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

BIOLASE, Inc. (NASDAQ:BIOL) Q4 2023 Earnings Call Transcript March 21, 2024

BIOLASE, Inc. beats earnings expectations. Reported EPS is $-1.76, expectations were $-2.56. BIOL isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and welcome to the BIOLASE Fourth Quarter and Full Year 2023 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Todd Kehrli with EVC Group. Please go ahead.

Todd Kehrli: Thank you, operator. Good afternoon, everyone, and thank you for joining us today to discuss BIOLASE’s financial results for its fourth quarter and full year and to December 31, 2023. On the call today from BIOLASE are John Beaver, President and CEO, and Jennifer Bright, Chief Financial Officer. John will review the company’s operating performance for the fourth quarter and full year and then we’ll 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 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 forward-looking 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 21, 2024. These risks are discussed in the company’s filings with the SEC. A replay of this call will be available on the BIOLASE website shortly after the completion of the call. When listening to this call, please refer to the news release issued earlier today announcing the company’s 2023 fourth quarter and full year financial results.

If you do not have a copy of the news release, it is available in the Investor section of the BIOLASE website at www.biolase.com. BIOLASE’s 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 provided in today’s news release offer additional financial information, so we encourage you to review them. The tables include the 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’m going to turn the call over to BIOLASE’s President and Chief Executive Officer, John Beaver. John?

John Beaver: Thanks, Todd, and good afternoon everyone. We appreciate your participation today as we review our fourth quarter and full year financial results and review our strategic objectives. Our objective, despite the ongoing headwind created by the current economic climate, is to ensure our industry-leading bill lasers continue to attract heightened interest and demand. The modest revenue gain for the year and our significantly increased lead generation demonstrate that we are on track. Additionally, our focus on internal optimization will enable us to expand our gross margin going forward and the cost reduction initiatives we have taken have positioned us to achieve our financial objectives in 2024. In 2023, we continued to create awareness of the benefits of laser dentistry as we held over 500 webinars, study clubs, trade shows, and training events in the US alone.

These investments of time and resources today are expected to yield revenue opportunities tomorrow. For example, we were highly engaged with potential customers in 2023, increasing the number of marketing qualified leads or MQLs generated by five times over those generated in 2018 as we continue to improve our sales and marketing efforts to reach potential customers. However, the uncertainty in the macroeconomic landscape has extended our sell cycle somewhat as various factors including elevated interest rates and worldwide geopolitical crises are contributing to the prolonged decision-making process. Having said that, I want to stress this isn’t unique to BIOLASE. Other businesses in our sector are facing similar challenges as evidenced by recent industry trends.

Nonetheless, we’re steadfast in our commitment to sustaining revenue generating activities. Our focus remains on converting these MQLs to cells while also continuing to raise awareness and interest in our acclaimed lasers, ensuring we’re well positioned to capitalize on the significant market opportunity in front of us. There remains a significant untapped opportunity in the dental market with more than 90% of dentists yet to embrace all-tissue laser technology. As a predominant brand in this space with approximately 60% market share globally under our Waterlase brand, we continue to actively engage remaining 90% of the market. Our targeted sales and marketing efforts and enhanced training programs are expanding our reach among dental specialists and general practitioners as we emphasize the benefits of laser dental solutions to practitioners and patients alike.

It’s important to repeat what we said in the past. Each 1% increase in the adoption of our all-tissue laser technology in the US alone will equal approximately $50 million in additional revenue for BIOLASE, assuming we maintain our estimated 60% market share. This doesn’t include potentially increased adoption outside the US, where historically approximately 30% to 40% of our revenue has been generated, or the consumable revenue generated from the procedures performed with our laser systems. Our strategy to grow market adoption of our lasers includes bolstering education training programs. Through our Waterlase and Epic academies, we have simplified training on our products for dental specialists and dental hygienists and made clear the significant return on investment they can achieve with our lasers, not to mention the benefits to their patients.

We are also actively seeking to engage the over 150,000 general practitioner dentists in the US by increasing education and training through initiatives like our Waterlase Trials Program, or WTP, and our recently opened state-of-the-art training facility, the BIOLASE Education Center, which provides dental clinicians with an engaging learning environment tailored around laser education. We hosted 22 WTP events in 2023 with the sales conversion rate of about 45%. Our record consumable sales, which increased 20% for the full year, are an encouraging indicator and highlight the growing utilization of our laser systems within our existing customer base. During 2023, we also introduced a [reoccurring] (ph) revenue subscription model for our consumables, which has already started to gain traction.

And we believe this will help accelerate our consumable revenue growth in the future. Furthermore, our strategic partnerships with corporate dentists and academic institutions are paving the way for future adoption of laser dentistry. In summary, we believe our growth strategies will achieve the desired long-term operating results and we remain optimistic about our ability to seize the substantial market opportunities ahead. Our goal, notwithstanding the economic headwinds, is to accelerate our revenue growth by continuing to improve operational efficiencies. Greater adoption of our dental lasers through increased education and training and the continued execution of our revenue growth plan coupled with the expansion of our gross margins and lower operating expenses would allow us to meet our revenue and profitability objectives for 2024 including being adjusted EBITDA positive for the full year.

Now I’ll hand over to Jennifer Bright, our CFO, to delve deeper into our financial performance and provide insights into guidance for the year.

Jennifer Bright: Thank you, John, and good afternoon, everyone. I’m going to provide more context around our full year results and highlight some of the operational improvements we achieved during the year. For further details, please refer to our financial results, which are included in the financial tables of our earnings release and our 10-K. As John mentioned during his prepared remarks, despite the challenging economic environment, we were still able to deliver modest revenue growth and increased laser dentistry awareness through our education and training initiatives. We delivered net revenue of $49.2 million for the full year compared to $48.5 million in 2022. While this is a modest increase, we reported record consumable sales, which increased 20% year-over-year due to our increased education and training and the introduction of recurring revenue subscriptions for our consumables.

Additionally, the momentum with new customer adoption continued in 2023, with 71% of our US Waterlase sales coming from new customers and 40% of our US Waterlase sales coming from dental specialists. Also, as John mentioned, the success rate of our Waterlase Trial Program was 45% for the full year, highlighting the continued success of this initiative. These are all positive indicators of the increased demand we are experiencing for our industry-leading dental lasers in the US and abroad, setting the stage for accelerated growth as the economic environment improves. We reported a 34% gross margin for the year, which is a 100 basis point improvement over last year’s gross margin, as lower inventory reserve charges in 2023 were offset by higher warranty expenses, mainly related to supply chain issues that we encountered in 2022 that required us to source new trunk fiber vendors, as well as an increase in material costs and unfavorable absorption of fixed expenses.

To improve our overall cost structure, at the end of 2022, we completed an acquisition of a trunk fiber supplier, which now allows us to replace third-party key components with our own in-house manufactured components. While we were working through the backlog of our third-party components in 2023, we expect to significantly reduce our overall cost of goods in 2024 and improve cash flow now that our in-house production is operating at full capacity and producing higher quality trunk fiber components. Additionally, we recently implemented certain cost reduction initiatives that are expected to significantly reduce fixed overhead expenses while maintaining best-in-class manufacturing and operational performance. On the expense line, total operating expenses were $34.7 million for the year compared to $41.2 million a year ago.

This decrease was mainly due to the cost saving initiatives we implemented during 2023, which included a roughly 20% reduction in BIOLASE’s US workforce in June 2023. The workforce reduction is part of the company’s broader efforts to gain greater efficiencies throughout the organization, without impacting our revenue generating strategies or the company’s ability to continue delivering unparalleled quality and value to our global customer base. We expect to generate approximately $5 million to $6 million of its annualized cost savings due to these cost savings initiatives. Our continued efforts to drive further operating improvements and efficiencies also reduced our 2023 operating loss by 29% compared to 2022. While we cannot control the macro environment, we can control certain manufacturing costs and operating expenses.

These improvements in gross margin and operating loss are positive indicators of our ongoing efforts to optimize operational efficiency and drive profitability. GAAP net loss for the full year 2023 was $20.6 million compared to a net loss of $28.6 million for 2022. Our adjusted EBITDA loss for the full year 2023 was $12.8 million compared to $20.1 million for 2022. Turning to the balance sheet, we finished the fourth quarter with cash and cash equivalents of $6.6 million, which we bolstered with gross proceeds of $7 million from an equity raise earlier this year in February 2024. We believe we have sufficient liquidity to execute our near-term growth strategy and reach positive adjusted EBITDA for the full year 2024. We believe we can achieve this goal through top line growth due to projected sales volume increases and certain price increases combined with cost reduction initiatives and expected lower cost of goods due to the trunk fiber acquisition I mentioned earlier.

As a result of this acquisition, our in-house trunk fiber now makes up 100% of our trunk fiber we are shipping in 2024. We expect these cost savings to drive increased gross margins, getting us closer to the 50% margin needed to reach profitability. We also expect to significantly lower WTP expenses for the full year 2024 by using our own centralized training facility, the BIOLASE Education Center, which opened at the end of July, 2023. We have two dentists on staff to train prospective customers, and we continue to work with educational facilities nationwide to host WTP events at their locations at little to no cost. During 2024, we expect to host about 50 to 100 practitioners at WTP events, so the expense savings will be quite meaningful.

And moving on to guidance, while we expect first quarter 2024 revenues to be relatively flat compared to the first quarter of 2023 due to the ongoing economic climate, we are projecting full year 2024 revenue to be 6% to 8% higher compared to the full year 2023 revenue as our growth initiatives continue to progress and demonstrate success. Additionally, with a higher gross margin, expected WTP savings, and the cost savings initiatives I referenced earlier, we expect to achieve positive adjusted EBITDA for the full year 2024. In summary, We believe our growth strategy, combined with our focus on improved operational efficiency, is positioning BIOLASE for long-term sustained success. And with that, I’ll turn the call to the operator to open the call for questions.

Drew?

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bruce Jackson with The Benchmark Company. Please go ahead.

Bruce Jackson: Hi. Good afternoon and thank you for taking my questions. So if we could maybe talk about some of the other sales initiatives that you’ve had, especially with the dental service organizations, and has the McGuire study had any impact?

John Beaver: Yeah, so, Bruce, thanks for those questions. I think the McGuire study has had an impact not necessarily quantifiable. In other words, I can’t tell you that we sold eight lasers because of the McGuire study results. But it’s just another piece of evidence that this technology is very clinically effective and also, as McGuire study showed, much better for the patients. Right? And so the more that word gets out, the better off we’ll be. In terms of the DSOs, we continue to work with a number of DSOs. I think Dr. Bicuspid came out with the top 10 out and we’re working with five or six of them, along with some of the other mid-sized DSOs as well. So we continue to work down that line as well. The other thing that you mentioned, which was maybe another revenue catalyst for us, we actually released a new product in February at the Chicago Midwinter Show, that was the iPlus Premier — Waterlase iPlus Premier.

And you may recall that a couple of years ago, when a company came to us to OEM a product for them, EdgePRO, that we developed that very quickly, kind of a record. And it really showed there was a market out there for this technology, this wavelength, the 2780 erbium chromium YSGG wavelength to be used in specific specialties. Before the premium edition was introduced last month, if a doctor wanted to buy a laser, a Waterlase, he had to buy everything. All the applications were included in it. What the OEM business showed us was there was a market out there for doctors that just wanted to do one or two things. And so with that, we developed the Premier, and it’s really a modular type concept, where, let’s say I’m a dentist, and I want to do soft tissue plus endo only.

Well, I can buy a Waterlase iPlus Premier and only turn on — the company would only turn on those two modules, if you will, pay a lower price point, but they’re getting what they want immediately. As they get more and more comfortable with the technology, what we foresee is they’ll add more and more modules and for us that’s very easy to do. It’s literally flipping the switch back at corporate to turn on those modules. So we think this is going to — it’s the right time for this product and we think it’s going to penetrate the market even more.

Bruce Jackson: Okay, great. And then one follow-up on the gross margins. If you could just kind of give us a rough idea of how you see that improving over the course of the year? And is the 50% like a long-term target, or is that something that you would anticipate hitting by the end of this year?

John Beaver: Yeah, so the 50%, we do anticipate will hit in the fourth quarter with the help of the seasonally strong fourth quarter revenue. For the year, I would expect margins to be on average for the full year around 45%. And we have a clear line of sight on how we get from the 34% to the 45%. And it’s really a couple of different buckets. One is the — a full year of internal trunk fiber manufacturing and improved quality that we’re seeing there. And so that’s going to be a significant chunk of that improvement. In addition, the revenue improvement that we’re forecasting is going to bring in, with fixed cost absorption, another point or two. And then we do have price increases lined up predominantly for our consumables business that we’ve already implemented that we think will also bring another point or two.

Bruce Jackson: Okay. All right. Great. Thank you. That’s it for me.

John Beaver: Thank you, Bruce.

Operator: The next question comes from Nick Sherwood with Maxim Group. Please go ahead.

Nick Sherwood: Good evening. Thank you for taking my questions. What kind of trends have you been seeing quarter-to-quarter in the length of the sales cycle, the number of qualified leads you have and the conversion of those leads?

John Beaver: Yeah, so the number of qualified leads we’re getting has been pretty consistent up year-over-year and quarter over quarter. So we continue to see that growing. And I would expect that to continue growing into 2024. I think what we’re seeing, and we started seeing is kind of toward the end of last year or early part of this year, was it was taking longer for us to close those leads into sales. And that’s where, I think listening to other medical and dental companies, capital equipment companies, they’re seeing the same thing. People are — the doctors are taking a little bit longer to decide because of higher interest rates, uncertainty around whether or not we were to have a recession, which I think most of that talk is dead now, but also the European wars that are ongoing right now have an impact on our international business.

So, yeah, I think the NQLs will continue to increase. I would expect over time that the sales cycle will shorten, but we’re not really planning for that in 2024, the shortened sales cycle. We planned our business around things kind of being status quo on a macro standpoint. And that’s the reason we’re excited that even with that, we believe we can achieve even a positive in ‘24.