Like biting into a piece of aluminum foil, dental laser manufacturer BioLase (NASDAQ:BLTI) jarred the market's dentures with an announcement that first-quarter revenues would be well below expectations. Where analysts had been expecting a small profit of $0.02 per share, BioLase instead said it would turn in a loss.
The company noted that the falloff in sales between the fourth and first quarters is typical in its industry, but CEO Jeffrey Jones said even the company was surprised by the size of the decline. Management said part of the reason for the drop was because rather than selling lasers, salesmen were training its new distribution partner, Henry Schein (NASDAQ:HSIC), on its technology.
BioLase made Henry Schein its exclusive distribution partner last year, and it's pumped a lot of product its way. That caused its receivables to rise disturbingly high in the third quarter, and I urged a note of caution in that regard back then. This past quarter, receivables were up another 79%, leading to concerns of channel-stuffing. Investors can flag such danger signals when receivables growth outpaces that of sales, and BioLase's sales last quarter were up only 5% in comparison.
The laser maker explained at the time that the disparity was simply a case of giving a new distributor enough supply to make sales, and that it expects the first quarter to produce its lowest revenue of the year. While revenue may end up being just bad enough to make it so, it may also support BioLase's contention that its new ezlase system is experiencing strong volume growth, and that its new consumables products will drive future sales growth. Over the past few years, BioLase's second and third quarters have typically been the sales laggards.
Despite the disappointing revenue announcement, BioLase also contends that it is not losing market share in the process. It notes that it is far and away the industry leader in dental lasers; BioLase owns some of the most important patents in the field. After acquiring the rights to the patents, it is now going after a number of its competitors for infringement. If successful, it will command royalties from them. Like the patent battles going on in other areas of the aesthetic laser market, such as those between Palomar Medical Technologies (NASDAQ:PMTI) and Candela (NASDAQ:CLZR), the victor stands to dominate and virtually monopolize the industry.
While the laser maker may have wanted to make the most of its success last quarter, considering its premier position in the market, I doubt it would need to resort to underhanded tactics like channel-stuffing to simply improve results for a quarter or two. While it's been attempting a turnaround, it has been unprofitable for a whole string of consecutive quarters, and merely notching one in the black would hardly seem to prove much.
BioLase's stock was scorched by the news, dropping as much as 30% on the day. Yet despite the hit, BioLase is not trading at a discount to very many metrics. So although there is a lot of potential in the Schein distribution agreement that could boost sales significantly later on, and even with much of the bad news now priced into the stock, investors may still want to use caution to protect themselves from getting singed.
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Fool contributor Rich Duprey owns shares of Candela, but does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
