BIOLASE, Inc.
Q3 2018 Earnings Call Transcript

Published: 13 Nov 2018

[Operator:]

Good morning ladies and gentlemen, and welcome to the Third Quarter 2018 BIOLASE Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference Michael Polyviou of EVC Group. You may begin, sir.

[Michael Polyviou:]

Thank you, Rob. Good afternoon, everyone, and thank you for joining us today to discuss BIOLASE's financial results for the 2018 third quarter and first nine months ended September 30, 2018. On the call today from BIOLASE are Todd Norbe, President and Chief Executive Officer; and John Beaver, Executive Vice President and Chief Financial Officer. Management will review the company's operating performance for the third quarter before opening the call for your questions. Before we begin, I would 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, 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, Tuesday, November 13, 2018. 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 the BIOLASE Web site shortly after the completion of today's call. When listening to this call, please refer to the news release issued earlier this morning announcing the Company's results for its third quarter ended September 30, 2018. If you do not have a copy of the news release, it is available in the Investor Relations section on the BIOLASE Web site at www.biolase.com. BIOLASE's financial results for its third quarter can also be found in the Company's quarterly report on Form 10-Q, filed with the SEC. The tables we provide in today’s news release are for additional financial information. So we encourage you to review them. The tables include the reconciliation of GAAP net loss, net loss per share to non-GAAP, net loss and net loss per share, as well as details of the company's non-GAAP disclosures. With that, I am pleased to turn the call over to BIOLASE President and Chief Executive Officer, Todd Norbe. Todd, please go ahead.

[Todd Norbe:]

Thanks, Michael and thanks everyone for joining today and your interest in BIOLASE and for joining us obviously on this call this morning. As many of you know this past August the Board of Directors appointed me to assume the responsibility of President and CEO of BIOLASE, since then I continue to be impressed with the value of our technology, it's ability to deliver on a new standard of care, around dental procedures, and I’ve personally made a goal to speak to many of our users, and I’m pleased that our technology is being validated by a passionate and growing dental community who have paved the way for further adoption through peer-to-peer referrals. A significant potential of our products in the marketplace and the commitment of the entire BIOLASE teams perform at the highest level are beginning to have a favorable impact on our results. Let me highlight some of our results for the third quarter. I’m pleased to report that the U.S laser revenue increased 22% year-over-year, while our Southern California Model Market laser revenue was up 127% during the quarter and up 175% over the last two quarters. These are encouraging results that demonstrate a high-level of interest in our technology and reflect early success we're having as we test different go-to-market approaches. Our leadership team continues to be dedicated to changing the way we do business here and we’ve spent about a week and a half on lessons learned to establish the appropriate KPIs and process improvements required to deliver on our goal of EBITDA positive in the fourth quarter of '19. One of our key strategic goal is to build our customer base, increased utilization of our products, thus driving recurring higher margin consumables revenue. We continue to attract new customers with more than 62% of our total third quarter revenue coming from new customers, while at the same time expanding our existing customer base. We are pleased to note that because of increased utilization, our consumables revenue for the quarter increased 9% year-over-year. In addition to these improving results, we also announced today in a separate press release that we've entered into a $12.5 million term loan agreement with SWK funding and its partners. SWK is a highly regarded name in the healthcare segment and its commitment to funding our growth reflects its confidence in our near and long-term business execution. John will provide more details later in the call, but this loan will provide us sufficient working capital to support the business and our growth objectives until we meet our goal of EBITDA positive in the fourth quarter of '19. We recently expanded our successful laser dentistry awareness initiative with the launch of a second Model Market in Dallas, Fort Worth. Several members of the BIOLASE team were in Dallas a few weeks ago, commenced on a similar awareness campaign the one that was highly successful in the LA, Orange County market. In the Model Market, employee volunteers have visited nearly 700 dental offices contributing to 175% Model Market laser revenue growth I mentioned earlier. In Dallas, in just one week, we campus almost 350 dental offices. And we are very encouraged by the early results that we're seeing from that activity. As a result of these efforts, patients are educating themselves on dental care and benefits of minimally invasive laser dentistry, resulting in more dentist having the information, support, resources they need to deliver the best possible care to the patients, which is ultimately our goal. We will continue to learn from these types of programs as we speak unlock this much-needed technology. After the end of the third quarter, we announced the addition of Dr. Elaine Wagner to the Board of Directors. Dr. Wagner is renowned leader in the practice of pediatric dentistry and a retired Rear Admiral with 33 years of service in the U.S. Navy. Her vast experience, strong management skills will be invaluable to BIOLASE. And our customers, as we continue to focus on making lasers, the standard of care in pediatric dentistry, in advancing dentistry through laser technology. Looking ahead, we firmly believe and minimally invasive laser dentistry can become the standard of care in modern general dentistry especially in growing markets like pediatric care and implant periodontitis. As we work to expand adoption of our new tissue lasers through the dental industry, we are focused on successfully executing on several initiatives that are top priorities for '19. These include developing a commercial growth engine that links lead gen to a robust sales funnel, supported by inside selling with a weekly growth [indiscernible]. Implementing a new product introduction process to build competitive advantage for new and existing products, while leveraging open innovation. Building a customer loyalty process to improve customer retention and satisfaction, while increasing the referrals that we received here and in-house. And then leveraging peer-to-peer, and a local and national level while expanding our podium presence. We are also going to look to develop an outsourcing processes that drives overall operational savings. And in taking advantage of a unique software we have called [indiscernible] to establish a new revenue stream based on pay per click and select statements. While there's still plenty of work ahead of us, we've a plan a path forward and new processes that will keep the team accountable and on track. With that said, I look forward to speaking with you again in the coming weeks and months, reporting on our progress next question. With that, I will hand it over to John to review our financial results.

[John Beaver:]

Thank you, Todd. And again, thank you all for joining us this morning. Since yesterday was better on sales, but I want to thank our veterans and military personnel for their service to our country. I want to thank our entire team of employees for their hard work and team has balanced results in the third quarter. We believe we’re building momentum and if you take at a close to our third quarter results are many reasons particularly optimistic. Now let me review the numbers. Total worldwide revenues for the third quarter over $10.9 million, a slight increase compared to $10.8 million in the third quarter a year-ago. More importantly, excluding revenue from a non-core imaging business revenue in the third quarter of 2018 increased 9% compared to the third quarter of 2017. Revenue from the Company's core U.S laser related products for the third quarter increased 22% year-over-year. Net revenue from lasers and our first Model Market in Southern California increased to 125. During the third quarter, 62%, of our All-Tissue laser system sales, were to new customers, reflecting early success with our new strategic priorities. These are positive indicators of progress and we will lead to improved financial results in the future. One of the most basic strategic goals is to build our customer base and increase the utilization of our product thereby driving recurring higher margin consumable revenue, a 9% increase in consumables and other revenue is due to our success in attracting new customers as well as expanding within our existing customer base. Internationally revenue for the third quarter was $4 million, essentially black compared to the prior year third quarter. Gross profit as a percentage of revenue for the third quarter of 2018 was 36%, up from 26% in the third quarter 2017. The increase in gross profit as a percentage of revenue for the third quarter compared to the third -- compared to the prior third quarter reflects new customer growth and a favorable change in product mix with an increase in laser sales which has the higher margin. Total operating expenses for the third quarter of 2018 were $8.5 million compared to $7.6 for the third quarter of 2017. Sales and marketing expenses increased by $0.5 million primarily due to an increase in advertising and payroll and consulting related expenses. General and administrative expenses I think $0.7 million primarily a result of increased legal fees. Engineering and development expenses decreased by $0.3 million primarily due to a decrease in payroll and consulting related expenses. Net loss for the third quarter of 2018 was $4.7 million or $0.23 loss per share compared to a net loss of $4.6 million or $0.30 loss per share for the prior year third quarter. The non-GAAP net loss for the third quarter of 2018 was $3.8 million or loss of $0.19. per share compared to the non-GAAP net loss of $3.8 million or $0.25 per share. Our cash, cash equivalents and investments totaled $2.4 million as of September 30, 2018. However, as Todd noted earlier, we have entered into a $12.5 million term loan agreement with SWK Holding. We used a portion of proceeds to retire our Western Alliance Bank debt and plan to use the remaining proceeds to fund our growth initiatives. We believe this is a win-win for all stakeholders as it provides BIOLASE with sufficient liquidity to execute to our long-term plan to further our current growth trajectory and drive, of course, profitability without the need for additional capital raises. We remain focused on wisely investing our cash on products and programs to drive future growth. Revenue and profitability, and as always cost containment and prudent cash management continues to be and will be a top priority. Before I turn the call over to the operator for questions, let me summarize our remarks. Todd and I remain very focused on solid execution and growing and expanding adoption of all-Tissue-lasers throughout the demo industry. Overall BIOLASE is experiencing significant increases in both adoption and utilization of all-tissue lasers, an increase in the speed of getting our lasers in the hands of more dentists is our goal. I believe we had the most all and energized group of the employee and BIOLASE is well-positioned to achieve sustained growth and profitability. Lastly on industrial relations front, in addition to planning several Industrial Road shows in the next months. We are also scheduled to present at the 11th annual LD micro minivan investor conference taking place December 4 through 6 in Los Angeles. And the singular research conference taking place in San Francisco on December 13. We looking forward to seeing many of you there. This concludes our prepared remarks. I will turn the call back to the operator to open the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Lisa Springer with Singular Research. Please proceed with your question.

[Lisa Springer:]

Good morning. Could you give us …

[Todd Norbe:]

Good morning.

[Lisa Springer:]

… a little additional color around the decline in non-core imaging revenues and what your expectations are for that segment of the business going forward?

[Todd Norbe:]

Hey, Lisa. Thank you for the question. This is Todd. Our focus as you’ve heard is around laser technology. The sales team is focused around that portion of it when the opportunity is there. It's not a key focus on a daily basis for our team, considering that it's not differentiator for us in the marketplace and there's many outlets for that technology today.

[Lisa Springer:]

Okay. And could you give us a sense of what contribution that made revenues, what percentage?

[Todd Norbe:]

Yes, Lisa, that will be in the 10-Q that we file tomorrow. So you will have that as far as the breakdown.

[Lisa Springer:]

Okay, great. And in the Southern California market, could you give us a sense of what you think your market penetration is currently, and what you target for market penetration next year?

[Todd Norbe:]

Yes. So, Lisa, currently we have in the all-tissue space about just under 3% market penetration. We believe that that's about two thirds of the total All-Tissue space in the market, though we can't be for sure on that. But we know that about 3% of LA, Orange County dentists, have our All-Tissue laser. It's interesting that the penetration and the improvement in the penetration doesn't have to be great to have significant results from online. If we were able to get that to even in the 5% to 10% range, that would greatly exceed our internal forecast, for instance, and exceed our forecast that went into coming up with a EBITDA positive for 2019 fourth quarter. So it doesn’t take a lot to probably move the needle?

[Lisa Springer:]

Okay. And regarding operating expenses, should we think of the operating expenses for Q3 at kind of a run rate going forward, or with a higher than normal or what -- how would you comment on that?

[John Beaver:]

I would say they were a little bit higher than normal. We would expect the operating expenses to certainly be reduced in 2019 for the full-year on a run rate. And that also, as, Todd, mentioned, will be one of the key factors and achieving that EBITDA positive in the fourth quarter and into 2020.

[Lisa Springer:]

Great. Thank you very much for the information.

[John Beaver:]

Thanks, Lisa.

[Operator:]

Next question comes from the line of Yi Chen with H.C. Wainwright. Please proceed with your question.

[Karthik Sunkesula:]

Hi. Thank you for taking the question. This is Karthik on for Yi. Can you provide more insight into how the company plans to use its newly announced debt facility to broaden customer base and increase product utilization.?

[John Beaver:]

So you want to be -- let me talk to the debt facility, of course, and I will turn over to Todd on some of the initiatives. On the debt initiative, on the debt facility as you know, we have then EBITDA negative or for a while. And so this facility will allow to really time without raising any additional capital to implement a lot of the initiatives that Todd highlighted in his speech. And so really it's just supporting that effort versus any individual initiatives. And with that, I will turn it over to Todd, to talk about some of the initiatives.

[Todd Norbe:]

Yes, one of the things that we need to build here is a more robust growth engine to understand lead gen to closure discipline around funnel management and what we're building here we spent 4.5 years as a leadership team to put together the priorities understand what will and what hasn’t gone well in the past is really making sure we had the right priorities and focus. And I would call discipline around the commercial piece of that and we started and had two runs at it on a weekly base just to look at our commercial growth engine, understand all the inputs that drive ultimately the results in the outputs that come along with that and make sure that we understand what's working, what’s not. So you’re going to see more of that from us as we go forward and that’s not only on a commercial side it's also on a new product introduction guide. That make sure, that we are chasing what we need to do there. And then to John's point, on the cost side, operationally we’ve got another war room stead up. Where we can take some cost out was opportunities for purchase price variant savings in many other areas within the business to eliminate waste where it exists, so that we can meet our goal in Q4 next year to be EBITDA positive and then roll forward to 2020 million start to [indiscernible] from a cash stand point.

[Karthik Sunkesula:]

Great. And as a follow-up to any details the financial metrics that need to be achieved to the extend the interest only period on the loan agreement?

[John Beaver:]

Yes, those are revenue based. And once again, I won't get into details to give you on that .We will file the facility as part of our 10-Q tomorrow. But they’re revenue based to extend that another 12 months.

[Karthik Sunkesula:]

Okay, perfect. Thank you for taking the question.

[John Beaver:]

Thank you.'

[Operator:]

[Operator Instructions] The next question comes from the line of Paul Bornstein with Black Diamond. Please proceed with your question.

[Paul Bornstein:]

Yes. Glad you, the management team is at least being a little more focused in terms of delivering sales, because the previous team before you guys joined went through $30 million and nothing dropped to the bottom line. So I applaud you at least trying to making the effort. I’m just curious on the sales effort. What is the main reason why dentists that you make a call side not to go on the via dental laser? Is it price, is it just don’t want to handle it rather excuse novocaine? I'm trying to understand the -- what kind of hurdles you’re looking to get over to increase the sales? And obviously you don’t need a huge amount of sales, but you just need some momentum to show the market that this great technology is going to be used by the dentists out there?

[Todd Norbe:]

Thanks, Paul. This is Todd. Yes, there's different reason codes in reference to why that decision may not be made. In general, your average GP, I have not been trained on lasers coming out of dental school. So it's not intuitive to them, it's not tactile in the field to them. So this is a change in the way they use this technology, right, and as you know change is never easy. And that's why we're spending a lot of time here figuring out how we get the right referral base from other colleagues in the peer-to-peer, because ultimately they listen to their peers and the dental industry has been built on that either at a podium power present or just from a local referral. And what we look at our business and really break it down and understand where our success comes from, the majority of our success were folks in this field that comes from other peer-to-peer referrals and that's how are territories grow with our more experienced reps. The other opportunity I think we have here is as I mentioned to drive the right lead gen opportunities to the right personas to understand what message resonate with what customer group so that we can be more targeted in our messaging and be more successful in our overall funnel management and conversion of that to ultimate revenue and then drive the consumable piece along with that.

[Paul Bornstein:]

Okay. So your team is really focused on the dentist that you have a better shot at versus this blanketing whole group. So -- and then once you get some of them on board, word spreads and then hopefully some other dentists will be looking at it, they see a launch of bigger amount of patients going to those dentists with the lasers. So because you only have maybe $10 million left, figure out the sales and marketing. So you got to be real focused and it seems like that's what you’re doing, because the last team wasn’t focused at all. So my apology for that because you're under the gun right now. And it's hard to keep borrowing money to be cash flow positive. So and you understand that which is a real positive also. So it's nice to see a little momentum and not this talk which was coming through for years. So keep up the good work and hopefully we can see the results.

[Todd Norbe:]

Thank you, Paul.

[John Beaver:]

Thanks, Paul.

[Operator:]

The next question is from the line of Ed Woo with Ascendiant Capital. Please proceed with your question.

[Ed Woo:]

Yes, thank you for taking my question. My question is do you have any early feedback from the Dallas initiative? And also are you doing anything in this market initiative that’s different than what you did in -- from California?

[John Beaver:]

Yes, Ed. This is John. Let me take that question. It's too early to see the early results from this initiative. You may recall that for Model Market one or the LA Orange County, we started in the first quarter and we do not see results in terms of revenue increase until the second quarter. I would expect that and I love to see results, tangible results of revenue in the fourth quarter. But however since we just started on October, I don't expect to see improvement in bottom-line revenue until the first quarter of next year and we will obviously be reporting on that as we get into that. In terms of doing things differently, we are doing sometimes differently. For instance we are focused in the visits to the dental office so we made to initiate the Model Market initiative to as Todd alluded to, the high priority candidates. One of the thing that we learned is that having employees go out and visit dentists and get awareness of, it's much more beneficial to do that, to our high priority list then just do it randomly, like we started doing initially in LA , Orange County. That’s one example something that we’ve done differently.

[Ed Woo:]

Great. And is it too early to think about your next potential market?

[John Beaver:]

Yes, I believe it is too early to think about that. As we talked about, Ed, we started this model marketing initiative to really like learn on how to increase awareness and increase sales in area. We’ve only been doing it in LA, Orange County now for -- about a half of the year. And only about six weeks in Dallas. So I would certainly like to see a little bit more learnings in those markets before we invest in a third market. So that we really hit the ground running and have a solid playbook in future market. Whether or not that’s three months, six months, nine months, I don’t know that yet. But obviously would like to expedite as much as possible.

[Ed Woo:]

Great. Well, thank you and good luck.

[Todd Norbe:]

Thank you, Ed.

[John Beaver:]

Thanks, Ed.

[Operator:]

Our next question is from the line of Steve [indiscernible]. Please go ahead with your question.

[Unidentified Analyst:]

Good morning, guys. Thanks for taking the question. Welcome Todd. Couple of things. Could you, obviously, about the promise land that we are all shooting for us, cash flow breakeven, but it's been a moving bogey for a while. I guess, I’m just curious and apology John on the new facility. But if you can run through some of the key assumptions on how we are getting there? For example, domestic versus international, we talked about international as being a great opportunity for a number of years now. And you’ve made some changes that I think overseas, but I see it flat year-over-year. Do we need that kick? And so I guess the first question is from the top line, what are we building and how important of the model market and getting us there? And the third part of that equation is looking at the approach to market. I think, Todd, you mentioned peer-to-peer. I’m just curious when we look at bottom up versus top down what are you finding is the most cost event advantageous way to get there? Si I really thought peer-to-peer is a good way. Well the awareness of the customer since we are in limited resources, how do I commit those resources to which channel.

[John Beaver:]

Yes, so I think from a top line standpoint. There's just a matter of discipline here that we need to make sure that we instill in reference to the time that we are spending industry with the customers with the right customer is I mentioned early with the right [indiscernible] we are spending a lot of time with our field [indiscernible] and the growth engine that I’m referring to is making that. We’re getting enough of the right marketing qualified leads that are funnel through in inside sales team and then converted over into an outside sales team where required and this includes not only our All-Tissue, but also diode sales is well. Where we haven't spend a lot of time and energy around. And inside selling and outside selling have not been operating in harmony. And that’s going to be changed. So Model Market to your second question, it contribute no connection of change so model market to your second question. Contributes to it but it's not be the answer for us to necessarily meet the overall commitment that we're making here by Q4 19. It's still a learning for us. There's still a lot of analytics and data that we want to look at understand what's truly working what’s contributing. So that when we do make those bets, because of the limited resources that you mentioned. And I think the peer-to-peer thing, when we really sat down and reflected on, what I would call best of the best. As I mentioned earlier, what's contributed to consistent high-performing sales in certain marketplaces. Peer-to-peer was a big credo for us in reference to that success. So we want to continue to learn from the model learn. And a ;lot of the direct to patient awareness that’s been done, but ultimately I think when you look at where we want to make more bets, it's making sure that we got the peer=peer thing working and even provide some incentive for that to occur at a larger percentage and it's happening today.

[Unidentified Analyst:]

Can I ask one follow-up just out of curiosity. I think a couple of years ago, maybe it was a year-ago you guys started working on some [indiscernible] maybe a year-ago, you guys started working on some academy and that kind of [indiscernible] research out in the field. Looking at the efficacy of lasers, where does that -- is that continuing to proceed. I can't remember what the timetable of that was going to be released. But one that also contribute to the peer-to-peer Channel.

[John Beaver:]

It does and I just got back from the AAP up in Vancouver and we’re doing a pretty extensive study with the Macquarie Group. Met with those folks and principles up there, that’s progressing as we expect. We should get some results and committed results in '19, probably midyear. The early indication is that, that is going to be some additional evidence and validation, especially from a period Amazon community., that lasers is a better minimally invasive procedure than what have been traditionally used and taught in a lot of the schools. So we’re really optimistic around what we’re seeing there or hearing early and should have hopefully something published sometime latter part of '19 around that.

[Unidentified Analyst:]

resources is making sure that we got your thing working and even provide some incentive for that to occur at a larger percentage than accepting the day .1 follow-up for a couple years the government of the year ago discussed working on academic research of the field of what different efficacy of lasers were that the continuing to determine what the timetable that will be released one but also contribute to the peer-to-peer channel to send I just got back from the AP up in Vancouver were doing a pretty extensive study with the Maguire group met with those folks and principles of their progressing you know as we expect we should get some results and committed results in 19 company midyear the early indication is that the that these additional evidence and validation especially from it. On this community that you lasers is a is a better minimally invasive procedure than what is traditionally used to talk to and a lot of schools so while were really optimistic around the what were you being there during the early and should have hopefully something published from time latter part of '19 around that.

[Unidentified Analyst:]

Okay. And when you look at -- I know you guys looked at pediatric and periodontist -- periodontal market, periodontitis is a target application. Is that still you’re seeing the greatest opportunity and when you look at that '19, bogey, is that -- are we going to be more focused streamline on those two initiatives, plus two market initiatives [indiscernible].

[John Beaver:]

I think the answer is yes. But also you’re seeing more GPs treating perio because of the issue and holding elder population. And as you know the average GPs is looking for additional procedures that they can do in house. You saw that happen .it [indiscernible] you saw that happen with orthodontics fix for the greatest opportunity and when you look at the 19 voted the original be more focused on the most commercial market initiative think the answer is yes but also your seeing more GPs are treating perio because of the issue in the beholding of elder population and as you know the average HD is looking for additional procedures that they can do in-house. TP is looking for additional procedures that they can do in a house you'll be so that happen within the context of a select Orthodontics agency that have been more with aerials of the GP will continue to be your growth opportunity force and also wounded in the DSO segment your seeing you know those large groups looking to add on additional services so perio will be a focus for sure and then perio is obviously a key focus as we roll forward.

[Unidentified Analyst:]

Last question, as you hit the another big topic from idea star. I mean, I’m sure it's not lost on you guys. There is a math of consolidation that appears within the individual dentist getting rolled up. How are you guys position to pursue those and are they -- I don’t know who [indiscernible], but they should be focused on profit. How is that playing into your strategy as well over the next couple of …

[Todd Norbe:]

It's one of our strategic initiatives as we roll forward. We have team focused around that. We’ve got some active trials going on right now in that segment. And there may be an opportunity there to as I mentioned with our [indiscernible] where we are pretty unique in that. It allows us to see every procedure that’s being used within a dental office. So there may be other revenue models here that we look at as well as we go forward.

[Unidentified Analyst:]

Right. Thank you, guys very much. I appreciate it.

[Todd Norbe:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Thank you. At this time, I will turn the floor back to Todd Norbe for closing remarks.

[Todd Norbe:]

Well, I appreciate everybody on the call. Understand that we’ve got some work ahead of us here as an organization. Looking forward to updating you along the way as we roll through Q4. So thank you and have a good day.

[Operator:]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.