All right. We're gonna kick things off with the first Fireside Chat we're hosting today with STAAR Surgical. With us, we have Patrick Williams, the CFO, as well as Brian, Head of IR. Thank you both for being here with us this morning. We appreciate it.
Thank you.
Good morning. Thanks for having us.
Maybe before we get into some more specific questions, I think, there's likely a few folks in the room who maybe are less familiar with the story. So I think it'd be good to start off with a more general overview of the business, what the EVO lens is, and then from a high level, maybe some of your strategic priorities.
Sure. Absolutely. Well, thanks for having us. Good out, to be out here, nice weather. We did put out our Q3 deck on our investor relations website, so encourage everyone to go there and check it out, and you'll learn a lot more about STAAR. The way to think about it is we treat myopia, which is basically poor distance vision. And so we have a product, which you mentioned, called EVO, E-V-O, and think of this as an alternative to LASIK. And I can go through some of the benefits and the pros and cons related to EVO versus LASIK. We have been. It's an interesting company. We've actually been around for almost 40 years, but we really have had revenue, meaningful revenue, I would say, over the last 3-5 years.
We're a bit of a 40-year startup, is how we think of ourselves. From that standpoint, you should think of this as a permanent contact lens. It is a PMA device, so a very high barrier to entry in order to get through a regulatory pathway. We just recently got approval for what we'll call our second generation, which is the EVO device in the United States back in 2022. What people don't understand, 'cause it's a U.S.-based company, but about 95% of our revenues are outside the United States, primarily in Asia Pacific, driven primarily by China. In fact, we have implanted or sold about 2.5 million of these lenses worldwide. About one in every five eyes in China that has done a refractive procedure is EVO.
That's a fact that people, once again, based in the U.S., talking to U.S. investors, they don't appreciate just the penetration that we have in other parts of the world and the fact that we have been around for quite some time. In terms of the technology itself, I'm a LASIK person. I got it about 15 years ago, so I can speak pretty clearly about some of the benefits of LASIK. LASIK's a great procedure. You walk in, you walk out without contacts and glasses. Exactly what you asked for, right? You walk out with 20/20, exactly what you asked for. But the issues and how EVO is different is what is your post-op or post-procedure optionality, flexibility, life like? What happens is, degrees of myopia are different.
So if you are a minus 2 or minus 3, you may not even know yet that you really have distance issues. You start squinting a little bit more, you can't read the board in the back of the room, you can't see the presentation. As you start advancing and your myopia gets worse, then you start saying, "I need glasses." And you start hitting that minus 4, minus 5, which is where I was, and you decide: Look, I can't see. I can't function on a day-to-day basis without having my glasses or contacts in. And that's when people start deciding, perhaps I want to get Visual Freedom , as we call it, and free myself of that.
And so how we're different is, instead of being a cornea-based procedure, which is what LASIK is, which actually removes tissue, it removes tissue in order to create a refractive correction. And when you do that, you're cutting nerves, you're flattening out the cornea, and that creates some other issues. Especially the higher myopia you are, which means the more tissue you have to remove, you're going to increase the severity and the frequency of such things as dry eye. You're going to increase the severity and frequency of such things as poor night vision.
And the other thing is, the higher myopia you are, and as we now have seen, people like myself that had LASIK 15, 20, 25 years ago, you may need a touch-up because when you damage the cornea, your body is constantly trying to heal that. And so, for instance, for me, I was about a -4.5, -5, depending on which eye, and my dominant eye now, my right eye, is about a -1, -1.5. I can still function without glasses, but from a distance standpoint, things are getting a little blurry as I look to the gentleman in the back of the room. And so that's another thing that people didn't appreciate when LASIK first came out, as I said, about 30 years ago. The unique thing about our product is we're additive. We don't remove tissue.
And so what we do is we insert in the posterior chamber of the eye, right behind the iris, basically looks like a rectangular contact lens. Once again, you can go to the website and learn more about it. It's meant to be permanent. It's an amazing product. It lives harmoniously within the eye and all those things that I just mentioned. You don't have instances of dry eye. Your night vision is crystal clear. A lot of doctors and patients would describe it as, think of your high-def TV that might be 1080, and then the 4K TVs come out. They're still great TVs to look at, but you can tell a difference in the 4K.
So what we talk about is the quantity of visual acuity, the quality of visual acuity is much better with EVO. And importantly to me, the device is able to be removed if you need it to be. So one of the things that a lot of people are concerned about when they think about getting a refractive procedure, or those that have chosen not to get a refractive procedure, such as LASIK, which is a household name, is the fear. They're concerned about, "I, I'm worried, what if it doesn't work?" A lot of that is unfounded, of course. It is, it's just fear of people because their eyes are very important to them.
But with our product, what we can guarantee, essentially, is that, well, if it goes in and for whatever reason you don't like it, then you can remove it, and you're back to square one. The reality is, people don't remove it. In fact, we don't know of a single case where someone's refractive correction changed after they got EVO. So in other words, if I went in for myself with EVO at a -4, -5, 15 years ago, if I had that opportunity, I'd still probably be 20/20 right now or even 20/15. And the reason why is because people think you see with your eyes, you actually see with your, your brain. And so there's a visual adaptation that happens, and because we're not touching the cornea, we're not damaging-...
cornea and we're tissue sparing, there's just something very magical, I guess, at the end of the day, but there is science and clinical basis behind that. In terms of the finances, I'll just do a quick run-through on it. We've been growing the last several years at probably about a 25% CAGR. We just had our investor day back in September in New York, so you can go look at that presentation as well. Strong gross margins, about 80% gross margins. We talked about also the fact that we have no debt. We generate cash. Since I've been on board, we've increased our cash balance by a little over $100 million.
We're now sitting on over $200 million of cash, and we've got about $100 million in AR, which I'm sure we'll talk about, and that'll be converted into cash in short order. So it's a very, very healthy company from a financial standpoint. We've been GAAP profitable now for several years, and have had double-digit growth, coming up on our sixth year of being profitable and high growth, et cetera.
Awesome! I think that's a great overview. Maybe to dig into the U.S. a little bit, I think that's a good place to start. You mentioned the recent launch last year, approval in March of 2022, and a launch soon thereafter. Could you first maybe size up that market opportunity, how you think about it? And you also mentioned that high myope as it relates to LASIK, and that patient may be being contraindicated for LASIK. Could you talk about the near-term opportunity, what that looks like, and then the broader market as well?
Yeah, of course. So as I mentioned, we did get EVO approved, I guess almost two years now, a year and a half ago. We had an original device, which was actually approved back in 2006, and that device was really only sold in the United States, and it required what we call a peripheral iridotomy, which was a primary procedure before you put the implant in. And the reason for that primary procedure was in order to create a channel for aqueous fluid to flow through the eye. The new EVO product that's been sold worldwide, that I talk about the 2.5 million implants, et cetera, that product has a little hole in the middle of the lens that is basically the ability for aqueous fluid to flow. It's the channel that's a physical channel within the lens.
In terms of the size of the market, when we launched the product, the U.S. is the second largest refractive market in the world. The number one market in the world is China. Right now, we say China's about 1.6 million eyes, eyes are done every year, from a refractive standpoint. As I mentioned before, we're approaching... People debate what the denominator is in China. Some people will tell us that are on the ground, that are very optimistic or bullish about refractive procedures in China. They will tell us that there is a bigger opportunity in China, even beyond the 1.6. They believe the number might be closer to 2 million. Some have even said even higher numbers than that. The U.S., you know, it fluctuates.
In the heyday, about 20 years ago, it was about 1.5 million eyes were being done. That number's been cut to about half, and you have to ask yourself: why? It's because people like me. So I have 2 girls. They're adults now, young adults. One of them has not-so-good distance vision. She knows that I got LASIK. I don't speak poorly about LASIK, but I talk about the fact that my night vision is a little compromised. I have halo and star effects. I've mentioned that. I talk about the fact that my right eye now, I went to the eye doctor, and I probably need a touch-up, and I can't quite see as well.
So when you have people that have been LASIK candidates that are now becoming older, and then they talk about it, other people that are now thinking about it start questioning it, and they take a pause, and that would be like my daughter, right? And so that's why you've seen that number really drop. There's also been more instances of dry eye issues and some other complications related to LASIK that weren't known, you know, 15, 20 years ago. So the long-term effects of LASIK are now being much more understood. All right? So right now, in the U.S., 2023, we are seeing a downturn in the refractive market. Now, to be fair, the comp, which would be 2022 and 2021, those are pretty strong years. Coming out of COVID, people were not able to buy cars.
They were not able to buy stuff for their house because you had supply chain issues. A lot of people spent money on themselves, and that was the one thing that they could do. So what we're seeing now in 2023 is the refractive market in the U.S. is probably down 15% year-over-year. Now, we still grew about 7% in the U.S. market, but I will tell you, the ramp of the launch in the U.S. is not going as quickly and as fast and as robust as we had hoped. And the reason for that is some of the stuff that you were just asking. One of the things that we are able to do is treat someone that's a very high myopia.
And the reason why is, if you try to take someone that's a -8, -10, certainly, and above, as I mentioned, you have to remove tissue in order to get a refractive correction. The higher myopia you are, the higher diopter, as we call it, that you are, the higher your prescription, the more tissue you have to remove. Well, at some point, there's not enough tissue to be removed. There's also some populations in the world that are genetically predisposed to have thinner corneas, is what we call it. That happens to be in the Asian countries as well as South Asia. And so because of that, as you move up that diopter curve or have high myopia, you actually are not a candidate for LASIK because the doctor cannot, with confidence, guarantee a predictive correction, not enough tissue to remove.
Once again, as I mentioned, EVO doesn't remove tissue, so we are actually the only choice for a lot of high myopes out there.
Yeah.
That's how the company has made a very strong living or grown our numbers, is because we've been looked at as the high myopia company or the high diopter company. It is imperative for us, because we believe we have good medicine, to move down that diopter curve. I'm sure we'll get into that, but that's really what it's about right now, is what are we gonna do over the next two, three, five years to move down the diopter curve and really challenge LASIK at those levels? And as we get into China a little bit more, I'll let you ask another question. I can talk about some of the things that we've been seeing there.
Perfect. I think we do have one question from the audience.
So let's say you're steady state and eventual, you know, 8-diopter corrected person. So let's say if you get in and get your lens at 5, does that halt the progression to 8, or do I need to keep getting lens replacements as-
Once you steady state, you're steady state.
Can you repeat the question?
Repeat it. Yeah, please.
The question was around, when you have the EVO procedure done, does it halt that myopia progression?
Yeah. So clinically, and label-wise, we can't say that, so I'm giving you sort of anecdotal stuff that we know from doctors. What we do know is this: you tend to stabilize in your your vision or your diopter myopia when you become a young adult. So let's call it 21 years old. All right? That is why our label is actually for 21 and above. All right? And so what happens is that as you stabilize and you go in, and the doctor will look at it and check you for about 6 months, if you're a -5, you go in there, you put it in, you'll come out. You'll probably come out about 20/15. They tend to overcorrect a little bit because people enjoy having really good vision.
What we do know is that we don't know of a single instance where the doctor has had to go in down the road in order to replace that lens because the person, as I was talking about myself, moved to a -1 or a -1.5 or something like that. Now, your question, I got a little confused because you're talking like you went -8 to -5. Once you stabilize, you're stabilized, and then we correct your vision, and then you're good to go. Very similar to LASIK from that standpoint. The difference, once again, is that because you're damaging the cornea, you're basically what... If the cornea's curved, right? It's like it's a curve. And what they do is you remove the tissue on the inside, and it flattens it out.
What happens is, once you flatten it out, the more, the higher diopter you are, the higher your myopia, the more flattening needs to occur in order to get that correct, that refractive correction. Your body views it as a damage, and it's constantly fighting to push back out. As that happens, guess what? You start moving back to where you were originally. You never get back to, obviously, the -5 or the -8, which is why I'm 15 years removed now or something like that. I'm about a -1, -1.5 in my right eye.
Thanks for the question. To the extent there's any other questions from the audience, please feel free. Maybe continuing with the U.S., you noted that the rollout this year has been a little bit slower than you had originally expected, and part of that is the macro. But could you also speak to some of the other headwinds as it relates to surgeon adoption and utilization and how your expectations have changed?
Absolutely. So, you know, originally we thought, you know, we were moving along in 2022, Q2 and Q3, at about $4 million a quarter, which is about 4,000 lenses, because our ASP in the United States is about $1,000 a lens, right? And so, as we were coming out and got approval, there was a lot of excitement, certainly within the company, because we heard doctors talking about the fact that, "Well, you got rid of this peripheral iridotomy," right? "That's a very challenging procedure. It can create a lot of adverse events. And so now that you've removed that with your new EVO lens, I am on board. I'm going to move down the diopter curve, right?
I'm going to do this at minus 6, minus 5s, minus 4s." Well, that didn't happen, and so we had to take a step back and ask why. So it's a little multifactorial, and I'll walk through that now. Some of it was surgeon confidence, right? The ability to go into the posterior chamber and feel comfortable doing someone at a minus 5 or minus 6 when they have a device that's essentially machine driven. A LASIK machine is not surgeon dependent; it's machine dependent. And so it's very easy for the doctor to go in there and just click a button, and every time they click that button, they make very good money. It's all cash pay, right? I should have mentioned that. This is all 100% cash pay. And so doctors take the path of least resistance often, right?
The other thing that we looked at was that people didn't know what EVO was. And so you can imagine someone comes into the doctor's office and says, "I want to get LASIK," because that's a household name, and everyone knows about it, and the doctor starts talking about, "Well, we're going to do this EVO thing. It's a permanent contact lens. Let me explain it to you." People hesitated. They didn't understand what it was. "I got to learn more about it." Well, the doctor oftentimes would say, "Well, I'm not going to let you walk out the door. I'm going to go ahead and just monetize you today with LASIK then," right? There's no reason to let $4,000 of contribution margin walk out the door, right? So that was when we thought, "Well, let's spend and invest in brand awareness," which we did.
We did a lot of brand awareness and everything else. What we found was people might have been coming in asking for EVO now because we saw our, our Google Trends went up, and you can go look at the data, got the Jonas Brothers, got some athletes doing it, all that stuff, but once again, there was something that was stopping the conversion to EVO. What we were doing was driving patients in that then were getting converted to LASIK. The doctors weren't comfortable still selling EVO within the practice. So why is that? So we took another step back. Well, let's go figure that out. So one of the things we found out was setting of care. What we looked at was: What's going on with the economics and the setting of care within the practice?
In order to do EVO, you need to have a higher level of sterility, and that usually requires either an ambulatory surgery center or what we call an office-based suite. It is sterile when they do LASIK, but it's not at the same level that you have to do with a PMA permanent device that EVO is. And so the patient flow was challenging for the doctor, right? They're used to having someone come into the office. They come into the office, they get the consultation, they're back in two days, and they get the LASIK procedure done in the same place. Well, with our procedure, they come into the office, they get the consultation done, and then they might have to get scheduled in an ASC outside the office that might not even be right next door.
It might be 20 miles away, 30 miles away, wherever it might be. That was a challenge. Doctors didn't want to deal with that. We had an economic side of it. Many of these doctors were so used to saying: "Look, if you walk in and you're not a candidate for LASIK, you don't have any other options. I'm going to charge you $10,000 to do EVO because you're a high myope."... you don't have an option to go do LASIK. There's nothing to compare to, right? And so because of that, when doctors- we started talking about moving down the diopter curve, they were still charging $10,000 for a -5, a -6, that has an option, which is to do LASIK.
So in the practice of the doctor, EVO was $10,000 to do two eyes, and LASIK might have been $5,000. So once again, a challenging patient flow, a challenging conversation for the doctor to have with the patient to say: "Let me tell you about EVO and all the benefits, but it's going to cost you about two times as much to do it." Now, the next question we get is, well, does the doctor have to charge that much because the economics are that bad for EVO? The answer is no. You can go look at our website and look at the slides and everything, but this is basically how it works out. If you charge $5,000 for LASIK, you've got to buy a piece of machinery, and that machinery can cost $400,000, $500,000 brand new.
You then have a click fee. So what we talk about is your incremental cost until you pay off that machine. It's probably about $1,000, what we call sort of variable cost, right? So your contribution margin on a $5,000 ASP for LASIK would be about $4,000 of contribution margin for the doctor.
To have similar for us, if your setting of care is that you have access to an ambulatory surgery center, which is yours, which a lot of doctors do, if your setting of care is you have an office-based suite, which a lot of these refractive surgeons do, because of the fact they're doing cataract surgery as well, which requires a sterile suite, you could charge $6,000, pay us $2,000 in cost, which is $1,000 a lens, as I mentioned before, your contribution margin is $4,000, exactly the same as LASIK. Now, the consumer patient is paying a little bit more for our product, right? $6,000 versus $5,000 for LASIK, but it's much closer and much more on parity.
And we believe that doctors are very comfortable having a conversation of, "Look, I have this other product, EVO, that gives you all these benefits: correctability, removability, no dry eye, better night vision, likely not to need a touch-up in the future. And that's going to cost you, by the way, about $500 more an eye." That is a much easier conversation for the doctors to have. So this is a lot that we've learned over the last several quarters, right? So what we just announced on our Q3 call was a focus now of really pulling back on some of the things that we've been doing. What I mean by that is not being as aggressive with the brand awareness and focusing on doctors that have embraced a couple of things. One is, they believe the medicine.
The medicine is good, and this is good for anyone, right? Anyone that walks in the door, I want to think EVO first, not LASIK first, EVO first, until I can prove they're not a LASIK candidate. Those instances will be few and far between, right? The other thing is the setting of care. We want to focus on doctors that have favorable economics within their setting of care, right? And then the final thing is doctors that understand patient flow and do some marketing, right? That are busy out there trying to bring patients into their practice. And so what we talked about on the Q3 earnings call was this concept called U.S. Highway 93, and the 93 stands for 93 accounts in the U.S. We have about 400 accounts in the U.S. across 600 doctors that we've trained on EVO.
We've now pulled back and decided, instead of trying to satisfy all those accounts, we're going to focus on those 93 that have those similar characteristics that I just mentioned. And so we talked about that we have a doctor in Louisiana who was on our investor day, and they were able to really drive a lot of growth in their practice over the last few months here, where they have decided when someone walks in, it's EVO first. Anyone a -3 and above, it's EVO first. And we've seen their numbers grow about 400% above what the rest of our practices are doing that we haven't focused on or don't have those same setting of care, dynamics, and patient flow. And he's also doing better than even the other 92 doctors on Highway 93.
He's an N of one, and so we're looking forward to talking about N of two, N of three, N of four, and we'll be talking about that surely within the coming quarters. What we did say, though, from an outlook standpoint, is that we expect the U.S. to be flattish at about $4 million a quarter as we move through the balance of this year into the first half of next year, with then meaningful spike up in Q3, starting in the second half of 2024. And that was, you know, we pulled the number down, absolutely, but what we wanted to do is give ourselves a little bit of runway here to really focus on Highway 93 and push things forward.
Perfect. Well, you answered a few of my questions along Highway 93 already, so thank you for that detailed answer. I do want to dig in a little bit further on that. You've mentioned a few qualities that these doctors have in common. What does that partnership look like from your perspective, though? What's maybe some investment that you're making from your end, or how should we think about that partnership and then the potential to expand that to other accounts in the U.S.?
Absolutely. Good question. And of course, Brian, if I forget anything, jump in, please. So Brian's actually, besides investor relations, he's in charge of what we call our High Performance Management System . And what that is, is a focused effort where we focus on the vital few things that really matter, that are going to push the company and push our growth over the next, call it, 12 months. And he spearheads that for us. So he's well entrenched in the day-ins and day-outs of our U.S. growth ticket, as we call it, in Highway 93. So a couple of things we do. Well, we're investing. What do we invest in? What can we do to make the practice embrace this?
Well, number one, we've created what we call sort of a pod, a pod of salespeople, clinical people, product marketing people. So it's really sort of a three-legged stool that has a salesperson, a clinical application specialist, and a product specialist, we'll call it, right? So what is their goal? Clinical-wise, we've got to make sure the doctor is comfortable. We talk about this procedure being not difficult, but delicate.... Doctors aren't trained on EVO procedure in their residency or their fellowship, right? They're actually not even trained on LASIK, really, but once again, it's a button you push, so it's a little-- it's not surgeon-dependent, it's machine-dependent.
So what we try to do is find doctors that are comfortable, and what we've recognized is the old way of doing it was we would certify and train a doctor, and they might only do 2, 3, 4 patients, and then we would say, "Okay, you're comfortable. You can put the lens in. You can now start doing it moving forward." Well, what we learned is we were looking at other parts of the world, like China. They spend a lot of time on training and continued education on training. Some of them don't become really experts until they implant 500 lenses, 250 patients.
And so we've taken a step back and said, "What is that journey that we need to take the doctor through?" So what we've talked about now is being with the doctor for their first 20 patients, 30 patients, 50 patients, whatever it takes in order to get that doctor more comfortable putting the lens in. That also allows us to be in their practice on a day in and day out basis, so we can find out, are they flipping patients that are coming in asking to EVO to LASIK and how the patient flow is working? That's why that product specialist is there. That's why that salesperson is there as well, in conjunction with the clinical-type person. The other thing we're looking at is, well, what if you don't have a sterile suite, right? What if you don't have favorable economics related to an ambulatory surgery center?
Where can we help you with that? Well, what does a sterile suite cost? You know, depending on where you're at, it could be anywhere from $50,000-$100,000 to build one out. We have the opportunity here where perhaps we go, I call it halvesies, right? But we'll invest, and you invest, right? You need to have skin in the game. So let's say the doctor says, "Hey, I'm willing to do it. Would you be willing, STAAR, to put $25,000 and invest with me on this sterile suite?" Absolutely. We've done a couple of those. They're sort of kicking off a little bit there. But that is a doctor that's now showing, "I'm willing to do EVO.
I want to put this forward." A lot of doctors, as they become busier, start thinking about putting a sterile suite in there because a lot of them do cataract surgery as well. That's why we call them refractive cataract ophthalmologists, okay? Those two worlds tend to blend a lot more in the U.S. Once again, our experience, primarily driven in the Asia market and China specifically, those two worlds did not blend. A refractive ophthalmologist was that. That's all they did. A cataract ophthalmologist, that's all they did. And so we didn't appreciate that in the U.S., perhaps there was a little bit more of a, a headwind there related to setting of care, et cetera.
The other thing we do is co-marketing, and so what we've talked about now is perhaps as we're looking at our brand awareness investments, that we don't have to create the market. Remember, every single day, there's 750-800 thousand eyes in the U.S., let's say, that are walking in the door asking to get a refractive procedure. It happens to be LASIK. What we need to do is convert those from LASIK to us, right? This is very different than certainly some of the companies I've been at in med device, where we actually had to create the market. We had to build brand awareness so people knew what the product was.
So there are some unique things that I think will help us, but there are some structural headwinds as well that is clearly shown that we need to focus on some of these investments. And so, as I said, we have practices now coming into the corporate office. We just met with one. We've met with some others, and we're starting to hear them say the right thing: "We want to move down the diopter curve. We want EVO to be our primary choice when someone walks in the door because the medicine is good.
We're willing. If you're willing to help us out with some of the marketing stuff or maybe even office-based suite, we're willing to move our price down, show the price more on parity." There was a lot of good discussion at the investor day around this with a surgeon panel that included a couple of U.S. doctors and a couple of a European doctor, a South American doctor, as well as an Asian doctor. And they talked about, you know, their thoughts on economics to the patient, as well as economics in their practice. The thought I will give you is this: we make money. The doctor makes money on our product. They make money on LASIK. We are as good, if not better, in terms of economics for them.
And now, as the patient pricing starts coming down a little bit and gets more in parity with LASIK, we think this is our real opportunity, and that's why we're focused on these 93 accounts that have that similar characteristic.
Okay. Okay.
I got a question. Are both procedures cash pay at this point?
The question was, are both procedures cash pay? The answer is yes. There's a couple of... You know, LASIK's been around a long time, so there's a couple of companies, and that's up to your company if you have a healthcare plan. They may choose to give you a little bit of a benefit on that. I'm sure they'd give you a benefit on EVO if you chose to as well, up to a certain amount. But yeah, insurance companies are not reimbursing for that. You know, your VSPs of the world, or your EyeMed is, which is one of the big ones, they're not reimbursing for things like that.
Thank you for the question. Sticking with some of the changes you're making in the US, you've talked about the call center that you've implemented and trying to control that funnel a little bit better. Could you maybe speak to some of the early things that you've seen after implementing that, some of the maybe surprises that you've had with patient demographics or any of those details? Beyond that call center, what some of the big opportunities are to change that customer acquisition?
Yeah, thanks for the reminder on that one. So yeah, we did talk about on the Q3 call that we did, I guess, a couple of weeks ago now, that we had just... We were about two weeks into the call center, I think, at that point.
Mm-hmm.
Maybe about two weeks, and so we're about a month into the call center now, so it's a little early still. What the call center is, is essentially we engage with a third party. This is no different than some of the other, what I'll call medical device companies that have a direct-to-consumer component. You may know some of them, an Align Technology, Inspire, right, for sleep apnea, et cetera. A lot of them have embraced this concept of a call center, and really the thought process behind that is: you do your brand awareness, people go to your website, they do the doc finder, and when they click that doc finder and they get routed to that doctor, we lose visibility as a company. Any company doing that, right?
What we did was, when you click that doctor, you now actually get routed to a call center. Now, it's invisible, I guess I'll call it, to the consumer. They don't know who they're speaking to, per se. And then once they speak to our call center, we will then route them to the doctor that, you know, that they chose or a doctor that has availability. And so what we try to do is we actually shepherd them live on the phone to connect them up with that doctor and to make sure they're a candidate, and then make sure that an appointment, a consultation is booked. We certainly can't tell them whether or not they can do EVO or not. There's a couple basic questions we can ask: Are you on label?
Are you within the age group that we have? Things of that nature. Very, very simple, sort of basic questions, and then at that point, we will shepherd them through. What it's gonna allow us to do, though, is really do a closed loop on them in terms of tracking. The call came in, did we get an EVO consultation done, and then did an EVO procedure actually happen, right? So we're in the earliest stages of that, we're still vetting it. We have now expanded it to some other geographies, areas, regions in the United States. But, you know, still, I would say, stay tuned on that.
The concept here is, if we're going to continue to invest some money in brand awareness or marketing, we wanna make sure that what I call a hot lead, a hot EVO lead, right? Someone that has shown an interest in EVO, a consumer patient, we want to direct them as best we can to those practices that are set up for success, right? That have embraced EVO as the primary choice, the first choice for refractive, that have a good patient flow, that have an on-site office-based suite, that have parity between their LASIK pricing and their EVO pricing, right? So that's what we're working on now, and I think what you have to appreciate in this market, that was a great question you asked about, is this reimbursed or is this cash pay?
Ophthalmologists that are in the refractive world, there's nothing wrong with it, but they're in it to make money, right? I mean, this is a business, right? You have to be a marketer. You have to bring people in, and then you've got to invest in marketing. And so we're not shy about that, and we're not shy to partner with people that want to try to drive their business, right? So those are the dynamics that we're focused on now, is let's take this hot EVO lead and direct them to someone that's actually going to convert them and convert them at EVO. And the reason why we're so passionate about it is because EVO is good medicine.
I mean, if you ask any doctor when you're doing your channel checks, if you had to do any refractive procedure on someone that you cared about, you love, so you're taking everything, you're taking the economics out of it, you're taking the setting of care out of it, they're going to tell you, "I'll do EVO all day long." So that's what we need to solve, is, well, why aren't you doing EVO for someone you don't know that comes in off the street? And it's all those dynamics that I mentioned that we need to do a better job of fixing, correcting, helping them out with.
Okay. Okay. A lot going on in the U.S. Maybe to just put a bow on it, could you remind us, and I think you touched on this at the beginning, how you're thinking about 2024, how we should think about, the potential macro impacts and ultimately, some of these other initiatives?
Sure
... as we move through 2024.
So specifically in the U.S., you know, we have certainly dialed down the number in the U.S. throughout 2023. And that's why our original guidance at, let's say, JP Morgan at the beginning of the year, has come down quite a bit. Right now, our full year guidance, on the Q3 call, we said we'd be on the lower end of the $320-$325 million range that we had given on our Q2 call. Now, that was less to do with the U.S., exactly, in fact, nothing to do with the U.S., because we'd already pulled down the number for the U.S. It had more to do with some of the macroeconomic uncertainty out there. And of course, in the Middle East, we have about $2 million of revenue that we anticipated to happen in the Middle East in Q4.
Obviously, there's a war going on that broke out not too long ago, and so there's some risk there. So what we did call out during the Q3 call is that we expect to be on the lower end, so $320 million, or about $74 million in Q4. Specifically for the U.S., the U.S., as we said, will kind of remain on that flattish trend of sequential, call it $4 million a quarter, and we expect that to go through until Q1 and Q2. Now, clearly, we're trying to drive things, we're trying to push things. We certainly want to see if we can get some upside to that. But at this point, until we prove it to ourselves, we've decided to really let's just sort of hold the bar right now.
We do expect, though, after having, you know, Q3, Q4 with Highway 93, the pilot program, the call center, and some of the other things we're doing, we would expect that by Q3 of next year to see a movement past that Q4. Now, people have asked, "Well, what does meaningful acceleration mean?" I'll leave it up to the analysts to decide that. It's probably not going from $4 million to $8 million in one quarter, but certainly you would expect to see some meaningful growth. And, you know, I've heard people throw out numbers like, well, do you expect to start doing a $5 million, maybe a $6 million? You know, I think meaningful growth of 20% sequential growth is probably a reasonable way to think about it. Now, what that means for Q4 and everything else and beyond that, we'll wait and see.
During our investor day, we did give a three-year outlook of 15%-20% CAGR for the next three years. We called it our, our Vision 2026. We gave a range for a reason, right? There is some uncertainty out there on the macro world, right? Companies do their best to try to look at adoption and look at what we're investing in and how we grow. 15%-20% CAGR is a pretty big range. And we also wanted to remind people, which I think some people heard better than others, I think, George, you heard it pretty well, that because of the initiatives that we're launching, a lot of that CAGR might be a little back-end loaded.
What I talked about during my presentation portion was, I would expect 2025 to grow faster than 2024 and 2026 to grow faster than 2025, even with a growing revenue number, because we believe some of the macroeconomic uncertainty would start going away. We believe that in the initiatives that we have in some of these areas, especially in the U.S., we'd be better at that. And remember, we need to move down the diopter curve, not just in the U.S., but around the world. And so what we wanna do now is to become, once again, the first choice for all refractive procedures. We actually have a really cool slide on China, but I'll stop there and let you ask your next question, and maybe we can get into China.
I think, I think you're reading my, my mind a little bit there. Yep, maybe shifting to China. But to start on some of your recent commentary, you grew around 14% in the third quarter. You talked about growing around 25% in the fourth quarter. Can you speak to why you feel confident, particularly in the macro, given the macro backdrop, you feel confident in that acceleration-
Yeah
- in the fourth quarter here?
No, look, you know, a lot has changed across the world, and we continue to see more companies report, and there's clearly some weakness out there. We're still feeling good about where we're at. So what happened was in Q3 that we just reported, we grew China 14% year-over-year on a revenue basis, which was a deceleration compared to what people had normally seen, which was 20-25% in China.
Mm-hmm.
So people are asking why, and then how are you gonna grow 25% in Q4 based on your commentary? Once again, it's all about comps. You have to go back and remember where the company was a year ago in Q3 of 2022. We were actually coming out of what we call a backorder position. So coming out of COVID in 2020 and 2021, we, demand was super high, right? We actually did not have enough lenses to supply the demand out there, and we openly talked about that in Q4 of 2021, Q1 of 2022, Q2 of 2022, where we had anywhere between 15,000-20,000 lenses that we were not able to fulfill, i.e., backorder.
And we made the decision, instead of having 1,000 grumpy customers, we decided to have one grumpy customer, which was, we went into China, and we said: "We're not going to fulfill your demand over the next several quarters because we don't have enough supply." We effectively got through all of that in Q3 of 2022. So what happened was, we fulfilled those 15,000 units, and so we had that sell-in into the market to meet that pent-up demand. So that's why the comp was challenging for us this year, looking year-over-year. Well, then how are you gonna grow 25% in Q4 of this year? Once again, you've got to go back in time and remember what happened last year. We actually took... if you remember, COVID across the world, most of the world was done with it, right?
We were traveling. We didn't have masks on. China was still under a strict zero-COVID policy with testing. In fact, if you recall, in October and November of last year, China, the population started going to the streets and protesting. The in-market sales, the in-market procedures, dropped to almost nothing in Q4, so there was no reason to order any more product from us, because demand basically dried up. And so another way of saying is, it was an easier comp for us, right? So, that's why we have a lot of confidence in our ability to hit the 25%, excuse me, for Q4 of this year.
That's fine.
Nothing has changed in our full year outlook for China, which is approximately $185 million for the full year.
Okay. Okay, and still a few things I wanna get to, we're getting close on time, but maybe to ask one last question on China, you know, you've grown really strongly there over a multi-year period. Could you just talk about how penetrated you are in that market, and if you think you're getting to a steady state, or if there's growth still to go?
Well, I think we feel very bullish about China. You know, we continue to monitor closely any of the macroeconomic issues that are happening, not just China, but worldwide. You know, other companies report, and they talk about their China business. I know some of the high-end retailers have been talking about a little bit more uncertainty in China. Look, we're tracking it. We're trying to be thoughtful of it. I think in this environment, a lot of companies are holding off on giving any sort of 2024 outlook at this point, until they get a better handle on it.
What I can tell you is, if you look at a couple of the slides, what we do know is we are moving down the diopter curve more organically in China, but we've been there for about six, seven years now, in terms of meaningful growth. One of our largest customers, the Aier Group , would actually show you back in 2018, like, 2018 to 2020, those years, this is their data. If you were a -10 and above, about 50% of the procedures were LASIK, and 50% were EVO. Fast-forward to 2021 and beyond, we're about 96% now is EVO and 4% is LASIK. Clearly, we are the high myopia solution there. But then we look at -6 to -10, that diopter range.
In 2018 to 2020, once again, we have a slide out there, it was about 50-ish, 55% LASIK, and there's another product that's sort of a, a minimally invasive LASIK, I call it, called SMILE.
Mm-hmm.
That was about 20-ish percent, 23%. Fast-forward to 2021 and beyond, we're actually now LASIK is about 55% still. We've replaced SMILE. EVO is actually now about 20% of the -6 to -10 in China. We have the ability to move down the diopter curve. The medicine is good. We are just trying to figure out how to accelerate that much quicker in some of these other geographies, primarily the U.S.
Okay. Yep, so I do want to also get to the balance sheet and cash flow, and maybe to first frame it up, and then I've got a specific question.
Sure.
But to first frame it up, you've got, as you mentioned, nearly $200 million in cash and cash equivalents on the balance sheet, no debt. How should we think about your capital allocation, and your appetite for M&A? And then also, the specific question, your accounts receivable has stepped up somewhat meaningfully since the first quarter. It was closer to $60 million, and then $90 million, and now, over $112 million or so, at the end of the third quarter.... how should we think about that moving forward?
Yeah, look, this company, it's got the ability to generate serious free cash flow. You know, we are making some investments. We spent about, I think we're up to about $15 million in CapEx this year. We did about $20 million for the full year last year. That's all about expansion and making sure that we've got enough manufacturing capacity, never hit that backorder situation again. So we feel very good about where we're at over the next three-year horizon from a supply standpoint. So cash will go towards investing in infrastructure, which, you know, like I said, about $20 million a year of CapEx, and then it's gonna go in all this stuff, which is probably only gonna be sales and marketing at the end of the day, a little bit in R&D.
We did give a full P&L in our Investor Day, et cetera. So, we don't really show any other number but a GAAP number, but our operating income on a GAAP basis is about 5% this year, and we would expect that to continue to increase. Our Vision 2026 talked about moving that up to about 12%-16% range. Once again, a range that's predicated on, are we gonna be on the high end of the 20% CAGR or on the low end of the 15% CAGR, right? In terms of the AR, you gotta go back in time once again, and so there's a couple of things that's happening there, and I'll address it. We did add one incremental piece of information on the Q3 deck. It's at the very end, it's on a cash slide.
Our AR balance at the end of Q3 was $112 million. It is now down to about $100 million at the end of October. So I just wanted to give that intra-quarter update. We expect that number by the end of the year to come down to $90 million in AR by the end of this year, and then we expect to then bring that down even further in Q1 of 2024. The reason why the AR has climbed, we didn't extend payment terms officially, contractually. What we did was, as we were coming out of that backorder situation in China that I was mentioning, and then we went into that Q4 where they didn't order, there was no AR to collect, right? So our AR naturally started coming down because they weren't ordering product from us, China.
Then they started ordering product again, but what happened was, at the beginning of 2023, they pay us in Chinese yuan, and that comparison to the U.S. dollar, whichever side you're on, either they got weaker, the dollar got stronger, or vice versa, however you wanna think about it, it started hitting an all-time five-year high and so on. So I had an agreement with the principal there that I'd rather have you invest in your own business than losing money on an FX exchange rate. So we let it float for a quarter, we let it float for Q2, and I let it float for Q3, and the exchange rate never changed. It basically fluctuated and still kinda hovering around that 7.5, 7.4 to U.S. dollar for one.
Well, clearly, neither of us are very good at looking at FX forecasting. We gotta collect the money, and we're doing that now. So this was not anything in terms of the... it's a very strong partner we have there. We've collected cash the entire time. This was a business decision with a long-term partner that we've had for seven, eight years now, and we're just trying to be good business partners with them. But we are collecting the cash. We're at $100 million now at the end of October.
We should be at 90 by the end of the year, and we'll continue to collect that cash, which shows you, once again, you add that AR to our, our cash balance, it, you know, we've almost got as much cash as our revenue that we're gonna do this year. So-
Yeah.
We're in a very good financial position.
Yeah. Okay, and I think we are just about out of time, so maybe I'll turn it over, Patrick, to you, and just ask, you know, what do you want investors to most take away from this?
Look, I think, a lot of opportunity here. Encourage you to check out the website. Brian's, always available to answer questions, and he pulls me in, and Tom, as appropriate, and, thanks for having us.
Thank you all for being here.