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Iradimed (NASDAQ:IRMD)
Q3 2019 Earnings Call
Oct 30, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by. Welcome to IRADIMED Corporation third-quarter 2019 financial results conference call. [Operator instructions] As a reminder, this conference call is being recorded today, October 30, 2019, and contains time-sensitive information that is accurate only as of today. Earlier, IRADIMED released financial results for the third-quarter 2019.

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 to 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 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 up the call 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 future results may differ materially from 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 for free from the SEC 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?

Leslie McDonnell -- President and Chief Executive Officer

Thank you, and good morning, everyone. Since this my first opportunity as the new CEO to present IRADIMED's performance results, I thought I would also spend a few moments telling you a little bit about my background and why I'm so excited being a part of IRADIMED and share a few of my initial thoughts after being on the job for about 10 weeks. I first would like to complement Roger Susi and the team for building and growing a truly outstanding business. I believe it is no exaggeration to say to IRADIMED's products are recognized for their critical value in improving patient care.

Everyone at IRADIMED should be proud of the work we do here every day. Now a little about my background. I come to IRADIMED after holding senior and executive positions of public companies in healthcare for over 20 years. Most recently, I was an officer and general manager at Natus Medical and was at Medtronic and 3M Healthcare before that.

I served in roles ranging from corporate M&A, to therapy and product development, to marketing, and to business and operations management. I have learned much and carry with me the knowledge of best practices, team development, strategy and process from companies among the most respected in med tech. With all this, I'm confident in my abilities to lead IRADIMED into the future. Now since joining IRADIMED, I have had opportunity to interact with a few of you.

One common question was why I chose to join IRADIMED. So let me address that question now for everyone. As I studied the company, a few particularly compelling things struck me. First, IRADIMED has developed novel technologies to solve very real challenges in providing high levels of patient care during MRI procedures.

The devices IRADIMED developed to date and those in our pipeline facilitate a far higher standard of care for patients who otherwise would be exposed to excessive and unnecessary risk while undergoing an MRI scan. Our products allow patients to receive the same high level of care in the MRI as they routinely receive everywhere else in the hospital. Second, IRADIMED has a strong track record of growth and profitability, which is extremely rare for a company this size. In my view, a large part of the financial success IRADIMED enjoys stems from the product development process, which is accomplished with manufacturability in mind.

This leads to higher gross margins and fees with sustainable profitability. Finally, I believe that IRADIMED has tremendous potential and scalability as we leverage the strength of our current product set and deep knowledge of how to overcome the challenges of the MRI environment. We work everyday at applying our novel technologies and understanding of how to overcome the challenges the MRI presents and plan to continue to do so. It is our technology and knowledge that is at the core of our current and future pipeline of products.

There are many other reasons that played into my decision to accept this role, but those I've just laid out capture the essence of why I'm excited to be part of the IRADIMED team. Now since joining in mid-August, I've been meeting with my team and absorbing as much as possible about this company and our culture. I have also traveled to meet with numerous customers to gain an understanding of IRADIMED and our products through their eyes. My initial thoughts are very positive, and I look forward to continuing our collective transition.

Through this early work with the teams, we have made a few changes to priorities and how we think about our structure and staffing. Some of these will be more evident to you than others. For instance, one of the more significant priority order changes is to delay the launch of the Ferro-magnetic Detection System until the second half of next year. Instead, we will spend this time wrapping up several smaller projects that are currently in different phases of development.

Concluding the work on these other projects will make room for a much cleaner path to work on larger projects. I have also spent much time learning and thinking about our processes, systems and staffing levels. My conclusion is that to maintain and accelerate the already healthy growth trajectory at IRADIMED, we need to make sensible supportive investments. Through my work with the team thus far, we have identified several needed investments in our IT systems and staffing in our regulatory and engineering areas.

We plan to be thoughtful about how we act in these areas, ensuring the right amount of investment is being made at the right time and always with an eye toward the financial impact of these decisions. Now I will move on to summarize the events of the third quarter. I am very happy to report third-quarter revenue of $10 million, which is nearly a 31% increase over the third quarter last year and up 8% sequentially. GAAP net income was $0.20 per diluted share for the third quarter in both 2019 and 2018, which is very positive when considering the $900,000 tax benefit in last year's quarter.

These strong financial results are due to the diligence and work ethic of the entire IRADIMED team, and validate the reasons why I'm excited about the future. Now from a functional area perspective, all the teams continue to perform well and has been very helpful during my transition, as well as adjusting to that transition. From a regulatory perspective, one of the bigger events to occur came just after the end of the quarter with the resolution of the warning letter. This was obviously a big relief for all who have spent countless hours working toward its resolution.

This resolution also derisks the company as it relates to that action. With the warning letter now completely behind us, we continue actively working toward regaining the CE Mark for our patient vital signs monitor. The dialogue with our notified body is frequent and positive, leading us to believe that a Q4 resolution is probable. We remain positive on this matter and are doing as much as we can to ensure our notified body has the information it needs to conclude as quickly as possible in our favor.

Until then, we continue to hold on to customer orders that we anticipate shipping immediately upon regaining the CE Mark. As explained on previous calls, only shipments of the 3880 into EU countries are being held by this lapse in CE marking. Additionally, this is not due to safety concerns and this does not impact the patient monitors that are already in the field. Now on to engineering.

As I mentioned earlier, we are revising our development priorities, focusing our near-term efforts on wrapping up the smaller projects and enhancements, as well as continuing the development of the next-generation IV pump. With the cleaner development slate, we expect to be much more effective in all of our development efforts going forward. Related to the next-generation IV pump, this remains our priority, and we continue our development efforts. Now I will quickly summarize our financial guidance for the full-year and the fourth-quarter 2019.

For the full-year 2019, we updated our guidance to reflect actual to date and the movement of the FMD from the fourth quarter until later in 2020. After considering these items, we now expect to report full-year 2019 revenue of $38.5 million to $38.7 million, GAAP diluted earnings per share of $0.69 to $0.71, and non-GAAP diluted earnings per share of $0.75 to $0.77. This range compares to our previous guidance of $38.5 million to $39.5 million of revenue, GAAP diluted earnings per share of $0.65 to $0.69, and non-GAAP diluted earnings per share of $0.70 to $0.74. As stated in our release this morning, costs associated with the CEO transition are expected to negatively impact full-year GAAP diluted earnings by $0.04 per share and non-GAAP diluted earnings by $0.01 per share.

For the fourth-quarter 2019, we expect revenue of $10.8 million to $11.1 million, GAAP earnings per share of $0.17 to $0.19, and non-GAAP diluted earnings per share of $0.19 to $0.21. Costs associated with the CEO transition are expected to negatively impact fourth quarter, GAAP diluted earnings per share by $0.03, and non-GAAP diluted earnings by $0.01. I will now turn the call over to Brent for a discussion of the sales organization.

Brent Johnson -- Executive Vice President of Worldwide Sales and Marketing

Thank you, Leslie, and good morning, everyone. As Leslie mentioned in her remarks, the third quarter was another good booking quarter for our sales team with a strong overall year-over-year increase in total worldwide orders. Our U.S. sales team continued our record of growth with another big quarter of increasing year-over-year IV pump orders, and we are significantly ahead of where we were last year-to-date in both multipump orders and dual-pump orders.

As we've talked about previously, these multipump and dual-pump sales are an important indicator of the success of our critical care strategy and shows how this effort drives not only the increased demand for IV pumps, but also drive demand for increased pump channels as well. Our critical care strategy has been fully adopted by our sales team, and we expect to see continued growth in this area of our business, especially as the tenure of our fast growing sales team increases. On the monitoring side of the business, our domestic sales team had another good year-over-year increase for third quarter. And on top of that, we had our best quarter ever with putting new monitor opportunity into our sales pipeline.

The small size of our nonmagnetic patient monitor and the workflow advantages that it offers over the large 100-pound cart-based systems in the market is really resonating with our customers and changing the way they look at managing their anesthetized and critical-care MRI patients. Our U.S. sales team is also continuing to gain experience with the monitor for better success when we go head-to-head on competitive deals. We continue to have success in getting our MRI monitor on contract with national group purchasing organizations and with integrated health delivery systems in the U.S.

We are in the final stages of signing an agreement for our monitor with the largest GPO in the nation, which will give our salespeople an opportunity to compete on equal footing for the monitor business with their member hospitals. We also are in continued talks with a number of large IDNs about sole-source and dual-source agreements, which has already produced an exclusive sole-source agreement with one of the largest IDN on the West Coast that we announced last quarter. Our international sales team continued with another solid performance for the quarter, especially in light of the continuing regulatory issues around our ability to sell the MRI patient monitor to EU countries that rely on the CE Mark. We have done our best to keep our EU team encouraged and engaged with the monitor while we push forward with the regulatory process, and we continue to receive orders from these customers that we plan to ship as soon as we are able to get the CE Mark on the product again.

On a very positive note, even in light of the issues restricting our CE shipments, international patient monitoring orders are up significantly year over year, showing the strength of the monitor in the international markets. We continued with our U.S. sales team expansion in the third quarter with one additional hire and two additional hires already made in the fourth quarter, for a total now of 29 salespeople deployed in the field. During the third quarter, we also promoted one of our area directors to the newly created position of U.S.

Director of Sales, to lead our continued emphasis on this growing domestic market. The new position oversees the four area sales directors who are continuing to focus their efforts on training our new sales managers and helping accelerate their learning process. Our demonstrated success in translating these additional sales hires into increased sales with our current product offering, gives us the confidence that this strategy will continue to deliver sales growth in future quarters. Now I'll turn it over to Chris to summarize financial results.

Christopher Scott -- Chief Financial Officer

Good morning, everyone. Today, 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 the 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 Leslie stated a moment ago, revenue increased 30.8% over the third quarter last year.

Once again this quarter, the increase in revenue was driven by healthy growth across all line items. Revenue from devices for the current quarter was $7.3 million compared to $5.4 million for the third quarter 2018, a 37% increase. Included in revenue from devices for the current quarter is $2.6 million in sales of our 3880 MRI compatible patient vital signs monitoring systems compared to $1.7 million for the 2018 quarter, a 49.1% increase. Revenue from disposables and services was $2.2 million for the 2019 quarter compared to $1.9 million for the 2018 quarter, a 15.4% increase.

And lastly, revenue from the amortization of our extended maintenance contracts was $500,000, a 21.4% increase over the third quarter last year. Domestic revenue was $8.3 million for the current quarter compared to $6.1 million for the 2018 quarter, a 35.8% increase. Revenue from international sales, which again were impacted by the CE Mark, were 7 -- $1.7 million for the third quarter 2019 compared to $1.5 million for the 2018 quarter. The average selling price of IV pumps recognized in revenue during the current quarter was approximately $35,100, compared to approximately $31,800 for the 2018 quarter.

The increase in ASP is the result of a favorable geographic and product sales mix when compared to the 2018 quarter. ASP for our patient vital signs monitoring systems approximately $33,700 for the third-quarter 2019 and approximately $37,900 for the 2018 quarter. The decrease in ASP is due to an unfavorable geographic sales mix when compared to the 2018 quarter. Gross margin was 78.2% for the 2019 quarter and 76% for the 2018 quarter.

The increase in gross margin percent is again the result of a favorable geographic sales mix. Operating expenses for the third-quarter 2019 were $5.3 million or 53% of revenue, compared to $4.3 million or 57% of revenue for the third quarter 2018. On a dollar basis, operating expenses increased due to higher expenses for payroll and benefits, sales commissions, regulatory approvals and legal and professional fees. Our effective tax rate for the 2019 quarter was 6.6%, compared to a negative 61% for the 2018 quarter.

The higher effective tax rate is primarily due to lower tax windfalls associated with the exercise of employee incentive stock options during the current quarter. On a GAAP basis, net income was $0.20 per diluted share for the third quarter of 2019 and 2018. On a non-GAAP basis, net income was $0.23 per diluted share for the current quarter, compared to $0.14 per diluted share for the third quarter last year. From a cash flow perspective, for the nine months ended September 30, 2019, cash provided by operations was $6.3 million, compared to $3.8 million for the same nine-month period last year.

This is primarily the result of higher net income, higher cash inflows related to deferred revenue and lower outflows related to income taxes, partially offset by lower cash inflows from accounts receivable and higher cash outflows for the purchases of inventory. For the three months ended September 30, 2019, and 2018, our free cash flow, a non-GAAP measure, was $3.1 million and $0.7 million, respectively. As of September 30, 2019, we had $42.6 million of cash, cash equivalents and investments. I'll now turn the call over for questions.

Maine?

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Scott Henry of ROTH Capital. Your line is open.

Scott Henry -- ROTH Capital Partners -- Analyst

Thank you, and good morning. Just a couple of questions. I guess, first on the pipeline side, I think you mentioned that the FMD got pushed into 2020 from late 2019. What was the driver for that?

Leslie McDonnell -- President and Chief Executive Officer

Scott, this is Leslie. As I have mentioned in my remarks, the main drivers for that were we really wanted to focus on some near-term projects and cleaning the slate in the product development process so we could focus on our highest priorities. We think that will yield a higher benefit for us later on. And also, we want to make sure we get the product right and that it meets customer needs.

So those were the main drivers.

Scott Henry -- ROTH Capital Partners -- Analyst

OK. And then staying on the pipeline, on the next-generation pump, what are the next inflection points that we should be thinking about in terms of gauging progress of that?

Christopher Scott -- Chief Financial Officer

I think we're at a point now, Scott, with the development of that, where we've got some things left to do on the engineering side. We suspect that we'll be very close to running through our validation procedures and testing, initial testing steps in the very early part of next year. It'll take us a few months to work through that and iterate. And then by, I suspect, last I've heard is toward the middle to the end of next summer, we'll be in a position where we can file a 510(k).

And then, of course, after that, you're really subject to timelines of the FDA and the progress that they can make.

Scott Henry -- ROTH Capital Partners -- Analyst

OK, great. And then just a couple of questions on the model. I think you mentioned that -- the monitor sales in general look pretty good in the quarter. And I think you mentioned that it was driven by international.

And my question is, so where are those monitors being sold if there's -- are there other countries in the EU that are not impacted? Or is it non-EU international? Just trying to gauge where that strength is coming from.

Brent Johnson -- Executive Vice President of Worldwide Sales and Marketing

Scott, this is Brent Johnson. The first thing I'd say is that, again, we had a good quarter, both domestically and international. I was pointing out in the remarks that international has -- is having a very strong year-over-year increase, even in light of not being able to ship to the EU countries, the CE Mark countries. And yes, we are selling outside of that area.

We have a number of large markets in the Asia Pacific area, Middle East, and in Canada, Mexico, Latin America. So again, we are selling that worldwide. We do have a pretty good reach with having over 50 distributors worldwide that sell the product. You're right, we haven't been able to sell it in the -- excuse me, delivered in the EU.

But we, again, have that strong order demand from the rest of the world.

Scott Henry -- ROTH Capital Partners -- Analyst

OK, great. Final question, for Chris. Just with regards to the tax rate, it seems to bounce around a little bit from quarter to quarter. What should we think about as kind of a sustainable tax rate for you? I think in the past -- I think you said 25%, 26%.

But I just wanted to confirm that.

Christopher Scott -- Chief Financial Officer

Yeah, Scott. I mean, I generally model at those levels that you mentioned there. It's quite difficult, especially given changes in the tax law, changes in some of the accounting around how tax benefits associated with stock options are recognized and where they're recognized. And that's created some complexity in trying to estimate a more precise tax rate.

So my approach here is to just kind of fall back on what I think a more normalized fed rate that's been impacted for state taxes looks like. And that gets me to around that 25% level.

Scott Henry -- ROTH Capital Partners -- Analyst

OK, great. Thank you for taking the questions.

Christopher Scott -- Chief Financial Officer

Thanks, Scott.

Operator

Our next question comes from Lisa Springer of Singular Research. Your line is open.

Lisa Springer -- Singular Research -- Analyst

Good morning, and congratulations on another strong quarter. I wanted to ask you, so the U.S. was a higher percentage of total sales this year versus last year. Do you expect that trend to continue in the fourth quarter? And if so, how should we think about fourth quarter gross margins in view of that?

Christopher Scott -- Chief Financial Officer

Yeah, Lisa, the sales mix generally runs somewhere around 80% domestic and international, and we're always within a few percentage points of that. But that change does impact gross margins and ASPs that we have outlined. So I suspect that the fourth quarter will remain within that sort of 80% plus or minus type range. It could be international plays a little bit stronger in the fourth quarter depending on the resolution of the CE Mark, which we didn't have a downward -- that we put downward pressure on gross margin.

But I think within -- even with the resolution of that, we'd still be within that 80% plus or minus type of a range for domestic sales.

Lisa Springer -- Singular Research -- Analyst

OK. And then I don't know if you have this information readily available, but do you have unit sales year-to-date for the vital signs monitor versus the IV pump?

Christopher Scott -- Chief Financial Officer

We do. We typically don't talk about that during the quarters. So I think more to follow at the end of the year when we file our annual report.

Lisa Springer -- Singular Research -- Analyst

OK. And also, in the press release, Leslie's comments, you mentioned about being opportunistic around identifying and investing in other technologies. That, to me, kind of suggests there might be M&A somewhere in the -- in your thinking. I was wondering if that's correct, and if so, what would be your criteria for M&A?

Christopher Scott -- Chief Financial Officer

Lisa, Chris here again. M&A is something that we've always had on our minds. It's something that was really played into the decision on going through the IPO process and raising some cash. So even dating back to the very beginning.

It is something that we do think about. We have looked at a few things over the years. Never got completely comfortable, but this is -- I think we've got a fairly healthy balance sheet. And we are -- we remain to look -- we remain active in looking for those types of opportunities and just don't want to ignore that aspect of business.

So something that we continue to remain aware and look for the opportunities that arise, would be something medical device-related, MRI-focused that's already commercialized and something that we think we could leverage our sales force and other distribution channels to accelerate some growth there. So a lot of things to talk about related -- or a lot of thoughts on how we consider M&A, but I think those are the highlights.

Lisa Springer -- Singular Research -- Analyst

OK. Thank you, Chris.

Operator

[Operator instructions] I am showing no further questions at this time. I would now like to turn the conference back to Ms. Leslie McDonnell.

Leslie McDonnell -- President and Chief Executive Officer

I would like to thank everyone for listening and participating in this call. Once again, I'm very excited to be here and to be part of this continuing growth story. I look forward to continuing my transition and further developing plans on how best to leverage our technology, new product pipeline and commercial footprint, all with the goal of creating significant value in the coming years. Thank you, again, and we look forward to speaking with you in early February as we report our fourth-quarter and full-year results.

Christopher Scott -- Chief Financial Officer

Thank you, everyone.

Leslie McDonnell -- President and Chief Executive Officer

Thank you.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Leslie McDonnell -- President and Chief Executive Officer

Brent Johnson -- Executive Vice President of Worldwide Sales and Marketing

Christopher Scott -- Chief Financial Officer

Scott Henry -- ROTH Capital Partners -- Analyst

Lisa Springer -- Singular Research -- Analyst

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