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Edited Transcript of BIOL earnings conference call or presentation 5-Mar-19 9:30pm GMT

Q4 2018 BIOLASE Inc Earnings Call

IRVINE Apr 27, 2019 (Thomson StreetEvents) -- Edited Transcript of BIOLASE Inc earnings conference call or presentation Tuesday, March 5, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John R. Beaver

BIOLASE, Inc. - Executive VP & CFO

* Todd A. Norbe

BIOLASE, Inc. - President, CEO & Director

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Conference Call Participants

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* Brooks Gregory O'Neil

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Edward Moon Woo

Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media

* Lisa Springer

Singular Research, LLC - Research Analyst

* Todd Kehrli

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Presentation

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Operator [1]

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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 call, Mr. Todd Kehrli of the EVC Group. Thank you, sir. You may begin.

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Todd Kehrli, [2]

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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 question and year ended December 31, 2018, 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. 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, 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 the call, please refer to the news release issued earlier today announcing the company's 2018 fourth quarter and full year results. If you do not have a copy of the news release, it is available on the Investors section of 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 have provided 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?

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [3]

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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's Day, a day created to show appreciation for dentists and a way to bring awareness to dentistry so that people can learn more about how to care for their teeth, and with as significant an advancement as we've made in dental care, such as our all-tissue laser Waterlase, we certainly hope that more people will be encouraged to go for a checkup within the next couple 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 and 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 the prior year and our laser revenue for the 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 the Southern California market of 209% and 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 continued to add new customers and increase our product utilization, driving recurring, higher-margin consumable revenue. More than 2/3 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 '19, and I'm happy to report that we are already seeing some early success here.

Since my joining BIOLASE back in August, we've made some concerted efforts to shift the company's R&D-centric culture to one that is focused on the customer in 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 laser revenue in this key market was up about 600% year-over-year in 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 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, have 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 the 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, sales force 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 sales forces while adding a quota for consumables 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 a commercial growth engine that links 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 and overall operational savings in 2019. And as we move through 2019, we expect to complete the McGuire study, which is already under way. We expect the findings 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 our 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 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?

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [4]

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Thanks, Todd, and thank you all again for joining us this afternoon. I also want to thank our entire team of 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 noncore 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-tissue laser system 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 decline in international revenue was 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 $0.6 million, primarily as a result of increased legal fees. Engineering and development expenses decreased by $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 a 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. The increase in net loss was primarily due to the negative impact of items just discussed.

As a reminder, our earnings release includes a reconciliation between unaudited 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 the 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 a 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 the 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 the 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 an increased utilization of our lasers. 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 was 37%, up from 32% for the full year 2017. The increase in gross margin reflects a favorable change in product mix and an increase in laser sales, which once again has a higher margin and, once again, a reduction of overall overhead expenses compared to the prior year.

Total 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 to an increase in advertising and payroll- and consulting-related expenses. General and administrative expenses increased by $2.1 million, primarily as a result of increased legal fees throughout the year. Engineering and development expenses decreased 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 the $1.5 million loss on the settlement of our patent litigation.

Net loss for the full year 2018 was $21.5 million, or $1.05 loss per share, compared to a net loss of $16.9 million, or $1.41 loss per share, for the prior year. The increase in net loss was primarily due to an increase in operating expenses as well as the negative impact of the one-time 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 a 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 totaled $8.3 million as of 12/31/2018. As we 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 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 improving 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 the disputed patent. The details of the settlement are spelled out in our 8-K filing on this matter. Going forward, the settlement will reduce our ongoing legal expenses and enable the company to pursue potential additional cost-saving 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 go-to-market sales initiatives. BIOLASE is experiencing significant increases in both adoption and utilization of our all-tissue lasers, and 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 of sustained growth and profitability.

This concludes our prepared remarks. I'll turn the call back to the operator to open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Ed Woo with Ascendiant Capital.

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Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [2]

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My question is on the current market initiative you're doing in Dallas-Fort Worth. How much of that is similar to what you're doing in Southern California? And do you see that as more similar, or do you see that you have to do things a lot different in different markets?

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [3]

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Yes. 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 role 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 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 2018 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 at DFW and did it for the entire U.S., so something that we learned in L.A.-Orange County that I think resonated well with everybody else.

We're 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, is to try to be, once again, more micro-focused, 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. And we knew that going in.

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Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [4]

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

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [5]

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Yes. So Ed, 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 2 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 '18, 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.

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Operator [6]

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Our next question comes from the line of Lisa Springer with Singular Research.

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Lisa Springer, Singular Research, LLC - Research Analyst [7]

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

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [8]

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Yes. I'll answer that question. So we are selling on a direct basis today in Canada. Actually, I shouldn't say today because respective March 1, 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 and you think about the geography there, there's 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 who have great relationships with their customer, and when you're also trying to service your equipment with 3 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.

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Lisa Springer, Singular Research, LLC - Research Analyst [9]

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Okay. Great. And I also wanted to ask you about the noncore 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?

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [10]

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Yes. 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 on that 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 wind that down in '19 and it'll probably be less of a material impact for us as we roll into 2020.

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Operator [11]

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(Operator Instructions) Our next question comes from the line of Brooks O'Neil with Lake Street Capital Markets.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [12]

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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?

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [13]

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Yes. So I think the first part of that question is, 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 is 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 in helping the team members get up to the level that they need to, 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.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [14]

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Great. So the other question I had, and 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 -- I'm primarily focused on the U.S. market, although I understand it's a global business and there could well be significant opportunities outside the U.S. as well.

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [15]

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Yes. So I would tell you that there's a few segments, right? The periodontal community and the McGuire study that we'll see some great results from 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 and 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, and maybe LASIKs would be a good example, it wasn't till the corporate entities started to move into that space. So we've got some really good progress going on in the corporate front, and that's into the DSO segment as well.

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Operator [16]

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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.

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [17]

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Yes. 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 mark of EBITDA positive in Q4, and also driving the top line revenue as we expect. So thank you, and enjoy the rest of your day.

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Operator [18]

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This concludes today's teleconference. You may now disconnect your lines at this time. We thank you for your participation, and have a wonderful day.