BIOLASE, Inc.
Q2 2021 Earnings Call Transcript

Published: 12 Aug 2021

[Operator:]

Good day, and welcome to the BIOLASE 2021 Second Quarter Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Todd Kehrli of the EVC Group. Please go ahead, sir.

[Todd Kehrli:]

Thank you, operator. Good afternoon, everyone and thank you for joining us today to discuss BIOLASE's financial results for the second quarter ended June 30, 2021. On the call today from BIOLASE is John Beaver, President and Chief Executive Officer and Jennifer Bright, Vice President of Finance. John will review the company's operating performance for the second quarter and then turn the call over to Jennifer to review the financials before opening the call for questions. Before we begin, I'd like to remind everyone that a number of forward-looking statements, which are statements, any statements that are not historical facts, will be made during this presentation including forward-looking statements regarding the company's strategic initiatives and financial performance. These forward-looking statements are based on BIOLASE's current expectations and are subject to a variety of risks and uncertainties that could cause the company's actual results to differ materially from the statements contained in this presentation. Such forward-looking statements only represent the company's view as of today August 12, 2021. These risks are discussed in the company's filings with the SEC. A replay of this call will be available on the BIOLASE's website shortly after the completion of today's call. When listening to this call, please refer to the news release issued earlier today announcing the company's 2021 second quarter results. If you do not have a copy of the news release, it is available in the Investor Relations section of the BIOLASE website at www.biolase.com. BIOLASE's financial results can also be found in the company's report on Form 10-Q which will be filed with the SEC. The tables we've provided in today's news release are for additional financial information, so we encourage you to review them. The tables include a reconciliation of unaudited GAAP net loss and net loss per share to non-GAAP adjusted EBITDA loss and adjusted EBITDA loss per share, as well as the details of the company's non-GAAP disclosures. With that said, I'll now turn the call over to BIOLASE's President and Chief Executive Officer, John Beaver. John?

[John Beaver:]

Thank you, Todd. And thanks to everyone for joining us this afternoon. We appreciate your continued interest in BIOLASE. Before we begin, I want to take a moment to acknowledge BIOLASE team's performance over the past 16 months. These have been challenging times. And we've all had to change our daily routines and for BIOLASE, I mean we had to adjust our operations to navigate a very shifting landscape. Through it all, I continue to be inspired by the commitment and resilience of all our BIOLASE employees. Their response and dedication making our customers successful and keeping them and their patients save is invigorating. And because of their determination, we had an outstanding quarter and a significant rebound from year ago. With that said, now let me review our quarterly operating performance. We reported substantial revenue of $9.1 million in the second quarter, up 211% year-over-year. This now represents three consecutive quarters of strong year-over-year revenue growth as the business continues to rebound from the low points of the COVID-19 pandemic. While most companies compare current quarters over previous years quarters, given the unprecedented times we went through in 2020, I also believe it's informative to look how we did compared to pre pandemic quarters, and during the second quarter of 2021 we increase revenue by 6% compared to the second quarter of 2019. Our strong performance is due to rising demand for our industry-leading dental lasers because of our intensified focus on education and training, the increased safety our lasers provide to dentists and their patients, and the published studies highlighting the improved results our laser provides to treat perio-disease. With over 70% of our U.S. laser sales generated from new customers during the quarter, and over 35% of our Waterlase sales coming from dental specialists, our messaging, marketing, educational and training efforts are bearing fruit. We're building best-in-class lasers and the dental practitioners are coming to us. Interest license today is also the day when two major league baseball teams will play on a field and Iowa made famous by movie Field of Dreams and the one line we all finally remember build and they will come. Well, we did and our results demonstrate that dentists are coming to us as they look to upgrade their dental practices. I ever also believe this is just the tip of the iceberg as our industry leading dental lasers provide a better standard of care for dental procedures. In addition, they ensure a safer environment for dental practitioners and patients by reducing aerosolization to mitigate the spread of infectious pathogens, such as COVID-19. This is an important and competitive distinction because dental practitioners experiences significant disruption to their business during the pandemic. However, our lasers give them added assurances that limiting their exposure from a health and business perspective, which was another contributing factor to a strong turnaround from a year ago. Our focus on educating and training dental specialists on the benefits of our lasers is already leading to increased adoption across these large and untapped markets. To further accelerate our growth over the past nine months, we have formed specialists' academies to expand the awareness of the benefits of our dental lasers into these dental specialist communities. Specifically, we have launched specialists' academies for endodontist, periodontist, and pediatric dentists to drive further adoption of our products. The market opportunity that exists for BIOLASE within each of these specialist communities is very meaningful. Let me quickly run through each of these addressable market opportunities. Let's start with the pediatric dental market. There are approximately 7,000 pediatric dentists in the US and based on our internal calculations, we believe that an additional 5% of pediatric dentists adopting our lasers will result in an additional $20 million in laser sales for BIOLASE. In turn, those additional sales would drive follow on consumable sales. During the second quarter, we launched the Waterlase Pediatric Dental Academy or WPDA for pediatric dentists. This Academy will provide clinicians with an immersive training experience through peer led learning, best practice sharing and ongoing mentorship to help ensure optimal integration of Waterlase technology into clinical practices. Pediatric dentists are actively seeking new ways to treat their young patients in a gentler and more holistic manner than traditional dental equipment offers. Our Waterlase all tissue lasers allow pediatric dentist to remove tooth decay gently and precisely, with less aerosols, less vibrations and little to no anesthesia. They can also perform soft tissue procedures with less blood and faster healing than traditional scalpel and suture methods. Waterlase is an excellent addition to any pediatric practice to help kids feel more comfortable in the chair and hopefully instill healthy practices in oral care for their lifetime. Last quarter, we launched innovative and first of its kind program in the periodontal community. This program fosters peer led learning with ongoing mentorship from leading clinicians featuring online meetings, case reviews by experts in the field. The Waterlase Perio Academy is open to all periodontist utilizing the Waterlase technology. Periodontist has seen a significant increase in Perio implant disease due to the substantial number of new dental implants being placed each year and the existing aging dental implants currently found in millions of patients. Periodontist are actively seeking ways to manage both periodontal and implant diseases. As the incidence of gum disease with bone loss has increased in the US adult population. There are approximately 5,000 periodontist in the US and 65 million Americans are suffering from perio-disease. Several studies have already confirmed that patient reported outcomes of Waterlase assisted treatment of periodontist were significantly better after laser procedures. This includes a McGuire study, which was published in the Journal of Periodontology, as well as a study in their national journal Perio and Restorative Dentistry. With so many Americans suffering from perio-disease, the study's findings are significant and determine the best course of treatment for these patients. Also, studies continue to suggest that periodontal health is essential for overall health. We believe these studies are significant for BIOLASE because they establish new protocols for perio surgery, and will drive further adoption of Waterlase in this target market. Based on our internal calculations, we believe that additional 20% of periodontist, adopt our lasers just in the US, we would to generate an additional $50 million in laser revenue, not including consumable revenue that would follow. Last year, we also launched a Waterlase Endo Academy and exclusive community of leading endodontist dedicated to improving patient outcomes and profitability with new technology. Our Waterlase dental laser offers various benefits for endodontist from faster procedures to new treatment options. In addition, Waterlase has also provided improved patient reported outcomes. Waterlase's unique approach allows for success and conservative endo treatment while the overall technology delivers more predictability, reduce patient discomfort and improve patient care. Top thought leadership is quickly establishing Waterlase as a new standard of care in endodontics. During the second quarter, we announced plans to develop the new EdgePro laser assisted micro fluidic irrigation device for endodontist with EdgeEndo, a global leader in commercializing endodontic products. This new device has been developed offer a solution endodontists thinking more from their current cleaning and disinfecting techniques. The EdgePro will be built upon BIOLASE's patented and proven, Er, Cr

[Jennifer Bright:]

Thank you, John. Good afternoon, everyone. My goal during my prepared remarks is to focus on providing more contexts around some of the numbers as well as highlight some of the operational improvements we achieved this past quarter. For further detail, please refer to our financial results, which you can find in the financial table of our earnings release and 10-Q. Our strong second quarter performance demonstrates the business momentum we have been generating since emerging from the low periods during COVID-19. This increased traction reflects a return to a more normalized operating environment for dental practitioners, as well as increased demand for our industry leading dental lasers. We delivered net revenue of $9.1 million representing 211% growth year-over-year. We are quite pleased with this continued momentum and for more reflective Q2 comparable, since we believe last year's Q2 was an anomaly. We are also very happy to report that we delivered revenue growth year-over-year when compared to our 2019 pre COVID revenue results in Q2 2019. Now let me share some additional year-over-year second quarter highlights, which include laser system sales increasing 425% year-over-year in the quarter, consumables and other revenue increased 173%, US revenue increased 167% and international revenue increased 340%. These are positive indicators of the increasing demand we're experiencing for industry leading dental lasers, as dental offices in the US and abroad continue to reopen, and more importantly as they implement increased safety measures such as our Waterlase so that they can remain open during these challenging times as the Delta variance spreads globally. During the quarter, gross margin improved significantly despite a higher contribution from international sales, which carry a lower margin since we sell through distributors. In fact, we were able to increase our gross profit by $3.1 million year-over-year. This resulted in a significantly improved gross margin of 44%, a 1,200 basis points expansion year-over-year, reflecting the impact of the increase in revenue, and average selling prices for products sold in the US during the second quarter. We continue to focus on margin improvement and believe we will improve this metric even more over the coming quarters. On the expense line, total operating expenses were $7.3 million for the quarter, an increase from $4.9 million in the year ago quarter. This increase was primarily due to commission expense and bonus incentives for achieving sales targets, higher fees incurred in connection with the annual stockholders meeting and proxy solicitation, and more engineering projects for 2021 as we continue to improve our industry's leading products. GAAP net loss for the quarter was $702,000, or $0.0 per share, compared to a net loss of $4.7 million or $0.12 per share for the second quarter of 2020. The improvement in net loss for the quarter was favorably impacted by a $3 million gain due to the forgiveness of a paycheck Protection Program loan during the quarter. On that topic, we also received an employee retention credit under the CARES Act for $800,000 net refunds and are submitting a request for a second employee retention credit during the third quarter. Our adjusted EBITDA loss for the second quarter was $2.7 million, or $0.02 per share compared to an adjusted EBITDA loss of $2.9 million, or $0.08 per share for the second quarter of 2020. Now let's turn to the balance sheet. We finished the quarter with cash and cash equivalents of $37.1 million due to the proactive and strategic decisions we took over the past year, today's balance sheet remains historically strong and is providing us that the resources to execute our growth strategies for several years without having to access the capital markets. Now moving on to guidance, we're continuing to experience high demand for our dental lasers and are currently forecasting revenue for the third quarter ending September 30, 2021 to be significantly above the year ago third quarter. Although the third quarter of the year is seasonally our second weakest revenue quarter, we expect the third quarter to approach revenues we achieved in the second quarter of 2021. In summary, we had another strong quarter with solid revenue growth and margin expansion and are confident that our actions to strengthen BIOLASE are working. I'll turn the call back to the operator to open the call for question. Operator?

[Operator:]

Our first question comes from Kyle Bauser with Colliers Securities.

[KyleBauser:]

Great, thanks for all the updates and congrats on the quarter here. Maybe I'll start with guidance. So just to be clear, Q3 last year, about $6.5 million, and we just did $9.1 million but significantly above last year. So on the upper end of that range is kind of what you're saying $6.5 million to $9.1 million.

[JohnBeaver:]

Kyle, that's what we're saying third quarter is our seasonally second weakest quarter. But despite that, we still think we will be approaching the second quarter revenue that we just achieved to $9.1 million. I'm not sure if we'll get all the way there. But it will be I think pretty close.

[KyleBauser:]

Got it. Great. Thanks for that. And sorry if I missed this, but how our procedure volumes trending in the US and no US just kind of curious where we're at based on -

[JohnBeaver:]

Yes, Kyle, the numbers I've seen over the last 90 days, the procedure volumes and patient traffic flow seem to be in the US 90%, 95% of what they were pre pandemic. And so things are moving along well, that's in the US. Internationally, we almost have to take it country by country. So I can't give you a number I know that, and UK for instance, we had a very strong sales quarter in the UK in second quarter, but Korea was down, it just - it really all depends on where they are with vaccinations, mandates, COVID levels and so forth.

[KyleBauser:]

Got it. Appreciate that. And initially pandemic was a headwind and then obviously, with Waterlase, having a benefit of reduced aerosolization. It turned around to be a tailwind, particularly with general practitioners, is that still kind of a point that sticking point with new clients, and people were kind of on the fence if the sales reps had some traction there.

[JohnBeaver:]

So, Kyle, I would describe it this way, certainly, both Waterlase and our Epic Diode products produce zero or less aerosolization depend on which product. And that is a sort of a benefit for dentists and patients. What I will say is, I'm not sure a lot of dentists have bought Waterlase, in particular, just for that, but what this has given us and when you talk about tailwind, is given us a message to at least enter the door with and have more in-depth conversations with practitioners. And I think that has really helped. The marketing qualified leads coming from that messaging have increased, and once we start having that discussion, and we can show them all the things that we can do to help their practice and their patients that's where really the sale takes place.

[KyleBauser:]

Got it. That makes sense. And maybe just a couple more here on OpEx. Over the next couple quarters how should we think about each of these buckets? Should it take up a little bit? I think from a modeling standpoint, I have it somewhat flat with what you just did, but just kind of curious, how we are thinking about our OpEx.

[JohnBeaver:]

Yes. So assuming that we approach second quarter revenue in Q3, OpEx especially in the sales and marketing side will be similar. That is really driven by sales commissions and so forth. So unless you have a significant change in revenue, that line is pretty steady. G&A, I think will be a little bit better or reduce costs, because we won't have kind of the extraordinary cost or unusual cost around the second quarter annual meeting that we had, along with the shareholder vote solicitation. But on the engineering side, I think it will be higher because we're getting close now to completing the EdgeEndo project and there are some costs associated with that in the second half of the year.

[KyleBauser:]

Got it. Perfect. And then lastly, how many territories do you have? And also, is there a loaner program going on right now? Or how do new clients finance a Waterlase for example?

[JohnBeaver:]

Yes, so we have about 26 territories. Right now we have, as of today four open. So we did really good in retaining our accounts managers through the pandemic, recently, we've seen some attrition, but certainly not to the extent we saw in 2019, I don't expect that. But I think every business is seeing that rise. So we're - I never like to lose anybody, but I think this is manageable. In terms of the loaner program, we are especially for Waterlase; most of the Epic customers will just pay by credit card. And so that's not a huge issue, a much lower price point. But for Waterlase, they will especially for iPlus, they will find financing, either through a financing group that we will introduce them to that we're not connected to. But we have certain financing programs that we've developed collectively, or their own bank, whatever. But here's the interesting part about the iPlus and how we structured this. Assuming that you buy an iPlus, your payment is only about $1,000 a month. And what we can show you pretty easily is if a dentist just adds a couple of procedures that they weren't doing before a week. Their ROI on that $1,000 payment is 200%, right. And we've shown that, I think, Dr. Russ Morrow at Heartland and we announced I think we did this publicly and one of the previous calls, he mentioned that he had an Express, which is a little bit lower price point, but not a lot. And he paid for the unit in additional procedures in three to four months, which was incredible. Right, so I think when we talk about payments, and so forth when we are successful in convincing the dentists that the additional procedures that they weren't doing before that this technology allows them to do brings in additional revenue it far out far surpasses the outlay that they have on the payments. But you also mentioned loaner, I do want to touch on our Waterlase exclusive trial program, did not mention this in my prepared remarks. But that continues to be ongoing. We're basically having a WETP event every week of the year, throughout the nation. And that's where you have four day dentist GPs, who come to us and get two days of training and in 45 days use of the laser, and then 45 days they decide to buy it or not. And I'm very much looking forward to the Waterlase weekend we are having in October. That's where everybody is part of this program that bought is invited out to California to spend a weekend with us, I think it really increases that that community of Waterlase users. And I'm very excited to have that in October.

[Operator:]

Our next question is from Anthony Vendetti with Maxim group.

[MattBullock:]

Hi, this is Matt on for Anthony. And just I had a quick question on DSOs. If you wouldn't mind talking a little bit about the progress you've made with some of the micro DSOs or some of those large DSOs like Heartland.

[JohnBeaver:]

Yes, so let me take the Heartland first because we've been talking about Heartland for a long time. One thing we certainly knew going in and we, I think history has proven out is that they tend to move slowly with adoption, we are still working with them. We like to compare - I like to a hurdle race. As I was looking at the Olympics last couple of weeks, every time they put up a hurdle, we jump over it and we go to the next hurdle. And so that's kind of the deal with Heartland, they are very optimistic that we'll get to the finish line there. The micro DSOs and different definitions for what a micro DSO is, but say 4 to 20 practices right under that roof. We're making significant progress, nothing that we can announce publicly, because we always want to make sure that before I say anything that they approve of this going public, but significant progress on the East Coast, in Canada, we've been, we've gotten into a pretty significant DSO there. So more to come on that but we are making notch progress. We set our goals for DSO at the start of the year. And not knowing what COVID was going to impact us maybe the goal is a little bit lower than I would have said it today. But we've already surpassed that go through eight months for DSO sales.

[MattBullock:]

Excellent, thank you and obviously very positive that your US sales are being sold at a higher ASP. Can you talk a little about what you feel contributed to that and maybe how you expect that to trend going forward throughout the second half of this year?

[JohnBeaver:]

So I think there are two things. One is we're really selling value, versus just a box. And so when you sell value, and when I'm talking about value, I'm talking about the laser itself, the ongoing training, the support that we can provide, the additional educational opportunities, the things that I talked about, for instance, in the academies, we had the same type of program working for the WETP and the GPS as well. I think that has really resonated with the dentist and potential purchasers. We've gotten away from selling on price because we have a lot of value to offer. And that gets me to the second part of the answer, which is I think training on the account managers. The regional sell directors have done a great job in that training where we don't lead with price. We lead with value of this laser. And that's really resonated in the US.

[MattBullock:]

Excellent, very helpful. And then if you could just - could you give us a general range of how your sales to specialist is broken down between endo, perio, pediatrics, and obviously, how you expect that to trend over time.

[JohnBeaver:]

Yes, so as I mentioned roughly a little bit more than a third of our US Waterlase sales were specialists in the second quarter. And that pretty much continues to trend that we had in the first quarter. If you look at it quarter by quarter, it is a little lumpy one quarter; we might have a big pediatric event that we sell more in relation to endo and perio. We have a nice indoor event coming up in September that I expect good sales from so endo may be the leader of the three specialists in terms of sales in the third quarter. So on a longer term picture, it's about a third, a third, a third between those three specialists with endo and perio, probably been higher than then pediatric at this point. But they're all pretty close.

[MattBullock:]

Excellent, very helpful. And just lastly for me, assuming you're able to get approval or clearance to the EdgePro, by the end of this year, could you just talk a little about your go-to-market approach there and maybe how you expect to dampen some of the cannibalization from your other products?

[JohnBeaver:]

Well, even though we're making great inroads on an endodontist, we're not in every endodontist office. Our penetration in that market is still single digits. So that's what the nice thing is about teaming up with somebody company like, EdgeEndo because they're in 75%, of endodontist office every week. And so we believe that by them going out and selling this device and with clients - with customers that they already have a relationship with, that's going to do nothing but increase the prominence of our erbium chromium YSGG2780 wavelength and we really will make that technology standard bear in this. And so when you look at GPS that are doing endo work, I think they have the proof point from the endodontist specialists that EdgeEndo is helping us provide with a penetrating that market. And then when you get into all the other things that they can do to bring an ROI to their practice, that our Waterlase can bring, I think it's just going to be a tide that lifts all boats. I really don't expect much cannibalization. And that will be more than offset by the GP side.

[Operator:]

We'll take our next question from Bruce Jackson with The Benchmark Company.

[BruceJackson:]

Hi, congratulations on a great quarter. And thanks for taking my question. So to the sales mix, how much of it was instrumentation and how much was consumables?

[JohnBeaver:]

Yes, so we actually have a third category, which is our service. And in the last quarter, and this is pretty consistent for the year as well. About two thirds have been laser sales, 20% plus consumables and about 10%, a little bit over 10% have been service warranties and contracts.

[BruceJackson:]

Okay, and then, in terms of the gross margins, it's nice to see some improvement. How do you think those are going to scale up over the next few quarters and you've got some new product launches mixed in there so may not be a smooth transition, but just directionally, where do you think that those might go over the next couple of quarters?

[JohnBeaver:]

Yes, so think it will, for the most part, track revenue growth. We've talked a lot about the EBITDA positive goal of the company. And for us to get EBITDA positive, we've talked about we need an annualized revenue somewhere in the mid-40s. So call that take a number $11.5 million a quarter run rate and add that right. I believe we can get to 50% gross margins and if you put all those numbers together that leads to an EBITDA positive quarter.

[Operator:]

Our next question comes from Ed Woo with Ascendiant Capital.

[EdWoo:]

Yes, congratulations on the quarter again. My question is you had a very strong quarter in international. Do you think that momentum will continue on? Then second of all, what do you see the long term opportunities for international versus US? You think it can be 50

[JohnBeaver:]

Yes, thanks, Ed. I expect similar results in Q3 internationally from Q2. One thing that's been difficult about forecasting or predicting what international markets are going to do is because we are in so many countries, and each country is different in terms of their COVID situation, COVID response. It's almost like whack a mole in the different countries and in our international management team has done a great job in pivoting where they can. So in other words, I'll give you an example. Most of because we sell through distributors we really depend on international events to draw leads and to create leads. And you can't hold those events currently in person events in many countries. And we've had a few events that were scheduled that we've had to delay, postpone and cancel, but we've had events in other countries very quickly where we could have them. So it's an interesting challenge for us internationally. Long term, I do expect international to remain between 30% to 40% of overall revenue. And for us to grow, like I expect us to grow certainly international will grow as well. That concludes today's question-and-answer session. Mr. John Beaver at this time, I will turn the conference back to you for any additional or closing remarks.

[John Beaver:]

Thank you. I want to thank everyone for being on today's call. With the many positive changes made over the past year, BIOLASE is a healthier company today. And we are positioned for long term revenue growth. I believe we now have the commercial infrastructure in place and greater financial flexibility to capitalize on the growth opportunities before us. We're confident of our business plan, our ability to achieve sustained profitability and revenue growth. We believe our long-term prospects for growth are significant as dentists and patients worldwide look for solutions that allow them to provide and receive dental treatment in the safest way possible. Jennifer and I look forward to reviewing our third quarter results in November and in the meantime, we will be participating in several investor events, including the Collier Securities 2021 Institutional Investor Conference on September 9 and HC Wainwright 23rd Annual Global Investor Conference, September 13 through the 15th. If you are participating in these events, please schedule a meeting with us. I look forward to talking with you then. Thank you, operator and thank you everyone for your interest in BIOLASE.

[Operator:]

This concludes our call. Have a great day. Thank you for your participation. You may now disconnect.