BIOLASE Inc (BIOL) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the BIOLASE Technology 2010 third quarter and nine-month results conference call. During today's presentation, all participants will be in a listen-only mode. And following the presentation, the conference will be open for questions. (Operator Instructions)

I'd now like to hand the conference over to Matt Clawson of Allen & Caron. Please go ahead.

Thanks, Josh. Good morning, everyone, and thank you for joining us today for the BIOLASE Technology third quarter and nine-months call. You should have all received a copy by mail this morning of the release announcing the company's results for the third quarter and nine months ended September 30th, 2010.

Before we get started, I've been asked to make the following statement. The words and 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 filing with 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 the statement was made or to reflect 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 third quarter and nine-month results can also be found on the company's quarterly report on Form 10-Q which the company will file with the Securities and Exchange Commission tomorrow.

With me on the call today from BIOLASE is Federico Pignatelli, Chairman and CEO. Federico will review some prepared remarks, including an update on the business, operational performance and outlook. And then there will be a question-and-answer session at the end of the call followed by a few closing remarks.

With that, I'd like to turn the call over to Federico Pignatelli. Good morning, Federico.

Good morning. I welcome you to our third quarter and nine-month results conference call. And thank you for participating. Today, we will review the accomplishments and progress we made at BIOLASE during the quarter, including discussing some of the key strategic initiatives that were implemented since I took over as CEO on August 27, 2010 and our new direct and multi-distributor sale model. I will also summarize the financial results for the quarter and first nine months of the year and then conclude my opening remarks and open it for questions.

In a very short time, along with the new Board members, I have implemented a series of key operational changes that have put the company on firmer financial footing and on a path towards a rapid return to growth and profitability. The key point I would like you to take away from today's call is that we believe the low point of the company is behind us. We experienced sequential growth between the second and third quarter, where normally 2Q to 3Q sequential growth is negative. And we believe that upward trend will only increase from here on with a return to profitability effective in the current quarter.

When I became CEO, my first step in the turnaround process was to control and reduce expenses. While we are continuing our critical innovation and new product development activities and increasing our direct sales force, we have eliminated nonessential costs, filtering more than $14 million with an approximate 30% increase from 2009 to 2010. With these cost reductions, we can achieve a total annual sales break-even level of approximately $32 million on EBITDA cash basis, or about $8 million per quarter. We are as lean and mean as possible and, as I mentioned, expect to return to profitability for the fourth quarter and beyond.

Secondly, I changed the company's sales and marketing approach. Henry Schein continues to be an important customer of BIOLASE, but is no longer our exclusive distributor in North America. Collaboration between our two companies continues and is evidenced by the receipt of a $9 million open purchase order by Henry Schein for BIOLASE products, $6 million of which will be for the purchase of our revolutionary iLase personal laser over a nine-month period, with an option for an additional 3 million of iLase or for other laser systems, including our flagship WaterLase MD product. We are now selling on a direct and multi-distributor basis, and we have plans to increase our sales force with a goal of [accounting] 35 strong during the first quarter of 2011 as we believe we now have the best commission plan in the industry.

Under our new nonexclusive distribution agreement, we recently received our first multi-distributor order from Benco Dental, the largest privately owned, fully service dental distributor in United States. This new sales model will allow us to be much more successful and reach the entire dental market both domestically and international.

As evidence that the new model is working right out of the gate, the majority of sales in the third quarter were WaterLase MD system sold by our direct sales force. As we have mentioned in the past, we believe the iLase has the potential to become the most popular diode laser in the world. Right now, we have a substantial backlog of end user sales. And it is important to note that this increase in business related to the iLase is bringing people to BIOLASE to discuss WaterLase, which is the world's combined best hard and soft tissue laser.

Other important accomplishments made during the third quarter in the weeks following the period include, we regained compliance with the minimum stockholders equity requirement for continued listing on the NASDAQ. We put in place new executive team members, including the appointing of Dmitri Boutoussov, PhD, to Chief Technology Officer. We were awarded two new patents to strengthen intellectual properties position in core WaterLase technology and diode laser, bringing total issued and pending patents to 286.

Many of the steps I've taken to restructure and relaunch the company [prepared] late in the third quarter, so the effect will not be seen in the financial results until we report the fourth quarter, which is also when I expect significant improvement and even a return to profitability.

I will review third quarter results now. Total revenue for the 2010 third quarter was $6.2 million compared to $5.9 million in the 2010 second quarter. Revenue, excluding license fees and royalties for the third quarter of 2010 was $6 million, up 27% sequentially from $4.7 million for the 2010 second quarter primarily due to our shift to a direct selling model in September. Total revenue in last year third quarter was $12.1 million. Total revenue for the first nine months of this year was $16.5 million, a 50% decrease compared to $33 million in the prior year period.

The year-over-year change in revenue in the third quarter and first nine months of the year was driven by minimized domestic laser purchases by Henry Schein. However, sales to Henry Schein worldwide has decreased as a percentage of product revenue from 51% in the second quarter 2010 to 39% in the third quarter 2010 and is expected to decline to a minimum of 11% of our product revenue the fourth quarter of 2010.

Total laser systems net revenue for this year third quarter and nine months was $4 million and $8.9 million respectively compared to $8.8 million and $24 million in the prior year period. Normally, the system net revenue, which includes consumable product, advanced training program, extended service contract and shipping revenues were $2 million and $6.2 million respectively compared to $3 million and $7.8 million in the third quarter and first nine months of last year.

License fees and royalty income for the 2010 third quarter and first nine months was $218,000 and $1.4 million respectively as compared to $289,000 and $1.2 million in the prior year period. The 2009 period includes amortization of the Henry Schein license fee which was fully amortized as of August 31, 2009. The 2010 period included $1.3 million of recognized deferred royalties from Proctor & Gamble.

Now I would like to provide a breakout of sales by region. This year, third quarter domestic sales were $4 million, or 64% of net revenue, compared to $8.5 million, or 71% of net revenues in the first -- in the prior year. For the first nine months of 2010, domestic sales were $9.7 million, or 59% of net revenue, compared to $24.4 million, or 74% of net revenue for the first nine months of last year. International revenue for the 2010 third quarter were $2.2 million, or 36% of net revenue, compared to $3.5 million, or 29% of net revenue in the third quarter of 2009.

For this year's first nine months, international revenues were $6.8 million, or 41% of net revenue, compared to $8.6 million or 26% in the prior year period. For the 2010 first nine months, gross profit was $4 million, or 24% of net revenue, compared to gross profit of $15.7 million, or 48% of net revenue for the year earlier period. Gross profit as a percentage of revenue, excluding license fees and royalties, improved by 9%, from 17% in 2010 second quarter to 26% for the 2010 third quarter.

Operating expenses for the 2010 third quarter were $4.2 million compared to $4.9 million in the prior year's comparable period. For the first nine months of 2010, operating expenses were $15.8 million compared to $17.2 million for the prior year period. The year-over-year decrease was due to recent restructuring activity.

The net loss operation declined significantly on a sequential basis [$2.4 million] for the 2010 third quarter compared to $4.1 million in the 2010 second quarter. Net loss from operation, excluding license fees and royalties, improved by $2.7 million to $2.6 million in 2010 third quarter from $5.3 million in 2010 second quarter. Net loss for this year third quarter was $2.7 million, or $0.11 loss per share, compared to net income of $859,000, or $0.04 per share in the 2009 third quarter.

Non-GAAP net loss was $2.2 million or $0.09 loss per share from the 2010 third quarter compared with non-GAAP net income of $1.5 million, or $0.06 per share for the similar quarter in 2009. Net loss for the first nine months of 2009 (sic - see Press Release) was $12.2 million, or $0.50 loss per share, compared to a net loss of $1.5 million, or $0.06 loss per share in the first nine months of 2009. Non-GAAP net loss was $10.7 million, or $0.44 loss per share for this year's first nine months, compared to non-GAAP net income of $791,000, or $0.03 per share for the similar period in 2009.

Turning to the balance sheet, as of September 30, 2010, we had cash and cash equivalents of $2.2 million and total assets of $19.5 million. We also announced our guidance for the fourth quarter in this morning's release. Our guidance on the top line is $9.5 million to $10 million, including a minimum of $1.1 million of equipment sold to Henry Schein. Our goal is to be profitable and cash flow positive in the fourth quarter with our leaner cost structure and with a larger percent of sales coming from our direct selling efforts and the efforts of our other nonexclusive distributors.

In closing, the improved commercial and operational metrics in the third quarter are just the beginning of the results of a company-wide restructuring and turnaround. The changes of the company have positively impacted cost structure, commercial momentum, employee morale and have reinvigorated the spirit of invention that has been a hallmark of this company through its initial success in growth period. The rapid pace of change of the company will continue during the current quarter and into the new year as we anticipate additional expansion of our sales and marketing organization, new distribution partners and an acceleration of the positive sales trends that began at the end of the third quarter.

We would like to thank you for your support and continued interest in the company. That concludes our formal prepared remarks. We would now like to open up for questions.

Yes, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) One moment, please. Our first question comes from the line of Richard Molinsky with Max Communications. Please go ahead.

Hello, Federico.

Hi.

Congratulations. Couple things. I noticed you bought a couple hundred thousand shares last year at $1.18, $1.17. And looking at the balance sheet for this past quarter, you're about $8 million in customer deposits. I know it comes out as a liability. But do you have any concern about the balance sheet, need to raise money, or do you think you have the working capital to be able to expand without having to raise money in equity?

Well, we definitely are not sitting on a lot of cash. But at the same time, we are sitting on a lot of cash in our inventory.

Right.

As you will see, our inventory is substantial. And that is calculated at cost, not the market value. So there is a lot of cash to be made out of selling inventory. That's exactly what we're doing.

Okay. So you don't see yourself coming to the market at these prices in the near term. I don't know. Is that the case?

I think the stock is not at the level that I would call appropriate for a capital raise. Sure, it would be nice to have $2 million more in the bank. But again, at the moment, I think we are fine. We have reduced the cost structure substantially. We are lean and mean. We have cash to be made out of our inventory. The easy cash is there. So why should I go and sell shares at the moment?

Right. Good point. Federico, appreciate it. Thank you so much.

Sure. Thank you.

Thank you. (Operator Instructions) Our next question comes from the line of Chip Saye with AWH Capital. Please go ahead.

Federico, can you hear me?

Sure.

I have a couple questions. So let me -- following up on the last call, you do not anticipate having a financing of any kind. Just looking at your working capital, it looks to be a negative. I understand that there's inventory there, cash to be realized. It looks like it's a negative $5 million for working capital. Do you -- any kind of financing coming, or no?

Like I say, the easy money is in the inventory. We have substantial amounts of money there. And when I will have inventory at one and a half time -- I'm sorry -- one and a half months of the quarterly sales, then I will think about potentially raising some money. But again, it is all about dilution too. And I don't think it's appropriate to sell shares at such price.

Okay. That sounds good. That's also helpful to let me know the one and a half months of quarterly sales, that metric. Okay. On the inventory question, how much of inventory of the WaterLase MD does Schein currently have now?

Yes. That's a question to ask Schein, not --

Okay. Because I know you said in the next quarter you'll have at least a $1 million order. And is that for WaterLase, or would that be for InterLase, or what would that order be for?

It's -- that will be only for iLase.

: ILase. Okay. Okay. The next question is on your interest expense, I saw the interest expense. Am I reading that correctly? It's $157,000 this quarter. Is that right?

Yes.

What is the -- and that's not -- you don't have a lot of debt. What is the interest rate on that debt?

Oh, well, that --

It seemed excessive. That's why I'm asking. It seems like a really high rate.

Yes. We're paying 14%.

Okay.

That was on prior to my becoming the CEO of the company.

Is there any chance you can refinance that at a lower rate?

Well, we do have a very good relationship with the bank, and very constructive. So we will see. I mean, they clearly are looking at how -- you know, on the -- the progress we're making from the operation point of view, and they are very reasonable people, so we will see in the future what will happen.

Okay. And then one more question, then I'll jump off and let someone else get in. The engineering and development costs this quarter was down to the lowest level it had been in probably eight or ten quarters. Do you anticipate it being at that $775, 000 level in coming quarters? Or do you think that (unintelligible) higher, or do you think that may go back up to around the $1 million level?

Well, R&D is very important to the company because it's about innovation, and we are a technology company. So I see some increases in expenditure there. So yes, there is a lot of focus around it.

So it's good. You think it might go back up to the -- I mean, if I'm trying to model the next quarter, and then for 2011, then actually I'd assume a higher number than $775,000 a quarter?

Correct.

Okay. Closer to the $1 million level. Is that fair?

Just about there.

Okay. Like I said, I'll hop off, and I'll ask another question maybe offline if you have time.

Sure.

Thank you.

Thank you.

Thank you. And our next question comes from the line of Paul Bornstein with Black Diamond. Please go ahead.

Yes. I just had a question on the sales cycle. You indicated that sales can be picking up. Just wondering how long your sales cycle is, because it seems like Henry Schein was a long cycle. And maybe they are focused on other things besides just your product. And your salespeople are obviously focused just exactly on your products. So I'm just curious how quickly -- you know, as you address various customers, is it three months, four months, six months before you start getting sales and then obviously follow-through sales?

We are selling now. So there is no three or six or nine months. We started selling in September directly.

No. I'm talking about a new customer.

Could you clarify what do you mean a "new customer"?

Well, if Henry Schein had basically the exclusive sales cycle, and now you're going into it with your salespeople, does it flow through in terms of immediate sale once you show them your product or when you go to a customer that you have gone to before, or does it happen over a three-month period?

Again, it's a mix of everything. I mean, the customers have been looking at our technology for quite some time. The new customers, it depends. Sometimes you close the sales very quickly. Some other times it takes longer. But these are all direct sales. And we started, like I said, also through other distributors. So we are picking up very nicely there. And what is nice to see is that there is a renewed interest in laser.

Okay. Well, that's the whole key to the company is sales, because under not your leadership but the other two CEOs, there were really no large sales. So hopefully, that's going to change under your leadership, and hopefully just stay there because the other two CEOs didn't perform.

I entirely agree.

Okay.

It is my focus.

Yes. Take care.

Thank you. (Operator Instructions) Our next question comes from the line of Chris [Bosco] with RBC Capital. Please go ahead.

Good afternoon. I was just trying to -- I jumped on the call a little late here, so if you commented on this, I apologize. But there's been no real color on the Proctor & Gamble relationship. Can you give any there? And if you have talked about it, I'll just check the transcript.

Again, Proctor & Gamble is a real tough one because they like a lot of confidentiality, so I cannot really elaborate on that. But the only thing I can say is that it is an active project, and I have to stop at that. I cannot say more.

Thank you. (Operator Instructions) And, Management, I have no further questions in the queue. I'll hand it back for any further remarks.

Thank you. I clearly understand how shareholders have been patient with BIOLASE, and I thank them for that. The important thing is to understand that BIOLASE is on a real recovery path for long-term growth and profitability again. We have $104 million in tax loss carried forward. And my goal is to use them all in the coming year. We, today, have over 10,000 lasers installed and working and generating potential revenue, a current and potential revenue. We have sold over 14,000 lasers since 1998. We are the number one in the world in the dental business. Just a few years ago, when we raised $42 million, 1850. In early 2005, the company only had 2,000 lasers installed and functioning. Today, we have over 5 times that level. So from that base, we will build up. And I am very positive on the future of BIOLASE. Thank you.

Ladies and gentlemen, that does conclude the BIOLASE Technology 2010 third quarter and nine-month results conference call. Thank you for your participation. You may now disconnect.