BIOLASE Inc (BIOL) 2019 Q4 法說會逐字稿

Good day, and welcome to the BIOLASE 2019 Fourth Quarter and Year-end Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Todd Kehrli of the EVC Group. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us today to discuss BIOLASE's financial results for the 2019 fourth quarter ended December 31, 2019. On the call today from BIOLASE are Todd Norbe, President and Chief Executive Officer; and John Beaver, Executive Vice President and Chief Financial Officer. Management will review the company's operating performance for the fourth quarter and full year before opening the call for questions.

Before we begin, I'd like to remind everyone that a number of forward-looking statements, which are 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 view as of today, March 26, 2020. These risks 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 the call, please refer to the news release issued earlier today announcing the company's 2019 fourth quarter results. If you do not have a copy of the news release, it is available in the Investor Relations section on the BIOLASE website at www.biolase.com.

BIOLASE's financial results can also be found in the company's annual report on Form 10-K, which will be filed with the SEC. The tables we provided in today's news release offer additional financial information, so we encourage you to review that. The tables include a reconciliation of unaudited GAAP net loss and net loss per share to non-GAAP adjusted EBITDA and adjusted EBITDA loss per share, as well as the details of the company's non-GAAP financial disclosures.

With that, I'm pleased to turn the call over to BIOLASE's President and Chief Executive Officer, Todd Norbe.

Thanks, Todd. Thank you, everyone, for joining us this afternoon. We appreciate your interest and continued support of BIOLASE. First off, I want to acknowledge the impact of coronavirus and express our heartfelt concern to those that have been impacted. The safety of our employees, customers, partners and patients is paramount as we're taking every precaution to ensure their well-being during this difficult period. While we hope the impact of the virus is controlled very soon, it is difficult to estimate at this time when our commercial activities and, more specifically, the dental market will return to normal levels. The coronavirus pandemic and the actions taken in response are unprecedented. It's impossible to know how and when its effect on our business will come through.

However, we do know that the dental office closures that have occurred in much of the world have significantly impacted our first quarter 2020 sales. Last week, we implemented a temporary closure of our building in Irvine, which houses our manufacturing operations, due to the executive order from the Governor of California. At this time, we do not know the duration of this order and how this closure will ultimately impact the company.

2019 marks my first full year as CEO of BIOLASE. I'd like to start the call with a bit of a recap. When I joined the company a little over 1.5 years ago, I believe it was not a question of if, but when, laser dentistry would become the standard of care. I still feel the same today. There is no doubt that laser dentistry will become the standard of care. And there is no doubt that BIOLASE is the industry leader in advancing laser dentistry through the Waterlase and Epic technologies. Furthermore, BIOLASE is well-positioned within a market where general practitioners and DSOs, which are large groups, eagerly look for ways to expand their services, keeping all revenues in-house.

With this positive market dynamic, BIOLASE needed to change its go-to-market, restructure the organization to focus investment on the customer and shift from an R&D-centric culture, a culture that was activity-happy but had a clear -- but did not have a clear focus on the desired result. There is also a perception that this business will continue to be funded, despite the fact the company had never made money. A lot of heavy lifting and change management by the team has occurred over the last year to create a culture centered around cost and results-minded discipline.

We are now about halfway through our journey of positively changing the trajectory of BIOLASE. Over the past 1.5 years, we have made many positive changes that improved our cost structure, built our talent bench to create a healthy operating company. Let me share with you some of the actions we took in 2019.

First off, senior management is now under the same roof. For the first time in the company -- in the company history, both CEO and CFO are based at the company's headquarters. Second, we brought in new management and our Board Members who have significant industry experience and proven success in growing businesses within the dental space. We've hired the right talent to create positive change and have implemented business systems to guide what we do and measure how well we execute across all functions. Majority of our commercial team is new, and we believe complementing their skills with the leadership we now have in place will allow us to focus on growing sales and doing so profitably.

We have rationalized our cost structure. In 2019, we reduced non-sales headcount by approximately 25%. We reduced R&D spend to less than 10% of revenue. And before COVID-19, we were on a path to deliver gross margins be above 50%, and we hope to return to that path soon. As a benchmark of this progress and improved operational efficiencies, we've also outsourced consumables this year and focused on designing for manufacturability to reduce assembly time on our Epic laser by 75%. On the revenue side, we've created guidelines around pricing discipline and payment terms, improving collections and margins. This is yet another example of something that was foreign to the BIOLASE culture.

In building our commercial engine, we hired new experienced sales leadership that has -- now represents 75% of the team, along with turning over 60% of our field selling team through a new assessment process. We also made great strides in building a strong commercial culture where marketing and sales are in full collaboration, and processes have been built to drive leads through inside sales to feed field sales. Previously, these functions were not aligned. Today, they are, with the comp structure that drives this positive collaboration. Many other processes are also underway like our growth war room, implementing Salesforce CRM, our learning management system and many others. We still have much to do in the spirit of continuous improvement.

In 2019, we walked away from unprofitable business, and the company's legacy imaging business is just one example of that. While some of our actions contributed to short-term revenue disruption this year, it was the right thing to do for the health of the business and to achieve our long-term growth and profitability goals. When I joined BIOLASE, revenue was $46 million and the company was operating with a $15 million EBITDA loss. Not only was this unacceptable, it was not sustainable. We successfully pared this back by 30% in 2019 to $10 million while exiting additional top line revenue.

So what is the plan for 2020? As I've noted, we've made significant changes to the business in 2019 to improve margins, lower costs, improve sales. Let me review some of the other exciting initiatives that we expect to accelerate our progress when our U.S. and international businesses return to some level of normalcy.

One of our initiatives is to continue to penetrate the DSO market. In 2019, we did a Phase I Waterlase trial with Heartland, the largest DSO group in the U.S. Phase I was a success with 4 of our partners, more progressive clinicians adopting our technology. Each clinician saw a complete return on investment within a period of 5 to 7 months based on the incremental revenue generated from laser treatments, mainly around procedures like peri-implantitis and soft tissue management. The goal is for Heartland to validate our technology and expand in-house procedures. We achieved that. In 2020, we plan to expand this to Phase II trial, adding additional Heartland dentists to see if they can replicate similar results. Based on this success at Heartland, we now have other DSO pilots planned across North America. Also, Heartland and others are now trialing our newly released Epic Hygiene laser, which received FDA clearance in December. As mentioned, drivers are in place to increase the adoption of technology, and we believe the sophistication and growth of the DSO segment is one of these key drivers.

You don't have to look far to see what happened with LASIKs. It was a DSO-like move in that segment that drove that new standard of care in corrective vision that we know today. Not only does the DSO segment represent a significant growth opportunity for BIOLASE for years to come, but it also spawned what we now call the Waterlase Mentoring Experience, or WME. This new sales approach puts training first, connects a group of progressive dentists and shows them the power of the technology firsthand while allowing them to use the Waterlase technology post-training in their office. We are also still learning and refining here, but early success and results show a 55% close ratio and an improved BIOLASE overall experience. We are seeing our referrals increase by creating this rewarding experience.

We had 4 WME programs in the first quarter, expected to increase this through 2020. Based on early success, we believe that WME could generate up to half of our U.S. equipment sales by 2021. Another milestone in 2020 will be publishing the landmark study performed by McGuire Institute on the clinical efficacy of Waterlase-assisted treatment of periodontitis versus traditional open flap gum surgery. The study also tracked the patient-reported outcomes, or PROs, for each procedure. I know we've discussed this previously, but due to it's important, it bears repeating.

The McGuire study is an important study for BIOLASE. It's actually an important study for the industry, validating minimally invasive perio treatment without the need for extensive surgery or extended patient recovery time. This will benefit both the specialist and the general practitioner, allowing for improved patient care in treating perio disease. The full study will be published in the Journal of Periodontology in the next few weeks and will show up first electronically. As we have noted before, we believe this study will establish new protocols for perio surgery and drive further adoption of all tissue lasers in our target markets.

We are also equally excited about the additional studies on treating perio disease expected to be released in 2020 from Columbia, Harvard and UCLA. We believe we have the best technology to advance dentistry and now are complementing this with a commercial infrastructure to support and expand the reach of our great devices. Over the past year, we have been building the business processes that we believe are necessary to successfully align BIOLASE's innovative technology with an approach that can achieve commercial success.

While we continue to make significant progress, we have much more work to do to reach our ultimate goal. While our strategic decision in 2019 to rebuild a substantial portion of the sales team had a short-term impact on our revenue, we believe it had to be done to successfully recruit like-minded sales team members for our success.

During 2019, out of the 32 sales territories, about 1/3 were open for the majority of the year. Today, I'm pleased to report that we have now filled all but 2 territories and look forward to the revenue lift this will produce once U.S. business returns to some level of normalcy. We believe we have successfully -- we've been successful in recruiting new sales talent that is more aligned with our transition from an R&D-centric company to a more disciplined customer-centric commercial organization driving best practices.

While it's too early to mention success, this new sales talent is already changing the BIOLASE culture. The energy and enthusiasm throughout the company is high, and we have -- we are excited to have this new talent on board as part of the team.

Before the coronavirus epidemic hit, we were confident that the prudent cost reduction initiatives we've implemented, along with what we still have planned, will put us on track to significantly reduce our EBITDA loss again in 2020. However, given current uncertainties, it is impossible to know how the rest of 2020 will play out.

In closing, we remain excited about our progress to date, our direction, our cost initiatives and our growth prospects. Once U.S. and international business returns to some level of normalcy, we've made some important strategic decisions in 2019, will benefit our future; and before COVID-19 pandemic hit, we were beginning to see some really positive results from these decisions. We are confident that these decisions along -- although not easy, will ultimately build a healthier business going forward and position BIOLASE for long-term, sustainable and profitable revenue growth.

With that said, I'll turn the call over to John for a review of our fourth quarter and full year financials in more detail. John?

Thanks, Todd, and thank you all again for joining us this afternoon. Now let me review some of the numbers. Total worldwide revenue for the fourth quarter of 2019 was $10.2 million, an increase of 18% sequentially over Q3 results. This represented $2.8 million decrease compared to $13 million in the fourth quarter a year ago. Revenue from the U.S. for the fourth quarter of 2019 increased 18% sequentially. On a year-over-year basis, U.S. revenue was down 34%. This reflects the strategic decisions we made to realign a significant portion of our U.S. sales force. The decline in revenue was primarily attributable to these open territories.

As Todd noted, we are changing the culture of the company and increasing transparency and accountability throughout the organization, and have been actively recruiting new direct sales team members who fit our new customer-centric, disciplined commercial culture. Internationally, total revenue for the fourth quarter of 2019 increased 17% sequentially. On a year-over-year basis, international revenue was up 3%. Gross margin for the fourth quarter of 2019 was 43% compared to 34% in the third quarter and 43% in the year-ago quarter. We achieved this improvement compared to year-ago quarter despite lower revenue.

Total operating expenses for the fourth quarter of 2019 were $7.5 million compared to $7.9 million in the third quarter and $12.1 million for the fourth quarter of 2018. The continued reduction in operating expenses, both sequentially and year-over-year represent the benefits of the cost rationalization efforts that we have been implementing throughout 2019. Sales and marketing expenses declined $200,000 or 6% sequentially and $1.4 million or 27% year-over-year in the fourth quarter due to reduced compensation-related expenses due to the open sales territories that we've talked about.

General and administrative expenses decreased $600,000 or 18% sequentially and $400,000 or 14% year-over-year in the fourth quarter. Engineering and development expenses increased $26,000 or 2% sequentially and $200,000 or 14% year-over-year in the fourth quarter. Operating loss for the fourth quarter of 2019 was $3 million compared to an operating loss of $4.9 million in the third quarter of 2019 and $6.5 million in the fourth quarter of 2018. Net loss for the fourth quarter of 2019 was $3.6 million or $0.13 loss per share compared to a net loss of $5.5 million or $0.25 loss per share in the third quarter of 2019 and a loss of $6.9 million or $0.33 loss per share for the prior year's fourth quarter.

As a reminder, our earnings release includes a reconciliation between unaudited GAAP net loss and adjusted EBITDA. We believe adjusted EBITDA provides a useful measure of the company's operating results by excluding depreciation and amortization expense, noncash stock comp expense, change in allowance for doubtful accounts and expenses related to the disposal of internally developed software and the cost of patent litigation settlements. The adjusted EBITDA loss for the fourth quarter of 2019, which excludes these items, decreased 39% year-over-year to $1.6 million or $0.05 per share. Our basic and diluted share count at the end of the fourth quarter of 2019 was 28.1 million shares compared to 20.7 million shares for the year-ago quarter.

Now let's turn to 2019 full year results. Total worldwide revenues for the full year 2019 were $37.8 million, down 18% compared to $46.2 million in 2018. Excluding revenue from our noncore imaging business, which we exited during 2019, revenue for the full year 2019 decreased 16% compared to the year-ago period. Revenue from the company's core U.S. laser-related products for the full year 2019 decreased 28% year-over-year. Internationally, total revenue for the full year 2019 was $14.9 million, down 14% compared to the prior year. The main reason for this decrease was the impact of our transition to a new Chinese distributor. Gross margin for the full year 2019 was 38%, up from 37% for the full year 2018 despite lower revenue. The increase in gross margin reflects a reduction in overall manufacturing expenses.

Total operating expenses for the full year 2019 were $29.9 million, a decrease of 21% compared to $37.8 million for the full year 2018. Sales and marketing expenses for the full year 2019 decreased by $3.7 million, primarily due to the open sales territories in the U.S. discussed earlier. General and administrative expenses decreased by $1 million, and engineering and development expenses decreased by $0.4 million.

Net loss for the full year 2019 was $17.9 million or $0.77 loss per share compared to a net loss of $21.5 million or $1.05 loss per share for the prior year. The decrease in net loss was primarily due to decreased operating expenses. The adjusted EBITDA loss for the full year 2019 decreased 29% year-over-year to $10.4 million or $0.44 per share when compared to an adjusted EBITDA loss of $14.5 million or $0.71 per share for the prior year.

Turning to the balance sheet. Cash and cash equivalents and restricted cash totaled $6.1 million at the end of 2019. As we face the challenges posed by COVID-19, we are focused on liquidity, cost containment and prudent cash management.

Now moving on to guidance. In Q1, we expect the coronavirus to have a negative impact on our revenue as dental procedures are down, as many dental offices and clinics are closed worldwide. This situation remains very fluid. So we don't know when they plan to reopen or we do not know what the demand for our products will be once the dental offices and clinics do reopen. This will impact consumable revenue as well as laser sales. In addition, laser sales will be down as most dental shows and workshops have been canceled for now. For example, IDEM, the biggest dental show in Asia, which happens every 2 years, has currently been postponed for 2 months. We are closely monitoring the situation as it unfolds.

Lastly, I want to add that prior to the coronavirus pandemic, we felt very strongly that having filled almost all of our open U.S. sales territories would lead to year-over-year revenue improvement for the last 3 quarters of 2020. However, whether we can achieve this depends on how quickly both U.S. and international business return to some level of normalcy. This concludes our prepared remarks.

And now I'll turn it back over to the operator to open the call for questions.

(Operator Instructions) We'll take our first question from Kyle Bauser of Dougherty & Company.

Todd and John, glad to hear that almost all the territories are now filled. Unfortunately, it was right when COVID-19 situation started to flare up. So given the recommendation by CMS to pause elective and dental procedures, are you potentially exploring the option to consolidate those last couple of territories into 31 or just kind of pausing things? Or would 31 territories just kind of spread things too thin?

I'll answer that, Kyle. This is Todd, and thanks for the question. I think we're looking at things pretty fluid here to understand what the next steps are in reference to field selling and filling those territories. We may have to look at providing more geographic size in territory with the current headcount that we have, but that decision has not been made yet. Currently, we have 2 open positions, as we've mentioned.

And Kyle, I would add to that. This is John. We actually had all positions open up until 2 weeks ago, which was certainly our goal by the end of the first quarter, and we had 2 people back out at the last minute, given the COVID-19 situation.

Okay. Got it. And I know you mentioned, you said some, John, of the clinics, dental clinics have closed. So are there still some out there that are operating? I mean, surely, there's some emergency dental procedures that could move forward right now. Is that right? And which procedures would warrant that?

So there are dental procedures being performed. We're actually getting information and request from our customers to support them on that with the disposable tips orders and service calls. A lot of this revolves around endodontics. And we had, I'd say, some late-breaking news yesterday in that we got very comfortable working with the ADA and our clinicians to be able to believe that we are essential business under the State of California requirements. And so we have begun very skeleton shift, keeping social distancing for some of our workforce. They have gone back into the plant now and begun shipping some essential materials that are required as of today.

Interesting. Okay. That's helpful. And then you speak -- there you spoke a little bit about it, Todd, the McGuire study -- do you have any visibility on when we could see a data readout here? And you also mentioned the study that included Columbia, Harvard and UCLA. Wondering if you could just provide a little bit more color on that.

Sure, Kyle. So it's ironic, I actually had the confirmation today via e-mail from the McGuire Group that the manuscript was approved for general periodontology and that it would show up electronically, as I mentioned in my statements. So I would expect that we would see that in the next 3 to 4 weeks, depending on what happens here with, obviously, the pandemic and what they do in reference to publications. But on top of that, and then on the heels of that, we also have another very compelling study that's coming out of Harvard, which even has histology behind it, and this is around perio treatment of disease implants and it's showing unbelievable results as well. And then Columbia as well as UCLA will have something very similar.

So I think what this does is really almost validates what we've known and what lasers do with soft tissue and healing, and being able to bring an implant back to life and getting regeneration, as well as getting better attachment regeneration in the pocket as well. We've been doing this for quite some time, but now we have really high caliber, really extensive landmark studies that are going to further validate this. And then, Kyle, I think it helps really with the segment of the population who've been on the sidelines waiting for this type of information to move forward in a better treatment of care, and one that's minimally invasive, and also provides a lot better in the patient-reported outcomes from a healing standpoint.

Right. Now that's great. We'll certainly keep an eye out for those. And then just lastly, we're hearing about some really nice conversion rates in the field as it relates to that mentoring experience program. Can you just remind me how many mentors you plan to have out there on a quarterly basis, maybe since things are on hold by year-end now going forward on a quarterly basis?

Yes. So Kyle, let me run through that for you, and let me give you an historical perspective as well. We had 2 WME events in Q2 of last year. We followed that up with 7 in Q4. We had another 7 planned in Q1 of this year, but we had to cancel the last 3 because of the pandemic. And so 4, we're finishing up kind of as we entered into March. We've extended those, given the situation. We had 10 planned in Q2, but we postponed the first 4 of that. So right now, we have 6 planned in Q2. But obviously, that's a very fluid situation, given the current status. And then our plan for the back half of the year in Q3 and Q4 are to have 10 of these WME events programs in each quarter.

We'll take our next question from Bruce Jackson with Benchmark.

Congratulations on all the progress you made during 2019. You guys did a lot. So looking at the marketplace right now, ADA came out on March 18 with some guidelines on what was essential and nonessential. And certainly, anything having to do with pain or infection management comes under essential, which I think would favor some of the procedures that you do. So can you give us a rough idea of -- for the offices that are still operative, can you give us a sense of how many that might be out there or just generally, who's still doing procedures out there right now?

So Bruce, I think you probably find the majority of those procedures being done by the specialty group, so the endodontists, periodontists, oral surgeons. You'd also find some, what we call, super GPs, GPs that are doing more surgery and higher-end procedures. And you're absolutely correct. Our technology and lasers are perfect for what they are doing; and the ones that are using it as a standard of care around perio treatment, also around the root canal process and cleaning the root canal out from an irrigation standpoint. So you're going to continue to see demand for at least our consumables in the short term, and that's the reason John mentioned that we've opened up limited shipping at our facility for making sure that we can get tips out to the customers that need them.

And then on that point, do you have -- what's your inventory situation like? So you've got some manufacturing going. Are you -- even now under this -- the current set of conditions you're working with, are you set up to adequately meet the customer needs?

So Bruce, we have -- to be clear, we don't have manufacturing going on right now, just shipping from inventory. And we will determine when to bring manufacturing back based upon the situation as it unfolds. We have inventory both at our German facility and in our Irvine facility. We think we have enough to cover the -- certainly decreased level of needs over the next couple of weeks. And then we'll play it by ear going forward. That's about all I can tell you there.

Okay. Fair enough. And then do you have -- in the conversations you've been having with the dentist offices and the other specialists, do you get a sense of what has to happen for them to come back online? Are there any things that they need to -- what are the things that they need to see before they decide that they're going to reopen?

Well, I think one would be the -- a lot of the offices are listening to the ADA guidance as well as any type of state requirements that are being put upon them. So I think that would be step one. And once they have that cleared, I think they're eager to get back with their staff. And there's going to be pent-up demand because people that need these services, these things don't go away. And I think you have an ability from many dental offices, Bruce, to increase the level of services that they can provide because they're not working 5, 6 days a week. Most are working 4 days so they can add additional workday or 2 to hopefully catch up with the demand that is out there with patients needing dental work.

Okay. And then with your sales force. So now you've been able to fill most of the open territories. Tell us a little bit about what you're doing to kind of help retain the people that you've managed to hire. And are there any activities that a salesperson can do right now, even though the market may be somewhat disrupted?

Yes, I think a good question there, Bruce. So we're keeping the team really busy for a few things. One is, how do they hone their current skills in reference to their clinical knowledge and so forth. That's one thing that's active right now. The team has pivoted fairly rapidly here. We've scheduled 8 webinars for our end customers within 4 weeks. We conducted one yesterday. It was sold-out with 500 dentists attending. It was all around how you treat a diseased implant. So that's obviously an indication that there's a huge demand for what we do here.

But on the tail end of that, what does the sales rep have to do? Well, typically, there's the next action around that webinar where a dentist wants to learn more, or virtually being able to have a lunch and learn done through Zoom. So those are all the things that the team is currently active with and working on. There's creative ways now to reach customers that change the paradigm a little bit. But we have, which is actually opportunistic, we have dentists that have time on their hands now that because of this pause can get educated and can learn about this technology. So we're taking every advantage of that as we possibly can.

That's great. And then is there any continuing and medical education credits associated with any of these programs?

Absolutely. That's -- we're PACE certified. So depending on the duration of the educational program will depend on how many CE credits they also obtain.

Okay. Great. And then last question for me on the newer studies with Columbia, Harvard and UCLA, any idea when those might reach publication?

Yes. We expect -- probably they're all going to hit in 2020. We didn't talk a lot about those. We spoke primarily about McGuire. But those have been active and in the works for at least a year or so, depending on the study. So it should all hit in 2020 based off of what we're seeing because they're really close to manuscript level.

We'll take our next question from Ed Woo with Ascendiant Capital.

My question is more on the customer base, the dentists. I know you mentioned that they have a little bit more time. Is that really different from the U.S. or Europe? Or are they pretty much in the same boat? And have you heard about them whether they're struggling financially at all?

Yes. So first question, Ed, in reference to time on their hands to listen to new technologies or be educated, the webinar we did actually wasn't just the U.S. We had -- I think the number was close to 30% international participants on that webinar. So I think the answer is yes. They're in a very similar situation, and again, it depends on the country. Financially, I think you're dealing with dental offices that are small businesses, and they've got x number of employees that they have to cover. And we've heard everything from the dentist saying, "I'm not going to take a paycheck here, and I'm going to keep my folks employed," to "we're going to furlough or let go of our team until we can get back operational." So it varies, and I think it also varies by state depending on what the situation is.

At this time, I would like to turn it back over to the company for closing remarks.

Thank you, operator, and thank you, everyone, for your interest in BIOLASE. This concludes our call. Have a great day.

This concludes today's call. Thank you for your participation. You may now disconnect.