VISX Keeps On Burnin' (Fool Plate Special) October 14, 1999

An Investment Opinion

VISX Keeps On Burnin'

By Dave Marino-Nachison (TMF Braden)
October 14, 1999

Laser vision correction systems designer VISX Inc. (Nasdaq: VISX) continued its impressive earnings momentum with last night's announcement of third-quarter results that, at $0.36 per share, beat last year's mark of $0.22 and came in two pennies better than First Call's consensus expectation.

Revenues for Q3 were $79.7 million, up more than 120% from last year's $35.8 million figure. Key profitability measures were upbeat: Gross margins improved to 78.1% from 77.2%, while operating margins were 48.1%, up from 44.2% a year ago. VISX boosted its cash hoard by $36.6 million to $225.9 million during the quarter.

VISX watchers shouldn't just concentrate on the big numbers, though, but pore over the company's revenue breakdown of system sales and license, service, and other revenues. As explained in a September Foolish Duel over VISX's prospects, the company not only sells and leases its laser treatment systems to physicians, but collects incremental revenues from each procedure performed through its "VisionKey card" that must be used to operate the machines.

It's the per-procedure revenue VISX is counting on to drive high-margin growth in the future as more and more of the millions and millions of corrective-eyewear-sporting Americans decide to opt for their procedure. "Because VISX grows as a result of increased procedure volume at our customers' sites," said Chairman and CEO Mark Logan in a statement, "this model aligns our clinical and financial incentives with those of our customers and the consumer."

By this measure, Q3 growth was even more impressive. While system sales revenue rose 91.4% to $23.3 million, license, sales, and other revenue (which covers the per-procedure fees and other items) jumped 138.1% to $56.3 million. Also notable is that license, service, and other revenue accounted for a larger proportion of VISX's total topline than it did a year ago, reaching 70.7%. In 1998's Q3, it was 66%.

Considering that laser shipments actually constrain margins in the short term -- and VISX shipped 90 in Q3 -- the company's profitability upside looks borderline exponential. The company's market size is estimated at more than 150 million potential patients and VISX has only performed 1 million operations. There's definitely more room to grow.

Logan was given an opportunity to crow on CNBC's "Squawk Box" this morning, and he took it.

"We are going to grow very rapidly," he said. "It's been about 100% a year in terms of the procedure growth year-to-year. I think we can continue that for a while. Then the percents get a little ridiculous, in terms of the numbers, but we've got such a big market here. And a lot of people are just becoming aware."

With VISX's impressive momentum, execution, and leading market position, the future looks bright; so bright, investors might wanna wear shades. Preferably -- to VISX -- shades without corrective lenses.

Related Links:
VISX Web Page
VISX Message Board
• Dueling Fools, 9/15/99: VISX
• Fool Plate Special, 7/16/99: Clear Vision at VISX