Earnings Call: Q2 2019

Aug 5, 2019

afternoon, ladies and gentlemen, and welcome to the Q2 2019 AllGen Genetics Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Nicole Borcher from Investor Relations. Ma'am, please go ahead. Great. Thank you. Good afternoon, and welcome to the Fulton Genetics' Q2 2019 financial results conference call. On the call today is Ming Hsieh, Chief Executive Officer and Paul Kim, Chief Financial Officer. The company's press release discussing its results is available on the Investor Relations section of the company's website, fulgentgenetics.com. An audio replay of this call will be available shortly after the call concludes. Please visit the Investor Relations section of the company's website to access the audio replay. Management's prepared remarks and answers to your questions on today's call will contain forward looking statements. These forward looking statements represent management's estimates based on current views and assumptions, which may prove to be incorrect. As a result, matters discussed in any forward looking statements are subject to risks, uncertainties and changes in circumstances that may cause actual results to differ from those described in the forward looking statements. The company assumes no obligation to any forward any forward looking statements as predictions of future events and should listen to management's remarks today with the understanding that actual results, including the actual future results, may be materially different than what is described in or implied by these forward looking statements. Please review the more detailed discussions related to these forward looking statements, including discussions of some of the risk factors that may cause results to differ from those described in these forward looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10 Q for the Q1 of 2019, which is available on the company's Investor Relations website. Management's prepared remarks, including discussions of earnings and earnings per share, contain financial measures not prepared in accordance with the accounting principles generally accepted in the United States or GAAP. Management has presented substitute for viewed as a substitute for or superior to the company's financial results prepared in accordance with GAAP. Please see the company's press release discussing its financial results for the Q2 2019 for more information, including the description of how to compare, how the company calculates non GAAP earnings and earnings per share and a reconciliation of these financial measures to income and income per share, the most directly comparable GAAP financial measures. With that, I'd now like to turn the call over to Ming. Thank you, Nicole. Good afternoon, afternoon, and thank you for joining us on our call today to discuss our Q2 20 19 results. I will review the highlights from the Q2 before call, discuss our financial results and outlook in detail. We had a record second quarter, deeply achieving quarterly results for both test volume and revenue. At the same time, we saw an equally gross margin and achieved a record cost protect, which leads to leveraging ANZSCA percent year over year to a record of $8,400,000 187% year over year for new record high of and 60 months, far exceeding the commitment we gave last quarter for at least 10,000 tests. With the strong volume, we have now reported more tests in the first of 2019 than we did in the fall of 2018. Our GAAP was 5 $15 Our ASP was $515,000 down 28% compared to the Q1 of 2019. However, this was offset by the record low cost per test of 2 $21 which was an improvement of 44% compared to Q1. The lower ASPs, efficiency, product mix, volume and efficiency, which will be discussed further in a moment. Non GAAP gross margin in the 2nd quarter was 69%, up approximately 3 30 basis points from the Q2 last year and up approximately 12% sequentially. GAAP income was $3,331,000 and the non GAAP income was $200,000 Non GAAP earnings per share was $0.06 in the second quarter. Adjusted EBITDA was positive at $1,500,000 in the second quarter. The strong results that was demonstrated in the second quarter were achieved of ongoing traction we have having in the spread of our offering across our growing customer base and with our collaboration agreement. The majority of growth in the test volume that we saw this quarter was driven by demand from our core clinical We have seen increasing level of momentum with our oncology test, while our reproductive health and the service for sequencing and research data analysis continues to work. The large volume test leads were able to assess in the quarter demonstrate how our investment in technology capabilities and infrastructure have settled us well for the future success. In addition to the strong volume growth we have generated in this quarter, We are absolutely pleased with the leverage we saw in our business, which resulted in GAAP profitability. We saw a meaningful improvement in gross margin resulted from our improved cost test, which benefited from scale, automation and efficiency with ramping volume. Our cost per test, excluding stock based compensation, was a record low of $2.11 We believe this enables us to serve more opportunities as well as we a M2NG compared in any environment. We also saw great leverage with operating expense, generating volume and revenue with a minimum incremental sales and overhead costs. As we have discussed in the past, we have invested meaningfully in our technology, infrastructure and talent in the last few years to create a scalable business capable of handling higher volume. Now that we are catching the demand for the increased spend of test volume, we're pleased with our ability to meet these demands in an efficient manner without high opportunity, operationally spend more to achieve these results. The market for the next generation sequencing and the generic text is large and growing. We are uniquely positioned to to capture this market share with our differentiated technology and approach. The collaboration agreement that we have continued to announce demonstrates that organizations and institutions value our offering because of our unique technology and the ability of a wide range of customized tasks that meet individuals' needs. And with the flexibility of our offering, partners are able to better leverage our sequencing capabilities to deliver more informed and expert care for their patients on a timely basis. Another example of partnership agreement that we have announced recently was with Parkinson's Foundation. The foundation was looking for a genetic testing partner to help them with a nationwide initiative that we will launch to provide eligible individuals with a genetic test for clinically relevant Parkinson's related gene. After a competitive and assuring each DNA samples for the patients in this initiative. In addition to supporting the individual tests, we were able to use data that we gathered to assist the Parkinson's Foundation in research and development of a new treatment for the disease. We are having ongoing dialogue with a number of other large organizations and institutions for potential future collaboration, and we are pleased with the diverse scope and geographic reach that we are seeing with this opportunity. The increased number of opportunities that we are seeing is a testament of our superior technology capabilities and our ability to offer partners flexible and cost effective solutions. We believe this type of partnership excluded several collaboration agreements with our sequencing as a service business with various biopharma and research institutions, and we expect to see revenue from this collaboration in the second half of this year. Moreover, we have made additional progress with our reproductive health area and amaze with introducing new offerings to the market in the later week, we were very excited to announce that we have received approval from New York State Department of Health for NGS testing in the state of New York. This approval has notarized the difficulty to achieve, and we are pleased that we have a process and approach to the rigorous standards stand by the sea. A testament to our differentiated technology, we believe we will expand our presence in the North East of U. S. And open up additional opportunities for collaboration with our partners and institutions in New York. Finally, we are pleased to welcome Li Da Marsh to our Board of Directors, which we announced in the press release this morning. We are excited to have Linda join us. Her knowledge and expertise in the healthcare industry, government relations and reimbursement will bring great insights to our Board. We look forward to working with Linda in the years ahead. In summary, we had a very strong start to this year. And as we look ahead the rest of 2019, we feel confident in our market position and opportunity. We have very solid platform to fuel up on, and we expect to continue to see strong test volume growth and profitability in the quarters ahead. I would like to now turn over the call to Paul to provide details on our financial performance in the Q2. He also provides updates on our financial outlook for the full year 2019. Todd? Thanks, Menck. 2nd quarter revenue totaled 8,400,000, dollars an increase of 56% compared to the Q2 of 2018. While our international business remained stable, our U. S. Business has continued to be a significant driver of our momentum. Revenue from the U. S. Grew 103% year over year in the second quarter, accelerating from 43% year over year growth in the Q1 of 2019. Revenue from the U. 2nd quarter, up from 67% in the Q1. Billable tests reached a new record high of 16,369 in the 2nd quarter, growing 187% over Q2 of last year and increasing 117% from the Q1 of 2019. Our average selling price was 5.15 down from the Q1 as our non pediatric business represented the majority of revenue in the quarter. While our ASP has declined due to product mix, the costs associated with these tests have continued to decrease 2 1 on a GAAP basis and $2.11 excluding equity based compensation of $167,000 We're pleased with the improvements we've seen in our cost per test, which has increasingly benefited from operational efficiency, higher test volume, better productivity and the use of our proprietary technology, including probe. The leverage we've proprietary technology including probes. The leverage we generated from a lower average cost per test has resulted in a meaningful improvement in our gross margin. Non GAAP gross margin improved 12 percentage points sequentially and 3 30 basis points year over year. We expect that we reach the new normal with quarterly test volumes while exceeding 10,000 tests per quarter and with this tests per quarter. And with this volume, we expect that our gross margin should remain strong in the coming quarters. Now turning to operating expenses, we remain committed to managing expenses while investing in for future growth. Our top line outperformance this quarter resulted in the first positive was $1,300,000 in the quarter, flat with what we saw in the Q1. R and D expense in Q2 was 1,600,000 dollars up slightly from $1,400,000 in the first quarter. We continue to invest in all areas of R and D from engineered chemistry next product and service offerings. Our results this quarter demonstrate that we have the ability to be aggressive in our R and D investments, while still maintaining a business model that demonstrates improving leverage over time. Lastly, total G and A expense was $1,600,000 up from $1,500,000 in the Q1. Total GAAP operating expenses were $4,500,000 in the 2nd quarter, up from $4,200,000 in the 1st quarter. Non GAAP operating expenses totaled 3.9 $1,000,000 up from $3,800,000 last quarter. We're very pleased we've been able to demonstrate strong momentum on the top line, while only marginally increasing expenses, a testament to the long term sustainability of our model and shows the discipline we've had in building our business is finally paying off. Adjusted EBITDA for the 2nd quarter was a positive $1,500,000 compared to 99 $1,000 in the Q2 of 2018. On a non GAAP basis and excluding equity based compensation expense, income for the quarter was $1,200,000 or $0.06 per share on 19,000,000 weighted average common shares outstanding. The effective tax rate at the end of the 2nd quarter was a benefit of 1% and non GAAP tax rate was 0 due to a full valuation allowance quarter on strong results. Cash provided by operating activities was approximately 675 $1,000 Now that we reach profitability, it's our intention to generate cash from operations during each reporting period. We ended 2nd quarter with $38,700,000 in cash, cash equivalents and marketable securities with no debt. This equates to $2.03 in cash, cash equivalents and marketable securities per share. Now moving on to outlook. As Ming discussed, we've seen strong momentum across our business and we expect test volumes to build through the end of the year. Given the outperformance we demonstrated in the Q2 as well as the confidence we have in our pipeline for the second half of the year and our growing network of partnerships, we're raising our full year revenue guidance. We now expect revenues for the full year to be at least $29,000,000 which represents a year over year organic growth of approximately 40%. We also remain focused on improving leverage while investing for growth. While we're pleased with the positive operating margin and net income that we generated, we may see near term fluctuations in profitability. We remain confident in our ability to demonstrate sustainable GAAP profitability by the end of the year. We're excited about the the momentum we've been seeing and the opportunities ahead for Fulgent. The results we demonstrated this quarter validate that our technology and operational differentiation and approach to the market is sustainable longer term in this growing environment. We look forward to continuing on this momentum in the second half of the year. Thank you again for joining our call. Operator, now you can open it up for questions. Thank Your first question is from Erin Wright from Credit Suisse. Your line is open. Great, thanks. Can you speak to some of the key factors that drove that sizable acceleration in volume in the quarter? Were there any of your new partnerships or collaborations that were a notable meaningful contributor? And or were there any sort of timing factors that we should be thinking about in terms of the quarterly progression? Or do you think this is sort of you hit a longer term sort of inflection point here? Thanks. Arun, thank you for the question. We have several collaboration partners, which contributed the significant amount of revenue for this quarter. So and we as I talked earlier, we continue expanded our reach and we have some more of our new partners will be joined and to continue we provide the service further. Yes. Aaron, as you very well know, we've made a significant expansion in the product offerings, the product and the service offerings that we've had over the course of the last 12 months, whether it be in the area of cancer or reproductive health. It took the market some time to digest that we do have those capabilities. The second thing is, with the new sales organization and the success that they've had, forming these collaborations, the long term collaborations and partnerships that takes time. The other thing that we've done is because we need a calibration of our operations, we made the pricing in this very competitive environment competitive. So whether it be service offerings, the result of the test, the quality of the test, the turnaround time, the prices, we made all those things available and we believe that's what's causing the inflection point. As far as sustainability, we feel confident enough based on the pipeline that we see and the traction that we have with these collaboration agreements for us to be confident about raising our outlook for the year. And we believe the second half of the year is going to be even more successful than what we achieved in the first half of the year. Okay. That's really helpful. And then you're clearly seeing some of the leverage here with the building volume. But I did want to ask on the ASP front, and I think you mentioned some of that, but how much of that was a proactive effort versus test mix in terms of the decline in the ASP? It just was a little bit lower than what we were expecting, but I mean, clearly, you're seeing the leverage thereon, but curious what the dynamics were from an ASP perspective. And is a rate that we should kind of continue going forward? Or how should we be thinking about that? Yes. Erinn, thank you for this is a tough question. As everybody worried about the declines in ASP, I think for the drop of the ASP, it is a proactive act from our end to respond to the market change in the industry. You haven't seen some of our competitors have been lowered their cost per test significantly regardless if they are losing tens of money millions of money per quarter. From our end, due to the efficiency of our cost reduction, We would like to share some of those success with our partners. So we have lowered our cost, our average cost to make our products more competitive, but we are not lowering the cost to satisfy the quality and the service. So we reduced our turnaround time and we increased our volume and also we lowered our cost. I think overall, our partners were happy to see our response to market demand and proactive services and the industry was looking for. I think if you take a look at the overall, as we continue to increase our test volume, we will continue to do the cost reduction in terms of cost from our side. We're continuing to invest in new technology, new artificial intelligence to make more automation for the entire process. So we could see in this market as a compete with anybody. Okay, that's helpful. Thank you. All right. Thank you, Henry. Your next question is from Bo Keurig of Piper Jaffray. Your line is open. Great. Thanks and good afternoon. A couple of questions. So I guess with respect to the volumes, is there any way to break out what the new lower ASPs did in terms of driving some of that volume as compared with, say, looking at same store sales with existing customers as an example? Phil, as you probably know, our test design is pretty flexible. So we do not almost every test comes in is a customized from our workflow. So we couldn't track that much in terms of which day come and what test. But overall, our test, the combination of the clinical, the test, our collaboration test and the research samples, they are all mixed together. I see. Okay. Well, then maybe a different way of asking the question Ming would be, is there any way to talk about the volume growth from, say, new customer new customers, excuse me, versus existing customers? Yes. I think, Bill, for this quarter, the majority of our tests are cancer tests. We see the vast areas that have provided the most increase. But some of the quarter depends on quarter to quarter. If you recall, the last few quarters, we have a strong demand in terms of caries reproductive caries cleaning test. But this quarter, compared to the test, the more test will come from the cancer related test. I see. Okay. And then 2 additional ones for me is, I guess one for Paul. The guidance you decline in revenue. And I guess I'd be curious as to why we would see a scenario like that given the really nice momentum you're seeing with volumes? And then separately and perhaps for Ming, any update on the latest with respect to your China joint venture? Thanks, guys. So, Bill, we did in the first half of the year close to $14,000,000 of revenues. And I think what you're commenting on is if we get $14,000,000 and if you're guiding to $29,000,000 then doesn't that equate to a sequential decrease of sales. So the short answer is no. We don't anticipate that that's going to happen. Based on what we see, we think business will continue to grow in each of the quarters that we have for the year. And that's the reason why we said the guidance is at least $29,000,000 So we certainly expect will be greater than $29,000,000 But we are being very cautious because we've missed estimates during the past couple of years and we certainly don't want to see that going forward. Understood. Thank you. And then Ming, just the question on the latest with respect to the China joint venture. Yes. Thank you, Bill. For the China joint venture, we do go through a couple of rebuild periods. This year, as you see from our financial results, the loss has been narrowed in China's operation. We continue seeing the growth and the new opportunities are right in our However, as you may know, last year's revenue wasn't that high, it's about $1,500,000 but this year, we expect a significant increase in that market. The JV in China has signed up several major institutions to start to ramp up their clinical tests. So we do see that the business will grow. Last year was stable. I think this year, we'll see the growth. Okay, got it. Thanks very much, guys.