Good day, ladies and gentlemen. Thank you for standing by. Welcome to the STAAR Surgical First Quarter 2018 Financial Results Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the call will be open for questions.
This call is being recorded today, Wednesday, May 2, 2018. At this time, I would like to turn the conference over to Mr. Brian Morse with EVC Group.
Thank you, Gigi, and good afternoon, everyone. Thank you for joining us on the STAAR Surgical conference call this afternoon to review the company's financial results for the Q1, which ended on March 30, 2018. On the call today are Karen Mason, President and CEO of STAAR Surgical Company and Deborah Andrews, Chief Financial Officer. The release of the Q1 results was issued just after 4 pm Eastern Time and is now available on STAAR's website at www.staar.com. Before we begin, let me quickly remind you that during the course of this conference call, the company will make forward looking statements.
We caution you that any statement that is not a statement of historical fact is a forward looking statement. This includes remarks about the company's projections, expectations, plans, beliefs and prospects. These statements are based on judgment and analysis as of the date of this conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward looking statements. The risk and uncertainties associated with the forward looking statements made in this conference call and webcast are described in the Safe Harbor statement in today's press release as well as STAAR's public periodic filings with the SEC. STAAR seems no obligation to update these forward looking statements to reflect future events or actual outcomes and does not intend to do so.
In addition, to supplement the GAAP numbers, we have provided non GAAP adjusted net income or loss and net income and or loss per share information. We believe that these non GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non GAAP information is included in today's financial release. Following our prepared remarks, we will open the line to questions from publishing analysts. We ask analysts to limit themselves to 2 initial questions, then re queue with any follow ups.
We thank everyone in advance for their cooperation with this process. Now I'd like to turn the call over to Karen Mason, President and Chief Executive Officer of STAAR Surgical.
Thank you, Brian, and good afternoon, everyone. I will begin our discussion with an overview of our strong start to 2018 and will update you on our outlook for the remainder of the year. Deborah will then review key Q1 financial results before we open the call for your questions. Our team at STAR Surgical is focused upon generating returns for our shareholders by building a company that provides a compelling business model to ophthalmic surgeons and visual freedom to their patients. The Q1 financial results illustrate that we are executing to this vision.
Furthermore, our progress since the end of the first quarter leads us to believe that our momentum is continuing. When we last talked with you in late February, we noted that one of our objectives for fiscal 2018 was to generate more than $100,000,000 in revenues. Today, based on our building momentum and the continued evidence that a growing number of surgeons are depending on STAAR and our EVO product line to enhance their business plan profitability and produce their happiest patients, we are raising the bar on the 2018 sales target from low double digit to closer to 20% growth over 2017. Our increased growth outlook is based solely on the momentum we are seeing in international markets and does not include any incremental U. S.
Contribution beyond our previous forecasts. Also, even though we are continuing to increase the investments required to maintain our emerging sales growth trajectory, we expect profitability improvement as compared to 2017 and to increase cash from operations for the full year. As noted in today's earnings release, we are currently enrolling patients in our European multisite EVO with EDOF presbyopia clinical trial. The cost to conduct this pivotal study and other clinical studies, increasing regulatory submission fees an expanded effort to build IP protection on new variations of our polymer material and EDOF products, commercial infrastructure expansion and consumer outreach will lead to an increase in overall spending as compared to prior periods. In the Q1 of 2018, operating expenses increased 12% as compared to last year's Q1.
This rate of growth was significantly below our top line growth rate and we were therefore able to achieve profitability for the quarter and increase our cash position by approximately $2,300,000 from December 31, 2017. To reiterate, we are not modifying our earnings projection of an improvement over 2017 EPS of negative $0.05 at this time, but are certainly getting more comfortable around the prospect of delivering breakeven to slightly profitable results by year end. While Deborah will go through the numbers in more detail, there are a few highlights that I'd like to offer. First, our net sales for the quarter grew 33% and were driven by 39% ICL revenue growth. ICL units grew 41% and our other product segment which includes IOLs and injector parts grew 17%.
2nd, while we expect our gross margin percentage to dip slightly during 2018 due to strong injector part sales, we are pleased to report that our gross margin actually grew 10 basis points in the Q1 due to the exceptional ICL growth. STAAR's key international markets contributed to the strong Q1 performance with China once again leading the way with 91% ICL unit growth. We continue to make investments in China and now have more than 60 combined star and distributor dedicated personnel servicing a growing number of strategic partners and providers. In May, we'll be traveling to China as our largest strategic partner IRI Hospital Group features STAR Surgical and their positive experience with EVO Visi and ICLs at their 2nd international annual refractive surgery meeting. We also recently expressed confidence to you that our challenges in Korea were being addressed.
And during the Q1, ICL units in that market grew 54%. Key factors behind the Korean turnaround are new strategic partnerships, renewed and solidified commitments from our distributor partner, and the digital marketing and social media campaigns that Star is introducing to the market. Japan at 56% ICL unit growth is another market with 50% plus unit growth as compared with last year. In Japan, we are benefiting from strong and significant strategic partnerships and solid digital marketing and media support. We plan to expand our team in Japan in the near term to meet increasing demand also fueled by recent Facebook, Instagram and Twitter postings of very happy EVO patients, some with celebrity status.
Other key international markets contributed to our strong first quarter unit growth including the Middle East with 25% growth and Germany with 22% growth. Our North American results are benefiting from the building interest in EVO in Canada with unit growth of 14% in the Q1 as well as our disciplined approach to surgeon certification, practice development and consumer outreach. We are committed to assuring that these relationships provide the outstanding premium and primary positioning we enjoy in our largest international markets. We continue to prepare for a possible toricvisine ICL launch in the United States by year end dependent upon achieving in compliance QSR rating by the FDA. In addition, with recent clinical data and patient registry reporting from around the globe, we believe we are on steady footing to present a very positive picture of the safety and effectiveness and patient satisfaction of the EVO Visian ICL family of lenses as our next targeted product family for U.
S. Approval. Our patient registry has now grown to nearly 1600 patients surveyed post ICL implementation with 99.4% reporting they would have the surgery again. Turning now to our quality system audit updates. During Q1 2018, STAAR completed an extensive series of audits of our facilities, products and processes.
Most notably, the ISO 13,40fivetwenty 16 and medical device single audit program known as MDSAP certification audits. ISO 13,40fivetwenty 16 is the latest upgrade to the global ISO quality system standard used in many markets including the European Union. The medical device single audit program is an assessment of the quality system for conformance to quality system requirements of 5 countries, which are Australia, Brazil, Canada, Japan and the U. S. And the audit results are recognized by the regulatory bodies of these countries.
The result of 19 person days of auditing by the certifying body resulted in a positive outcome and we anticipate certification in the near future. In addition to these audits on April 30, the FDA commenced a reinspection of our Monrovia facility in relation to the 2014 warning letter. We will provide an update when appropriate and permitted after the inspection is completed. I have two quick updates I'd like to share before turning the call over to Deborah. First, STAAR has purchased lab and manufacturing equipment and tools, office furnishings and equipment and hired operations leadership from Revision Optics, which recently closed its doors.
In addition, we secured their office and manufacturing space south of us in Lake Forest in Orange County on a 5 year lease. We are intent upon designing and building our foundation's 2020 operations improvements including precision manufacturing and engineering at this site. Our EVO ICL manufacturing for myopia and our IOL manufacturing for cataract care will remain in the Monrovia facility and should benefit from the precision and automation improvements developed in Lake Forest. We are considering manufacturing our EVO ICL lenses for presbyopia in the Lake Forest facility as well. Our goal of achieving effective global manufacturing, packaging and shipping operations with backup facilities designed to mitigate risk while achieving significant specialization in selected locations is well underway.
2nd, I'm pleased to have been selected as the new Chair of the Ophthalmic Sector for AdvoMed. AdvoMed is a trade association representing the medical device industry headquartered in Washington DC with over 300 members. AdvoMed promotes competitive policies that foster the highest ethical standards, rapid product approvals, appropriate reimbursement and access to international markets. The opportunity as Chair to bring together the leading ophthalmic industry members and to create a strong and guiding platform for areas of special interest, including significant regulatory agency engagement, global outreach on trade and intellectual property, reimbursement for vision care products and industry collaboration on vision for life initiatives is very exciting. And finally, at the recent ASCRS conference in mid April, I met with the leaders of STAAR's key ICL global markets and several prominent surgeons from around the globe.
The uniform feedback from STARZ business leaders was that our key markets were responding to our business model and recognizing the EVO ICL's capability to be a significant contributor for surgeon practice profitability and patient satisfaction. The surgeons from our international markets with the EVO family of lenses validated our team's view. Many of the U. S. Surgeons I met with and the team met with expressed a very strong interest in bringing the EVO family of lenses to the U.
S. As soon as possible. We share their enthusiasm and anticipation and are committed to adhering to regulatory protocol to assure a strong submission and the best timeline possible. And with that, I'll now turn the call over to Deborah.
Thank you, Karen, and good afternoon, everyone. I will start the financial overview with a summary of top line results and then provide more details by product and market. STAAR reported net sales of $27,100,000 in the Q1 of 2018, an increase of 33% over the $20,400,000 reported for the Q1 of 2017. The sequential growth rate in net sales was 9% and Q1 was the 4th consecutive quarter of sequential sales growth. As Karen mentioned, the strong top line increase was driven by ICL revenue growth of 39% with unit growth of 41%.
In addition, beginning with today's reporting, we are combining the presentation of IOL sales, injector parts and other product sales into an other products category that better reflects STAAR's strategic ICL focus. The other product sales category grew 17% during the Q1 of 2018 and accounted for approximately 22% of our $27,100,000 in net sales. Focusing on ICLs, the 39 percent ICL revenue growth during the Q1 was driven by strong unit growth in the company's key markets. For instance, we generated 91% unit growth in China, 54% in Korea, 56% in Japan, 25% in both the Middle East and Latin America, and 22% in Germany. Moving down the income statement, our gross profit margin for the Q1 was 71.7%, up 10 basis points compared to the prior year period gross profit margin of 71.6%.
The slight increase in gross margin for the quarter resulted from the strong ICL TiCL revenue growth and improved IOL mix, which more than offset the negative impact of to margins of increased injector part sales and higher unit costs. While we had originally forecasted slight decline in gross margins for 2018 due to a higher mix of lower margin injector part sales, we now believe that if we maintain the ICL growth rate achieved during the Q1 throughout 2018, gross margins will increase as compared to 2017. For the Q1 of 2018, gross margin dollars increased 33% over the prior year quarter to $19,400,000 Total operating expenses for the Q1 were 18,600,000 dollars an increase of 12% compared to the prior year quarter of $16,700,000 Taking a closer look at the components of operating expenses, G and A expense was $6,200,000 as compared to $5,400,000 due to increased headcount and compensation. Sales and marketing expenses were $7,400,000 as compared with $6,500,000 due to the increased investment in digital, consumer marketing and commercial infrastructure. And our R and D expense was $5,000,000 during the Q1 as compared to $4,800,000 last year with increased clinical expenses associated with our clinical trial for the next generation ICL with EDOF optic and increased development project spending, partially offset by decreased quality remediation expenses.
We generated operating income of approximately $800,000 during the Q1. Net income during the Q1 was approximately 600,000 dollars or $0.01 per diluted share, a meaningful improvement as compared with a net loss of $2,200,000 or $0.05 per diluted share in the prior year period. On a non GAAP basis, we reported adjusted net income for the Q1 of $1,800,000 or $0.04 a share, as compared with an adjusted net loss for the same period of 2017 of $1,600,000 or $0.04 a share. Turning now to our balance sheet, our cash, cash equivalents and restricted cash at March 30, 2018 totaled 20.9 $1,000,000 compared with $18,600,000 as of December 31, 2017. The company generated $2,500,000 in cash from operating activities in the Q1 of 2018.
That concludes our prepared remarks. At this time, operator, please open the line for questions.
And our first question is from Brian Weinstein from William Blair. Your line is now open.
Great. Thank you. This is Andrew on for Brian today. I wanted to start with the cash in the quarter. Obviously, it was up 2,300,000 sequentially.
Does having this growing cash balance urge you to bring forward any of your planned investments into this year? And does this kind of help bring you bring forward some investments in the United States a little bit quicker than anticipated?
Well, I think we're definitely being opportunistic as we were with the revision optics opportunity. When we we do definitely have plans with Foundation 2020 to invest in equipment and systems and resources that will really support us getting further into precision manufacturing, engineering and automation. Also, there is always opportunity as well for us to increase our spending in those markets where we see the greatest opportunity. So yes, we will definitely be opportunistic and also continue to try to accelerate the top line, manage expenses appropriately, make great investments and hopefully get to that breakeven or better by year end.
Great. Thanks. And then on the presbyopia clinical trial, could you remind us when you think that you're going to be done enrolling patients on that and when you expect approval in the larger markets? Thanks.
Okay. Well, we really haven't given the details of the protocol for the study. We are pleased with the progress we're making enrolling patients. We expect our first implants as early as tomorrow. And our hope is that we will be able to wind up this study by year end at the latest.
Great. Thank you.
You're welcome, Andrew. Thank you.
Thank you. Our next question is from James Sidoti from Sidoti and Co. Your line is now open.
Can you hear me?
Yes, Jim. Good afternoon.
Well, quite a bit in the quarter. Can you talk a little bit more about your comments regarding the FDA and the inspection?
No, I cannot. The comments that I made during the script reading as well as in the press release are all we can really say.
Okay. Can you just repeat what you said then?
Sure. I'd be happy to. The reinspection of our Monrovia facility in relation to the 2014 warning letter commenced on April 30. We'll provide an update when appropriate and permitted after the inspection is completed.
Okay. I think everybody's been waiting a while to hear that. Congratulations.
We're happy it started, yes.
Okay. Can we talk about the facilities? You said you leased a third facility. Yes. So will you maintain the R and D in the facility where you had the Investor Day?
Yes. So the Tustin facility will remain the technology center. The Lake Forest facility is really a center of excellence for precision engineering and automation development. Most of the processes and systems development there will be transferred to Monrovia as appropriate and Aliso Viejo as appropriate. And then right now, we are strongly weighing the benefits of having our presbyopia lenses manufactured in Forest.
This gives us an opportunity to maximize our production capacity here in Monrovia, specializing in myopia and cataract care, specializing in presbyopia in Lake Forest and also making sure that we have the ability as necessary to have duplicity for the risk management so necessary especially on those strong growth trajectory that's now underway.
Okay. And I assume the $2,000,000 increase in PP and E on the balance sheet that's related to the leasing of this facility?
Yes, in part. Okay. As well as other investments in the U. S.
Can you repeat what you said about China in the quarter? Sure.
China in the quarter was up 91% in units. We have very strong momentum in China. We have now 60 individuals between our star employees and our dedicated distributor employees that are supporting the business model we established in the Q1 of 2016. So we are very excited about the continuing momentum there. We have multiple strategic agreements for both public and private entities within China.
And a team is going over to China to partake in Iyer Hospital Group's
2nd Annual International Refractive
Symposium, where we will be a headline company. There will be other companies in attendance as well, but we are very enthusiastic about the positioning that IR places us as a premium and primary refract procedure at high to mid diopter ranges.
Okay. And it's fair to say you have direct to consumer marketing programs, electronic marketing programs in China, Korea and Japan right now?
That is correct.
Okay. Well, I'm sure I've exhausted my 2 questions. So thank you.
Thanks, Jim, very much.
And our next question is from Jason Mills from Canaccord Genuity. Your line is now open.
Hi, this is actually Cecilia Furlong on for Jason. Can you hear me okay?
Yes, Cecilia. How are you?
Good. Thanks. And congrats on a really great quarter and meaningful progress on the warning liner front. That's great to hear.
Thank you.
But I was just wondering, could you just provide some additional color just around your pricing strategy and lower diopter ICLs and how it played out in the quarter. Just unit volume trends, share capture you've seen to date and where this can take start in terms of continuing to grab LASIK share?
Okay. So with regard to the pricing strategy, as we go down the diopter range to mid to lower diopter, We find that LASIK pricing does weigh more for the patient because the procedure requirement in terms of reshaping etcetera for LASIK does give the patient a choice. And we know all the right reasons why we believe that the ICL is always the best choice, but it also ends up being important in our consumer pricing and consumer outreach that we have less of a difference than in the higher diopter ranges, especially for patients with astigmatism where there really is no other selection that works. So bottom line is, yes, we do lower pricing in a range of 15% to 25% usually, not always, but usually that does make a huge impact in supporting the patient's decision to go to ICL. And if you could repeat your second question, please?
I guess just in terms of what you're seeing in terms of grabbing LASIK here, just as a result of your pricing changes?
Well, at this time, we do know that we are gaining share, especially in the markets that we talked about today that have very high growth. And between mid year to Q3, we will start talking because it will have been about a year since the it was actually last fall that we really started this initiative of lower diopter. So at that point we'll really start to solidify what the market share growth is. It is significant obviously from the volume increase that we've reported.
Okay, great. Thanks for the color. And then just could you talk a little bit more about the positive trends out of the Korean market so far in 2018? I know you had expected growth, but is this kind of in line ahead of expectations and this is what you're thinking on a go forward basis?
Yes. I think the Q1 in Korea benefited from a really strong restart, the inclusion of strategic partnerships, the beginning of a number of major outreach programs, consumer marketing, etcetera. I believe that especially with toric lenses, we're seeing a really nice increase. So we expect Korea will be a very strong component for us for the year. And as Korea is gearing back up, we'll probably see some higher quarters and then a few quarters that are always double digit, but maybe not as significant as Q1.
But for the year, we expect significant growth in Thanks, Cecilia. We appreciate it very much.
Thank you. Our next question from Raymond Myers from Benchmark. Your line is now open.
Thank you. And first, let me say congratulations. The question is describe the ICL market potential in Japan and perhaps some of the other markets where Star has executed marketing partnerships over the years?
Okay. So in Japan, we're really building the ICL market. We are the major and perhaps sole major company in terms of building the ICL story. We think Japan where we have had strong IOL business for many years, we have enough confidence in what we're doing there that we are adding to our team in Japan and we are in May Japan a target market for us to invest significant consumer outreach and digital marketing dollars. We have not sized Japan in terms of exactly what the total target would be, but it also is 40%, 50% growth range for sure going for the year.
Okay, sounds good. And my second question is about which products or world regions are you most excited about over a 2 or 3 year planning horizon?
Okay. So from the big picture, I would say that in terms of markets we're most excited about bringing our business model to in a very big way, I would say the United States. In the U. S. Market, we are obviously hoping for positive outcomes associated with bringing Toric to the U.
S. And then hopefully as quickly as possible the EVO family of lenses where I had indicated on the script, there is such clamor from the U. S. Refractive surgeons that we have spoken with who have contacted us. And then after that, of course, I'm excited about presbyopia globally starting with the EU.
And in terms of building the myopia market, really we have just got to the very surface of the opportunity. We're talking about 3,500,000 myopic eyes of opportunity annually where refractive procedures are performed. We've got a 1,500,000 additional presbyopic eyes. And we believe that as surgeons take on more and more ICL as the way their business models are driven as well as their patient satisfaction levels are so very high, we think that that 5,500,000 possible lens is where we're really building a 30% increase in the market we think by introducing presbyopia and bringing more ICL. We see a tremendous opportunity going forward in terms of what we can do with this great Visual Freedom technology.
Well, thank you. That sounds exciting.
Okay, Ray. Thank you very much. We really appreciate your support and coverage of the company.
Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Karen Mason, President and CEO, for closing remarks.
Thank you very much, and thanks, everyone, for your participation on our call today. We'll be on the road again as we have Bank of America Merrill Lynch Healthcare Conference on May 16 in Las Vegas. We appreciate your interest and investment in our company. All the best to all of you.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.