Welcome to the IRadimed Corporation Third Quarter of 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded today, November 3, 2023, and contains time-sensitive information that is accurate only today. Earlier, IRadimed released its financial results for the third quarter of 2023.

A copy of this press release announcing the company's earnings is available under the heading news on their website at iradimed.com. A press release, a copy was also furnished to the Securities and Exchange Commission on Form 8-K and can be found at sec.gov.

This call is being broadcast live over the Internet on the company's website at iradimed.com, and a replay of the call will be available on the website for the next 90 days. Some of the information in today's session will constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements focus on future performance, results, plans and events and may include the company's expected future results. IRadimed reminds you that future results may differ materially from these forward-looking statements due to several risk factors.

For a description of the relevant risks and uncertainties that may affect the company's business, please see the Risk Factors section of the company's most recent reports filed with the Securities and Exchange Commission, which may be obtained free from the SEC's website at sec.gov.

I would like to turn the call over to Roger Susi, President and Chief Executive Officer of IRadimed Corporation. Mr. Susi, please go ahead. .

Good morning. Thank you for joining us on today's call. I'm very pleased to report our ninth consecutive record quarter. With Q3 '23, again showing our ability to execute and grow our business. This morning's press release announced third quarter '23 revenue came in at $16.5 million, representing a 23% increase over the third quarter of 2022.

GAAP diluted earnings per share for the third quarter were $0.40. Non-GAAP diluted earnings per share for the third quarter of '23 was $0.43 per share, a 48% increase over Q2 of '22. Our entire team remains strong, committed and able to pull together to bring in orders, needed materials, production plans, delivery and customer setup.

The MRI patient vital science monitor continues to gain acceptance in new customers with some very large orders this past quarter. Sales of our MR IV pump remains strong. And with the new program for field replacements of older pumps, we anticipate growth of this older product line as well.

As with last quarter, we again feel comfortable raising our guidance for the year, which we shall learn up in a moment. Q3 is typically our weakest quarter for new bookings due to the summer holidays, yet still our total backlog built year-to-date continues to be sizable.

As I have said before, though a strong backlog provides excellent visibility and allows us to maneuver and reallocate resources as supply issues may arise, we are striving to reduce this backlog and deliver products with less customer lead time. However, we still have a bit more backlog and associated long lead times than we preferred.

We recently quote domestic lead time to our customers of 90 days and international at 120. But we plan to shave off some lead time by close to 30 days in the coming quarter. This is being done through an acceleration of production and materials flow to provide customers quicker access to the products that they have purchased.

Now I'd like to provide progress regarding our FDA efforts surrounding the new 3870 MRI IV pump. Last quarter, I spoke of the massive testing that's underway here, which continues with some tests finished, while still others remain in progress. I'd like to note that the results are positive so far.

And so it's a matter of continued forward efforts and progress to complete the test. As further support for our internal 510(k) team, we have engaged 2 external support consultants. One for technical help, and the other for statutory and relationship assistance, neither is inexpensive.

Still, we feel it necessary to ensure 510(k) success with a minimal amount of FDA review time. We saw such a payoff for using external support with the recent 8-month approval of another manufacturer's new IV pump.

Though we've been targeting late Q1 for refiling the new 3870's 510(k) should our new external help suggest additional or different elements that cost us additional time, but pay off with reduced FDA review time, we will consider such input carefully. Again, the hope is that such an external input should shorten the time FDA needs for clearance.

Now I'd like to recap our Q3 performance and indicate our confidence that this upward trajectory will continue. Therefore, we now announce an increase in our guidance with the expected revenue for the year 2023 of $65 million to $65.5 million.

We also raised the forecasted annual GAAP diluted earnings per share to $1.34 to $1.37, and the non-GAAP diluted earnings of $1.48 to $1.41 -- I mean, $1.51, excuse me.

For the fourth quarter of 2023, we expect to report revenue of $16.9 million to $17.4 million with GAAP diluted earnings per share of $0.35 to $0.38 and non-GAAP diluted earnings per share of $0.38 to $0.41. Now I'd like to turn the call over to Jack Glenn, our CFO, to review the financial results for the quarter. .

Thank you, Roger, and good morning, everyone. As in the past, our results are reported on a GAAP basis and non-GAAP basis. You can find a description of our non-GAAP operating measures in this morning's earnings release and a reconciliation of these non-GAAP measures to the GAAP measures on the last page of today's release.

As we reported earlier this morning, revenue in the third quarter of 2023 was $16.5 million, an increase of 23% compared to the third quarter of 2022. Domestic sales increased 29% to $13.9 million and international sales remained flat at $2.6 million.

Overall, domestic revenue accounted for 85% of total revenue for Q3 of 2023 compared to 81% for Q3 of 2022. Device revenue increased 25% to $11.8 million. This was driven by a 40% increase in monitor revenue.

Revenue from disposables and services increased 24% to $4.2 million for the third quarter of '23, while our maintenance contracts were consistent at $0.5 million for both periods. The gross margin was 77.8% for the 2023 quarter compared to 78.67% for the 2022 quarter.

The decrease in gross margin is primarily due to higher overhead costs and increased raw material costs. Operating expenses were $6.9 million or 42% of revenue compared to $6.4 million or 47.8% of revenue for the third quarter of 2022.

On a dollar basis, this increase is primarily due to higher general and administrative expenses for additional headcount, higher regulatory and legal and professional expenses and increased benefit expenses. As a result, income from operations grew 43% to $5.9 million for the 2023 third quarter.

We recognized the tax expense during the third quarter of 2023 of approximately 1,341,000, resulting in an effective tax rate of 20.9% compared to a tax expense of approximately $810,000 in the 2022 quarter. This increase is due to higher taxable income in 2023.

On a GAAP basis, net income was $0.40 per diluted share compared to $0.27 for the 2022 quarter. On a non-GAAP basis, adjusted income was $0.43 per diluted share for the '23 third quarter compared to $0.27 for the third quarter of 2022.

Cash from operations was $1.4 million for the 3 months ended September 30, 2023, down from $3.9 million for the same period in 2022. And for the 3 months ended September 30, 2023 and 2022, our free cash flow, a non-GAAP measure was $1 million and $3.4 million, respectively. And with that, I will now turn the call over for questions.

Operator?.

[Operator Instructions] Our first question will come from Scott Henry of Roth Capital Partners. .

Congratulations another strong quarter. Just a couple of questions. First, any thoughts on what you're seeing on the pricing environment? And perhaps with the monitors how the shift is between U.S.

and OUS?.

Scott, this is Roger. So maybe I'll take that one. So our pricing has -- with the monitor specifically, we increased that by negotiating a lot of the contracts over the previous 18 months. The largest, I think two, those increases actually began in July. So actually, our prices are going up a bit.

And that's on the monitor, it was a decent increase there. The pump increase was very, very small, actually. So relatively insignificant. So we're seeing -- we're not seeing a pushback from that sort of thing, if that was your question. As far as international goes, with the monitor, monitor sales internationally are very strong.

The rate of adoption and growth in the sales internationally for the monitor has been pretty stout, both from just penetrating the countries that we had been in historically, but as well as cultivating some new areas. So we've had some pleasant surprises in Mexico and Colombia, for example, with some nice opportunities for the monitor there.

So all in all, just positive -- I guess, positive things to report. .

Okay. Great. And then on the monitor side, we know one of your competitors appears to be less focused on that segment.

Has anything changed on that landscape? Or do you feel still you are in a position to take share right now?.

Well, good question. So they are less focused. They still have huge problems that are in the news at least weekly, so you can tell where their focus is.

But we had another little manna during COVID from them because not only were they not so focused, which remains to be the case, generally, but their deliveries got extremely long because they had a real supply chain issues much greater than we did. So we see them catching up there. So that's, let's say, 1 point for them.

But it removes one of their -- one of their hurdles. But overall, the focus is still light the size of the sales force is still lighter than it had been and they have their hands full dealing with, let's say, bigger fish to fry, just the same. .

Okay. Great, Roger. And final question, gross margin strong in the third quarter. As we start to think about 2024, 2025, in higher volume of monitors and pumps.

How do you think about is 78%, 79%, does that start to move in on the ceiling for gross margins? Or do you think with higher volumes could you get to that 80% level?.

Another good question, okay? Another good question. So during COVID, you can't really see it that much, but we did lose some pricing advantage with suppliers. We were paying through the nose let's say, for a lot of components just to get our hands on them.

And so worst, as a matter of fact, just the last -- it's been a big subject for a few days this week that I've had with our materials people. It is a visible impact to our raw materials costs. They're up a couple of percent. So there is something there to be corrected. How long it will take? Of course, it's not going to be like a one quarter fix.

But that's a mandate now for this coming year in 2024. We think -- and you can see it, right? The semiconductor suppliers are now -- their shortages have reversed where they have surpluses and they're even thinking of cutting and scaling back some output.

But -- so there's opportunity there to sort of recover ground that was lost to expedite in an effort to get parts that were very short supplier during COVID and upped our cost to turn that back around. But it won't be quick, but you should -- you can -- I'm counting on the effect over this coming year.

So short answer to your question is, yes, I hope that we will be able to even boost our gross margin. .

[Operator Instructions] Our next question will come from Frank Takkinen of Lake Street Capital Markets LLC. .

This is Nelson Cox on for Frank. Congrats on another strong quarter. Jack, you mentioned Q3 being a seasonally slower quarter for orders.

I was hoping to hear your expectations for Q4?.

Well, the flip is Q4 is usually a big quarter for us. Yes. Q3 is conventionally light and Q4 is conventionally strong. And last year, I think we also had a pretty strong Q1 because a lot of stuff -- even though we had a good Q4 last year, there were still stuff that carried over didn't get written as far as the orders until Q1.

So yes, I mean we don't expect the seasonality factor to change. .

Got it. And then in relation to the customer announcement to discontinue service on IV pumps over 7 years old.

Can you help us understand your installed base better to try and place context around how many of your pumps could be over 7 years old? And how large could that increase per year going forward?.

Well, I believe -- let me think I somehow lost that number. .

I think we think that it's somewhere in that 1,500 to 2,000 units out there that are in that category over 7 years. .

Yes. So a large number of pumps. And we've had -- we've quoted, I think, close to 400 already. So that kicks in at the end of December, right? So we see that as being a factor that might bring in some orders certainly in the Q4, but much more so Q1 and 2. Those will be -- we start -- we're going to start seeing those turn into orders here very soon.

But I think the strength of it being great in Q1. .

[Operator Instructions] Our next question will come from Frank DiLorenzo of Singular Research. .

Can you expound upon the strength you saw in the ferromagnetic detection systems this past quarter? And can you talk about to what extent you may be able to maintain growth going forward for the fourth quarter and into next year?.

Okay. Yes. Well, the sales have been growing slowly, frankly, with the FMD product. The -- it's a matter of our sales force really learning what the critical call point is. International demand has actually grown quicker than our domestic, but the market is quite huge compared to where we're at now.

So we've got a decent number on the backlog but it is not up to our expectations. So I think with the U.S., with the domestic market, it's a matter of that sale is a little different to our sales folks than it is to sell a pump or a monitor. And they're learning how to come to grips with that.

And as they do, we see different territories starting to sell FMDs as those different reps in those territories really learn who they should be talking to. And the international seems to be a little bit more quick for them. They're picking up the ball on that 1 a little quicker.

So long runway yet for the FMD, lots of opportunity, and we over the year 2024 in the U.S. gained the keys to how we position that product and to whom we position that product to increase the sales. .

Okay. One other question regarding your next-generation pump. Can you talk a little bit about your strategy outside the U.S.

for that as far as getting approvals and launch kind of the timing on that going forward?.

Oh, yes, we won't turn our guns to obtain the CE Mark for that one, probably until mid-late summer that's one will have the capacity with our team is working on the 510-K to deal with making the tech file and getting our notified body on board to do that.

And with the changes in Europe, though they've delayed all this MDR stuff for products like ours yet, the notified bodies are still kind of applying the logic of the future mandatory MDR stuff currently. So they're taking a long time to review tech files and clear them. So an estimate of that would be mid-2025 before we'd have a CE-marked pump.

Now having said that, that's probably accounts for 1/3 of our international business. The other 2/3 of it doesn't need a CE Mark. And so we'll enter those markets very soon -- much sooner. Those will enter as soon as we're launched in the U.S. .

[Operator Instructions] This will end the Q&A session. I would now like to turn the conference back to Roger Susi for closing remarks. .

Thank you, operator. Again, it's with great pleasure to report our Q3 2023 results, demonstrating yet another quarter of strong growth. It is also a great pride that we can guide that we expect strong performance as the year concludes. With that, I look forward to reporting our year-end success. And thank you all for participating in today's call. .

Thank you. This does conclude the call. You may now disconnect. Have a pleasant day, and enjoy your weekend..