BIOLASE Inc (BIOL) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2004 BioLase Technology earnings conference call. My name is Carlo (ph) and I will be your coordinator for today's presentation. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during this call you require assistance, feel free to press star, zero and a coordinator will be happy to assist you.

It is now my pleasure to turn this presentation over to your host for today's call, Mr. Scott Jorgensen, Director of Finance and Investor Relations. Please proceed, sir.

Thank you, Carlo. Good morning and welcome to BioLase's third quarter 2004 earnings conference call. I'm Scott Jorgensen, Director of Finance and Investor Relations and with me is BioLase's chairman, Federico Pignatelli and President and CEO Robert Grant. Just as a reminder, we'll be making some forward-looking statements on this call. So, in that 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, affect, 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 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 current 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 unanticipated events. And with that, I'd like to turn the call now over to our chairman, Federico Pignatelli.

Good morning. During my preparing (ph) in today's press release, we made a change in management. Jeff Jones has been named the new Vice Chairman and Chief Technology Officer of the company, while Robert Grant has been promoted to the position of COO, interim CFO to the position of president and CEO. I also welcome the addition of John Hohener as our new chief financial officer.

Let me start to say that the contribution of Jeff Jones - of Jeff Jones to BioLase since he joined the company has been immeasurable. And I want to ensure to give the message to all listeners that Jeff Jones will continue to be a very important and active contributor to the future growth of the company in its new position as vice chairman of the board of directors and chief technology officer.

Jeff will concentrate his energy on new product developments and expansion, including consumables, and any opportunities, intellectual properties and strategic developments of our great technology platform. His vision and management are and will be fundamental to the future success of the company.

Robert Grant, the newly named president and CEO, since he has joined the company back in June, 2003, has been demonstrating outstanding manner and skills and he well deserves his new nomination. Robert is knowledgeable, energetic, structured, a good communicator and a man of long-term vision. I fully trust that he's the right man to bring BioLase to our next level of growth.

Regarding John Hohener, I am very pleased that staff and experienced financial officer has decided to join our company. He brings to BioLase a high level of expertise in financial systems and controls and general business knowledge. He's a very solid guy.

Then, on another topic, while we are very unhappy and disappointed with the performance of our start after the secondary offering at the end of February 2004, due to our past two quarters of ended performance. I want to reassure our shareholders that BioLase management is very concerned about preserving shareholder value. And to that end, is taking all necessary steps to ensure the continued progress and expansion of the company.

In conclusion, your company, BioLase, is growing at a healthy pace, also in 2004, and is built on a very strong foundation with an extraordinary technology platform, excellent program and a strong leadership in a very committed workforce. I have been the chairman of BioLase for 10 years now and I cannot think of any other time in which I've been more positive and confident about the long-term future prospect of BioLase. Now, I would like to turn the call over to our new president and CEO, Robert Grant.

Thank you, Federico, and good morning, everyone. As we evaluate ourselves over these past three quarters, we are still of the opinion that fundamentally, nothing has changed with the big picture of the market opportunity that lies in front of us. While our critics may claim that we've hit a wall in demand at the 1.5-2.5% level, we firmly disagree with this assertion. And our analysis and introspection in the markets where we have already achieved greater than 3-4% market penetration, we have notice that our sales in the past quarter have been robust.

Some examples of this market penetration include California, with a market penetration currently at 4%, Hawaii at 8%, Indiana at 5%, Oregon at 5%, Washington State at 4% penetration and Nevada at 7%. While we do not believe that there has been any fundamental change to the market, we do recognize that we need to fine tune our marketing and our selling efforts.

Within this context, we believe that a consumer awareness campaign will be very important to increasing both recognition and interest amongst our next level of customers. The hydrokinetics, as we have trademarked it, or hydroplatonics (ph), as I like to call it, the category of technology that combines both the use of water and light. This technological platform is truly only at the beginning stages of its applicability and market penetration. This innovative technology we feel has the potential to change the way that dentistry is not only practiced, but also how it is perceived.

Our products utilizing this technology are far superior, in our opinion, to any other competitive offering current available. With the introduction of the Waterlase MD, we are confident that BioLase will expand the reach of its technology as well as achieve a much wider level of market adoption.

2004 has clearly been a year of transition for BioLase. We needed to build and invest in the necessary infrastructure to take the company to the next level of growth. We have made significant strides in the past year towards achieving this goal. Additionally, during the past six months, we faced the challenge of the most important product transition in the history of the company. The good news is that this issue is well on the way to being behind us. We are making a concerted effort, as well, to make sure that production keeps up with demand.

Regarding the company structure, we have some more work to do in relation to Sarbanes-Oxley. And we're putting the maximum attention and resources into achieving this important milestone. To that end, we are making good progress. We are reevaluating our marketing approach as well, as well as the expense lines, to better position ourselves to appeal to a much broader audience. In this process, we are committed to optimizing investment returns. All of this will be done in an effort to both regain shareholder value and shareholder confidence.

To sum up, our business outlook is strong. Management is very confident. And we have a proven business model. And we realize that this most recent quarter was very disappointing. As a management team of an emerging growth company, we understand that the path to long-term shareholder value will bring some difficult quarters. Growth is not linear. Our shareholders should know that BioLase is no different. In looking forward, we believe the company is as strong as ever, with a solid balance sheet, with $36 million in cash in the bank and no debt and a growing interest in our products.

With that, we would like to thank you for your continued interest in BioLase and look forward to updating you on our progress in the next quarterly earnings call. We will now open the call to questions.

Thank you, sir. Ladies and gentlemen, at this time, if you wish to ask a question, please press star, one on your touch-tone telephone. If your question has been answered or you wish to withdraw a registration, they press star, two. We do ask that participants limit their comments and questions to one question per person, in the interest of time. Once again, star, one for any questions. One moment, please. Sir, our first question is from the line of Alex Arrow.

Thanks. Robert, you mentioned more work to do with Sarbanes-Oxley. Could you be any more specific about what that might mean for the next (inaudible) some of the metrics. Is that (inaudible)?

Alex, unfortunately, the line that we have with you is not very good. I could not quite understand your full question.

Oh, I'm sorry. Is this - I'm on a cell phone. I apologize. Is this any better?

It's a little bit better. Yes.

I'm sorry. If this doesn't work, I'll just go back in queue. But the question relates to Sarbanes-Oxley. You said that - you made a comment that you have some more work to do with Sarbanes-Oxley. I'm wondering, can you be any more specific about the potential financial implications of that, particularly in the next quarter, since there's some deadlines coming up versus what Jeff was alluding to a quarter ago. Is there any more financial impact of you comment about Sarbanes-Oxley.

Thank you. Yes. Let me just speak to this in generality and then I'll kind of come to more specifics if I can. First of all, like all public corporations in the United States right now, the company is very much focused on Sarbanes-Oxley compliance. This has been a task that we've been working on for several months. It is not an easy task. A lot of the work is tedious in nature. A lot of it, however, we see is going to help us improve our business efficiency going forward as we create a structure that is able to create more reproducible results within the organization.

At the same time, though, it comes at a cost. Sarbanes-Oxley is particularly challenging for companies of our size. Because we are in the sub-$100 million category today, it is an area that will cost us significantly, not only to establish, but also to maintain into the future. Jeff put out a press release recently, and the company did, regarding our expenses related to Sarbanes-Oxley as well as anticipated expenses related to the shareholder class action litigation and the Diodem litigation. We - they're not making any changes whatsoever to comments that we made in that regard in the press release, in relation to expenses.

Sir, we have a question from the line of Mr. Dalton Chandler with Needham & Company.

Hi. Good morning and, Robert, congratulations on your new position.

Thanks, Dalton.

You mentioned a couple of things, but could you talk a bit more about, you know, what changes we should expect to see and how the company is run, given the management changes that have taken place?

Well, I think - I mentioned that our self introspection has really led us to look at our sales and marketing effort and re-rationalize and redouble our efforts on that front. We're also looking at our expense lines. We need to make sure that our expenses are rationalized with the revenue that we achieve. In addition to that, one of the things that we would like to focus on is greater transparency for our shareholders. Managing expectations well, going into the future, as well. Not only with shareholders, but also with customers as well as employees, the different constituencies related to the business.

I think one of the other areas of focus is going to be the consumer awareness campaign. We would like to see the phrase Waterlase dentistry become as ubiquitous, on a household basis, as the word lasik. I think you'll also find that we're going to exploit the benefits of the hydroplatonics, as I called it, platform technology that we believe has greater application not only in the field of dentistry, but potentially, in other medical sub-specialties.

Sir, our next question is from the line of Juan Noble with Oppenheimer.

Yes, hi, Robert, and congratulations.

Hi, Juan. Thank you.

Just - I have two questions if I might. First of all, on the issue of sales and marketing reviews, Robert, you know, I think there's a sense out there that, you know, if you'll forgive me for being blunt. The quality of your sales force is not quite what it might be. And that might be one of the root causes of your sales growth having slowed. I was just wondering if you could speak to that directly and my second question is do you have a sense out there - is a secondhand market developing for Waterlase systems or I don't know what their predecessor names. So, I'm asking the question based on a local experience.

And if there is such a market developing, you know, you might know that because they have they have to come to you for refurbishment as well as dental certification. Now, would the development of that kind of a market in any way undercut your sales growth momentum on our new systems?

OK. Well, let me answer the first part of your question first, Juan, if I may.

Sure.

I think that as we continue to evaluate our current sales situation and the channel that we - that we currently employ. One of the issues that really comes directly through the analyst to mind is that in certain pockets of the country, we've had excellent sales performance. I mentioned earlier that where we have greater than 4% or 3% penetration, in particular, we had very strong sales, both last quarter and the quarter prior. And what we're really going to be working towards is getting a greater level of homogeneity within our sales force. We need a more homogenous sales force where we have reproducible results.

Now, we think that that's going to come through training. We'd like to be able to get our sales force trained to the point where everyone is speaking at a consistent message that, when we hire new sales reps, we don't go through a significant learning curve or at least we're able to mitigate that risk. And I think that's an area, certainly, that we have targeted, over the coming months, to really shore up and improve upon.

The next part of your question was in relation to the secondary marketing - secondary market for our products. I've been in the medical laser industry since the early 1990s. I have never worked in - I have never worked in any field within medical lasers where there has not been some level of secondary market that has been created. I will say, however, that, in general, the secondary market for products - for lasers as well as for our products, is small. It is a challenge that we are going to be working to deal with. We're looking at alternatives on how to deal with that. But it's not something that we feel is currently affecting or impacting significantly our current business model.

And sir, our next question is from the line of Scott Johnson (ph) with Highland Capital.

Good morning, guys, and, Robert, congratulations.

Thanks, Scott.

I just had two quick questions. One was with regards to inventory. Given that you guys have basically, transitioning to an upgraded product, are you - what are you guys doing with the old inventory?

Well, here's some important things to note about this. First of all, our current product - or it was our current product - the Waterlase - not the Waterlase MD - is still in production. It's still a product that we're selling and we expect to have strong sales going forward. We recently had a conference in Germany where they had the opportunity - customers had the opportunity to purchase both the Waterlase MD as well as the Waterlase. And we feel that the Waterlase, because it is priced at a nice mid-tier point level - and we're keeping incidentally, the prices relatively constant with where they've been in the past for that tier. We feel that the market demand for the Waterlase will still remain quite constant.

Having said that, one of the things that bears - is important to note as well is that a lot of the components that are in the Waterlase MD are shared with the Waterlase. As I mentioned, our Waterlase technology or hydroplatonic technology is a platform technology. The MD platform is one that utilizes best in class and world class componentry (ph) and these components, by and large, are also used in the current Waterlase. So, as a result, our risk with obsolescence, at this point in time, we feel is very low.

OK. Can I ask a follow-up question?

Sure.

With regard to your manufacturing capacity, where do you guys stand in regards to utilization and the - to have your sales increase, to an extent you guys are going to have the ability to ramp without adding meaningful cap ex?

The greater part of investment related to ramping up production as the business grows is really more in the line of assembly. It's not through capital expenditure that we have to get there. With our current facilities, with our new facility that we move into - our second facility in California, as well as our facility in Germany, the company is able to grow 250% or greater from where we currently stand today. So, if you look at our utilization or capacity, we're certainly underutilized. That obviously has implications on our amount of operating leverage today, but it has positive indications on where operating leverage could be in the future.

And our next question is from the line of Peter Cardilla (ph) with S.W. Beck.

Hey, Robert, congratulations.

Thank you, Peter.

Just one question, on the international side of things, how is the new product - how was the reception of the new product taken? And also, with the strength of the euro - shouldn't - do you think that that should increase sales going forward in Europe?

Well, in Europe, we recently had, just last week, the World Clinical Laser Institute in Munich, Germany where we had more than 200 attendees. It was a very well attended meeting. It was a great session for current users as well as perspective purchasers of our product, to learn more about the technology and to gain access to the Waterlase MD. All the initial feedback that we've had, regarding the Waterlase MD, has been very positive. And we're very pleased with this.

Having said that, Europe is somewhat of a more challenging situation from the standpoint of reimbursement. Reimbursement, you may have noticed that other dental companies as well as other medical device companies we've mentioned - that reimbursement for healthcare changed quite significantly in Germany as well as select other places in the European Union during last quarter. So, right now, we're not quite sure the impact that that change in reimbursement is going to have, on a go forward basis on our direct sales in Germany.

But we're very confident about the applicability as well as the marketing appeal of the Waterlase MD to the European theater. And obviously, to the extent that we can take advantage of the current exchange rate between the dollar and the euro, we will certainly do so to the maximum extent.

Sir, we have a question from Dalton Chandler with Needham & Co.

Yes, hi. I had a few questions, but I got cut off last time. First of all, you talked about, early on, about not changing - you didn't see any fundamental change in the marketplace, historically, you have said, in general, your objective is to grow revenue 40-50% year over year. Is that something that you would reaffirm today?

One of the things right now and I think it's premature to make any affirmation or reaffirmation of guidance going forward. We have not, at this point in time, given any guidance for 2005. However, suffice it to say we believe that we will see a reacceleration of growth going into 2005 and we're very enthusiastic about the business model. As I said before, you know, we're certainly very positive about where we are today even though we were very disappointed, at the same time, with our underperformance for the last two quarters. We truly do not feel that, fundamentally, the business model has really had any significant setbacks.

OK. And then, on the sales of the MD versus the older Waterlase, at ADA, I think you said afterwards, that the orders were about four to one in favor of the MD. Have you seen that pattern continue?

You know, it depends on where we're going. But in general, in the United States, we've seen four to one. In our recent meeting in Europe, where you have a greater level of price sensitivity in certain markets like Spain, we've seen that it's more 50-50. So, we believe that the mix at the end of the day is probably going to be closer to the 60-40 range.

OK. And have you had any sales to non-dentists?

Not as yet.

OK.

I mentioned earlier that we are looking at - and this is one of the initiatives that Jeff Jones is going to be heading up - we are looking at, really, going through a discovery phase of all the different applications for this field or category of combination of water and light - hydroplatonic - the trademark of hydrokinetics. But we think that this technology certainly has application outside of the field of dentistry - and that's an area that we're going to be exploring in more depth and also giving transparency to the market as time goes by.

And sir, we have no further questions at this time. Back over to you for any closing remarks.

Federico?

Well, as a closing remark, I want to say that I feel very confident where BioLase is today. We have the foundations to build a long-term growth and BioLase will continue to be very successful. The market opportunity that is out there is the biggest market opportunity in the medical business - was three years ago, two years ago, a year ago and still is today and going forward. Nothing, fundamentally, has changed. We will make sure to manage at our best the opportunity to penetrate these markets at the fullest.

And I believe that we are very well placed today with the products that we have. We have products at different prices. We have the new MD that has been very well received. I think it's going to be a very success for the company. This new product is the best choice in the marketplace and is going to make a substantial difference in the future growth of the company.

If I might add, Federico, just as far as our areas of focus going forward are, personally, we're still in the process of reevaluating, introspectively, our marketing approach to appeal to a broader audience. The second focus that I think we need to really gain is to really minimize the distractions related to the business. Certainly, we've been dealing with issues like the Diodem litigation class action, the Sarbanes-Oxley, et cetera, et cetera, and these are important and necessary things we need to deal with. But we'd like to just focus our time, efforts, attention on the business.

We also want to appropriately manage expectations going forward of all constituencies related to the business and the stakeholders. The effective consumer awareness campaign and strategy we feel is going to help create a greater level of urgency and interest in the market for our products and make Waterlase dentistry a household word or phase.

We're also going to rationalize our expenses to revenue actuals. We're going to make sure that we redouble our efforts to analyze overages where they may be in the sales and marketing expenditure line as well as in the G&A side of the business. And finally, we intend to exploit fully the benefits of hydroplatonics as a platform technology - to go through a discovery phase in the medical specialties and advise the market accordingly when we're ready to. And also to better understand the full applicability in the mainstream dental applications that are also open and available to us.

And this is where we really see the future. The future is bright for BioLase. We're very confident about it. We have a fantastic product and we have dedicated, experienced employees and we're going to take the company to the next level of growth. And thank you very much for your time today and I'll turn the time back over to the proctor.

Thank you, sir. Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude your presentation and you may now disconnect. Good day.