BIOLASE Inc (BIOL) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2006 BioLase Technology earnings conference call. My name is Shanika, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Mr. Scott Jorgensen, Vice President of Business Development. Please proceed, sir.

Thank you. Good afternoon, and welcome to the BioLase second quarter 2006 earnings conference call. I am Scott Jorgensen, Vice President, Business Development, and with me are BioLase's Chief Executive Officer, Jeffrey Jones, and BioLase's Chief Financial Officer, Richard Harrison.

To begin, we would like to apologize for the delay in starting the conference call. Unfortunately, our wire services today at around 4:00 PM, their systems crashed, and that's the reason for the delay. However, it appears that the press releases have crossed the wire, and as a result we would like to begin the conference call.

Jeff today will provide an update on the business's operational performance and outlook, and he will review management's strategies and vision for realizing the full potential of BioLase.

Rich will then provide a review of our financial results. Management will then conduct a Q&A session and end the call with a few closing remarks. And just as a reminder, we will be making some forward-looking statements on this conference call. 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.

Forward-looking statements are subject to various known and unknown risks and uncertainties and BioLase cautions you that any forward-looking information provided 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 and may be discussed in BioLase's filings with the Securities and Exchange Commission.

All such forward-looking statements are current only as of the day 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.

As a quick reminder, our earnings release and a replay of this conference call are available on our website at www.biolase.com. The company's 2006 results can be found on the company's Form 10-Q, which is expected to be filed later this week with the Securities and Exchange Commission. Now, with that said, I would like to turn the call over to our CEO, Jeff Jones.

Thanks, Scott, and good afternoon, everyone. Over the last few weeks, I have been very, very busy, but at the same time, it's been a lot of fun. We have negotiated and signed fundamental and key strategic alliances that are invaluable to the near and long-term success of BioLase. As you saw this afternoon, despite the wire being late - we hope you saw it - that we have just entered into an exclusive multiyear distribution agreement with Henry Schein. And as many of you know, Schein is a powerhouse and a true leader in dentistry, healthcare products and services to office space practitioners in the combined North American and European markets.

Other [revamps] that are worthy of note, we increased laser system placements in dental schools. We signed an alliance and licensing agreement with Procter & Gamble for consumer products. We just received our 510-K approval for our ophthalmic laser, OCULASE MD and all the while progressing through a major management and staff transition, and I assure you our progress continues.

Before outlining each of these initiatives, let me speak briefly to our second quarter financial results, which Rich will cover later in more detail. Well, firstly, we concluded the quarter generating approximately 16 million in sales, which represents 9% growth over the prior year same quarter. Achieving the improved profitability, cash flow management and closing major fundamental agreements during a period of management and staff transitions is a tribute to the entire organization. I think this truly does demonstrate the passion and talent of our new team, and I really want to thank all of our employees for their hard work to bring about these fundamental strategic alliances, and they've made tremendous contributions and worked very hard also to reduce cost, enacting certain cost-control measures and initiatives at the same time.

Well, as you can see from our Q2 news release, we have dramatically reduced the operating expenses in our business, particularly in the G&A area, reducing these costs by approximately 47%. Also, we have greatly improved our working capital and cash flow statistics.

Well, first and foremost, I will address our transition to an exclusive distributor model for North America through our new partner, Henry Schein. We are very proud and happy to announce today that we did just enter into this agreement formally with Schein, a true leader in dental distribution and also a leader in many other services that are very important to the customer relationship across the U.S. and Canada.

This agreement is for an initial term of three years, and as part of this transaction, Henry Schein will pay us an upfront $5 million licensing fee for access to the company's broad portfolio of intellectual property and, of course, the distribution of our products. In addition, the agreement requires that to maintain its exclusivity, Henry Schein must meet certain performance criteria, including minimum purchase requirements that are very attractive growth commitments.

This agreement is a strong endorsement of our technology and the strength and breadth of our intellectual property portfolio. We are convinced that this alliance between BioLase, the world leader in dental lasers, and Henry Schein, the powerhouse in dental distribution, creates a powerful combination that will well position Waterlase technology as an integral and fundamental part of the standard dental suite.

This allowance - this alliance, I should say - will allow our sales and service teams to work in tandem with the Henry Schein sales and service reps to market, promote, sell and service BioLase's complete line of dental laser systems, accessories and services. We recognize that our products require significant technical expertise and training and as such our sales reps will continue to play a key role in soliciting and closing business, working alongside the sales professionals of Henry Schein.

However, we recognize we could never replicate the extensive reach and deep relationship that Henry Schein has in the dental professional community. They now have more than 1,100 customer and sales consultants in the U.S. and Canada. Our senior management has spent considerable time and energy over the past months to ensure the success of this important agreement.

As a result, we believe this transaction will greatly accelerate our growth and we look forward to taking full advantage of this powerful partnership by leveraging our brands and product offerings across the Schein distribution network. Well, now let's address the Procter & Gamble transaction, which is also very important to BioLase and you, our shareholders.

As many of you may have read, we just entered into this strategic relationship. As part of the transaction, BioLase received $3 million as a partial payment for a license of certain of our patents. Additionally, P&G will pay BioLase quarterly payments of $250,000 until the first product is launched, as well as certain milestone payments and ongoing royalties or commercialized products utilizing our intellectual property. Today, we are working with P&G to complete the long-form definitive agreement, which we expect to be completed prior to this quarter end.

As you may suspect, many of the terms and details are confidential and as such we cannot provide more information at this time. This transaction has tremendous potential and we look forward to working with P&G to develop consumer products that utilize our unique technology.

And now to review our new 510-K for ophthalmology. We recently announced the FDA, Food and Drug Administration, granted us a clearance for our OCULASE MD. The clearance covers general ophthalmic soft tissue procedures indications, which is more precisely an excision, incision, vaporization. This clearance is an important milestone in our ophthalmic pursuits. It represents an early achievement along the path to developing a treatment for presbyopia, but it also enables us to pursue other applications in ophthalmology utilizing our core technology.

With this clearance, we will be better able to move forward with clinical research and sales and marketing initiatives, both domestically and internationally. Turning to the university program. The company recently signed an agreement with the University of Florida for integrating Waterlase dentistry into its course curriculum. The University of Florida College of Dentistry is one of the top dental schools in the nation, with recognized strength in teaching and research.

Today, the company has placed Waterlase systems at 21 of the 56 dental schools in the United States. Currently, the company is in contract negotiation with additional U.S. dental schools that it expects to finalize over the coming quarters. We applaud these institutions for recognizing Waterlase technology as a valuable and necessary aspect of their educational discipline by training future dental professionals on the benefits of Waterlase dentistry.

Our goal is to have Waterlase units in all 56 U.S. dental schools within the next three years. We have learned from our research that approximately three of four dentists use the same dental products they used in dental schools, measured five years after graduation. Hence, this is an important initiative.

And now, finally, I would like to take a little time to address our sales organization. As many of you know, we recently reorganized sales and brought back Keith Bateman. Keith was the Head of Sales from 1999 to 2004, a time period where average growth was more than 50% and we went from 1 million to 60 million in revenue. We're very pleased with the very, let's say, rapid and substantive changes that he's made, and we believe he is doing the right things to achieve our goals in sales.

In particular, I have personally been impressed with the new reps that have been brought on board. I have met most of them, spent time with them, and I believe they are the right profile that can be successful in our market. From a sales and marketing perspective, we're getting back to basics, hiring the profile of sales reps that made us successful in the past. And, as you would expect, we have been transitioning out those reps that do not fit this profile for success.

For example, we are looking for sales reps that are customer centric, passionate, dedicated, committed to excellence and results oriented with track records of success in capital equipment sales. We are confident that our domestic sales will begin to re-accelerate over the coming quarters.

However, it is important to remember that it does take some time for new reps to come up to full speed, sometimes two to three quarters. We were fortunate that we brought back some reps that we had before who did begin to contribute significantly very promptly.

Well, at this point, I would like to turn the time over to Rich Harrison, our CFO.

Thanks, Jeff, and thanks everybody for joining us on this call this afternoon for the second quarter operating results. Just to recap some of the information that was in the earnings release, our revenue for the second quarter of this year, 2006, was $50.9 million. That was a 9% increase over the second quarter of 2005.

Waterlase system sales comprised approximately 81% of total sales in the second quarter of 2006. That compares with 80% in the same quarter of last year. And more than 90% of Waterlase sales in the second quarter of 2006 were comprised of our flagship product, the Waterlase MD system.

International revenue for the quarter ended June 30th, 2006, was $7.2 million, or 45% of net revenue, as compared with $4.8 million, or 33% of net revenue for the same quarter of last year. Turning now to the gross margin, the gross margin in the second quarter of this year was 47% of net revenue, compared with 43% of net revenue in the same period last year.

Our gross profit continues to be impacted by the higher product mix weighting to international distributor sales, and also an increase in total warranty expenses, as the mix of systems under warranty has shifted predominantly to the Waterlase MD. However, I'm pleased to report that these unfavorable effects were more than offset by a comparatively lower production cost and inventory reserve provisions, as well as the absence of significant Waterlase MD redesign costs, which we incurred a year ago in the three months ended June 30th, 2005.

So we're pleased with the progress achieved in lowering our production costs, but we continue to expend significant efforts internally, aimed at improving our gross margin, and we're confident that improvements will be yielded from these efforts. Turning now to operating expenses, our total operating expenses for the second quarter of 2006 were $10 million. That's 22% lower than in the second quarter of 2005.

The major contributor to this significant decline in expenses was in the general and administrative area, a decrease of 2.6 million, or 47%, despite the recording of about $300,000 in compensation expense resulting from the adoption of FAS-123R. And not only have we benefited from the absence of significant costs that we incurred last year relating to restatements and delayed filings, but we have also reduced costs, by eliminating unnecessary expenses, staffing levels and temporary personnel, as well as by observing SOX 404 compliance procedures, primarily using in-house personnel over temporary labor.

As a reminder, in the first quarter of 2006, we recorded a $432,000 charge related to the 45,000 shares of BioLase common stock that had been placed into escrow a year ago in January 2005 in connection with the Diodem patent litigation settlement. The settlement agreement provided that the shares would be released to Diodem if certain criteria were met on or before July 14th, 2006.

At the end of March, we determined that it was probable that that the shares would be released, and therefore we recorded that charge in the first quarter - it's a non-cash charge based on the fair market value of our common stock that was $9.55 as of March 31st. At the end of the second quarter, the fair market value of our stock was $8.40 per share, and accordingly we reduced the year-to-date charge by $52,000 to a net of $380,000.

Our net loss declined to 2.4 million in the quarter ended June 30th, 2006, or $0.10 per diluted share, which included the recording of approximately 300,000 in compensation expense resulting from the FAS-123R adoption and approximately $52,000 for the adjustment to the Diodem matter that I just reviewed for you that was a one-time gain. This compares to a net loss of $6.8 million a year ago in the second quarter, or a $0.30 per diluted share.

Turning now to the balance sheet, our financial position at June 30th, 2006, reflects cash, cash equivalents and marketable securities of $17.6 million, which includes the $3 million that we received from Procter & Gamble on June 30th as partial payment for a license of certain of our patents. Additionally, we have $5 million outstanding on our line of credit. Total assets were at 42.7 million. Our accounts receivable, at $7.6 million, were about $2.4 million lower than they were at March 31st, 2006.

Our total inventory stands at June 30th at $6.4 million, and that's about $1.3 million lower than it was in the March quarter and about $2.2 million lower than it was at the beginning of the year. This is primarily the result of process and manufacturing improvements to the Waterlase MD, improved inventory management and a strong international sales performance in the first half of 2006.

Because of our focus on reducing costs and improving our working capital management and the $3 million received in the Procter & Gamble transaction, we had cash generated by operations of $1.4 million during the first half of 2006, as compared to cash used by operations of $12.5 million in the first half of 2005.

So, in summary, I'm happy to report that we made progress on all three of our short-term financial objectives, which continue to be improve cash flow from operations, improve profitability and growth in revenue. So now this conclude the financial review. I would like to turn it back over to Jeff to make a few comments before the Q&A.

Jeff?

Thank you, Rich. BioLase's vision is to make Waterlase technology an integral part of the standard dental suite. We have the tools and means to do this. We can take the fear out of dentistry, expand what dentists can do for their patients and at the same time actually improve the quality of dental care. This results in energizing the dental profession. Outside of dentistry, our vision includes going into new revenue streams, such as ophthalmology, such as the consumer-based products, as with our Procter & Gamble alliance.

Of course, we also are very focused on growing our consumables. We're going to grow our gross margin, keep the R&D pipe full and return to profitability.

At this point, we would like to open the floor up to you for questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from the line of Alex Arrow. Please proceed.

Thanks. Hi, Jeff, hi, Rich. Maybe we can start with the Henry Schein selling alliance. It seems like a bit of a departure from the previous approach, in which you had allowed the competition to go with Henry Schein - I believe it was actually this exact same distributor, whereas preferring to keep your selling channel completely direct, because I think at the time you explained that Henry Schein, there was the potential for them to lose focus, because they had a lot of other things that they were selling at the same time.

Maybe you could just reconcile why the change in strategy.

Sure. Schein is very excited about this transaction, as are we, were this is exclusive. They will not be telling another hard tissue dental laser. They recognize BioLase for being the number one product in dental lasers, and we recognize them being 1,100 strong in the field with sales consultants, and the product is at a different point in maturity. The brand name recognition from surveys is up, dentists are interested in lasers.

These relationships I think never found a better time to become a key part in the sales process. I know I speak for not just me but the entire management team. Keith is very much embracing this Henry Schein relationship, and the whole sales force, we believe, is going to embrace it. It will make us more efficient, and the time now is the time to do it.

Okay, but is there something specific that you can maybe point out to us about what gives you the confidence that even though they're 1,100 strong that they're going to stay focused and that they're going to give you their complete selling effort even though they have lots of other products to sell? I think it was either [Hoya Con Buyo] or it was one of the smaller competitors that went with Schein before and at the time it seemed like that was just a way for them to lose focus.

I understand that they're 1,100 strong and they've got probably the biggest reach of any distributor, but anything in particular you can point to that will give us confidence that they're going to stay focused on this.

I think so. If you look at the commitment they're making upfront, it's not very often that Henry Schein - I shouldn't say somebody like, because Henry Schein is really - they're one of a kind in their position. They have made a commitment to us, including some sales growth numbers, which we're not at liberty to disclose, but they've also paid money upfront, which we have disclosed, and they have cut themselves free of being able to sell other hard tissue dental lasers. That's quite a commitment from their side.

And what they have shown us through the negotiation process and energy, commitment, professionalism, we do feel confident about it. And I know, Alex, you've heard me speak about this before, analyze it, look at when would the timing be right, and so your question is well placed. We did several things that are unusual here.

We structured it such that we keep our sales force, and our sales force and their sales force work in tandem. We will still continue to do the marketing that BioLase has been well known for being successful at, and Henry Schein and the organization respect that. we will continue to sponsor the World Clinical Laser Institute, which is so focused on penetrating lasers into the dental laser market and that organization will also be greatly stimulated from our alliance with Henry Schein's people.

So there are numerous factors that make me personally feel very good about it, and I can say that I believe that this really was the right thing for BioLase to do now, especially with the terms and conditions that we have negotiated. I think the deal is very good for Henry Schein and very good for BioLase.

Okay, that helps. Maybe, and then just segueing into the difference between the international performance versus the U.S. performance, I understand that the sales force turnover hurt the U.S. performance, but can we draw parallels between what has been working so well internationally, where you've got a lot of that because of well-placed distributors that you know you do have an above-expectation the growth rate for OUS, where you failed out a bit on the U.S.

Now that we've got Henry Schein, maybe that's an analogous situation to what works in the OUS markets. I mean, is that a fair comparison to draw?

I think it is, Alex, and when you look at the U.S., we have territories where the demographics are such that we should be doing very well, but we're not, and we have other territories where the demographics are the same or comparable and we're doing extremely well, so the difference is what you just pointed to, is that we have the right profile for the sales professional in that territory, and that's how international is.

Countries with good dealers, and yes there are economies that very from one country to the next, which make it a different analysis, but at the same time, good dealers who are focused, they do a good job and the same thing in the U.S. We tell our salesmen to treat this territory as your country and make it successful.

Okay, and maybe one last question about international. In one of your recent filings, I think it said you had a 10%-plus international customer in the March quarter. Was that Korea, and, if so, can you say anything more about that customer and how much that customer is represented in this quarter?

We haven't disclosed more than the one customer being more than 10%.

Okay, but would you be willing to comment on whether that customer has become even bigger - was that a major factor in the outperformance in the June quarter?

It was a significant factor, obviously, if one customer goes over 10%, but we still had numerous dealers who are also all contributing in the aggregate. It's not a situation where it's one dealer, it's a multitude of dealers. And we also have certain operations direct internationally.

Okay, can you say, is Korea your number one OUS market at this point?

We haven't disclosed which market it is internationally.

Okay, I'll ask more questions later. Thanks, Jeff.

Thank you.

Your next question comes from the line of Dalton Chandler. Please proceed.

Hi, guys. What can you tell us about how your sales reps will now be incentivized and how the Schein reps will be incentivized under this new deal.

Dalton, we do have some sensitivities there, so I'm going to try to step through this to the degree that I'm allowed to. We're allowed to keep the transaction structured so that we had, let's say, enough of the price points on our side to incentivize our people properly, and that's an unusual situation, as you know, in distribution.

So our sales guys will be leveraged, which is something we've been trying to do for years on their own and it hasn't been an easy challenge. We now have the 1,100 Schein people, and there will be certain areas - well, not certain areas, but certain people, that we'll be more focused on within the Schein organization.

But the Schein organization with their direct relationships with all the dental offices across the U.S., they know what markets these dentists are in, and they're often asked what should I be doing? Or if they want to get some high-tech equipment, they ask this person they have the relationship with what laser should I buy? We do have the brand recognition, but they'll say, I've been thinking about a BioLase, what can you tell me?

An now the Schein rep can say, it's a great product and we're going to line it up for you and bring that product to your office. Our rep would work in tandem with them, but then our rep will be able to spread his resources, his or hers, across many, many more offices, because the strong relationship side of it can now be handled by the Schein person with that relationship already established.

Relationship establishing takes a lot of time and energy and Schein has that.

So the idea is it will be more of a referral-type relationship, where your sales rep will get a prequalified lead from a Schein rep?

Correct, and there's other deals that recently that Schein has done that really demonstrated to us that this can work well.

Do they have any other products at your price point?

At our price point right now, they just acquired a product, but [Dexus] is the one that I was referring to earlier, that they've had for I'm not sure the exact amount of time, but long enough. It's been at least a year, and the Dexus product, which Schein has an exclusive on, has done extremely well, and we've been told that their close rate is 70% plus on the leads that they're getting. It sounds real high, but I know its' something that's worked out very well for them.

And they just acquired another product, which I'm not as familiar with that's in the imaging that's more panoramic that has a price tag of about 100,000. Fortunately, it does not compete against our product. It gives Schein, I think, more to focus on on the high-ticket sales program.

Okay. And will Schein be a stocking distributor, or will you continue to ship direct to dentists?

Pardon me?

Will Schein be a stocking distributor, or will you continue to sell direct to the dentist?

In answering that question, I need to be careful of terminology. They will be stocking in the sense that they will buy from us and take ownership. They have depots all over the country. And part of our arrangement is going to be that the laser from BioLase will be shipped to one of these depots were from there, Schein, we refer to it as the white glove treatment. They can take it from that depot or that distribution center or zone. Refer to it as you like - and drive it to the dentist. It's a huge improvement as far as the service to the dentist, because they don't have to plan their day around when the truck is going to arrive with this box and unload it and try to coordinate everything.

Schein will go in their own van, vehicle, deliver it in person and especially initially, with our sales specialist, and install it. So they will take ownership of the laser. It will go through their depot, but we do not intend for them, nor do they want to stock inventory.

Okay, so you will only ship a laser to their depot as an order comes in?

Well, that would probably be quite inefficient. I'm sure that will happen many times, but I would also suspect that if they have a run rate, let's say, of 30 lasers in an area in a two-week time period, they may take 30 lasers in one or two shipments, 15 at a time or 10 at a time or maybe all 30, depending as it conveniently fits to that depot and then be redistributed. But our intention wouldn't be that it would be more than to fill the immediate needs.

Okay, and then I'm not sure exactly what it was, but something in your comment about the technology fee that they're paying up front seems to imply that there may be more than just dental technology involved in this deal. Is that the case or is this exclusively related to dental applications?

Well, the primary focus here is dental systems and primarily our flagship product, the Waterlase MD. There are other opportunities between the entities that are interesting, to say the least, that we are going to pursue together, but that's the primary activity right now.

Okay. And then can we move onto the P&G deal. Did you receive the $3 million during the quarter, or did that come after the quarter?

We received it during the quarter, Dalton.

Okay, and can you just give us a sense of what is left to negotiate on that? I'm assuming you've agreed on the products you're going to pursue and you've moved on to more minutiae, or what's going on there?

Well, what we did with them initially is we entered into a binding letter of intent. It was a fairly detailed binding letter of intent, and actually a redacted version of that document will be filed with our 10-Q as an exhibit. Of course, all of the confidential aspects of it will be removed.

The long-form definitive agreement will essentially take the elements of the binding letter of intent and add in all of the other legalese that for the sake of time we didn't include in the binding letter of intent. So I don't know if that answers your question, but we expect that we're pushing to get that done before the end of the quarter.

It answers it about as well as I'd expected.

Okay.

Thought you'd give it a shot.

And then let me just ask a question about the university programs and you say you're negotiating with I think - maybe you didn't give a number that you're negotiating with. But I'm just curious, I think the agreement is you give them lasers and they include them in their curriculum. So is this actually a lengthy negotiation, or what do you need to do to get a laser into one of these schools?

It is a little more involved than it might seem like it would be upfront. The universities and schools, of course they all want the product, but you can't just provide the product and expect to get the rate of return you need to justify doing it. What we require is that there is a qualified champion who will be well supported by the school to pursue developing programs around the laser, and that they specifically start the bureaucratic process of getting it into the curriculum, and that's not a small project.

Okay, and then just one final item here. Did you give the dollar breakdown on international versus domestic? I missed it, if you did.

We did. We indicated that international sales in the second quarter of this year were $7.2 million, and that was 45% of our total revenue, and a year ago it was 4.8 million, or 33%.

Okay, all right. Thanks very much.

You're welcome, Dalton.

Your next question comes from the line of [Randy Salick]. Please proceed.

Hi, guys. A couple questions for you. I'm sorry, you already answered that question. Will there be a decrease in margin as a result of having to pay Schein commission in their deal?

There will be some decline in our average selling price. However, that's going to be partially offset by an expectation that we will be having an overall increase in suggested retail price.

So you're raising prices to cover the lost margin, or the reduction in margin.

To some degree. I don't think it will cover the entire.

So hopefully you'll get it back with volume.

That is correct.

How is Schein's sales force equipped to handle the long lead times that your products require, or typically require? Are you going to have to spend time training them, or are they equipped to do that now? How does that work?

The lead times do vary, but part of this project is to shorten the lead times. You have a relationship with the dentist, that in and of itself dramatically shortens the lead time. Where we are in the marketplace right now, from what the surveys show in our brand-name recognition and what dentists are starting to understand, that will also shorten it.

But the relationship that we're going to gain from having the trained professional offering the product, that in and of itself will shorten the lead time. But we also have training programs that we've already ...

I see. Will you have to sort of like a one-time expense to train the sales force? Or how does that work? Is that embedded in the margin?

It will just be an absorbed cost. We don't think it's going to be over burdensome. We can do a lot of it by webinar. There will be some travel within zones, but we're not going to bring in 500 reps at a time and do 500 this week and 500 next week and spend hundreds of thousands of dollars. We can do it very quickly and efficiently without a big expenditure.

Okay, and a couple quick questions. What's the difference between profitability on the international versus domestic front?

I think at this point I would say that if you looked at our international business on totally an incremental level, it would probably be roughly in a breakeven area. But if you fully burdened it with corporate overhead and allocations and things of the sort, then both the domestic and the international business would share in some of the loss that we have reported in the last couple quarters.

I see, but if you were to strip out the overhead, just in terms of gross margin, which is more profitable, international or domestic?

Domestic revenues are more profitable from a gross margin standpoint.

I see.

Average selling prices are higher in domestic than they are in international.

Yes, I've got you. And, last question, when will you be able to really provide us detail with your P&G, sort of around the nature of your P&G relationship?

I think this is what you're going to see - you're going to see a redacted version - I don't know if you heard this before, but you'll see a redacted version of the binding letter of intent in our 10-Q tomorrow, and then by the end of the quarter we expect to have the definitive agreement signed. But I think that a lot of the aspects that you would probably like to see in the agreement P&G finds highly confidential to their business plans and I'm not sure you're going to get as much of the details as you'd like to see out of that.

All right, thanks.

You're welcome.

And your next question comes from the line of [Van Brady]. Please proceed.

I had several questions. Maybe we can take them in the sequence they are asked. You mentioned that the new VP of Sales hires new salesmen. Could you update us and tell me just how many quota carrying salesmen there were as of the end of June?

Hello?

Just a moment. Sorry for that interruption. Keith Bateman, who is the VP of Sales, sitting right there and rather than answer it for him, we're going to have Keith reply to that.

We have 30 territories. At the end of June, we had about 25 sales reps active in the field at that point in time.

So you still have five to hire, is that is?

Correct. We still have some positions that we're filling right now. We're in the process of doing that.

Okay, and then a short question about Schein. From the way you've described the license fee, I presume that will all be paid in the third quarter? Is that totally upfront, or is that staggered over a period of time?

Which license are you referring to?

The $5 million.

The $5 million license fee from Schein.

Yes, that should all be in the third quarter, the receipt of that money.

Okay, and then you mentioned that there are some aggressive sales forecasts, and I think you used the word they committed themselves to. And I just wondered, is there any fallback for you if they don't make these sales targets, or are you compensated in any way, better pricing or whatever?

Put it in these terms, there are, for lack of a better word, teeth in the commitment. I mean, they put some skin in the name. It isn't like they make commitments with no backing. The commitments do have substantial reasons to comply with it. It's not meaningless at all.

This is Rich Harrison. I have a news break for you. Someone just brought into the room and handed to me an indication that the licensee has actually already been received, so that's a more definitive answer to your question.

Now, maybe this question has been answered, but looking at Alex's model, there was a real turnaround in terms of the geographic mix of the sales and the domestic part was off significantly from the first quarter, and it was partially made up by bumping up the international from what it was in the first quarter.

Is there anything further you can say to clarify what was going on and why?

I think, Van, it's no secret that we've been disappointed over the last couple of quarters with our domestic results, and we've been extremely pleased with our international results. And as far as our domestic results go, as Jeff has pointed out, we have made some management changes here and we've asked Keith to step back into the management role for sales because of his track record with the company in the '99 to 2004 timeframe. And he's been able to so some, we think, some very key recruiting already in the short time that he's been in the role. So overall we felt that we needed to make some changes in the profile of the type of sales rep who was going to be the most successful with the BioLase product line, and I would say that that played a large part in what we saw over the last few quarters in domestic sales.

I'd like one more question if you'd care to answer this. It's a little conceptual, of course, but can you tell us when, knowing what you'd do about Schein and the various plans in various geographic areas about getting up to speed, would it be possible to give us some indication of, say, what quarter you might see sales there and when they might, say, increase your domestic line by as much as $1 million?

We expect that to happen in Q4.

Effective in Q4. Could it add $1 million in Q4?

Yes.

Okay, thank you very much.

Your next question comes from the line of [Austin Hopper]. Please proceed.

Good afternoon. Thanks for taking my questions. The first couple of questions relate to your balance sheet. I saw that your deferred revenue in the quarter was at 5.4 million. That compares to about 2 million in the first quarter. I was hoping you might comment on that.

That's the $3 million from P&G.

Okay, thank you. And then, secondly, your allowance for doubtful accounts versus sort of a gross accounts receivable, it looks like it was about 9.8%, and that compares to 4.3% in the first quarter and 4.7% in the June quarter of last year. Thought you might comment on that?

Hello, are we still connected, because we just heard a loud noise on this end.

Yes, can you hear me? Overhead. Your allowance for doubtful accounts was about 9.8% of gross A/R in the second quarter. That compares to 4.3% in the first quarter and 4.7% in the June quarter of last year. I was hoping you could comment on that.

Yes, nothing overly specific I can tell you, except the fact that every quarter, as we close out the quarter, we take a specific look at receivables. We make some management judgments on what we think the appropriate allowances would be for specific receivables, and then we also maintain a general reserve for receivables as well. And I don't have anything more specific I can tell you except that that was the result of our analysis.

Okay, two other questions. You had a 10% plus international customer in the first quarter. Was that customer Point Medical of Korea?

We haven't disclosed who the customer is.

Okay. Scott Jorgensen has sent me an e-mail indicating that that was Point Medical of Korea. I just want to make sure that that still is correct.

Well, then it sounds like we have disclosed it, so yes, it's Point Medical in Korea.

Okay, and then final question is, have you heard anything about [Cineron] Medical? Are they planning on launching a hard-tissue dental laser that might be priced around $45,000 and if so how might you compete against that?

We've heard talk of it. They have not approached us for a licensing arrangement and you hear rumors about a lot of products. You see a lot of products introduced at key shows every year, and you might expect nine of 10 of them don't survive at all and the ones that do might hop along. So let's see what happens, but you know we take all things like this seriously, but at the same time, they have no name recognition in dentistry and we have a hard time imagining how they could introduce a product that would be competitive without a license, given how broad our patent portfolio is.

But they haven't disclosed to us more details than what I'm telling you. So it's unknown.

Okay, thank you very much.

Thank you.

You're welcome.

I would now like to turn the call back over to Mr. Jeff Jones. Please proceed.

I want to thank everybody for joining us this afternoon. And, in summary, would like to wrap up by just reviewing what BioLase is about. We are embracing the largest potential medical laser market that has ever been embraced. When you combine the ophthalmology, the EMT, the dermplastics in their aggregate there's fewer of them than there are just dentists alone and BioLase is by far the market leader for revenue share in the dental market space, with an estimated 70% market share in this market.

We have a disruptive technology that truly is changing dentistry. It is not a me-too technology. Our intellectual property position numbers over 100 patents. We have a lot of room for margin expansion and with the size of the market, we could grow on a sustainable basis for many, many years. And we believe this new alliance with Henry Schein puts us in a very good position to achieve strong and sustainable growth, and with our new potential revenue segments from opportunities like ophthalmology and P&G put us in even a better position. So thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.