BIOLASE Inc (BIOL) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank for standing by. Welcome to the BioLase Technology, Inc., 2008 Second Quarter Results Conference Call. (OPERATOR INSTRUCTIONS)

This conference is being recorded today, Thursday, August 7, 2008. I would now like to turn the conference over to Mr. Rene Caron of Allen & Caron.. Please go ahead, sir.

Thank you, Mary, and good afternoon everyone, and thank you for joining us for the BioLase 2008 Second Quarter and Six-month Results Conference Call.

You should have all received a copy by e-mail this afternoon of the release announcing the Company's results for its second quarter and six months ended June 30, 2008. 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. Slides will be used during this call. To access the 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 underway, I've 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 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 are 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.

Also, a quick reminder, a replay of this conference call will be available on BioLase's website at www.biolase.com. The Company's 2008 second quarter and six-month results can be found in the Company's quarterly report on Form 10-Q, which we plan to file on August 8th 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. Jake and Dave will each review some prepared remarks and will provide an update on the business operational performance and outlook and the management team will then conduct a question and answer session. At the end of the call, we will close the call with a few closing remarks.

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

Thank you, Rene, and good afternoon, everyone. To summarize today's call, we'll be covering some of the following agenda items before we open it up to Q&A.

Some of our key strategic initiatives, some of our new market positioning now that we've just announced a major new product launch. Dave Mulder will go through financials, I'll summarize and then we'll open up for Q&A.

Our focus in the last six months has been to identify and address a number of key fundamental processes to improve our execution and ultimately our focus is to build credibility so that as we deliver consistent, sustainable performance. One of the most questions we're receive are, "What are the key issues that you're focused on to get your company moving in the right direction?"

Some of those items that we've shared with the investor community have been our inefficient sales process and have been, on past calls we've talked about how we've operated, in many cases, like a direct company that happened to have a distribution partner, a one-size-fits-all marketing approach, focus on customer satisfaction, the fact that we've only had two major product introductions in the last seven years. How do we the improve the growth the recurring revenue stream and then, ultimately, how do we improve our day-to-day performance?

So these are the issues that reflect the top priorities and I'd like to share some of the progress that we're making to date and the things that we're doing to make these improvements as we going forward.

One of our top priorities has been to improve our tactical sales process and how we work with our distribution partners, most notably Henry Schein here in the United States. In the second quarter, we developed our new process and in early July we completed training for the BioLase salesforce.

This training is a disciplined, consultative approach to selling. This process is built on using best practices to improve teamwork and coordination with our partners. Those best practices were based on input that we received from our own top performers, from Henry Schein, from our international team and key marketing staff.

So what are the improvements we hope to see? The improvements we hope and expect to see are better pipeline management, better organic lead generation and improvement in the overall process.

Our selling and marketing expenses for the first half of 2008 dropped to 28% of sales from 40% of sales last year, due to better management controls. Our goal is to continue to focus on that spending over time, as our competency and performance improve with a more disciplined approach to selling.

Its also important to note significant improvements are taking hold with the Henry Schein sales team, as a result of our efforts to date. Those improvement were even noted on the Henry Schein earnings call this week when CEO Stan Bergman cited the improvements in management alignment and how that was beginning to cascade to the local levels in the field. This foundational sales process also gives us the added benefit of being able to provide future training to new hires as they come onboard with BioLase, to give us a sustainable process going forward.

In July we announced the launch of our new Waterlase C100 at the Henry Schein National Sales Meeting and then, subsequently, to our international sales team and distributors. This market segmentation is an important strategy to broaden our technology offering to appeal to a broader market. I believe one of the keys to accelerating Waterlase adoption is to do a more effective job of delivering the right solutions for the right dental practices.

Our research indicates that there's a market opportunity to segment the market at a lower price point, for example, to emerging practices and to important specialties such as pediatrics. This new Waterlase C100, we believe, will attract more dentists who are interested in laser dentistry but have delayed purchase decisions due to price. Essentially, we call those folks the fence sitters. This technology provides excellent performance for hard and soft tissue basic restorative procedures.

Our research also indicates that current MD owners are very well established in their practice, essentially all over 10 years in practice. The Waterlase C100 at an estimated monthly payment price of $1,000 per month can attract dentists who are interested in really building their practices going forward.

The status of our launch activities to date? We're currently promoting the C100 with our Henry Schein partner as well as our other distribution partners around the world and we have a startup number of demonstration units in the field and are targeting shipments to our distributors and end-users prior to the end of Q3.

As we look at the segmentation slide, there's a couple of things to note here, because the launch of the Waterlase C100 will do two things for us. First, it's going to allow anyone interested in laser dentistry to have an opportunity to pick the technology to match their practice.

This is really a very important new element to our approach. Until now, if a dentist was interest in laser dentistry from BioLase, the choice would have been the highly featured MD or ezLase for soft tissue applications. This new offering will now allow more dentists the opportunity to have a new entry point to become a Waterlase dentists.

Secondly, it will allow our sales team to operate in a consultative manner, with a classic high end/low end marketing approach. In fact, I believe that a dentist who begins to investigate laser technology because of this new product, may ultimately choose the MD because it could possibly become a better fit for them as they look at their practice and analyze where they want to go into the future.

I also believe there will be minimal cannibalization of MD sales and any small loss of MD sales, we believe, will be offset by the number of new dentists that can enter Waterlase dentistry. For the goal of this new offering is to bring in the fence sitters, dentists who have been interested in laser dentistry but have hesitated due to pricing and this should essentially broaden our market opportunity.

We also believe that, under challenging economic conditions and during a traditionally slower Q3, this is a perfect time to introduce this technology, as well as to get our promotional effort kicked off early July at the Schein National Sales Meeting, which was an outstanding success.

Some improvements in customer satisfaction? We completed our first survey of our installed base of customers in June. It's very important to reach out to existing owners to ensure that we understand the level of satisfaction and build a baseline for future improvements.

So the news here is that we have some work to do. Almost a third of our installed customers expressed some questions or concerns that we will address. Now, some of those concerns are very routine follow-ups, questions around coverage, service, pricing, product, while other concerns were addressed around training and support. My goal is to demonstrate to our Waterlase user family is that we support our products in a way that we will continue to develop customers for life.

So what are we doing and how are we addressing some of the challenges? We've taken an aggressive posture to really focus on customer satisfaction. We've begun to offer refresher-training programs. We'll obviously provide onsite support from Henry Schein or the BioLase sales rep, as appropriate. We've launched new service programs.

Our senior leaders in the organization are actively contacting customers who express concerns to ensure that we're meeting their needs. And we've also significantly improved our service coordination with new training with the Henry Schein service organization.

I'm pleased with the data, in terms of now we have a baseline. We know where to focus our efforts and priorities and this is going to be an ongoing effort to drive that culture of creating customers for life.

In our international markets, as we previously discussed, for most of the first half of the year our primary focus has been on the North American market and improving our internal functions and processes. We have recently expanded that focus and are actively working on improvements in international. In the first six months, international represented 25% of sales. However, our total international sales were down 33% over prior year. Clearly this performance is not acceptable.

As importantly to our topline ,is our bottom line in our international direct subsidiaries. Direct subsidiary sales for the first half also were below expectation and additionally, we lost $1.0 million in operating profit. While the management efforts have significantly reduced the losses this year versus last year, we're actively engaged in additional analysis to determine how we can improve both the topline and bottom line performance in those marketplaces.

As we enter the second half -- I'm sorry, one other note I'd like to make here is our international distributors. Some of the challenges that we face throughout the world are some of our distributors have had some very challenging compares, as we look year-over-year, as well as some have reported some economic conditions that have caused some challenges for them in the first half of 2008.

So, as we enter the second half, we're focused on how we can quickly apply our best practices to our international subsidiaries and distribution partners to improve our sales results in the second half and in the future. We've recently conducted business review meetings in Germany, Spain and with our European, Middle East and African distributors. We've also started working on growth plans in North Asia.

The health and growth of our international business is a vital part of our future plans. We plan to communicate strategies before year-end to get our performance moving in the right direction here.

I'm encouraged by the fact that during a significant transition time in our Company, we've been able to deliver growth year-over-year. The trailing 12-month total revenues are beginning to show annualized growth with the continued focus on costs, improved execution, and we're pleased with the progress that we're making. There's still a significant amount of work ahead and probably some lumpiness in our quarterly performance as we work to continue to build a strong foundation in the future, but again, we're very pleased with the progress that we're making to date.

So with that start, I'd like to be able to pass this off to our CFO, Dave Mulder, to begin getting into the number details.

Thank you, Jake. In the second quarter and first six months of this year, we are pleased with progress we've made and being profitable for two quarters in a row. Total second quarter of 2008 sales increased $486,000 or 2.7%, to $18.7 million from $18.2 million in the same period last year.

To provide a little color on how product sales broke out during the quarter, the Waterlase family sales decreased 6.6% or $805,000 from net decreases in our international sales, primarily. The DioLase family sales increased over 41.7% or $1.2 million, primarily with the growth of ezLase, which was introduced to the market at the end of the first quarter in the prior year.

Total laser growth was 2.9% or $443,000. Consumables, services and other increased 10.4% or $204,000, with consumable products revenue increasing $136,000 or 14%, which has been an ongoing focus of the Company, and services and other revenues increased $68,000 or 7.0%.

License and royalty fees decreased 15% or $160,000 and based on current estimates of royalty streams and accounting treatments, seem to be level at about the $900,000-a-quarter level. Our mix of sales for the second quarter of 2008 and 2007 are in the slide presentation.

For the first half of this year, total sales increased $4.5 million or 13.4% to $37.7 million from $33.2 million in the same period last year. In breaking our revenues, the Waterlase family decreased 1.3% or $303,000. The DioLase family increased over 105% or $4.0 million, primarily with the growth of ezLase, and total laser growth was 13.8% or $3.7 million.

Consumables, services and other revenues increased 20.5% to or $845,000 with a $341,000 or 18.6% increase in consumables and an increase of service revenues of $504,000 or 22%. License and royalty fees decreased about $100,000 year to date. Our mix of sales for the first half of 2008 and 2007 are in the slide presentation.

Now I'd like to provide a breakout of sales by region. 2008 second quarter and first half domestic sales, where most of the execution focus was applied during the first half of this year, increased 34% and 46.1% to $14.5 million and $28.5 million, respectively, from $10.8 million and $19.5 million for the prior year periods.

International sales for this year's second quarter and first six months decreased 43% and 32.9% to $4.2 million and $19.2 million, respectively, from $7.4 million and $13.7 million in the respective prior year periods. Our improving relationship with Henry Schein and execution, as discussed by Jake, was a major contributor to our sales success domestically and Jake already discussed our international declines, the reasons and some of the actions we're taking to improve those results going forward.

As a percent of sales, 2008's second quarter and six-month international sales were 23% and 25%, respectively, versus 41% for both the second quarter and first six months of 2007.

On operating highlights, gross margin dollars increased by $97,000, but decreased as a percent of sales from 55% to 54%, due primarily to a greater mix of DioLase family sales, which have slightly lower margins. Operating expenses decreased $1.0 million from prior year spending and also decreased as a percentage of revenue from 60% to 52%.

To highlight a few points, we reduced our historically high sales and marketing expense by $1.9 million, or 27%. The largest decreases were in convention and seminars expenses, which decreased by almost $0.75 million and travel and entertainment expenses, which decreased by about $0.50 million. A broad variety of other expenses in the category were also decreased.

Our general and administrative and engineering and development expenses showed a combined increase of $670,000, driven primarily by our efforts to strengthen the infrastructure of the Company and drive new product introductions. The result was an operating profit of $386,000. We also benefited from a $225,000 foreign exchange gain.

We are pleased to announce a second consecutive quarter of profitability with a net profit for the quarter of $622,000 or $0.03 per share versus a prior year loss of $901,000 or $0.04 per share.

For the six months ending June 30, 2008 gross margin dollars increased by $1.6 million, but decreased as a percentage of sales by 55 to 52%, due largely to the sales of demonstration units and other factors discussed in the first quarter.

Operating expenses decreased as a percent of revenues from 63% to 53%, dropping $1.0 million due to the net cost reductions in the second quarter. The result, again, was improvement on the operating line. The first half benefited from an $841,000 favorable foreign exchange gain, which resulted in a net profit for the six months of 2008 of $648,000 or $0.03 per share versus a loss of $2.6 million or $0.11 per share the prior year.

As a result of our second quarter and first half performance, we ended the second quarter with $600,000 more cash than at the end of the first quarter. And notably, that is after paying off all of our outstanding debt, which totaled $3.6 million as of December 31, 2007, and $2.0 million as of March 31, 2008.

I'd like to discuss the larger portions of our net working capital components in a quick summary. Receivables were down about $6.0 million from year-end. The largest reason for the reduction was our year to date decrease in international sales of $4.5 million, which generally carry much longer terms and the timing of those international sales that we did have.

Inventory rose $1.7 million, due largely to the international sales softness. Combined accounts payable and accrued liabilities were reduced by over $2.0 million from year-end and over $1.0 million from the prior quarter balances. This is due to a second consecutive quarter of reducing our overall operating expenses, which were down $1.0 million for the first quarter.

I'd now like to turn the call back over to Jake to summarize and then open up the call for questions. Jake?

Thanks, Dave. Just a couple of summary points before we open up for the Q&A. I'd just like to step back for a minute and share some midyear thoughts in terms of the progress that we're making. We're showing some growth and we're making good, sound fundamental progress on a lot of things around the Company to make those improvements.

As you look at some of the things that we've accomplished and focused on today, we've worked very hard to continue to strengthen our relationship with Henry Schein. We've launched our Endolase root canal therapy system. We've actually had some consumer interest on Fox Business Channel, as well as USA Today.

We've strengthened the organization. I came onboard in January. Dave came onboard three months ago. But also, as importantly, around the Company, engineering, customer service, supply chain, other areas, and we've also increased our focus on the quality system as well as bringing in and starting to introduce lean manufacturing concepts into the Company. We've initiated marketing research in a number of new areas and focused on our new product development process, as that's going to be one of our critical success factors going forward.

I'm also very proud of the fact that this management team, in the first half of the year, identified the importance of a segmentation strategy and made the determination to launch a new product. And we hit all of our internal targets with the launch of the Waterlase C100, to hit the marketplace in early July. So we're very pleased about that, to open up our market and give ourselves broader market appeal.

So, from a strategic standpoint and a bit of a broader perspective, I continue to believe that we have a compelling opportunity as we improve adoption of laser dentistry. We recognize that there's still heavy lifting ahead and may experience some ups and down quarters as we focus on these fundamentals to improve our Company.

I believe we shared many of the details that demonstrate that BioLase is on the move and strengthening its foundation and I also believe we're developing a compelling vision about Waterlase dentistry. I'd like to see a BioLase laser in every office to capture market share, create customers for life, build new revenue streams that strengthen our business and as importantly, bring value to our customers as we go forward.

So that's my summary and with that, operator, we'll open it up for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) And our first question comes from the line of Dalton Chandler with Needham & Co. Please go ahead.

Good afternoon.

Good afternoon.

First a housekeeping question here. Did you have any inventory or stocking sales to Schein in the quarter?

Dalton, we typically don't comment on the difference between stocking and end-user sales and those kinds of things in terms of what's in our pipeline, in terms of those details.

However, we did not have any significant demo sales, I don't think, at all this quarter.

Oh.

Okay. All right, great. And then just looking at the results of -- you talked about the tough environment for the Waterlase sales, but the diode laser has continued to grow at a very fast clip. Is that, you think, just due to the difference in price points or is there something more fundamental going on there?

I think there could be some attractiveness to the price point, Dalton, where someone may have interest in getting into laser dentistry. And maybe they're hesitant right now to make the decision to move to an MD and have seen the attractiveness of starting with the ezLase at the lower end price point. So I think there may be something to that in terms of that interest.

Okay. How is the ezLase domestic/international mix? Is it similar to the Waterlase or is it more of a domestic product?

At this point, although we don't get into that level of detail around the globe and in the mix, I would say that the ezLase is definitely stronger in our North American market than in our international markets to date. In fact, that's one of the areas that we're focusing right now, is to improve the product training and the work that we're doing with our direct subsidiaries and our distributors around the world is to really put some emphasis on the ezLase product line.

Okay. And you did mention also part of the reason sales and marketing is down is a reduction in the number of seminars. Which I assume that's the World Clinical Laser Institute you're referring to, which, I think, in the past had been cited as a good source of sales leads. Have you concluded that there's just a more efficient way to do that or why the change in focus there?

Well, Dalton, really the reduction -- I mentioned that the reduction in sales and marketing expense, we came down to the 28% of sales versus 40% last year. The number one driver of that is not just WCLI's. Actually it's there's seminars, there's a number of different lead-generation activities conducted by marketing, but a lot of the benefits were also driven by travel and entertainment expenses and across the board improvements in terms of eliminating wasteful spending. We've put a number of important management controls in place with the team and they've responded very nicely, so it's not specifically driven by anything changing or doing anything differently with the WCLI.

Now, one next point that I'd add. I do believe that we've done some of these expensive lead generation events maybe inappropriately or too soon or too many in the past. That's why we've adopted this new sales process training, so that when we're conducting an over-the-shoulder or we're doing seminars or we're doing a special event, that it's targeted at the right time in the sales process to have maximum effect.

So we're trying to create more discipline in the sales process so that when we do those events we get a better return on the investment.

Okay. All right. Thanks a lot.

Carlton Savoy, Princeton Capital Management

Thank you. Hi Jake and David. A quick question on -- two questions, actually. Your press release mentions the transitional impact of introducing the new C100. Is that -- should we just assume that gross margins are going to come down a little bit as you guys get this thing out? I assume that the pricing is a little lower, etc, as you pointed out, but can we assume lower gross margins for a period of time?

I think, looking forward and at least the near-term, the C100 as we introduce it, the margins will probably -- right now are probably running about 5.0% less than the MD.

Okay.

I think that may improve as we get volume up and start producing it over time. Also in the third quarter we have a number of promotions going on to get the C100 introduced. And we've also done some promotions during the same time on the MDs, to solidify the positioning of the two-tiered strategy and keep the MD very attractive to people who are also now looking at the C100.

So, in the short-term, I -- and we also may look at some, probably will look at some demos as the C100s go out. So I think you'll see a few things in the third quarter, as far as gross margins go.

Okay. The other one was that you mentioned about the international sales. Just roughly how much of the decline would you guys say is due to what I'll call economic impact and how much is due, Jake, just to - excuse my words saying it this way - but poor organizational structure catching up to international sales? How much is due to economic factors and how much are internal factors?

Carlton, that's a great question. I think all of those things. I can't give you an exact percentage, but both of those items I think you hit the nail on the head. We've gotten reports that there are some economic factors that are pinching some of our distributors and making some of the year-over-year compares up. But, frankly, our focus in the last weeks is to really dig into our international businesses and make sure we're giving our people the right support, make sure the right product training's in place, and make sure the right things are happening to make the business run much more effectively. So those are two of the big drivers, both of those items.

Okay. Thank you. (OPERATOR INSTRUCTIONS) One moment, please. And I'm showing that there are no further questions. Mr. St. Philip, I'll turn it back to you for closing comments.

Thank you, operator, and thanks to all of your who joined us on our second quarter call today and look forward to sharing our progress in the future at next quarter's call.

Thank you. Ladies and gentlemen that will conclude today's teleconference. We do thank you again for your participation and at this time you may disconnect.