Q3 2026 Financial Results Call and Webcast - STAAR SURGICAL CO

Financial Performance:

• Third-quarter 2026 net sales were $83.4 million, a 12% decline year-over-year, though excluding the $25.9 million deferred revenue from Q3 2025, sales grew 21% (to $68.8 million prior-year base).
• China net sales were $39.3 million; excluding the deferred sales item, this represented a 31% growth driven entirely by higher average selling prices (ASP) due to mix shifts toward EVO Plus and toric lenses, as supply constraints limited volume growth.
• Non-China regions posted 13% growth to $44.1 million; Asia Pacific (ex-China) grew 4%, EMEA grew 31% (51% ex-Middle East), and Americas grew 14% driven by the U.S.
• Gross margin was 70.9% in Q3, down from 82.2% in the prior year, impacted by temporary factors including ERP implementation costs, freight, tariffs, and inventory provisions.
• Adjusted EBITDA was $14.4 million ($0.28/share); excluding the prior-year deferred sales benefit, prior-year adjusted EBITDA would have been $8.9 million ($1.18/share).
• Company reported net income of $5.6 million ($0.11/share) in Q3, flipping from an adjusted net loss in the prior year (excluding deferred items).
• Balance sheet remains debt-free with $206.4 million in cash, cash equivalents, and investments as of October 2, 2026.
• Full-year 2026 guidance was not provided due to macro and geopolitical uncertainties, though management confirmed strong profitability and cash flow for the nine-month period.

Guidance and Future Outlook:

• Management expects fourth-quarter gross margins to improve over Q3 due to lower tariffs (following the completion of the China-bound manufacturing move to Switzerland) and reduced inventory provisions.
• Long-term gross margin improvement is projected for 2027 as manufacturing facilities (U.S. and Swiss) operate at full capacity, driving down unit costs.
• China unit volume shipments grew 12.4% year-to-date, outpacing the broader refractive market, with expectations for continued growth despite a seasonal sequential decline in Q4.
• Management anticipates a structural market shift from laser to lens-based vision correction globally, with U.S. laser procedures declining 5.8% in 2026 while ICL sales grew double-digits.
• No full-year 2027 financial guidance is expected until Q4 2026 or Q1 2027, pending resolution of operational and macro challenges.
• The board authorized a $50 million share repurchase program, citing undervaluation and confidence in the business.

Business Segments and Product Lines:

• Product Innovation: First-in-human clinical trials for two new presbyopia products (multifocal and aspheric) utilizing the Colomer platform are expected to begin patient enrollment within the next few months.
• Manufacturing: Completed the transition of all China-bound ICL manufacturing to the Swiss facility, reducing tariff exposure; secured DECRA certification for a second clean room at NEDAL to support scaling.
• Commercial Updates: Appointed Ben Park as CTO (R&D), David Bailey as Chief Commercial Officer (returned CEO), Andrew Pilon as VP Business Development, and Pascal Ashleman as VP Asia-Pacific.
• Regulatory Expansions: U.S. label expanded to include patients up to age 60 (~8 million new patients); Brazil's minimum prescription lowered, adding ~26 million potential patients.
• Inventory Management: Distributor inventory in China has been managed tightly and declined below the six-month target, reflecting high demand rather than distributor destocking.

Market and Competitive Landscape:

• Market Trends: A global structural shift is occurring from laser to lens-based procedures, with EVO Plus adoption accelerating in China (mid-tier hospitals closing the gap with top centers) and strong growth in Spain, Germany, and the U.K.
• China Dynamics: Distributor unit shipments grew 12.4% YTD; growth was driven by premium mix (V5 and toric lenses) rather than market volume expansion, as the end market volume remained stable.
• Competitive Position: ICLs are growing double-digits while U.S. laser procedures decline; EVO ICL is positioned as the most clinically validated phakic IOL with 4 million lenses distributed.
• Regional Challenges: Japan saw a slight decline due to currency headwinds; South Korea faced market softness (estimated 5-10% decline in broader market) impacting revenue.

Risks and Challenges:

• Supply Constraints: Inability to fully meet demand in Q3, particularly for V5 and toric lenses, limited revenue potential and caused distributor inventory drawdown.
• Manufacturing Complexity: High SKU count (hundreds of thousands) and custom "made-to-order" lens requirements create supply chain friction, particularly affecting U.S. backlogs.
• Temporary Margin Pressures: ERP implementation, higher freight costs, tariffs on U.S. products sold to China, and inventory provisions impacted Q3 gross margins.
• Macro/Geopolitical: Ongoing macroeconomic and geopolitical uncertainties prevent the issuance of full-year 2027 guidance.

Management Commentary and Tone:

• Tone was confident and forward-looking, emphasizing record nine-month revenue, profitability, and a debt-free balance sheet providing investment flexibility.
• Management highlighted successful execution of operational goals (ERP, manufacturing relocation) and strategic hiring to drive innovation and commercial growth.
• CEO Warren Faust and CFO Deborah Andrews emphasized that the company is "beating internal plans" despite supply constraints, attributing growth to pricing power and mix optimization.
• Management stressed the long-term opportunity to convert patients currently on the "sidelines" of refractive surgery who seek freedom from glasses/contacts.

Analyst Questions and Answers:

• China Supply vs. Demand: Analysts asked if inventory depletion was due to distributor action or supply constraints. Management clarified that high in-market volume (12.5% growth) drove inventory draw, but supply constraints prevented meeting all demand, specifically for V5 lenses.
• ASP Sustainability: Analysts questioned the durability of 29% global ASP increases. Management indicated runway for continued price growth as V5 and toric lens mix continues to increase, driven by customer preference and clinical advantages.
• Q4 Outlook: Analysts sought specific Q4 guidance. Management declined to provide specific numbers, citing seasonal demand softness (Q4 historically lower in China) and macro unknowns, but reaffirmed confidence in sequential growth vs. prior year.
• U.S. Backlog: Regarding U.S. made-to-order (MTO) backlogs, management stated they are "mostly through" the backlog and positioned to supply demand, though some patients may have been lost or are waiting.
• Yield Improvements: Management confirmed manufacturing yields have improved post-ERP issues and could generate $750k-$1M in annual profit per percentage point of yield gain.

Other Key Points:

• Colomer Platform: Leveraging over 30 years of clinical evidence and 100,000+ eyes studied to expand beyond the core ICL offering into new therapeutic areas.
• Commercial Strategy: Focus on deeper surgeon adoption, education, and targeted patient awareness to convert interest into treatment, particularly in the U.S. and China.
• Shareholder Returns: The $50M buyback program signals management's belief in current valuation and commitment to capital allocation discipline.
• Mid-Tier Hospital Growth: Significant adoption of EVO Plus and higher mix products is occurring in mid-tier Chinese hospitals, expanding the addressable market beyond top-tier centers.