BIOLASE, Inc. (NASDAQ:BIOL) Q3 2017 Earnings Conference Call November 1, 2017 4:30 PM ET
Michael Mason - Vice President, DresnerAllenCaron
Harold Flynn - President and Chief Executive Officer
John Beaver - Senior Vice President and Chief Financial Officer
Lisa Springer - Singular Research
Ed Woo - Ascendiant Capital Markets LLC
Ladies and gentlemen, thank you for standing by, and welcome to the BIOLASE 2017 Third Quarter Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the call will be opened for questions. [Operator Instructions] For the benefit of those who may be listening to the conference call replay, this call was held and recorded on November 1, 2017.
I’d now like to turn the conference over to Mike Mason of DresnerAllenCaron.
Thank you, David. Good afternoon, everyone, and welcome to the BIOLASE conference call to discuss the results for the company’s third quarter and nine months ended September 30, 2017. On the call today is BIOLASE’s President and CEO, Harold Flynn; and the company’s new Senior Vice President and CFO, John Beaver. After Harold and John 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 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 the presentation. Such forward-looking statements only represent the company’s views as of today, November 1, 2017. These risks 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 nine months ended June 30, 2017. If you do not have a copy of the news release, it is available on the Investor section on the BIOLASE website at www.biolase.com. The company’s results for this year’s third 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, November 1, 2017.
With that, I’m pleased to turn the call over to BIOLASE President and CEO, Harold Flynn. Good afternoon, Harold.
Good afternoon, Mike. Thank you, and thanks to all of you for joining us on the call this afternoon.
I’d like to start by introducing our new Senior Vice President and Chief Financial Officer, John Beaver. John joined us in early October, and we believe he is a great fit. John has been successful in situations just like ours, a transition that includes completely rebuilding commercial processes and ensuring effective financial discipline is driven throughout the whole organization. We’re very pleased to have John and his expertise aboard, and he’ll be presenting a review of the financial results in a few moments.
We’ve also appointed a new Board member, Dr Richard Lanman, a well-known healthcare innovator and entrepreneur, who specializes in the development and adoption of novel healthcare technologies. And I’m excited to have Dr. Lanman’s fresh perspectives and engagement added to the Board.
As Dr. Fred Moll is leaving the Board, given his increasing time commitments as CEO of Auris Surgical Robotics. I want to take this opportunity to personally thank Fred for his dedicated years of service to the Board and to the company.
While there are many reasons for my continued optimism about this business that I’ll discuss later and we’ve made great strides in many areas. We’re clearly is still a work in progress. As our efforts have not yet been reflected in our revenues, which continue to be uneven and at times disappointing, worldwide revenue for the third quarter of 2017 was $10.8 million, down 18% from last year’s third quarter.
We could offer several reasons for the decline, such as last year’s third quarter revenue was unusually strong for summer quarter, as it was bolstered by a program focused on current customer upgrades, making comparisons difficult, and this summer’s hurricanes in Texas and Florida combined with the disruptions caused by our sales force reorganization initiative caused us an estimated $1 million in revenue during the third quarter. But despite these occurrences, we simply should have done better.
There’s no question that we’re disappointed with our results as we expected better revenues and we expected to be further along in the transition process at this point. However, I believe this is ultimately a matter of timing. As those of you who have followed us closely know, we’re in the midst of a complete brick-by-brick restructuring of our sales organization.
We brought in experienced sales leadership, Jim Surek as our Vice President of Sales for the Americas, and Holger Arens as our Vice President and Managing Director for Europe, Middle East and Africa. Jim is leading the restructuring of our U.S. sales organization, which is a direct sales force, and both of them are involved in developing and retraining our sales teams, reconfiguring sales territories and focusing on areas we have found to be more productive.
Some of our new reps have hit the ground running and are doing very well. But overall, they are learning a completely new process and it generally takes a few quarters for an experienced yet new to laser dentistry sales rep to get up and running and become fully productive inside our enhanced sales system.
As I’ve said in the past, the key part of our challenge in sales is to move beyond what has for years been a typical BIOLASE customer. The early adopter who inherently understands the value of lasers and is eager to try the newest technologies. That has historically been our sweet spot, but it’s time to move beyond.
Now our focus is on penetrating a much larger group of customers, the practice-oriented solution seekers. They currently know very little about laser dentistry and it’s our focus now to educate them about the clinical value of lasers unlock for patients, doctors and staff, as well as a sustainable business and strategic value they unlock for their practices.
This requires a completely different sales approach, instead of technical specs and the coolness of the products, which are hot buttons for the typical BIOLASE customer of the past. This new customer cohort is more cautious and requires more education on the value, ease of use and integration of laser-based solutions to meet everyday challenges they face in their practices.
The opportunity in this new technology adoption segment is huge. But it’s taking time to develop this part of the market, and we’re commensurately stepping up our efforts in this area, as well as the customer intimacy it will take for long-term success.
In terms of our sales strategy in the U.S., we eliminated several territories that weren’t producing, so that we could redeploy resources and focus on those that do. As I mentioned, that is having a disruptive impact on revenue in the short-term. But we believe focusing on the fertile and higher-producing territories and creating a much crisper value proposition for specific segment will shorten the sales cycle and over time dramatically increase revenues. We’re already seeing early evidence that this can work.
My longer-term bullishness on our prospects as a business was reinforced during the quarter, as sales of our Waterlase Express product is generating enthusiasm in the market and beginning to ramp. We saw that enthusiasm at the American Academy of Periodontology or AAP conference in Boston during September, which turned out to be an excellent trade show for us.
We generated the largest number of new all tissue laser sales at that conference in our history, thanks to Waterlase Express. We believe the Express is the simplest, most elegant laser tool ever designed for dentistry, and the early response is getting stronger. As evidenced by a number of the sales at the AAP being same day spot sales after hearing a lecture from our Chief Dental Officer, Dr. Sam Low.
Express placements in the quarter nearly doubled in the U.S. for the second consecutive quarter. Granted, this is still early and based on a relatively small numbers. But we believe it demonstrates that the interest we’re seeing in the marketplace can be transformed into sales and has continued runway to ramp further as we upgrade our commercial channel and processes. Thanks to the Express we’re making inroads and building new customer base in a market segment that is significantly larger than the market segment occupied by our current customer base.
During the quarter, three out of four sales of all-tissues lasers were to brand new customers. Our consumables revenue also continue to expand up 7% year-over-year. Again, this is a comparison to a relatively small base and it has been uneven. But as we build our business, this is a high-margin revenue stream that will continue to grow. With new and higher engagement level from Dental Service Organizations some that support over 600 clinics within the U.S. reaching out to us.
I expect, laser sales and especially consumable sales to benefit from this fast-growing segment, given that BIOLASE is the market leader, has the deepest and widest portfolio of laser solutions available, and by far has the best infrastructure to support these nationwide entities as a one-stop-shop.
Before I turn the call over to John for more detail in the financial results, I will say that working – we’ll say that working through this transition, we continue to look for ways to cut nonessential costs. As I mentioned on our last call, we cut costs and had a reduction in force in August, which on an annualized basis reduced payroll and consulting-related expenses by approximately $2.5 million.
With that, I’ll turn the call over to John, who will also make some comments about our previously announced rights offering and then review the financials for the third quarter and the first nine months of this year. John?
Thank you, Harold. I’d like to start by reemphasizing what I said in today’s news release. I’m very pleased to join BIOLASE at this time, as the company is at a very key point in this transformation.
While we all recognize there are challenges ahead of us, I and the executive leadership team are all excited about the future of BIOLASE and very optimistic about our ability to overcome the challenges and achieve our goals of increasing revenue and achieving profitability. I look forward to working with Harold and the BIOLASE team, as we work towards achieving the company’s full potential.
As the company has done in the past, this afternoon, I’ll focus on revenue, gross margins, operating expenses and liquidity. Unless I indicate otherwise, all the comparisons I make will be to the comparable period of 2016. Tables we provided in today’s news release offer additional financial information, including the details of our non-GAAP disclosures and the reconciliation of our GAAP net loss and net loss per share to our non-GAAP net loss and net loss per share. So I encourage you to refer to those tables.
Net revenue for the quarter was $10.8 million, compared to net revenue of $13.2 million for last year’s third quarter. The quarter-over-quarter decrease of 18% was primarily driven by decreases in worldwide laser systems sales and services revenue, partially offset by increased worldwide imaging revenue, consumables and other revenue, and license fees and royalty revenue.
Net revenue for this year’s first nine months was $34.3 million, a 10% decrease when compared to net revenue of $38 million for the nine months of 2016. Gross margin for the quarter was 26% compared to 42% in the third quarter of 2016. Gross margin for the first nine months of this year was 34% compared to 39% for the first nine months of last year.
Declines in gross margin for the year’s third quarter and year-to-date compared to the comparable prior year period reflect an increase in lower margin imaging revenue, promotional introductory pricing of Waterlase Express and unabsorbed fixed costs due to lower sales volume. Gross margin typically fluctuates with product and regional mix, selling prices, product costs and revenue levels.
Total operating expenses for the third quarter were $7.6 million, compared to $8.8 million for the third quarter of last year. Sales and marketing expenses decreased $0.3 million, primarily due to decreased sales commission expense. General and administrative expenses decreased by $0.8 million, primarily due to decreased payroll and consulting-related expenses and decreased patent and legal expenses.
Total operating expenses for this year’s first nine months were $24.8 million, compared to $25.8 million for the first nine months of last year. Sales and marketing expenses increased by $0.2 million, primarily due to higher convention-related expenses. This increase was offset by $0.4 million decrease in general and administrative expenses and a $0.7 million decrease in engineering and development expenses, both primarily due to decreased payroll and consulting-related expenses.
Net loss for the third quarter was $4.6 million, or a $0.06 per share, compared to a net loss of $3.1 million, or a $0.05 per share for the third quarter of 2016. The $1.5 million increase in net loss in this year’s third quarter was primarily due to a $2.8 million reduction in gross profit, partially offset by a $1.1 million reduction in total operating expenses.
Net loss for this year’s first nine months was $13 million, or $0.18 per share, compared to a net loss of $10.9 million, or $0.19 per share for last year’s first nine months. The non-GAAP net loss for the third quarter of 2017 totaled $3.8 million, or a loss of $0.05 per share, compared with a non-GAAP net loss of $2.1 million, or a loss of $0.04 per share from a year ago. The non-GAAP net loss for the first nine months of this year totaled $10.4 million, or $0.15 per share loss, compared with a non-GAAP net loss of $7.6 million, or $0.13 per share loss for the first nine months of last year.
As of September 30, 2017, BIOLASE had approximately $14.7 million in working capital. Cash and restricted cash equivalents at the end of the third quarter of 2017 were $4.7 million, compared to $9.2 million on December 31, 2016.
We reduced our cash burn in the third quarter to $3.5 million, compared to $6 million during the second quarter of 2017, primarily driven by reduction inventory during the quarter. We remain focused on reducing our cash burn, and going forward, we expect to see the impact of the cost reduction measures we implemented in August and always – as always prudent cash management continues to be and will remain a top priority.
As we’ve previously disclosed, the company has filed with the SEC an amended registration statement related to a proposed public offering of nontransferable subscription rights to purchase shares of BIOLASE common stock. If the proposed rights offering is consummated, the company expects to receive gross proceeds of between $8 million and $12 million before expenses.
We expect to use those proceeds for general working capital needs. Certain existing shareholders have agreed to exercise their basic subscription rights and any available oversubscription privilege pursuant to the rights offering in an amount combined of, at least, $6 million.
Now, I’d like to turn the call back over to Harold for a brief summary before we open the call up for questions.
Thank you, John. In short, we continue to make progress on the ongoing transition of BIOLASE and are in the midst of a fundamental top to bottom rebuilding of our sales and marketing organization, and the revitalized sales team is in the process of adjusting into new products, new territories, and new value proposition, and new market segments and new customers.
On the plus side Waterlase Express is gaining solid traction in the marketplace, sales cycles are becoming shorter, more and more of our sales are to new customers, and we appear to have established a beachhead in a couple of new and important market segments.
We also continue to upgrade our management team with the addition of our new Senior Vice President and CFO, John. And the company brought some impressive talent and credentials to our Board with the appointment of healthcare innovator and entrepreneur, Dr. Richard Lanman.
We’re committed to and remain confident that we will successfully reach our goals of transforming BIOLASE into a growing and prosperous business that can create significant value for our customers, shareholders and employees.
With that, I’ll turn the call over to operator for questions. Operator?
Thank you. We’ll now open the call for questions [Operator Instructions] Our first question comes from Lisa Springer with Singular Research.
Thank you. Hi, Harold and John.
How far along do you feel you are in the restructuring of the sales force? Is this something that three quarters of the way done? Is – are we going to see some more of this in the fourth quarter?
Yes, I think, as we cycle these things around, I think, it’s – we’ve been in the process for one to two quarters after, at least, in the U.S. Jim had the ability to assess the organization and start to make some of these changes. And I think, if you use kind of the few quarters’ view that, we’ll start to see things solidify and stabilize within a couple of quarters in that respect from the sales force restructuring. We’re getting into the new training processes. We’re hiring for some of the more dense and productive areas. So we’ve got a lot of that staked out and a lot of new people on Board already.
And then could you remind me of some of the different areas that you’re now targeting in dental market?
I think, we typically had gone out to kind of larger segments, and we had not done the job of targeting and specific value proposition that we should have been doing, frankly. So we’ve stepped up our efforts there. So when we look at the real value propositions, obviously, no needles and anesthesia-free dentistry for pediatrics is a key card for us. That periodontology and implant placers, peri-implantitis management, we have a fantastic tool in the treatment and management of peri-implantitis disease and those people that are involved with implants.
And then the wider and broader and, frankly, a little bit longer to develop the market area is to help bring periodontal anesthetic management to the general practitioner. And that requires kind of the total access call from the hygienist all the way through the practice to make sure that the entire team understands how laser dentistry can transform their practice when add that strategic financial and clinical value in each of the practices. So those are kind of the three top of mind in that regard.
Okay. And then one last question, if you could update us on the Epic Pro product, what you’re seeing with that?
The Epic Pro, I think, it’s still in its early days of us engaging with oral surgeons and what we call the Super GP, The super General Practitioner who is a general dentist who add services to their practice above, let’s call it, drill and fill and traditional crown and bridge.
So we’ve continued to work on that product and we’re ramping that launch, it’s still in its fairly early days as the oral surgery market was not a cohort, we called on very frequently. So our priority was to get the sales cycle and sales restructuring correct, and then we can do some targeted work here towards the end of the year and going into next year to get the Epic Pro out there.
We do get some great reviews of people that use it as the next step above anything in the marketplace with respect to diode lasers. But we’re refining and honing that value proposition as well.
Okay. Thank you, Harold.
Thank you, Lisa.
[Operator Instructions] Our next question is from Ed Woo with Ascendiant Capital.
Yes, thanks for taking my question. Nice to meet you, John. Best of luck in your new endeavor here. My question is touching a little bit on the last question in terms of where are you guys in terms of reorg, but how should we start thinking about 2018 as we’re heading into it pretty quickly now? Is there any big products planned for next year and what should we kind of expect?
Yes. Thanks, Ed, good to hear from you. I’m sure John is looking forward to communicating with you as well. From a new product perspective, we now have a certainly by far the deepest and widest portfolio in the industry. So our focus in 2018 will be to really take advantage of those new products and the portfolio overall and really start to ramp sales and accelerate the launch activities or continue to launch activities themselves.
So our focus will be on our kind of core two products in the Waterlase franchise, right, the new Waterlase Express, as well as the flagship Waterlase iPlus, and then on the diode side our Epic X and the new Epic Pro. So outside of those particular segments, we’re very excited about the opportunities that will exist and grow as we work more closely with the dental service organizations.
So there’s several very large opportunities for us to be of great service and integrate laser dentistry into networks that have hundreds of clinics. And that will not only help us with respect to some laser placements, but it will really help, because these are very utilization-oriented organizations.
So the way to think about 2018 is to get our channels right to get the crisp value propositions right and take the new portfolio that’s there, and really take advantage of it and really accelerate efforts there. We wouldn’t expect necessarily to drop a big new product and confuse the marketplace in that regard with so much opportunity with the current product that we have.
Great. And in terms of your international operations versus your domestic, is there any big differences or in terms of what you guys have expectations or plans for next year?
Yes. I think as we have discussed before, we are underrepresented in Europe, Middle East and Africa, which is a market as large arguably larger than the United States in terms of dental clinics. They’re very different markets and they are in a number of smaller markets that are combined, if you will, to become that region.
But our expectation is that, we’ll start to get some traction work with some of our distributor partners to get more traction in some of the major countries and that will see progress in the direct market of Germany, most specifically that Holger has put a team on the ground to grow as we’ve discussed in previous calls.
So we do expect to see disproportional growth out of Europe, Middle East and Africa for 2018. But as we’re successful in the U.S., it will be a bit of a race to see if the proportion of sales change, overall, if that answers your question.
Yes, that does. And my last question is, in terms of – you mentioned some of the disruptions from the weather this quarter. Is – are things back on track? Do you think it’s just a one quarter delay, or you think it’s sales that potentially just you may never get back?
Well, John migrated here from Houston. So I’m not sure what – I’m not sure exactly how long it will take for the areas affected to get back to “normal.” But the very specific answers, we do expect that was delay, not loss of opportunity. The market essentially in those areas shutdown, if you will, for acquisition.
So we expect in the coming quarters that weather it would be one quarter or spread over two or three quarters is hard to tell, overall, as these areas recover and if they are not subject to other issues. But we expect to get those sales back over that period of time and how that helped to build our momentum in the first-half of next year.
Well, John, I hope it was very good time for you to be where you’re at right now. So I wish you best of luck and I wish you guys best of luck, Harold. Thank you.
Thank you, Ed. I appreciate that.
Thanks, Ed, always appreciate the support.
Ladies and gentlemen, this concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Flynn for closing remarks.
Thank you. We’re all very excited about the potential in front of us and the opportunities afforded by laser dentistry. We’re laying the groundwork for that success by introducing new innovative products like the Waterlase Express and the Epic Pro and training our sales team to expand into a much larger part of the market.
We believe that despite short-term challenges, the future of BIOLASE is very bright. Thank you all for joining us on the call this afternoon and for your support. We continue to look forward to speaking with you again, when we announce our results and discuss our progress for the fourth quarter of 2017. Have a great afternoon, everyone.
Thank you. This concludes today’s conference. You may disconnect your lines at this time, and thank you for your participation.