Loss Widens for BIOLASE in 2Q

Leading dental laser maker BIOLASE, Inc. (BIOL - Snapshot Report) reported a loss of 6 cents per share in the second quarter of fiscal 2012, wider than the Zacks Consensus Estimate of 2 cents and the year-ago quarter’s loss of 3 cents per share.

Net revenues in the reported quarter were $12.2 million, up 1% year over year. However, after considering the accounting treatment for the repurchase of Waterlase MD Turbo laser systems from Henry Schein (HSIC - Snapshot Report), adjusted revenues came in at $13.3 million, surpassing the Zacks Consensus Estimate of $13 million and the year-ago quarter’s adjusted revenue of $10 million.

The growth was on the back of robust demand for BIOLASE’s all-tissue Waterlase systems, higher sales of imaging systems and consumables. Reported revenues were in line with the company’s guidance of $13−$14 million.

In February 2012, BIOLASE terminated its agreement with Henry Schein, its former exclusive distributor in North America. Based on this arrangement that was completed in April, BIOLASE repurchased Henry Schein’s inventory of Waterlase MD Turbo laser systems for $1.1 million during the reported quarter.

Excluding the inventory repurchase, sales of the company’s flagship product, Waterlase systems (which includes the iPlus, MDX systems and the MD Turbo) during the reported quarter were $8.2 million, up 48% year over year. Contribution from this franchise stood at 58% of net revenues during the quarter while Diode systems, revenues from consumables, service and warranty contracts and imaging systems contributed 11%, 23% and 7%, respectively.

Recent Developments

BIOLASE has been working on several strategies to strengthen its foothold in the dental market. The 5-year agreement with Copenhagen-based 3Shape Corporation in July 2012 ("3Shape") enabled the company to be a distributor of 3Shape's Trios intra-oral scanning technologies for digital impression-taking solutions in the US and Canada.

The company introduced its next generation total diode solution, EPIC 10, in May, 2012. This product enjoys several advantages such as a built-in battery for a full day of operation and short pulses causing less thermal damage in tissues thereby producing cleaner cuts.

However, the product has yet to receive 510(k) clearance from the US Food and Drug Administration (“FDA”). The company is expecting international approval of the product before the FDA nod.

Expenses and Margins

Despite higher revenues, the company’s bottom line was adversely impacted by lower margin. Gross margin contracted 130 basis points (bps) year over year due to unfavorable product mix.

Operating expenses are on the rise with higher sales and marketing (23.6% year over year to $3.7 million) and engineering and development expenses (16.4% to $1.27 million). However, general and administrative expenses remained almost unchanged at $2.2 million.

Consequently, BIOLASE reported a wider loss from operations of $1.7 million in the reported quarter compared with loss of $0.7 million in the second quarter of 2011. The higher expenses were incurred to support the investments in new technology development for dental markets.

Outlook

BIOLASE expects product revenues to be in the range of $13.5−$15 million in the third quarter. On an adjusted basis, revenue is expected to record a year-over-year growth of 11−23%. For the full year 2012, revenue guidance stands at $57−$60 million and the company expects positive cash flow in the fourth quarter.

BIOLASE develops and markets lasers and related products for applications in medicine and dentistry. Its key products, the dental laser systems, perform a broad spectrum of dental procedures, including cosmetic and complex surgical applications.

The stock carries a Zacks #4 Rank (Sell) in the short term.