Daily Double
November 15, 1999

VISX Inc.

(Nasdaq: VISX)
Phone: 408-733-2020
Website: http://www.visx.com
Price (11/12/99): $73 7/16

By Barbara Eisner Bayer (TMF Venus)

How Did it Double?

VISX has been on an eye-popping tear since its Daily Double debut in April 1998, meriting rocketship status by blasting through 11 consecutive profitable quarters. The performance of its stock has been as miraculous as the 20/20 vision its technology brings to the eyes. In 1998, investors saw their VISX stock rise 295%. So far this year, the stock is up more than 205%, even though it is down considerably from its July highs.

In the first two quarters of 1999, VISX smashed all analyst expectations, sending the stock price into the stratosphere. In the most recent third quarter, it reported an annual procedure growth rate of 123%. Sequential procedure growth was an impressive 6%, although it underperformed analysts' hoped-for estimates of 8%, and caused the stock to fall back. Even the big news -- that it placed 90 lasers in the third quarter, beating analysts' expectations of 80 -- couldn't prop up the stock. But more lasers placed means more procedures ultimately to be performed, which translates into more future revenues.

Revenues for Q3 were $79.7 million, up more than 120% from last year's $35.8 million figure in the thrid quarter. Key profitability measures were also upbeat: Gross margins improved to 78.1% from 77.2%, while operating margins were 48.1%, up from 44.2% a year ago.

Approximately 157 million Americans, who already spend $13 billion a year on vision correction, could benefit from laser surgery. The market is just beginning to be tapped.

Business Description

VISX manufactures the STAR laser, which uses a laser beam of cool light to gently reshape the cornea to effectively treat nearsightedness, astigmatism, and farsightedness. The product provides three distinct revenues sources: 1) worldwide sales of lasers; 2) service and parts sales; and 3) licensing of procedures and equipment.

VISX's potentially dazzling future comes from the outlook for revenues generated from per procedure license fees for the use of their proprietary technology. A unique "VisionKey card" must be used each time the procedure is performed, so that when the eyes have it, so does VISX -- a $250 royalty, that is.

Financial Facts

Income Statement
12-month sales: $238.1 million
12-month income: $83.2 million*
12-month EPS: $1.23*
Profit Margin: 34.9%
Market Cap: $5045.2 million
(*Includes non-recurring items)

Balance Sheet
Cash: $77.6 million
Current Assets: $310.4 million
Current Liabilities: $50.5 million
Long-term Debt: None

Ratios
Price-to-earnings: 59.7
Price-to-sales: 21.2

How Could You Have Found This Double?

Laser surgery is all the buzz, as satisfied celebrity customers like Tiger Woods, Greg Maddux, and Courtney Cox spread the word. Or perhaps you've already personally encountered one of the satisfied recipients of the procedure: 400,000 performed in 1998 and an anticipated 900,000 this year. That number is expected to grow to 1.3 million in 2000. So the word is out about the benefits of laser eye surgery.

Stock split worshippers might have noticed VISX popping up on their radar, as the zooming stock price propelled it to two stock splits in 1999.

Where to From Here?

1999 revenues are on track to increase more than 100% from 1998 as laser vision correction becomes as common a procedure as braces or cosmetic surgery. Continued strong sales of the STAR laser should result in explosive growth in procedures, which in turn will result in a continued increase in VISX's revenues. Analysts estimate earnings growth to be upwards of 30%, always noting that this is a very conservative number.

However, there are two potential dark spots that could erase the gleam from VISX's eye -- competition and litigation.

Competition has always been a reality in this business, with Summit (Nasdaq: BEAM), Bausch & Lomb (NYSE: BOL), KeraVision (Nasdaq: KERA) and Nidek breathing relentlessly down VISX's back. VISX machines have been performing 75-80% of the procedures, even with an installed base of only 60% of the laser machines in use. Thus, VISX machines get more of a workout than their competitors. And with the recent announcement of its partnership with 20/10 Perfect Vision of Germany, a company that specializes in Wavefront technology, VISX will stay on the cutting edge of new developments in the laser field.

The companyy is involved in litigation that has been blamed for the stock price's recent fall to earth. VISX is seeking an order from the International Trade Commission (ITC) prohibiting the importation, sale, and services of the Nidek laser system in the United States. The initial determination is expected on December 1st, and the stock is pretty much in a holding pattern until then. If VISX wins it would be a significant positive for the stock. If it loses, not much will change, except that Nidek will be able to sell its machines in the U.S. VISX, however, will continue to sue doctors who use Nidek. Other lawsuits, including some legal black eyes with the FTC and various antitrust cases, will continue to be litigated over the next several years.

Many of those knowledgeable believe that VISX will prevail in these lawsuits, but nothing is guaranteed. Still, through the advertising campaign started this past July and continued positive word of mouth, VISX should continue its stellar returns in the upcoming years.

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