BIOLASE Inc (BIOL) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank for standing by. Welcome to the BioLase Technology, Inc., 2008 First Quarter Results Conference Call. (Operator Instructions.) This conference is being recorded Wednesday, May 7th, 2008. I would now like to turn the conference over to Mr. Matt Clawson. Please go ahead, sir.

Thank you very much Christen. Good afternoon everyone, and thank you for joining us for the BioLase 2008 First Quarter Conference Call. You should have all received a copy by e-mail this afternoon of the release announcing the company's results for the first quarter ended March 31st, 2008. If any of you did not receive a copy of this news release, you can call our office after the call at 949-474-4300 and we will be happy to e-mail you a copy. Slides will be used during this call. To access those slides, please click on the link provided on the investor section of the BioLase website at www.biolase.com. To listen to the event, register and select the "No Audio Slides Only" option.

Before we get under way, I have been asked to make the following statements. The words or phrases can, be, expects, may, affect, may depend, believes, 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 or uncertainties and BioLase cautions you that any forward-looking information provided is not 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 are made. BioLase does not undertake an obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events.

Also, a quick reminder, a replay of this conference call will be available on BioLase's website at www.biolase.com. The company's 2007 fourth quarter and year-end results can also be found in the company's annual report on Form 10-K which was filed on March 17th with the Securities and Exchange Commission.

With me on the call today from BioLase are Jake St. Philip, CEO; and David Mulder, Chief Financial Officer. Also on the call is Fred Capallo, Corporate Controller. Jake and David will each review some prepared remarks and will provide an update on the business's operational performance and outlook and the management team will then conduct Q&A session at the end of the call, and some closing remarks to wrap it up.

With that said, I would like to now turn the call over to Jake St. Philip. Good afternoon Jake.

Thank you, Matt, and good afternoon everyone and thank you for joining us on our first quarter call. This first quarter now marks my first full quarter as CEO of BioLase Technology and I'm very excited about sharing not only our performance, but some of the progress we are making as an organization.

First as Matt said, I'm pleased to have the newest member of our executive team, David Mulder, who joined us last week as CFO joining us here today. We are very fortunate to have attracted an executive of his caliber to our team and it's already clear he is a great fit and most importantly I'm very pleased that he is going to participate on today's call with us too.

So, before we get started, I would just like to ask Dave to make a few comments about his background and why he joined our company. Dave?

Thank you, Jake. It's great to be here today. Let me tell you a little about where I came from. I have worked in a number of industries and been a part of public and private Fortune 500 companies, turnarounds and high growth entrepreneurial businesses that were stepping up to a global presence. The latter had been my favorite.

I was honored to be a part of the team that took Salton over $1 billion in global sales, I have worked and lived in Europe, and have been responsible for global operations. I'm honored to now be a part of the team supporting BioLase as it steps up to its growth potential. From my perspective, that's why I came to BioLase, to be a part of an exciting growth story. I'm also committed to help communicate our progress to you, our investors. Thanks again Jake.

Welcome Dave and I believe all of you will enjoy working with Dave Mulder here in the days and weeks ahead. So to summarize today's call as you can see on the topics, we are going to cover a number of items before we get into the Q&A.

First, we will recap some of the historical highlights of the company, focus on the execution priorities that we have identified as a senior leadership team, discuss why we feel the company is moving and moving in the right direction. Dave will review the revenue and financial highlights for the quarter. I will summarize and then we will open it up for a Q&A.

On our last call, I shared many of these observations on this next slide with you through my initial assessment of the company. Since that time, I believe -- and I believe many of you do too -- see that we can play a major role in helping to influence the standard of care in dentistry. We have a strong foundation to build on here, which is why I was attracted to the company and why I continue to be optimistic about our future.

So, let's recap some of our key company strengths. Our unique technology, the HydroPhotonic technology, combines laser energy and water that delivers a more comfortable patient experience. It also provides more applications for the dentists to grow their practice, which is a very important aspect of our technology.

We have a formidable patent portfolio. We are the global leader in the large growing dental laser market. In fact we have over 9500 laser systems placed globally. The market is still in its early stages of development, so as we increase adoption, we have a significant growth opportunity here. And one of the items that I am very pleased with is the fact that we have an engaged, energized team that really want to create the new BioLase for our customers in the marketplace.

On the next slide, if you look at our revenue assessment over the last nine years, there is really three key observations. First, it's a very exciting technology growth story in the early adoption curve. Second, stable revenues, but relatively flat growth for the last three years. And third, looking at the last quarter, significant growth opportunities do exist. In fact as you look at the trailing 12 months, we show a 6% growth over the full year 2007 total sales and that is the highest revenues we've had now in the history of our company, so that's positive.

Although the early stage growth has slowed in the last three years, we believe that the stable sales results demonstrate there is a viable market for this technology and our focus and my focus is on execution, improving our segmentation, targeting, managing the customer buying process to accelerate adoption in the near term. We are encouraged by the Q1 results coming off of a strong Q4 and that 26.4% growth is a very positive start for the year and reflects, I believe, some of the positive things that we are doing to improve our performance already in the company.

Now, we recognize our real goal here is to deliver sustainable results quarter-to-quarter. That being said, we also recognize that there is still much work to do and we will experience some variability as we look to continue to rebuild our foundation throughout 2008. Overall, we are very pleased with the Q1 performance and as importantly, I am very pleased with the progress we are making in resetting our ground work for future growth.

Now, on the next page, I would like to share with you some of our execution priorities that we have identified. I've spent the past few months really reshaping the team, getting to know our customers, digging into our go-to-market strategies and tactics. By improving our execution with the proper plan and now the right people returning to our historic growth patterns, I believe, is a realistic goal.

And let me touch on some of those priorities for you. First and foremost is focus on the customer. It's very important to ensure we are building an excellent customer experience for all of our laser users. I look ahead to future shipments -- for our future strategies and I want to ensure we have a healthy growing base to grow and sell future consumables, service, and new products down the line.

Secondly, we will be revamping our market message and analyzing our customer segmentation to place greater focus on providing targeting to our sales team that can provide a clear value proposition and give our sales team better efficiencies and better opportunities to close the business more effectively.

We will be redefining our sales process not only with Henry Schein but all of our global partners and will be focusing on our new product development process to accelerate time-to-market. Frankly, we have only launched one major new platform in the last three years. We must be able to do that better and faster than we have in the past and I firmly believe that we can do that.

And finally, we must make the appropriate necessary investments in systems and infrastructure to support future growth. We are planning for success and that means to build out the organization appropriately that will manage with excellence at the next level of adoption.

So, what are we doing? What progress have we made so far? BioLase is on the move, I think we are making a number of significant steps. We have significantly strengthened our relationship with Henry Schein both strategically and tactically between our teams. The tactical improvements we have made is we renewed our agreement back in February, and our focus since that has been at the tactical level from our territories to the Schein territory for the local centers to make sure we've got the right process and connections to drive our business.

I have personally presented the new BioLase story to the senior leadership team of Henry Schein to their field zone managers and to nine different sales centers. So, we are taking an active role in getting the message out to improve our performance together as a team.

This month we launched our Endolase Root Canal Therapy System, which also as a positive attracted natural exposure on the FOX Business Channel, as well as we just recently had an article in USA Today. This launch is an important procedure for our Waterlase system for general practitioners and others. There are 15 million root canals done in the United States alone, and almost 70% of those procedures have done by general practitioners. This is an important application to add to our laser solutions with the Waterlase MD.

We have also begun to redeploy spending, so as we have selectively been able to change our spending with selected key positions in our organization to strengthen us -- areas like customer service, marketing, supply chain, sales management, and engineering. We have also initiated marketing research to focus on our messaging and segmentation. We have initiated new process design for our sales process and as well as we have completed cross-functional training to redeploy or really to redefine our new product development process.

Additionally, we are taking an active role in surveying our end-user customers. We want to understand what we can do better as a company to serve our end-users better. We are also going to be initiating a survey very shortly in the next -- in the days and weeks ahead -- to the Henry Schein sales representative and ask them the same questions. I really want to have a culture here in our company that demonstrates that we want to continuously improve and learn and grow from the feedback that we receive.

Internally, we have aligned our incentives, so that not only our financial, but our key initiatives to strengthen our foundation are all lined up and backed up by our incentive compensation plan and everyone on the company is aligned on the same goals.

And lastly, and as importantly, I am very happy to say now on this call that we have a strong new management team in place. We have an excellent officer team, it's an experienced entrepreneurial team, now adding Dave Mulder to the staff, I feel that we've got the right people in place to take our company to the next level.

So, with that, that's the overview in terms of what we've done to-date. I would like to hand it over to Dave, and he will start covering the details of the financial results. Dave?

Thanks Jake. Before I get to the numbers, I want to let you know that I look forward to meeting and working with you all in the coming weeks and months as we progress and as I get my arms around the work at hand.

On revenue highlights, in the first quarter the company posted solid progress and a strong advance from the first quarter of last year. Total first quarter 2008 sales increased $4 million or 26.4% to $19 million from $15.1 million in the same period last year. First quarter 2008 domestic sales, where most of the first quarter execution focus was applied, increased $5.3 million or 61.2% to $14 million from $8.7 million last year. First quarter international sales decreased $1.3 million or 21% to $5 million from $6.4 million the prior year.

Domestic revenue increases were the key to the first quarter results. Approximately half of the increase was driven by completing the demo unit sales to Henry Schein. As you know, this demo program facilitates sales efficiency and is a much more cost effective way to provide local sales support. This also represents a strong commitment by Henry Schein to strengthen our relationship and performance.

Internationally, nearly all of the decline was in Canada, which had a particularly strong year in 2007, but just got off to a slow start in 2008. The rest of the global sales were relatively flat.

While the company remains committed to its international expansion, the new management team has placed its priority on domestic sales during the last quarter. In the coming quarter, the international operations will be reviewed and discussed in more detail.

As a percentage of sales, first quarter 2008 international sales were 26% versus 42% in the first quarter of 2007 for the reasons we just discussed.

Now, I would like to provide a little color on how product sales broke out during the quarter. We have generally given you the percentage breakouts in the past and have decided to layout the numbers cleanly in our presentation.

In breaking out our first quarter 2008 revenue increase of 26.4% or $4 million, the Waterlase family sales increased 4.5% or $500,000, the Diolase family sales increased over 300% or $2.8 million, primarily with the growth of ezlase which was introduced to the market at the end of the first quarter in the prior year. The total laser growth was 27.6% or $3.3 million. Consumables, services and other increased 29.8% or $600,000 and license and royalty fees had a slight increase of 4.6%. Our mix of sales for the first quarter of 2008 and 2007 are in the slide presentation.

On operating highlights, gross margin dollars increased by $1.4 million, but decreased as a percent of sales from 54% to 50%. The $1.4 million increase in dollars was driven by a 2.1 million increase in volumes, which was offset by a $360,000 in discounts related to the units -- the demonstration units sold to Henry Schein -- and a $295,000 increase in period symposium expenses.

Operating expenses were kept in check, decreasing significantly as a percentage of revenues. We are in the process of redeploying our expense priorities to spend more effectively and to spend in areas that build the foundation for future growth. The result was an improvement on the operating line and we also benefited during the period from a $616,000 favorable foreign exchange gain during the period that brought us to break-even.

Now I would like to review a few balance sheet highlights. As you can see, we ended the first quarter with $685,000 less cash than the yearend, but we also paid down $1,580,000 of our credit facility during the period.

I would like to discuss the larger portions of our net working capital components in a quick summary. Receivables were down $1 million on timing of payments. Inventory was relatively flat compared to the improved levels achieved in December and combined accounts payable and accrued liabilities had a nominal decrease just under $1 million on a quarter with lower overall operating expenses than the immediately preceding quarter.

Operating expenses were $12.4 million in Q4 and were $10.1 million in Q1. So in essence, the payables and accrued liabilities are lower $1 million, because our expenses in the prior -- were $2 million lower than the prior period.

Now I would like to turn the call back over to Jake to summarize and then open up the call for questions. Jake?

Thanks, Dave. So, in summary, there is probably three key thoughts that I would like to leave with you in terms of this overview. #1, we continue to be optimistic because of our historic strength that we have here in the company. There is a significant growth opportunity as we improve our market adoption here in terms of the market size we have.

BioLase is on the move. We have disciplined strategies for growth. We are focused on the right basics -- customers, sales process, internal systems and strengthening our fundamental execution across the company. We are going to focus on accelerating product development as the key core competency here. And then ultimately something that we'll talk more about in future quarters, we are developing a compelling vision for the future to broaden our market appeal, grow new revenue streams and again to create a strong foundation of an attitude of creating customers for life so that as we bring new things down the pipeline, we will have an able, ready, willing base to move ahead.

So, with that, we are excited about how we finished up the quarter and are open up now for questions. So, operator, if you want to open it up.

Thank you. Ladies and gentlemen, at this time I'll begin the question-and-answer session. [OPERATOR INSTRUCTIONS].

There aren't a lot of questions, that means we were clear as a bell.

[OPERATOR INSTRUCTIONS]. And our first question comes from [John Peno] from [Peno Associates]. Please pose your question.

Yeah. I feel you boys are very very enthusiastic, but when you first opened up, my family bought 500,000 shares of your company. Now we still own 300,000 shares of it. But, let me ask you, all the dentists I talk to around here are very dissatisfied with your laser -- not your laser, but lasers in general -- and to extract money from these people is very very hard. You must have an overseas operation that fix up the slack from this. Not only that, but have you got any products that your laser can use that can get this thing rolling, because the way you are going you are trying to take a long time to overcome what happened in the past with BioLase. BioLase does not have a good past history, you must know that.

Right.

Can anybody answer this over?

Sure. John, this is Jake St. Philip. That's probably a bit of a multidimensional question, so let me just give you what I believe. #1, I believe there is a significant market opportunity here and what may have happened or not happened in the past is there are things that we need to understand and learn from and grow from. We are focused on the basics. We are trying to rebuild our foundation here from the ground up and that's why I said when -- my previous slide -- was we want to focus on the customer. That should be the number one place that we focus, not only for customer satisfaction or how we support our customers, how we train them, how we keep them happy, but then have our customers involved in our new product development process and give us great ideas on what we can do to continue grow and expand our company.

We are strengthening our organization for post-sale support, our service team, our work with Henry Schein, I feel very good that we are putting the basics in place. Fundamentally, what we have to do as a company going forward is to have a much better connection with dental community over the benefits of this technology to the patient and to the dentist and the practitioner and as we improve that messaging, that value proposition, I believe our success will continue to grow. I'm very optimistic about what we can do in this marketplace and also recognize it's tough market and it definitely is. But I think there are key things here with sound business judgment, management skills, and good marketing will allow us to really get this company growing.

Thank you. Our next question comes from Carlton [Savoy] from Princeton Capital Management. Please pose your question.

Good afternoon gentlemen. I just had a question -- two actually. The first one is, Jake you mentioned the segmentation that you want to try and do more of, can you explain that a little bit more? And the second question is about the Procter & Gamble arrangement, is that still alive and what are the details surrounding that? Thanks.

Sure Carlton. Let me take P&G first. On our call last quarter we mentioned that there are active projects at P&G, but it's their proprietary R&D efforts that are really driving that process. So, making any comments about the progress that they are making or not is really not in our spot. So, until they give us the word that they've got some material news to share, then we will -- we pretty much will remain silent on that.

In terms of segmentation work, our immediate focus is to really understand customer buying behaviors in the marketplace and really help our sales force improve their targeting. Frankly right now our sales force is trying to be all things to all people, and I think by providing better market information, better information at profiling their dentists by using information from Henry Schein, by using practice data, by doing market research, we can really help our sales force target more effectively so that when they are out generating leads, they will be more effective in their close ratio. So I believe that's something that we can do in the short-term and that's where we've already started that work.

Okay. So, you are not talking about coming up with a whole new product that's going to be sold on a different price level to a different type of dentist, we are not talking about values, I am talking about something more near term?

Well, that's clearly the near term goal. In terms of future product strategy, we are not prepared on this call to really talk about what our plans are going to be there. We will do that in future calls and we clearly have some ideas there.

Okay. And last -- I just going to sneak one more and that is -- there are thought about what you are going to do overseas in Europe at this point? It sounds like you are very enthusiastic about the domestic markets. You have strategies to try and fix things up before the end of the year?

Yeah, in relation to -- in relation to international, Dave mentioned it in his comments, we've had a very strong focus on really improving some of the disciplined management processes and sales process here in the North America market. We've started that process in Q1 in international, but we will be putting a much more heavier focus on really implementing some of the strategy we put in place in North America globally. We do have some ideas on areas of strengthening our distributor partners in certain select markets where we probably need to enhance our performance. We have some -- we've just put a new dealer in place in North Asia and Taiwan who I am very pleased what they are going to bring to our market up there. But I think in future quarters we will be able to share a little bit more detail about the steps that we've taken to strengthen our global business, because it is a tremendous opportunity and we have a good foundation there. We just need to do some work there.

All right. Thank you.

Thank you. Our next question comes from Paul Bornstein with Black Diamond. Please pose your question.

Yes. I just have a question also on the sales. When you said that you are focused on the US sales, given that you are starting off the low base and now you are going to focus on the international business. Does that mean the US sales has to still be really focused in on, is that starting to move forward with each quarter with Henry Schein or is there -- you really still not have that in motion where you can get sustainable sales growth out of the US? And then kind of focus in on the international business, because obviously you are very enthusiastic about all segments, which I guess the new management team always is when they come on board, and the proof is just in the numbers we should be making enough to be cash flow positive. But given the history, you need sustainable growth on revenue and cash flow to make the company work something going forward? So, I am just kind of -- I am still not clear on the process that you are going through right now since we are in the second quarter now of the year?

Right, right. Well, Paul in terms of the US business, the Henry Schein relationship, terrific progress since we renewed our agreement in February; tactical planning, information sharing, cooperation, coordination like it's never been at any time that we've had the agreement in place, and I can say that for all the people that are involved. I feel good about it. Do I think it's a done deal? No. We feel that we will continue to focus on that. We will continue to have work on it as we build this model. Right now in the short-term, we will be -- we are -- we have engaged the consultant to come in and help us redesign our sales process, so that we can manage the funnel and the pipeline much more effectively than we've done at the past also to know when and how do we spend more effectively to really help our sales people close sales. So we still have work to do in the US market.

The focus on international will not distract us from sticking to the knitting and making sure the broadest franchise here is growing and driving. Our US business grew very nicely in Q1, but our focus in international will not take us away from making sure that we keep the domestic business going in the right direction.

Okay. So, you have sustainable growth in your mind with the US business quarter-over-quarter not year-over-year?

Well, I believe -- I believe we are making good improvements. I think we are getting the right things in place. This business has had variability. The folks that have followed the company understand that as well as anyone. I think we will probably still experience some variability as we go forward, because it's not only the Henry Schein relationship, but it's also revamping our market messaging, the ROI and really freshening up our message and making it stronger to our enduser. So, there may still be some variability as we look ahead, but the right steps are being taken everyday.

Okay. And since I have you, just one other question in terms of the incentive pay. Obviously you are getting a pretty good base salary which shareholders get no return unless the stock goes up from where they bought it. What kind of incentives do you get in terms of performance, is it cash flow based, sales growth that you are coming off a low base? What are you guys looking at in terms of and its domestic US, domestic international, what kind of incentives do you have, because you get paid anyway, obviously your upside should be in the sales growth for the company and the profitability growth?

Right, right. Yeah, our incentive plans are focused on the operational improvements, achieving our financial goals for the year, and there we have good stretch targets in place. So it's all -- it is cash based, but it is focused on achieving our goals.

Okay. You got a lot of hurdles to go over given the history, so if you could make it work, you will shine if it takes a long time, you are not going to shine at all. So, you get an opportunity to make significant progress given the history of the company?

Right.

And doesn't even have to be that much.

Well, and I can share with you that the optimism you hear from me is genuine, and that the senior leadership team feels the same way that we have an opportunity here to do something special, but we got to prove it, right? We got to demonstrate that we can...

Yeah, the talks easy.

Yep, yeah.

If I look at the numbers.

Absolutely.

So that's the only way I can judge you on and obviously the stock prices as your public company is the other way over a 12 months period not a month or two?

No.

You've got 12 months to show whether you can make progress or not? So, okay, thank you.

Okay.

Our next question comes from Joel Hausman from Willow Creek Capital. Please pose your question.

Hi, Jake. Congratulations on your first quarter in the hot seat. Anyway, Jake are you in a position -- I mean I was looking at gross margins and they were down from year ago, but up sequentially from Q4. Is there a range that we can sort of look at depending on discounting or demonstration equipment in each quarter? How should we think about that for the rest of the year?

I'll let Dave talk a little bit about the margins.

Yeah. Our margins as we are looking at them historically and going forward, mid 50% range seems to be a pretty good target number for our gross margins, excluding any one period expenses that might be happening.

Okay.

But, that seems to be pretty much where we are.

Okay. And Jake I noticed -- thank you Dave -- and Jake I noticed you also mentioned earlier you're working with a consultant on revamping the sales message and sales force, et cetera. When do you think you will be in a position to sort of discuss the investments necessary to make this a sustainable company that you want to make it?

Well, I'd hope that in the quarters ahead, we can start sharing more and more information about what we are doing, Joel, in terms of initiating the sales process and what's the new messaging and what that structure looks like. We are just getting at up and running. It's probably going to take a good -- it's probably going to take a good 90 days or so for us to get fully through that process and get it completed.

Okay. And one last question, I know you are in the early stages of the Schein, can you give us a sense of how many Schein reps are -- have heard the early message in our productive and out of the potential number of Schein reps that might get there someday?

Well, that's a great question. That's one of the reasons I mentioned that we are out surveying the Schein reps. I want to build an active living breathing database of the support and we've really focused in the last 45 days at the local centers with the local management teams, so we are doing tracking along with the Schein leadership team in Wisconsin, how we are doing at the local centers, what performance looks like and really getting to the next level of information that was not in place before. Ultimately they have -- Schein has over 1100 sales reps. We don't need 1100 sales reps selling a laser everyday. If we get 200 or 300 that are really knowledgeable and excellent, they can probably drive a great top line working with this and that's why we are in the process of working on the sales process, improving the definition of roles and responsibilities, what are we doing, how are we going to do it, how are we going to track results and really put another layer and level of professional management on the relationship as opposed to some of the things that may have happened in the past. So, we are putting the basics in place, Joel, and I don't have a number that I can give you right now, but it's clearly -- we don't need everybody being perfect and don't expect everybody to be perfect.

Thank you very much.

Okay.

Thank you. At this time, I would like to turn the conference back over to management for any closing remarks.

Thank you, operator. I would just like to summarize again and thank all of you for joining us today and look forward to speaking you in the weeks and months ahead. Take care.

Ladies and gentlemen, this concludes the BioLase Technology Inc. 2008 first quarter results conference call. We thank you for your participation. You may now disconnect.