Elle Investments Research Report: IRIX

 

Company: IRIDEX Corporation

Symbol: IRIX

Analysis Date: 10/2/18 – UPDATE: 8/7/20

Analysis Price: $2.35

Price Target (PT): $4.75

Upside: 102%

Dividend: NA

Recommendation: Buy

 

IRIX: 1-Year Chart

Source: Seeking Alpha

INVESTMENT THESIS:

Our original Buy recommendation for IRIX did not work out. Adoption of their new CYCLO G6 glaucoma laser system has been slower than anticipated, but we aren’t ready to throw in the towel just yet. We think the marketing shift away from emphasizing increasing the install base towards increasing probe utilization is a good move, and the aggressive cost-cutting shows that management is making a good-faith effort at preserving what shareholder value is left. The investment is requiring more patience than anticipated, but we still think IRIX is a Buy.

 

LIQUIDITY POSITION: Fair

IRIX announced 2Q20 results on August 6 after the market closed. As of June 30, the cash balance stood at $11.6M. Over the past few quarters (even before COVID-19), expense management has been superb. During 4Q18, their total operating expenses ("OpEx") were $7.6M. For this past quarter, OpEx was down to $5.2M. On the earnings call, management made clear that there would be some “snap-back” once travel and tradeshows resume. However, the new normal OpEx level will be about $5.2M to $6M for at least a few quarters.

The change in net cash for this past quarter was +$500k, but the quarter was positively influenced by the receipt of $2.5M in PPP loans. During 1Q20, the cash burn was $1.6M. We expect the quarterly cash burn to be somewhere between $2M and $3M, which is a very big improvement considering where it was at the beginning of 2018. It’s very probable that they will need another round of dilutive financing, but we like the fact that management has been hyper-focused on prudent cash usage.

COMMERCIAL PROSPECTS: Fair

IRIX is a small medtech company that operates in one segment: ophthalmology. Their laser-based products can be divided into two categories: legacy systems and CYCLO G6 systems.

Legacy Laser Systems

 

The legacy laser systems are used to treat various retinal diseases and continue to bring in about $30M per year. This part of the thesis has played out and remains unchanged.

CYCLO G6 Laser Systems

 

The other half of our thesis depended on the new CYCLO G6 glaucoma laser system seeing a continued ramp-up in the installed base, along with a corresponding increase in probe utilization. This would lead to a nice recurring revenue stream and put IRIX on its way to reaching management’s long-term revenue target of $100M.

Unfortunately, sales of G6 laser systems and probes have not increased as hoped for. Total company sales for 2019 were only $43M, so the revenue target of $100M looks very out of reach right now.

During 2H19, they decided on a shift in the commercial strategy for the G6 platform. They had previously been offering bulk discounts in order to increase the install base of the G6 laser systems. Instead, they have shifted the focus on increasing the probe utilization rates of the systems that had already been purchased.

For 1Q20, only 38 G6 laser systems were shipped, down from 107 in the prior quarter. Some of the decline was due to the COVID-19 panic, which hit towards the end of the quarter. But the majority of the drop was because of this change in the marketing strategy.

Previous guidance for 2020 was withdrawn and they are not yet ready to issue new guidance. They did say that they have seen a rebound in G6 probe shipments starting in May. Also on the earnings call, they said that the positive trends continued through June and July. They have also converted all US customers (and over half of the international customers) onto the newly revised probe, which is supposed to be easier to use and should help physicians achieve more consistent results.

Also on the earnings call, management did say that the early adopters have seen an increase in their confidence levels with the new probe. This is purely anecdotal evidence of increased utilization at this point, and it will take another quarter or two before we are able to see it in the data.

We agree with management’s strategy to focus on increased utilization, and are willing to give them more time to execute before deciding that this investment has been a failure.

CONCLUSION:

With IRIX having come down so much since our first Buy rating, we felt that it was time to either double down or cut our losses. We agree with the shift in commercial strategy to focus on increasing G6 probe utilization, and we are somewhat reassured by management’s sharp focus on prudent cash usage. This investment is taking longer than we expected to play out, but we are still willing to wait. We think IRIX is a Buy.

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Published By: Elle Investments Research Team

Phone: (914) 715-8066

Email: info@elle-investments.com

Disclaimer: The Elle Investments portfolio is managed utilizing a “quantamental” approach where each position, while based on Fundamental Analysis, is sized as part of a larger quantitative portfolio. The commentary presented here is for research purposes only and is not to be taken as investment advice. Readers are expected to perform their own due diligence and/or hire an investment professional prior to entering/exiting positions. Published research ideas are related to the specific market price and publicly available information at the time of research submission/publication. Elle Investments will enter/exit positions without notice.