BIOLASE Inc (BIOL) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the BIOLASE 2017 First Quarter Results Conference Call. (Operator Instructions) For the benefit of those who may be listening to this conference call replay, this call was held and recorded on May 3, 2017.

I would now like to turn the conference over to Rene Caron of DresnerAllenCaron. Thank you, Rene. You may begin.

Thank you very much, Doug. Good afternoon, everyone, and welcome to the BIOLASE conference call to discuss the results for the company's first quarter ended March 31, 2017.

On the call today are BIOLASE's President and CEO, Harold Flynn; and the company's new Senior Vice President and Chief Financial Officer, Mark Nelson. After Harold and Mark complete their opening remarks, we will open up the call for your questions.

Please be aware that a number of forward-looking statements, which are any statements that are not historical fact, will be made during this presentation, including forward-looking statements regarding the company's strategic initiatives and financial performance.

These forward-looking statements are based on BIOLASE's current expectations and are subject to a variety of risk and uncertainties that could cause the company's actual results to differ materially from statements contained in this presentation.

Such forward-looking statements only represent the company's views as of today, May 3, 2017. These risk factors are discussed in the company's filings with Securities and Exchange Commission.

A replay of this conference call will be available on the BIOLASE website shortly after the conclusion of today's call. Also, when listening to this call, please refer to the news release issued earlier today announcing the company's results for its first quarter ended March 31, 2017. If you do not have a copy of the news release, it is available in the Investors section on the BIOLASE website at www.biolase.com.

The company's results for this year's first quarter can be found in the company's quarterly report on Form 10-Q, which BIOLASE plans to file with the Securities and Exchange Commission on Friday, May 5, 2017.

With that, I'm pleased to turn the call over to BIOLASE President and CEO, Harold Flynn. Harold?

Thank you, Rene, and thank you all for joining us on the call this afternoon.

We had a very busy and productive first quarter and made important progress in the ongoing transformation of BIOLASE. We launched 2 new products designed to be game changers: the Waterlase Express, our smallest, easiest to use and most technologically advanced All-Tissue laser ever; and the Epic Pro diode laser system, our highest capability soft tissue solution with automatic power control and super thermal pulse. We continue to strengthen our senior management team with the hiring of our new CFO, Mark Nelson, who will discuss our financial results in a few moments, and Jim Surek, our new Vice President of Sales for the Americas. And shortly after the end of the quarter, on April 18, we completed the $10.5 million private placement. This provides us the necessary funds to push forward on our strategic path toward our vision of fundamentally changing dentistry with laser technology.

This progress is critical to our future growth as a commercial enterprise. It's paving the way in bringing us closer to generating sustained revenue growth, positive cash flow and profitability. As most of you know, we're in the middle of a fundamental transition of the company. And as such, we could continue to see some unevenness in our revenue growth for the next several quarters while we ramp up our new product sales and improve our commercial execution globally by focusing on sharpening and simplifying our messaging to our next targeted market segments. The first quarter of 2017, seasonally one of the slower quarters in the global dental industry, was an illustration of that.

Our revenues were essentially flat year-over-year with revenue of $10.9 million compared to $11 million in last year's first quarter. Our goal will always be to drive revenue growth, but near-term growth is not the only metric by which we judge our long-term progress. We're a new team building a global innovation, manufacturing, marketing and sales organization and to do that right takes time.

That said, we're continuing to see clear signs of progress. Operationally, our gross margins improved year-over-year, and we cut our operating loss by 6%. In the U.S., WaterLase placements were up 43%, attributable to the new Waterlase Express, which drove a 25% increase in WaterLase revenue, supporting a 7% increase in U.S. revenue overall. We continue to see improvement in the average selling price of WaterLase in the U.S., which means our U.S. sales organization is continuing to sell the value of our solutions. Internationally, our sales channels, both direct and indirect networks, are still a work in progress and small enough to be disrupted by a small number of countries' quarterly performance, and such was the case in Q1.

We're building a global sales and distribution team and establishing and improving commercial channels and developing strategies country by country. Again, these types of material changes are not immediate improvements, but we're confident that international sales will develop and become an important contributor to our growth and prosperity.

Without question, one of our many current strengths is product innovation and development. The Waterlase Express is a perfect example, designed with simple elegant user controls and integrated educational support so that every dentist, whether new to lasers or an experienced pro, can learn its capabilities and start using it. We're very encouraged by the growing U.S. interest in Waterlase Express. And while still very early, clinician response to its ease-of-use and our onboard training has been very strong. I see these breakthroughs as the most important enablers that will lead to a future penetration of All-Tissue lasers that is 5x what it is today with utilization of higher-margin consumables more than 10x the current rate, securing BIOLASE's dominant share in that much larger market that in my view could top $500 million annually.

With the typical sales cycle for dental laser systems ranging from 3 to 5 months from first interest to close, the near-term challenge is to get Waterlase Express in front of more dental professionals so it can prove itself in the marketplace, either through direct sales of Express itself or opening the door to sell the higher-priced Waterlase iPlus for those clinics that demand or need more power.

We also continue to work closely and collaborate with IPG Medical corporation on a variety of innovative ideas. Based on the work we're doing internally and with external partners like IPG, we feel strongly that our product pipeline of new laser solutions and indications is well-suited for the challenges of modern laser dentistry.

As you know, our overall goal at BIOLASE is to establish laser dentistry as a standard of care and grow the laser dentistry market substantially, winning over both dental professionals and patients. To do that, as I've said before, 3 imperatives inform our strategic and operating plans.

First, we have to break the outdated status quo and shape the complacency sometimes demonstrated by dental professionals around the world who are using outdated methods and get them to try our lasers. We need to educate them on how to perform the practice-building procedure lasers make available to them and understand the patient and practice benefits of our solutions. Second, we need to create a world-class development system with high-quality education as well as clinical and business development resources that will expand the use of consumables and services. The third imperative is directed at patients and dental care decision-makers all around the world, and we call it patient pull. We need to help create a laser dental practice brand globally that helps them understand the compelling benefits of BIOLASE laser dentistry and demand it or switch dentists.

Concurrent with transforming the company, we're operating in a global dental industry also undergoing significant changes, structurally, operationally and technologically. I'm confident we're developing the right solutions to address the challenges in this new emerging world of dentistry. Our simple-to-use technologies bring the frontier of treatment into the general practice. Clinicians can now offer more comprehensive treatment plans and minimally invasive procedures that will enable them to practice better dentistry and lead to better outcomes for happier and healthier patients, which we believe leads to more viable and sustainable practices in this rapidly evolving dental landscape.

With that, I'll turn the call over to Mark Nelson for more detail on our financial results. Mark?

Thanks, Harold. Before I discuss the financial results in more detail, I'd like to say I'm glad to join the BIOLASE leadership team to help establish dental laser technology as the new standard of care in the evolving dental industry.

As the company has done previously, I will now focus my discussion on revenue, gross margin, operating expenses, profitability and liquidity. During my review, unless I indicate otherwise, all of the comparisons I make will be with the comparable period in 2016. Also, I encourage you to refer to the financial tables included in the news release disseminated earlier this afternoon for additional details about our financial results.

As Harold mentioned earlier, our worldwide net revenue for this year's first quarter was $10.9 million as compared to net revenue of $11 million in the first quarter of 2016. The 1% decline in revenue resulted from a 2% quarter-over-quarter decrease in overall laser system sales. However, sales of our core laser products improved 14% domestically, while sales of our core laser products internationally decreased 15%, due largely to softness in Canada, the Middle East and Italy.

The decline in revenue also resulted from a 10% decrease in imaging systems revenue and a 5% decrease in consumables revenue. Partially offsetting these decreases was a 9% increase in worldwide services revenue for the quarter as driven by a 10% increase in domestic services revenue.

Gross margin for the first quarter was 36.4%, up 325 basis points from the 33.1% recorded in the first quarter of 2016. This improvement reflects a larger concentration of domestic laser sales of Waterlase iPlus and Express, which typically have higher pricing and product margins than our international sales

Total operating expense for the first quarter of 2017 was $8 million, which is essentially the same as in the first quarter of the prior year. Sales and marketing expense increased by $380,000 quarter-over-quarter, primarily due to increases in sales payroll expense and also increases in media, advertising, printing and convention expenses from our participation in the Chicago Dental Society's Midwinter Meeting and the International Dental Show in Cologne, Germany.

General and administrative expense increased by $149,000, primarily due to increases in patent expenses. Engineering and development expense declined by $457,000 due to the recent completion of our Express and Epic Pro product development initiatives, resulting in lower operating supply, engineering payroll and consulting expenses.

Net loss for the first quarter of 2017 was $4.1 million or a $0.06 loss per share compared to a net loss of $4.3 million or $0.07 loss per share. The quarter-over-quarter decline in net loss was primarily due to the previously mentioned increase in gross margin.

The non-GAAP net loss for the 2017 first quarter totaled $3.4 million or $0.05 loss per share as compared with a non-GAAP net loss of $3.2 million or $0.06 loss per share in the first quarter of 2016. The details of our non-GAAP disclosure and the reconciliation of the GAAP net loss and net loss per share to our non-GAAP net loss and net loss per share measures can be found in the financial tables included in our results news release, which was disseminated earlier this afternoon.

As of March 31, 2017, we had approximately $12.2 million in working capital. Cash and restricted cash equivalents at the end of 2017 first quarter were $3.8 million compared to $9.2 million at December 31, 2016. Net accounts receivable totaled $9.2 million at March 31, 2017 compared to $9.8 million at December 31, 2016.

Our cash burn increased 5% quarter-over-quarter to $5.3 million. This increase was due to a $1.4 million investment in inventory related to the launch of our new Waterlase Express and Epic Pro products. Without this investment in inventory, our cash burn would have declined by 22% as compared to the first quarter of 2016.

I would like to reinforce that prudent cash management and preservation continues to be and will remain our top priority for BIOLASE.

And with that, I'll turn the call back over to Harold for some final words before our question-and-answer segment. Harold?

Thanks, Mark. While we continue to innovate and bring more laser-based solutions and treatments to the market, we need to further develop and build our global organization, especially the customer-facing commercial teams. We need to build awareness of the promise of laser dentistry and educate both dentists and patients on the value of our laser solutions in terms of patient care and returns on business investment. We're engaged in a lengthy process, but we believe now more than ever we have the right tools to get there. The global dental industry is in the midst of sweeping change, and we're transforming BIOLASE to take advantage of that change. The laser solutions we're creating today can disrupt the old ways and outdated standards of care and support the development of more sustainable and vibrant dental practices in single group or corporate form.

With that, I'd like to turn the call over to the operator for questions. Doug?

(Operator Instructions) Our first question comes from the line of Ed Woo with Ascendiant Capital.

Congratulations on the quarter, Harold. And Mark, welcome aboard, definitely looking forward on working with you going forward. I had a question in terms of the 2 products that were released this quarter or actually the last quarter. How do you feel about it, I guess, roughly about 3 months out and where do you think sales trajectory are probably going to head, heading out this year on those?

Yes, thanks Ed. Our engagements with customers, both locally during trade show exhibits as well as the International Dental Show were overwhelmingly positive in a couple of facets. One is the incredible ease-of-use of the new Waterlase Express from people that have never seen or really weren't too aware of lasers before and the cutting speed and capabilities of the Epic Pro. When we have people cut with them side by side, there's a pronounced wow factor. The Waterlase Express has a great response when we talk to them about the animations and onboard training support that's available to them and that by 3 simple clicks, they can be ready to perform a procedure and have animation and detailed tutorials that help them understand the procedure and the practice itself. And obviously, because it's priced much more attractively than the iPlus, we get good response with respect to its value proposition as well. So all of the people that we're getting in front of, we see pretty universally great response to the concepts. And now the work is to show them how it adds value in their practices to create and maintain more viable and more sustainable practices to provide both better dentistry and better business returns.

So I'm pretty excited by what I see in the early stages. What we have to do is get our commercial channel oriented around this new methodology. And as you recall, we've used Crossing the Chasm as a model for the business in the past, where we're moving from the early adopters that just love technology to that early majority who are pragmatists. And it won't be as much about the dental wavelength or laser wavelength and the power, it will be what do they do for us and how does it add value to my practice and how do I integrate it.

So I see us building a ramp as you would expect. We launched in the middle of the quarter essentially toward the -- actually toward the end of February at the Chicago Midwinter Dental Show. And as I stated before, we have pretty lengthy initial interest to close sales cycles. So I would expect that to pick up over time. But as we really access that and as we do better in our commercial offerings of this value proposition and get awareness up, I'd expect that would grow at an accelerated pace as we go through the year and into next year. Hopefully that answered your question.

Yes, it does. If I could just have one follow-up. I know you've mentioned in the past that you guys want to get sales to be more balanced between international and the U.S. Have you changed the way you guys are prioritizing the rollout of the WaterLase, the laser diode? Could it just have a more expanded rollout in international first or just you'll kind of roll it out in the U.S. and then kind of wait a little bit before you roll it out in international?

Yes, I would characterize it as simultaneously as possible so we're not going to wait. But as we noted earlier, we have a -- an international distribution system and set up channels that's still a work in progress. Some of our partners are more ready for a new technology than others. So it is really a surgical view of which countries can we get the ramp-up going quickly. But to say specifically we are waiting for a U.S. response and then doing a 1 quarter or 2 quarter-delay to the general international market would not be correct. We're going to do them as simultaneously as possible.

The other thing that affects product rollouts and their timing is registrations in the various jurisdictions. And those registrations can range from already having a family registration approved for something like WaterLase, and it's a matter of a couple of pieces of paperwork. Or in the case of a country like China, it could take several years and a lot of clinical study to get a new product in even if it's a derivative of an old product. So we're going to do as much as we can to augment and build out the international as simultaneously as we can. And in those cases where we can get CE marking ahead of the FDA clearance, we will do that and go internationally first.

Our next question comes from the line of Lisa Springer with Singular Research.

Sounds like you're off to a really strong start with the Waterlase Express. I was wondering if you could give us a little more commentary about what you've seen with Epic Pro and whether that's likely to have a longer sales cycle than Waterlase Express.

The Epic Pro is a premium diode in a space that's then characterized more by commodities. I think we have a market-leading position with our EPIC X. But certainly, as those people graduate to want better cutting capabilities and the like, it will be a step-up, but it is likely the most expensive diode system in the market. One of our target markets for that is the Oral & Maxillofacial Surgeon market and those people doing a good deal of surgery. In addition to that, restorative doctors can have a benefit from this technology as well, but I do expect a slower ramp-up, given that that's not been a call point for us really ever in the history of the company and as we organize our target lists and our messages. And this is a product that really needs to be demonstrated to get the true value and truly understand what the capabilities of this new technology are. So to your point, I do expect something a bit slower from that, and we'll be tracking that over the course of the next several quarters as we engage the Oral & Maxillofacial Surgeons more heavily in some of our international markets, where this can actually be a higher-end laser for their use.

And I know in the fourth quarter, you reported some pretty good sales growth in Germany. What happened during the first quarter? Was that one of the markets that was still strong or did you see that fall off or...

I think, Germany, fairly specifically, we are building out our infrastructure there. So Q4, we started to see some momentum. And if you're not as familiar, you may or may not be, the International Dental Show happens every other year in Germany, in Cologne, and there's well over 100,000 dentists that attend that every year. So our very small team was really focused on delivering a much higher experience than BIOLASE has delivered at that show previously. We actually had booths in 2 pavilions, one the local German one and the international one for distribution markets. So I would say we showed fairly very well, and we've generated a pipeline bigger than we ever have. But Q1 was so focused on that show and getting ready for it and executing it that we were relatively flat year-over-year in Germany. But we built a pipeline that we will look to close throughout the coming quarters. So I'm happy with what the small team did there, and we showed well above our investment level at that show with a lot of interest and a very busy booth, certainly compared to the competitors that were all around us. The Waterlase Express on the corners got a ton of attention as did the cutting station for the Epic Pro.

(Operator Instructions) Our next question comes from the line of Wyatt Carr from Western International Securities.

My question is you talked about lumpiness, I think, of your business in the near term. What does that mean going forward in like in Q2 for revenues?

Well, Wyatt, you recall that we don't provide guidance and forward-looking views of the growth. I mean, the lumpiness for me is really in terms of growth, and we saw that last year as well, where we had fairly flat in Q1. We had significant double digits in Q2 and Q3 and then declined slightly in Q4 after a very strong Q4 the year prior. So while I don't provide guidance seeing the variability of growth, although we would expect it to accelerate going into 2018, we don't provide that sort of guidance that could give you any specifics on that.

Got you. And also with the private placement that you just did, you have, what, somewhere in the neighborhood of $13 million, $13.5 million. Will this -- at the current burn rate, will you need to be doing another financing somewhere 3 to 4 quarters out?

Well, we expect that the new products will really lift us to those levels that we've spoken about before to get us to cash neutrality. I'd be remiss to say never say never, but I'm really focused -- we're really focused on getting to cash neutrality and self-sustainability with this particular one. And I really don't want to go back to the markets at this level of valuation. I think that the company and the stock is a much higher value than it is today, so we're going to do everything we can to avoid having to go back to the equity markets prior to us meeting that -- prior to us being cash flow neutral and cash flow positive.

Our next question comes from the line of Paul Bornstein from Black Diamond.

I'm glad you're still very hopeful and making progress, Harold. Just trying to be clear in terms of new products. Laser has a very small penetration in the marketplace. Maybe there's some attitude change among dentists but, as you know, they don't like to spend money. So you're making some progress with that. So and I guess, the $10 million you just raised, you're going to put in some of the funding for new products. So obviously, you're starting to get a little kick on the new products, and I would think you'd get a big jump in the new products since you've studied the market in the last year or two. So I'm just trying to understand how quickly the new products can overtake the declines that you've recently seen and have been seeing with the old products that are offsetting any kind of gains you get in the new products because -- and obviously, you got a lot of different markets you're going into, and I don't understand all the markets. But I'm trying to look at the new products how they -- how quickly they can overtake any slowdown or decline in the existing products and the regions that they're in because that will really drive your stock, which has significantly underperformed the market. So maybe you could spend a couple of minutes just kind of laying it out and giving me a little more clarity in terms of the regions. You're starting to get it in the U.S. here with this new product launch, and you got another million or two of inventory, you said you'd put it in the first quarter, and how long will that last? Will you get that out in the next quarter or two with the money you've spent on inventory? Or is that a longer process?

I'll do my best to address and then see if you have a follow-up. The -- we're seeing different responses kind of regionally. And as we said, let's just take the general view of this past quarter. We see a 7% increase in the U.S. overall, and we saw nearly a 14% increase in lasers in the U.S. So our old products are not falling off, and our new products are meant to augment and accelerate that level of growth. We did have some regions, most notably Canada, the Middle East and Italy, that had quarterly performances that were not what they were in the prior year period. And those international markets are so small, which is one of the things we're after addressing, that they have a sensitivity to drive large percentages on relatively small movements. But the best way to answer the question is these new products fill out a portfolio and are meant to address all those segments of the market that we weren't accessing before, most notably that early majority in a technology adoption curve that is really looking for something that's simple and easy to use. They're still the technologists. And what I'm pleased about is that we may start a conversation about the Waterlase Express, which is the lower-priced laser offering but because what the dentist wants to achieve, they decide with a sales representative that they want to have more power, and that we actually see an up sale to the older product. So this is a portfolio play in having the right products for the clinics when you go in and one of the reasons that I've been happier that we now have what we are saying as a laser for every dentist. So the second part of that discussion is about cannibalization, and I'm very confident that the growth of the new products will overcome the cannibalization that they might actually induce. So we have both of those dynamics going on, one is offset with volume, and the other is offset by essentially an up sale, but the Waterlase Express allows the sales rep to get into the sales call because there's a more approachable and affordable price point and a more attractive technology. But ultimately, they decide they want 800-horsepower instead of 500-horsepower. So I'll stop there to see if there's a follow-on or a place you'd like me to focus a little bit more.

I guess the sales force, you've just hired a new head. And I'm wondering do you have enough salespeople that they can bring more leverage in with their current leads or are you looking to hire some more sales people since you have a lot of capital to really drive sales, which I know you've been working on? And at some point, I don't know when it is, you should get some significant growth in sales, and we haven't seen it yet, so I don't know if you can give me a little flavor of when that's going to start kicking in with all your efforts paying off because we haven't seen it yet, but I know you're getting close. And I just don't know if it's next quarter or the quarter after or sometime this year where you can leverage the sales and get to cash flow positive, which I'm hoping you get there sooner than later cause I know you've been trying to, and you tried to get there for the end of last year but you didn't make it. So now we're getting into the middle of this year, and that's really what the market's looking for. So if you can give a little color on that, whether you need some more sales people to get in there or they've made a good hit with the existing customers where you can get the leverage and you don't have to hire any new people right now, so maybe you can give a little flavor on that.

Yes. There's a little bit of region -- regional specificity to that as well. Mark reported earlier that our actually salary base for sales has gone up modestly, about $380,000 or so in the quarter year-over-year. Some of that is internationally as we build out leadership there as well as sales representatives in Germany, which is our direct market there. In the United States, we have not added sales reps recently -- or we've not added territories, but we will look to optimize the areas and the productivity per rep. So to your point, I'm much more favoring getting the lead generation correct, getting the marketing correct, target the places we want to send that sales force and make them more efficient and more effective with the marketing efforts. And Jim Surek has, on 2 other occasions, built world-class sales forces and fundamentally changed companies in his experience. So I'm excited about the opportunity we have to improve our productivity and effectiveness and execution overall with his leadership. So I would say, when we have it all right and we know that where we've reached efficiency is when we'll start to ramp up the number of sales representatives because we would be capacity-limited, and we're not at that point yet.

Okay. And then just one last thing. You really didn't go to the market on this raise, so I appreciate Oracle standing behind their change in direction of the company. And it's said there's some officers in -- that bought into this offering. Would you -- have you disclosed who they are? Because the company management is buying stocks. I don't care about options, because that is an option, but you don't have to put any money up until you know you're in the money versus buying it in the open market where you've got to put it and you give me some pencil operative of the abilities of the management team.

I would just say that I participated in this last round as did Mark Nelson, who has seen the opportunity that we have in front of us as well, and I participated in last round as well.

Okay. That's nice to hear. That's what I wanted to hear. That tells me that you believe in what you're doing. So that's important.

Paul, those participants are listed in the fundraising documents, so you can see online who participated.

(Operator Instructions) Ladies and gentlemen, this does conclude the question-and-answer session. I would now like to turn the conference back over to Mr. Flynn for closing remarks.

Okay. Thank you, Doug. In closing, I'd like to thank all of our stakeholders for their encouragement and their patience. In addition, I'd like to extend the company's and my personal gratitude to our current lead investors and board members for their continued support and recent additional investment. They see the great future for this company that I see and have yet again endorsed BIOLASE with precious financial resources. As I said earlier, we're building a new team and a new global commercial organization. We believe we have the right laser technology and are developing the right tools to be successful. I'm convinced that our technologies and breakthrough products provide us with disruptive solutions needed to reach a tipping point and become the standard of care in the rapidly evolving dental laser market, where penetration will be more than fivefold higher than it is today and the usage of laser and their consumables is more than 10x the current rate. It takes time to do this effectively, but we're confident we're headed in the right direction, and we'll get it done.

I want to thank everyone for joining us this afternoon -- for this afternoon's call and for your continued support, and we look forward to speaking with you again when we announce our results and discuss our progress for the second quarter of 2017. Have a great day, everyone.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.