BIOLASE, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Mar 2021

[Operator:]

Good day and welcome to the BIOLASE 2020 Fourth Quarter and Full Year 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 fourth quarter and full year ended December 31, 2020. On the call today from BIOLASE is John Beaver, President and Chief Executive Officer. John will review the company's operating performance for the fourth quarter and full year 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 that are not historical facts, will be made during this presentation including forward-looking statements regarding the company's strategic initiatives and financial performance.

[John Beaver:]

Thanks Todd and thank you everyone for joining us this afternoon. We appreciate your continued support and interest in BIOLASE. Before reviewing our quarterly performance, I want to address the recent management change and how honored I am the Board has entrusted me to guide BIOLASE as its President and CEO during its next growth phase. Since joining in 2017 as CFO, my goal has always been to position the company to succeed. I work closely with our customers, our team, and our Board to help write the next chapter of the BIOLASE narrative as we focus on driving profitable growth through the commercialization of our industry-leading dental lasers. As President and CEO, my vision for what BIOLASE can be has not changed and I will continue to be at the forefront to ensure we have the resources to achieve our goals. This is made easier because our industry-leading products provide a new and proven and better standard of care for dental procedures, while ensuring a safer environment for dental practitioners and patients by reducing aerosolization to mitigate the spread of infectious pathogens such as COVID-19.

[Operator:]

Our first question will come from Kyle Bauser with Colliers Securities.

[Kyle Bauser:]

Hey, good afternoon, John. Thanks for all the updates here. Maybe first just wondering how your efforts are going to educate and train specialists on Waterlase for repairing implants. As we learned from several KOLs, there's really nothing else out there like Waterlase in saving implants. How has growing adoption of this indication gained some traction?

[John Beaver:]

Right. So as – I think Kyle, as you'll hear me say this a lot, it's a surround sound approach to this, right? For us to really increase adoption and this goes beyond periodontists and treating implants to everything else we do. I think dentists probably have to hear it more than once. So we're doing a number of things on the implant side. One is the Perio Academy, very much talks about perio-implantitis and how to treat that. So the things that we're doing in the academy getting key opinion leaders having constant webinars around that, sharing cases, doing things on social media to get the message out as well, all leads to that. And certainly with our US field sales team, they are very focused on not only specialists as a whole but in particular periodontists.

[Kyle Bauser:]

Got it. I appreciate that. And in terms of the number of sales territories, I know it kind of was ratcheted back a little bit through COVID. How do you envision that evolving? Do you think it stays flat for a while until we get back to baseline? Just any color there would be helpful.

[John Beaver:]

Sure. Pre-COVID, we had roughly 30 sales territories in the US. As COVID hit, we reduced that. And today we have 24 field sales territories. We are adding a couple more, now that we're seeing geographies open up, allowing us to actually talk to the dentists face-to-face. But I think overall, we'll be at probably 26, 27 territories. I think that's a constant state as we look ahead right now. I will say that – for a number of reasons. I know that the COVID situation had an impact, probably a positive impact on this for us as well. But we have had less turnover in the sales group, in an account manager sales group in 2020 than any time since I've been here, which I think is a testament to the training that we're giving them. We revamped the comp package to be more competitive. And the fact that they believe that they're really working for a company that is about ready to take off.

[Kyle Bauser:]

Sure. Agreed. And nice to see a lot of new users and so we saw a significant increase in installed base of systems. How should we think about gross margins kind of going forward? I know that the US mix was trending higher. But maybe, if you could provide a little color on kind of the difference in gross margin for consumables versus laser systems maybe just an updated ballpark number would be helpful. Thank you.

[John Beaver:]

Yes, Kyle. So I won't talk specifically about product lines but I will give you some general guidelines. As you know, traditionally our sales revenue have been split about 60% US, 40% international. I think we can get back to that, though we will take a few quarters to do that. Certainly from a COVID situation, the recovery in the US has been quicker than many other countries around the world. And so as I mentioned in my prepared remarks, we actually had higher US laser sales in Q4 of 2020 than we did in 2019, which is pretty remarkable. We would have hit I think the total revenue number for 2019, if it wasn't for the slowdown in the international markets. So with today in the next couple of quarters, US making a higher percentage of our – component of our laser sales then you would tend to have margins higher because of the direct sales model we have in the U.S. versus the distributor model we have internationally. Longer term our goal is to get to EBITDA positive and we have really put in place a lot of the cost savings and I think the discipline in the organization over the last year or so that are going to allow us to get that easier than it would have been four years ago. Having said that, now we have to focus on revenue. And our revenue needs to be around $45 million to get us to EBITDA breakeven. That's a significant decrease over the $75 million that it was three years ago. And to do that gross margins need to be around 50% at a $45 million level with typical 65%/35% let's say split U.S. international, we can achieve the 50% gross margins given our current cost structure.

[Kyle Bauser:]

Got it. Really helpful. I appreciate that. And then just lastly on guidance, I appreciate Q1. And I know you're not going to talk about full year guidance, but I'm just trying to get a sense if I look back historically maybe with the exception of the last couple of years, we tend to see a sequential uptick in Q2 from Q1. Can you talk about seasonality at all? Any, sort of, projections here? And maybe how much pull-through from Q4 we might see into Q1? I'm just trying to get a sense of how things might shake out from a cadence standpoint this year?

[John Beaver:]

You're right. I'm not going to give guidance past what I already said for Q1 but -- and the reason for that is there are still unknowns. The large international market, which is a big deal for us, we don't know really what that looks like even next quarter, because there's a lot of moving pieces moving very fast. Having said that, historically you're right we did have a seasonal business. Q4 was our best quarter followed by Q2, followed by Q3, followed by Q1. Obviously if you do the math on our Q1 guidance you'll see that Q1 in comparison to Q4 of 2020 is going to be relatively similar. And so I'm kind of -- the way I look at this, Kyle, I'm a little bit off of the seasonality in looking at prior years because coming back-off COVID is such a big factor and how quickly our guys can get in front of dentists and those are all moving. So what I am optimistic about is the sequential growth that we had in Q4. I would have expected that because Q4 is as I said our strongest quarter. It's too early to tell what Q2 and Q3 and Q4 will do for 2022. I am once again optimistic, but I'm not going to give guidance simply because of the uncertainties.

[Kyle Bauser:]

Understood. And the guidance for Q1 is certainly higher than expectations. So, thanks really for update. That’s it for me.

[John Beaver:]

Thank you, Kyle.

[Operator:]

We will take our next question. This will come from Anthony Vendetti with the Maxim Group.

[Anthony Vendetti:]

Thanks. John, just a little more follow-up on the international side. U.S. has, obviously, recovered faster. As best you could tell at this point, would you say the international side is a few months behind, or is it hard to gauge in terms of the recovery there? And what particular countries are you seeing the most impact still?

[John Beaver:]

So I would say, we're about six months behind internationally versus what we've seen in the U.S. It's interesting. It's a different market strategy internationally for us than it is in the U.S. The international sales in large part are driven by events, and large events that we get a lot of the sales from that where you get a bunch of international dentists together at some annual event. And that really drives a lot of leads for us and a lot of sales for our distributors. I don't expect that to happen until the second half of 2021. And so that's holding us back somewhat. I mean, we're trying to mitigate that with Zoom webinars and different things but they're just not as effective internationally for whatever reasons they are in the U.S.

[Anthony Vendetti:]

Okay. And then you mentioned a number of DSOs in the fourth quarter press release from today. Can you talk about their purchase patterns during this fourth quarter? Is there any one of these particular DSOs that have stood out as being more aggressive in terms of purchasing the BIOLASE products?

[John Beaver:]

Yeah. I think in terms of level of aggressiveness Virginia Family Dental, DCA probably had that with Heartland somewhat behind and that may have to do with just the size of the organization. Heartland, we're still very excited about the opportunity there. But, yeah, I was excited two years ago and things did not go as quickly as I had hoped. And a lot of it was COVID-related. I understand that. But with Heartland, it seems like every time that we step-up and meet their expectations, they throw another challenge to us, which is fine and we're happy to meet that. But it just takes longer to go through that process than it does with some of the smaller DSOs. And then because of that, we're really focused on some of the I'll call it micro DSOs if you will but the five to 10 dental offices that may not necessitate or really be to the level of a press release, but we're getting some traction there. And from a strategy standpoint, we're certainly spending a lot of time in that area.

[Anthony Vendetti:]

Okay. And Heartland Dental is the largest dental service organization you're working with right now, correct?

[John Beaver:]

Correct.

[Anthony Vendetti:]

Okay. And then you mentioned the academies. Seems like a great way of other industries in the device area I follow. When they put together these academies, they notice adoption improve sometimes dramatically. Can you talk about the expectation there for how that's going to roll out and the opportunity in terms of growth? What's your expectation for how many of these particular specialists can get enrolled in these academies and see exactly what it is BIOLASE has to offer?

[John Beaver:]

So what we're trying to do the academies is create that learning group, camaraderie almost cult-like. I don't want to use the word cult, but following of what we're doing and give them opportunities for education and learning and bettering their practice. The reason it's important to us is as we look at just the overall number of specialists, I mentioned 5,000 endodontists and 5,000 periodontists in the U.S., just a fairly small adoption rate, increased adoption rate of that means big numbers to us as I mentioned in my remarks. But in addition to that Anthony as we get more and more specialists to embrace and adopt this technology, we believe there will be a trickle-down effect on the general practitioners. Once they see that a lot of specialists are adopting it that will get their attention as well. So I see the opportunity not only -- the reason we did the academies wasn't only to promote our technology to the specialists, but also the ability to get that message and attention of the general dentist.

[Anthony Vendetti:]

Okay. Excellent. And then last question is just on the gross margin side. It looks like there was a inventory obsolescence expense, which obviously impacted the gross margin this particular quarter. Was that related to any particular product? And do you think that that's -- that charge is now all encompassed here in this fourth quarter? Or is there going to be any spillover here into the first quarter?

[John Beaver:]

As you may recall, we moved offices and manufacturing facilities in the middle of the year. And what we found was with that move -- and we've been in that facility for I believe 12 or 13 years. You can imagine when you live in a house and you lived there that long and moved you find a lot of stuff that you may have known you had but you no longer needed. I think most of the stuff that we wrote off or reserved for fell into that category. There was really no surprises other than we just had to do the work to dig through it after the move and figure out what it was. And I am very comfortable that we got everything taken care of in Q4.

[Anthony Vendetti:]

Excellent. All right, John. Thanks very much. I’ll pass it back. Thank you.

[John Beaver:]

Thank you.

[Operator:]

We can take our next question. This will come from Bruce Jackson with The Benchmark Company.

[Bruce Jackson:]

Hi, good afternoon. Thank you for taking my questions.

[John Beaver:]

Hi, Bruce.

[Bruce Jackson:]

Hey, John. If we could start off with the second part of the McGuire study, any idea when that might be published? And then second part of the question is, is that going to be used to seek guideline inclusion? Is that still something that the company is working on?

[John Beaver:]

So as far as the timing goes, we are getting close. Certainly expect it to be this year for it to be published. I think it could actually be published online as early as this summer. But I feel comfortable that it could be this year. One thing we learned with the first McGuire study, we kept on thinking we knew when it was going to be published but it's out of our control. And so we were wrong, right? It took probably three or four quarters over what we thought but feel good about that being published this year. And I didn't catch your second question Bruce?

[Bruce Jackson:]

So with the positive data that you've been able to generate so far, is that something that you can use to get included in some of the society guidelines?

[John Beaver:]

Well, we certainly will – have been trying and will continue to try. That is not easy. Let me just say that. It really needs to not be driven by the manufacturer of the equipment like us. It needs to be driven by clinicians, practitioners and the leaders in those societies. We hope that – one of the reasons we love having the Perio Academy is that gives us a forum for having those discussions.

[Bruce Jackson:]

Okay. And then, if we could just talk about the DSO valuations a little bit more. I know that it sounds like they're kind of an ongoing activity but how far along would you say some of these organizations are in their evaluations? And is this something potentially, where you could have a broader contract in the next quarter or sometime this year? Or is it just something where you can't really predict what's going to happen?

[John Beaver:]

So you cannot predict it. Once again, we can move as fast as we want and can and it still may not mean that the DSO on the other side of the table is moving at the same pace we are. Having said that, I don't expect any significant incremental change on the DSO side in Q2. But I'm hopeful that in the second half of 2021, we'll see more and more. The DSOs, they're coming out of COVID too. And right now they're seeing about 85% of the patient load. They're having more money that they're spending on PPE still. And so they're a little bit – they're trying to figure out what their model is going forward as well and what their financials are. I think they will figure that out over the first half of 2021 and be in position to – we will be in a position and hopefully, they will be to accelerate some of this stuff.

[Bruce Jackson:]

Okay. Then last question on gross margins. So you've got some overhead absorption that's going to have to take place before the gross margins start to expand a little bit, but if you could just give us maybe a rough idea of where the pivot point might be on the gross margin improvement from a revenue standpoint. And then, are you still contemplating any sort of cost improvement on the lease themselves for example, by moving to the subassemblies?

[John Beaver:]

Yes. So some of the cost savings are occurring and did occur late in Q1 on the subassemblies that you mentioned. And so we'll see some of that benefit for a full quarter in Q2. In terms of margin, the way I look at it is, if you take $45 million as our revenue needed to be EBITDA breakeven and I mentioned that the margin at a $45 million annual number is going to be about 50% to achieve that then you can extrapolate between $12.5 million a quarter and whatever other number you expect for the quarter kind of there's a -- it's not a linear as you said because of fixed cost dilution. It's not a linear formula but 50% gets you to $12.5 million gets you to EBITDA positive or neutral.

[Bruce Jackson:]

That’s perfect. Thank you very much and congratulations on the progress.

[John Beaver:]

Thank you, Bruce.

[Operator:]

We can take our next question. This will come from Ed Woo with Ascendiant Capital.

[Ed Woo:]

Thank you for taking my question. My question is as revenue ramps up as business stabilizes back at the dental office, you guys did a very good job managing your costs. How much of that cost do you think is going to come back once you -- your revenue gets generated back up?

[John Beaver:]

Yes. So from a fixed cost standpoint very little. In fact, I just had a meeting with our operations group this morning and we feel very comfortable that with the resources that we have today we can generate about $50 million of revenue a year. So that's kind of the demarcation for us. As we see revenues start increasing over that $50 million, we will have to add some cost, but that certainly will be a good thing, right? In terms of operating costs we're in a pretty good position now. About the only thing that will move with increased revenue is sales and marketing which will be reflective of the variable component of our sales team and variable comp commissions.

[Ed Woo:]

Great. Going forward obviously trade shows and conventions were pretty big parts of your line item now that people are talking about well maybe there's a new normal. Will -- do you anticipate if travel and conventions come back that you guys will actively participate? Or do you think we're kind of -- you are comfortable at this new normal and be able to cut a lot of cost out of your fixed costs?

[John Beaver:]

Yes. So on that one I'll say it depends and let me explain that. We have spent a lot more effort and resources on study clubs for instance, webinars that's generated a tremendous amount of leads for us over the last six to nine months. Having said that, what we found historically is that in the large trade shows conventions that we do extremely well when we have podium presence. So we have somebody on the podium speaking about lasers and the benefits of our technology. I would say that we will be opportunistic in supporting and participating in those events. But it really would mean that we need to have that podium presence or it's in my view a waste of money.

[Ed Woo:]

Sounds great. Thank you for the color. And I wish you guys, good luck.

[John Beaver:]

Thank you.

[Operator:]

We can take our next question. This will come from Tony Marthaler with -- he's a stockholder.

[Unidentified Analyst:]

I was just curious has there been any pursuance or any interest gates from say the US military and/or government facilities given the number of VA hospitals across the country that service guys like me?

[John Beaver:]

There are some interest. We consider that part of our DSO strategy and so we're certainly focused on it. That includes anything from the DSOs that we've mentioned before to Native American reservation and tribes to the prison system to VA. Once again most of those move very slowly. But we do have engagement with some of those communities.

[Unidentified Analyst:]

Okay. Thank you

[John Beaver:]

You’re welcome

[Operator:]

I would now like to turn the conference back over to the speakers for closing remarks.

[Todd Kehrli:]

Thank you, operator. We look forward to updating you again on our continued progress when we report first quarter results in May. Thanks again everyone for joining our call today. This concludes our call. Have a great day.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.