BIOLASE Inc (BIOL) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 Biolase Technology earnings conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Mr. [Matt Clausen] from [Allen & Kerin]. Please proceed, sir.

Thanks, Danielle. Good morning, everyone, and thank you for joining us for the Biolase 2006 third quarter results conference call. You should have all received a copy by email this morning of our release announcing the company's results for the third quarter and nine months ended September 30th, 2006. If any of you did not receive a copy of this news release you can call our office after the conference call at 949-474-4300 and we'll be happy to email you a copy. Additionally, a replay of the conference call will be available on the internet. This can be accessed via the company website at www.biolase.com.

Before we [get into it], I've been asked to make the following statement. The words and phrases can be, expects, may affect, may depend, believe, estimates, projects and similar words and phrases are intended to identify 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 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.

As a quick reminder, our earnings release and 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.

With me on the call this morning are Jeffrey Jones, Biolase's president and CEO, and Richard Harrison, its chief financial officer. To begin, Jeff will provide an update on the business's operational performance and outlook. He'll 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 a reminder, we will be making forward-looking statements on this call. With that said, I'd like to turn the call over to CEO Jeff Jones. Good morning, Jeff.

Good morning, everyone, and thank you, Matt. It is a pleasure to host this call today.

In the third quarter we began to produce the kind of results that we targeted, planned and executed towards since the executive and management changes we made in May. Sales, financial and operational metrics were all positive, highlighted by record third quarter revenue and a return to domestic sales growth, thus reversing a decline that began in early 2005.

Now I will touch on some additional highlights of the quarter and I'll come back with more detail later. We successfully kicked off our distribution agreement with Henry Schein, a big milestone for our long-term success and adding to the positive Q3 organic growth that we experienced in the U.S. market. The U.S. market is an ongoing priority for us and we intend to continue our aggressive efforts in this area.

We continue to increase laser system placements in dental schools with several key steps there. Our presence in these institutions builds a pipeline of potential customers with each graduating class. We successfully, promptly and professionally addressed an FDA Warning Letter and in doing so improved certain internal processes. We secured an additional U.S. patent on Laser Pulse and related technology, continuing to broaden what we believe is the most valuable intellectual asset base in laser dentistry. Additionally, subsequent to quarter end, we secured a very important patent in Europe, improving our position there quite significantly.

We have realized significant success from our ongoing reorganization and buildout of our sales and marketing groups and in doing so prepared the company for what we believe will be our return to ongoing growth in sales, both domestically and abroad. This team was under the spotlight this quarter and they performed.

Before adding color to the milestones, let me briefly speak to our third quarter financial results, which Rich will cover in more detail. We concluded the quarter generating just over 17 million in sales, which represents 46% growth over the same period last year. This was a record third quarter revenue performance for Biolase. While international sales remained strong, domestic sales went from declines in prior quarters to positive growth.

In summary, financial metrics showed progress in all fundamental measures as gross margins were up, costs were down, efficiencies improved and our net loss was approximately one-fifth of that experienced in last year's third quarter. Rich has done a tremendous job of balancing the resource needs of the organization to fuel growth while finding ways to improve our efficiency and control costs.

On the operational side, the new management we have put in place has inspired the entire organization and has brought fresh energy and perspectives to all aspects of our business. I am encouraged by both the basic execution exhibited in the quarter as well as the production of new ideas to consider as we move forward. On the sales and marketing front, in addition to realizing fruits from reinventing our group, we also teamed with Henry Schein as exclusive distributor in North America.

Through this alliance, as many of you know, the company's direct sales and service organizations will work with Schein's impressive sales and service teams to market, sell and service all Biolase products and services in the U.S. and Canada. Schein is the number one dental distribution company for North America and Europe and a really wonderful partner for the ongoing growth and success of Biolase.

As part of the agreement, we received an upfront $5 million licensing fee. During the quarter Schein began purchasing products from Biolase and distributing products directly to North American customers. Included in their purchases were Waterlase MD units for certain Schein regional centers to satisfy their customer service requirements in a timely fashion.

While these purchases by certain regional centers during the quarter bolstered our top line, it is important to note that our domestic sales showed growth even without those purchases. We continue to be very enthusiastic about this new relationship and are convinced that we have created a powerful combination that is well positioned to establish Waterlase technology as an integral and fundamental part of the standard dental suite.

Turning to the dental school program, the company recently signed a new agreement with Columbia University College of Dental Medicine for integrating Waterlase dentistry into its course curriculum. Columbia is one of the top dental schools in the nation, with recognized strength in teaching and research. Currently the company is in contract negotiations with several 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 ensure Biolase dental laser systems are an integral part of dental education around the world. We are aggressively pursuing and for that matter responding to requests from the dental schools to have Waterlase in their curriculum of the entire spectrum of dental education for professionals. This includes the alumni organizations.

We believe we have the strongest patent position in the world for lasers in dentistry. We continue to build and fortify this position. Our new European patent expansion adds fundamental strength to our overall position in Europe. Our new U.S. patent related to laser and pulse technologies covers many elements, including diode pumping, key pulse structures, as well as additional soft tissue applications. We continue to aggressively invest in technology to be an engine for innovation and protect our assets and our future.

The regulatory and manufacturing teams faced a challenge during September when the company received an FDA Warning Letter. Clearly, we gave the situation the highest priority and professionally addressed the issues raised by the FDA. Within three weeks we were informed by the FDA that we had adequately addressed their concerns.

Our goal going forward is not only to maintain acceptable practices for the entire organization in regards to regulatory requirements, but it is to exceed those levels and adhere to company-wide policies that set a higher standard.

Finally, on the sales and marketing front, I would like to thank Keith Bateman and his entire team. The new members of the sales organization have assimilated quickly, continue to assimilate, and our veterans have approached their goals with new energy and they have produced under pressure.

As I mentioned last quarter, my mandate to the teams has been to get back to basics, nourishing a culture that does not accept mediocrity, does not reward average performance, but does recognize and reward producers. The idea of attending to the blocking and tackling aspects of capital equipment sales while taking care to weed out poor practices and under-performers has begun to show results. We look for that trend to continue as we exit the year and we look forward to what we can all accomplish in 2007.

I would like now to turn the call over to Rich Harrison, our CFO, who will provide more detail on our financial results. Rich?

Thanks, Jeff, and thanks again to everybody for joining us on the call this morning for our third quarter earnings review. I'll cover the first quarter -- or the third quarter results first and then I'll give some highlights for the year-to-date results.

For the quarter, total revenue ended the three months September 30th, 2006 rose 46% to $17.1 million versus 11.7 million a year ago. It was also up sequentially over the second quarter of this year by 7%. This is a third quarter revenue record for Biolase in what happens to be our seasonally weakest quarter historically.

Domestic revenue was up by 32% over the third quarter of 2005, representing the first year-over-year quarterly increase since the first quarter of 2005. While we had expected the launch of our relationship with Henry Schein to help generate domestic sales growth for Q3, we were very pleased to see that even excluding purchases of Waterlase MD systems by certain Schein regional centers, our domestic sales reflected growth over the third quarter of '05, both in revenue dollars to Biolase and in units.

This ended a trend of five consecutive quarters in which domestic revenue trailed revenue in the same quarter of the previous year. Also very notable is that domestic sales of our flagship Waterlase MD system increased during the quarter by over 20%, even without the aforementioned purchases by certain Schein regional centers.

For international business, our international sales for the third quarter of 2006 were also very strong, increasing by 84% over the year ago quarter. We saw improvement in our gross margin, reaching 50.5% in this year's Q3 versus 45.5% a year ago. This improvement reflects a reduction in our production costs per unit and lower inventory reserve provision, despite an increase in total warranty related expenses and expenses related to increased customer training programs that we have held.

Operating expenses declined quarter-over-quarter for the fourth consecutive time. Q3 operating expenses were about $800,000, or 7% lower, even including approximately $364,000, or $0.02 per diluted share, in stock option compensation expense compared to no charge in Q3 of '05. Bottom line, our net loss narrowed to $1 million, or $0.04 per diluted share, again which includes $0.02 per share from stock option comp, from a net loss of $5.2 million, or $0.23 per diluted share, a year ago. This was our smallest net loss in 2006.

For the year-to-date results I'm not going to review them at the same level of detail as I just gave you for the quarter, but I'll just present some highlights. We had 16% total revenue growth over the same period of 2005. We had a 17% reduction in operating expenses, including a $4.2 million reduction in G&A expense, even including 0.9 million in year-to-date 2006 stock option compensation charge. And we had a 65% reduction in our year-to-date net loss.

Turning now to our balance sheet and our financial condition, Q3 2006 highlights included the receipt of $5 million from Henry Schein in connection with our license and distribution agreement, which we essentially used to pay off our line of credit balance and the late quarter closing of a new, more traditional two-year $10 million line of credit facility with Comerica Bank. Our quarter-end balance sheet shows $15.7 million in combined cash and short-term investments and a zero balance on our line of credit.

Also noteworthy is a $2.5 million year-to-date reduction in inventory resulting from our cost containment efforts and inventory management efforts. And although accounts receivable shows an increase of $1.7 million year-to-date and $2.6 million since June 30th, note that approximately $4.8 million of that September 30th accounts receivable balance was with Henry Schein and that has subsequently been paid.

We continue to be confident that we have the cash resources necessary to run and grow our business and therefore we have no current plans to raise additional capital.

This concludes the financial review and I would like to turn the call back to the operator for our question and answer period. After the Q&A, Jeff will have closing remarks.

Thank you.

[OPERATOR INSTRUCTIONS]

And your first question will come from Dalton Chandler with Needham & Co. Please proceed.

Yes, this is actually Clay Wilson for Dalton. I just had a couple of quick questions. With regard to the Waterlase sales, do you think that in general going forward, do you see the pattern of revenue increases to be choppy based on those or maybe you could give some guidance going forward?

Yes, hi, Clay. I still think the company at this point is not going to begin providing any specific earnings or revenue guidance. But I think with that I'll say that we've indicated on previous conference calls when we've discussed the Schein relationship that there are targets and goals and incentives built into that relationship that surround that 20% area.

So we saw about a little better than 20% growth in our Waterlase MD sales in Q3, even if you exclude the purchases by the regional Schein centers. That certainly is a goal of ours to be hitting that kind of growth, but I'm not going to provide any specific guidance on that.

Okay, thank you. And the other question is the Warning Letter, is that now completely resolved, are there any overhangs on that score?

We're not aware of any overhangs on that. The letter that we received said that we had addressed -- that we'd adequately addressed their concerns, their issues.

Well, that's wonderful. Congratulations on this very wonderful quarter.

Thank you.

Thank you, Clay.

Your next question will come from the line of Alex Arrow with Lazard Capital Markets. Please proceed.

Hi, thanks. Good morning. Could you comment on your ASPs during the quarter?

You know, I think what I'm comfortable saying with regard to ASP is that we saw -- we saw what we expected to see when we had our Schein conference call in early September, that we expected to see a slight degradation in the ASP because of the margin that we give to Schein. So and that was really beginning in September 1st, but average selling price, as we expected, was in the neighborhood of -- for domestic Waterlase sales in the neighborhood of 62 to 63, as we expected.

Okay, thank you. Actually, I do remember you saying exactly that. It was going from 65 down to 62 for your [inaudible]. However, can you comment on what the end user is paying now because I think that would have to go up to 80 according to what you said a quarter ago, with an 85 list from Henry Schein? Are customers now paying 80 for them?

Yes. I think when we had the conference call we indicated that the arrangement with Schein was going to provide for a certain amount of room to give some discounting. So, as you said, the list price is 84.9. We did see some discounting on that. I don't know that we're in a position where we can disclose the average end user price. Certainly that's Schein information. But it varies from deal to deal.

Okay. All right. Now, you mentioned that the -- you stated purchases from Schein had started during the quarter, during the second quarter. Can you be any more specific about exactly when that started for our modeling purposes and -- ?

Well, the -- yes, the Schein agreement was launched on August 8th, but the remainder of August was really considered to be a pre-launch or an implementation period as the organizations got together to work out all the protocols. So effectively, September 1st was the true launch date for all of the invoicing and billing and orders to go through Schein. So I guess you would say that September 1st is when it really got kicked off.

Okay, so you had one quarter -- one month out of this quarter when you were really utilizing Henry Schein. Can you comment on how different your revenue was in the month of September versus July and August?

That's probably a little more drilled down to monthly data that we don't normally do. We were pleased with our results monthly throughout the quarter. We had good business in August and we had good business in September once the Schein relationship started. So what I'm happy to say is that we are seeing an increase in the amount of lead generation coming out of the Schein organization and we think that's one of the real keys to this -- to the success of this relationship.

Okay. Without saying specifically what the month of September was by itself, can you say was the month of September a fair indication of how October, November and December are going to go or do you think September was a particularly good month that should be viewed in isolation?

I think September was a particularly good month from the standpoint of we did indicate in the press release that we had some sales to certain of the Schein regional centers and that was -- and it wasn't to all the centers and in most cases it was one Waterlase MD for them to have there for showing purposes or for meeting their customer delivery requirements. But certainly that was a bolstering of our numbers in September, so...

And how many centers...

...we would not expect to see that same kind of activity in the following months, but we expect our growth to continue to be there on the domestic front.

And, Alex, let me add this. We don't believe that September would be very indicative anyway given it's the first full month with our relationship, so things will evolve and change substantially. So we believe we had a good relationship, the functionality between the teams went well in September, but it was our first month working with Schein.

Okay. Can you say how many of those Schein centers there were that had to be stocked with one unit?

That isn't something that we're releasing, no.

Okay. All right, if I could get in one last question. You mentioned that there was more warranty related expense. Why was that?

If you look in our MDAs for Q1 and Q2, you'll see a similar comment on the warranty related expenses and, for the most part, what we see now is that versus a year ago and especially on a year-to-date basis versus a year ago, when we came into 2005 the vast majority of the laser systems that were under our warranty program or protected by that one-year first warranty were the original Waterlase. They were sometimes called the Waterlase MDA systems. As we've gone through the last 2005 and going into 2006, that balance has shifted now so that the majority of the laser systems that are now under warranty are the Waterlase MD. And the Waterlase MD is a more sophisticated design and we've seen at this point that it does have a higher warranty cost per unit.

So there's more service calls on it, you mean? There's more stuff you have to go and fix?

Not necessarily more calls, but more cost per laser if you look over a 12-month period.

Okay. Okay, so basically that representative of what the warranty costs will be going forward because it's going to be all MDs anyway.

Yes, but you know what, I don't expect the warranty expenses period-to-period to continue to grow at the same rate that they have because it's been amplified by the fact that we've shifted from most of the units that are under the warranty being non-MD to being where almost all of the units under warranty are MD. So in the future, I would expect that the growth in warranty expense to be somewhat commensurate with the growth in sales of MDs.

And we also are going to experience some benefit from our suppliers becoming more skilled at building the components and we've already started to realize that.

We also expect, as we mentioned, Alex, on the Schein conference call in September that we're also going to start to realize some efficiencies in a number of areas of our business and the whole service area is one of them because we can now leverage to a great degree the whole service organization of Schein that is going to be trained or is being trained as we speak on the service requirements for our laser systems.

Okay, great. Thank you.

Thank you.

Your next question comes from the line of Van Brady with Presidio Management. Please proceed.

Very good quarter, gentlemen. I had a couple of questions regarding your sales effort. Did you -- considering the fact you really just said -- you mentioned just really launched in September 1st, do you actually see leads from Schein that resulted in sales to end users or were your sales to Schein all the ones to the service centers?

We did receive some leads from Schein, not to the degree that we expect later. One of the first steps is building the relationships between the Biolase sales professional in the field and the Schein sales professional and we had tremendous progress there. In fact, I think it exceeded my expectation as to how quickly the groups are starting to work together.

Well, now that sounds very understandable. There's a lot of relationship building and getting to know your tech staff and identifying prospects and this type of thing, but the question was not whether you got some leads, but did you actually make sales to end users as a result of leads from the Schein organization and -- ?

Yes, we did.

You did? Okay, that's very good.

And, Van, just for your information, we're seeing more of that occurring as we move into Q4.

Okay.

And we're seeing the lead activity is increasing.

Well, that kind of leads me to the second question and that is one of the -- there's no secret who's models we're talking about, so let me identify him. Dalton's model showed an estimate for September, kind of a dramatic tail-off in September quarter and then the big build in December, specifically he went from 12.7 to 21.5 on the assumption that the Schein arrangement would really begin to show good traction in fourth quarter. Alex had kind of flattish quarters, 17.1 in the third quarter, which was right on target, and then 17.9 in the fourth quarter. And my question was in regard to those two. Is -- was Dalton's assumption that there would be very good uptake in the fourth quarter as a result of Schein a logical one and therefore he showed 12.5? Is it logical that the fourth quarter, coming quarter would be up reasonably significantly from the third quarter?

Van, this is Rich. You know, I can't really speak to exactly what Dalton and what Alex thought processes were as they made their modifications to their projections for Q4. A couple of things that I can tell you is that obviously after Q2, we weren't happy with our domestic performance. We're very happy with our Q3 domestic performance. But we weren't so happy with Q2 and I think as a result of that both Lazard and Needham made some downward estimates in there in their forecasts.

Now that being said, one thing you have to consider and I'm sure they considered as they put together their Q4 projections is that Q4 is typically our strongest quarter seasonally of the year. But beyond those comments and the fact that I'm sure they're both expecting to see gradual growth out of our Schein relationship, I think you'd really have to contact Dalton and Alex to get more color.

Yes, well, it doesn't sound -- intuitively it doesn't sound unreasonable that the fourth quarter being the strongest and also one where you'd benefit from three full months of the growing traction from Schein versus one this last quarter that you should show nice sales growth sequentially. Is that kind of obvious intuitive judgment?

Yes, I'd say between what we just accomplished in Q3 and the improving and increasing results of our relationship with Schein and the fact that Q4 is typically a seasonally strong quarter, we're very optimistic about Q4.

Okay. Thanks, fellows.

I'm showing no more questions in the queue. I'd like to turn the call back over to Mr. Jeffrey Jones for closing remarks.

Thank you. I would also like to thank each of our customers and I can't stress enough how big a role our customers played in the last few months and in the last quarter. Want to thank our investors for their continued support of Biolase and our employees. We really had a rally from our employees being very committed, not just having the statement that customers are number one but showing it with their actions and going out of their way to make our customers feel that they're number one.

And we know how important this is for our short-term goals, but our long-term goals and for our new relationship with Schein, which our employees have embraced wholeheartedly. We really believe that the milestones that we are achieved are resulting in a true turnaround and that we are capitalizing on our brand name technology, our market leading products, our patent position, that we're accelerating our sales growth with the new sales organization at Schein, that we're in a position and we are now developing more consumables to expand our recurring revenue streams, which will be easier for us to do with Schein, and we can expand the reach and value of our technology via strategic partnerships, such as the Procter & Gamble agreement, and expand into consumer products, but also expand into other applications of our technology.

We are starting to penetrate mainstream dentistry and realize our potential as the best -- as the next big revolution in high tech dentistry. We always remind ourselves that every 1% of worldwide penetration represents a $300 million opportunity.

So to close I'd like to say we are capitalizing on the largest market ever embraced by medical lasers. Thank you very much for joining us today.

Ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a great day.