BIOLASE Inc (BIOL) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the BIOLASE 2017 Second Quarter Results Conference Call. (Operator Instructions) For the benefit of those who may be listening to the conference call replay, this call was held and recorded on August 7, 2017.

I would now like to turn the conference over to Michael Mason of Dresner, Allen & Caron. Michael, please go ahead.

Thanks, Rob, very much. Good afternoon, everyone, and welcome to the BIOLASE conference call to discuss the results for the company's second quarter and 6 months ended June 30, 2017. On the call today is BIOLASE President and CEO, Harold Flynn. After Howard completes his 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 facts, 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 risks and uncertainties that could cause the company's actual results to differ materially from the statements contained in this presentation. Such forward-looking statements only represent the company's views as of today, August 7, 2017. These risk factors are discussed in the company's filings with the Securities and Exchange Commission.

A replay of this conference call will be available on the BIOLASE website shortly after the completion of today's call. When listening to this call, please refer to the news release issued earlier today, announcing the company's results for its second quarter and 6 months ended June 30, 2017. If you do not have a copy of the news release, it is available in the Investor Section on the BIOLASE website at www.biolase.com.

The company's results for this year's second 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 today, August 7, 2017.

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

Thank you, Mike, and thank you all for joining us on the call this afternoon. Before we begin our discussion about the second quarter results, I want to give everyone a quick update on our search for a new CFO. We have an active retained search underway and are interviewing a number of very interested and highly qualified candidates for the position. We're narrowing the field and, of course, we'll make a formal announcement when the position is filled.

As for second quarter financial results, worldwide revenue for the second quarter of 2017, $12.6 million, down 9% from last year's second quarter, was not what we had expected and, needless to say it, was disappointing. We are still in transition and although I've stated previously that our quarterly revenue growth will be uneven, we expected higher sales in the quarter. It's taking longer than I expected to change the long-standing approaches of our sales force of distributor partners and make the transition to a different type of sale to a different group of buyers. More about that exciting change later.

We look forward to better supporting our sales efforts in downstream marketing, which we're working on, and I know we can get there because we have some fantastic bright spots in our U.S. sales force with relatively new reps who are killing it. Building a commercially viable, disciplined and global enterprise takes some time, but based on the feedback we're getting from patients and clinicians who are using our new laser product and technologies, we remain very confident we're going to get there. We continue to make solid progress in several key areas, which I'll discuss in greater detail shortly.

The comparison quarter, the second quarter of 2016, was a strong quarter at over 16% growth over its prior year. It included a large shipment of our EPIC lasers to a dental service organization, or DSO, and a significant number of WaterLase customers, who experience the tremendous value daily in their practice, reinvesting in it by upgrading from their previous generation to the more powerful Waterlase iPlus. Neither of these events repeated in this year's second quarter, resulting in a difficult year-over-year comparison. When comparing to the first quarter of 2017, revenue in this year's second quarter increased by 16% sequentially. We've already taken corrective action to bolster our sales and marketing efforts and to reduce our overall costs. These include a reduction in force in early August as well as a planned reduction in executive management cash compensation and reductions in planned discretionary spending that'll help us control costs, conserve cash and achieve cash flow breakeven sooner and at lower quarterly revenue levels.

I'm really excited about what our new Vice President of Sales, Jim Surek, has done in a very short time since joining in March, and it's going to pay great dividends well into the future. Jim is without a doubt an action-oriented change agent. We've already restructured the U.S. sales force, added new field leadership from outside the company that's successfully worked for Jim in the past and are implementing a comprehensive training and development program for the field leaders and every single sales rep. The field leadership and sales reps are responding with enthusiasm, they're sharing best practices and accelerating their growth and engagement and it's quite something to see. I can really feel the flywheel turning and picking up speed.

The training and development is crucial to continue our transformation to enable reps to build, educate and convey clinical and practice value to the clinicians in what we call the early majority segment of the technology adoption curve from Crossing the Chasm where the clinicians are more practically minded. These dentists are looking for solutions to their everyday challenges. They're not just interested in cool technology and being the first ones on the block with the latest and greatest or upgrading to a new model year.

BOILASE and All-Tissue dental laser companies in general have lived many years on initial sales and in part model upgrades to the early adopters who tend to be technology-seeking, open to new things and product- and future-oriented. We're enhancing our marketing efforts to generate higher demand and leveraging the great success and value that our current customers realize from our solutions and the near unbelievable benefits and comfort that the patients experience. We also intend to ramp up demand-generation initiatives that have proven successful in dentistry and other medical areas for disruptive technologies. We're going to change from pushing the technology to dentists one clinic at a time to having them pull it from us.

It's clear to us and to our customers that we have unique, effective laser technologies that have important applications in modern dentistry. The dental industry is evolving dramatically, and we believe our laser technology will change dentistry's future and the standard of care. I'm really excited about how we can help advance pediatric dentistry and change the dental experience for generations to come. I only wish this technology was available when my daughter was young and afraid of the drill and the pain at the dentist.

One of our customers, [Dr. John Blithe], took the words right of my mouth when he said, "My goal with WaterLase is to develop a generation of children who can come into the dental office and not have any fear. I don't give them anesthetic and they can go back to play or to school with no numbness. The first expression I almost always get from the kids is wow."

We at BIOLASE are also on a mission to change the management of early to moderate gum disease, unnatural teeth and implants, the result of the associated infection and chronic inflammation that affects the entire body can contribute to a list of debilitating diseases and even death. So WaterLase technology can be vital not only to dental but overall health of patients of BOILASE customers.

In this era of social media, selfies and the like, WaterLase is absolutely a game changer as well, enabling the finest aesthetic tooth aspirations and cosmetic dentistry, where beyond the fantastic reduction of pain and conservative treatment of cavities makes patients feel and look better. These are all growing areas of the modern global market and are large opportunities for us.

While we're not satisfied with the speed and the steepness, I am pleased we saw a positive ramp in sales and increasing customer interest in our new Waterlase Express laser. Thanks to having Express in the market, in the U.S., we acquired the same number of new customers as we did the second quarter last year and grew internationally. The Express is the simplest, most elegant All-Tissue laser tool ever designed for dentistry and a great example of our product innovation capabilities. Every dentist needs one. They just don't know -- they don't know -- all know it yet, and that's our job. Whether new to lasers or pro, clinicians can easily learn to use the Express and put it to work, solving everyday problems.

A meaning -- meaningful number of iPlus sales in the quarter actually started those conversations about the value All-Tissue lasers bring while introducing the Express, but the dentists wanted more power. The key for us is not so much about the specific product mix but the continued acquisition of new customers and expanding the market penetration, which generates higher recurring revenue in our higher-margin consumable business.

Worldwide consumables and other revenue increased 19%. Granted, it's from a relatively small base, but it's a meaningful uptick. We expect to see it continued, albeit uneven, growth of quarterly consumables revenue, especially as we build our business with new customers. And it includes additional sales to group practices and DSOs, which are also great opportunities for us. I was pleased that the quarterly average selling price of our flagship WaterLase iPlus laser continued to increase during the quarter, another expected benefit of having Express in the market. A mid-tier value offering to our WaterLase technology relieves the pressure to more aggressively discount our flagship iPlus to acquire new customers.

Finally, our worldwide imaging systems revenue increased 39%, which would've been higher but we ended the quarter with nearly $400,000 in shipments on back order from our OEM supplier, attributable to short-term capacity constraints in their operation.

With that, I'll now turn to a discussion of our financial results for the second quarter and first half of this year. This afternoon, I'll focus on revenue, gross margin, operating expenses, profitability and liquidity. During my review, unless I indicate otherwise, all the comparisons I make will be to the comparable periods in 2016. Also, I encourage you to refer to the financial tables included in the news release, which we disseminated earlier this afternoon. The tables will provide additional information about our financial results, including details of our non-GAAP disclosures and the reconciliation of GAAP net loss and net loss per share to our non-GAAP net loss and net loss per share.

As mentioned earlier, net revenue for the second quarter was $12.6 million compared to $13.8 million. Net revenue for the first half of 2017 was $23.5 million, down 5% from $24.8 million. The revenue decreases in both 2017 periods were primarily due to declines in worldwide laser system sales and licensing fees and royalties, partially offset by increased worldwide imaging, consumables and services revenues.

Gross profit margin for the second quarter was 37% compared to 41%, and for the first half of 2017, gross profit was 37% compared to 38%. The declines in gross profit was a percentage of revenue, reflected an increase in imaging revenue, which typically has lower product distribution margins than laser systems revenue, as well as a change in international product mix.

Total operating expenses for the second quarter were $9.2 million compared to $9 million. Sales and marketing expenses increased by $46,000, primarily due to higher convention-related expenses. General and administrative expenses increased by $185,000, primarily due to increased provision for doubtful accounts. These increases were offset by a $90,000 decrease in engineering and development expenses.

Total operating expenses for the first half of 2017 were $17.2 million compared to $17 million. Net loss for the second quarter was $4.3 million or $0.06 per share compared to $3.5 million or $0.06 per share in 2016. Net loss attributable to common shareholders for the second quarter, which includes a $4 million deemed dividend on convertible preferred stock resulting from the April 2017 private placement, was $8.3 million or a $0.12 loss per share compared to $3.5 million or a $0.06 loss per share. The increase in net loss was primarily attributable to $952,000 reduction in gross profit and $141,000 increase in total operating expenses, partially offset by a $343,000 increase in gain on foreign currency transactions.

Net loss for the first half of 2017 was $8.4 million or a $0.12 loss per share as compared to $7.8 million or $0.13 loss per share. Net loss attributable to common shareholders for the first half of 2017 was $12.4 million or $0.18 loss per share as compared to $7.8 million or a $0.13 loss per share in the prior period.

Non-GAAP net loss for the second quarter totaled $2.3 million or a loss of $0.05 per share compared with a non-GAAP net loss of $2.3 million or a loss of $0.04 per share. Non-GAAP net loss for the first half of 2017 totaled $6.6 million or a loss of $0.10 per share compared with a non-GAAP net loss of $5.5 million or a loss of $0.10 per share.

As of June 30, 2017, we had approximately $18.8 million in working capital. Cash and restricted cash equivalents at the end of the second quarter were $8.2 million compared to $9.2 million on December 31, 2016. Net accounts receivable totaled $9.8 million at June 30, 2017, compared to $9.8 million at December 31, 2016.

Our cash burn in the second quarter was $6.2 million. This amount contains a $2.6 million change in our working capital, including nearly $600,000 increase in accounts receivable; a $500,000 increase in inventory; and a $1.5 million decrease in accounts payable and accrued liabilities. As always, prudent cash management and preservation continue to be and will remain a top priority.

To wrap up and summarize my opening comments, in its simplest terms, it's just taking us longer than we had hoped to transition beyond our historical sweet spot of the early adopter market segment to penetrating the early majority segment, a significantly larger market opportunity. These clinicians are practice-oriented solution seekers who still understand very little about lasers in dentistry, about the clinical value they unlock for their patient and the sustainability value they unlock for their practices. They require a different sales approach and more education on the value, ease of use and integration of laser-based solutions to meet the everyday challenges they face in their practices rather than the technical specs and the coolness of the products. Our sales organization is focused on transitioning to the more solutions-oriented approach these clinicians require. We're making progress in that regard, but we've not yet effectively repositioned ourselves in the market and made all the necessary changes in our direct sales force or training our long-standing international third-party distributor part of our network.

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

(Operator Instructions) Ms. Springer, please go ahead with your questions.

Could you give us a little more color about the additional training you're giving the sales force? And also, could you sort of describe the sales force for us in terms of how many reps, direct reps, you have right now? How many are experienced? And what kind of production you're getting from your best salesmen?

Yes. Thanks, Lisa. And as I said, we're excited because we do see some reps that are killing it and that would have tremendous productivity. And then we have others that are working in territories and coming up the learning curve themselves. We don't share the specific numbers of sales territories, but in the past, we've characterized, it's somewhere in the high 20s to the low 30s in the United States as a direct sales force. So part of the work that we're doing is restructuring, and we've added resource to have more opportunity for the field-based leadership to ride and develop the rep setter in the field. So part of this restructuring and the training is related to not only the product technology training that they used to get about the products, the features, the benefits and wavelengths and so forth, but true selling skills and abilities that are woven into that process in a very different way. Jim has had great experience in 2 other companies by bringing in the right types of resource to deconstruct and reconstruct the sales training and be able to sell the value of the product in the clinic and really get the access to the decision makers by having a total access call to the entire clinic, right? Dental clinics are an enterprise sale to some extent where you have a number of people involved with the interaction. So I would say, in many respects, that the training has several aspects. One is, how do you get a good, consistent message to go in and actually convey the value to all of the involved parties that are going to be involved with it inside the practice. And then, how do you gain access to the clinician with powerful information that those people have shared with you, so it is true sales training that's interwoven into our technical training. Our previous training exercises were more focused on the anatomical and clinical aspects only, and we hadn't done enough to really integrate the commercial engagement as well so -- and so, from a productivity perspective, we look at the various markets, we look at where the opportunities are and where the clinics are, and we try to concentrate reps in those areas that have more opportunity. But we're seeing and want to see an increase in productivity per rep as we go forward obviously. We don't share the specific numbers, but when you see the U.S. breakout, we have a number of different things that are there. But we -- I expect that we will see -- and we do have some reps that are beyond a run rate of $1 million a year, and we've got to get more people up to that level.

Okay. And your reps tend to specialize or do they represent the entire product line?

Yes. It's a portfolio sale, right? So they go in and they talk not only about the value of All-Tissue lasers but of soft-tissue diode lasers as well. So they tend to be account managers in that respect and not specialists.

Our next question comes from the line of Ed Woo with Ascendiant Capital.

I know you guys don't give specific financial guidance, but has it -- has this unevenness in revenue in the second quarter, should we expect more on even if -- on, I guess, more -- a little bit more volatile basis over the next several quarters?

Thanks Ed. I think we see great examples out there in the field and we see great feedback in our training sessions of some of our new users. There's nothing that leads us to believe that this is now a pattern of particular volatility. As I said, what we haven't done yet is, really, make the turn to -- as quickly as I had hoped to actually get the value selling into this new customer cohort that we expected to see. So there is nothing to lead me to believe that it should be more volatile. But indeed, we were disappointed, as I said in the outset, that it wasn't higher than it was.

Great. And just touching in terms of international versus domestic, was it too much across the board? Or do you feel that 1 area had a little bit more impact than the other?

I'm sorry, Ed, could you clarify your question a little bit?

Well, sure. In terms of sales, I guess, performance by region, do you think it was across the board, across your different regions? Or do you think it was more focused within the U.S.?

Yes, I think that our shortfall was focused in the U.S. in that regard, if that's the question. So we had some international strength, and we didn't have, necessarily, particular areas across the board in that regard. We had solid performance on a trend in Asia-Pacific, as an example, and some of the other jurisdictions, Europe, Middle East and Africa. We had good WaterLase placements and a good placement trend on the back, essentially, of some Waterlase Express as well as some of the other products. So I would...

Our next question comes from the line of Chris Sassouni with Eagle Asset Management.

Harold, could you spend just a few moments just telling us a little bit more detail about the reduction expenses that you put through this quarter? That -- you talk about a reduction in force, roughly how many is that? The reduction in R&D? And then the reduction in executive compensation? And my second question is just the status of clinical trials at this point?

Okay. Thanks, Chris. As we characterized in our press release that we did a reduction force that was across several parts of the organization. The annualized expense associated with that, that we would expect to say is on the order of $2.5 million, annually. The reduction in compensation of the executive, the cash compensation, will be in -- over the course of the next couple of periods, on the order of $200,000 or a little bit more. And the expenses in R&D are against the number of planned projects themselves. So we wanted to lower the overall expense base required and -- to get to cash flow neutrality, as you can expect. We're not articulating or giving too much more color with respect to the specifics and where they came from or the detail of the number of positions affected. But I would say, it was pretty broad across the organization.

And do you -- are you willing to discuss at all, roughly, the revenue run rate at which you would be at cash flow breakeven, either on a quarterly basis or on an annual basis?

The difficulty with that, Chris, is that it really depends on product and geographic mix. Previously, it could've come down $1 million or $2 million on a quarterly basis, depending upon the swing between U.S., which is a higher gross margins and higher fall-through and the international business. And as we articulated, the swing between imaging revenue and laser revenue can also make a substantial difference. So I'm going to not necessarily speak publicly or set an expectation or guidance about the specific revenue at which, because it depends on those other factors.

Okay. And the status of the clinical trials?

We expect to get to the recruitment and surgical phase of the McGuire study here, as we exit the summer. So we're looking forward to that and to seeing results in early 2018. So we're also quite excited about that particular clinical study and the benefits that it's going to show about the patient-reported outcomes in the management of periodontal disease. We have several others, 1 at UCLA, and another one that is starting up in Europe that we're pretty excited about as well. So we are making those investments and continuing to focus on those particular outcomes here as part of our ramping up the publication and clinical study portions of our demand generation.

(Operator Instructions) Our next question is from the line of Paul Bornstein with Black Diamond.

I'm just curious. I guess you started about 2 years ago, and I'm kind of curious, what the restructuring is in the sales force. Because when you started 2 years ago, I thought you were restructuring. So maybe give a couple of examples that really is going to leverage the sales force from when you started 2 years ago. Because I thought it was being restructured back then. So I'm still very unclear how you generate a huge increase in sales with -- you seem to have great products. What I have seen at the demo show, you've got a lot of dentists interested in the product and are very -- want to get the product on board. But I'm still not sure why the sales isn't taking off? I mean, you've been on board for 2 years. So maybe you can give me an example of what you might have missed, which is okay, and you're addressing it that you're really going to leverage it up? Because with the lack of the sales, I mean, the market cap has gone down by $76 million since you started 2 years ago. So I'm trying to understand that and obviously, it's down a lot more since Oracle did all these changes 3 or 4 years ago. So -- and also, are you getting any help from Oracle, in terms of getting a direction since they're the owner of this change at BIOLASE, since Federico, was on board making a $1 salary. And so I have a couple of questions in there. I'm just trying to understand, with a great product, how are you not seeing great results? And I know it takes time, but it's been 2 years since you, it's been, I don't know, 4 years since Oracle has been on board. And so I'm trying to understand where you need help, and are you really close to the finish line to get the sales going? And that's been my question, every quarter.

Right. Paul, I appreciate it. I'm going to try to stick to the constructive parts of that, as best I can. And speak for -- Oracle is not involved with the day-to-day running of this business. So I just want to kind of dispense with that part of the questions. And I can't speak to those things that happened before me. So what I can do is speak to the 2 years that I have been here. And in those 2 years, there is a great sense -- and I am still extremely excited about what we are going to do. Because I see what you see at the trade shows. I see what you see when I sit with the customers and new customers in training events. I see what you see when we talk to our clinicians that are training other customers. And so why is it that we're not getting more hold, and we're not taking off faster than we are? So in essence, in my opening comments, I tried to express, we were good at selling and I would say, even in the past, before I got here, and when I got here, to a part of the market that was very biased toward technology, that was easily pushed technology and products, because they were very accepting of it and tended to be very well educated about it. So BIOLASE had a good deal of success and has existed for a long time in that early adopter part of the market. So when I arrived here, I said, okay, well, let's understand this market, what's working well, and let's do more of what's working well, and let's do less of what's not working well. And so we embarked on that and had some early successes with some high growth. But what I was slow to change was changing the fact that we had to access a different market completely. We had the product portfolio part right, but how we sell to this new part of the market, which is the majority of the opportunity, is what I didn't drive fast enough. So that's what we're going about doing. And as I said, this restructuring is adding the level of development and training necessary to, really sell a different way to a different group of people. We look to this Crossing the Chasm model as an accurate description about how technologies are taken up and adopted. And so as we think that as pragmatic early majority of people as 3x the market size that we have in this early adopter and in this early adopter, we continue to churn. And we know that these people love this technology. We've had people buy 4 generations from us. So when they get it, they get it. That's what gives me such great optimism in our future is, this is going to work. We have to adapt ourselves to how to sell it in the market and generate demand instead of trying to push these out 1 at a time, which is what we did when we found the early adopters. That's the best way that I can summarize it, and that's exactly in the process of the restructuring. So we have a lower span of control for our field leaders, so they can spend more time with each individual rep in their territories, developing that territory, developing their skills and abilities from a sales perspective to do a better job at this notion of what's being deemed a total access call for each of the clinics and really sell the value. Because just selling a laser for a laser's sake does not generate demand. So hopefully, that answered your question, and that's what we're getting after in a very big way, certainly since Jim's arrival and the focus on that aspect of our business that this is focusing on our channel and being able to get the great value of those great products out there.

I guess, the only question is, how soon? Do you understand how quickly you have to get this out in the marketplace to do it? So are they really driven?

Yes.

Especially, your new salesperson? I mean, he should be working 7 days a week, because I'm sure he can get rewarded for it. So if he's not, he's in the wrong position.

No doubt, right. We all have a great sense of urgency. I, the board and the rest of the leadership team have a great sense of urgency to increase our trajectory.

Okay, as long as that's the key. Obviously, no one's perfect. But after 2 years, I would expect it to have a little more traction here. And you went -- you've got $20 million extra. So hopefully, that gave you your cushion. And you're still not cash flow positive. So as long as you understand the urgency here, because everybody is getting paid, unless you're a shareholder, and you've got to get a return off your investment. And so that's the -- and you could be losing money, if you don't perform. And it seems like you have a great product.

We do.

So it's just a huge disconnect, which I don't really understand, unless I was there, spending a week at the company, and then I could figure out what the problem is, and whether it's being resolved. So I hope you have enough insight to make that happen, like yesterday. Because, that's all I can say, the results speak for themselves. And they will when you turn it around.

(Operator Instructions) Our next question is from the line of William Adams with Morgan Stanley.

Say, I'm curious, years ago, I've followed this company a long time, you guys were supporting dental schools as a way of teaching new, young dentists getting out into the system about your WaterLase, is that continuing?

Thanks for your question. We do have a number of systems in various dental schools, some in the graduate programs or mostly in the graduate programs. And there are a few fledgling programs that are starting up in the undergraduates to expose the lasers. We have seen a number of different changes in the industry as people are coming out with increased debt and going to work for these dental service organizations. But it is an area that we look at and look to leverage, especially combined with clinical studies, such as the ones we're doing at UCLA. So it is a part of the, kind of, investment portfolio, if you will, but one -- it tends to be one that, in these days, different than it was years ago, is a little bit longer-term oriented investment.

At this time, ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back to Mr. Flynn for closing remarks.

Okay, thank you, operator. I appreciate all the questions today. And overall, we know what we need to do, and we're getting after it and, we will make this happen. We're cutting our costs to get the cash flow breakeven quicker, and we'll continue to invest in the sales and marketing initiatives that drive growth and expansion in the business. We have great technology, and it continues to prove its value case by case and practice by practice. But we need to generate higher demand and better convey that value more broadly and educate the clinicians. This will require us to generate pull or fundamental demand in the marketplace, rather than just push great solutions into clinicians, practice by practice. We're convinced we'll be successful in transferring BIOLASE into a growing and profitable enterprise, and while it will take some time, as I said earlier, I, the Board of Directors, our leadership team and the entire company have a very high sense of urgency to change the trajectory of our progress upward and make our business more sustainable.

Thank you all for joining us on the call this afternoon and for your support. We look forward to speaking with you again when we announce our results and discuss our progress for the third quarter of 2017. Have a great day, everyone.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.