BIOLASE Inc (BIOL) 2004 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to your Biolase Technology Q2 earnings conference call. My name is Bernie and I'll be your coordinator today.

At this time all participants are in a listen only mode and we will be facilitating a question and answer session toward the end of this conference call.

If at any time during the call you require assistance, please press star zero and the coordinator will be happy to assist you. As a reminder, I would like to tell you that this call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Mr. Scott Jorgenson Director of Finance and Investor Relations.

Thank you Bernie. Good morning and welcome to Biolase's second quarter 2004 earnings conference call. I'm Scott Jorgensen, Director of Finance and Investor Relations and with me are Jeff Jones, Biolase's President and CEO; Robert Grant, Biolase's Chief Operating Officer and Biolase's CFO, Edson Rood.

This morning Jeff will discuss our second quarter and first half performance followed by Robert who will review our financials in more detail. Before opening up the call for questions Jeff will provide a revenue outlook for the rest of 2004.

Just as a reminder, we will be making some forward-looking statements on this call. So, in the spirit of safe harbor, during the course of this conference call representatives of Biolase may make forward-looking statements concerning Biolase's business, operations and financial condition. The words or phrases: can, be, expects, may effect, may depend, believes, estimates, projects and similar words and phrases are intended to identify such forward-looking statements.

Such forward looking statements are subject to various known and unknown risks and uncertainties and Biolase cautions you that any forward-looking information provided by or on behalf of Biolase is not a guarantee of future performance. Actual results could differ materially from those anticipated in these forward-looking statements due to a number of factors, some of which are beyond Biolase's control in addition to those discussed in Biolase's public filings, press releases and other statements made by Biolase's management.

All such forward-looking statements are currently only as of the date on which those statements were made. Biolase does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement was made, or to reflect the occurrence of anticipated events.

With that I'd now like to turn the call over to our CEO, Jeff Jones.

Thank you, Scott and good morning everyone. For the first half of 2004 we generated revenues of 29.2 million, an increase of 49% over the first half of 2003. During the second quarter we had revenues of 14.8 million, which is an increase of 43% over second quarter of 2003.

While those sales are less than analysts' expectations, we are not pleased with the results. We do remain confident though of our continued high growth. It is unfortunate when our quarters do not have 50%+ year-over-year increases, but such are the occasional challenges of a company with the growth dynamics that Biolase has.

Quarter one sales exceeded analyst expectations and Q2 is less than analyst expectations, netting a strong year-to-date sales growth but a disappointing second quarter. In fact, if you compare analyst numbers when Q1 came out, the amount we exceeded the number in Q1 netted against the shortage in Q2, the year-to-date is within 1% of the analyst consensus, while these unit sales increased over the year, over the prior year, by approximately 50%. That's on a unit sales basis so that it very much falls in line with the revenue growth rate.

Gross margins increased from Q1 2004 to Q2 2004, approaching 66% in Q2. This is especially encouraging given our international sales mix increase for Q2, moving from 20 to 24 percent of total revenue for the quarter. The financial components of the statements will be covered in more detail later. The business outlook is very positive and we are very confident in our prospects going forward.

Let me now cover a few of the advancements we made recently and during the second quarter. Right now we are better positioned than ever as a company. We have continued to work hard to put in place a series of events and actions all designed to make Biolase stronger and all designed to provide long term and ongoing sustainable growth, not just short term.

In the first part of the quarter we successfully opened our new manufacturing facility adjacent to our headquarters. With this we can expand manufacturing by more than 250% from our current output. The facility is full functional and we have already produced and shipped hundreds of laser systems from this new location.

In May the management team committed to launch at least one new significant product every year. We were saying that conservatively as I think we have already demonstrated. We announced the launch and we did launch the DioLase Plus. We, the DioLase Plus actually represents the first product that is an integration of the American Dental Laser and Biolase Technology which allows us to have a lower price product under our brand name American Dental Laser.

We released the next generation whitening gel, the LaserWhite10. We believe that LaserWhite10 is a great example of how we are making strides to leverage our consumable strategy for the long term, which will help drive the business going forward as our installed base continues to grow. We will introduce a very significant product in Q4, details coming at quarter end as we said in the last call. The new product is expected to raise our overall ASP.

The addition of Dr. Robert Anderton to our board of directors was another big accomplishment. As past president of the American Dental Association, we are very excited to find someone of Dr. Anderton's caliber and experience bringing a long and distinguished career in dentistry as well as his business acumen and relationships in the dental and medical technology fields. Dr. Anderton is a very important asset to our board of directors.

In the later part of the quarter we held the first formal Asian chapter of the world clinical laser institute. We had over 200 attendees from 17 countries and I think our international sales reflect the success of that meeting. Approximately one-half of the dental professionals in attendance were prospective customers for the WaterLase technology, the other half owners. This makes the owners better reference points because they learn more about how to expand their dental practices with the WaterLase technology as well as, of course, selling product to the non-owners in attendance.

The Asian WCLI Symposium was also featured on several television programs as well as printed news stories in the Asia Pacific region and was attended by many of the political dignitaries for the countries there as well as dentists.

In addition to the Asian Symposium the company sponsored symposiums in New York and Chicago. In Mexico Biolase conducted its first seminar and had over a hundred attendees. In Japan we hosted the second chapter meeting of the WCLI with 120 attendees.

The WCLI symposiums that are upcoming here shortly include one in Vale, Colorado, Orlando, Florida, and Germany. I think you can see that our education programs are very active and they not only build a solid foundation, but they build long-term avenues for growth that will pay us dividends not just today and midterm, but long term.

On the media front, numerous print and journal advertisements and articles were published both domestically and overseas in Europe and Asia, and for that matter Latin America. For example, in the July issue, which is the current issue, of Dental Town, which goes out to all of the dentists in the United States, Biolase is the featured cover story article.

The Dental Economics, the current issue also that is just hitting the dentists' desks, we are featured in a twelve-page CE education module that is specifically on the Biolase or the YSGG technology and how it is impacting and advancing today's dentistry. This is something new that we have not done before. It is something new in dentistry where right out of their journals they can take a module that may very from 10-15 pages. Complete it and get CE credit. But it brings in a much more serious and long-term funnel for the sales cycles.

To increase marketing directly to consumers the company is moving forward, and we plan to release more details in the weeks to come regarding this initiative. We are also pleased to report that we are progressing with our development of programs with the dental schools.

We would like to report the company's two recent corporate finance initiatives: First the company has, in accordance with the announcement we made, been repurchasing shares. As a management team we firmly believe in the company's long-term outlook and believe that a share repurchase represents a great use of the company's capital today. We think it does look to the interests of our shareholders. Second, we announced the board's decision to declare a regular cash dividend of one cent per share every other month. We believe that a consistent dividend program is a further sign of Biolase's financial strength and improved business outlook and appeal to long-term share holders. It also allows many funds that would like to hold our stock but restrict it for lack of a dividend. It allows these funds to hold the stock.

In short, there is a buzzing enthusiasm surrounding Biolase and its technology in the marketplace. Our booths at shows are extremely busy. There is no light up at all. Our employees and our customers are proud and motivated.

Each day more and more dentists come to the realization that the superior clinical and financial results of WaterLase dentistry. During the second quarter we undertook significant penetration initiatives. We believe that we have clearly set the stage for a strong second half and 2005 and beyond.

I will now turn the call over to Robert Grant to review the financials for the quarter and an announcement that if the press release hasn't came out, but it is a very important one. Ed Rood, who is our Chief Financial Officer, has announced his intentions to retire. The company wants to express their gratitude to Ed for all the hard work that he has done for the company.

He's had a very busy last eighteen months and we understand his intentions, that is, where he is in life, wanting to retire. But he has also said he will stay on until we find a suitable replacement and even beyond that he wants to be involved with the company and help with things right now such as the Sarbanes-Oxley compliance.

So we sincerely thank Ed for his hard work. We are naming, on an interim basis, Robert Grant as the CFO. Robert is, we believe, well based and has the experience to take on this role. Robert has had many positions over the last fifteen years, but they include significant responsibilities both for overall operations of divisions and financial companies. For example he was responsible for a 200 million dollar division of Coherent. He's been Vice President of Business Development, Executive Vice President/General Manager for companies including Sulzer Medica, Coherent and we believe that he will do a very good job for us there. He holds a Bachelor of Arts as well as an MBA and has substantial financial training.

With that we will turn the time over to Robert. We also have Ed Rood here with us on the call.

Thank you Jeff. There are certain aspects of the second quarter that we are not happy about. Net sales for the second quarter of 2004 were 14.8 million compared to net sales of 10.4 million for the three months ended June 30, 2003. Sales of the company's principal product, the WaterLase system, for the second quarter of 2004 comprised 82% of sales compared to 81% of sales for the second quarter of 03. Net sales for the first half of 2004 were 29.2 million dollars, representing a year-over-year growth rate of 49% when compared to first half net sales of 2003, which were 19.6 million.

Gross profit for the second quarter of 2004 was 9.7 million, an increase of approximately 53% over gross profit of 6.4 million for the prior year same period. Gross margin was 66% for the second quarter of 2004 compared to 61% for the second quarter of 03.

Operating expenses were 8.7 million dollars for the second quarter of 04, compare to 5.2 million for the second quarter of 03. Sales and marketing expenses were 6.2 million for the second quarter of 04 or 42% of sales as compared to 3.6 million for the prior year same period, or 35% of sales.

The increase in sales and marketing is related to the expansion of our sales force as well as increased marketing expenses related to new and ongoing associations with education and dental institutes.

General and administrative costs were 1.8 million dollars for the second quarter of 2004 or 12% of sales as compared to 1 million for the second quarter of 03, or 10% of sales. Increases in general and administrative expenses are due mostly to increased cost associated with legal and professional fees, insurance costs and shareholder communication expenses associated with the company's proxy and annual report production and distribution.

Engineering and development costs were 706 thousand dollars for the second quarter of 2004 or 5% of sales as compared to 521 thousand for the prior year same period, or 5% of sales.

Income before income tax was 1.2 million for the second quarter of 04 compared with 1.3 million for the second quarter of 03. After the provision for income tax of 461 thousand dollars, net income for the second quarter of 04 was 716 thousand or 3 cents per fully diluted share. For the second quarter of 03 net income, with no provision for income tax, was 1.3 million or 5 cents per fully diluted share.

Our fully diluted shares for the second quarter of 04 were 26.2 million dollars, which reflects our recent issuance of 2.5 million shares in the secondary offering. This compares with 23 million fully diluted shares a year ago.

Now with respect to our balance sheet, our financial position at June 30th, 2004 reflects the effects of our equity offering in March. As of June 30th we had approximately 50 million in cash and marketable securities and no debt. Total assets remains at about 85 million dollars while receivables and inventories both increased in the quarter.

Days receivable were 45 days on an average basis and inventory turns were at 4 1/2. That concludes the financial results overview and now I'll turn the time back over to Jeff for his final thoughts.

Thanks Robert. At this point we are going to review some of the rationale and thought regarding why there was a mid-quarter reduced growth rate, and why earnings for the quarter were lower than analysts' expectations. In addition, we're going to address certain questions that have been poised to the company between the call we did a week ago and today.

Well first we believe there are various reasons for the lighter growth rate in Q2 and we'll cover some of those. The territories had what we believe was the biggest disruption, probably, in the history of our company. We added new sales people, and when you draw lines to give them their new territories you do disrupt the process both for the sales person that is getting a reduced-sized territory and then of course the new person who hasn't got, who has not developed the relationships and doesn't have all the sales cycles in place for the territory.

In addition, we've been analyzing the impact of the launch of our new entry-level laser, the DioLase Plus. We recognize that that there were certain negatives from this launch. We did have the DioLase Plus cannibalize some of our LaserSmile sales. In our final analysis, the WaterLase sales were up for the quarter, both in unit and revenue.

There is no indication that the DioLase Plus replaced any WaterLase sales, but it definitely replaced some LaserSmile sales and the LaserSmile is at a significantly higher price with more margin. So for a similar number in DioLase sales, there is a significantly less amount of revenue.

Interestingly enough, internationally the LaserSmile held its own and did not have the damage from the DioLase Plus sales. It was a domestic event and the management team has plans in place which we believe will correct this issue. It's one of those things that happens.

We learn from it and address it accordingly. The LaserSmile has many more capabilities than the DioLase. For example, it has the whitening aspects; it has certain other accessories which expand what the dentist can do and we have plenty to build the platform to better differentiate the LaserSmile from the DioLase Plus.

Additionally, this may have slowed WaterLase purchase decisions, the disruption of the territories and not understanding clearly what the new product, DioLase Plus, is or was and despite our ads, which we thought were clear, we understand that they are going to have to be even more clear and we're working on just direct communications with the marketplace as well. But I think that a lot of that is already behind us and we will go on from it.

The new sales funnel, the new leads coming in throughout the quarter, the closing process, it may have effected that, but what we do know is that whatever caused a lot of growth rate in June, it was absolutely back to normal. June, being the end month of the quarter, was very strong. Business was as usual and of course that made it even more difficult to understand exactly what caused the lighter temporary growth rate.

Well during the quarter the higher expenses relate to the expansion of the sales force primarily. Each person you add has a direct correlation to expenses, both for their travel expenses, their activities during the quarter, selling in their territory, as well as the base component of their salary. There's also training costs with the new people when we bring them to headquarters and go through a very extensive training program.

Another thing that magnified the expenses was the mid-quarter lighter growth. Obviously, if you have lighter growth during part of the quarter and you miss a piece of sales, then your expenses are going to be magnified.

I think that we will leave most of this to the question period, but I'll point out a couple more things that might be helpful. Biolase generates approximately 42% of its total fiscal year revenue in the first half of the year. For the past three years this has been the course that we have seen - 42 to 43 percent, which means 57%, of course, is in the second half.

If you analyze that on this year, if you do the math, that puts us in the range of 68 to 70 million dollars for this year, that same 42, 43 percent and 57. That also correlates to the fourth quarter being 34 to 36 percent and, as we discussed in the earlier call, the Q4, it does fit together, especially with the addition of a new product in Q4.

So that is how we see it going forward and how we analyze our numbers compared to prior year experiences, and not just one but the last three years' experience and it has been amazingly consistent.

With that we will turn our time over to questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Dalton Chandler of Needham & Company. Please proceed sir.

Good Morning. I was wondering, Jeff, in your remarks you said the WaterLase unit sales were up 50% year over year. Was that for the quarter or for the year?

For the unit sales -

The unit sales for the quarter were at 300 units on a worldwide basis for WaterLase, and it was up for the quarter from the prior quarter.

OK. The 50% was for the quarter year over year?

The 50% that he's speaking of is on a year to date basis, the first six months of the year versus the first six months of the year last year.

That's correct.

OK. Thank you, and I think you clearly implied this, but let me just ask explicitly, would you say that the strength that you saw in June has continued into July?

The strength we saw in June did continue into July, but having said that, the third quarter has always been a strong, the strongest month is September. So we don't expect July to be the strongest quarter of the month, we expect September to.

But all of these quarters within the quarters are not linear and you end up in the third quarter having a heavier end than the others because dental trade shows, conventions, all the activity that normally goes on in the marketplace is not there in the third quarter. We have, to respond to that, put together heavy marketing program, so we do expect our third quarter to be normal in regards to the guidance that we've given.

OK. And can you just comment on what the ASP trends have been?

the ASP trends have actually been moderately increasing, and this is a trend that we've had for several quarters and it's also reflected in the higher gross margin that we've seen in the second quarter of 04.

OK.

Let me add to that, Dalton, that the WaterLase being our primary product is, of course, the driver behind that. Because even though our ASPs were up, on the Diode sales they were obviously down because of the DioLase Plus displacement. But on the WaterLase the ASPs were up.

OK thanks. And just a final question: You mentioned you had some plans in place to correct the DioLase Plus cannibalization of the LaserSmaile, could you talk a little bit more about what that is. Is it a pricing change, or is it different accessories, or what are you doing there?

It is both. There will be some increase in price on it, but primarily we are really focusing in all of our education and marketing on the advantages of the LaserSmile where you have the whitening hand piece and other accessories that are not compatible with the DioLase Plus. The DioLase Plus is much more limited in its applications than the LaserSmile Plus so we will magnify those differences.

OK.

And incentivize the sales force accordingly.

OK. Thanks guys.

Thank you Dalton.

Thank you Dalton.

Your next question comes form Alec Arrow of Lazard. Proceed sir.

Thanks, good afternoon. Jeff, again on the cannibalization issue, the DioLase and LaserSmile to me seem fairly different given the whitening capability I thought was the reason that someone would be buying a LaserSmile to begin with. So, why would DioLase, since it doesn't whiten, cannibalize, you know, a product that presumably is being bought mostly for its whitening? Or is that not the main reason people are buying LaserSmile?

Well if the marketplace thought as clearly as you this wouldn't have happened to us, that's clear Alex. The diode laser, you know we have the name LaserSmile which I think we've marketed quite well, and Biolase, the feedback we have is that the ads, even though they said DioLase Plus, because it had, you know, from the American Dental Laser brand of Biolase in the ads. The Biolase probably had the most recognition in the fact that it was a diode. So the difference of the whitening just didn't do it. It wasn't clearly seen by the consumers.

And I guess it also tells you that the number one driver isn't the whitening. At least it hasn't been. So we have to push that more now, even. It's easier to do now that we have our new gel. So whitening wasn't the driver on those.

So that would apply for all but what you called the tag along sales that you were doing with LaserSmile getting bought (inaudible). Those tag along sales were more for soft tissue work rather than for whitening?

Correct.

OK. Now, can you also, on the DioLase, can you compare it with the Odyssey and whether your seeing any material competitive impact from that one and whether that's a competitor that you pay much attention to or not and any other comments you can give us about the Odyssey later.

OK, we never take anything lightly and the Odyssey is from a company that has not been a laser company. They have a big long list of products. So it was kind of odd that they offered it. But the Odyssey came out at, in the neighborhood of 11, 10 to 12 thousand dollars, it varies. And the comparison is that the DioLase Plus has more features and has more power and thus more capability. And that's one of the factors.

You know we always look at things like that and make sure there is a clear and distinct advantage for the Biolase product. And the DioLase Plus, compared to the Odyssey, the DioLase Plus beats it all the way around as far as the features, the output power, etc. So I think that any dentist that wants to compare the two, the Plus is very attractive.

Can you make any comment about the relative sales of DioLase versus Odyssey?

We don't have any real sound data on Odyssey sales, but in the marketplace we're not seeing a lot of them pop up in dentist's office. We see some of them, definitely, they're selling some. But we evaluated that carefully to see if it appeared that it impacted our diode sales, but our diode sales for the quarter were similar to the prior quarter.

Our total diode sales, not the revenue, the revenue's down because we had close to half of them being DioLase Plus. So even though the revenue from diode sales was down, the unit sales was similar. Therefore we didn't detect that we were losing any business to the Odyssey.

OK.

I'm sure there's a few that we did, but you're never going to get 100%.

OK. And then on the consumables, can you tell us the percentage that came from tips and whether that's going according to plan and what your thoughts are, any kind of outlook thoughts you might be willing to give us about the level of consumables and the rate of reusing tips and that kind of thing?

The consumable sales for the quarter were similar to prior quarters and we are though, as the LaserWhite10 that is an example of the projects that are going on in the consumable arena. And we do have more consumable projects that we are confident will impact our consumable sales in a positive way.

I'm sorry, consumable projects? You mean like marketing projects?

Marketing and expanding what we offer and training dentists such that they find advantages to using more tips and accessories in generating more revenue in their practice and converting them more to things such as the root canal procedure where it's a one-time use and where they see the advantages of not trying to reuse the tips so many times in standard cavity preps for better system performance, patient comfort and then just practice in the office of throwing things away rather than reusing them on patient after patient.

Aha! And how soon might we anticipate that kind of thing happening. So for our modeling purposes how soon should we start to, assuming that those efforts are successful in reducing the amount of reusage of -

We will provide more updates as we progress, Alex, but I think for the rest of this year it will be similar to what we've had with perhaps a very moderate increase on the consumables. We totally expect sales to be in the guidance range that we have given, but the consumables to be the comparable component of that as they have been.

OK thanks. Then if I could ask one last question, can you say anything about any new distributors in Europe or any notable outside U.S. changes, additions, victories, failures, so forth, outside U.S. territory?

I'll go ahead and take that question Jeff, if you don't mind. Basically we've not really changed, in a significant way, our distribution channel outside the United States. We have had some smaller distributors that have recently joined our ranks and we're excited about those areas, but none of them are really significant or major markets.

We did, obviously, go through a whole litany of items that occurred last quarter in relation to our marketing initiatives internationally. WCLI was probably the most prominent of these, in Phuket, but outside of that international business is basically trending nicely and doing as we had expected.

OK, thanks very much.

Thank you.

(OPERATOR INSTRUCTIONS)

Your next question comes from Juan Noble of Oppenheimer.

Good morning everyone. Just a couple of questions, the first one is a margin question: Robert alluded to higher, or rather ASPs trending higher, which I imagine contributed to the nice jump in your gross margins, any other factors coming into play there like better (inaudible)coverage or manufacturing efficiencies, if you could just give us little bit more color on that?

Sure, sure, obviously as our volume increases, although we did not meet analyst expectations for revenue, our volume has increased quite substantially over last year's period. Jeff mentioned 50% growth on the year-to-date basis for WaterLase and as our volume increases we are also seeing increased synergies from a cost standpoint on our WaterLase production as well as all of our other product production. So we did see a slight reduction in our cost of sales on our products.

OK, great. Another question about how expenses are trending; Your sales and marketing and your G&A, both in margin and dollar terms, look quite a bit elevated relative to year earlier periods. Can you give us some clue here on how these are trending? How is it going to look in the third quarter? I mean are these numbers going to be at about the same levels or are you expecting them to drop more or less sharply for any reason? The fact is that you discuss this contributing to higher expense margins and it don't strike me as a single quarter phenomena. So maybe you could give us some clue as to how they're going to work out in the third and fourth quarters.

OK, those are good points Juan. The marketing expense for the quarter, sales and marketing, was higher than we would like to see it and there are several reasons. One of them we talked about is that it was magnified by the level of sales. So when you look at a percent that impacts it but other factors that were very significant, we had the highest number of new people in a quarter that we've ever had.

We had some of the people start in Q1 and we talked about that actually in our year end call and our Q1 call. Some of the new people didn't impact revenues as quickly as we would like to have seen them do it. June they came on pretty well. But we still had the disruption in the territories so it really messes with the sales funnel when you redraw a territory line; the new guy that doesn't have the relationships, the guy moving who broke 'em and he's readjusting. It's disruptive.

So the expense of the new sales people, with training, with salaries, with their travel and activity expense in the field and things that we do surrounding them for marketing raised it to that high level. We do not find that level of marketing acceptable to us, but it is something that happened because it was a growing pain adding the sales people. So maybe it is acceptable as a growing pain to add them, but as an ongoing percentage it will come down and get more comparable to prior quarters, so sales and marketing expense will go down.

OK, I understand the productivity improvement part Jeff, but earlier in your presentation you at length talked about symposia and the seminars and I guess I have some concern there. I mean these are not cheap undertakings and if you're spending there stays elevated that might have some effect going forward. But I guess another way to pose the question on expense margins or impact is: late last year and maybe even earlier this year I think your operating margin guidance was something on the order of 15%. What would you say today in light of the first half's results?

Alright, firstly we're not providing guidance on the operating margin. But we are glad to get into a lot of the details to understand it. One is we do not believe that we should be leveraging the operation too much for the bottom line, that if this company is going to be strong and successful mid term and long term but not just quarter to quarter we have to be willing to take some of the heat for doing the things that build, keep the foundation healthy and keep the foundation growing to support the mid and long term growth.

You know it's a huge marketplace we're in and our product is gaining more and more respect and recognition from big institutional sights. We can't ignore those things and make one good quarter on expenses and long term damage our ability to be a long term strong, healthy company. We have the resources to do this right now, so not to do it we feel is irresponsible. So yes the education is expensive, but as sales grow, as a percentage you will find it to be acceptable.

As we go through some of these tough quarters, like this one, it is difficult. But looking forward you've got other things that will help it. And we've also got things this year we really haven't talked about, but we should. You know, Sarbanes-Oxley, Juan, is something that will impact your margins this year. You know we had some expense in the last quarter that was significant regarding Sarbanes that went in G&A. Q2 will have more because, as everybody knows, by year end we all have to be complying with Sarbanes-Oxley and you have to bring in these outside groups to go through there process. The Price Waterhouse has to then audit it, and it's a very involved audit.

And smaller companies like Biolase, you don't get a break. You have to comply with the same standards that very large companies comply with. So it's quite burdensome but again those are things that you get through and they're done. Next year in Q1 and Q2 we won't be paying for all of the additional expense for something like Sarbanes-Oxley. So in a dynamic growth company like we're in, the sales and marketing I there and then we're going through this evolution of the marketplace with things like Sarbanes-Oxley and we just have to take those things and do them.

Those are good points Jeff, well put. I have just one last question; it's more of a comfort type thing. Going back to an earlier question, you reported WaterLase revenue as accounting for 82% of the quarter's revenue Jeff. Now up until the third quarter of last year you were giving a WaterLase, LaserSmile and other breakdown. Are you going to continue doing that? You didn't give that kind of a breakout on the second quarter, and I guess some people, myself included, got kind of comfortable with that.

You know, especially for year end we'll give more details. We'll give as much as we can. The part that makes part of that problematic is suppliers and then would be competitors like they were mentioning earlier on the call. That kind of information is sensitive. But I think we can break out WaterLase versus other and consumables, yes, and I will make a point of doing that.

Thank you, that's fair. Thanks very much and good luck.

Your next question comes from Ben Andrew of William Blair. Please proceed sir.

Hello, Ben?

Your next question comes from Jonathan Moreland of Insider Asset Management.

Hi guys. Can I start with yet another gross margin question? It seems that domestic sales were down on a sequential basis, correct?

State that again Jonathan, please?

It seems that domestic sales were down on a sequential basis, correct?

They were down slightly.

Yeah, they were down by about 60 thousand dollars approximately.

Sixty thousand bucks is the precise number.

And you have explained that and I'm not going to go into that. You were still able to increase the gross margin which, my understanding is that the international sales have a lower gross margin, correct?

That's correct.

Given that international sales seem to be doing quite well, can you still be confident that you can keep and actually increase this gross margin?

I think so, but it won't be the same every quarter. We did have the fact, and I mentioned this, that LaserSmile was not knocked out by DioLase Plus internationally and that helped our international margins. Also, our prices internationally just held very well. In Q4 international should see even higher gross margins as an impact of new product introduction.

OK. In the last conference call Jeffery, you stated confidence that Biolase could increase revenues year-over-year at a 40 to 50 percent clip, correct?

That's correct.

Just to confirm, that is on an accrual to accrual basis?

Yes, I mean you need to look at apples to apples. Many times in the quarters it doesn't make any difference. It didn't make a lot of difference for this last quarter. But in Q3 there is a significant difference because last year Q3 had 2.7 million dollars of deferred revenue included. So you'd have to treat that deferred revenue component that was not part of the Q3 operation and look at the 10 million dollar number for a comparison for Q3 because that's what revenue was from shipments in Q3 last year, the accrual based, as you put it.

And you have brought up what I was leading to. Given that you have to announce the GAAP growth rates in your press releases, it would seem that you have a PR problem three months from now when meeting your revenue numbers. On the non apples to apples basis it's just going to be a mid teens growth rate. Don't know whether you guys can do anything to try and head off what some people are likely to do with that posted number out there. But-

That's a good point Jonathan.

On an apples to apples basis certainly that would meet the target. Going on with the revenue questions, anything else that you can help us feel more confident about the large Q4 revenue estimate, something more than just extrapolating the past trends? That would seem to be a bit far out to just look at the sales channel and backlog of sales. Anything else to help with the comfort level?

Right, OK, well first of all I'd like to go back to kind of your earlier question about apples to apples comparisons and that is precisely why, in our press release that's gone out today, we've decided to put a table, like we did last quarter, that you can basically do your apples to apples; compare against this year's revenue versus last year's, both on an accrual basis as well as on a cash basis. It represents the two methodologies that were used last years after the restatement.

But in addition to that, going back to your question about Q4 and the revenue number, Jeff has given guidance for Q4 of between 23 and 25 million dollars for the whole company. And we believe that that number is a realistic number. And the reason for that is if you go back and look on a historical basis, the fourth quarter represents, normally, 33 to 34 percent of the annual revenue of the company.

As a result of that, if you take 34% of the total year and do that same extrapolation calculation for 2004, you would find that our revenue would be in the range of 23 million dollars. Actually it's 34 to 36 percent if you go back a historical basis. I apologize for that. But you would find that our revenue would be in the 23 million dollar range.

Jeff has also announced that we are going to be having a new product in the fourth quarter of the year that will substantively increase our average selling prices and as a result of that we believe that the numbers for the fourth quarter of the year, at this time, are conservative.

OK, that would be nice. Just a few other quick questions: Just to confirm the tax provision is - that's a non cash charge, correct? You're not actually paying that out, that's just something -

That's correct. We have no tax effect. Did you want to make any comment on that Ed?

Yes, that's correct. The tax provision is really, if you want to look at it as an amortization of our deferred tax assets. It's a non cash transaction until we use up our net operating loss for tax purposes, of which we had about 30 million at the end of the year, plus a little bit I think. We won't be paying any taxes on a cash basis except for perhaps some taxes due to the A&T provisions in the tax laws, but those would be pretty minor.

OK, two other quick ones: Any comments on some persistent statements of asserting that there's backlog at distributors? There was an article out that just casually mentioned that which caught my attention.

Well that's interesting. In Q1 we had a lot of people asking if there's a backlog because, well quite frankly, the shorts had simply stated there was a big backlog at all of our dealers. And as we pointed out, dealers are at that point about 15% of our sales and they're slightly more than that now.

But I think Q2 demonstrated that that was very inaccurate. Had that been the case, you'd have seen the dealer component or international sales as a component of our total decrease and that didn't happen at all. We had an increase from around 2.8 up to 3.5 million. So we went from around 2.8 in international Q1 to around 3.5 million in sales in Q2, which totally proved that those rumors were false.

Alright, I guess we just have to put up with this. Last question: when does the window for insiders open to be able to buy shares, and actually, when was the last time it was open?

Pardon me? Say that again Jonathan.

When does the window open for insiders to be able to buy shares?

Oh, to buy shares. Well --

- or to trade shares.

Well the lockup period that related to the offering is over. The window for insiders to transact in securities would be, probably, the day after tomorrow - the earnings are released.

Alright. And there has been a closed window because of the offering for quite a while, right?

Yeah, up until July the fourth I believe approximately. Insiders were locked up due to the offering and then of course following that we're blacked out around the earnings period.

OK. Lastly I just want to say goodbye to Ed. It's been good talking with you in the past and sorry that we're loosing you.

Thanks Jonathan, appreciate it.

Alright, bye-bye.

Your final question comes from Ben Andrew of William Blair. Please Proceed sir.

I would like to turn the call back over to Jeff Jones for his closing remarks.

Thank you. To sum up, our business outlook is strong and management is confident in its three year plus proven business model. The dynamics of our company, being a high growth model and in a market where we are the market maker, it is going to produce quarters that are not linear and challenge us at times, but it doesn't impact the size of our market and the product which is absolutely the number one product in this marketplace.

So the quarter was tough for the reasons outlined. And as a team of an emerging growth company we accept that and learn from it and go forward. We did grow in the quarter, 43% for the quarter and 49% year to date. And our shareholders should know that we will continue as a strong growth company and that is how we will continue to model our business plan.

We have a healthy balance sheet. Our cash position is strong. We still have no debt. Our gross margins are attractive and growing and we are dominant in our marketplace. And we want to leave you with that and thank you for joining us on the call.

Ladies and gentlemen that concludes today's conference. That concludes your call. You may now disconnect.