BIOLASE Inc (BIOL) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the BioLase Technology Incorporated First Quarter 2010 Results Conference Call. During today's presentation, all 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, Monday, May 17th, 2010.

I would now like to turn the conference over to Ms. Jill Bertotti of Allen & Caron. Please go ahead, ma'am.

Good morning, everyone, and thanks for joining us today for the BioLase Technology First Quarter Results Conference Call. You should have all received a copy by e-mail this morning of the release announcing the Company's results for the first quarter ending March 31st, 2010.

Before we get under way, I've been asked to make the following statement. The words or phrases can be, may affect, may depend, believe, estimate, project 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 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 of the Securities and Exchange Commission.

All such forward-looking statements are current only as of the date on which 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 that statement was made or reflect the current unanticipated events. Also as a quick reminder, the replay of the call will be available on Biolase's website at www.BioLase.com. The Company's 2010 first quarter results can also be found on the Company's quarterly report on Form 10-Q which the company plans to file today with the Securities and Exchange Commission.

With me on the call today from BioLase are Dave Mulder, the Company's Chief's Financial Officer, and Brett Scott, Chief Financial Officer. Dave and Brett will review some prepared remarks, including an update on the business operational performance and out look. They will then conduct a question-and-answer session at the end of the call and close with a few remarks. During the 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, if you wish to submit an e-mail, a question by E-mail to be considered for the Q&A period, please send your question to me at Jill@AllenCaron.com. Please submit your questions as early as possible in the call.

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

Good morning, Jill.

Thank you. We want to he will welcome all of to you our first quarter results conference call and thank you for participating. Today, we'll review the progress we made here at BioLase during the quarter and since our last call, including some of the key strategic initiatives under way. Brett will summarize the financial results for the quarter, then I'll make a few closing comments, and we'll open it up for questions at the end of the call.

Fundamental change within an organization always ushers an a range of internal and external responses, but most importantly it creates opportunity. The first quarter of BioLase certainly held its share of change as we announced plans to revise our distribution model beginning April 1, increase our direct sales force, introduce a groundbreaking new dental laser, the iLase, and restructured our sales and marketing management team. As we exited the period with a new approach and team in place, I can confidently say that the opportunity outweighs the uncertainty and the end users sales of lasers from the beginning of the second quarter is an indicator we hope that we may have seen the purchasing trough and are on our way to a recovery.

As we announced in March, the restructure are of our distribution partnership with Henry Schein had a notable impact on our revenues in the first quarter. This impact was felt in two substantial ways. First, under the revised agreement, minimum laser purchase commitments that would have been recognized as revenue upon shipment of product in the first quarter were, instead, replaced by prepayments for future deliveries with revenue being recognized in future quarters. The change preserved cash flows and decreased pipeline inventories, but impacted the Company's first quarter revenues on the order of about $4 million. Second and more simply, both BioLase and Henry Schein have made a commitment to selling through channel inventory, especially to Waterlase. This strategy will make revenues choppy in the first half of the year, but will better align our manufacturing and operations with end users sales run rate as inventories drop, the economy improves the selling climate, and as our broader market selling efforts bear fruit. As we announced last quarter, the new agreement provides incremental sales and margin incentives for BioLase to market and sell Waterlase and other lasers to dental offices that are non-traditional core Schein accounts. We begin those efforts in earnest on April 1 and continue to pursue traditional Schein accounts with the continued support of the Schein organization. The best of both worlds.

To support this more aggressive approach to the market, we removed almost one-third of our lower performing reps over the quarter and since then have almost doubled their numbers. We took the sales force to as low as 15 during the First Quarter and are now at 27, and we are planning to rise significantly above that. We go over the specifics of those efforts in our recently released annual meeting presentation, which can be reviewed and listened to in the investors section at BioLase.com. These sales reps are nearly all from the dental industry and have now almost all undergone five days of new intensive training and each one has already sold a laser. I'm pleased to say that with all of the things put in place on April 1, that April end user shipments were double those of the prior year. May continues to look positive.

The reasons we are expanding and upgrading the sales force are also discussed in the presentation at BioLase.com, but I would like to summarize. We have studied each of the 420 different metropolitan statistical areas, MSAs for short, in the United States, and found some telling statistics. In 67 of those MSAs, we have over 5% Waterlase penetration into dentists. As a matter of fact, our top 20 MSAs range from 6% to as high as 61% penetration. They're 83 MSAs where we have no penetration at all, and there are 270 MSAs where our penetration ranges from one unit to 5% of the dentist population in those MSAs. One of the major things our top areas have in common is an excellent sales rep who truly understand the product and what it can do for a dental practice. This goes back to the passion I first spoke about when I became CEO a year ago. One of the things in common in the areas where we have no penetration was the lack of the sales representative or passive sales representative, which we can no longer afford. The incredibly exciting things about these statistics is that we have not reached a mysterious chasm and that we have exceptional opportunity still to come.

To go along with those statistics, we have had some preliminary work done that shows up to roughly half of dentists have still not heard the BioLase message. While surprising, much of BioLase's efforts over many years have been around trade shows and it's been estimated that only about one quarter of dentists attend trade shows. The opportunity is out there, and we have been ramping up to go after it with the aggressiveness that drove double digit growth rates of the past. There are too many changes to talk about right now, but they're all outlined at BioLase.com and include 2006 level pricing, new sales leadership, the new iLase strategy, and an expanding poll viral marketing approach to the broader population who does not know this technology is there to help them and their children. They don't even know it exists. You can now find us on Facebook, YouTube, Twitter, Laser Cap and the list goes on and it will grow. You will soon see blogging and much more.

With consumer marketing and my history in my blood, I will let you know a simple billboard or sign or speech from me on an airplane will get a patient to ask his dentist about Waterlase. However, while we have 0 to 60% penetration rates, we still only have touched a total of 3% of dentists here in the US and dentists do not want to lose patients and everyone wants to look knowledgeable. Therefore, the dentists is almost certain to explain why a laser is not needed, even though he may not even know about them him or herself. And I know I would believe my dentist before I believed an advertisement or somebody on a plane who is telling me about something, so I believe straight out advertising is a waste of time and money.

However, if we show that patient evidence, they can see for themselves from a critical source, that changes things. If that patient's friends tell them about the fantastic experience they had with Waterlase laser and a dentist using it, that changes things. If the patient sees multiple credible doctors recommending the procedure and showing how well it works, that changes things. That base of evidence and validations sets that patient on the path of encouraging their dentist to get a laser or finding a dentist that already has one. We already got 100,000 hits a year from patients looking for Waterlase dentists and our efforts are designed to take that and multiply it many, many times. To get there we have built out our large video evidence and began the process of organizing it and getting it delivered to the general population, and our thousands of happy doctors and our hundreds of thousands of happy patients are starting to help us in new ways.

During the first quarter, we announced our newest product the iLase Diode laser for the dental market. This revolutionary new product is the world's first personal laser fot dentist or hygienists perform a full range of minimally invasive soft tissue and hygiene procedures and takes advanced portability to a whole new level. Immediately after FDA approval, the first of many orders was made in to an orthodontist. I saw him just last weekend and personally delivered one of the first units off the line to him. He said he had been looking at lasers for two years, but worked five offices and needed portability. He said moving wires and foot switches were just not feasible for him as he was moving around, and as soon as he saw the launch of the iLase, he knew he needed to have one.

As we mentioned on our call several weeks ago, we believe the iLase has a potential to become the most popular personal laser in the world. The iLase is being presold in selected approved countries and FDA approval in the United States is allowing us to work with our partners at Henry Schein to begin shipping some early units this month with a further ramp up in June and going forward into the third quarter. Right now, we have a backlog of end users sales that is about one to one and a half months long and distributor backorders that will keep iLase production at high levels throughout the remainder of the year. A very positive result for the iLase launch has also been an increase in the activity of the ezlase which is being sold as the total diode solution with all of the ilase soft tissue capabilities plus 20-minute whitening and pain management, and that increase of business is bringing people to BioLase to discuss the best soft tissue laser in the world, which also does hard tissue, and that is the Waterlase.

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

Thanks, Dave.

Let's start with revenues. Total 2010 first quarter sales were $4.4 million compared to $6.6 million in the same period last year. The reduction was anticipated and was driven by lower licensing fees and reduced purchases by our domestic distribution partner, Henry Schein. As Dave indicated, lower sales volumes resulted from the new structure of our agreement and by the commitment by both companies to sell through existing inventories. In addition, the prepaid that we received for our new iLase diode laser helped us maintain a good level of cash flow, even though sales were down in the period. We expect to begin shipping again, these iLase units, in the second quarter of 2010 and we expect that the impact -- revenue impact will gradually subside as the year progresses.

Total laser system net revenue for this year's first quarter was $2.2 million compared to $3.8 million in the prior year period. Non-laser system net revenue, which includes consumable products, advanced training programs, extended service contracts and shipping revenue, decreased to $2.1 million compared to $2.3 million in the first quarter of last year. License fees and royalty income for the 2010 first quarter decreased to $56,000 as compared to $475,000 in the prior year period. The 2009 period included amortization of the Henry Schein license fee, which was fully amortized as of August 31, 2009.

Now I would like to provide a breakout of sales by region. This year's first quarter domestic sales were $2.2 million or 51% of net revenue, compared to $4.6 million or 70% of net revenue for the prior year. International revenues for 2010 first quarter were $2.2 million or 49% of net revenue, compared to $2.0 million or 30% of net revenue in the first quarter of 2009. Our gross profit for the first quarter of 2010 was $270,000 or 6% of net revenue, compared to a gross profit of $1.8 million or 27% of net revenue for the prior year period. This decrease was due largely to overall lower volumes which resulted in lower overhead cost absorption.

Operating expenses for the 2010 first quarter were $5.6 million, compared to $6.7 million in the prior year's comparable period. This represented a 16% year-over-year decline for the period. We continue to implement cost reductions to help offset the negative impact of the current economic conditions. The shift in the business model that is impacting our top line -- excuse me. This is the shift in the business model that is impacting our top line results in the near term. GAAP net loss for the first quarter of 2010 was $5.3 million or $0.22 per share, compared with a loss of $4.7 million or $0.19 lost per share for the same period in 2009. Non-GAAP net loss was $4.8 million or $0.20 per share for the first quarter of 2010 compared with non-GAAP loss of $3.8 million or $0.15 per share on a non-GAAP basis for the corresponding quarter 2009.

Turning to the balance sheet, as of March 31, 2010, we had cash and cash equivalence of $3.4 million, total assets of $19.6 million and a total stockholders equity of $2.7 million. Before we open the call for questions, I would like to turn it back to Dave for some additional comments on the recent changes at the Company and the impacts of those changes going forward. Dave?

Thanks, Brett.

As I mentioned at the outset of the call, we've spent a good deal of time in recent months and weeks structuring a new sales and marketing team, an infrastructure that reflects our new hybrid approach to US sales. Dr. Wayne Harrison, our new Vice President North American Dental Sales and Marketing has been busy hiring and rolling out our domestic sales efforts. Dr. Harrison is taking his experience gained as a top performing sales representative and our best performing regional sales director, a dentist and luminary for Noble BioCare to identify and execute on new sales plans and approaches for the Waterlase MD.

In addition, we're continuing to focus on improving our international sales progress and structure. Our initial entry into the Chinese markets is progressing as planned. We have trained the teams from our distributors and they now have tender offers into multiple state owned hospitals across China which have a long approval budget and tender process, but we expect to see the fruits of those results starting to happen in the second half of this year. The relationship we have initiated in multiple other countries continue to progress and expand. To repeat, what we have indicated throughout 2009 with the help of all of our partners, we're doing what we said we were going to do during this economic downturn, position BioLase to grow our market share as the economy recovery begins and position the Company with opportunities to grow long-term, even if the economic recovery takes longer than expected.

Finally, a few comments on our new product efforts. All over the world, dentistry is becoming more high tech. Diodes are becoming the standard of care and we feel the Waterlase is not far behind. More and more dentists are asking for a first look at BioLase products and more and more dentists are being trained in the use of our laser products every day. As doctors look at the new iLase, we're very pleased they are also looking at the total diode solution with the ezlase which adds whitening and pain management, and we have claimed positive ezlase sales indications as doctors have started looking at both of those lasers. Beyond those two diodes for soft tissue, we're ensuring doctors also take a look at the best hard tissue and soft tissue laser in the world, the Waterlase, which has the added benefits of being able to work near painlessly near tooth and bone and soft tissue performing endodontic and periodontal functions as well. The suite-of-products strategy we adopted is working well and as we implement our up selling strategy, that is going well as well.

In addition to traditional dental lasers, we are still in the process of working with Proctor & Gamble to refine our strategy and relationship in order to bring an entirely new professional and consumer product to the market. We expect to have more news on that in the coming weeks. Outside of our core dental market, there are increasing opportunities for the use of our lasers for pain management and ophthalmology, as evidenced by the recent clinical presentation to the American Society of Cataract and Refractive Surgery Symposium and Congress in Boston on the benefits of using our laser for eye surgery, including pain reduction and the prevent of breed bleeding.

We hope and expect that 2010 will be the year we're able to announce partners that will allow for significant marketing efforts in those markets and transform the BioLase story into a true platform for the use of lasers across the life sciences. We would like to thank you for your support and continued interest in the company and hope that you will be watching as all of these new elements of the business begin to bear fruit the rest of the year. That concludes our formal prepared remarks. We would now like to open up the call to questions.

Thank you, sir. We'll now begin the question-and-answer session. (Operator Instructions).

Our first question comes from the line of Dalton Chandler with Needham & Company. Please go ahead.

Good morning.

Good morning, Dalton.

Good morning, Dalton.

How long do you think it will take you to get caught up on the Schein pre-orders?

I think some progress will be made in the second quarter. I think a lot of progress will be made in the third quarter.

So would you expect by the year end you'll be fully caught up?

I would think so, yes. Yes..

Okay.

And as you introduced these new products and your product mix shifts, how do you expect that to impact your gross margin?

Interestingly enough, I think long-term our gross margin, right now, is actually structured to rise as you start seeing all of the sales being recognized. There is not honestly a huge shift in our product mix.

One thing that I saw at a show this weekend is I had seen the iLase adding incremental sales to our other product lines just at the CDA in California, where last year we had trouble and didn't get much sales at all. This year we sold eight iLase. We sold 20 ezlase and we sold, I think, four MDs there and three or four some place else over the weekend.

So we're seeing a good positive results. We see the iLase bringing people in to look at BioLase and many times for the first time and we're seeing a very positive blend of end user sales.

Okay.

I think you said you're up to 27 sales reps now. Where do you see that number going?

Right now, I would like to take it to 40 by year end. i think we'll be to -- in the 30s as we get to the end of the second quarter and early third quarter.

Okay.

As you hire these new people, what is the process you're going through to introduce them to their Schein counter parts?

Right now, when we hire them we take them first of all into our organization for five days of intensive training. It used to be they would pretty much hit the road and learn out in the field. We train them on sales. We train them on the product. And we trade them on dentistry. Most of them have a dental background.

Then what we are doing is we are pursuing two paths. We are introducing them to their local Schein counterparts to work with them. But we are also focusing on getting them leads outside of traditional Schein accounts, where they don't have as much interaction with -- truly with very many people at Schein because these are non-traditional accounts and we are hiring people who can aggressively go after that market. That is something very specific that we're looking for.

Okay. All right. Thanks a lot.

Yes, sir. Thanks.

Thank you. (Operator Instructions). One moment, please.

And our next question comes from the line of Robert Hoffman with Princeton Capital Management. Please go ahead.

Hello, Rob.

Mr. Hoffman, your line is open. I would now like to turn the conference over to miss Bertotti for any questions on E-mail.

If anybody has any questions please queue up. We have received a couple of e-mail questions we would like to address. First, Dave, do you think the first quarter is the bottom as far as revenues go for the year?

Yes. Definitely we feel it will be the bottom for the year.

Have you spoke to any investment banks about raising any money?

Jill, I'll take that. This is Brett.

As most of the listeners know, we have a shelf registration in place right now. That shelf registration allows us to raise up to $9.5 million. Should we decide to go in that direction, we are talking to bankers right now and reviewing all of our options. In addition to those efforts, we're also talking to some commercial banks to try to craft out a credit facility and get that in place as well.

Yes. We have -- with Proctor & Gamble coming and many of the other things that we have on the table right now and basically cash -- I'm pleased to say over the last 12 months our cash balances slightly grew.

But, still, $3 million is not what you want in the bank when you have growth opportunity in iLase, all the opportunities we're pursuing and expanding in the Waterlase and other new products, so this is something that we do have an interest in right now.

Okay. And real quick, guys, it looks like Rob Hoffman has queued back up, so we'll take his questions. Operator, please open that line.

Okay. Mr. Hoffman, your line is open.

Hopefully, it will work this time. I was getting off my speaker phone before.

You sort of answered it. I was questioning what your cash burn is, what your plans for a credit line, but you talked about that. But, Dave, maybe you can just fill in a little bit more about the Proctor & Gamble? You mentioned it before, but you talked about that in the discussion of cash. Will that have an effect on cash in the short-term?

I don't think it will have a big effect on it. Most of the development work that we're working on on the new product has largely been done, and we've already been sharing resources back and forth.

We want to conclude the deal before we say too much. I think there is only a minor investment in tooling and a little bit of inventory. And then we may -- once we get going, then there may be a little bit of additional marketing to go with it. I don't think it's going to be a huge cash drain on us, but I do see it as a great opportunity and I want to make sure we do this right with a partner like P&G.

Can you give us anymore details of what you're talking about there?

I think I can, yes, because I think we have some patents out there. Brett, can I?

Yes. Absolutely.

All right. Wonderful. We're very excited about 2 it actually. We want to get into people's mouths and get them comfortable using it and see the brand. The iLase is getting a lot more dentists involved. We're after the general public. We believe the tooth brush we would like to launch with P&G and get out into the professional channels is going to be very exciting and get our brand out to a lot more people.

What the brush does is basically it comes with a toothpaste. When you shine it in your mouth, it shows you where the plaque is and where you've missed the plaque. We have another device that does something similar at the professional level. We believe that these are things that will really help people see the benefits of light in their mouth and then we have other patents, too, as far as the tooth brushes that we would he like to proceed going forward, but we believe this is probably the most important and the most significant and the one that can make the most immediate impact.

Now, can you give us a general overview of how you would get paid just on the brush sales, on the toothpaste sales? Not talking about specific numbers, but how would you picture it being structured?

I would structure it we would probably -- we would be the manufacturer, BioLase. We own professional rights and our historic agreements with Proctor & Gamble and they own consumer rights.

I would see us working through professional channels as, for instance, as the electric tooth brushes were launched as doctors showed them and got people interested and got them going and then probably over a few years, if this took off into the consumer market then we would switch there. The agreement that we're contemplating has cross licenses for some of the shared technologies.

What I meant is would you get -- is it a razor end razor blade or just the razor meaning is just the tooth brush itself you get a piece of that revenue or also for the toothpaste that shows where the plaque is?

We would be picking up all of the manufacturer revenues on the toothbrush, which is the razor, and the toothpaste, the razor blade, and we would be picking up a royalty with Proctor & Gamble.

Okay. Thank you.

Yes, sir.

Thank you. (Operator Instructions). One moment, please. And we do have a follow-up from the line of Dalton Chandler with Needham & Company. Please go ahead.

Yes, hi. Can you talk about how you expect the tooth brush to be branded with P&G?

We're still in the process of working that through, but it would -- I think at least in the early years, I would expect to see our brand on it.

Okay. Thanks very much.

Thank you.

I've had one more question that I had come in from somebody else, and they asked me what we would be doing in the ophthalmology market. What we would probably do is we would probably be setting up in an ideal world we would set up a separate company where we and our shareholders would have a stake in it and we would be the exclusive supplier of the laser.

Someone asked me if we would be using the fund raise for that. I don't think we would. We're working on some sterile water for that field which will also help us in many other fields, but we will probably be capping the expenses there separately as the ophthalmology field can be extremely -- opportunity there is tremendous. However, that can be a very expensive process.

Okay, Dave. We have just a couple more e-mail questions, and then we'll turn it over to close up the call if there is no other people that prompt up. The question came up about the ramping of the internal sales stores. Can you give us a number on the level of marketing sales expense we should look for?

Last year, we cut our sales and marketing expense fairly drastically. I would expect there was probably going to be another $2 million to $2.5 million in sales and marketing expense over and above last year.

Okay. And then the final e-mail question that I received was how will margin vary between the sales through Henry Schein versus the ones sold direct?

I should -- I do want to say when I speak to our partners at Henry Schein, the word direct makes them a little uncomfortable because all of the sales that we do, and I know this is complicated, they will all flow through Henry Schein, so we keep a clear point of contact. On the non-traditional Schein -- on the Schein accounts, our margins will remain very similar as to where they are today.

On the non-traditional Schein accounts, where we are bringing in basically additional accounts for Henry Schein and they will be getting longer term benefits for supplying millions of dollars worth of consumables to those accounts, there our margin will be far greater and we'll be keeping actually the lion's share of the margin we have to Schein, plus over and above that we'll be keeping a large percentage of the other margins that would normally have gone to a distributor, and that's because we have gone out and found those accounts.

So our margins for the business with Schein remain roughly the same. Our margins to the new accounts will be greater.

Okay. Thank you. It looks like, operator, there is one more person in the queue for questions.

And this question comes from the line of Kent Holden with HAM Funds. Please go ahead.

Good morning, gentlemen.

If we could go back to the toothbrush. I want a clarification. This will take a special kind of toothpaste, is that correct?

Absolutely. When you shine the light on it, it will show you where the plaque is in your mouth, and without the light, it won't be there. If there is any comparison from history, it would be the old red pills that doctors used to put in your mouth, but people didn't like going out with a red mouth. This will not give you a red mouth, and we think it could have that amount of popularity and more.

Okay. And so you're planning to manufacture both the toothbrush and the toothpaste?

Yes.

What kind of a cost is that going to run?

Well, Kent, this is Brett Scott. I hate to get ahead of ourselves here. We're in negotiations with Proctor & Gamble right now. We do not have a signed deal.

What we're speaking about is what we contemplate this deal is going to look like. So we can't get -- we're not able to get down too far into the details with costs, et cetera. We're just trying to give you an idea of what we think the deal will look like.

Okay. Thanks.

Yes. Thank you. I'm going a little further than I have in the past because think has taken awhile. I feel very good about where it is, but as my investors I feel like it's time to tell you a little bit more.

Thank you. Mr. Mulder, there is no further questions at this time. Please continue with any closing remarks.

Thank you very much, everybody, for joining us today.

Nobody is pleased with the way the first quarter looked. It was a little unique in that we had to wrap up a 14-month deal with Henry Schein. The new deal starts on April 1, and it has room for more up side than that. We look forward to talking to you again in our second quarter release. Thank you.

Ladies and gentlemen, this concludes the BioLase Technology Incorporated First Quarter 2010 Results Conference Call.

If you would like to listen to a replay of today's conference, please dial 1-800-406-7325. For international participants, please dial 1-303-591-3030 and enter the access code 4294699 followed by the pound key. The replay will be available until May 18, 2010.

Thank you for your participation. You may now disconnect.