BIOLASE Inc (BIOL) 2008 Q3 法說會逐字稿

Thank you for standing by, welcome to the Biolase Technology, Incorporated third quarter results conference call. During today's presentation, our parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded today, Wednesday, November 5th, 2008. I would like to turn the conference over to Rene Caron of Allen and Caron. Please go ahead, sir.

Thank you. And good afternoon, everyone, and thank you for joining us for the Biolase 2008 3rd quarter nine-month results conference call. You should have all received a copy by e-mail this morning of the release announcing the company's results for its third quarter and nine months ended December 30, 2008.

If any of you did not receive a copy of the news release, call the office after the conference call at (949)474-4300 and we will be happy to e-mail you a copy. Slides will be used during this call today. 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 and register. Select the no audio slides option in order to view the slides.

Before we get underway I have been asked to make the following statement. The words or phrases "can be", "expects", "may effect", "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 the statements are made.

Biolase does not undertake any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date on which any such statement was made or reflect the occurrence of unanticipated events. Also, as a quick reminder, a replay of the conference call will be available on Biolase's website at www.biolase.com. The company's 20083rd quarter and nine Monday rules can also be found in the company's quarterly report on Form 10-Q which the company plans to file on November 7th with the Securities and Exchange Commission.

With me on the call today from Biolase are Jake St. Philip, CEO, Dave Mulder, CFO. Jake and David will review some prepared remarks and provide you an update on the business operational performance and outlook. The management team will then conduct a Q&A session and end the call with a few closing remarks. With that said, I would now like to turn the call over to Jake. Good afternoon, Jake.

Thank you, Rene. Welcome to all of you for our third quarter conference call. Today we will review the progress we have made here at Biolase since our call to include our new market positioning that was just recently released at the ADA, some of the key strategic initiatives that we have completed since our last call. Dave Mulder will go through the financials. I will take an opportunity to summarize some key points and open it up to your questions at the end of the program.

I would like to start off first by talking a little about our new positioning in the market place. We've taken a very important step in positioning the company for future growth in the broad market opportunity that we have for Waterlase Dentistry.

Our new market message redefines and repositions Waterlase Dentistry for the mainstream market as a total solution to integrate Waterlase Dentistry technology into a dental practice. The key message here clearly is that Waterlase Dentistry is the total solution. I'd like to take just a couple of minutes and share with you what elements of that total solution -- what they mean to folks that acquire our technology.

First and foremost, our industry leading technology is now a broader market appeal. The ezLase, the C-100 all tissue laser and the flagship M.D. offer more choices for our doctors to enter into Waterlase Dentistry.

Training and certification - our goal is focused on optimized training at each stage. We want to be able to provide rapid rapid and continuous learning to our dentists who use our technology. Practice management support. Consulting and support by our sales team to really determine what applications and where the dentist would like to take his practice in terms of the capabilities that our technology provides.

Tips, accessories, everything to support the system available through us and our distribution partners such as Henry Schein here in North America and service programs, flexible service programs to be able to provide technology to operate at its peak performance throughout the life of it. By bringing someone into the Waterlase Dentistry family, our focus is really to create a culture of creating customers for life so we have strong partnerships as they use our technology going forward. Obviously, our objective is to continue to solidify our category leadership.

Offering outstanding technology choices, really exemplifying our positioning around patient focus and doctor/patient relationship, leveraging our overall experience and longevity in the industry that no one else can offer. And building greater trust in the brand by providing superior customer satisfaction in what the customers are looking for and expecting from us.

Overall, what Waterlase Dentistry positioning means, it is an emerging standard in dentistry, enhancing the outcomes and creating a much more comfortable patient experience. A new experience for your patients. Working with patients in an atmosphere free of fear and anxiety.

We all know what it is like to white knuckle in a dental chair and having a technology like Waterlase Dentistry technology can really provide a much more collaborative relationship between the dentist and their patient and ultimately leading to a new kind of practice. Enhancing their clinical capabilities, increasing their productivity and work flow and ultimately improving the revenue stream for the doctor. So overall, Waterlase Dentistry is an excellent solution to have a dentist invest in their practice. It can touch every patient that comes through the door, and can establish strong word of mouth advertising and support building a practice under any market conditions and frankly, especially in difficult market conditions that exist today. So we are very excited about the new positioning.

On the next page is a sample of some of the new print immediate why and how we are -- media and how we are focusing. This was launched at the ADA, not only in the materials. But in the booth at the trade shows and strengthen our message in the market place going forward. Wanted to shear that information with you. And that exciting development in the company.

Now, on to the next slide, International. As you note from the previous calls, in the first half of the year, we are focused on the North American market and the improvements we are making here. In the 3rd quarter our senior leadership team spent a lot of time assessing the International operations in all of our business segments. Out of that review, one key development came out of it. That was that we announced new leadership for the International team and Bill Browne who is an industry veteran, sales and marketing veteran has taken on the responsibility for our international business. And we announced that at the beginning of October.

Our focus going forward in International, and Bill, is in the leadership position of driving that, is really the immediate focus of improving our execution. Training, product positioning and sales process. Bill was heavily involved in that effort here in North America.

Although we don't take what we do here in North America as a cookie cutter and spread it out internationally, the key core competencies that we have learned and deployed here in this market place can be used here in our international relationships with our direct businesses as well as with our distribution partners. So, Bill is on the ground and beginning that process as we speak. Over the next two to three quarters we will continue a strategic review of our distribution channel to continue to make improvements as we look ahead.

Other key strategic initiatives that have been addressed since the last call, we have launched our new sales process and trained all of our sales team on the methodology on how we can improve their effectiveness going forward. And also as part of that,we launched our CRM software package with that that gives us and our management team the ability to track and monitor all of our prospects in the sales pipeline much more effectively than we have in the past. As I mentioned, we launched our new messaging and positioning and really demonstrating that we are the total solution partner that can provide everything a dentist needs to have a successful implementation of Waterlase Dentistry We've got our new International leader in place.

We also announced in October that we launched a new training luminary team and an important part of that announcement was that we added a new clinical website that will provide the ability for our dentists to access training and support to help in our goal of providing rapid and continuous education throughout their use of our technology. Additionally, we have also launched a number of programs that will be ongoing. And ongoing is the operative word here. Because these are not one-time events.

We are continuing to improve our training process to support the goals that I have mentioned and also we've launched free refresher training. We know and we've mentioned on past calls, that there is a segment of folks out there that probably aren't utilizing the technology as much as they could. We have reached out to them and offered free refresher training to get them reenergized in using this technology in their practice. And by the end of this week, we would have retrained in this refresher program over 200 dentists.

So the program has been very well received to date and it's a strong statement about our commitment to customer satisfaction. With that opening, I will hand it off to Dave Mulder, our CFO, to begin going through our financial results.

Thank you, Jake. The chart here highlights the company's growth history over the last eight years. For the last eight years, the average growth rate has been roughly 30%. However, as you see we have had some very strong growth years early on and then flattened out for about the last four years with a slight dip in sales in 2007. In 2008, early 2008, the management team was changed and we have gone through quite a bit of execution items and in this period of transition, we are very pleased that we had a 15% growth for the first nine months of the year.

On the Q3, in the 3rd quarter and first nine months of the year we are pleased with the progress in our financials. Total third quarter 2008 sales increased $2.5 million or 19.3% to $15.3 million from $12.8 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 increased 34.8% or $2.8 million driven by our initial orders for the Waterlase C-100 system which we both launched and started shipping in the third quarter. At this point, we are not breaking out our hard tissue laser sales by product. But we will share that this included approximately $1.5 half million in C-100 demonstration unit sales.

For the Diolase family which includes ezLase, sales remained level year-over-year. Total laser growth was 27.8% or $2.8 million. Consumables, service and other decreased about $200,000 from the prior year. While the 11.6% mix is about our current run rate, the prior year included the launch of our gold handpiece accompanied by several tip promotions, so the prior year sales mix at 15.8% was particularly high. Our mix of sales for the third quarter of 2008 and 2007 are in the slide presentation. For the first nine months of this year total sales increased $7 million or 15% to $53 million from $46 million in the same period last year.

Breaking out our revenues, Waterlase family sales increased 7.8% or $2.4 million. The Diolase family sales increased 70% or $4 million, primarily with the growth of ezLase and total laser growth was 17% or $6.5 million. Consumables, service and other increased 9.8% or over $600,000 with a 6% increase in consumables and increase of service revenues of 13%. Our mix of sales for the first nine months of 2008 and 2007 are in the slide presentation.

Now, I would like to provide a breakout of sales by region. 2008 third quarter and first nine month domestic sales where most of the execution focus was applied during the first half of the year increased 27% and 40% to $11.9 million and $40.3 million, respectively, from $9.4 million and $28.8 million for the prior year periods.

International sales in the third quarter were approximately equal to the prior year and for the first nine months decreased 26% to $12.7 million from $17.2 million in the prior year period. Our strength in relationship and agreement with Henry Schein and the recent launch of our Waterlase C-100 were the primary drivers of the domestic increases.

We have already discussed the prior quarter International declines, the reason, and today we have discussed some of the actions we are taking to improve those results. As a percent of sales 2008 third quarter. and nine month International sales were 22% and 24%, respectively, versus 27% and 37% for the prior year periods for the reasons we just discussed.

We have discussed the sales increase of 19% over the prior year. Gross margin dollars increased by over $900,000 on higher volumes but decreased as a percent of sales from 51% to 49% due primarily to the Waterlase C-100 demonstration unit sales. The percentage was also somewhat impacted by lower unit gross margins on the Waterlase C-100 compared to the Waterlase M.D. As with the launch of any new product, initial individual margins may have been a bit smaller.

As time goes on, the additional volumes of the C-100 does help with overhead absorption and does improve margins overall. Operating expenses $1.1 million from the prior year's spending. This increase was primarily driven by the $1.2 million in charges for the Diodem settlement and legal fees and approximately $500,000 of additional expenses for the new sales process and CRM program, new marketing messaging and materials, launch of the Waterlase C-100 and several customer service programs including the refresher training we discussed.

These factors offset other decreases totaling about $600,000. As we have previously discussed we continue to look for ways to reduce less efficient operating expenses, but we have also been reinvesting those savings in the business.

Some detail on operating expense categories. Despite the new programs that were launched we reduced our historically high sales and marketing expense by $677,000 or 11%. The largest decreases were in convention and seminar expenses but there were quite a few other small reductions which helped fund some of our launches.

General and administrative and engineering and development expenses showed a combined increase of $597,000 driven by several factors in legal, building our infrastructure and launching initiatives that were discussed already. Our legal expenses increased from the NLT lawsuit and countersuit and heightened patent activity. On the positive front, our insurance carrier agreed to pick up a portion of the cost of the case which is in the process of being negotiated now. The result was a loss from operations of $3.8 million.

For a brief recap versus the prior year, $1.5 million in volume and other operating improvements were offset by $1.2 million from the Diodem settlement and $500,000 million -- excuse me -- $500,000 in additional reinvestments and launches of new initiatives. We also recognized $637,000 loss on foreign currency transactions for the quarter compared to $34,000 loss on foreign currency transactions for the prior year period. This was a result of inter company payable balances which were restructured into equity in mid October.

While some minor adjustments continued in early October, these swings should be reduced to very minor levels going forward. Net loss for the third quarter was $4.5 million or $0.19 cents loss per share versus a prior year loss of $3.5 million or $0.15 loss per share. I would like to recap this difference on the following slide. To recap the prior year, again, the net loss for the 3rd quarter was $4.5 million versus a prior year loss of $3.5 million. Third quarter income improvements of approximately $1.3 million were offset by about $2.3 million in total cost and charges for the Diodem settlement, foreign currency losses and reinvestments and new initiatives laid out on the prior slide.

The Diodem settlement will have a few minor legal wrap-up expenses in Q4, but is largely done. Foreign exchange loss has been mitigated going forward and the historic large swings that we experienced under the old structure should be greatly minimized. Some of the reinvestments continued into the fourth quarter and we have more reinvestments, but those are within management's control. The same factors impact the nine months.

For the nine months ending September 30, 2008, gross margin dollars increased by $2.5 million but decreased as a percentage of sales from 54% to 51%. The improvements in gross profit dollars of $2.5 million was primarily driven by a $6.5 million laser revenue volume increase, partially offset by discounts on demonstration units which mostly impacted the first and the third quarter.

Operating expenses decreased as a percentage of revenues from 68% to 59%. The amount in dollars increased $100,000, but that included a $1.2 million charge for the legal settlement with Diodem and associated legal fees in the third quarter and some reinvestment that we have just discussed. The result, again, was improvement on the operating line for the first nine months of this year we reported a net loss of $3.8 million or $0.16 loss per share versus a loss of $6.1 million or $0.26 loss per share in the prior year.

As a result of our third quarter and first nine month performance, we ended the third quarter with $1 million more cash than at the end of the second quarter, but we also drew $4.4 million from our credit line. The company has historically defined net working capital as current assets less current liabilities.

The biggest change is the addition of $4.4 million in debt. The other key components include inventories grew $2.5 million fourth quarter, and $4.2 million over the nine months. The company has normal seasonal growth of inventory in the third quarter which has generally been a light quarter due to dentists going on vacation and it is just ahead of our historically strongest quarter which is the fourth. It is $1 million higher than last year's ending third quarter balance of $10.8 million due to the start of the Waterlase C-100 this year.

Receivables declined approximately $600,000 in the quarter and $6.5 million for the year. The first half decline in foreign sales with longer terms was a primary driver in the decrease. We were also able to get more favorable terms with our domestic distributor. Combined accounts payable and accrued liabilities grew in the quarter by about $2.5 million on the higher inventory purchases for the quarter and grew about $500,000 from year end.

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

Thanks, Dave. As we approach year-end and on into 2009, I want to frame up a couple of perspectives. Both some positives and some challenges that we face as we look ahead. On the positive side, we certainly feel as a new management team we've made excellent progress repositioning the company and focusing on fundamentals.

We've got our new domestic selling process in place. New messaging materials. Strengthened our Henry Schein relationship. Our strong focus on customer satisfaction is underway. We've released new products and as we head into -- are into Q4, we recognize there are significant tax benefits for dentists who acquire capital equipment prior to year end, Section 175, which really provide real dollar savings for them if they acquire equipment.

We also have credit readily available for financing with our customers through our Henry Schein financial partnership and, as mentioned, we have also got our new leadership team in place in International. A lot of positives in place. Also recognizing as we look ahead, there are a number of challenges. As we compare Q4 to last year, we had a record breaking Q4 in 2007. And recognize that that is going to be a challenging comparable. We all recognize that the current economic uncertainty is a concern. We are not sure as we look ahead on how our customers will completely respond. And will their buying behaviors return to normal or not. As we look at the Q4 and current economic conditions that is an open item that we'll see as we proceed through the quarter. So we wanted to share those perspectives with you as we look ahead.

In then to summarize, overall we still have significant strength. As you look at the opportunity we have in the overall market opportunity to convert customers over to Waterlase Dentistry. We are on the move. We have been focused on fundamentals, accelerating product development and really strengthen our business and we're also working very hard to continue to develop a compelling vision for the future by broadening the market appeal and demonstrating that we can create strong partnerships with our customers going forward. With that, operator, we will open it up for any questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). And at this time, I am showing no questions in the queue. I would like to turn the call back over to Mr. St. Phillip for closing remarks.

Thank you, operator. Thanks to all of you who joined us on the call today. Our thanks to our employees, customers, partners, investors for your continued interest and support of Biolase Technology and we look forward talking to you next quarter.

Ladies and gentlemen, that does conclude the conference for today. We thank you for your participation. You may now disconnect.