Good day, ladies and gentlemen. Thank you for standing by. Welcome to the STAAR Surgical Q3 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. If you have a question, please press star followed by one on your touchtone phone. If you're using speaker equipment today, please lift the handset before making your selection. We will have approximately 45 minutes for today's call. This call is being recorded today, Wednesday, November 2, 2022. At this time, I would like to turn the conference over to Mr. Brian Moore, Vice President, Investor Media Relations and Corporate Development for STAAR Surgical. Please proceed.
Thank you, operator, and good afternoon, everyone. Thank you for joining us on the STAAR Surgical Conference call this afternoon to discuss the company's financial results for the Q3 ended September 30, 2022. On the call today are Caren Mason, President and Chief Executive Officer, and Patrick Williams, Chief Financial Officer. The press release of our Q3 results was issued just after 4 p.m. 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 risks 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. Except as required by law, STAAR assumes 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 and adjusted earnings per share and sales in constant currency. 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 press release. Following our prepared remarks, we will open the line to questions from participating analysts. We ask analysts limit themselves to two initial questions, then re-queue with any follow-ups. We thank everyone in advance for their cooperation with this process. With that, I would now like to turn the call over to Caren Mason, President and CEO of STAAR.
Thank you, Brian. Good afternoon, everyone, and thank you for joining us on today's call. STAAR achieved 30% net sales growth in the Q3, which reflects strong EVO ICL unit growth in APAC and strong accelerating growth in the U.S. despite constant currency challenges and a European macroeconomic headwind. In the Q3, global ICL unit growth was up 40% year-over-year. We advanced our patient awareness, engagement, and market building initiatives for EVO in the US during and subsequent to the Q3, highlighted by media campaigns with global entertainment celebrity Joe Jonas and NBA player Max Strus, and introduced our presbyopia lens, EVO Viva, to surgeons at our experts meeting preceding the annual congress of the European Society of Cataract and Refractive Surgeons.
In China, we concluded another successful peak busy season that put EVO on track to exceed a 25% share of refractive surgery market units by year-end. However, due to tighter COVID-19 restrictions in China, resulting in expected delayed demand in the Q4, ongoing headwinds in Europe, weakness in the yen and euro, and lower other product sales, we now anticipate total net sales will be approximately $285 million for FY 2022, which represents $300 million adjusted for constant currency. Our fiscal 2022 outlook includes ICL sales of approximately $272 million, representing 28% year-over-year growth and other product sales of approximately $13 million. As you know, today it is vital that STAAR focus on the significant growth opportunities we have with our premium EVO products.
At the same time, our low-margin other products business, which represents approximately 5% of sales and consists of cataract IOLs, IOL injectors, and injector parts, has faced increasing supply chain challenges. As a result of third-party materials and supply chain challenges that only affect our other products business. We will no longer be able to support other products as we have historically. We will continue to support customers of other products through the end of 2023. As we look to FY 2023, despite the aforementioned challenges, we expect to achieve approximately 30% ICL sales growth year-over-year to approximately $355 million in total company net sales, which contemplates limited sales from other products.
We see tremendous growth potential for our EVO family of lenses globally and look forward to continuing our focus, efforts, and resources on especially large growth opportunities in the U.S. and Asia in 2023. Turning back to the Q3 2022. For the Q3, Global ICL unit growth was up 40% year-over-year. By geography, we achieved strong ICL unit growth in China up 52%, the United States up 63%, Japan up 40%, South Korea up 49%, and APAC distributor markets up 47%, all as compared to the prior year quarter. In the U.S., we are pleased with our progress in advancing the adoption of EVO lenses through patient awareness and surgeon engagement. After our August partnership announcement with singer, songwriter, and actor Joe Jonas, we launched EVO brand advertising featuring Joe in the U.S. on September 26.
The campaign included targeted geographic and multi-channel advertising to our core 21- to 35-year-old target population on YouTube, Instagram, Snapchat, TikTok, display advertising, and search engine marketing. Last month, we announced our partnership with NBA player Max Strus, a sharpshooter for the Miami Heat. Max is another example of a person with a myopia prescription of less than -5 diopters who had EVO lenses implanted and is now thrilled with his new 20/10 vision, which is better than 20/20. Max joins other EVO brand ambassadors in the U.S., including a top model, a TV chef, a style expert and blogger, a fitness and wellness coach, and others who are helping to inform potential patients about the benefits of EVO based on their own EVO experiences.
Each of our ambassadors speaks to potential EVO patients with a unique voice that we believe will continue to build momentum and contribute to EVO's broad success in the U.S. YouTube is the second most popular search engine for our target audience. In August, we launched our EVO ICL educational series on YouTube, which has now expanded to eight videos as we added individual videos about Joe and Max's decision to choose EVO. The EVO ICL channel on YouTube is now approaching 6 million video views. Going forward, we will continue to partner with new micro, macro, and celebrity EVO brand ambassadors in the U.S. since we have experienced through our earlier partnerships that we can successfully expand our engagement with potential patients. We are also engaging with U.S. refractive surgeons.
Our goal is to accelerate education of our lens so that surgeons may increasingly transition the mix of vision correction options or entire practices to lens-based solutions with our EVO family of lenses. As of today, we have trained and certified over 550 U.S. surgeons on EVO since FDA approval approximately seven months ago. We remain on track to meet or exceed our goal of training and certifying 600 U.S. surgeons on EVO in 2022. Please take note that, "The number of surgeons trained," is just one of the metrics we establish, manage, and measure for surgeon and patient engagement.
Our U.S. commercial organization and STAAR management is working diligently to assist patients in their journey for visual freedom from glasses and contact lenses, and to assist surgeons in their confidence and desire to offer the EVO lens-based solution to appropriate patients seeking visual freedom. We're focused on transforming the refractive industry for qualified patients to an EVO lens-based industry. We are pleased to report accelerating unit growth in the U.S. of 63% year-over-year in the Q3, and up from 36% one hundred percent year-over-year. Innovation and strengthening the moat around our business remains a strategic imperative for STAAR.
This includes potential expansion and enhancements of our EVO lenses to new indications and execution of other R&D, clinical and regulatory pathways to get our existing and next-generation products to market and to certified surgeons. As we look to FY 2023, our outlook is for a strong trajectory of growth for EVO ICL, continued market share gains, prudent investment, growing earnings and many happy new EVO ICL patients and surgeons. Patrick.
Thank you, Caren, and good afternoon, everyone. Total net sales for Q3 2022 were $76 million, up 30% as compared to $58.4 million of net sales in Q3 2021. The 30% year-over-year increase in Q3 2022 net sales is attributable to a 32% increase in ICL sales, which represented 95% of total company net sales in the quarter. On a sequential basis, Q3 2022 sales were down 6% from Q2 2022, which is similar to the year ago step down in sales from Q2 to Q3. Q3 2022 reported net sales includes an approximate $4 million negative currency impact as compared to the prior year quarter, due to changes in constant currency, primarily the Japanese yen and the euro.
In constant currency, net sales for Q3 2022 would have been approximately $80 million, up 37% year-over-year. For the nine months ended September 30, 2022, reported net sales includes the $9 million negative impact from changes in constant currency, as outlined in the constant currency table in today's earnings release. We currently anticipate approximately $65 million in net sales for Q4 2022, which contemplates tighter COVID-19 restrictions in certain cities in China, resulting in an expected delayed demand in the Q4 of approximately $5 million. Ongoing headwinds in Europe of approximately $2 million. Weakness in the yen and euro since our August 10 Q2 Earnings Call of approximately $1.5 million and lower other product sales of approximately $1.5 million. Turning back to Q3.
Gross profit was $60.5 million or 79.5% of net sales, as compared to gross profit of $45.3 million or 77.6% of net sales for Q3 2021, and $63.9 million or 78.8% of net sales for Q2 2022. The 190 basis point year-over-year increase in gross margin is due mainly to geographic and product mix, partially offset by increased period costs associated with manufacturing projects. The sequential increase in gross margin of 70 basis points from Q2 2022 is primarily due to geographic and product mix and decreased inventory reserves, partially offset by increased period costs associated with manufacturing projects. For Q4 2022, we now expect gross margin will be approximately 80% of net sales. Moving down the income statement.
Total operating expense for Q3 2022 was $46.8 million as compared to $37.5 million in Q3 2021, and $46.9 million for Q2 2022. Taking a closer look at the components of operating expenses, G&A expense for Q3 2022 was $14 million as compared to $11 million for Q3 2021, and $14 million for Q2 2022. The year-over-year increase in G&A is due to increased compensation related expenses, facility costs, and outside services. We continue to expect G&A expense will be approximately $15 million for Q4 2022. Selling and marketing expense was $23.1 million for Q3 2022 compared to $18.2 million for Q3 2021 and $24.2 million for Q2 2022.
The increase in selling and marketing expense from the prior year is due to increased trade shows and sales meetings, advertising and promotional activities, travel expenses and compensation related expenses. The sequential decrease in selling and marketing expense from Q2 2022 is due to decreased marketing, promotion and advertising expense, partially offset by increased trade shows, sales meetings, compensation and travel expenses. We now expect selling and marketing expense as a percent of sales will be approximately 35%-40% for Q4 2022. Research and development expense was $9.6 million in Q3 2022 compared to $8.3 million for Q3 2021, and $8.6 million for Q2 2022. The year-over-year increase in R&D is due to increased compensation related expenses.
The sequential increase in R&D from Q2 2022 is partially due to increased post-approval study clinical trial expenses. We now expect R&D expense will be approximately $10 million for Q4 2022. Operating income in Q3 2022 was $13.7 million or 18% of net sales, as compared to $7.8 million or 13.4% of net sales for Q3 2021. We continue to expect operating margin for fiscal year 2022 will be approximately 15%. The STAAR team continues to be proud of our ability to drive very high levels of sales growth while expanding profitability. For Q3 2022, net income was $10.3 million or $0.21 per diluted share, compared to net income of $6 million or $0.12 per diluted share for Q3 2021.
On a non-GAAP basis, adjusted net income for Q3 2022 was $18.1 million or 37 cents per diluted share, compared to adjusted net income of $10.3 million or 21 cents per diluted share for Q3 2021. A table reconciling the GAAP information to the non-GAAP information is included in today's financial release. We now expect our Q4 effective tax rate will be approximately 20%, subject to no change in our valuation allowance. Turning now to our balance sheet. We implemented an investment policy for a portion of the growing cash on our balance sheet. The primary objective of our investment policy is capital preservation while maximizing return on investment through triple-A to A-minus investments discussed further in today's Form 10-Q.
The investment policy resulted in STAAR shifting a portion of our cash to high quality U.S. Treasuries and commercial paper with shorter maturities. This did result in additional gains in interest income in Q3 2022. Thus, our cash equivalents and investments available for sale totaled $224.7 million as of September 30, 2022, as compared to $202.5 million at the end of Q2 2022. In Q3 2022, we generated $24.1 million in cash from operations and invested $6.3 million in property and equipment. We remain on track to invest approximately $20 million for the full- year FY 2022 on CapEx, primarily to support manufacturing capacity expansion.
We also continue to anticipate generating positive cash from operations in Q4 2022 and ending the year with a higher cash equivalent and investment balance than FY 2021. With regard to foreign exchange rate headwinds when compared to our initial FY 2022 full- year revenue guidance in January of this year, we now estimate an approximate $15 million negative impact on full- year FY 2022 net sales. Normalizing for these FX headwinds results in constant currency net sales up approximately $300 million.
For FY 2023, as we complete our initial planning and budgeting, we currently believe we can achieve ICL net sales growth of approximately 30% year-over-year, which contemplates the continuing challenging macroeconomic environment in Europe, a lessening impact of COVID-19, no significant changes to foreign exchange rates and little to no sales from our other product business, which is more than offset by a strong trajectory of growth in the Asia and U.S. markets. Finally, including the Stephens Annual Investment Conference in Nashville, Tennessee on November seventeenth, BTIG's Virtual Ophthalmology Day on November 29, and the Sidoti Investor Bus Tour in-
Again, it is star one on your telephone keypad and star two to remove that question. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. Our first question today comes from the line of Anthony Petrone with Mizuho Group. Anthony, your line is now open.
When we look at the implied ICL guide for Q4, it looks like $63 million-$64 million is implied and there was several headwinds, you know, called out. Caren, just, you know, provide a little bit more color on how those headwinds are broken out. In terms of, you know, the implied U.S. outlook, you called out 100% growth in units, but, you know, we're missing sort of how we should translate that into dollars. Then I'll have one quick follow-up on 2023.
Hello, this is Patrick. Anthony. Why don't I kick off and then Caren might be on. Caren, if you get on there, please jump in. To answer your question, I try to highlight in my prepared comments. You are right. What we talked about and what you described is contribution from the other products, which is our IOL legacy business. Then I did highlight in my prepared comments. We saw about $5 million of what we think is delayed revenue related to the tighter COVID-19 lockdowns in China. $2 million related to European macroeconomic factors. $1.5 million on the FX side since our August 10 Earnings Call in Q2, and then another $1.5 million related to that as well.
We try to bridge that gap and provide as much transparency as we could.
Then just the follow-up would be, as we bridge for healthy growth year-over-year, just wondering if you can provide a little bit more color geographically, what is contemplated in there for China growth, for instance, assuming we still think about the rest of the geographies. Of course, U.S. is in the launch phase, we also have headwinds in Europe. Just how should we be thinking about the geographic makeup in 2023?
Hi, Anthony Petrone. This is Caren. I'm happy to be with you today. I had a little bit of connection issue. So with regard to looking into 2023, we believe that growth in China will still, on a unit basis, exceed the 30% range. We believe, as Patrick Williams stated, this is delayed demand largely due to the fact that the recent election has, for a number of, you know, how COVID-19 would be handled. It seems to be a perception that COVID-19 might in fact, the lockdowns might in fact be a little more. Our clinics are very much looking forward to 2023. There is a belief, it's on social media, hasn't been validated, you know, very strong growth. We're talking way above this year's growth in terms of percentages.
We expect that within 18 months, that the market share wins. With regard to Europe, we think that's a little foggier in terms of when we expect Europe to really get out of a predicted recession. It's just when is demand gonna be at its greatest? In light of the macroeconomic trends, some of the political challenges, et cetera. Overall, we see nothing but blue sky ahead.
Hey, good afternoon, everyone, and thanks for taking the question. Yeah, I wanted to follow up just to start on the China comment. You know, it could be wrong, but it seems like that's just the first time that at least I've seen you guys kind of, you know, and not only delaying, but what's the base that we should look at, I guess, for that 30% growth?
Thank you, Margaret, for joining us today. Sharing with the appropriate amount of what are our toric lenses, which continue to grow in demand even above our aspheric growth. We already are aware where the hospitals and clinics are planning for 2023 as we plan along with them. The reason why the Q4 has a question mark is because right after the election, over the last week or week and a half, there have been behaviors by consumers and employees, as you saw, may have read about Foxconn, which is making people a little hesitant about how the government may react to the freedom around COVID-19 and what can happen if you happen to be in the wrong place at the wrong time with an outbreak.
Supply concerns are different than what we experienced in the other COVID-19 challenges throughout the last two and a half years. We decided, rightfully, to a strong 2023.
Okay, great. No, I appreciate that color. You know, let's maybe shift to the U.S. The 550, it seems like maybe you're pointing towards more of an inflection in the back half of the year. Maybe you can tell me whether I'm right or wrong on that. You know, any color on the profile of or just adding it as an option for those that aren't eligible for LASIK or SMILE. Thanks.
In the United States, we believe that the enthusiasm is just beginning. We are training the most interested surgeons first, obviously the ones who have committed from the very beginning to science. Just a personal note, the other day, my husband and I went to an outstanding surgeon in San Diego, Dr. Sandy Feldman, and the entire team, and this was just on my personal visit. You can imagine that this is being replicated around the United States. In terms of moving the business model based EVO, you know, it varies, but we found everywhere else, including our largest markets around the world, that within 12-18 months you start to see going into 2024 and 20%, by 2025.
These are big numbers, but we believe we're gonna meet them, and we think that, you know, the rollout as-
Thanks, guys.
Thank you. Our next question is from the line of Bill Plovanic with Canaccord. Bill, your line is open.
Thanks for taking our question. I kinda actually just wanna follow up on Margaret's question. Could you talk about the early U.S. users? Have you been able to convert any exclusive laser-only clinicians? Do you see practices today, especially those laser-only users, do they have the infrastructure and facilities today for doing the procedure, or they need to build those out still? Thanks.
This is assuming they've never done EVO lenses, even in the previous Visian type of lens. Let's say that you are not doing a lot of intraocular procedures. It's probably gonna take you a little longer to move your practice model and your clinical confidence than it will be for those surgeons who are very comfortable in the eye, either having used our EVO, lenses known as Visian before and/or adaptively to go from maybe not all LASIK-based to all lens-based that quickly, but certainly from a mix of procedures to way more EVO pickup and the greatest users we currently have.
That's really helpful. Thank you. As we think about Q4 and when you've spoken about China and the softness there and setting up for 2023, are there any updates to the backlog that was existing? And will you be able to catch up by year-end?
I appreciate because we've, you know, we're reporting 40% growth quite often that it appears that Q4 is soft. It's not soft. We're still looking at China at 22%-25% growth of units. It's just not gonna be 30%-35% in the Q4 while we're delayed as people are trying to figure out how this COVID-19 challenge plays out. In terms of, you know, what we expect.
Okay, thank you. Just to sneak one last one in too. The other product discontinuation. I know that product line was important to some KOL surgeons in the U.S.
Injectors and injector parts. They are at this point very happy with STAAR's lens, but we are gonna make sure, as we moved out of the IOL business and other markets, that there's a long lead time and that we're very supportive to provide inventory until they find alternative sources for their IOL lenses and injector parts. We're really talking about two markets. Really our hope is that the ICL business will be even stronger in conversation in those markets where IOL business has really been not a focus for us for a long time, a bit of a downward cycle. We're only gonna be talking positives going forward, and we see our ICL business picking up just fine in those markets as well.
With Jefferies. Zach, your line is open.
Hey, everyone. Thanks for taking the question. I just wanted to touch on the U.S. market. It looks like, looking at the Q that was released, it looks like U.S. was flat sequentially this quarter. Can you just give some color on performance in the quarter in the U.S. and how we should be thinking about it in the fourth-
Can I take that one? I do not believe it was flat sequentially.
You are correct. Let me go pull maybe to see what you're seeing, Zach. No, we were up actually on revenue closer to 75% year-over-year. As Karen said in her prepared comments, we expect unit growth to be going from 66% year-over-year in Q3 to 100% in Q4. Then as she said, even as we go through 2023, continue to see even larger market share gains as we move through 2023.
Apologies. I'm mostly looking at the wrong thing. I guess, just looking at how do you look at procedure volumes through the quarter, and how should we think about it through 2023? Thanks.
As I said, we went plus. You know, that is, we consider that strong, healthy growth.
Thank you.
Our next question comes from the line of Ryan Zimmerman with BTIG. Ryan, your line is open.
Good evening. Thanks for taking the questions. Just to follow up on the last after sales, and I appreciate that the units are up. I guess, you know, the question goes to just the fact that U.S. growth sequentially on the EVO launch, you know, for the U.S. in Q4 and just, you know, wanna check my math on that and see if that's what you're kind of expecting for the U.S. in Q4.
Yeah. If you're checking math, Patrick.
Yeah. There's a little bit of noise in there on the domestic side related to perhaps some Canada and North America, so you can't quite get apples to apples on that one. In terms of your math of looking at Q4, I would say directionally, you're headed in the right direction. As Caren has said, we expect to get greater market share gains as the product is in the market longer. As a reminder, the Q4 that we're currently in, this is only the Q3 of commercialization. We've been very consistently saying, we expect to see bigger gains as we move through 2023, and certainly as we exit 2023 in terms of contribution from U.S.
Appreciate that color and the clarifications. You know, on the next year's number, the 355, I would appreciate your thoughts, either Patrick or Caren, around just the impact of units versus price and how much price you expect to pick up maybe next year as the U.S., you know, becomes a larger proportion of sales, you know, your guide on an underlying basis.
Patrick?
Sure. On that one, what I would say is that, in terms of our ASP, we don't see a lot of pressure on ASPs at all because of the nature of our strategic alliances globally. We know exactly what we're going to get in terms of pricing, and that's set for the forthcoming year. Where we do see a mix in ASP is going to really come from either product mix, where we see more toric or spheric, toric being a higher ASP. Of course, the geography mix, which is what your question was on the direct side for the U.S. Still, the U.S. is a relatively small piece of the revenue contribution, so it's really not gonna move the needle that much.
In fact, if you look at our revenue in the U.S., as you said, we were 66% on units and actually higher on revenue growth year-over-year because of the higher ASP. Hopefully that answers your question, Ryan. I think we're, as we said, it's still a relatively small piece of the contribution, but as we move through 2023, then I think those questions will be a lot more viable in terms of modeling.
Just a clarification then. The 355 and the implied 30% growth essentially equates to the 30% unit growth, or there is some, you know, price impact in there as the other, you know, sales diminish?
Yeah, we would expect a slightly higher unit growth. I think to your point, as the U.S. is starting to come on board with a higher ASP, that differential is perhaps not as great as it's been in the past when we were more concentrated with lower Asian market pricing, such as China.
Okay. Appreciate the color. Thanks. Thanks for taking the question.
Of course.
Thank you, Ryan. We are showing no more questions in queue. I would like to now turn the call back over to Caren for closing remarks.
She might have dropped off with some connectivity, so I will chime in. Appreciate everyone's participation today. We look forward to seeing you at these upcoming conferences. We appreciate your interest in investing in STAAR Surgical. The best to everyone.
That concludes today's call. Thank you for your participation. You may now disconnect your lines.