BIOLASE, Inc.
Q3 2016 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the BIOLASE 2016 Third Quarter and First Nine Months Result Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the call will be opened for questions. [Operator Instructions] For the benefit of those who maybe listening to the conference call replay, this call was held and recorded on November 8, 2016. I would now like to turn the conference over to Rene Caron of DresnerAllenCaron. Rene, please go ahead.

[Rene Caron:]

Thank you, Jerome. Good afternoon, everyone, and welcome to the BIOLASE conference call to discuss the results for our third quarter and nine months ended September 30, 2016. On the call today are BIOLASE’s President and CEO, Harold Flynn; and the company’s Chief Financial Officer, David Dreyer. After Harold and David complete their opening remarks, we will open the call for your questions. Please be aware 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 views as of today. These risks are discussed in the company’s filings with the Securities and Exchange Commission. A replay of this conference call is also 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 results for its third quarter ended September 30, 2016. If you do not have a copy of the news release, it is available in the Investors section on the BIOLASE website at www.biolase.com. The company’s results for the third quarter ended September 30, 2016 can also be found in the company’s quarterly report on Form 10-Q, which the company filed with the Securities and Exchange Commission today, November 8, 2016. With that, I’m pleased to turn the call over to BIOLASE President and CEO, Harold Flynn. Harold?

[Harold Flynn:]

Thank you, Rene, and thank you all for joining us on the call this election day afternoon. I’m pleased to say that we posted solid performance both operationally and financially during our third quarter, typically the weakest throughout the dental industry. We grew worldwide revenues by 18% over prior year, improved our gross margins over 12 full percentage points to 42% and we narrowed our operating loss by 41%. We also completed a $10 million private placement led by our investors, providing us the funds we believe necessary to achieve self-sufficiency and further our transition into a successful discipline and commercial enterprise. This investment demonstrated continued investor confidence in our team, our strategy, and the traction we’ve generated thus far. We still have a long way to go, but we’re pleased to have incurred by the progress we have made during these recent quarters. The exceptional work of our domestic sales team continues to be a highlight, in the U.S., our largest and most profitable market. The team grew overall revenues by 33% and our flagship WaterLase product revenues by 77%. The U.S. sales team also grew the revenue of our soft tissue EPIC client by 10% in the quarter. One of our most important initiatives is building a strong disciplined sales team. And we believe these results show that, we are making progress. We’ve upgraded talent and we’ve invested in sales training and our sales representatives better understand the substantial value of the solutions we offer, making them better at the sales process. The results of these efforts were reflected in the quarter by improved sales execution and demand generation, as well as improved pricing and margin. International markets, especially Europe, the Middle East and Africa, which we refer to as EMEA represent enormous opportunity for BIOLASE. It’s the largest single geographic region by revenue in dentistry and in my previous experience can be roughly half of the world’s dental market. Europe alone has the potential to be as larger market for us as the U.S., perhaps even larger. While international revenues remained relatively flat during the quarter with the addition of Holger Arens to our leadership team, we’ve begun the process of focused investments to realize the great potential of laser dentistry in the EMEA region. We’re very excited to have such a seasoned dental sales and business development executives, as Holger, joining the leadership team as Vice President and Managing Director, EMEA, to lead these efforts. With more than 15 years of experience in a variety of commercial and operational activities in international, dental sales, Holger understands how to manage the complexities and challenges associated with building a successful international sales organization. Holger has hit the ground running and I’m confident, we’ll enjoy significant returns, as we build out our commercial execution capabilities and capacity in EMEA. While we’re on the topic of building our leadership team, we recently announced that renowned dental educator and periodontist Dr. Samuel B. Low has joined BIOLASE as our Vice President, Dental and Clinical Affairs and Chief Dental Officer. Sam has a deep understanding of laser dentistry and BIOLASE, as well as the unique value and opportunity our laser technology presents to improve modern dentistry. He will play a leading role in our educational and clinical efforts, as well as continue to help us to develop new protocols for clinical treatments, most specifically for the periodontal patient. Executing significant and focused clinical studies, such as the landmark periodontal study we recently announced in collaboration with the McGuire Institute in September, it’s another main tenant of our strategic plan. As Chief Dental Officer, Sam will lead these efforts, which we believe are important to achieve sustained success as a dental equipment and service provider. The addition of both Holger and Dr. Low to leadership team will further enable the building of a healthy high-performance culture of BIOLASE, one of our most important strategic goals. Turning to our innovation and new product development efforts, our strategic plan includes a comprehensive roadmap to build out a robust portfolio of new and improved products to further enhance penetration and utilization of laser dentistry, both in the soft tissue as well as all tissue franchises. We continue to make progress on these efforts and we’re looking forward to introducing a unique innovative new product for the soft tissue diode-based laser market over the next couple of months. This important new addition to our product line was created in collaboration with IPG Medical, as part of our broader development and distribution agreement. We’re all excited about seeing the first fruit of our joint labors introduced into the global marketplace. Our overall goal at BIOLASE is to establish laser dentistry as the standard of care and achieve success by substantially growing the laser dentistry market, winning over both dentists and patients. To accomplish our goal, we have three imperatives that inform our strategic and operating plans. First we need to shake complacency with traditional methods and influence dentists around the world to perform procedures with lasers that they are currently reluctant to perform, or uncomfortable presenting to patients. So they may achieve better patient reported outcomes and higher patient compliance. We believe laser dentistry can make every dentist, the better dentist. Second, we need to educate dental professionals to full confidence with lasers to ensure great results with simple to use and versatile system. And we need to create a laser dental practice brand globally through high-quality education and training, as well as clinical and business development activities to expend utilization of our consumables and services. We believe we can enable the beneficially use of lasers for all aspects of modern dentistry. Third, we need to create patient pull by getting patients and care decision makers, including spouses, partners, and parents around the world to understand the compelling benefits of BIOLASE laser dentistry. We need to educate them, so they will demand laser treatments and seek out dentists who use our laser systems regardless of reimbursement consideration. We believe, laser dentistry can make every patient happier and healthier patient. Success in achieving these three imperatives will take time, but we’ve been taking the necessary steps to stabilize our business and set ourselves up to accelerate and sustain the growth and profitability necessary to achieve positive cash flows and further reimbursement in the business. While I’m pleased that we demonstrated traction in these improvement efforts during the recent quarters, we’re still not yet large enough to buffer all the short-term turbulence we might encounter, as we continue our longer term client. That being said, my confidence on affecting a full turnaround in realizing BIOLASE’s larger potential has only grown since we last spoke and I’m excited about our future. Before I hand the call over to David to discuss our detailed financial results, I’ll point out that despite an $800,000 increase in spending this quarter on inventory related to new product development, our cash burn rate still decreased by 53% to $2.2 million. It will take continued careful operational planning and financial discipline to meet the challenge of transforming the company into a strong global commercial enterprise, while minimizing the use of financial resources that our investors have been trusted us with. With that, I would like to turn the call over to David for more on our financial results. David?

[David Dreyer:]

Thank you, Harold. Good afternoon, everyone. In keeping with the focus of previous quarterly reviews, during today’s discussion of the 2016 third quarter and nine months results, I will concentrate on five key financial areas; revenue, gross margins, operating expenses, profitability and liquidate. Also, unless I indicate otherwise, all the comparisons I make will be with the comparable periods in 2015. Overall, our worldwide revenue increased 18% to $13.2 million for the quarter, with worldwide sales of our laser systems increasing 30%. U.S. sales increased 33%, while international sales decreased 4%. The increase in net revenue was primarily driven by 77% growth in our U.S. WaterLase sales. International WaterLase sales remained relatively flat for the quarter with a decline of 1%. EPIC revenue grew by 10% in the U.S. and 2% internationally. The revenue improvements were largely due to the continued realization associated with the improvements in our marketing and sales programs and the changes to our selling processes we began implementing in late 2015. Net revenue for the 2016 third quarter also included a 11% increase in consumables and other revenue and a modest 2% increase in services revenue. Services consist of extended warranty service contracts, advanced training programs and other services. With our primary focus on the core dental laser business, imaging systems revenue decreased by $371,000, or 52% for the quarter. Gross margin increased more than 12 percentage points to 42% compared to 30% last year. This improvement reflected a larger mix of domestic sales, specifically U.S. WaterLase iPlus sales, which usually have higher product margins due to higher pricing. Our gross margin typically fluctuates with product and regional mix, selling prices, product cost and different revenue levels. Total operating expenses increased slightly by 20,000 to $8.8 million. Our main expense categories include sales and marketing expenses, which increased 6% primarily due to increased sales commission as our revenues increase. General and administrative expenses decreased 3%, mostly due to lower payroll and consulting expenses and engineering and development expenses decreased 2%. The PATH Act, which was enacted last year suspended the medical device Excise Tax for the years 2016 and 2017, because there’s no Excise Tax expense in 2016, our Excise Tax was decreased by 78,000. Sales and marketing and G&A expenses as a percentage of revenue declined 32% and 21%, respectively, from last year’s 36% and 26%, respectively. As we strive to return to sustained revenue growth, we expect this lower percentage of revenue trend to continue. Engineering and development expenses as a percentage of revenue declined to 13% from 16%. However, we plan to increase our investments in engineering and development for the remainder of 2016 and into 2017, as we continue to develop new products and technologies that we believe will further strengthen our worldwide market leadership position. Net loss attributable to common shareholders for the quarter decreased by $1.1 million or 21% to $4.2 million, or $0.07 loss per share compared to a net loss of $5.3 million, or $0.09 loss per share last year. The decrease in net loss was attributed to the overall business improvement including the $2 million increase in net revenue and a substantial increase in gross margin. With respect to our 2016 year-to-date results, revenue increased 12% to $38 million. Operating loss decreased 39% to $10.8 million. Gross margin increased 880 basis points to 39% and net loss attributable to common shareholders decreased approximately 32% to $12 million, or a loss of $0.21 per share. Looking at our non-GAAP net loss, when you exclude net interest income, the income tax provision, compacted non-cash expenses for depreciation and amortization and non-cash stock-based compensation, our non-GAAP net loss for the 2016’s third quarter was $2.1 million, or a loss of $0.04 per share. This compares to a non-GAAP net loss than last year’s third quarter of $4.4 million, or a loss of $0.08 per share. The non-GAAP net loss for the nine months of this year was $7.6 million, or a loss of $0.13 per share. This compares to a nine-month non-GAAP net loss in 2015 of $14.9 million, or a loss of $0.25 per share. Now I’ll turn to our liquidity. As of September 30, 2016, we had approximately $20.8 million in working capital. Cash and restricted cash equivalents at the end of the third quarter were $12.9 million and net accounts receivable totaled $9.9 million. As we’ve said for the last several quarters, cash preservation continues to be a top priority for us and this year’s third quarter cash burn reflects the positive impact of our cash management efforts. As Harold mentioned earlier, cash used in this quarter’s – third quarter declined 53% to $2.2 million. So our cash burn declined 53% to $2.2 million, which included in making an $800,000 investment in inventory related to new product development. In closing, I continue to be very optimistic about our future. We’re making important improvements throughout our entire company and we have made deceive steps to strengthen our leadership team. Our balance sheet has been strengthened by the recent $10 million private placement and we believe we have financial resources to support our future growth. We still have a lot of work ahead, but I’m confident, we will continue making excellent commercial and financial progress. With that, I would like to turn the call over to the operator for questions. Operator?

[Operator:]

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ed Woo of Ascendiant Capital. Please proceed with your question, Ed.

[Ed Woo:]

Great. Well, congratulations on the quarter guys, and good job on the progress. My question is, you talked about international opportunities, you talked about how big with the European markets are? How quickly will you be able to expand in that market, or just something that you guys are going to focus on for longer-term?

[Harold Flynn:]

Yes. Hi, Ed. Thank you very much for the question and thanks for the congratulation. The – we’re putting the plan in place after Holger’s addition to the leadership team. Obviously, that plan will balance between the level investment we can make to grow the infrastructure and the resources and the returns that we can get. So our approach will be to prioritize certain countries and be able to to look at those over time. So, I will expect some positive influence in the relatively near- to mid-term, but to really achieve the level of potential we would expect, that would obviously be longer-term growing from a smaller proportion of our revenue today to a larger proportion over the next couple of years. But I hope to be able to report on the progress there in our international sales in the quarters to come.

[Ed Woo:]

Great. And then perhaps just one last follow-up. You mentioned that, your goal is to really have, I guess, fully ramp strong sales force in terms of what you guys have now, how far along you guys are towards having a fully ramped up sales force?

[Harold Flynn:]

Yes, I think that’s a – it’s a good question for us. I intend over time, as we grow and get an effective sales process, as well as our marketing and lead generation, I expect, we will become sales capacity limited. So that number will actually grow over time. I would consider us fully staffed at this time and really a lot of those new or added resources and talents have been coming up to speed and contributing quite quickly after they’re on boarding and training efforts. But that’s one where we will judiciously expand the sales force, as we see the opportunity and introduce new products that will appeal to the broader market and other segments than we’ve been deploying the sales force against today. So I would say today, we are where we plan to be. I would expect in the coming periods and years to slowly expand the sales forces in the area of greatest opportunity. Hopefully, that answers your question.

[Ed Woo:]

Great. That’s all I have. Thanks for answering my questions. I wish you guys a best of luck. Thank you.

[Harold Flynn:]

Great. Thanks, Ed. I appreciate your support and call.

[Operator:]

[Operator Instructions] Our next question comes from the line of Chris Sassouni of Eagle Asset Management. Please proceed with your question, Chris.

[Chris Sassouni:]

Yes, good afternoon, and again, congratulations on a progress you’ve been making. I had basically three questions. One is, if you could review the competitive landscape right now in terms of anything that competitors are doing or targets for – the competitors are focused upon in terms of indications? The second one is, any information you could give us on the size and/or the design of the clinical study or planning with McGuire Group? And the third one is, whether or not, there’s going to be any new products introduced at the Greater New York Dental Association?

[Harold Flynn:]

All right. Hi, Chris, thank you very much. Thanks for the congratulations. From a competitive landscape, we haven’t seen a lot different from many of the major competitors. There are some that are still early in their lifecycle pursing the strategy that has been pursued in the past in laser dentistry with kind of the painless restorative drilling, if you will. We haven’t seen that yield great success, at least, in our market checks. So we are very happy with the fact that, we have such a versatile system and can participate across so many dental procedures that, and I think, it shows in our relative what we believe as a unit placement quarter-after-quarter that it’s more broadly appealing. And so we’ve seen some people doing some price discounting, while we have enjoyed some average selling price increases. So we see a number of different responses, but none of them very fundamental, or none of them changing strategy dramatically, most of them sticking to the same stories per se. As I think we’ve discussed in the past, our big challenge is not so much the market share, while I really do want to enjoy dominant market shares in the markets that we participate in. Our biggest challenge is to expand and grow the market overall. So our focus, while we do watch competitive activity, I think, we have the right laser that’s just right and a balance of all of the things that one would look for in a dental laser, while at the same time having the best value proposition in terms of price point and capability per dollar spent. Sorry, was there a follow-up to that Chris?

[Chris Sassouni:]

No. I mean, just out of curiosity as you are focused on the soft tissue dental laser space who would you say right now are or I think, where do you get competition if at all at this point and even just it would have just be less expensive diodes that are really more competition for the EPIC, where it sounds like the WaterLase is sort of in a category by itself given its versatility with both soft tissue and hard tissue?

[Harold Flynn:]

That’s right. There are tissue lasers certainly WaterLases and a category by itself, I think, has demonstrated over longer – over the longer-term. Soft tissue, I would characterize, the competitors is more regional in nature. So we will have three or four different competitors in Europe than we might have in the United States and certainly in Asia. There would be additional competitors that would be regionally located. So I think we do see price competition. But we see the opportunity across several tiers in soft tissue. We introduce entry level folks in the soft tissue space with our iLase, our entry-level offering, let’s say, and very quickly they ramp up to EPIC level. And we believe there’s an entire tier that is yet untapped that we can bring some additional technology to bear and it gets a little bit into your questions that, while we have to make sure we pay almost to all of the regulatory agencies and the announcements and the abilities to promote products, I’m looking forward to sharing some of the new product work that we’re doing, especially with IPG Medical at the Greater New York Dental Show.

[Chris Sassouni:]

Okay.

[Harold Flynn:]

So, and as I said in my opening remarks, that will be a soft tissue market focused product for our first offering from that broader distribution and development agreement that we’re pretty excited about. So come see us and I’d happy to talk a bit more.

[Chris Sassouni:]

And the last question was just on the – whether you can comment at all on the design and size of the clinical study or studies you’re planning with McGuire Group?

[Harold Flynn:]

Yes, I think we’ve – I want to be careful, because we do have competitors that were listening. But we’ve worked with the McGuire Group who works with a pretty renowned clinical research organization and biostatisticians. And we’ve looked at the statistical power of the study and the nature of the study, and we believe, it will have all the strengths that we believe necessary to determine the patient reported outcomes and the performance relative to do traditional methods for periodontal treatment of the mild to moderate periodontal disease. So we’re not really talking about the specifics of the study. But it’s fairly material, and I will share that it’s a multi-site – it’s a multicenter study with six different investigators involved.

[Chris Sassouni:]

Okay. And when would the results of that likely be available for publications, that’s something that’s 2017, or in 2018 about?

[Harold Flynn:]

Well, I think the good news is that periodontal procedure follow-ups can be measured in as little as six months, but we might continue to follow-up with other time periods. So I’m hopeful that and expecting to see some results certainly in 2017. And then the publication, as you know, can be a little bit different, but in terms of timing after the results have been collective. But it’s not a two to three-year study before we get results, it should be in a shorter term.

[Chris Sassouni:]

Okay. Thank you.

[Harold Flynn:]

Thank you.

[Operator:]

This conclude today’s Q&A session. [Operator Instructions]

[Harold Flynn:]

Okay, it sounds like everybody is onboarding.

[Operator:]

Yes. This concludes our Q&A session. I would now like to turn the conference back over to Harold Flynn for closing remarks.

[Harold Flynn:]

Okay, thank you, operator. In conclusion, we know that we know what we need to do strategically and operationally to be successful in the global dental marketplace. We’re steadily taking the steps to get there. Our ultimate goal is to make all tissue laser dentistry the standard of care for a wide variety of dental procedures. To do that we need to educate the dental and patient communities on the capabilities and value of our lasers and ensure our products and services make our customers better dental professionals and make their patients healthier and happier. Our team is very bullish about prospects for a very prosperous future. Thank you all for joining us on the call this afternoon and your continued support. We look forward to speaking with you again when we announce our results and discuss our progress for the fourth quarter and full-year of 2016. Have a great day, everyone.

[David Dreyer:]

Thank you.

[Operator:]

Ladies and gentlemen, this concludes the conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful rest of your day.