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Edited Transcript of BIOL earnings conference call or presentation 8-Aug-18 8:30pm GMT

Q2 2018 BIOLASE Inc Earnings Call

IRVINE Sep 5, 2018 (Thomson StreetEvents) -- Edited Transcript of BIOLASE Inc earnings conference call or presentation Wednesday, August 8, 2018 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

* Rene Caron

DresnerAllenCaron - Investor Relations

* Todd A. Norbe

BIOLASE, Inc. - President, CEO & Director

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Conference Call Participants

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* Ed Woo

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

* Paul Bornstein

Black Diamond Advisers - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the BIOLASE conference call to discuss the company's results for its second quarter ending June 30, 2018. (Operator Instructions) For the benefit of those who may be listening to the conference call replay, this call was held and recorded on August 8, 2018.

I would now like to turn the conference over to Mr. Rene Caron of DresnerAllenCaron. Rene, please go ahead.

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Rene Caron, DresnerAllenCaron - Investor Relations [2]

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Thank you, Michelle, and good afternoon, everyone, and welcome to the BIOLASE conference call to discuss the company's financial results for its 2018 second quarter and first 6 months. On the call today is BIOLASE's newly appointed President and Chief Executive Officer, Todd Norbe; and Executive Vice President and Chief Financial Officer, John Beaver. Todd will make a brief opening statement and then John will review the operation and financial results for the quarter.

After John completes his opening remarks, we will then 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 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 statements only represent the company's views as of today, August 8, 2018. These risks are discussed in the company's filings with the Securities and Exchange Commission. A replay of this conference call will be available on the BIOLASE website shortly after completion of today's call. When listening to this call, please refer to the news release issued earlier this morning, announcing the company's results for its second quarter ended June 30, 2018.

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. BIOLASE financial results for its second quarter ended June 30, 2018, can be found in the company's quarterly report on Form 10-Q, which BIOLASE plans to file with the SEC on Friday, August 10, 2018.

With that, I'm pleased to turn the call over to the newly appointed 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, Rene, and for your interest in BIOLASE and for joining us on the call this afternoon. I'm going to turn this call over to John Beaver, who stepped in as our interim CEO and Chief Financial Officer during the second quarter, and deserves a lot of credit for his positive results as well as building momentum for this business for successfully engaging the entire BIOLASE team along the way over the past 4 months.

I'm excited that the Board of Directors have appointed me to assume the responsibility of President and CEO of BIOLASE, and to have the opportunity to lead the company at this pivotal time in its turnaround. I look forward to working with Jack, the board, John and the entire team as we strive to achieve the full potential of BIOLASE. We believe minimally invasive laser dentistry can become the standard of care in modern dentistry, especially in growing markets like pediatric care and implant periodontitis. We also believe that there is plenty of work ahead of us and we're on track to getting there.

With that said, I look forward to speaking with you all again in the coming weeks and months and I'll turn this over to John, and thanks, John.

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

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Thank you, Todd, and again, thank you all for joining us this afternoon. I'm very pleased to report that thanks to the superior efforts and performance of our entire team of employees, we had a solid and encouraging second quarter, especially in our core business of lasers, consumables and services. Total worldwide revenues were $12.2 million, up 21% over the first quarter. Revenues were down slightly from the $12.6 million in last year's second quarter where we had a onetime order in noncore imaging products last year, that resulted in approximately $0.6 million increase in imaging sales quarter to year-ago quarter. We believe we are building momentum and if you take a closer look at our second quarter numbers, there are lots of reasons to be optimistic.

Compared to last year's second quarter, international revenue increased 13%, U.S. WaterLase Express placements increased 10%, worldwide WaterLase placement increased 5% and consumables and other revenue increased by 12%. We also continue to attract new customers. One of our most basic strategic goals is to build our customer base and increase the utilization of our products thereby driving recurring higher-margin consumables revenue. The 12% increase in consumables and other revenue including a 6% increase in U.S. and a 23% increase internationally is due in large part to our success in attracting new customers.

During the second quarter, more than 66% of our All-Tissue laser systems were to new customers. Over the last 4 quarters, that number is nearly 75%. This is a meaningful improvement for us over 2016 when less than half of the company's sales were made to new customers. We're all very excited about the success of the Southern California-focused sales marketing and training initiative, what we call our Model Market Initiative Southern California, particularly in Orange and Los Angeles Counties, is a huge and critically important dental market for us. This initiative provides us opportunity to increase patient and dental awareness of our products and technology and to demonstrate in our own community the promise of the dental world's most advanced laser technology, it's minimally-invasive, pain-free, it provides the highest level of patient care and it can be the centerpiece of a much more prosperous dental practice. Thanks to the dedication and enthusiasm of all of our employees and our newly created Southern California Dental Advisory Board, we're gaining traction in this initiative as shown by the nearly 3x increase in laser sales in this market during the second quarter of 2018 compared to the year-ago quarter.

Sales of our WaterLase family of All-Tissue Lasers are up, utilization rates are up, consumable revenues are up, all great indicators of progress and better financial results in the future. You may have seen some of the recent activities we have implemented in our model market. We are excited the exposure we have received from our partnership with LA Chargers, the LA Angels, Healthy Smiles For Kids of Orange County and our direct-to-consumer advertising.

Our employee participation and volunteer efforts have been a big reason why we've been able to make so much progress in this area in a short period of time. I believe this success demonstrates that we have developed a blueprint to improve sales, service and overall laser dentistry awareness in our focus area. We look forward to rolling out the Model Market Initiative in another major metropolitan area in the fourth quarter of this year.

Now I will review the details of our financial results for the second quarter and 6 months ended June 30, 2018. As we have done previously, this afternoon I'll focus on revenue, gross margin, operating expenses and liquidity. Unless I indicate otherwise, the comparisons I make will be to the respective comparable periods of 2017. As mentioned worldwide net revenue for the 2018 second quarter was $12.2 million compared to $12.6 million for the year-ago period. However, last year's second quarter included increased revenue from a large onetime dental study club purchase of noncore imaging products as mentioned above.

Revenue from the company's core laser-related products in this year's second quarter increased 1%. Worldwide revenue for the year's second quarter -- for this year's second quarter was up sequentially more than 21% from the first quarter of this year. And as I mentioned earlier, net revenues from lasers in the Southern California Market Initiative area, our model market, increased nearly 200%.

Net revenue for the 6 months ended June 30, 2018 was $22.2 million compared to net revenue of $23.5 million for the 6 months ended June 30, 2017, which benefited from the large onetime study club purchase of noncore imaging products. Gross profit as a percentage of revenue for the second quarter of 2018 was 35% compared to 37% in the second quarter of 2017. Gross profit as a percentage of revenue for the 6 months ended June 30, 2018 was 33% compared to 37% for the 6 months ended June 30, 2017. The decline in gross profit as a percentage of revenue for the second quarter and first half of 2018 was mainly attributable to unabsorbed fixed costs due to lower revenue. Gross profit typically fluctuates with product and regional mix, selling prices, product costs and revenue levels. Total operating expenses for the second quarter of 2018 were $9 million compared to $9.2 million for the second quarter of 2017.

Sales and marketing expenses increased by $0.1 million, primarily due to payroll and consulting-related expenses. General and administrative expenses increased by $100,000, primarily the result of increased legal fees. Engineering and development expenses decreased by -- excuse me, $0.4 million primarily due to decreased operating supplies and a decrease in payroll and consulting-related expenses.

Total operating expenses for the first half of 2018 were $17.2 million, the same as for the first half of 2017. Sales and marketing expenses decreased by $0.2 million, primarily due to decreases in convention-related expenses. General and administrative expenses increased almost $0.8 million, primarily due to increases in payroll and consulting expenses and increase in legal fees. Engineering and development expenses decreased by $0.6 million, primarily due to a decrease in operating supplies and payrolls and consulting-related expenses.

Net loss for the second quarter of 2018 was $4.9 million or $0.24 loss per share compared to a net loss of $4.3 million or $0.32 loss per share. The $0.6 million increase in net loss was primarily attributable to $0.4 million negative impact on the effect of foreign currency transactions. Net loss attributable to common shareholders for the second quarter of 2017, which includes a deemed dividend on convertible preferred stock of $4 million, was $8.3 million or a $0.61 loss per share.

Net loss for the first half of 2018 was $9.9 million or $0.48 loss per share, compared to a net loss of $8.4 million or a loss of $0.62 per share for the first half of 2017. The $1.6 million increase was primarily attributable to a reduction in gross profit of $1.3 million and a $0.2 million decrease in gains on foreign currency transactions. Net loss attributable to common shareholders for the first half of 2017, which includes the deemed dividend on convertible preferred stock of $4 million was $12.4 million or $0.91 loss per share.

The tables we provided in today's news release offer additional financial information, so I encourage you to refer to these tables. The tables include the reconciliation of GAAP net loss to non-GAAP net loss table at the end of the news release, which provides the details for the company's non-GAAP disclosures and a reconciliation of GAAP net loss and net loss per share to the company's non-GAAP net loss and net loss per share. The non-GAAP net loss for the second quarter of 2018 totaled $4.1 million or a loss of $0.20 per share compared with the non-GAAP net loss of $3.2 million or $0.24 per share during the second quarter of 2017.

The non-GAAP net loss for the first half of 2018 totaled $8.1 million or a loss of $0.40 per share, compared with the non-GAAP net loss of $6.6 million or a loss of $0.49 per share during the first half of 2017. As of June 30, 2018, the company had approximately $14.4 million in working capital. Cash and restricted cash totaled $3.1 million on June 30, 2018, as compared to $11.9 million on December 31, 2017. Net accounts receivable totaled $10.4 million on June 30, 2018, as compared to $10.1 million at December 31, 2017.

We remain focused on wisely investing our cash on products and programs to drive future growth in revenue and profitability, and as always, cost containment and prudent cash management continues to be and will be a top priority. Before I turn the call over to the operator for questions, let me summarize my remarks. We're all confident that our new management including Todd and I, and our newly constituted Board of Directors represent a very strong and experienced leadership team that can carry on the turnaround to BIOLASE.

We believe minimally invasive laser dentistry is the future of dental industry especially in growing areas like pediatric and implant periodontitis. We're all focused on expanding the adoption of our All-Tissue Lasers throughout the dental industry. We're particularly energized by the momentum and traction we're gaining in our Southern California-focused sales, marketing and training initiative, our model market. We are seeing significant increases in both adoption and utilization of All-Tissue Lasers, increasing the speed of getting our lasers in the hands of more dentists is our goal.

Finally, we want to thank all of our employees for their superior efforts during the quarter. We hope to carry on the momentum we have established. We believe we have positioned the company now to be able to attract high-quality talent into our team and to achieve sustained growth and profitability.

With that, I'll turn the call over to the operator 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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Ed Woo, Ascendiant Capital Markets LLC, Research Division - Director of Research and Senior Research Analyst of Internet & Digital Media [2]

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Yes, I just want to say congratulations, Todd and John, I'm looking forward to working with both of you guys going forward. My question is on the SoCal Model Market Initiative. It looks like it's a big success. Are you guys still going through that initiative right now? And have you identified other markets to take this to?

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

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Ed, thank you and good hearing from you. In fact, we just had an employee communications meeting today on that very subject, it was one of the items and to be clear, no matter what we do going forward in future Model Market Initiatives, we will never lose sight of what we're doing in LA, Orange County. That will continue to be our petri dish for new ideas, and our focus as 10% of dentists in the U.S. reside in this Model Market, we'll never waver from this market.

But what we've learned in this market, I think is, certainly portable to other markets and as I mentioned in my prepared remarks, we are close to announcing our second Model Market Initiative in the U.S. and we'll announce that sometime later in the third quarter. We're excited to bring the lessons learned in this market to a second market, but make no mistake about it, we will continue to focus on this market and continue to grow revenue in the Southern California market.

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Ed 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 just as a follow-up of the next market, do you anticipate any market, one market at a time, so that you could focus all your resources on that particular market? Or do you possibly see it, able to do multiple markets at the same time?

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [5]

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So good question, Ed. I think if you ask me today, the second Model Market will be just add a single one, and potentially the third one, which would expect to roll out early in the 2019 period. However, I strongly believe that not only the lessons that we've already learned in the LA Orange County market, but as we expand this to Model Market 2 and 3, will allow us to be very efficient at rolling out additional Model Markets at a faster pace and doing it more than one at a time. So in other words, I see Model Market 2, Model Market 3 being one at a time. But after that, I would fully expect to have 2 or 3 or 4 additional Model Markets rolled out at a time going forward.

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Operator [6]

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(Operator Instructions) Our next question comes from the line of Paul Bornstein with Black Diamond.

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Paul Bornstein, Black Diamond Advisers - Analyst [7]

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Appreciate the new management team given how poorly the previous CEO was, so I appreciate your efforts. I'm just curious how you leverage your sales, which I've always asked and I know you're testing some markets to sell the products, but you do have a worldwide sales effort and that's why you have some foreign exchange, which isn't your fault, hurting the numbers. But I'm just wondering, how are you -- are you focused just on the U.S. now? And letting the other ones ride out? Or are you going to start focusing on trying to improve the results outside the country?

Trying to understand the positioning, and you also were going to look at bringing partners in to help out with the sales effort. That was an announcement, I don't know, 6 months ago, and I am wondering if that's been dropped/still looked at to really ramp up sales, because it seems like the company has good products, but just hasn't been able to execute on the sales.

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [8]

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So Paul, thank you for the question. Let me address it in a couple of ways. First of all, the international market continues to be and will remain a high priority for us. What we have done in the Model Market is, in addition to everything else that we're doing in other markets including internationally. So while we -- and Paul, you may want to be on mute, you have a little bit of wind noise there, but we have what we've done in the Model Market is in addition to everything else. And so typically, international sales represents close to 40% of our revenue, as I said, it will continue to remain important.

As you know, we tend to be more focused on distributor relationships internationally versus our direct-to-sell, direct-to-customer model in the U.S. So I don't think anything is changing there. What we're hoping and what we believe is that the things that we're doing to raise awareness not only will help in the Model Market, this one, Model Market 2 and 3, but there, for instance, the social media, that's worldwide. And so our focus, while trying to get awareness up in this market is certainly job one for us. The ancillary benefits of what we're doing is going to be felt and has been felt across the world as well. So no intention to diminish our focus on international sales.

In terms of adding additional help on for our internal sales team, I'm not sure exactly what press release or announcement you were talking about from about 6 months ago, but we continue to look at best practices for training and recruiting ourselves, both sales force and sales managers and we have certainly seen, over the last, I would say, 9 months, improved performance from our newer sales managers, hitting the ground running much quicker than they did in the past. So that is a reason for optimism as well. Thank you, Paul.

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Operator [9]

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(Operator Instructions) Ladies and gentlemen, this does conclude the question-and-answer session. I would now like to turn the conference back over to Mr. Beaver for any closing remarks.

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John R. Beaver, BIOLASE, Inc. - Executive VP & CFO [10]

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Thank you, operator. And again, thank you for joining us today and for your continued support. Todd and I look forward to sharing with you the results of the efforts of our entire organization as we all focus on realizing the full potential of BIOLASE when we speak again to discuss the third quarter of 2018. Good afternoon, everyone.