Roger Susi - President and Chief Executive Officer Brent Johnson - Executive Vice President of Worldwide Sales and Marketing Chris Scott - Chief Financial Officer

Larry Solow - CJS Securities David Solomon - ROTH Capital Partners Larry Haimovitch - HMTC

Thank you, and good morning. Earlier this morning, we reported second quarter 2018 revenue of $7.4 million, with GAAP net income of $0.11 per diluted share and non-GAAP net income of $0.14 per diluted share.

In comparison, second quarter revenue increased 33.5% over last year, with both GAAP and non-GAAP earnings significantly higher than last year as well. Additionally, on a quarter-to-quarter sequential basis, revenue increased nearly 4%.

I'm very satisfied with these results as they continue to show strength in the demand for our products and the earnings potential that exists within our business. Last quarter, I spoke about momentum that had have been building over time and our desire to expand upon it and carry it forward into the future, paving the way for realization of our 5-year revenue goal.

While I said that we are likely to experience bumps along the way, this quarter was not one of those. With sales and marketing, the MRI patient monitor is doing very well globally, with revenue growing 277% over the second quarter last year and 25% sequentially.

Additionally, it was a very good quarter for our international business overall, which grew 141% over the second quarter last year and 45% sequentially. Sales of our IV pumps also grew nearly 10% over last year and remained consistent with the first quarter this year.

We view this as a positive sign that our domestic sales team is progressing in their ability to simultaneously manage multiple products. As for the new product development front, we are progressing as planned on the next-generation IV pump as well as enhancements to the patient monitor and have made no changes to our project calendar or the anticipated commercialization dates for new devices upon which we are actively working.

From a regulatory standpoint, we recently received clearance to begin sales and importation of our patient monitor in Japan, which has been a large market for IV pumps, and we feel the MRI patient monitoring market will be equally as exciting. Overall, I believe the company's performing well and poised to take advantage of the momentum we are seeing.

Now I shall address our updated financial guidance for the rest of the year. For the third quarter, we expect revenue of $7.4 million to $7.5 million, in -- with GAAP earnings per share of 78 -- $0.07 to $0.08, and non-GAAP diluted earnings per share of $0.09 to $0.10.

As a reminder, third quarter is historically our lowest booking quarter of the year, and to address this seasonality, we've applied additional measure of safety to our revenue guidance. Additionally, we expect higher sales and marketing expenses in Q3 as compared to Q2 due to headcount increases and additional investments we're making in sales team.

For the full year, we are increasing our revenue and earnings guidance. We now expect to report revenue of $29.5 million to $30.1 million, with GAAP diluted earnings per share of $0.35 to $0.37, non-GAAP diluted earnings of $0.45 to $0.47.

Now with that, I'd like to turn the call over to Brent for a discussion of our customer orders.

Thank you, Roger. Good morning, everybody.

The sales team had another good quarter, with increased bookings on both domestic and the international side of our business, which was the continuation of strength that's been building for a number of quarters now. The composition of those orders has changed as we have expanded our product offering with the introduction of the new 3880 MRI patient monitor.

On the domestic side, we saw bookings of patient monitors more than double when compared to our first quarter. We see this as an indicator that the market and our customers are beginning to recognize the patient safety and workflow benefits of the radically improved design of our product.

The compact and lightweight form factor really resonates with them as they visualize the additional utilization and efficiencies that are made possible by iRadimed's design. On the international side, our patient monitoring bookings for the quarter remained strong as our distributor teams have fully integrated the product into their selling efforts.

During the quarter, we began shipping our new invasive blood pressure module to the international market. Much of this business outside the U.S.

is done on tenders, and the invasive blood pressure is requested on the majority of tenders. Now that we have this important parameter, our distributors will be able to respond to a much larger share of existing patient monitoring opportunities and increasing their potential market with the product.

We had a number of successes for the quarter with bundling our patient monitor with an IV pump sale. Bundling our IV pump and monitor into a combined sale remains a great opportunity for us and only us as iRadimed is the only company in the world with the capability to provide hospitals with a truly mobile patient care system that allows for transporting patients to the MRI and back without having to make multiple time-consuming equipment changeovers.

We are really seeing this concept resonate with customers and is a key differentiator between iRadimed's product offerings and anything else on the market. We're excited about the future of the 3880 patient monitor, and we anticipate increasing demand as customers move towards realizing additional utilization and driving efficiencies in their operations.

As I stated previously, the composition of our orders for the quarter has changed, and so did our -- and so, too, did our salespeople's time allocation to our product. A little more than 6 months ago, we were a one-product company in the U.S., with our domestic sales team concentrating 100% of their efforts on the IV pump.

Now with addition of a 3880 patient monitor, we've doubled our product offering and, while we are still spending most of our time on the IV pump business, there is a significant amount of selling time being spent on the patient monitoring business as well. This increased time allocation to the patient monitor resulted in better-than-expected monitor bookings and slightly lower-than-expected IV pump bookings for the quarter.

We see this as an allocation -- time allocation matter for our U.S. selling team as they are responding to customer requests for monitor downloads as part of the customers' own internal process of assessing, pursuing alternatives with shifts -- we've shift some of the selling time from the IV pump to the new patient monitor.

While we recognize these situations impact the time we could spend selling the IV pump, we also recognize that customers are becoming more aware of our patient monitoring offering and willing to consider our device in their first-think decision. This has caused us to focus on balancing our sales efforts between the two products to help ensure we are achieving our targeted growth rates for both devices.

Accordingly, we've taken steps to address this by shifting IV pump incentives, providing more sales education to our U.S. sales team and continuing to expand the number of salespeople we have on the field.

The composition of U.S. orders for our pump systems in the second quarter remained consistent with recent quarters, with approximately half the orders coming for first time adopters and half coming from our existing customers.

We remain committed to our strategy of targeting multiple hospital departments with our IV pump and believe it will continue to gain traction. We are experiencing greater rates of success with our critical care strategy by stimulating the demand for MRI [indiscernible] pumps in those departments.

And while changing hospital workflow is often difficult and time-consuming, we are beginning to see successes in converting customers' long-standing practice of using conventional pumps with long lines extending into the MRI room or just waiting until patients are stable enough to go to MRI for diagnostics scan without IV medication. As we've discussed before, both of these workaround solutions have a negative patient risk associated with them.

As for the sales team itself, our expansion plans remain on track for the year and we're currently searching for 2 additional U.S. sales managers to bring us to a total of 24 direct sales managers, which are supplemented by our 3 area directors and growing clinical nurse and customer service teams.

We remain committed to the expansion plan that I spoke about in the last call and growing our sales teams in both the U.S. and international markets during 2018.

Now I'll turn it over to Chris to summarize the financial results.

Today, I'll be discussing our financial results on a GAAP basis as well as on a non-GAAP basis. Our non-GAAP operating results excludes stock-based compensation expense and the related tax effects.

Our free cash flow measure is cash flow from operations less cash used for purchases of property and equipment. Lastly, infrequent tax items are considered based on their nature and excluded from a provision for income taxes as these costs are not indicative of our normal or future provision for income taxes.

We believe the presentation of these non-GAAP measures, along with our GAAP financial statements, can be helpful in providing more thorough analysis of our ongoing financial performance. You can find a reconciliation of these non-GAAP measures to the nearest GAAP measure on the last page of today's press release.

As already stated, we reported second quarter revenue of $7.4 million compared to $5.5 million for the same quarter last year. Domestic revenue was $5.7 million for the current quarter compared to $4.8 million for the same quarter last year.

Revenue from international sales was $1.6 million for the current quarter compared to $0.7 million for the 2017 quarter. Revenue from devices was $5.1 million for the second quarter of 2018 compared to $3.7 million for the same quarter last year.

Included in revenue from devices for the second quarter was $1.5 million in sales of our new MRI-compatible patient vital signs monitor compared to $0.3 million for the 2017 period. Revenue from disposables and services was $1.9 million for the current quarter compared to $1.6 million for the 2017 quarter.

And finally, revenue from an amortization of our extended maintenance contracts was $0.4 million for the current quarter compared to $0.2 million for the prior year quarter. The average selling price of IV pumps recognized in revenue during the second quarter of 2018 was approximately $29,400 compared to approximately $35,600 for the same quarter last year.

The decrease in ASP is a result of higher international sales as a percent of revenue during the current period when compared to the same period last year. ASP for our patient vital signs monitor was approximately $34,100 for the second quarter of 2018 compared to approximately $20,600 for the 2017 period.

The increase in ASP is due to the addition of U.S. sales of the monitor in the current quarter compared to only having international sales in the prior year quarter.

Gross margin was 76.8% for the current quarter and 77.7% for the 2017 quarter. The increase in gross margin percent was primarily the result of higher international sales as a percent of revenue that have a negative impact to margin and unfavorable overhead and service-related costs compared to the second quarter last year.

These negative impacts were partially offset by higher average selling prices, MRI compatible patient vital signs monitoring system when compared to the same period last year. Operating expenses for the second quarter of 2018 were $4 million or 54% of revenue compared to $4 million or 72% of revenue in the second quarter last year.

On a dollar basis, operating expenses were comparably impacted by higher sales and marketing costs, primarily associated with higher sales activities expenses and payroll due to higher headcount and higher sales commissions, also due to higher sale. These were partially offset by lower stock compensation expense.

Higher sales and marketing costs were offset by lower G&A and R&D expenses primarily related to the elevation of the expense in the prior year due to the write-off of non-trade AR and lower expenses for legal and professional services, applies for R&D project development. Our tax effect -- our effective tax rate for the current quarter was 20.5% compared to a negative 2.4% for the 2017 period.

The higher effective tax rate is primarily due to higher taxable income in the current quarter compared to the prior year quarter, which also decreased the relative impact of permanent items on the tax rate in the current quarter when compared to the prior year quarter. On a GAAP basis, net income for the current quarter was $0.11 per diluted share compared to $0.03 for the second quarter last year.

On a non-GAAP basis, net income was $0.14 per diluted share for the current quarter compared to $0.06 for the second quarter last year. For the 6 months ended June 30, 2018, cash provided by operations was $3.1 million compared to $0.1 million for the same period in 2017.

This increase is primarily the result of higher net income and lower cash outflows related to income taxes and accounts payable, partially offset by higher net cash outflows related to prepaid expenses and other current assets, accrued payroll and benefits and lower net cash inflows related to deferred revenue. For the 3 months ended June 30, 2018 -- 2017, our free cash flow and non-GAAP measure was $1.5 million and $0.1 million, respectively.

As of June 30, 2018, we had $29.5 million of cash and investments. Now I'll turn the call over to questions.

Operator?

On the pump sales market, it looks like sales have been sort of, at least dollars-wise, have been close to flat for a few quarters now. I know you had a nice little bump up, and year-over-year growth is still growing nicely.

But do you still think you could sort of get that long term, mid- to high, even 10% growth on the pumps? And how do you sort of invigorate growth?

Is it just a question of your sales guys, a little bit too focused on the monitor side? Or are there other things you're maybe concerned about?

Yes, this Brent. That's a great question.

When you introduce a new product like that, obviously, there is some excitement in the sales force and an excitement on the team with the new product. So it's up to us to balance those selling efforts as we were saying in the call.

And so we've done that in some different ways. Mainly, it's been with the incentives that we've put on the different products, the incentive we've put on the IV pump versus the patient monitor.

And also it's headcount. I mean, again, as we were trying to describe during the call, you've got a finite number of selling hours then when you've got 1 pump, you can devote 100% of your selling hours to that.

When you've got 2 products, again, it's going to be 100% minus x. So that's our balancing act.

And we can do some of that with incentives, and some of that really needs to be headcount. So that's why we are continuing to put on more salespeople, more -- and get more headcount so that we can keep increasing the amount of time that we are spending on the IV pumps.

And over time, do you see -- I realized you talked -- you've constrained how many salespeople you can add in a given quarter. Over time, do you see this number growing a lot faster?

Because -- if I look back, I know that your former competitor left the market. I think their sales force was more than double what yours is today -- and may obviously got a lot of missionary sales that made it easier for you guys, paved the way for you a little bit.

So perhaps you need to considerably increase the sales force, which would eventually drive more growth.

Well, this is Roger. I mean, we're not surprised by it at all.

Actually, Philips, it's not bad sign at all. Actually, a good sign.

Brent's maybe put a little bit more color into this. The sales force has allocated a good 1/3 of their time away from selling IV pumps.

That sale has more or less, as you pointed out, plateaued off. So we're basically getting the same business we used to get, with 2/3 or a little bit less of the selling effort.

So I don't see that as a bad sign. I actually see it as a potential good sign as the market's still quite good there.

Right. And how about pricing?

I mean, if you exclude sort of the mix towards international, are domestic sales still sort of -- maybe that you're not going to get that growth to try to help also. But are we still sort of in that mid-30s thousand range on the domestic side for pricing on the pumps?

There's been no average selling price change at all.

Okay. It's all mix, essentially.

Okay. And how much -- just switching real fast on the monitor side.

Just to clarify, did you say the average selling price -- the average price was $34,000?

$34,100.

Right. Okay.

And obviously, international skewed that down a little bit, but still somewhat below, I thought, internally, obviously, well below your competitor and somewhat below, I thought, what you guys might eventually reap. And I know you just kind of came out with term price discovery last quarter.

Are we still in that process? Do you still expect sales -- your sales price to go up?

And any update on what the competitor's doing, the reaction was? Are they coming down?

I know you mentioned last quarter you've seen price quotes, anecdotally, in the low-70s. Did that change at all?

Not much. I mean, they have gotten aggressive in certain situations, but you're -- certainly, that's the exception of the rule.

So there -- so we do see some opportunities for potentially getting a little bit higher prices than the domestic market. But we think we're doing well.

I mean, if you look at that number, internationally, it's heavily, heavily skewing that number down because we don't have the sales and marketing expenses on the international side. And...

And yes, and the configured model is selling at higher rates internationally.

And is international like half the price? Is that like a ballpark or...

Oh, boy. Larry, it's -- the distributors, we're talking about what would sell it to the distributors...

Right. Understood.

It's much less than half.

Okay, you're much less than half. Okay.

Fair enough. That's really skewing the average down, obviously.

Got you.

The international ASP's about 40% of domestic.

Just want to follow up on Larry's questions. We'll start with the monitor and then move on to the pumps.

So I don't want to belabor the pricing, it looks like it was -- the monitor was sequentially down a fair amount. Was that all from international mix?

Or was some of that bundling? There's the bundling -- or how much has the bundling maybe influenced price of either the pump or the monitor?

So it's the pump that's down a little bit from last year, about $29,000 versus $36,000, roughly. And in large part, we have international sales, it was about just around 22% of total revenue.

For this, we were about 12% of our total revenue for last quarter. And when I look at the ASPs, I see slight increase versus international ASPs.

So yes, I think part of that decline in ASP quarter-to-quarter is strictly due to the international sales.

Yes. I think David was asking about the bundling.

The second piece, I think, of what he was talking about, yes.

So maybe Brent can...

Sure, yes. And that really hasn't significantly impacted either the price of the pump or the price of the monitor.

We're not offering a deep discount on the pump because we're selling the monitor along with the pump.

Okay. And just in the past, you've mentioned multipump orders.

Is -- did you try that this quarter? Or are you no longer following that?

That seemed like something that was also growing recently.

Yes. We continue to attract multipump orders with dual -- what we call multipump, more than 3, dual pump orders, too.

Again, they were down a bit. Like we've said, on the -- the IV pumps orders, we're lower than our expectations, I think.

And multipump's, again, no exception to the rule.

And again, David, that goes to the allocation of the sales time. The monitor, so when the guys are selling the monitor and they move a substantial part of their selling time to that, we haven't -- we're just busy chasing the existing monitor business, which is pretty much all about MRI.

There is none outside of there. So all of that part of the selling time never gets to those works as we -- as we're focused on the monitor with that piece of our selling time.

So as you know, we hope to, because the monitor is suitable for transports, small and lightweight, lasts a long time on the battery, will eventually, hopefully, spread the monitor as well as into the other areas of the hospital, like we've been doing with pumps, but that's -- it's not there yet. We're just chasing the abundant amount of these deals that are going down in MRI right now.

Excellent. And then I just want to talk on -- a little bit on the expense side.

It seems like you've been doing a really great job with improving operational margins. And it looks like the guidance, if you add in the revenue for next quarter, it looks like, potentially, you could be earning more than what you're guiding to for the year on a non-GAAP basis.

Is that maybe -- are gross margins maybe a threat? Or is there is something this quarter that was exceptional with respect to G&A.?

I'm just trying to think about operating expenses and gross margins going forward in the next couple of quarters.

I think what we saw this quarter and while you see a movement down in expected earnings, we did have some shifting of expenses going from Q2 to Q3. For one, we had some sales guys, 2 sales managers, I think, that we had anticipated coming in early on the quarter but didn't make it until later in the quarter.

So some of -- a lot of that cost shifted out the quarter and into the third quarter. And then some of the investments that we're making in the sales team to are going to start to hit in the third quarter.

So we're anticipating some higher sales and marketing cost that are impacting our earnings estimates.

Excellent. And then just lastly, on the monitor.

Are there any reasons in the country or types of hospitals that you're having better success with? Just any color we can have on how the launch is going to be would be greatly helpful.

Sure. And again, if you look at the hospitals we've sold to, it has been a pretty wide variety both geographically and the size of the institution.

We've sold in some very small institutions, we've sold in some huge institutions. So it's really been pretty well spread across the board.

I can't give a lot of comparisons there.

Most of my questions have been asked, but just one for Brett. When you look at the patient monitoring sales, are these new customers that haven't had patient monitoring equipment before?

Or are they orders that you're winning from the competitor?

Larry, these are almost all replacement market products, right? I mean, this is a mature market.

This is a market that's behind these products for years and years. You have a pretty low growth rate -- a bit of your growth rate is new MRI coming -- being sold in the market.

What our opportunity here, the market share play, obviously, and taking market share from our competitors. So every one of these sales is competitive and every one of these deals, we're really taking from our competitor, Philips Medical Systems, is basically the only one that's actually selling in the U.S.

And I think the only thing I would add to that, Brent, is the critical care strategy. And once we begin to gain some more traction there, the market will grow for us as we begin to realize this multiple monitor sale compared to, really, today's sale is -- this replacement market, it's just a one-to-one business model.

The ones we're able to get in there and really show off our product and convince hospitals to change their workflows and processes. We'll be able to realize this multiple monitor per MRI sale, which will ultimately grow the market for us.

Okay. And then follow-up question.

You mentioned overseas the invasive blood pressure monitoring. Is that something that we'll see in the U.S?

Yes.

And how important, Roger, do you view that as a new product addition?

Well, it hasn't affected our sales so far but it will be nice. It's not going to add to the revenue much.

So I have to say I wouldn't relegate it to a very high position in your mind. It's not hurting our sales to not have it specifically at this point.

Will it help us continue to add growth momentum? Yes.

Is it going to affect the revenue much? No.

Yes. Okay.

And then one final for Chris. I'm assuming there wasn't really share buybacks in the quarter?

I don't think you commented on that, Chris.

That's right. We don't have an active buyback program right now.

We don't have one authorized.

So any thoughts about the cash? Or cash is probably way, way more than you'll ever would need to run the business day to day?

Yes. I mean, we're building excess cash.

It's something that the board has -- we actively dialogue with -- at the board level with what to do with it. And at this point, there hasn't been an appetite for any type of dividend.

I often get asked questions around dividends or special dividend or anything like that. There just hasn't been the appetite to implement one of those right now.

So we still hold on and...

You will generate free cash flow this year of approximately how much?

It's about $5 million.

$5 million, okay. And then presumably grows as the business grows next year and the year after?

That's correct.

It's actually a couple of follow-ups. On the monitors side, does the competitor have the invasive blood pressure monitor in their piece or not all of them or...

Well, yes. It's been a feature in the competitor system for years but it's not hugely used.

Okay, right. So it's not often utilized in the hustle, it may not necessarily need to have a like-for-like.

So how about the monitor market in Japan? Is that also going to be a replacement marker or is that somewhat of an assumed yes?

Or is that -- will that be sort of a newer missionary market for you guys?

Actually, that is -- that's a good question, Larry. That market was -- though these multiparameter MRI patient monitors have been offered for sale in Japan for 20-plus years, it was not a very well accepted or fully adopted thing for the Japanese.

They just -- they sold, in other words, very poorly in the Japanese market, relied on buying single parameter and dual parameter, just a pulse oximeter had served them well for all of those years until about, I think it's about 2 years ago now. There had been some change in the way they think and some of their guidance for accessible patient care, I won't call it a law.

I'm not sure any it's quite at that level. But their patient safety and care recommendations changed a couple of years ago, and so they upped the ante to where -- I believe, they now recommend that there 3 parameters be available for monitoring patients in the MRI and that's still to gas blood pressure and -- as well as pulse oximetry.

So that has made the market for these multiparameter MRs now all of a sudden have a whole new entire profile in Japan. So most -- to cut the answer short, yes, there's quite a few installations in Japan in general, MR systems, and there's a quite a few of those that never had a multiparameter MR monitoring.

Okay. So it's an opportunity.

And then I guess, I assumed that will be through distributors initially and are you selling pumps there too or no, in Japan? Just remind me.

Yes. As I've mentioned, our Japanese distributor has done well with our pump and it's the same ones that we expect to do very well with this monitor, now that they've just gotten it cleared to import.

Okay. And just on -- switching gears, you mentioned some investments in sales and marketing in addition to sort of the increasing headcount.

Is that sort of -- I know you did mention that you called out somewhat an increase in some incentive compensations or at least a shift a little bit more to the pump side. Anything else you can -- any more color on sort of what sort of initiatives you're spending some dollars on?

Just going back to the training initiative. We've got training coming up in the middle of August and we've spent some money on some outside training for the sales people.

That would be included in that.

Got it. And then just lastly, any update on the time line for -- you said, you mentioned some of your future newer products, sort of in line with expectations.

So the magnetic detectors, is that still sort of like a one year late-type thing? And also on the next generation pumps, any thoughts on when we might see some news on that?

I mentioned just in brief that our development plans are unchanged and still progressing well, reporting change there but to reiterate, that does include the magnetic detector item, which is still in the works to be something we hope to have revenue, appearing in about a year. And the pump is -- that's the bulk of the effort here at this site at the present time in spite of doing some things for the monitor, like adding this invasive pressure.

That one's very difficult. But the pump, the new pump, that's a big project and we're deep into that thing.

And I don't know what more to say about it. There's nothing negative to report there.

Okay. But I don't know if you've ever given a time line to that.

Is that something you expect that we'll see maybe by sometime late night in '19 or even beyond that?

Well, I think you have to look at our -- that 5-year revenue goal. You'll see an inflection in there and that inflection point is because of that new pump.

Thank you, all, for participating in today's call. Overall, we had a very good quarter.

And again, while remaining cautious as we build out our sales force, I'm encouraged by the demand for our products and the progress we're making in this company. We look forward to reporting back to you next quarter.

Thank you.