Nothing ever made a bigger impression on me than Roger Enrico’s decision to take a salary of $1 a year when he took over the helm at Pepsi in the late 90’s. So when I heard the following comment today by Federico Pignatelli, the Chairman & CEO of BIOLASE (NASDAQ – BLTI – $4.63) on the company’s year-end ‘10 conference call, I did a double take:
“I will continually look for ways to align management’s interests with all of the shareholders and employees of the company, as evidenced by my commitment to continuing to work for an annual salary of one dollar. The only way I will make money is the way shareholders will make money, and I intend to make millions.”
I’m willing to bet a case of beer you haven’t heard that on any of the conference calls you’ve listened to lately. I hadn’t heard it in more than a dozen years. Talk about pay for performance! Pignatelli, who has been increasing his stake in the company (by that, I mean he’s actually been buying shares on the open market), owns around 1.6 million shares and options (out of the roughly 25 million shares outstanding).
Let me be clear: I don’t intend to do an exhaustive write-up of BIOLASE today; in fact, I am meeting with Pignatelli next Tuesday night in L.A. (the company is based in Irvine, which is coincidentally just about a stone’s throw from two of my other favorite companies, Acacia Research andSTEC). But I wanted to bring BLTI to your attention mainly because it possesses several, if not all, of the key investment characteristics I’m constantly looking for:
- A disruptive technology (its lasers are revolutionizing the way dentists practice, putting the traditional drill and scalpel out to pasture. Lasers offer dentists significant benefits, including the ability to perform a broader range of higher-value procedures, and they provide patients with less pain and faster recovery times.
- An emerging sponsorship story (Dalton Chandler at Needham is the only sell-side analyst following the company, and the top 15 institutional holders own just around 15 percent of the float).
- It’s a classic turnaround (this stock actually traded above $20 in ‘04 before the bottom fell out; it’s hard to imagine now, but BLTI did a secondary offering of 2.8 million shares in ‘04 at $18.50 a share!) with a relatively new (and heavily-incentivized) management team.
- In a relatively recession-resistant industry. It also helps that BIOLASE’s installed base of some 16,000 lasers at 10,000 dental practices around the world provide it with a relatively strong competitive position in an industry with fairly high barriers to entry.
BIOLASE’s problems began in ‘06 when it signed an exclusive deal to sell its laser systems through Henry Schein (NASDAQ – HSIC – $67.91), the world’s largest dental equipment distributor. Only problem was Henry Schein never really sold any (mainly for lack of focus), and the deal turned out to be a dud (it’s recently been converted to a non-exclusive arrangement). Pignatelli took charge of the company, ended its downward spiral, cut an astounding $14 million in annual costs, and is now focused on consistent profitable growth.
The company is coming off a terrific quarter in whichit posted its first operating profit since the middle of ‘04! That’s right, seven years ago. Management is guiding ‘11 revenue to be in the range of $60-$65 million, up significantly from the $26 million it generated last year. It appears as though profitability is here to stay. The company has a nice backlog of its two flagship products, and is expanding into adjacent categories including digital imaging and possibly orthopedics, ophthalmology and pain therapy.
As typically happens in the case of companies that survive by the skin of their teeth, employee morale took a big hit, according to CFO Fred Furry, who joined the company in November. But Furry and the rest of the BIOLASE team are beginning to feel re-energized. Furry signed on (in part) for 150,000 options at $2, and 1.5 million options were divvied up among employees in December. And, unlike many manufacturers, the company is committed to continuing to make the majority of its products in California, which I also like.
It goes without saying that this isn’t going to be a straight line up, and I do expect there will be some bumps along the way. The question of how fast BIOLASE can ramp its salesforce is critical (it appears to be making terrific progress so far) as is the even larger issue of what will the continuing adoption rate of laser technology be among dentists? Like most folks, dentists don’t exactly embrace change. There is the extra cost of the equipment and the training, and there isn’t much laser equipment in dental schools around the country, although that’s changing too. I do think that Pignatelli’s first-rate job of shifting BLTI’s fortunes back within its own control is a key first step, and today’s results and the bullish tone of the conference call suggest to me that there are many more steps coming, in the right direction.