BIOLASE, Inc. (NASDAQ:BIOL) Q4 2022 Earnings Call Transcript

BIOLASE, Inc. (NASDAQ:BIOL) Q4 2022 Earnings Call Transcript March 28, 2023

Operator: Greetings. Welcome to the BIOLASE 2022 Fourth Quarter and Full Year Financial Results Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Todd Kehrli of EVC Group. You may begin.

Todd Kehrli: Thank you, operator. Good afternoon, everyone, and thank you for joining us today to discuss BIOLASE’s financial results for the fourth quarter and full year 2022 ended December 31, 2022. On the call today from BIOLASE are John Beaver, President and Chief Executive Officer; and Jennifer Bright, Chief Financial Officer. John will review the company’s operating performance and then turn the call over to Jennifer to review the financials in more detail before opening the call for questions. Before we begin, I’d like to remind everyone that a number of forward-looking statements, which are any statements that are not historical facts, will be made during this presentation and subsequent Q&A session, including forward-looking statements regarding the company’s strategic initiatives and anticipated financial performance.

These statements are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995 and are based on BIOLASE’s current expectations and assumptions and are subject to a variety of risks and uncertainties that could cause the company’s actual results to differ materially from the statements made. Such forward-looking statements only represent the company’s view as of today, March 28, 2023. These risks are discussed in the Risk Factors section of the company’s most recent Form 10-K filed 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 2022 fourth quarter and full year financial results.

If you do not have a copy of the news release that is available in the Investor Relations section of the company’s website at biolase.com. BIOLASE financial results can also be found in the company’s report on Form 10-K, which will be filed with the SEC. The tables we’ve provided in today’s news release offer additional financial information, so we encourage you to review them. The tables include a reconciliation of unaudited GAAP net loss and net loss per share to non-GAAP adjusted EBITDA loss and adjusted EBITDA loss per share as well as more information regarding the company’s non-GAAP disclosures. With that said, I’ll now turn the call over to BIOLASE’s President and Chief Executive Officer, John Beaver. John?

John Beaver: Thanks, Todd, and thank you, everyone, for joining us this afternoon. We appreciate your continued interest in BIOLASE. 2022 was a great year for BIOLASE as we strengthened our business and position the company for continued growth and achieved our goal of improving profitability in 2023. Looking quickly at some of our results. Total revenue for the year was $48.5 million, representing a 24% increase year-over-year. Our U.S. laser sales for 2022 increased 39% year-over-year and our U.S. consumables sales increased 25% for the full year. Our strong performance this past year reflects continued positive momentum on several fronts, including continued progress with our innovative Waterlase exclusive trial program, which puts a BIOLASE laser in the dentist office for 45 days, supported by mentor and two days of in-person training.

When we started the WETP initiative pre-COVID, our success rate — the percentage of dentists who purchased after the trial was about 30%. However, success rate in 2021 improved almost 40%, and our success rate in 2022 was nearly 50% from the 32 WETP events we hosted. We have sold well over 100 Waterlase lasers through this program since the start of 2021. And in 2023, we expect to host about 35 WETP events and achieve a 60% success rate. Additionally, we will be hosting our first WETP events internationally with four expected to be scheduled throughout the year. This initiative and our continued emphasis on dental specialists, including endodontists, periodontist and pediatric dentists, continue to generate increased adoption of our laser technology by new customers with a record 84% of our U.S. Waterlase sales during the year coming from new customers and 47% of U.S. Wireless sales for the full year coming from dental specialists.

It’s important to note that our focus on dental specialists really didn’t exist two years ago. So this momentum is quite encouraging and gives us confidence that we can attain even greater success in the future. Lastly is a testament to the entire BIOLASE team that we have no open sales territories and had no sales turnover during 2022 because our team is enthusiastic about our products, programs and initiatives and the excitement they are creating in the dental community. As many of you already know, BIOLASE has approximately 60% share of the worldwide all-tissue laser dental market represented by our Waterlase brand. However, less than 10% of dentists in the U.S. and less than 2% of dentist outside the U.S. currently use dental lasers today.

We plan to leverage our brand and grow the overall market by engaging with the other 90% of dentists while ensuring we continue to protect our position as a market leader. To reach this large and addressable market opportunity, we are focused on increasing education and training to build awareness of our industry-leading laser benefits to dentists and their patients. For example, in 2022, we held over 600 educational and training events in the U.S. alone. And because of these increased efforts, dental practitioners are now proactively approaching BIOLASE as they look to upgrade their dental practices and improve their patient outcomes. Last year, the number of marketing qualified leads or MQLs increased by 400% in the U.S. market compared to 2018.

To put this into better perspective, the number of inbound leads a couple of years ago was less than 1,000 a year. And in 2022, they grew to 4,000. This is a phenomenal achievement. And if we convert half of these new leads to Waterlase sales, it would represent $150 million in new laser sales. We believe each 1% increase in the adoption of our all-tissue laser technology in the U.S. will equal approximately $50 million in additional revenue for BIOLASE assuming we keep our same 60% market share. This doesn’t include potential increased adoption outside the U.S., where historically, approximately 40% of our revenue has been generated or the consumable revenue that is generated from the procedures done with our laser systems. We have a well-established three-pronged strategy to grow market adoption of our lasers, which has created the growth momentum we are experiencing today.

The first of these is to give more dental specialists to use our lasers. In 2021, BIOLASE formed specialist academies to expand awareness of the benefits of dental lasers in dental specialist communities. Specifically, we launched specialist academies for periodontists, endodontists, pediatric dentists, and dental hygienists to drive further adoption of our lasers and obtain superior patient outcomes. Our plan in 2023 is to combine all these specialist academies into two academies, one for each of our product families, the Waterlase Academy and the EPIC Academy. We believe that this will not only further improve and simplify training for the specialists, but also give the general practitioner who is interested in adding more specialty procedures to the practice, an avenue to pursue further training.

We believe the opportunity that exists for BIOLASE within each of these specialist communities is very meaningful. Imagine a pediatric dentists, who doesn’t need to give a kid a shot, to fill a cavity or an endodontist that can remove 99.5% of the bacteria from the root canal instead of just 50%. Led by key opinion leaders, or KOLs, in each of these specialties, BIOLASE is increasing education and training to drive expanded awareness and adoption. Our focus on increasing education and training for these dental specialists is translating into higher demand for our products as they look for safer, more advanced alternatives to improve patient outcomes and their practices. Combined, these dental specialist markets represents hundreds of millions of dollars of potential laser systems revenue each year, not including the potential for recurring revenue from the sale of our consumables.

The second of these is focused on the significant opportunity we have with over 150,000 general practitioner dentists in the U.S. alone. We believe that if an additional 5% of U.S. GPs adopt our lasers, it would generate $225 million in laser revenue, not including the follow-on consumables. The success we are seeing with our Waterlase exclusive trial program is driving our continued penetration of this key target market. We believe it’s a win-win for GPs because a big part of the Waterlase exclusive trial program is teaching them additional procedures they can do in-house with our laser so they keep more procedures and more revenue in their practice and achieve superior patient outcomes. Doing just two extra procedures a week could potentially generate a 200% return on investment in our laser.

We believe that, along with the better patient experience is motivating dentists to incorporate Waterlase technology into their practices. The more training education we do through our Waterlase exclusive trial program, the more success we believe we’ll have in driving laser adoption. Our Waterlase laser has over 80 FDA-cleared indications or procedures that dentists can perform using our laser. We recently announced a new handpiece for the Waterlase that will allow dentists to perform skin resurfacing procedures. Did you know dentist administer more BOTOX shots in the U.S. than dermatologists? The new Waterlase fractional handpiece is FDA cleared and can deliver both ablative and nonablative fractional treatments and provide the user with control over the penetration depth with different parameters and treatment techniques.

It can create a uniform one-dimensional pattern of microperforations on the tissue surface for maximum efficacy, offering patients comfortable and effective skin resurfacing treatments with faster healing and quicker recovery time. This is just one example of the multiple use cases that exist for dentists to increase our revenue using our laser technology. I believe this launch will further accelerate the adoption of our Waterlase technology in the dental industry and is consistent with our commitment to providing less invasive, patient-friendly technology for both patients and clinicians while at the same time, expanding our access to the skin resurfacing market worldwide, which is projected to reach $650 million by 2031. More we can do to raise awareness of the many procedures dentists can use our laser for and the benefits of doing these procedures with the laser, the faster we can drive increased adoption of all-tissue lasers.

While less than 10% of dentists in the U.S. use an all tissue today, a recent survey indicated that almost 80% of the recent purchases of Waterlase laser use it daily. The WETP is just one way we are looking to drive increased awareness. As I mentioned before, we hosted over 600 webinar study clubs and training events in the U.S. during 2022, including our BIOLASE advancing dentistry podcast launch. Due to the overwhelmingly positive response from the dental community and the rise in interest in popular demand, we recently announced our plans to launch the second season in 2023. Season 2 will continue to provide world-class education in a readily accessible and visually appealing format, focusing on trending topics for dental clinicians. New episodes will feature engaging stories from clinicians about the benefits of laser technology.

The podcast will continue to be available on Spotify and Apple podcast platforms. Speaking of increased education. During the fourth quarter, we began constructing our new training facility and first ever model dental office named Laser Smiles and we expect both to open in April. These new spaces are conveniently located next to our corporate headquarters and will expand our ability to drive revenue and laser adoption by training practitioners in a hands-on dental environment. This is a novel opportunity to educate, train, produce marketing materials, create content, perform studies and test new equipment. We’re also embodying leading international dentists to spend time at our facility this year to work with us as we help ensure that our customers’ international voice has heard as well.

We also recently announced that we are further advancing our market awareness and educational initiatives with the launch of our new education web portal, education.biolase.com, which allows us to offer tailored education pathways through our Waterlase Academy and Epic Diode Academy, which are designed to offer dental clinicians an easy-to-navigate solution for laser education. Finally, the third prong of our growth strategy is getting corporate dentists and universities to adopt our lasers. We continue to develop stronger relationships with key dental schools across the country, and we have lasers in about one-third of the dental schools now. We have also integrated our Waterlase lasers into several postgraduate programs and plan to expand into many more programs over the next few years.

We believe there is a large appetite among dental residents to utilize state-of-the-art technology in treating patients and the introduction and reinforcement of technology during training are key to the adoption of laser dentistry with this new generation of dentists. Also, today, most new dentists are employed by corporate dentists or DSOs, right out dental school. We have ongoing trials with four of the five largest DSOs in the U.S. Our goal is for these new dentists begin using our lasers while employed at the DSO and for them to make our lasers a central part of their practices moving forward, becoming new dental laser and consumable customers when they go out on their own. We just completed the second phase of our trial with Heartland.

The results were again very positive. We continue to make solid inroads with the DSOs, and we believe that the DSOs can lead to far greater revenue for BIOLASE in the coming years. In summary, our growth plan is generating positive results as evidenced by our strong revenue this year. Further, we have a very large opportunity and a well-developed road map for future growth. Our sales team’s success and continued performance gives us continued confidence that we can achieve our operating objectives for 2023 and beyond, as we’ve set our sights even higher. I have one final comment before I hand the call over to Jennifer, I would like to congratulate the entire BIOLASE team for their two top workplace awards for 2022. The awards announced earlier this year and based solely on employee feedback, reaffirm the cultural tone that runs throughout the organization.

Our team generalizing cares about our customers and each other, and they are incredibly passionate about the role in advancing our objectives. I’m truly grateful for our exceptional team and their daily efforts. With that, I’ll turn the call over to Jennifer to provide further details regarding our fourth quarter and full year financial results.

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Jennifer Bright: Thank you, John, and good afternoon, everyone. I also want to congratulate the team. The top workplaces awards were well deserved. Now I’m going to provide more context around some of the numbers and highlight some of the operational improvements we achieved during the full year 2022. Our strong full year financial performance demonstrates continued business momentum and the higher demand for our industry-leading dental lasers. As John mentioned during his prepared remarks, we believe our success is directly related to our increased education and training initiatives, and we look forward to building on that success in 2023. Now diving into the results. We delivered net revenue of $48.5 million for the full year, an increase of 24% year-over-year.

Some additional full year highlights include U.S. laser system sales increased 39% year-over-year to $20.4 million, and U.S. consumable sales increased 25% year-over-year to $7.5 million, an increase to over $11 million on a consolidated basis. This record-breaking year in consumable sales was driven by an increase in procedures using BIOLASE lasers. We continued momentum with new customer adoption in 2022 with 84% of our U.S. Waterlase sales coming from new customers and 47% of U.S. Waterlase sales coming from dental specialists. Lastly, as John mentioned, the success rate of our Waterlase exclusive trial program was nearly 50% for the full year, highlighting the success of this program. These are all positive indicators of the increased demand we are experiencing for our industry-leading dental lasers in the U.S. and abroad.

The gross margin for the year was 33% versus 42% a year ago. The decrease in gross margin reflects mainly the impact of supply chain issues that we encountered during the year that required us to source new trunk fiber vendors, resulting in significantly higher cost for inventory and related warranty expenses. At the end of 2022, we completed an acquisition of a trunk fiber supplier that will allow us to supplement certain third-party key components with our own in-house manufactured components. We expect this will reduce our backlog for these materials as well as reduce the overall cost of goods and improved cash flow when production is operating at full capacity beginning in the first half of 2023. In addition, largely due to the supply chain issues I mentioned, we had to source replacements for other vendors resulting in some end-of-life designated parts in inventory.

An analysis of our inventory resulted in expense of $2.8 million to write down inventory and to increase our reserve for obsolescence during 2022. On the expense line, total operating expenses were $41.2 million for the year compared to $33 million a year ago. This increase was due to compensation expense since all territories were filled in 2022, commissions and bonus incentives for achieving higher sales targets and increased travel-related expenses. GAAP net loss for the full year 2022 was $28.6 million compared to a net loss of $16.2 million for the full year 2021. GAAP net loss per share for the year 2022 was $4.13 compared to $2.73 in 2021 as adjusted for the reverse stock split. Our adjusted EBITDA loss for the full year 2022 was $20.1 million compared to an adjusted EBITDA loss of $14.7 million for 2021.

Adjusted EBITDA loss per share for the year 2022 was $2.91 compared to $2.49 for 2021 as adjusted for the reverse stock split. Now let’s turn to the balance sheet. We finished the fourth quarter with cash and cash equivalents of $4.2 million. Following our January 2023 equity raise of an additional $9 million in net proceeds, we believe we have sufficient liquidity and to execute our near-term growth strategy and greatly improved profitability. Now how do we get there? First, in addition to projected sales volume increases, and certain price increases contributing to top line growth, we expect to have lower cost of goods due to the trunk fiber acquisition completed in 2022. As a result of this acquisition, we are on schedule to have our in-house trunk fiber make up approximately 50% of the trunk fiber we will be shipping beginning in the second quarter of 2023.

We expect these cost savings will drive increased gross margins, getting us close to that 50% needed to reach profitability. We also expect to lower our WETP expenses this year by opening our own centralized training facility. We now have four dentists on staff to train prospective customers, and we are also working to partner with educational facilities around the country to host WETP events at their locations for little to no cost. We expect to host about 35 WETPs this year, so the expense savings will be quite meaningful as well as the continued improvement in our closing success rate that we anticipate for 2023. With higher gross margins, the expected WETP savings and continued revenue growth, we believe we will have the potential to improve profitability and achieve positive adjusted EBITDA for the full year.

Now moving on to guidance. For 2023, we are forecasting continued strong revenue growth of at least 25% year-over-year. And as I just mentioned, we also expect to achieve positive adjusted EBITDA for the full year. For the first quarter, however, we expect net revenue to exceed $10 million, representing relatively flat revenue compared to the year ago quarter. We believe the recent banking environment has created some uncertainty around the overall economic outlook for some dentists looking to invest in our technology. We do believe the situation will be short-lived and expect to begin trending towards a 25% forecasted growth rate in the second quarter of 2023. In summary, we had another strong year with significant revenue growth and solid sales execution and are confident that our strategies and our actions to strengthen BIOLASE are working.

With that, I’ll return the call to the operator to open the call for questions. Operator?

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Q&A Session

Operator: And the first question is coming from Bruce Jackson with The Benchmark Company. Please proceed.

Bruce Jackson: Good afternoon. And thank you for taking the questions. The first one is about the gross margin progression throughout the year. So how do you think that the gross margins build off in the fourth quarter? And where do you think they could exit the year in 2023?

John Beaver: Yes, Bruce. So good question. How’re you doing? I would expect that we had a couple of, I would say, onetime items in Q4 that adversely affected gross margins. Jen mentioned the inventory write-down, while noncash has still had an impact on gross margins. We expect to approach 50% gross margins and exceed that in the fourth quarter of next year. To get there, there are a few things that have to happen, and I think we’re well on our way to that. Jen mentioned the trunk fiber in-house production, that’s going to significantly improve not only our cost of goods sold from a manufacturing standpoint, but also our service and warranty as well. In addition, some of the things that we’re doing on the training side to reduce costs like open up the training facility here and having WETPs at various, I would say, static locations as opposed to hotels and so forth are greatly going to reduce the cost of training, which also shows up in the cost of goods sold line.

Bruce Jackson: Okay. And then one question on the Heartland study. Can you give us a sense of what they were looking at and some of the data points that they were using to evaluate the Waterlase system?

John Beaver: Sure. The first trial that we had with Heartland a few years ago, we were working with some of their most experienced dentists, I would say, not laser dentists, but very experienced. And there, and we’ve shown this in our videos before investor presentations and so forth, they each paid for their lasers in four to seven months in additional procedures. The second phase of this trial was looking at kind of the next tier of dentists, if you will. And how much they would bring in additional revenue during this period. And for them — each of them, the trial is complete. And they each pay for their laser on estimated, I think it was 17 months. So long — it took them longer, but it still beat the Heartland, I think, kind of incremental or internal hurdle rate of two years for payback on equipment. So we were really encouraged by that. We expect those units to be sold in Q2 and continue to try to roll out these additional units at Heartland throughout the year.

Bruce Jackson: Okay. Great. Very helpful. So congratulations again on all the progress and I’ll hop back in queue.

John Beaver: Thanks Bruce.

Operator: The next question comes from Frank Takkinen with Lake Street Capital Markets. Please proceed.

Frank Takkinen: Great. Thanks for taking the questions. I wanted to start with one on the growth guidance. I appreciate the color on Q1. I was hoping you could provide a little further color on the expected ramp of revenues for Q2 to Q3. And how you expect that to trend throughout the year to hit the 25% growth number? And then as a second part to that, any — if you could provide any color related to contribution from systems versus consumables? That would also be great color. Thanks.

John Beaver: Sure. Thanks, Frank. As Jen mentioned, we still expect — excuse me, 2023 to have at least a 25% increase in revenue over full year 2022. Though we are off to a little bit slower start than we had wanted. But it will ramp up, we believe in Q2 and Q3, I would expect Q2 and Q3 to have similar revenue to each other and then Q4 to be our strongest quarter. If you were to line all that stuff out and assume at least a 25% increase over the $48.5 million that we had in ’23 — excuse me, in ’22, I think you can model that out. The second question was in terms of revenue split between systems and service and consumables I still expect a similar as a percentage of revenue split among those three items. We continue to grow on an absolute basis, our consumable sales.

We had record consumable sales in 2022, and I expect to break that record in 2023. However, we’re selling a lot of laser systems as well. And so I would expect each of those as a percentage of revenue to remain fairly constant next year or this year in 2023.

Frank Takkinen: Okay. That’s helpful. And I wanted to follow up on the comment related to some customers having challenges with SVB. My assumption is that this is — that’s implying this is related to system sales in Q1 and consumables continue to be positive through Q1? Or is there any other color you can provide on that?