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Edited Transcript of BIOL earnings conference call or presentation 9-May-19 8:30pm GMT

Q1 2019 BIOLASE Inc Earnings Call

IRVINE May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of BIOLASE Inc earnings conference call or presentation Thursday, May 9, 2019 at 8:30:00pm 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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* Bruce David Jackson

The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst

* Edward Moon Woo

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

* Kyle Royal Bauser

Dougherty & Company LLC, Research Division - Senior Research Analyst

* Todd Kehrli

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Presentation

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Operator [1]

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Greetings, ladies and gentlemen, and welcome to the BIOLASE First Quarter 2019 Earnings Conference Call. (Operator Instructions) It is now my pleasure to introduce your host, 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. Good afternoon, everyone, and thank you for joining us today to discuss BIOLASE's Financial Results for the 2019 First Quarter Ended March 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 first quarter before opening the call for question.

Before we begin, I'd 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 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, May 19 -- or 9, 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'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 first quarter result. 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 also can be found on the company's quarterly report on Form 10-K, which will be filed with the SEC. The tables we've provided in today's news release offer 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 net -- 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's President and Chief Executive Officer, Todd Norbe.

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

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Thanks, Todd, and thanks, everyone, for joining and your interest in BIOLASE on the call this afternoon.

Let's jump right in and talk about the performance for the first quarter of 2019. Our first quarter results reflect the success we are seeing around our revenue growth and cost-savings initiatives. Our strategy continues to build increased awareness around our all-tissue Waterlase laser. At the same time, our ongoing focus on managing the cost of the business is putting us on track to achieve our goal of becoming EBITDA positive in the fourth quarter of the year.

Let me share some highlights from the quarter. As I'm pleased to report that our total U.S. laser revenue increased 18% year-over-year. And our laser revenue in our model markets, which is now includes Southern California and Dallas-Fort Worth, Texas grew 88% year-over-year in the first quarter. These solid results demonstrate the growing interest in our technology and the success we're seeing with our go-to-market approaches.

During the first quarter, we continue to add new customers' increased utilization of our products driving more recurring higher-margin consumables revenue. For the ninth consecutive quarter, more than 60% of our revenue came from new customers, and our U.S. consumables and other revenue increased year-over-year as well.

As we further build on our market presence, we continue to shift the company's culture from one that was heavily focused on R&D to one that is more focused on commercialization of our technology. As part of this effort, the team continues to drive our initiatives to expand our influencer base, validate our technology through corporate dentistry, expand our partner base and create new standards of care with the specialist while testing new strategies in our model markets.

One new test is our pediatric [loaner] program recently launched in Southern California. This program focuses on the specialist, providing access to our technology before they make a buying decision. Our initial rollout result in such positive feedback that we expanded this program to the Dallas-Fort Worth market and expect to roll it out to several additional areas in the country in the second half of 2019.

As previously mentioned, we appointed Sinclair Dental as the exclusive distributor for all our products in Canada. We recently trained their service and high-technology teams at our corporate headquarters and are conducting branch trainings throughout Canada. As we work to further expand adoption of our all-tissue lasers in 2019, we are excited that we have recently announced our Advancing Dentistry Symposium taking place later in the year in San Diego. This 2-day event will provide dentists the opportunity to learn about the latest cutting-edge technologies and techniques and includes a keynote address by Dr. Gordon Christensen, a world-renowned dental educator, influencer and founder of Clinicians Report. This event will also include other leading companies such as Glidewell Dental, Align Technology and Hu-Friedy, just to name a few. This will be a unique opportunity for current and new customers to experience the best in dentistry.

We also continue to be excited about the progress of the McGuire study. As we have previously discussed, this study will not only compare the clinical efficacy of Waterlase-assisted treatment of periodontitis versus traditional open-flap gum surgery but also will track the patient-recorded outcomes or prose for each procedure. We anticipate 6-month data to be available by the end of 2019 with publication in a scientific journal after the study is completed in the first half of 2020.

During the quarter, we strengthened our talent bench with the addition of David Rodriguez as our Director of Clinical Education, and Steve Sandor as Director of Inside Sales. David joins us from Invisalign where he was the Director of Professional Relations. Steve joined last month from Danaher. He will build out our training program and spearhead our inside sales efforts. We're excited to have David and Steve onboard.

The team has accomplished quite a lot over the last 6 months, but we're -- still have much to do towards building a business foundation where repeatable processes are the norm and the commercial engine drives predictable results. As we transform the culture, we are positioning ourselves for continued growth. Our disciplined efforts to grow revenue while managing cost positions us to achieve our goal of becoming EBITDA positive in the fourth quarter of 2019.

With that said, I'll now turn the call over to John to review our first quarter financial results in 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 and achieving our solid results in the first quarter.

Now let me review the numbers. Total revenues for the first quarter of 2019 were $10.3 million, a 3% increase compared to $10 million for the first quarter a year ago. Excluding revenue from our noncore imaging business, revenue in the first quarter of 2019 increased 4% compared to the first quarter of 2018. Revenue from the company's core U.S. laser-related products for the first quarter of 2019 increased 18% year-over-year.

Our most basic strategic goal is to build our customer base and increase utilization of our product thereby, driving recurring higher-margin consumables revenue. During the first quarter, 68% of our all-tissue laser system sales in the U.S. were to new customers, reflecting success with our new strategic priority. And our consumables and other revenue in the U.S. increased 4% year-over-year in the first quarter of 2019 reflecting increased utilization of our lasers. These are positive indicators, and we believe the changes we've made over the past 6 months will lead to improved financial results in the future.

Internationally, total revenue for the first quarter of 2019 was $4.2 million, down 3% compared to prior year's first quarter. The reason for the decline in international revenue was primarily due to a reduction in sales to EMEA and China as they continue to manage through the new tariff. Add into that, we have faced delays in collections from our distributor in China, which put a strain on our cash position at the end of Q1. This led to amending our term debt facility, which I will discuss in more detail a little later. We continue to monitor the situation with our Chinese distributor, and we'll take the necessary actions to remedy the situation, including considering other distributors for the region if warranted.

Gross margin for the first quarter of 2019 was 34%, up 400 basis points from 30% in the first quarter of 2018. Excluding the impact of sales of our noncore imaging product, which are being phased out from the company's product offering in the second quarter of this year, gross margin would have been 37%. The increase in gross margin reflects the favorable change in product mix with an increase in laser sales, which has a higher margin, along with the decrease in overhead expenses.

Total operating expenses for the first quarter of 2019 were $7.9 million compared to $8.2 million for the first quarter of 2018, a 4% reduction and in line with our expectations. Sales and marketing expenses were essentially flat year-over-year. General and administrative expense decreased $600,000 primarily as a result of reduced legal fees from the settlement of the CAO Group litigation, which we discussed in detail in our last earnings call.

Engineering and development expenses increased by $0.1 million primarily due to increased costs related to clinical studies. During the first quarter of 2019, the company also incurred a $0.2 million loss from the change in fair value of the patent litigation settlement liability that we have recorded on our books.

Net loss for the first quarter of 2019 was $4.9 million or $0.23 loss per share compared to a net loss of $5 million or $0.25 loss per share for the prior year's first quarter. 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 first quarter of 2019, which excludes these items, was $3.2 million or a loss of $0.15 per share compared with the non-GAAP net loss of $4 million or a loss of $0.20 per share during the first quarter of 2018. Our basic and diluted share count at the end of the first quarter 2019 was 21.1 million shares compared to 20.5 million shares in the year-ago quarter.

Now turning to the balance sheet. Cash, cash equivalents and restricted cash totaled $3.3 million as of March 31, 2019. At the end of 2018, we entered into a $12.5 million term loan agreement with SWK Holdings. Earlier this week, we entered into a memo with SWK to expand this term loan by $2.5 million for total of $15 million. We amended this facility primarily to help offset the impact of the collections issue with our Chinese distributor, along with obtaining a waiver of certain financial covenants for the first quarter of 2019.

We remain focused on wisely investing our cash on programs to drive future growth, and cost containment, improving cash management continue to be a top priority. On the topic of cost savings, during the quarter, we implemented further cost-savings initiatives, including the rollout of our e-store, which allows customers to purchase certain of our products online and will automate and expedite order processing. Our cost-containment efforts have helped lead to a 16% decline in operating loss for the first quarter of 2019 compared to 2018.

Before I turn the call over to the operator for questions, let me summarize our remarks. Our first quarter results reflect the initial success of our new go-to-market sales initiative. BIOLASE is experiencing increases in both adoption and utilization of our all-tissue laser, 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 with the same growth and profitability.

This concludes our prepared remarks. I'll turn the call back over 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 Kyle Bauser with Dougherty & Company.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [2]

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Todd and John, can you hear me okay?

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

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We can.

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

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We can.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [5]

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Great. So we're seeing some really impressive growth out of the SoCal and Dallas markets from your focused initiatives there. Can you speak maybe a bit more specifically about go-to-market approaches and marketing tactics you're leveraging in those markets to drive adoption? Really, any sort of example for what's working would be really helpful.

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [6]

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Yes. Sure, Kyle. This is Todd. One of the things that we're trying to really work on, and I would call it 4 different pillars for the organization, creating more connection with influencers from a peer-to-peer standpoint. We're plugging into some of those here in the Southern California markets, starting to do that in Dallas and then obviously learning from that to go elsewhere.

When you also look at it from a standpoint of the specialist, most recently, we had some specialists here lecturing at our facility as well around periodontitis and making sure that we can spread that message around how do we treat that with our technology.

And then also from a corporate standpoint aligning with other companies that where we can do joint programs and events which has also helped us out.

And then most recently, we're seeing some really good success here. We haven't necessarily seen it hit the revenue line yet, but the pediatric program we look to be something that we can really scale across the U.S. based off of this approach and really focusing in on the specialist as we address this.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [7]

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Got it. That's helpful. And then as you build awareness for Waterlase for the next generation of practitioners within the university, I'm just curious, can you speak to sort of how many universities have a Waterlase system and/or to some of the activities you're working on with the dental schools to drive adoption on the newer docs?

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

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Yes. Kyle, I would tell you that the dental schools have not necessarily been a focus of ours. We have, I think, approximately 8 dental schools that have our technology in their facilities. But really, what I believe is the future here with DSO and corporate dentistry where you see these graduating dentists come out with a debt load of anywhere from $0.25 million to $400,000. Many of them are navigating the corporate dentistry in the DSO space and really learning how to do dentistry in a productive manner there. And we look at that as a really good opportunity for us to educate those new dentists coming out. And many of them want to ultimately get into their own practice.

So on the back-end of some of those DSOs, from a turnover rate, that provides, I think, a funnel for us as well, if that does happen. But we're also seeing a higher instance of females coming out of dental school, and the DSO, we believe, provides a great opportunity for them as well to continue to practice and not have to deal with all the back-office, finances and management of that as well. So I think that's where we're spending our time and energy. It's also one of the pillars that we're focusing in on as an organization.

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Kyle Royal Bauser, Dougherty & Company LLC, Research Division - Senior Research Analyst [9]

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Got it. Makes sense. And then just lastly, sorry if I missed this, but I know some upcoming expanding indications include crown veneer removal. First, how are these going? And are there any notable indications you're working on?

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

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Yes. So crown veneer removal is a major pain point for a lot of dentists as you probably are aware. The protocol today is to take a diamond or bur and maybe 2 or 3 of them depending on the material to cut off that crown or that veneer. Obviously, patient satisfaction is not high; can take up to 30 minutes for the dentist to do that.

So we're looking for FDA approval on that. We're also looking for approval around some a few other things that we can't necessarily always disclose right now. But we have probably at least 3 things with the FDA that we're looking to expand that would be very similar to our crown and veneer removal and as important to the dentist.

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Operator [11]

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Our next 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 [12]

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Yes. My question is, is there any big changes in the competitive landscape?

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

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I would say not that I have seen it.

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Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [14]

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Great. And then going -- you actually said you evaluate other market models. Have you guys identify the market models as you might go through for the rest of...

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [15]

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Yes. So Ed, this is John. At this point, we believe that having 2 model markets, one in L.A. in Orange County, San Diego; one in Dallas-Fort Worth are sufficient for us to allow for testing of new ideas. And so kind of like the pediatric program, the [loaner] program, we want to test it there, make sure it's ready for prime time, learn from it, improve it and then roll it out to the rest of the country.

I don't think we need certainly now or anytime in the near future to expand this to a third or fourth model market where we believe the 2 model markets we have allow us the opportunity to test out new things and see if they succeed or not, and if they do, roll them out, which we've been doing.

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Edward Moon Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [16]

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Great. And given what you learned, how quickly do you think you can make these changes?

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [17]

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So it depends on what those changes are. An example last year was the BIOLASE [ambassador] program, which I talked, I think, at our call maybe a year ago, where we rolled that out very quickly to the entire U.S. We are still improving that program, but that's one that probably took 2 to 3 weeks to make a decision on rolling that out. The pediatric [loaner] program, I would say, it's could be a little bit longer because that's a 2-month program. We want to get through the program and decide how to tweak it to make it better and to judge its effectiveness. And so that may take a quarter or 2 for the rest of the U.S. to see that program.

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Operator [18]

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(Operator Instructions) Our next question comes from the line of Bruce Jackson with The Benchmark Company.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [19]

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With the -- regarding the imaging business winding down during 2019, when do you think that you might be fully out of that particular product line?

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [20]

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Yes. Bruce, it'll be in the second quarter, so we're pretty much winding that down as we speak. So I would not expect any revenue in the back half of the year.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [21]

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Okay. Similar revenue within second half. And then with the McGuire study, is that coming along? And are you still hoping to get that completed in Q3?

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [22]

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Yes. Bruce, the study is closed, meaning that they're not taking more patients. We've got the number of patients that we need there. Now it's a matter of just the time to be able to evaluate the performance of the Waterlase technology. And as previously mentioned, we expect to have an early read on this sometime in Q4 to see how it's progressing. We're pretty optimistic around what we're hearing so far.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [23]

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Okay. And then with the -- your new agreement in Canada with Sinclair Dental, so that went into effect on March 1. And then I'm assuming that there is like a training and transition period, so when do you think that they might be contributing to revenue?

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Todd A. Norbe, BIOLASE, Inc. - President, CEO & Director [24]

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Yes. Any transition like this, it takes some time to get everybody up to speed. As I mentioned, we just had their high-tech team in here that really will be focused on that technology, went through 4 days of training. Also trained all their service techs in reference to how to service of our products. So I would say that we'll start to see that getting traction probably in the latter part of the second quarter here.

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Operator [25]

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Thank you. Ladies and gentlemen, at this time, there are no further questions. I would like to turn the floor back for management for closing comments.

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Todd Kehrli, [26]

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Thank you, operator. That concludes our call. Thank you for joining us today, and we look forward to talking to you next quarter. Thank you.

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Operator [27]

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Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.