BIOLASE Inc (BIOL) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the BIOLASE 2012 fourth-quarter 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, March 6 of 2013, and I would now like to turn the conference over to Lisa Wilson, Investor Relations for BIOLASE. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining the BIOLASE fourth-quarter and year-end 2012 financial conference call. Today's conference will include remarks from Federico Pignatelli, Chairman and Chief Executive Officer, and Fred Furry, Chief Operating Officer and Chief Financial Officer, followed by a question-and-answer period. When listening to this call, please refer to the press release issued earlier today announcing the Company's results for the fourth quarter and year ended December 31, 2012. If you do not have a copy of this release, it is available on the BIOLASE website at BIOLASE.com.

Before we get started, please be aware that a number of forward-looking statements will be made during this presentation. Forward-looking statements are any facts that are not historical facts, and can be identified by words and phrases including can be, may affect, may depend, believe, estimate, project, and similar words and phrases. These forward-looking statements are based on BIOLASE's current expectations, and are subject to a variety of known and unknown and uncertain -- risks and uncertainties that could cause the Company's actual results to differ materially from the statements contained in this presentation. These risk factors are discussed in the Company's filings with the SEC. BIOLASE cautions you that any forward-looking information provided is not a guarantee of future performance. Any forward-looking statements represent the Company's views only as of today, and should not be relied upon as representing our views as of any subsequent date.

For the benefit of those who may be listening to the replay, this call is held and recorded on March 6, 2013. A replay of the call will be available on the BIOLASE website shortly after this call's completion. The Company's 2012 fourth-quarter and year-end results can also be found on the Company's annual report on Form 10-K, which the Company will file with the Securities and Exchange Commission.

With that, I'd like to turn the call over to Federico. Federico, please go ahead.

Thank you, Lisa, and good afternoon, everyone. The fourth quarter of 2012 reflected the favorable and positive results of the significant restructuring that BIOLASE has undergone during its turnaround over the past two years, where we have improved our financial condition and increased the growth in our core dental business. It gives me great pleasure to report that we exceeded our stated high range of revenues guidance for the 2012 fourth quarter by approximately 9%, with revenues of $19.1 million. This is the highest quarterly revenue for the Company since 2007. This growth was driven by the continued demand of our core line of WaterLase all-tissue lasers, and our newly released EPIC soft-tissue diode laser.

Our revenues were also augmented by sales of our in-license digital imaging products, including the initial sales of our CAD/CAM system. Additionally, our gross revenues for the year totaled $58.5 million after adjusting for the inventory repurchase in connection with the Schein termination agreement in Q2 2012. I'm very pleased to know that these results -- this result was the exact midpoint of our initial guidance for the year. This is also the highest level of sales by BIOLASE since 2008. We also achieved improved margins and reduced our general and administrative expenses, enabling us to report net income for the quarter of $1 million or $0.03 per share.

I will discuss our business and key growth drivers in greater detail, but first I would like Fred Furry, our COO and CFO, to review the financial information for the 2012 fourth quarter and full-year. After that, Fred and I will be glad to answer your questions.

Thank you, Federico, and good afternoon. For the quarter ended December 31, 2012 we reported net revenue of $19.1 million versus $13.2 million for the fourth quarter of 2011, representing quarter-over-quarter growth of 45%. The 45% increase in net revenue was due to increased sales across all of our revenue streams, including our line of all-tissue WaterLase lasers, diode soft-tissue lasers, imaging systems and consumables, with the primary driver being higher sales of our all-tissue WaterLase systems.

Unit sales in our WaterLase product line increased by 42% in the 2012 fourth quarter as compared to the prior-year quarter. Such growth was primarily the result of the continued success of our direct sales force in North America. Revenues from the sale of WaterLase systems during the 2012 fourth quarter totaled $11.7 million, an increase of $2.6 million or 29.2% as compared to $9.1 million in the 2011 fourth quarter. The number of WaterLase systems sold increased by a larger percentage than WaterLase revenues quarter-over-quarter, as a result of our strategy to offer systems of varying capabilities at multiple price points. The iPlus is still our flagship product and our primary revenue driver, and we expect this to continue in 2013. By offering multiple product configurations across a range of price points, we believe that we can attract more customers, drive adoption, and generate more significant product and consumables revenue. WaterLase system sales comprised approximately 61.5% of net sales for the 2012 fourth quarter, compared to 69% for the prior-year quarter. The majority of these WaterLase revenues in both quarters were from the sales of the Company's flagship WaterLase iPlus all-tissue laser system.

Diode laser system sales comprised approximately 14.4% of net revenues for the 2012 fourth quarter, compared to 11.6% for the prior-year quarter. As you recall, our diode sales were impacted in the second and third quarters of 2012, due to the pending regulatory clearance of our new EPIC diode laser system. As we had expected, however, sales of diode laser systems increased significantly in the fourth quarter following receipt of FDA clearance in early October. Diode laser sales for the 2012 fourth quarter increased $1.3 million or 79.9% to $2.8 million, compared to $1.5 million for the 2011 fourth quarter. We believe that the favorable price point of our EPIC diode soft-tissue laser system will continue to broaden the demand for lasers, and create an upsell opportunity for our more expensive all-tissue WaterLase systems.

Imaging revenues totaled approximately $1.6 million or 8.6% of net revenue during the 2012 fourth quarter, as compared to $138,000 or 1% of net revenue for the prior-year period. This represents growth of over 1000%. We also expect that by leveraging our growing direct sales force, which is already effective in selling high-tech equipment and improving quarterly, to sell our high-tech in-license cone beam and CAD/CAM imaging products, we will create more BIOLASE customers who will ultimately have interest in our core laser products.

Gross profit as a percentage of net revenue was 46.6% as compared to 42.2% for the prior-year period. This year-over-year increase for the fourth quarter was primarily due to higher unit sales of our core products combined with decreased cost of revenues, as we continue to improve our manufacturing processes and quality, and our service and warranty expenses continue to decline. It is especially notable that our margins continue to improve while sales of our in-licensed products also continue to grow, as our in-licensed products generally have significantly lower margins than our manufactured products. Operating expenses in this year's fourth quarter were $7.7 million or 40.4% of net sales, as compared to $7.5 million or 56.9% of net sales in the 2011 fourth quarter. The increase in sales and marketing expense is primarily a result of sales commissions incurred on higher system revenues, as well as higher payroll and consulting costs associated with the development of our direct sales force in North America and an increase in convention costs, which were offset by a decrease in the cost of supplies. General and administrative expenses, and engineering and development costs, were lower in the 2012 fourth quarter than in the prior year, due to primarily decreased payroll and consulting fees. Patent costs and bank fees have increased, while other legal costs have decreased.

As a result, net income for the fourth quarter of 2012 totaled $1 million, or an income of $0.03 per share, compared to a net loss of $2 million or a loss of $0.06 per share for the 2011 fourth quarter. After removing interest expense of $99,000, non-cash depreciation and amortization expense of $140,000, and non-cash stock-based other equity instruments and other non-cash compensation expense of $383,000, the 2012 fourth quarter resulted in non-GAAP net income of $1.7 million or $0.05 per share, compared with a non-GAAP net loss of $1.3 million or a loss of $0.04 per share for the 2011 fourth quarter.

Turning to the earnings results for the year ended December 31, 2012, on a GAAP basis net revenue totaled $57.4 million compared to $48.9 million for the prior-year. Adjusting for the inventory repurchased in connection with the Schein termination agreement, which was offset against our 2012 second-quarter revenues, non-GAAP adjusted revenue for fiscal 2012 totaled $58.5 million, which was the midpoint of our initial annual revenue guidance for 2012. This is an increase of $9.6 million or 19.7% as compared to net revenue of $48.9 million for fiscal 2011. When excluding both the 2012 inventory repurchase in connection with the Schein termination agreement, and the 2011 non-recurring event of equipment sales to Schein for irrevocable purchase orders of $5.9 million, non-GAAP adjusted revenue of $58.5 million for 2012 represents a 36.1% increase over non-GAAP adjusted revenue of $43 million for the prior-year, which was right in line with our guidance of 36%.

Domestic revenues were $40.6 million or 70.7% of net revenue for 2012, compared to $32.8 million or 67.1% of net revenue for 2011. International revenues for 2012 were $16.8 million or 29.3% of net revenue, compared to $16.1 million or 32.9% of net revenue for 2011. The number of WaterLase systems sold during 2012 increased by 37.1%, primarily due to increased sales of our flagship WaterLase iPlus system and sales of our MD Turbo laser system, including 100% of the laser systems that the Company repurchased in connection with the Schein termination agreement during the 2012 second quarter. These repurchased systems were sold throughout the 2012 second, third and fourth quarters, at margins consistent with our other laser products. The inventory repurchase was a tremendous opportunity for BIOLASE, and we will -- and we demonstrated what a well-trained and properly motivated sales force can do. We will continue to offer our lower-priced new and used MD Turbo laser systems, as well as our mid-priced MDX laser systems, as all-tissue alternatives to our flagship iPlus in 2013.

GAAP net revenues from the sale of WaterLase systems, which includes the effect of the $1.1 million inventory repurchase from Schein during the 2012 second quarter, increased $6.8 million or 23.1% for 2012 as compared to the prior year. Excluding the effect of the Schein inventory repurchase, and the 2011 non-recurring event of equipment sales to Schein for irrevocable purchase orders of $2.3 million, non-GAAP adjusted net revenue from the sales our WaterLase systems for 2012 increased by $10.2 million or 37.7% compared to 2011. WaterLase system sales comprised approximately 62.8% of gross revenue for 2012, compared to 59.9% for the prior-year period. The majority of these WaterLase revenues were from the sale of the Company's flagship WaterLase iPlus all-tissue laser system.

Revenues from the sale of diode laser systems decreased $2.9 million or 31.2% to $6.3 million for 2012, as compared to $9.2 million for 2011. Diode laser system sales comprised approximately 11% of our net revenues for 2012, compared to 18.8% for the prior-year. Excluding the effect of the 2011 non-recurring diode sales to Schein for irrevocable purchase orders of $3.6 million, non-GAAP adjusted net revenue from the sales of our diode systems for 2012 increased by $729,000 or 13.1%, compared to 2011. Diode laser system sales were negatively impacted during 2012 due to market anticipation of our new EPIC 10 diode laser system, which was cleared by the FDA in October 2012. Imaging systems net revenue, which includes our in-licensed cone beam and CAD cam products, totaled $3.4 million for 2012 as compared to $238,000 in the prior year.

We added cone beam digital imaging to our product offerings in late 2011, and further enhanced our imaging products with the addition of CAD/CAM intra-oral scanning in late 2012. These in-licensed imaging systems are expected to generate revenue growth in future periods, while increasing awareness in our core internally-developed laser products. Other revenues, comprised of consumable products, services and license fees, and royalty revenue, increased approximately $1.4 million to approximately $11.6 million in 2012, as compared to $10.2 million in 2011. The increase was primarily the result of ancillary sales from a broader customer base.

Gross profit as a percentage of net revenue was 46.2% in 2012, as compared to 43.6% for the prior-year. The year-over-year increase was primarily due to increased sales of WaterLase systems and increased sales of consumables, coupled with lower cost of revenues reflecting lower service and warranty expenses due to ongoing improvements in our manufacturing processes and quality. Operating expenses totaled $29 million for 2012 or 50.6% of net sales, as compared to $25.3 million or 51.8% of net sales in the prior year. The increase was primarily due to increased sales commissions earned on higher revenues, increased convention costs associated with the imaging product line, increased payroll and consulting costs related to further development of the Company's direct sales force, and increased media and advertising costs. The net loss for 2012 totaled $3.1 million or a loss of $0.10 per share, compared with a net loss of $4.5 million or a loss of $0.15 per share for 2011. After removing interest expense of $239,000, non-cash depreciation and amortization expenses of $513,000, and non-cash stock-based other equity instruments and other non-cash compensation expense of $1.9 million, the non-GAAP net loss for 2012 totaled $431,000 or a loss of $0.01 per share, compared to a non-GAAP net loss of $1.4 million or a loss of $0.05 per share for 2011.

Turning to the balance sheet, as of December 31, 2012 we had approximately $7.5 million in working capital. Cash and cash equivalents totaled approximately $2.5 million, compared to $1.3 million at September 30, 2012 and $3.3 million at December 31, 2011. Accounts receivable totaled $11.7 million, compared to $10.3 million at September 30, 2012 and $8.9 million at December 31, 2011. Stockholders' equity was $11.8 million at December 31, 2012. In addition, the Company had two revolving lines of credit with Comerica Bank totaling $8 million, with $1.6 million outstanding and $6.4 million of available borrowings at December 31, 2012.

Moving on to financial guidance, we are very excited as we look ahead to 2013 after closing 2012 on a strong cash-positive note. We plan to invest heavily in sales, marketing and advertising efforts in North America and internationally during the 2013 first quarter. We have already attended several trade shows and are committed to attending several more, including the WCLI Super Symposium. These events can be expensive but they generate sales during the events, generate significant interest in our product offerings, and create a large amount of leads that are closed subsequent to the shows. As a result, we anticipate that these efforts will be a draw on our cash flows from operations for the 2013 first quarter, but that they will provide a cumulative overall benefit and help the Company generate cash from operations for 2013 as a whole.

Additionally, under the Affordable Care Act, which became effective in January 2013, semi-monthly installments for a 2.3% excise tax on a substantial portion of our product sales to customers located in the United States became -- or become due and payable. We are evaluating our pricing strategy and operational initiatives to identify areas of cost savings that may help to offset the negative impact of this tax.

With that, I will turn the call back to Federico.

Thank you, Fred. The 2012 fourth quarter was another productive and active quarter for BIOLASE, with 45% growth quarter-over-quarter. This growth was driven by continued growing demand for our flagship WaterLase iPlus and the EPIC diode soft-tissue laser, for which we received FDA clearance in early October. A portion of the increase in net revenue in the 2012 fourth quarter is a direct result of the worldwide sales of this innovative new device. I continue to be extremely pleased with our efforts and success in the turnaround of BIOLASE. In addition, our testimony to our success -- the Orange County Business Journal cited BIOLASE as being one of the fastest-growing public companies in 2012 for its two-year revenue growth of 58.5% for the 12 months ended June 2012, compared with the same period for 2010.

I want to underscore the importance of our achievements, and to note that BIOLASE achieved these successes despite facing strong headwinds caused by a surplus of our own laser systems sold into the marketplace by Henry Schein in 2011 and early 2012. Nevertheless, our strategy to sell to end-users, and to dealers that sell to end-users, has led to significant revenue growth and no inventory accumulation at our distributors. It indicates that we have worked through the issues of past management involving inventory build up, and are completely beyond the overhang this created for BIOLASE. We now have a clean slate from which to move forward and build the Company for continued success in 2013.

Furthermore, we expect to continue to benefit from the efforts of our expanded direct outside sales force and established inside sales organization, both of which continued to drive sales growth during the 2012 fourth quarter. We expect this traction to continue in 2013. Our inside sales representatives and lead generators work in partnership with our direct outside sales team to sell our lines of internally-manufactured laser systems and in-licensed imaging products, win new customers, leverage the Company's existing new [store] laser system, and drive new dentists to our sales seminar. We intend to continue to invest heavily in the training and education of our sales team, because a well-trained effective sales team is critical to driving the increased adoption of our products.

Now let me go into more details about the business and our overall progress. WaterLase remains our core product line, and this technology is what makes BIOLASE unique. Conventional surgical devices such as the scalpel, high-speed drill, [electro surge], electric bone saws, and even heat-generating lasers, all create trauma to tissue and cause pain. WaterLase is a [destructive] technology that is changing the way that surgery is performed in dentistry. The WaterLase is a brand-new approach to surgery which greatly expands a dentist's product offering and greatly increases patient acceptance. Further, traditional sterilized surgical devices can carry pathogenic microorganisms from patient to patient. Autoclaving for example fails 15% of the times to decontaminate dental burs, which by nature have very ragged surfaces, and 76% of the time to decontaminate [and define] for root canal surgery.

A recent article in Business Week from the February 25 to March 3, 2013 issue noted that over 100,000 people in this country die each year from hospital-acquired infections. WaterLase technology is bacterial [cedral] and antifungal, and can significantly reduce cross-contamination in dental [operatory]. Our strategy within dentistry remains to broaden our WaterLase, diode and in-licensed product lines to drive adoption of our core products. The WaterLase iPlus is our flagship product and our primary revenue driver, and we expect this to continue in 2013, but we also believe that by offering multiple product configurations at multiple price points, we will attract more customers and generate greater adoption and revenue. Further, the favorable price point of our EPIC diode soft-tissue laser system will also continue to broaden the demand for lasers, and create an upsell opportunity for our more expensive all-tissue WaterLase system.

We have also leveraged our growing direct sales force, which is already effective in selling high-tech equipment, to sell our high-tech in-licensed cone beam and CAD/CAM imaging products. These products will of course add to revenue, but they will also create more opportunities for our core laser products. During the 2012 fourth quarter, we launched the EPIC diode soft-tissue laser. This next generation diode soft-tissue laser features ComfortPulse, BIOLASE's proprietary technology, that allows dentists to precisely control the level of laser energy that penetrates the target tissue. ComfortPulse keeps patients more comfortable by avoiding pain-inducing heat buildup at the surgical site, which can cause excessive tissue damage.

Further, the EPIC features a revolutionary intuitive applications-based user interface, with a high-resolution touch-screen pre-programmed with 15 of the most commonly performed soft-tissue procedures, including pain therapy, which is a highly popular treatment in the dental community for addressing pain in the oral-maxillofacial region. We also executed a definitive five-year agreement with 3Shape Corporation during the 2012 fourth quarter, making BIOLASE a distributor of the TRIOS intra-oral scanning system in the US and Canada to dentists, dental specialists and dental schools. After launching the TRIOS at the ADA meeting in San Francisco in October, the initial reception has been very positive. We have already seen an impact from TRIOS revenues in the 2012 fourth quarter, and look forward to the contribution that it will continue to have in 2013.

Moving back to our core technologies, we currently have a number of 510(k) submissions filed and under review by the FDA, including three files already in 2013, and we expect to submit several more key 510(k)s throughout the rest of the year. This pipeline of incremental opportunities will be important, as we strive to build upon our core dental franchise and develop into new areas where we can maximize our extensive patent library. Looking beyond our core dental platform, and without taking our focus away from it, we also see many exciting opportunities for our innovative patented laser technologies in various medical fields. As we have mentioned before, there are multiple applications available to BIOLASE in ophthalmology.

We launched the Oculase website earlier this year to showcase how this wholly-owned subsidiary can expand WaterLase technology and other related intellectual property into ophthalmology, where we believe there are a number of surgical and non-surgical applications. With minimal disruption to our core dental laser business, we are currently performing proof-of-concept for research and clinical studies with the assistance of various opthalmic specialists under the supervision of Dan Durrie, Oculase's Chief Opthalmic Advisor. At the same time, we are looking for strategic partners through a joint venture or other approach to invest in Oculase for an ownership percentage to commercialize this tremendous opportunity. Coming on the heels of our Oculase announcement, we received a new patent covering the use of laser technologies for treating various conditions of the eye, including presbyopia, glaucoma, retinal disorders and cataracts. BIOLASE currently holds a total of 19 issued and 21 pending US international patents in ophthalmology.

Another growing segment of medicine is pain management, reaching into the $1 billions each year in revenue. Age, stress, and economic factors can all impact the body, and the pain and discomfort that it can create -- can be effectively created -- treated with our diode laser therapy. Diode technology is extremely effective in anti-inflammatory manipulation in muscle and nerves, and can even be used to treat [affective] manifestation. Our EPIC 10 diode laser is already FDA cleared for these indications, and we have seen significant demand for this product for treating TMJ and providing temporary pain relief in dentistry. We currently plan to enter this large market with our modular EPIC platform, using an independent sales force separate from our core dental sales force in approaching chiropractors and support therapy offices.

In February 2013 we also received FDA clearance for the 940 -nanometer Diolase 10 diode soft-tissue laser for use in over 80 different procedures in 19 additional medical markets. These new markets include general surgery, opthalmology, dermatology, plastic surgery, ENT, oral surgery, arthroscopy, gastroenterology, podiatry, GI/GU, gynecology, neurosurgery, pulmonary surgery, cardiac surgery, thoracic surgery, urology aesthetics, and vascular surgery. This FDA clearance is the first step in enabling BIOLASE to leverage its modular EPIC dental diode laser platform and consumable business across a wide range of multi $1 billion-dollar medical markets with a focused strategic partner. As an example, we recently launched the EPIC V-Series veterinarian soft-tissue diode laser, which is based on our modular EPIC dental laser, at the 85th Western Veterinarian Conference held in February 2013, at which we demonstrated the product and took advance orders.

While these opportunities will initially be addressed by our inside sales force, and through an online store, we ultimately plan to expand this market segment to a variety of strategic distributor relationships beginning in the 2013 second quarter. To give a quick glimpse into the veterinary market, there are approximately 70,000 veterinarians and nearly 34,000 veterinary clinics in North America alone, as well as more than 100,000 veterinarians and 30,000 clinics in Europe. We can address this market with pain management, surgery and dentistry. This presents an interesting market opportunity for BIOLASE, as we believe that we are positioned to capture a portion of this emerging market with our technology to perform surgery and treat gum disease which, as an example, is the most common medical problem for dogs, cats and horses.

In closing, as we move forward in 2013 we no longer expect to be troubled with the multitude of extraneous issues that we faced throughout our challenging turnaround, including exiting our exclusive global distribution relationship with Henry Schein, and returning to a direct sales mode -- model in North America and multi-distributors model internationally. We reached the number of milestones in 2012, and we are proud of our many accomplishments. We look forward to 2013 and beyond, as we expect a substantial acceleration in the adoption of lasers, specifically our core WaterLase technology, in dental practices around the world over the next three to five years. We are very confident that all-tissue lasers will become the standard of care in dental practices worldwide, as has been the case with diode soft-tissue lasers.

Now moving to our financial guidance, we are currently projecting net revenues of $68 million to $72 million for the year ending December 31. The midpoint of this guidance of $70 million represents growth of 22% of 2012 net revenues of $57.4 million, and would also represent record revenues for the Company. For our 2013 first quarter, we are projecting net revenues of $14 million to $15 million. The midpoint of our guidance for the 2013 first quarter of $14.5 million reflects growth of 18% quarter-over-quarter. Please note that after the 2013 first quarter, we do not expect to provide quarterly guidance for the remainder of 2013. As Fred mentioned, while we do not expect to generate cash from operations during the 2013 first quarter, due to significant investment in our sales and marketing efforts, we do expect to generate cash from operations overall for 2013.

And finally, I have once again agreed to a symbolic annual cash salary of $1 for 2013. To reiterate what I have said in the past, it simply makes sense to align my interests as a shareholder with that of all shareholders, the ultimate owners of BIOLASE. My goal is for BIOLASE to generate continued growth and improved financial performance, and as the Chairman and CEO, I will not benefit unless our shareholders benefit. I currently own approximately 4.8% of the Company shares on a diluted basis, the vast majority of which I purchased in the open market over time, and the only way that I will earn a profit is if our shareholders will earn a profit. This pledge will remain in effect until the Company generates a substantial profit for an entire fiscal year.

With that, we now -- we will now open the call for questions. Thank you.

(Operator Instructions)

Suraj Kalia, Northland Securities.

Hi, Federico, Fred. Congratulations on a great quarter. So Federico, my analysis tells me in Q4, you sold a little over 220 WaterLase units. Am I close? Is my math correct?

Suraj, we typically don't give guidance or information on the number of units sold, but you make us smile, I'll put it that way.

I had to try. Sorry. (Laughter). In terms of US and OUS growth for WaterLase, can you guys shed some color there?

In what regard? We have some information that we put out in the press release about our growth overall. You're asking for -- typically about 30% of our revenues throughout the year are International, and the product lines are fairly consistent between the US and International.

(Multiple speakers) So growth was fairly split between -- growth was fairly split?

Yes, that is -- well, remember, in 2012 our diode revenues were a little bit low because in Q2 and Q3 we were still waiting for the regulatory clearance, but overall your assumption is very accurate.

Fair enough.

The growth was stronger in Q4 in the North American market, and also you have to consider that we had no imaging sold in the International markets.

Right. Correct. In terms of fiscal '13, Federico and Fred, how -- to the extent that you all can share, how are you looking at the WaterLase, at least from an implied guidance perspective, and specifically EPIC 10? Again to the extent that you can share, when you look at your entire guidance of $68 million to $72 million, I'm very curious what are the building blocks, specifically for WaterLase and for EPIC 10?

Well, the building blocks are that we continue to organically grow and penetrate the market. The iPlus is very well received and more. The iPlus we have out there in the marketplace, in dental offices, the more patients that are driven to these offices, and the more we have dentists that feel a competitive disadvantage compared to others that have it, and so they join the ranks of advancing their practices by adopting our technology. That is, the new approach to dentistry. Also we have a slate of educational events that -- obviously educating dentists to this revolution that we are bringing into the dental market and the conventional approach of dentistry.

Regarding the EPIC diode lasers, they are very well accepted today in dentistry. And we believe that we have the best diode in the market, the most functional, priced extremely competitively. The 940-nanometer is -- we are the only one to have it, and it is a very efficient wavelength. So we believe that the EPIC will be a very nice driving force in revenue growth in 2013 and beyond.

Okay. Federico, in terms of sales reps and productivity, care to shed some color what it is currently? And where do you see, let's say, if we exit fiscal '13, what would your expectation be in terms of the number of reps and expected productivity per rep?

Well, we exited Q4 with 43 total, of which 8 that were inside sales reps, so 35 in the field, our troops in the field. We clearly -- we will increase in 2013 the numbers of sales reps, strategically in the various regions, and also we will add a few of inside sales reps. So there is the plan.

Okay. And Federico, right now is it -- am I right in looking at it, let's say, $19 million aggregate sales, 43 reps, if I just use macro-level numbers, each rep is averaging looks like a little close to $450,000 per quarter? Is that an approximately -- a good metric for me to use, and try to extrapolate it for fiscal '13?

No. It's really not a very good way to do the -- a projection in revenues, because the fact is that we have several of the new sales reps that joined our ranks in the past few months, and so it takes a certain time for them to get out to really generate substantial revenues. So as these sales reps mature, their revenues, they will go up. So it's too simplistic to just take the overall revenues and divide it by sales reps. We have sales reps that do much greater numbers, but again, young ones clearly getting up and learning from the best, and going through some intense training and so on. Also, let's not forget that 30% to 35% of our sales is towards International markets, that is through distributors. So again, doing the kind of math that you do is not really the way to go.

Fair enough. And final question, Federico, G&A went down in the quarter. Is this, especially given your [like] purchase, if memory serves me correctly, like 150 or so units from Schein, and you sold -- pretty much sold it directly in the market, and one would have expected G&A, and sales and marketing, to go up, but it actually went down. And I'm curious, specifically how would you characterize the sudden drop of almost 400 bps in the quarter? And that the same time, how should I look upon fiscal '13 from a housekeeping perspective?

Well, you've got a couple different things in there, and they may not be entirely related. With the first part of your question, yes, we repurchased 153 units from Schein. Those were all sold into the market over Q2, Q3 and Q4, but then those expenses would go through our sales and marketing, but those commissions were consistent and the margins were consistent with all of our other laser products, so that really wouldn't have had -- the relationship there would be as our sales increased our commissions increased, so as a percentage that percentage would stay fairly consistent. There are two things happening. One, our sales are growing, so we are outpacing our expenses, but also we are very cognizant of where we're spending money, and we're trying to be frugal in certain areas so we don't -- so we do not overspend. I'm not really clear on the second half of your question, Suraj. Can you recharacterize it --?

How should I -- essentially, how should I look at fiscal '13, specifically from a G&A perspective and sales and marketing perspective, as a percent of sales? What are the incremental synergies you'll expect to drive, and now Henry Schein, all those headwinds are out, I'm curious again from a housekeeping perspective how should I look at that?

I would expect it to track similarly to -- how 2012 interacted with 2011, where the dollar value will increase but the percentage may stay fairly consistent or decrease a little bit.

Okay.

But the -- we're really focusing on now is manufacturing and our cost of product sales, and our warranty expenses and improving product quality, and we're really -- obviously we've done a lot to maintain our expense levels in G&A, but we're really focusing in 2013 on improving our margin, our gross margin.

Fair enough. Guys, excellent quarter. Thanks for taking my questions.

[Lenny] Brecon, Brecon Capital.

Thanks, guys, for a very good 2012. Looking forward to another year in 2013. But I wanted to ask, if you look at the growth implied in your midrange, the midpoint of the guidance, which is like 22%, which is similar to 2012 over 2013 -- sorry 2012 over '11, and that's consistent, so the growth rate is similar, when I look at your business you have many more things happening in '13 versus '12. I think Suraj's questions were trying to understand why the growth rate is consistent, while your product portfolio is so much broader and better versus '13 over '12, so your implied growth rate should be higher. So can you just help us understand that? In addition, if you just look at the overall picture, can you just outline the catalyst for accelerating WaterLase sales in 2013? Thank you.

Thank you, Lenny. Well, first of all, yes, we grew 20%, and now we're going to grow another 20%, but it's from a higher number, so the actual sales that keep on growing at a higher pace over the -- in total dollars. You are correct, and Suraj as well, in saying we have many things at play, so how come we only forecast 20% growth? Well, we like to be realistic, and we like to be conservative given also the economic climate, and the fact that we clearly believe in what we are doing, but we also are clear in the challenges in what we're doing. We are a [disruptive] technology. The dental market doesn't move overnight. When it moves, it moves -- the adoption rate accelerates significantly. We believe that we are very close to the cusp of that happening, but we cannot actually forecast that way. So when it will happen, we will be there, with a facility that can grow up to $300 million in revenues, as we have already established. So we will not have problems in terms of satisfying demand, but we want to be realistic and I would say conservative, and make sure that the numbers that we broadcast to the investors are met.

Okay. And can you just outline the catalyst for further acceleration in your core WaterLase sale? What are you doing in marketing -- I know you are adding salespeople as you outlined, but what are the major initiatives for 2013?

Well, we have clearly -- we're putting a lot of emphasis on education, but also we have the catalyst of the greater adoption of diode lasers in dental. I would say that diode lasers have become standard of care now. So we believe that as the dentist converts to -- adopts diode laser technology, eventually over time will upgrade to an all-tissue laser that is WaterLase, that does all, does soft and hard tissue. So once the dentist starts thinking lasers, then he will eventually have a full line of products, and that means also acquiring our flagship product, the WaterLase. And so the WaterLase will be driven by several factors, but education is definitely a very important one.

Then we also have scheduled several World Clinical Laser Institutes, that is our laser institute, around the country and in Canada, and these events that create a lot of interest of -- from dentists that want to learn about laser dentistry and the WaterLase technology, and they've been very successful so far. So we are moving away from the conventional dental conventions, and we will reduce the number which we're going to go -- we're going to be present at these conventional shows, and we will instead promote more mirrored educational events towards laser technology and high-end imaging.

And Fed, on that point, I wanted to just follow-up the -- it seems to me that you're getting more demand that's unsolicited. Can you give a measurement of that demand, meaning dentists are coming to you because the awareness of lasers and the capability are going up, and buying the product rather than you going to them? Can you give some measure of that, and on that same measure, what are you doing to educate the consumer and making them more aware that the technology exists?

Okay, this is two-part question, so let me address the first one. Again, we have now roughly 20 sales seminars per month, with a very good attendance. So clearly, more dentists, they are learning about the WaterLase technology. And just a few years ago, it would take us to talk to 15, 20 dentists to close a sale. Now every two or three dentists we close a sale, so that is clearly a very strong indication of the fact that the dental community is finally seriously thinking to adopt WaterLase technology, and advance their dental practices into the era of high-tech dentistry. It is a fact that often we receive calls from dentists that outright they want to buy the WaterLase, and they're looking to buy WaterLase simply because they heard from others colleagues that is a very successful tool in their practice, and that is happening more and more, and that is definitely a clear sign that things are moving in the right direction.

Regarding consumers, that's a very interesting question that you are posing, because we're making in 2013 a very strong effort in educating the consumer. The fact is that 90% of dentists in North America, US and Canada, they know of Biolase, they know of WaterLase technology, but they haven't moved yet in buying our technology, in adopting our technology. And the reason is mostly that while they recognize it is superior clinically, and that it has a lot of advantages for the patients as for them, the dentist, there is always an obstacle in learning a new technology and dedicating the time to education and so on, besides obviously the investment. Even though that is not really a big concern, because 80% of the dentists, they buy a WaterLase with a lease, or essentially is a payment of $1,000 a month that is also tax deductible. But it is really taking the time educate themselves, and change the way they practice dentistry in a conventional way.

So our next step is to go to the consumers. Only less than 1% of the consumers in United States and Canada, they are aware of the advantages of WaterLase, or they are aware of the existence of WaterLase technology in dentistry. So we are out there to now make an effort in educating consumers, obviously we cannot do it in a very economic fashion, in the sense that we got to be very careful in how we invest the money in educating consumers. So the education of consumers should drive the demand we expect, because once the consumer is educated there is a better alternative to a needle, and dental bur and a scalpel, then will demand this technology, and today we have so many dentists around the country that use our technology, they can easily find the WaterLase dentist. Every year, 1,000's of dentists, they performed millions of procedures around the country using our technologies. So that is the premise on which we believe now has come the time to move also not only to educate dentists, but also to educate the consumer, the patients, in knowing about the existence of this alternative technology, of this new way to approach dentistry, to actually demand it from their dentist or to drive themselves to a WaterLase dentist.

Okay. Thanks.

Thank you.

Joe Munda, Sidoti & Company.

Real quick, Fred, you were talking about the gross margin improvement in the quarter based on lower service and warranty expenses. Can you give us a little bit more color on that? I mean, the sales that you guys are projecting forward, and how that's trending going into 2013? And also I have a follow-up to that.

Well, with the gross margin, there are several things happening in there. We have -- as everybody knows, we've done a lot to improve our production process, from the basics of improving our supply chain and getting into the supply chain of our suppliers even, with the addition of our VP of Ops, Rick Whipp, 1.5 years ago, we've really gone down the road of picking the low-hanging fruit, a we still think there are some very basic ways to improve our manufacturing flow. If you come by -- if you ever see a tour of our facility, if you had a frame of reference it would look very different today than it did a 1.5 years ago. It's a linear production line, we have production cells, we're moving in the modified [combon]-type systems, where our vendors are holding inventory just in time for us when we need it, and is -- with the line of credit from Comerica Bank, that's given us more flexibility to produce X number of units per day throughout an entire quarter, to keep some of our costs down there.

So we've made improvements in our supply chain, we've made improvements in our usage of our overhead throughout a quarter. We've made improvements in the quality of our products, because when somebody knows they are going to produce 10 units a day just throwing out 10, or 5, or whatever the number is, they are pretty good about the effort they put into that, so we're seeing great strides in our quality improvements, plus the iPlus has just finished its second year in production, so we've been through the alpha, the beta builds. We have a pretty good team downstairs, and they understand the nuances of the product and how it works, so all of those things have been real positives in improving our margin. And all of that, in light of the increased sales of our imaging products, which typically have a far lower margin because they're in-licensed product, but we do expect that trend to continue, and we have several plans in place for 2013 to tackle to get a little bit more out of -- I don't want to be too specific, but we want to get more out of what we've done in our operations.

Okay. If you can, approximately what was gross margin on WaterLase and diode?

Well, those are fairly consistent. We mentioned it several times in the script about how we're selling things at margins that are consistent among our products. We really -- haven't really ever gone into the details of the margins between the WaterLase and the diode. Obviously the diode lasers are lower cost, and has a lower bill of materials so we can offer it at a lower price, but the service of a diode laser is much different than the service of a WaterLase. All of the field service engineers we have out there to help service our lasers and keep our customers happy, those costs tend to go into -- or the margin, right? Those are more applicable to the WaterLase, but then again the WaterLase has a higher selling price, so it covers a lot of those costs. And a diode, it's a very -- a much more basic machine. So we've never really gotten too much into that, Joe on --

It's very simple. Our laser products, they have a higher margin, and our imaging that we license has lower margin. So our laser products, they have higher margins than what our overall margin is.

Okay. Federico, since you put it that way, let me ask you it another way. The sales mix of products, WaterLase, EPIC 10, are we going to see a similar mix going forward in 2013, or do you think EPIC 10 takes more of the mix in 2013?

I think that EPIC 10 will gain more traction. As you know, as you've seen from the report in 2012, we were lower in diode sales overall because we're launching the diode 10, and got only approved in October, and so we gear that production since then. And so we believe that diode lasers will increase nicely in 2013, but clearly we still feel that WaterLase will be the driving force of the revenue growth.

Okay. And then real quick two others, first off, Federico you talked a little bit about the pain management, and in terms of new products for pain management and with the guidance, is the guidance including any new products like the veterinary or the pain management that you spoke of, or is that more of a longer-term picture, a longer-term story?

We have essentially not included it, because whatever is new we don't like to include, simply because we like to be conservative.

Okay. But I mean, there are plans right now to develop those products and commercialize them?

We already started, absolutely, yes. We already have taken orders for the EPIC (technical difficulty) here.

Okay. And then --

I want -- for you, Joe, to understand that it is a natural extension to what we're doing in dentistry, because a great deal of problems in animals, they are in their mouth. The most common disease is gum disease, for instance. Surgeries like teeth extractions and so on. So the mouth is the center of what a vet would do on an animal. Pain management is also another important market in that, and so it is a natural extension from our core dental business. And again, it is a large market, so very interesting opportunities there. There are 140,000 dentists in the United States, and more or less the vet market is half that size. So overall, it's not a distraction from us, it's just an extension of what we are doing in -- already in dental.

Okay. And then my final question on the decision to take a salary of $1, I mean, is that going to change sometime soon after 2013/2014? Would you think you would take a salary or is it going to be like this for a while?

Well, Joe, if I put on the bottom line a nice number, and I grow revenues in a substantial way, and I feel that I fulfilled my duty towards the shareholders, then I will keep my mind open. But at the moment, I want the shareholders to be rewarded, and I feel that I should be rewarded if I perform. And so I have a substantial position in the Company. I will do well if everybody else is going to do well as a shareholder. Then we'll see.

Yes. I mean it's the dividend as well? Does that play a role as well? If the Company continues to do well, would you increase the dividend?

Well, frankly, we are not there at this stage to discuss increasing dividends. We have done the dividend for several reasons, also because we like to keep rewarding shareholders that are there for the long run and -- versus the shareholders that trade the stock. We like shareholders that believe in what we are doing and that stay with us, really invest in the Company for the long, and while they are investing, they are also accumulating shares to a stock dividend.

Okay. Fred, also I forgot, one more housekeeping question, CapEx for the year in 2012 and your expectation going forward?

We'll have -- that detail will be in, specifically in the Q that's going to come out next week, Joe. I don't want to jump the gun on that. But we don't -- as Federico mentioned, our facility here is already built and we could sustain growth up to $300 million with our facility without a whole lot of additional -- maybe inconsequential build-out of a line next to our WaterLase line or another EPIC line, so our CapEx numbers are going to stay fairly consistent with what they have been.

We also own a facility in Germany, and that facility we might rethink to bring it up to as it used to be, a production facility. At the moment, it's just a service repair facility for all the European and Middle East markets, but has a substantial production capacity. So in theory, we can approach $400 million in production level as we are, with very limited amount of CapEx.

Okay. Thank you. That's very helpful.

Thank you.

Chris Sassouni, Eagle Asset Management.

Good afternoon, and congratulations on a great quarter and a great year. It's been one amazing turnaround to watch this.

Thank you, Chris.

Just one of the things I want to get a sense of at this point is, do you have a number of the cumulative number of WaterLase units that have been sold, period, well since you first got approval for a WaterLase unit? Roughly?

We sold over 22,000 lasers, another combination of WaterLase and diodes, and WaterLase since it was approved --WaterLase systems, since it was approved by the FDA, is a little less than 10,000.

Okay. Perfect. All right. And would you say that the split of 70/30 US/Overseas still holds cumulatively, or is it even more slanted towards the US if you look at it cumulatively?

Regarding WaterLase, you mean? Or --?

Yes. Well, the total number of units. Even if you combine WaterLase plus the diodes is -- I'm just trying to get a sense for how things are changing over time. In other words, initially was the vast majority of units sold in the US, and then over time you started to migrate overseas?

Actually, it was the opposite. First, we started selling in Europe because we didn't have yet the FDA approval, but overall is -- I would say two-thirds/one-third.

Okay. That's fine. All right. Next thing, just real quick, any particular focus that you will have at IDS, since that's such an important dental show, and also because it only comes around once every other year?

We have a lot of activity at the IDS, Bill and I, we are going there, and I cannot even tell you how much interest there is in BIOLASE and in our technologies. So we're working on many very interesting things, but clearly I cannot discuss them. But we are very excited about the direction of the Company.

Okay. So at the IDS show, I take it that the focus though in terms of from a product point of view will continue to be iPlus, plus the EPIC 10?

Yes. But again, don't forget that we spent a substantial amount of money in R&D, and we always look to expand our product offering and to innovate, and so on.

Okay, great. Next thing is, since we're in the focus of overseas with the IDS show, can you just give us an update on the distributors outside the US, and how those are configured? How many countries, what are you doing in various geographies that are important, as particularly Germany, Far East, Middle East, what's going on there?

Well, we are -- Chris, we are increasing consistently our presence internationally. I'm actually -- in two days I will be going to Europe for the IDS. After that, I will meet with potential new dealers. So it is a constant effort, and we definitely look at the International market as a -- very important in driving growth in the future of the Company.

Okay. So let's just isolate down to probably the largest dental laser market in Europe, which is Germany. How many distributors do you have there, and have you ever contemplated going direct in Germany?

We have a very good distributor in Germany, and so we feel that we are in a good position there. It is a very interesting market, Germany. We have already a substantial install base over there. We are the market leader, and we have an association with Professor [Gutnick] of the Aachen University, that is the world laser expert, and he is entirely dedicated to the success of the WaterLase technology. He is a strong believer in what we're doing, so we're very well-positioned in Europe. But again, Europe is suffering at the moment, of a very strong economic recession. But notwithstanding that, we are expanding in all these markets.

And going to the Middle East, the Middle East is a -- definitely a growing market and very interesting. Turkey is a wonderful market. We were in the Emirates just recently at the AEEDL show and -- I'm sorry, the AEEOL show, and we were awarded the prize of the most visited booth of the whole convention. And that is very important, because if you want to know in essence where the interest lies in the dental community, it's interesting to see the activity in a dental show, where it is. And if you see that dentists are attracted to a certain booth other than another one, then you understand that there is a lot of interest towards that type of technology, that type of product. And for us to have been the number one most visited booth, it is a very strong sign.

Same in Chicago, Chicago just ended recently, and the Dental Tribune, that is the world's dental newspaper, the most read, they put BIOLASE on the cover with a picture as the cutting-edge technology. And actually the title of that article is, Stay On the Cutting-Edge, and they chose us. So that is symptomatic of what we are doing in the field of dentistry. We are getting the word out in a strong way that the WaterLase technology is the new wave in dentistry, and more and more we are recognized as the innovators, and more and more we see our technology being adopted, and more and more interest is generated.

Okay. My last question is, just since we're on the topic of being cutting-edge, basically being the technology pioneers in the field of dentistry, so there are other competitors that have diode lasers that are being used as a sort of entry-level device to get familiar with lasers in general, but if you just look at the capabilities of the EPIC 10 versus any other diode laser, how does it exactly stack up? It looks to me like there's some that are sort of pen-based, and I can't really tell if they have the power or the capabilities that the EPIC 10 does, and is that slowly being recognized by dentists that are now getting exposure to the EPIC 10?

Well, first of all we are the only 940 in the market, and we -- the 940 has the best penetration on tissue than any other wavelength. But it is the most functional laser, is priced super-competitively, so we believe that we are in a very strong position. And also we are the only company in reality that offers a diode and also a all-tissue laser, the hard-tissue laser, so we're the only laser company in North America with both.

Okay. All right. Again, congratulations, and great quarter.

Thank you so much.

Thank you. And at this time, I'm showing no further questions in my queue. I'd like to turn the conference back over to management.

Well, it was a very interesting two years of radical restructuring of the Company. I became the CEO at the end of August of 2010, and the Company at that time was running at the run rate of $18 million in revenues on a yearly basis, and we grew from that to $58 million in 2012, so that is a very strong increase in revenues. And we went from very large losses in 2010 to -- before we took over, to a minimal loss of a few $100,000 in 2012 on a non-GAAP basis, and we expect to turn 2013 into a profitable year, and a cash generating year. So we feel that we have built a very strong foundation to propel this Company to grow substantially, and we've overcome incredible challenges, and we feel very confident about the near-term and long-term future of BIOLASE and the WaterLase technology, and all the technologies that we are promoting in transforming conventional dentistry into high-tech dentistry. Thank you very much, and I will hear from you next quarter. Thank you.

Ladies and gentlemen, this does conclude our conference for today. We thank you all for your participation, and at this time you may now disconnect.