, we expect selling and marketing expenses will be approximately 38% of net sales as we make the important investments in EVO ICL patient awareness and our sales organization that Tom discussed earlier. In terms of calendarization, we expect selling and marketing expense will be approximately $30 million for Q1 2023 and $33 million each quarter thereafter.

Research and development expense was $9.8 million in Q4 2022, compared to $9.1 million for Q4 2021, and $9.6 million for Q3 2022. The year-over-year and sequential increase in R&D is due to increased expenses associated with our U. S. post-approval studies. For fiscal 2023, we expect R&D expense will be approximately 13% for the full year, which is approximately $11 million each quarter.

Operating income in Q4 2022 was $1 million or 1.5% of net sales as compared to $7.4 million or 12.5% of net sales for Q4 2021. Operating income for fiscal 2022 was $43.8 million or 15.4% of net sales as compared to $33.3 million or 14.5% of net sales for fiscal 2021. We expect operating margin for fiscal 2023 will be approximately 12%. For Q4 2022, net income was $5.9 million or 12 cents per diluted share compared to net income of $4.9 million or 10 cents per diluted share for Q4 2021. On a non-GAAP basis, adjusted net income for Q422 was $6.8 million, or $0.14 per diluted share, compared to adjusted net income of $9.5 million, or $0.19 per diluted share for Q4 2021.

A table reconciling the GAAP information to the non-GAAP information is included in today's financial release. For fiscal 2023, we expect our effective tax rate will be approximately 25 to 30%, subject to no significant change in our valuation allowance.

Turning now to our balance sheet, our cash, cash equivalents, and both short-term and long-term investments available for sale total $225.5 million as of December 30, 2022, as compared to We received $199.7 million at December 31st, 2021. In fiscal 2022, we generated $35.7 million in cash flow operations and invested $18.1 million in property and equipment. For fiscal 2023, we expect to invest approximately $26 million in property and equipment, which includes approximately $2 million of carryover capital expenditures that were planned for fiscal 2022. Our strategic investments in property and equipment are primarily to support manufacturing capacity expansion and a strong trajectory of sales growth.

This concludes our prepared remarks. Operator, we are now ready to take questions.

I wanted to start maybe with the guidance for the year and whether you guys can give us a more detailed sense, I guess, on a geographic unit growth basis as being in the Tom, thank you for the question. And, you know, as it relates to China, I think, I don't know if we would say bullish is the right word, but we certainly are confident. Our local team certainly has expressed confidence in terms of what's happening at the street level with China.

You know, we're not seeing COVID testing. There are no travel restrictions. We seeing more normal refractive procedures being done at the eye clinic So together with the confidence of our local team I think we remain confident that we can deliver on the China projections for this year as previously stated Yeah, Morgan, I think in relation to your question of the composition, nothing's materially changed, right? We gave the guidance back on early January of the $340 million. We reconfirmed that today. You heard Tom's comments just now, so we're feeling good about where we're at and where the year is shaping up at this point. But the overall composition is nothing's materially changed when we gave the original guidance.

Sure. Again, I would just say given my experience in launching products, I think a team approach makes a lot of sense in what we're doing in terms of increasing our headcount, both with sales personnel, practice development personnel, and clinical apps people, is really surrounding the customer, specifically from a practice development point of view. How do they become a lens-based refractive surgery practice? How does it get reduced into the fabric of that practice?

And, you know, we're just coming off of a practice development seminar recently held in Austin, Texas, which was well attended by practices where they learn the tools and the programs we have available to certainly drive towards that end goal. But I think, again, surrounding the customer with this team approach where clinically, marketing-wise, and sales-wise, with common management so decision-making is close to the customer is certainly a recipe that has proven successful. And, you know, we're poised for a strong year in the U. S. Thank you, Margaret. Operator, next question.

Absolutely. Absolutely.

Sure. Thank you for the question, John. Again, I think at an overarching number, we're going to increase our field infrastructure by 50%. We've already hired two or three people in Q1, and we'll continue to look to hire people throughout the first half of this year so they are productive in the back half of the year. So I would say, you know, we're looking at very experienced people, people that understand missionary-type selling as we bring them into the organization or working in practices that have a cataract refractive mindset, if you will. So I think the startup is probably a quarter, but we hope to increase our infrastructure in the first half so they are effective in the back half.

Thanks, Ken, for taking your question. I appreciate it. As I said, the first 50 days, there's been no surprises, which is the good thing. As I've thought about our strategy, our people, our business in general, I'm extremely encouraged. If anything, just bringing maybe more focus to increasing the infrastructure in the U. S. and continuing to support the infrastructure we have outside the United States. And I think there's growth potential in both those segments of our business. So nothing dramatically changed. I think just reinforcing what STAAR has said historically and maybe bringing just some added direction and focus to making sure we're putting our best foot forward in a market which today is white space. I mean the U. S. , and we're excited about what we're prepared to do here.

Thank you, John. Operator, next question. Thank you.

Hey, Anthony, it's Patrick. I'll take that since it was on my watch before Tom got here. So, as we talked about, there was about $5 million in Q4 that we took out of our Q4 number in 22. And so, as Tom said, we're feeling really good about it. You know, we always talked about it. This was transitory in nature. They weren't going out and getting any refractive procedure, right, because everything was either locked down or getting relieved and people were unfortunately getting infected. So, as Tom said, we're back on track. The in-market numbers in China are very, very encouraging for us, and so that led to, obviously, the reconfirmation of guidance once again and the comments that we made in our prepared comments.

Thanks, Anthony. Let me try to answer that. If I could predict what the FDA is going to do, I'd probably be doing something different than what I am doing. So I can't really comment on the timing of their decision. But, you know, as I've said before, it's a practice of medicine issue that I think, you know, as STAAR, we don't want to get in the middle of. But as it relates to us, I mean, let me remind you, you know, less than a year ago, you know, FDA did a careful review of EVO's clinical trial data, found it safe and effective, and granted us approval. So I don't think, you know, we're impacted by this, but the timing around when it might come out and the tailwind that potentially it could cause for us, I think is an unknown at this point in time.

Thank you, Anthony. Operator, next question.

Yeah, Zach, we haven't really given those metrics. You know, occasionally we'll talk about the majority of the lenses being below minus 10 now, and that's still the case. But I think overall, as we're in a market, we tend to see the migration down the dioptic curve, and clearly that's an area of focus for the company, not just in China, but globally. And certainly I know Tom has talked about that specifically in the U. S. , especially as we look to go forward.

Yeah, we're good on ASP. I think, you know, maybe I'll answer this in terms of the gross margin. You know, we saw a little bit of a dip in our gross margin for Q4, and I want to make sure everyone understands that that was more of a byproduct of some one-timers as we close out the year. As you heard in our prepared comments, our gross margin for 2023 is going to hit that, I guess it's maybe that magical 80% plus number in terms of gross margin as we go forward. So there should be zero concern about ASPs, the nature of our contracts, the nature of how we set stuff up. We don't get variation in pricing, and there should be no concern about gross margins in the fourth quarter.

As I said, that's sort of some one-timers as we close out the year. It was also one of our lower quarters in terms of overall revenue, and of course, you've got to absorb some of those fixed overhead costs, which did impact it. So we're in good shape overall when it comes to ASP and gross margins as we move through this year.

Thank you, Zach. Operator, next question.

It seems like guidance is implying some contraction in the first half and then kind of switches to expansion in the back half So are there any reasons why that margin improvement should continue into 24 And if so I mean should we think of the kind of 15 that implied in the back half as a good jumping off point for our 24 estimates Yeah, you know, I think, you know, we haven't obviously given 2024. We're getting our arms around 2023. At some point, we've talked about doing an analyst day, investor day, where we would provide long-term metrics. I think for now, you're on the right track. Clearly, this is a year, as Tom outlined, where we want to make some strong investments, specifically in the U. S. market.

And as we move throughout this year, then we'll see how that goes. But we're clearly one of the only companies out there that's growing at the rate that we're growing and still throwing off cash and still have a very nice operating margin profile, et cetera. So I think directionally you're okay, but I don't want to back us into a corner as of yet. But it's a very, very elegant and leverageable business model at the end of the day.

Yeah, thank you, David. Let me attempt to answer your question because I think it's a little bit of a combination of both. But as I said in our prepared remarks, our focus is certainly we'll continue to certify doctors as they come on board, but I think it's equally important for us to go deep with the customers we currently have, and that's why we're increasing our infrastructure and surrounding the customers we currently have As they continue to reduce EVO into the fabric of their practice and make that transition from being more laser vision focused to maybe lens based focus.

So a little bit of both, but clearly I think as we go deeper with the customers we currently have and really drive adoption of our procedure, you know, business will take care of itself.

Thank you, David. Operator, next question.

So I'll stick with 2023, and we're probably going to punt on 2024. But in terms of the cadence, it's consistent to what we said before, right? We said this is going to take about 18-month journey for the surgeons to get all up and running. That's really going to happen as we move into Q4 this year. We talked about approximately $5 million in Q1. We would expect to see some sequential growth as we move throughout the year with really a back-end loaded number as we approach, honestly, looking to approximately double our U. S. business from 2022 to 2023. We did provide that supplement out there, and if you look at it, we did approximately $15 million in revenue in 2022, and the doubling is consistent to some of the comments we've made previously.

Yeah, no, I'll take a crack at that, Tom, and certainly Patrick can add his comments as well. But as I've said earlier, you know, our local team is extremely confident. Our in-country or end-user demand is starting to pick up, which tells us the refractive procedures are approaching back to normal status, which continues to bolster our confidence in our ability for the China team to meet their goals for this year. So, you know, we're very confident and very excited about what China is going to be as part of our overall business this year.

Yeah, and I think it's a good reminder. We talked about this as well in the past that in our Chinese market, we've got 65-ish STAAR employees on the ground that Tom referred to. And we have a very rigorous forecasting cadence around globally. But specifically in China, we know exactly what's being sold in the end market, as Tom said. And so that gives us further confidence in terms of reorders and everything else when it comes to China. And we'll end up not only this quarter as we move throughout the year.

Yeah, so I'll come back to the guidance, right, and the $340 million and the composition of it, Brian. You know, I think Tom made a comment that, you know, we have over 1,200 individual physicians out there in China right now. And so, you know, on top of that, I know that there was some work done on dock finders and things of that nature. There's not always a one-to-one ratio between accounts and physicians. And as I said in my question before, we've got very good visibility in the end markets. We know exactly what's happening by procedure, by account. And so, you know, the question around, and I think you used the word pockets or maybe a pause or something like that, we're just not seeing it.

So, you know, I just come back to you, we feel good about the guidance we gave. We reconfirmed it today, and China's doing very well as part of our prepared comments.

Ryan, let me try to address your price issue as it relates to the U. S. I think the old adage holds true even in this case. If you sell on price, you can lose on price.

And price is a non-factor in terms of our growth strategy in the U. S. And then on the R&D side, Ryan, it does include other stuff besides just sort of what people think of traditional R&D. We've got clinical in there. We're still doing the post-follow-up on the original supplement of the TMA, right? It's a three-year follow-up. We did have a second part of that study we had to do related to IOP. But we've also got quality in there and other things. So, you know, we just want to make sure that we're supporting the organization. As Tom talked about, one of the big things is clinical, and we want to make sure we have a strong podium presence, etc. And, you know, we feel good about that number.

We'll see how it trends as we move throughout the year.

I would like to turn the call back over to Tom Frenzy. That concludes our call. I want to thank everyone for joining us today. Please reach out to Investor Relations with any questions you may have. Thank you.