BIOLASE, Inc.
Q3 2023 Earnings Call Transcript

Published: 9 Nov 2023

[Operator:]

Good day, and welcome to the BIOLASE Third Quarter 2023 Financial Results Conference Call. Please note, this call is being recorded. [Operator Instructions]

[I would now like to turn the conference over to Michael Polyviou. Sir, the floor is yours.:]

[Michael Polyviou:]

Thank you, Karen. Good afternoon, everyone, and thank you for joining us today to discuss BIOLASE's financial results for its third quarter ended September 30, 2023.

[On the call today from BIOLASE are John Beaver, President and Chief Executive Officer; and Jennifer Bright, Chief Financial Officer. John will review the company's operating performance for the third quarter and then turn the call over to Jennifer to review the financials in more detail before opening the call for questions.:]

[Before we begin, I'd like to remind everyone that a number of forward-looking statements, which are any statements that are not historical facts, will be made during this presentation and subsequent Q&A session, including forward-looking statements regarding the company's strategic initiatives and anticipated financial performance.:]

[These forward-looking statements are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995 and are based on BIOLASE's current expectations and assumptions and are subject to a variety of risks and uncertainties that could cause the company's actual results to differ materially from the statements made. Such forward-looking statements only represent the company's view as of today November 9, 2023. These risks are discussed in the company's filings with the Securities and Exchange Commission.:]

[A replay of this conference call will be available on 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 2023 third quarter financial 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 Securities and Exchange Commission.:]

[The tables we provided in today's news release offer additional financial information, so we encourage you to review them. The tables include the 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 more information regarding 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, please go ahead.:]

[John Beaver:]

Good afternoon, everyone. Thank you for joining us today to discuss our third quarter earnings results. While we continue to experience rising interest in our industry-leading dental lasers through increased lead generation, the ongoing uncertainty caused by the macroeconomic environment is extending our sales cycle and did impact our third quarter revenue performance. The same headwinds impact our business were also being experienced by many other companies in our sector as evidenced by their recent results and commentary.

[We believe there are several factors contributing to the longer decision-making process, including higher interest rates and lower patient volumes. However, we believe it is critical that we maintain our revenue-generating activities to drive greater awareness and interest in our award-winning lasers to minimize the impact and be in a much stronger position when the economy returns to a more normalized state.:]

[Our goal is to be prepared to capitalize on the significant market opportunity in front of us. Having said that, dentists may also take the opportunity to seek our laser solutions in an effort to grow their business. And I believe we are well positioned to benefit from this potential growth driver as our value proposition is obvious. Currently, less than 10% of dentists in the U.S. and less than 2% worldwide using all-tissue laser in their practice. And we are the go-to leader as we command approximately 60% of the worldwide all-tissue laser dental market with our Waterlase brand. However, we need to attract more than 90% of dentists who are not using an all-tissue laser in their practice. This untapped market represents a significant market opportunity for BIOLASE and having to establish ourselves as a premium brand for quality, reliability and after sale service and training, we are working hard to engage this other 90%.:]

[We have significantly increased our efforts to engage dental specialists such as periodontists, pediatric dentists, endodontists and dental hygienists. Through our Waterlase and EPIC academies, we have simplified training on our products for these specialists and made it clear the significant return on investment they can achieve with our lasers, not to mention the benefits to their patients.:]

[We are also actively engaging the over 150,000 general practitioner dentists in the U.S. by increasing education and training through initiatives like our Waterlase trial program and our recently opened state-of-the-art training facility, the BIOLASE Education Center, which provides dental clinicians with an engaging learning environment tailored around laser education.:]

[The BIOLASE Education Center is adjacent to a state-of-the-art dental office, LaserSmile, which provides access to live patient education. We continue to explore ways to improve this training program and are excited about changes made this quarter and for next year, that move our training platform to more of a nationally event helping us market even better and making these events much more cost effective. These initiatives drive increased laser adoption by providing dentists with education and training they need to provide safer and more advanced alternatives to their patients through laser dentistry.:]

[On the top of the laser adoption, we are encouraged by the continued growth in our consumable sales, which increased 10% year-over-year in the third quarter as utilization of our laser systems by our installed base continues to increase.:]

[As the industry leader, our new customer acquisition efforts continued to generate increased lead generation even in this difficult macro environment, and we continue to actively pursue partnerships with corporate dentists and universities. Several dental schools and postgraduate programs have already integrated our Waterlase lasers and our EPIC soft tissue lasers, creating a pathway for future dentists to adopt laser dentistry early in their careers.:]

[Turning briefly to operations. Our internal optimization efforts over the past several quarters have considerably improved our results and are beginning to bear fruit as evidenced by our expanded gross margin and the 52% reduction in operating loss year-over-year in the third quarter.:]

[The greater efficiencies and improved operating performance have dramatically reduced our losses and position us for greater success as the economy improves. I expect our stronger and leaner operating posture will allow us to perform far better in the future and achieve our top and bottom line goals.:]

[In summary, while the uncertainty caused by the macro environment impacted our results this quarter, we are confident in our ability to capture the substantial market opportunity still in front of us. We adapted our business during COVID to operate more efficiently, while at the same time preparing for better days. And as a result, our performance coming out of the pandemic was significantly improved. We're doing the same thing in this environment. We're prepared to irrespective of the macroeconomic issues drive greater adoption of our dental lasers to increase education training and the continued execution of our revenue growth plan. While at the same time, our prudent expense management will propel us toward achieving our profitability objective.:]

[With that said, I will turn the call over to Jennifer Bright, our Chief Financial Officer, to provide more in-depth insights into our financial results for the quarter and discuss our guidance for the remainder of the year. Thank you again for your participation. We look forward to addressing your questions at the end of the call. Jennifer?:]

[Jennifer Bright:]

Thank you, John, and good afternoon, everyone. I'm going to provide more context around some of the numbers as well as highlight some of the operational improvements we achieved during the third quarter. For further details, please refer to our financial results, which you can find in the financial tables of our earnings release and our 10-Q.

[As John mentioned, our third quarter performance reflects the impact of macroeconomic environment is having on our dental laser sales, while our consumable revenue continued to grow as a result of our increased education and training. For the third quarter, we reported net revenue of $10.9 million, representing a 9% decrease year-over-year. This revenue decline is being driven by the difficult macro environment, which includes increased interest rates. Despite these headwinds, we were able to achieve some promising metrics. We increased our consumable sales by 10% year-over-year as a result of higher utilization of our laser systems.:]

[We also expanded our gross margin by 1,400 basis points, which reflects improvements from changing to new suppliers, which resulted in lower inventory reserves and warranty expenses along with the impact of a favorable mix from higher-margin consumable sales compared to the year ago quarter.:]

[Lastly, our continued efforts to drive further operating improvements and efficiencies resulted in a significantly reduced operating loss during the quarter, down 52% compared to the year ago quarter. While we cannot control the macro environment, we can control certain manufacturing costs and operating expenses. And these improvements in gross margin and operating loss are positive indicators of our ongoing efforts to optimize operational efficiency and drive profitability.:]

[During the third quarter, our gross margin was 34% compared to 20% in the year ago quarter. As I mentioned, this represents an improvement from changing to new suppliers, which has resulted in lower inventory reserves and warranty expenses compared to the year ago quarter. Also, at the end of 2022, we completed an acquisition of a trunk fiber supplier that has allowed us to supplement third-party components with our own in-house manufacturing components. This has helped us reduce the overall cost of goods for those key components.:]

[On the expense line, total operating expenses were $7.4 million, down significantly from $10.1 million in the year ago quarter. This decrease was mainly due to the cost savings initiatives we announced during the 2023 second quarter, which included a roughly 20% reduction in BIOLASE's U.S. workforce. The workforce reduction is part of the company's broader efforts to gain greater efficiencies throughout the organization without impacting our revenue-generating strategies for the company's ability to continue delivering unparalleled quality and value to its global customer base. We expect to generate approximately $5 million to $6 million of annualized cost savings due to these cost savings initiatives.:]

[GAAP net loss for the quarter was $4.6 million compared to a net loss of $8.4 million for the third quarter of 2022. GAAP net loss per share for the quarter was $3.89 compared to $110.36 for the third quarter of 2022. Our adjusted EBITDA loss for the third quarter was $3.1 million compared to an adjusted EBITDA loss of $5.6 million for the third quarter of 2022. Adjusted EBITDA loss per share for the quarter was $2.67 compared to $73.99 for the third quarter of 2022. These positive trends indicate our continued progress toward achieving profitability.:]

[And now turning to the balance sheet. We finished the quarter with cash and cash equivalents of approximately $7.8 million. And looking ahead, as we continue our drive towards profitability, we expect to continue to expand our gross margin and reduce our operating expenses further. Our in-house trunk fiber made up 100% of the fiber we shipped in the third quarter, well ahead of our own internal projections. The expected cost savings will continue to drive increased gross margin and will get us closer to the 50% gross margin that we believe is needed to reach profitability.:]

[We also expect to drive significantly lower WTP expenses this year by using our own centralized training facility, the BIOLASE Education Center, which opened at the end of July, and we have 3 dentists on staff to train prospective customers. We also continue to work with educational facilities nationwide to host WTP events at their locations at little to no cost.:]

[Moving on to guidance. Despite the difficult macro environment, we continue to expect year-over-year revenue growth. We are now projecting full year 2023 revenue to be 1% to 3% higher than full year 2022 revenue. With higher gross margin, expected WTP savings and the cost savings initiatives we've implemented, we expect our net loss from operations for both the fourth quarter and full year to be significantly improved compared to the comparable periods in 2022.:]

[With that, I'll turn the call back to the operator to open the call for questions. Operator?:]

[Operator:]

[Operator Instructions] And we'll take our first question from Bruce Jackson from Benchmark Company.

[Bruce Jackson:]

I wanted to start off with the revenue guide. Generally speaking, the fourth quarter is your strongest quarter and there's a lot of sort of like last minute spending that goes on, how are things currently shaping up in terms of the fourth quarter revenue?

[John Beaver:]

Yes. So so far during the fourth quarter of this year is tracking pretty much to where we were in the fourth quarter of last year. I still expect that we can beat the fourth quarter number from last year, and that's factored into our guidance for the full year.

[Bruce Jackson:]

Okay. And then the other question I wanted to ask about was the lift on the [ vigorous ] profit. So in-house fiber was certainly an important component of that. Do you have any other sources of gross margin expansion that you can work with?

[John Beaver:]

Beyond what we've already incorporated, Bruce?

[Bruce Jackson:]

Yes. I mean -- is it a matter now of like overhead absorption? Or are there any other types of cost savings you can achieve through supply chain, for example?

[John Beaver:]

Yes. Right. And you hit the nail on the head. Those are the 2 ways that we expect to continually improve our gross margin. One is with the fixed cost absorption, higher revenue and higher production volumes, obviously, but also, we are looking at a number of projects that could reduce our -- both our cost of goods sold from a material standpoint and an efficiency standpoint. So I am cautiously optimistic that we'll get some of those put in place next year, probably won't have an impact on our fourth quarter, though, this year.

[Operator:]

And we'll take our next question from Frank Takkinen from Lake Street Capital.

[Nelson Cox:]

This is Nelson Cox on for Frank. Maybe continuing with that gross margin question, which had a nice jump from a year ago. It sounds like it should continue improving from here. Just wondering if you can maybe provide a bit more color, give us a sense of where you would expect margins to level out in '24 and then maybe what we're shooting for beyond that?

[John Beaver:]

Yes. So Nelson, I would expect gross margins next year in 2024 to be approaching that 50% level that, Jen, referenced in her remarks. I think as volume continues to go up, we could get to the mid-50s in 2025 and beyond. But certainly a target for next year will be as close to that 50% as we can get it. Not sure we can get all the way to 50%, but we should certainly be in the high 40s.

[Nelson Cox:]

That's helpful. And then you've talked about the challenging macro backdrop. Can you give us a sense of what you've maybe seen improving or not improving recently? And with that, did you see any noteworthy seasonality during the quarter? And if so, maybe help me understand how much of the slowdown was related to seasonality versus the challenging just overall environment.

[John Beaver:]

Sure. So in terms of seasonality, traditionally, and this goes back for many years, our best revenue quarter is Q4, followed by Q2, followed by Q3, followed by Q1. And that has been a pretty consistent pattern throughout the years. So Q3, the one we just completed is seasonally our second lowest quarter historically. Having said that, from a macro standpoint, we started seeing, I would say, in kind of August, September time frame, deals that we normally would have expected to be closed in a certain time frame, taking longer to close. .

[We knew that this could be a possibility, but we have not really seen it up until recently. And my belief is because of the higher interest rates that our doctors are seeing and therefore, the higher monthly payments for the equipment. So what we've seen is those sales haven't gone away, they've just taken a little bit longer to close as they look for various financial [ intelligence ] and so forth. So I'm cautiously optimistic that those sales still will occur, and many of them did in the fourth quarter that we thought would delay or that we thought we would be able to close in the third quarter.:]

[And then from an international standpoint, there are some macroeconomic headwinds that are unique, somewhat to our international markets. Even though we had a pretty good quarter internationally, we were up quarter-over-quarter a year ago in revenue. Having said that, we still have the Ukraine war going on and so our sales to Russia are nil. And certainly, our sales in the Ukraine have been diminished. Israel is one of our top 10 to 15 countries, typically, and their sales went to almost 0 in the third quarter because of the war going on there.:]

[In addition, one of their really promising markets that we've developed over the last year after taking about 6 years to get registration is in Japan. However, being a U.S. company and selling U.S. dollar, the really historical strength of the U.S. dollar against the Japanese yen have hurt ourselves there, making our product higher cost than it normally would be. We continue to work with our Japanese distributors to figure out ways to mitigate that, but that has been significant for us as well.:]

[Nelson Cox:]

Got it. And then maybe one more quick one. Realizing it's fresh data, can you talk about the expected response to the 12-month clinical outcomes for BIOLASE repair? Any anticipated reaction you are expecting to see from a demand perspective?

[John Beaver:]

Yes. So you may recall that this is a follow-up to the report that came out about 2 years ago on the initial findings that were 6-month follow-ups. The messaging and the results were as expected, which clinically were the same as the traditional treatment and the patient-reported outcomes were much better. .

[We will be maybe coincidentally, maybe not so the American Academy of Perio Annual Meeting is this weekend. And we are well positioned to publish -- publicize the recent McGuire study update that came out on the 12-month follow-up. And so hopefully, we'll see some movement on specialists in that area. We have [ something to show us as specialist ] and what have you to help speed up that acceleration.:]

[Nelson Cox:]

Congrats again.

[Operator:]

And next, we'll go to Ed Woo from Ascendiant Capital.

[Edward Woo:]

You said that the -- certain kind of macro environment is causing the sales cycle to lengthen. Is it -- you're talking about maybe 1 or 2 quarters? Or are some of these just dropping off because people just don't have the money and they don't see the economic environment getting better near term?

[John Beaver:]

So we haven't seen really any that I know about sales that we thought we'd go through they have said no and they don't want to buy. It's more the yes, I'm still interested or I'm still working on the financing but I'm going to need another 2 to 3 months to figure this out. It's more of that. So I'm hopeful that it is a lull here and that we'll catch up some part of 2024 in interest rates if and when they start declining. But I don't see any really lost sales, it's just delayed sales, Ed. .

[And as mentioned earlier, I'd just add that we saw some of this back in 2008 and '09 with the recession which I don't believe we're in a recession today, but we certainly were back then. And we actually had dentists come to us that I think may have been on the [ fence on buying ] or not decided and they decided they needed to differentiate their practice and bring in additional revenue streams and those are things that certainly our laser can do for their practice. And so we had some of that going on, which I would expect if this continues that more dentists will be -- even more dentists will be reaching out to us to differentiate their practice with this technology.:]

[Edward Woo:]

Great. And just dissecting a little bit, was it pretty much across all general dentists as well as specialists? Or is it some of the weakness limited to one group versus another?

[John Beaver:]

No, it's pretty much across the board. There wasn't one specific specialist or the GP sector that was impacted more or less than the others.

[Operator:]

[Operator Instructions] And we'll take another question from Bruce Jackson from Benchmark.

[Bruce Jackson:]

I wanted to ask briefly about the impact of the McGuire trial on the guidelines. And do you think this is going to help you in some way? And was the -- you were able to achieve equivalents on the radiographic data and it approached statistical significance depending upon what cutoff is. But maybe just tell us a little bit about how guidelines process works? And will that help you in the long run?

[John Beaver:]

So Bruce, I don't think that the McGuire study is going to create a seismic shift in changing guidelines for perio surgery or change in the way perio surgery is taught in post-grad programs. However, I think it did open a lot of periodontists and GP size, and this is important because probably more GPs doing periodontal surgery than there are periodontists doing it because you have 150,000 GPs, many of them doing periodontal surgery in the U.S. and 5,000 or 6,000 periodontists.

[I think the key here is the improvement in the patient-reported outcomes. We were happy that it was clinically statistically equivalent to traditional surgery. We knew that we would -- and we believed that we would kind of blow the study away in the patient reported outcomes. And I think that's key as more people, patients, in particular, become familiar with our technology. There's still a long way to go on that. But one of the challenges for dentists perform the perio surgery to a patient is case acceptance.:]

[If anybody that has heard about somebody having traditional perio surgery or someone in their family has had or they've had in the past, they don't want that to ever happen to them. It is one of the most invasive surgeries there are, and the healing period is long for that. So by showing that there's a better way of doing this a more, I would say, a less invasive way of doing it, with quicker healing time and less pain, I think, that's where the real benefit of the McGuire study is.:]

[Bruce Jackson:]

And the patient outcomes, that difference was statistically significant, correct?

[John Beaver:]

It was statistically significant. My reaction to that is, of course, it is, right? Because if you've seen both surgeries, I almost would have to be.

[Bruce Jackson:]

And is this one of the first times that you've -- that the professionals and generalists had a randomized-controlled trial of something like this?

[John Beaver:]

Yes. So Bruce, glad you brought that up. It is the first trial of this type that any dental laser company has ever done. And so we wanted to do it the right way. I just have 10 of our dentists performing kind of track progress and everything. This was really a best-in-class first of this type study and no dental laser companies ever done anything like this before. It took us a long time to do it. I think we started this about 4 or 5 years ago. But here we are, and we're certainly glad that the results were what they were and that it's completed.

[Operator:]

[Operator Instructions] And there appear to be no further questions at this time. I'll turn the call back to John Beaver for closing remarks.

[John Beaver:]

Thank you, Karen. I want to thank everyone for being on today's call. Also, I want to thank the BIOLASE team for their continued commitment and dedication. Each of them has worked tirelessly to make our customers successful in delivering an elevated standard of care and safety through laser dentistry. This is not in my prepared remarks, but I will tell everyone that we had some patients down at our LaserSmile office this morning. And I went down there and there was a 7-day old baby that was having the frenectomy done because they could not latch properly, and we're having feeding issues. I talked to the parents, young parents never had -- this was their first child. They were scared. It was just amazing what our technology can do. The frenectomy with our laser took about 2 minutes and the baby was sleeping when they came out of the room. That's what I talk about our employees. Just a story like that makes all of us want to get up and excited to come to the office and come and support our patients, our customers and their patients. So thank you, everyone. This concludes our call. Have a great day.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.