BIOLASE Inc (BIOL) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the BioLase Technology, Incorporated 2009 Third Quarter and Nine Months Results Conference Call. (Operator instructions)

This Conference is being recorded today, Thursday, November 5th, 2009.

I would now like to turn the conference over to Matt Clawson of Allen & Caron. Please go ahead, sir.

Thank you, [Tudeo].

Good morning, everyone, and thanks for joining us today for the BioLase Technology 2009 Third Quarter and Nine Months Results Conference Call.

You should have all received a copy by e-mail this morning of the release announcing the Company's results for third quarter and nine months ended September 30th, 2009. If any of you did not receive a copy of the news release, please call our office after the call at 949-474-4300, and we'll be happy to e-mail you a copy.

Before we get underway, I've been asked to make the following statement. 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 statements are made. And BioLase does not undertake any obligation to publicly update any forward-looking statements to reflect events or circumstances after the date on which such statement was made or reflect the occurrence of unanticipated events.

Also, a quick reminder -- the replay of the Conference Call will be available on BioLase's website, at www.biolase.com. The Company's 2009 third quarter and nine-month results can also be found on the Company's quarterly report on Form 10-Q, which the Company plans to file tomorrow, November 6th, with the Securities and Exchange Commission.

With me on the call today from BioLase are Dave Mulder, the Company's Chief Executive Officer; and Brett Scott, Chief Financial Officer. Dave and Brett will review some prepared remarks, including an update on the Business operational performance and outlook. They will then conduct a question-and-answer session at the end of the call and will close with a few closing remarks.

During today's Conference Call, we'll be taking questions by e-mail which, time permitting, may be asked at the end of the telephone Q&A session. For those participating on the call over the Internet who wish to submit a question by e-mail to be considered for the Q&A period, please send your question to Jill Bertotti, at jill@allencaron.com. Please submit your questions as early in the call as possible.

With that said, I'd like to now turn the call over to Dave. Good morning, Dave.

Morning, Matt, and thank you. We want to welcome all of your to our Third Quarter and Nine Month Results Conference Call, and thank you for participating.

Today, we will review the progress we've made here at BioLase since our last call, including some of the key strategic initiatives underway. Brett will summarize the financial results for the quarter, I will make a few closing comments, and we will open up for your questions at the end of the program.

During the first half of the year, we worked swiftly to restructure the Company and to radically adjust our core domestic sales and marketing efforts for lower spending and long-term effectiveness. Immediate results were evident in the second quarter, as sales and profitability exceeded both of the prior two consecutive quarters.

In the third quarter, we applied ourselves to expanding our global consumable and service offerings, to reigniting our international growth, and to the long-term commercialization of the Company's intellectual property, both inside and outside of dentistry. We are very pleased that consumable sales have nearly doubled, that our overall international business has shown both consecutive quarterly growth and growth over the prior year, and that the first targeted commercialization of our intellectual property outside of core dental was achieved earlier this week with the launch of the Diolase 10.

Our consumable sales were most notably impacted by the upgrades we offered for the Waterlase MD, with the new turbo hand piece and the accompanying software. This was launched earlier in the year, and we caught up with our back orders completely in the third quarter. The orders were built largely through just word-of-mouth.

We are now expanding our efforts to offer and advertise a new hand piece to a barter group of our installed base. We also continue to work on additional products and service offerings to our loyal installed base of over 10,000 customers worldwide.

To provide some additional color on our international sales efforts and progress -- our international sales in Q3 grew 13% over the second quarter of 2009, despite the economic environment and a historically low quarter. Throughout the world, the introduction of laser dentistry continues to progress.

As most of you know, our distribution partner, Henry Schein, joined our international effort last quarter, taking over sales in Germany, Spain, Australia and New Zealand. We have already expanded that relationship into Benelux, Austria, where we sold our first unit last weekend; Italy, France, and several more countries.

Remaining on the international sales front -- one of the highlights of the third quarter was the announcement in August of the approval by the People's Republic of China that enabled us to begin selling our Waterlase MD dental laser systems throughout mainland China. That was followed in September by our appointment of three regional distributors in China.

We're very excited about the long-term prospects for laser dentistry in the vast and rapidly expanding Chinese markets, where people are very receptive to modern dentistry and innovative products like our laser systems. Again, the establishment of a market in China has long been a key strategic initiative for BioLase, and we believe that we have positioned ourselves very well in what could prove to be a very important market for us.

While we are pleased with these third quarter successes, we remain focused on the long-term expansion opportunity into dentistry with our core products surrounding the Waterlase technology. In October, we launched a multimedia mass-marketing campaign that combined elements of past successful consumer product campaigns -- where I have a background -- with new data and internal and external expertise on dentistry, including the expertise of the Roger Levin Group and a global partner, Henry Schein.

While we have remained mindful of costs, the new interest from doctors wanting to learn more about BioLase lasers has rose to the highest level since we started tracking lead generation a couple years ago, and it's very exciting. The number of leads coming in tells us that interest is alive and growing in our target markets. When asked why this great technology has taken some time to hit the growth many see as very possible, we remind them that it took 15 years for products like the high-speed drill to become the standard of care.

We have already trained a growing base of well over 10,000 dentists and continue to constantly work on accelerating adoption. In the meantime, we are now pursing that adoption with a company that has just had two profitable quarters, has a lower cost structure and has feasible new revenue opportunities that are going forward.

In short, with the help of our partners, we are doing what we said we were going to do during this economic downturn. We have held onto the gains we made throughout the year in the face of a tough capital equipment market, stabilized the Company through cost efficiencies, positioned BioLase to grow our market share when the economic recovery begins, and positioned the Company with opportunities to grow long term, even if the economic recovery takes longer than expected.

Before I close this portion of my remarks, I'd like to welcome our newest member of our Board of Directors, Greg Waller. Greg has many years of experience in the dental and medical fields and has lengthy experiences serving on boards of publicly traded companies. We look forward to working with Greg and benefitting from the expertise he is here to provide us.

Now I'd like to turn the call over to Brett Scott, our Chief Financial Officer, who will review some of the financial results. Brett?

Thanks, Dave.

Total 2009 third quarter and nine-month sales were $12.1 million and $33 million respectively; compared to $15.3 million and $53 million in the same periods last year, which is a decline of 21% and 38%. The change in revenue was driven primarily by the inclusion of initial distributor orders for our Waterlase C100 laser systems in the prior-year third quarter, and current economic conditions and the amortization of historic licensing contracts.

Total laser system net revenue for this year's third quarter and nine months was $8.8 million and $24 million respectively; compared to $12.6 million and $43.5 million in the prior-year periods. Non-laser system net revenue, which includes consumable products, advanced training programs, extended service contracts and shipping revenue, increased 67% during the quarter, to $3 million from $1.8 million in the prior year's comparable period.

These sales benefitted from a 98% increase in consumable sales and a 34% increase in global service revenues, driven by the Company's initiatives to expand offerings in upgrades, accessories and services to its existing customer base.

For the nine months of 2009, non-laser net revenue increased 16% to $7.8 million, from $6.7 million in the first nine months of 2008. License fees and royalty income for the 2009 third quarter and nine months decreased to $289,000 and $1.2 million respectively, compared to $868,000 and $2.7 million in the third quarter and nine months of 2008.

Now I would like to provide a breakout of sales by region. For this year's third quarter, domestic sales were $8.5 million, or 71% of net revenue; compared to $11.9 million, or 78% of net revenue for the prior-year comparable period. For this year's nine months, domestic revenues were $24.4 million, or 74% of net revenue; compared to $40.3 million, or 76% of net revenue [in the] 2008 nine-month period.

International revenues for the 2009 third quarter were $3.5 million, or 29% of net revenues; compared to $3.4 million, or 22% of net revenue in the third quarter last year. For the nine months of 2009, international revenues were $8.6 million, or 26% of net revenues; compared to $12.7 million, or 24% of net revenue in the prior-year period.

Moving on to gross profit for the third quarter of this year -- our gross profit was $5.8 million, or 48% of net revenue. And this compares to gross profit of $7.5 million, or 49% of net revenue for the prior-year period. For the first nine months of this year, gross profit was $15.7 million, or 48% of net revenue; compared to the year-earlier period of $27.2 million, or 51% of net revenue.

Operating expenses for the third quarter and first nine months of 2009 were $4.9 million and $17.2 million respectively, compared to $11.3 million and $31.2 million in the prior year's comparable periods. This year's nine-month period included $602,000 in severance and related costs associated with the departure of our former CEO and the workforce reduction at our international operations.

GAAP net income for the third quarter of 2009 was $859,000, or $0.04 per share; compared with a net loss of $4.5 million, or $0.19 loss per share for the same period in 2008. Non-GAAP earnings were $1.5 million, or $0.06 per share, on a non-GAAP basis for the third quarter of 2009.

GAAP net loss for the first nine months of 2009 was $1.5 million, or $0.06 loss per share; compared to a net loss of $3.8 million, or $0.16 loss per share for the same period last year. Non-GAAP net income was $0.8 million, or $0.03 per share, on a non-GAAP basis for the first nine months of 2009.

Turning to the balance sheet -- as of September 30th, 2009, we had cash and cash equivalents of $3.9 million, up from $3.5 million at June 30th, 2009; total assets of $23.3 million and total stockholders' equity of $9.1 million. We believe that with the minimum purchase agreement in place, cash flows twice a month and our lower-cost structure, that we will have sufficient resources to meet our obligations and sustain operations.

Before we open the call for questions, I'd like to turn it back to Dave for some additional comments on the quarter, and an overview of the economic market and operational factors that we see influencing our business in this year's fourth quarter and into next year. Dave?

Thanks, Brett.

The expanding lead base is fresh and early, but a positive sign that at BioLase we may be turning a corner. Our success to date in 2009 has been due in large part to the support of the Henry Schein organization. They have stood behind our commitment -- they have stood behind their commitment of minimum purchases. To give you a recap on our sales to Henry Schein -- they have purchased $27 million through September 30.

In regards to our other developmental projects -- we have already provided a news release about our entry into pain management, where we already have orders, and discussed it briefly earlier in the call. We are continuing our efforts in the ophthalmology space and in working with Procter & Gamble. All these efforts are part of our strategy not only to build sales and revenue today, and work towards achieving sustained profitability, but to also position BioLase for the future, when the economy improves and when the overall market turns around.

Our companywide cost-cutting efforts will provide us with significant operational leverage when the economy improves. Our costs have been lowered to a point that when sales turn around even more significantly, each additional laser sale will positively impact our gross margins and the bottom line. I'd like to thank the efforts of our entire team and our partner, Henry Schein, for getting us to that point.

Finally, I'd like to summarize by saying we believe we are successfully executing what companies should be doing during a downturn -- cutting costs where possible, investing time and effort in research and development, launching new, innovative products, looking at new ways of commercializing the assets you have, particularly our intellectual property base; and adjusting our business plan for a changing economic climate. And once again, I'd just like to reiterate -- we're very excited about the number of leads that we're getting right now.

That concludes our formal prepared remarks. We would like to now open up the call to questions. Operator?

(Operator instructions) Austin Hopper, AWH Capital.

Good morning. Thanks for taking my questions.

I was hoping you might talk to us about the headcount of the Company -- kind of what it was as of end of last year, and what it is currently; and specifically, what you've done within sales and marketing, and salespeople.

Sure. At the end of last year, we had about 250 people on the overall headcount. And after we went through our restructuring efforts, we cut it down to 150 people, and we've held it pretty steadily at that level. Salespeople at the end of last year were about 30. That went down to 25. With the number of leads we're having right now, we're currently increasing our sales force to about 30.

Okay.

And then also, can you just comment on the MD Turbo upgrades in the quarter and what specific impact that had on the numbers?

Do we want to get into details?

I think -- from the last call, I think you talked about how many units you had in the quarter, I think what the price point was. So --

This is Brett. We -- certainly, that was -- had a big impact on our non-laser sales in this quarter, and for the previous quarter as well, too. We -- again, as Dave said earlier, those sales came about as word-of-mouth. And we want to follow that up with a marketing effort to the rest of our installed base in the following quarters.

Great, thank you.

Dalton Chandler, the Needham Group.

Hi, good morning.

Morning, Dalton.

Morning.

I was wondering -- just a housekeeping question, to start off -- could you give us the revenue breakout, the way you provide it in the regulatory filings, by Waterlase, diode, non-laser, et cetera?

Sure. Would you like it for the three months?

Yes, please.

For the quarter?

Yes.

Yes. So the Waterlase systems for the three months were $7 million. Diodes were $1.8 million. I'm just rounding up for you.

Okay.

Non-laser systems were $3 million, and license fee and royalty were approximately $300,000 -- total of $12 mil for the quarter.

Okay, thanks.

And then, just moving on to, I guess, broader market questions -- I know yesterday, on Schein's earning call, they said that laser sales had been weak, but they were seeing a meaningful turnaround. Is there any color or quantification you can provide on that comment?

Well, we were -- we're very excited about lead generation right now. We've spent a lot of time looking at the entire sales process, starting with how many leads, and what is our close rate. The number of leads that we have seen come in the month of October was five times the amount of the leads that we saw come in September.

So the lead generation -- while it's early to know the quality of those leads, because we're getting them from a lot of new sources and from a lot of new and unique marketing efforts that have started taking place in October -- we've been planning this campaign in October for quite some time -- it hit, and it has exceeded our expectation in generating interest from dentists in taking a look at BioLase lasers. So I think that can give you a little bit of a flavor as to why we're so excited right now.

Yes, that's helpful. And I know the third quarter is seasonally weak; the fourth quarter is seasonally strong. Do you think the market has normalized enough that we would see the typical pickup in the fourth quarter?

I think we have to put a little caution on that. One good thing to point out is that the -- with the new agreement that we have with Henry Schein, we've seen some smoothing of the historical lumpiness in the sales that BioLase has, jumping up in a strong quarter and down in a weak quarter. We've seen some smoothing there, which is very positive. However, in any minimum purchase agreement, that will help you smooth out some of the valleys, but it also might smooth out some of the peaks as well.

Okay. That makes sense.

And then, just to move on to the new Diolase 10 -- could you talk about list price, and how you're accessing the chiropractic channel?

Certainly. We have -- our list price on that right now is just a little -- we have an introductory price right now for folks who want to come in this first quarter, and we're listing it at just under $16,000. There are about 60,000 chiropractors out there, which we put in the release. Right now, we have been working with about five chiropractors around the country in treating various patients.

As a matter of fact, we have been treating some world-class sports athletes who, in a hurry, need to get back into production. We have been treating members of some sports teams, national sports teams, that also need to get back in and help their team. We've also been treating some stars in Beverly Hills that are performing, and they need to perform. So they need to get healed very, very swiftly.

Right now, we have actually seen quite a stack of leads and interest just from the chiropractors we've been working with, and word-of-mouth through the people that they know. Going out right now to handle this initial batch of orders, we want to keep our costs very, very low.

And so what we are doing is we've hired some -- we've been in the process of hiring some manufacturer reps that work on commission-only in different parts of the country, who are currently working with chiropractors.

Okay. How many reps do you have now, and where do you see that number going?

Right now, we have -- I didn't want to start hiring them on until we got the release. It's hard to say exactly how high that will climb, as they're commission-only. Really don't want to get into those numbers right now.

Okay.

And then, you did mention also the ophthalmology market. Is there any update on developments there?

We actually have some ophthalmologists right now, here in the States, doing some studies with us right now. And as I have said before, I think that's -- it's probably going to take us at least into the middle of 2010, I think, before we're going to have anything that generates any revenue.

Okay. Thanks very much.

Sure.

Thanks, Dalton.

(Operator instructions) Robert Hoffman, Princeton Capital Management.

Good morning.

Yes, I was wondering if you could update us on -- or give a little color in terms of the sell-through. Can you share anything like that with us? Sell-through to Schein?

Sure. As we indicated last quarter, the combination of the summer months with the vacation, and the overall market for dental capital equipment -- the third quarter would be challenging for sell-through. And as we had said before -- and that was accurate -- sell-through is not where we'd like it to be. But we expect growing volumes in the coming periods as marketing programs continue to mature and gain traction. And we've been particularly excited about the new leads that we have coming in right now.

Great. Thank you.

Sure.

Mark Haas, Interinvest Global Asset Management.

Good morning, gentlemen.

Morning.

Morning.

I'm just curious about the whole China situation, and just in terms of -- you're opening up a bunch of new sales channels. Are there any particular markets that are opening in Q4 or Q1? Or, more specifically, when will China be set up for really ramping up sales?

In China, we have already sold in some demonstration units. We have some shows that are starting, and I've had people working with our Chinese distributors on training them up on the sales process. They already have leads, and they are starting to move forward. It's hard to say how long it will take. But I believe -- as we have entered a lot of other markets, I believe there will probably be a few initial sales this quarter, ramping up more next quarter. And I think -- but I do think it will probably take as much as half the year to get a serious ramp-up there.

Okay. Any other particular markets that are interesting to you, that are opening up, you said, this quarter or the following?

Quite a few, actually. We have a few sales going into the Middle East. We've been getting a bit of reinvigoration signals from our distributor in Russia. We have just signed agreements last quarter in South Africa. And we have several that we're working on right now in the Middle East. Several of them are Schein accounts; several are not. And we've also seen -- Henry Schein has a great global network. And in some of those countries even where Schein is not right now, they have helped make some introductions to us.

Interesting.

And just a follow-up from my question of last quarter -- any progress on the P&G deal? Procter & Gamble?

The Procter & Gamble deal is something that we are still working on with them. We feel -- we still feel very good about it. Procter & Gamble is a big company with a lot going on, and it takes awhile to make sure you work something out with them.

Right. Okay, that'll be it, then. Thanks, guys.

Welcome.

Raymond Yung, Dolphin Asset Management.

Morning, Raymond.

Good morning.

I think the duration of the Henry Schein contract is 14 months. Have you begun discussions? [Should we] do that, at this point?

Those -- usually, they -- right now, they're set to let us know how they feel about it in the early -- I think the early part of next year.

Okay. That's it. Thanks.

Sure.

Robert Hoffman, Princeton Capital Management.

Yes. Could you just talk a little bit about the competitive marketplace or environment, in terms of the take-up of your product? Is it definitely economically driven, as in the slowness is economically driven? Or are there any competitors out there that you think are interesting or worrisome?

In our hard tissue, hard and soft tissue, all-tissue Laser, the Waterlase MD -- we haven't seen -- we're not seeing a lot of significant competition there. We still have a very strong leading market share in a product that really isn't seeing a lot of impact by anyone else.

In the diode market -- we see a lot of activity out in the diode market. We see a lot of low-cost diodes out there. There's not a whole lot of intellectual property protection in that area. That's not our primary thrust, as you can see by our mix of sales. We have a very strong product in the diode area when we go head-to-head with the dentist. We sell very well against those low-cost diodes. And that positions us, I think, very well for future sales of Waterlase MD.

We're actually kind of pleased to see a lot of diodes in the marketplace, because that is increasing dental awareness of lasers. And eventually, patients who are excited about just what happened to them with a diode are going to ask them, By the way, can you do this on my teeth? And when the answer is no, that dentist is going to be looking for the BioLase. So we're very excited about that.

In terms of the -- well, the diode is in your new indications for things like pain management and those areas. What would it take for the competitors to enter those businesses? Is it product, is it approval, is it distribution?

It is all of the above. They -- first of all, they'll need a product. The hand piece that we're using in the pain management market is patented. It does a very good job of dispersing the laser energy. And I think it's going to be a little bit difficult to duplicate. I don't -- and plus, they will need approvals, and that will require studies, and that is not inexpensive. And we also have some special features of wavelengths.

Another thing I think it will also take is size. We have built the Diolase 10 based largely on many of the same components in the ezlase, where we sell thousands of units. Trying to get the cost structure -- having somebody get the cost structure to where we can take the cost structure, sharing what we have with ezlase, I think, would be very difficult to do.

And also, approaching the market -- while this is a new market for us, we have been -- our roots have been a very entrepreneurial company. Many years ago, we took lasers directly, and we broke into the dental market. And we did it in a very similar way. And we have a lot of guys who have the expertise. And as a matter of fact, some of the manufacturer reps that we'll bring on to help us out with this -- a lot of them are old BioLase salesmen, back in the days when we were penetrating the market rapidly and fast.

So this isn't just a matter of going out and finding people. We know people in the market, and we have a lot of experience breaking into new markets rapidly.

How about on the testimonials side? You mention that you've been working, [or that people thought] that the lasers had been working with world-class athletes to get them back faster. Is there any possibility of using testimonials to spread the word a little bit?

The guy that I've retained to help me move this market forward has a handful of release forms, and he's actually traveling with one of our key doctors today. And I'm trying to get some quotes and some releases from some stars. And we're working on it. Right now, a lot of guys are very positive about it. But we want to be very cautious, because we want to protect the privacy of patients. But we are definitely working on it, and I think there's definitely some possibilities there.

You need to remember that in my background, I did the George Foreman grill. I've done products with Linda Evans, I've done products with Rachael Ray, I've had John Cleese of Monty Python fame as one of the spokespersons for a product I had before. So I'm not unfamiliar with doing things like that, and we're after it.

Great. Thank you.

Thank you. And I show that there are no further questions at this time. I would like to turn the call back to management for closing remarks.

Okay. Well, thank you very much for joining us today. I look forward to talking to everybody at the end of the fourth quarter, when we can talk about our results for the full year.

Thank you again for joining us.

Ladies and gentlemen, this concludes the BioLase Technology, Incorporated 2009 Third Quarter and Nine Months Results Conference Call. Thank you for your participation. You may now disconnect.