BIOLASE, Inc.
Q4 2018 Earnings Call Transcript

Published: 6 Mar 2019

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2018 BIOLASE Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to introduce you to your host for today’s conference, Mr. Todd Kehrli of the EVC Group. Thank you, sir. You may begin.

[Todd Kehrli:]

Thank you, operator, and good afternoon, everyone, and thank you for joining us today to discuss BIOLASE's financial results for the 2018 fourth quarter and full year ended December 31, 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 fourth quarter and year ended December 31, 2018 before opening the call for questions. Before we begin, I would 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. 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 result to differ materially from the statements contained in this presentation. Such forward-looking statements only represent the company's view as of today, March 5, 2019. 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 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 2018 fourth quarter and full year result. If you do not have a copy of the news release, it is available on the Investors section on the BIOLASE website at www.biolase.com. BIOLASE's financial results for 2018 can also be found in the company's Annual Report on Form 10-K which will be filed with the SEC. The tables we've provide in today’s news release are for 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 net loss and net loss per share, as well as the details of the company's other non-GAAP disclosures. With that, I'm pleased to turn the call over to BIOLASE President and Chief Executive Officer, Todd Norbe. Todd?

[Todd Norbe:]

Thanks, Todd and thank you everyone for your interest in BIOLASE and for joining us on this call this afternoon. It's appropriate that we're doing our call today, since tomorrow is actually National Dentist Day, a day created to show appreciation for dentists in a way to bring awareness to dentistry, so that people can learn more about how to care for their teeth. And with a significant advancement as we've made in dental care such as are all-tissue, laser, WaterLase, we certainly hope that more people will be encouraged to go for a checkup within the next couple of weeks. Now let's talk a little bit more about our performance, not only for the fourth quarter, but also for the full 2018. Our strong results for the fourth quarter reflect solid execution around our growth in cost saving initiatives. For example, our new commercial marketing efforts are building increased awareness of our products in the marketplace, which has started to drive further adoption of our all-tissue WaterLase technology. At the same time, the team is keenly focused on managing the cost side of the business, putting us on track to become EBITDA positive in the fourth quarter of 2019. Our new results-based culture has the entire BIOLASE team performing at the highest level. Let me highlight some of the fourth quarter results. I'm pleased to report that our total U.S. laser sales increased 51% over prior year and our laser revenue for Southern California market grew in excess of 600% year-over-year in the fourth quarter. Recall that we also saw year-over-year increases in laser revenue and growth in Southern California market, up 209% and a 127% in the second and third quarter of 2018, respectively. These solid results demonstrate the growing interest in our technology. Early success as we test our new go-to-market approaches and provide evidence for the sustained and sustainable adoption of the use of lasers in dentistry. During the fourth quarter, we continue to add new customers and increase our product utilization, driving recurring higher margin consumer revenue, more than two-thirds of our laser revenue came from new customers and our U.S. consumables and other revenue increased 13% year-over-year. This is a key initiative for 2019 and I'm happy to report that we're already seeing some early success here. Since my joining BIOLASE back in August, we made some concerted effort to shift the company's R&D-centric culture to one that is focused on the customer and building the right commercialization processes to support our current and future customers. As part of this, in 2018, we launched new go-to-market initiatives focused on increasing patient awareness and improving the overall customer experience and we have seen good initial results. One of these initiatives is our Model Market campaign and seeing great success in generating increased awareness of our product, creating new customers and revenue. We began the Southern California initiative in Q2 of 2018 to test and learn in a market really close to home. As I mentioned earlier, our major revenue in this key market was up about 600% year-over-year into Q4, great results, but still much to do and learn as a team. As a result of this better than expected performance and to build on our success, in Q4, we expanded to a second Model Market in the Dallas-Fort Worth area. Since launching in Dallas, we have canvassed more than 300 dental offices and established partnerships with the dental -- with the Dallas Mavericks and ESPN to raise awareness of advanced dental care in the community. We are encouraged by the early positive reception that we are seeing in this new test market. These ongoing efforts combined with our focus on improving our operational efficiency has enabled us to improve our gross margin which gives us increased confidence that we will achieve our goal of becoming EBITDA positive in the fourth quarter of 2019. As we work to further expand adoption of our all tissue lasers in 2019, we have taken some additional steps to improve our sales and marketing efforts. We recently appointed Sinclair Dental as an exclusive distributor for all products in Canada. Sinclair is the fastest growing dental supply company in Canada and this partnership will give access to their customer base, salesforce, as well as customer support staff. We are extremely excited to partner with Sinclair moving forward. We have upgraded our sales and marketing talent and overhauled our sales compensation plans to align to and with our outside-inside salesforces while adding a quota or consumable sales and creating more incentive for our sales organization to increase or hold pricing; something that the company has never done before. We have improved our sales funnel management through development of commercial growth engine that linked lead-gen to a robust field sales funnel and is supported by inside sales in a growth war room. We launched a customer loyalty and referral program to improve current customer retention and satisfaction, while increasing referrals, incentivizing peer-to-peer referrals will be a key focus for 2019. We continue to develop smart outsourcing processes that we believe will drive continued cost reduction in overall operational savings in 2019. And, as we move through 2019, we expect to complete the Maguire study, which is already underway. We expect the finding of this study will show improved patient reported outcomes for perio surgery and believe this will help drive further adoption of our all-tissue lasers in our target markets. We also will be focused on adding new indications such as crown and veneer removal and laser bacterial reduction for lasers with the FDA, which will further expand our addressable market opportunity. We have accomplished a lot in a short period of time and have a plan and path forward with new processes that will keep the team accountable and on track. We don't need a significant increase in revenue to reach our EBITDA goal of positive in fourth quarter of this year with modest revenue growth. We believe our significant growth margin -- gross margin improvement and cost savings initiatives will get us there. With that said, I look forward to speaking to you again in the coming weeks and months and reporting on our continued progress next quarter. With that, I'll turn it over to John, who will go into our financials in a little more detail. John?

[John Beaver:]

Thanks Todd, and thank you all again for joining us this afternoon. I also want to thank our entire team and employees for their hard work in achieving our solid results in both the fourth quarter and full year. We believe we are building momentum and our fourth quarter performance gives us reason to be optimistic. Now let me review the numbers starting with the fourth quarter. Total worldwide revenues for the fourth quarter of 2018 were $13 million, a 3% increase compared to $12.6 million in the fourth quarter a year ago. More importantly, excluding revenue from our non-core imaging business, revenue in the fourth quarter of 2018 increased 9% compared to the fourth quarter of 2017. Revenue from the company's core U.S. laser related products for the fourth quarter of 2018 increased 51% year-over-year. As Todd noted, one of our most basic strategic goals is to build our customer base and increase the utilization of our product thereby driving recurring higher margin consumables revenue. During the fourth quarter, 66% of our all-laser systems sales in the U.S. were to new customers, reflecting early success with our new strategic priority, and our consumables and other revenue in the U.S. increased 13% year-over-year in the fourth quarter of 2018, reflecting increased utilization of our lasers. These are positive indicators of success and we believe our continued progress will lead to improved financial results in the future. Internationally, total revenue for the fourth quarter of 2018 was $4.2 million, down 19% compared to the prior year fourth quarter. The reason for the declined international revenue is primarily due to a reduction in sales to China as they continue to manage through the new tariff situation. Gross margin for the fourth quarter of 2018 was 43%, up significantly from 29% in the fourth quarter of 2017. The increase in gross margin reflects a favorable change in product mix with an increase in laser sales, which has a higher margin along with a decrease in overhead expenses. Total operating expenses for the fourth quarter of 2018 were $12.1 million compared to $8.3 million for the fourth quarter of 2017. Sales and marketing expenses increased by $1.1 million primarily due to an increase in advertising and payroll and consulting related expenses. General and administrative expenses increased by a $0.6 million primarily as a result of increased legal fees. Engineering development expenses decreased $0.1 million primarily due to a decrease in payroll and consulting related expenses and expenses for the disposal of internally developed software increased by $0.7 million. During the fourth quarter of 2018, the company also incurred a $1.5 million loss due to patent litigation settlement with the CAO Group which I will discuss in more detail later in the call. Net loss for the fourth quarter of 2018 was $6.9 million or $0.33 loss per share compared to a net loss of $3.8 million or $0.23 loss per share for the prior year fourth quarter increase in net loss was primarily due to the negative impact of items. Just as a reminder our earnings release includes a reconciliation between un-audited GAAP and non-GAAP net income. We believe non-GAAP net income provides a useful measure of the company's operating results by excluding depreciation and amortization expense, stock comp expense and expenses related to disposal of internally developed software and the cost of our patent litigation settlement. The non-GAAP net loss for the fourth quarter of 2018 which excludes these items was $2.7 million or a loss of $0.13 per share compared with the non-GAAP net loss of $3.1 million or a net loss of $0.19 per share during the fourth quarter of 2017. Our diluted share count at the end of fourth quarter of 2018 was 20.7 million shares compared to 16.7 million shares in the year ago quarter. Turning now to our 2018 full year results, total worldwide revenues for the full year 2018 were $46.2 million down 2$ compared to $46.9 million in 2017, excluding revenue from a non-core imaging business revenue for the full year 2018 increased 3% compared to the full year 2017. Revenue from the company's core U.S. laser related products for the full year 2018 increased 7% year over year. For the full year 2018 worldwide consumables and other revenue increased 13% year over year reflecting increased utilization of our laser. Internationally total revenue for the full year 2018 was $17.5 million down approximately 1% compared to the prior year. Gross margin for the full year 2018 with 37% up from 32% for the full year 2017, the increase in gross margin reflects favorable change in product mix and an increase in laser sales which once again has a higher margin. And once again a reduction overall overhead expenses compared to the prior year. The operating expenses for the full year 2018 were $37.8 million compared to $33.2 million for the full year 2017. Sales and marketing expenses for the full year 2018 increased by $1.4 million primarily due an increase in advertising and payroll and consulting related expenses. Generally and administrative expenses increased by 2.1 million primarily as a result of increased legal fees throughout the year. Engineering and development expenses decrease by 1 million primarily due to a decrease in payroll and consulting related expenses. And as mentioned earlier total operating expenses for the full year included the $0.7 million increase in loss on the disposal of internally developed software and $1.5 million loss on the settlement of our patent litigation. Net loss for the full year 2018 was $21.5 million or a $1.05 loss per share compared to a net loss of $16.9 million or $1.41 loss per share per share for the prior year. Increase in net loss was primarily due to an increase in operating expenses as well as the negative impact of the onetime expenses mentioned earlier. The non-GAAP net loss for the full year 2018, which excludes these items was $14.5 million or a loss of $0.71 per share compared with the non-GAAP net loss of $13.6 million or a loss of $0.92 per share a year ago. Turning to the balance sheet. Cash, cash equivalents and restricted cash total $8.3 million as of 12/31/2018. As we've previously announced during the quarter, we entered into a $12.5 million term loan with SWK Holdings. We used a portion of the 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 of our stakeholders as it provides BIOLASE with sufficient liquidity to execute to our long-term plan to further our current growth trajectory and drive towards profitability without the need for additional capital. We remain focused on wisely investing our cash on programs to drive future growth and as always cost containment and prudent cash management continues to be a top priority. On the topic of cost savings following the close of the quarter, we successfully settled our outstanding IP litigation with CAO Group, which grants us a royalty free worldwide license to disputed patents. The details of the settlement are spelled on our 8-K fling on this matter. Going forward, the settlement will reduce our ongoing legal expenses and enable the company to pursue potential additional cost savings initiatives in the future. Before I turn the call over to the operator for questions, let me summarize our remarks. Our strong fourth quarter results reflect the solid execution of our new – our new go to market health initiative. BIOLASE is experiencing significant increases in both adoption and utilization of all-tissue lasers. We are increasing our efforts to further expand adoption throughout the dental industry. At the same time, we have taken steps to significantly improve our operational efficiencies and remain focused on solid execution and achieving our goal is the same growth and profitability. This concludes our prepared remarks. I'll turn the call back to the operator to open the call for questions. Operator? Thank you. [Operator Instructions] Our first question comes on line of Ed Woo with Ascendiant Capital. Please proceed with your question.

[Ed Woo:]

Yeah. Thank you for taking my question. My question is on the current market initiative you're doing in Dallas-Fort Worth. How much of it is similar to what you're doing in Southern California? And do you see that it's more similar or do you see that you have to do things a lot different in different market?

[John Beaver:]

Yeah. So, Ed, this is John. Let me answer that. There are some similarities in what we're doing for instance we have implemented in the L.A. Orange County market, a new roll called practice development specialist and really their role is to increase the effectiveness of the dentist after the laser sale and really improve their customer journey. We knew – we saw early signs of promising results there in L.A. Orange County. So when we started the Dallas-Fort Worth market, we added that as well. Another thing that we did in L.A. Orange County during 2013 was we implemented a BIOLASE Ambassador role once again to improve that customer journey and ease the transition of the dentist our customer into the use of lasers. And that is one that we actually just skipped over DFW and did it for the entire U.S. So it's something that we learned in L.A., Orange County that I think resonated well with everybody else. We were trying in 2019 to be more micro focused in what is driving that awareness and adoption in 2018 in L.A., Orange County. We tried a lot of different things. And we know that the combination of those things seemed to work. However, any one item it was hard to differentiate the effectiveness of that initiative versus another, so both in L.A., Orange County and Dallas, Fort Worth. Those are the things we're doing in 2019 to try to be, once again, more micro focus so we can determine the actual effectiveness of those initiatives. Overall, there's -- other than maybe a little bit more traffic in L.A., Orange County, going from dentist to dentist. Dallas, we have found is not that dissimilar. We knew that going in.

[Ed Woo:]

Great. And is it too early to start thinking about the next market you want to focus on.

[Todd Norbe:]

Yes. So this is Todd. I think the answer is yes. There's still a lot for us to learn here. Not only in the Southern California market and we're testing and trialing some other things right now as we speak, but those two markets, I think, are very manageable for us and also can be replicated across the United States, once we find the secret sauce that works. As John's point was well taken here is that, we did a lot of great things in 2018, but we didn't necessarily understand exactly the input to the output for each one of those. And we want to get tighter around that before we start to expand any further, Ed.

[Ed Woo:]

Great. Well, thank you for answering my questions and good luck. Thank you.

[Todd Norbe:]

Thank you.

[Operator:]

Our next question comes from line of Lisa Springer with Singular Research. Please proceed with your question.

[Lisa Springer:]

Thank you. My question concerns the Canadian distribution agreement. Had you had a distributor in Canada? You change distributors or is this a new market for you? And has this relationship with your new distributor already gotten off the ground?

[Todd Norbe:]

Yes. I'll answer that question. So we are selling on a direct basis today in Canada. Actually, I shouldn't say today, because effective March 1st our distribution agreement with Sinclair has gone into effect. We will launch that at the Pacific Dental Conference starting actually tomorrow. And when you think about Canada, you think about the geography there, is the ability to create reach and for the size of the marketplace which represents about 10% of U.S. sales, very hard to do that on a direct basis. So Sinclair is going to bring about 170 representatives to the table for us. We have great relationships with their customer. And when you're also trying to service your equipment with three techs, it makes it very difficult. So they bring a lot to the table for us. So we expect to see some really good things from Sinclair in 2019.

[Lisa Springer:]

Okay. Great. And I also wanted to ask you about the non-core imaging business which seems to be a little bit of a drag on sales. Could you comment on what's going on with that business and what the outlook is?

[Todd Norbe:]

Yeah, I think, it's not a focus of ours when we can wrap the imaging together with a laser then I think it's beneficial as an organization. When you look at our overall margin at product, it's extremely low. And as we laid out here our goal is to increase overall gross margins. So, it's fairly dilutive to what we do as an organization. So, we're going to continue to whine that down in 2019 and it'll probably be less of a material impact for us as we roll into 2020.

[Lisa Springer:]

Okay. Thank you.

[Todd Norbe:]

You are welcome.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Brooks O’Neil with Lake Street Capital Markets. Please proceed with your question.

[Brooks O’Neil:]

So, thank you and congratulations on the progress. I was hoping you might talk about any changes you've seen in kind of the fundamental market that have been either beneficial or detrimental to your efforts, or whether you maybe you could comment on whether you believe the improvements you've seen while you can't be specific about which items have driven it, do you believe the improvements you've seen are driven by the efforts you have underway to drive better results?

[Todd Norbe:]

Yeah. So, I think the first part of that question is you know, the market, in general, in North America has been fairly soft and flat when you look at patients coming to the average GP, that's not new news by any means. One of the benefits with this technology is it provides additional revenue opportunities for the average GP that represents, call-it north of 80% of the dental work that's being done today. So, it's very attractive when the average GP seeing reimbursement decline in insurance rates and they're looking to literally generate the same amount of revenue that they did the prior year. So, opportunistic for us, for sure. There's not many other technologies that provide that. And in reference to our overall success and some things that we're seeing work for us is really creating some standards around performance in many functions that we operate in here at BIOLASE and specifically around our commercialization, and making sure that those standards and expectations are set and then helping the team members get up to the level they need to be able to produce at the level that the organization is expecting. And that's also part of our initiatives and KPIs for 2019.

[Brooks O’Neil:]

Great John, thank you. Todd, thank you very much. So the other question I had it might be contained in your basic PowerPoint, but have you guys made any effort to try to size what you believe is the overall opportunity you're attacking in and primarily focused on U.S. market, although, I understand it's a global business and there could well be significant opportunities outside the U.S. as well?

[Todd Norbe:]

Yes, so I would tell you that there's a few segments, right. The periodontal community and the Maguire study that will see some great results that we expect by Q3 ahead of the AAP in Chicago, that's one segment, again a smaller segment, but very influential from a peer to peer in specialty to GP. So that's a segment that we want to continue to focus in on. The Pedo community is also really important when you look at all tissue laser around, especially hard tissue and to be able to drive that adoption. John's working on a few initiatives here in the model market around that. And then lastly, we have in the general segment, our GPs and working with a peer to peer and influencers there to drive more referrals. And then the last piece is more around corporate dentistry. If you look at other industries where things have gotten unlocked, maybe Lasix would be a good example. It was until the corporate entity started to move into that space. So we've got some really good progress going on in the corporate front and that's been the DSO segment as well.

[Brooks O’Neil:]

Sure. Okay great. Thank you very much and again congratulations on your progress.

[Todd Norbe:]

Thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of our question and answer session. And I would like to turn the call back over to Mr. Todd Norbe for closing remarks.

[Todd Norbe:]

I want to thank everybody for your interest in our company and our technology. We've got a lot of work still ahead of us here, but I think we have a really solid plan to go execute on and we've got the team members here engaged around a plan with the right accountability and hopefully overall focus around hitting the market EBITDA positive in Q4 and also driving the top line revenue as we expect. So thank you and enjoy the rest of your day.

[Operator:]

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation. Have a wonderful day.