Earnings Call: Q1 2019

May 7, 2019

Good day, ladies and gentlemen, and welcome to the Q1 2019 Fulljet 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, today's conference is being recorded. I would now like to introduce your host for today's conference call, Ms. Nicole Borja. You may begin. Great. Thank you. Good afternoon, and welcome to the Fulgent Genetics' Q1 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 financial 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 update any of the forward looking statements it may make today to reflect actual results or changes in expectations. Listeners should not rely on any forward looking statements as predictions of future events and should listen to management's remarks today with the understanding that actual events, including the company's 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 the 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 ks for the Q4 and full year 2018, 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 accounting principles generally accepted in the United States or GAAP. Management has presented these non GAAP financial measures because it believes they may be useful to investors for various reasons, but they should not be 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 Q1 2019 for more information, including the description of how the company calculates non GAAP earnings and earnings per share and a reconciliation of these financial measures to earnings and earnings 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, and thank you for joining us on our call today to discuss our Q1 2019 results. I will review the highlights from the Q1 before Paul discusses our financial results in detail. We had a good start to the year and demonstrated solid year over year growth in revenue and the tax volume. Revenue grew 15% year over year to $5,400,000 We saw strong growth in billable test volume, which increased 63% year over year to a new record high of 7,500. Our ASP was 713, down 19%, compared to the Q4 of 2018 due to product mix. Non GAAP gross margin in the Q1 was 47.4%, up approximately 430 basis points from the Q1 last year and down approximately 600 basis points sequentially. GAAP loss was $1,900,000 and a non GAAP loss was $1,000,000 Non GAAP loss per share was $0.06 in the Q1. Adjusted EBITDA was negative $712,000 in the Q1. We saw strong growth in the test volume this quarter, driven by momentum in our core clinical business. We have made ongoing investment in our business and this have been paying off through increasing diversification of our customer base and broad events for the variety of our tests. In addition to the ongoing success, we have had in the areas such as reproductive health and sequencing as a service. We are seeing recent success in our cancer business. The increased diversification we are seeing across our businesses beyond the success we'll continue to see our pediatric business, which will help driving sustainable growth over the long run. The increased diversification of product mix has been impacted our ASPs, which decreased about 19% compared to the 4th quarter. However, we believe our gross and operating margin should improve in coming quarters as we increasing scale, efficiency and automation. We have begun to see scale with growth test volume and we expect to continue over the course of the year. We are confident our ability to surpass 10,000 tests in the second quarter as we build on our momentum within the area I have discussed. As we look ahead, our overall growth in 2019 will be driven by our ability to capitalization on the large and diversified market opportunity for next generation sequencing. We continue to do well in the cash market for cancer, reproductive health and the pediatrics. But at the same time, we're expanding our footprint through partnership agreement with institutions, research organizations and the biopharma organizations. In this partnership situation, organizations are leveraging our advanced technology and a sequencing capability to deliver more informed and actionable care for their patients. Our sales organization has been successful in sourcing the sequencing partnerships agreements and we have continued to build our pipeline for large partnership agreement. This agreement helped to create more stable and predictable test volume events for us, which we believe will help drive sustainable growth for our business. So far this year, our team has executed the collaboration agreements with academic institutions and the major medical foundations that are leveraging our technology for patients' care and furthering their treatment research. Another partnership we recently finalized is a large clinical lab and a research facility in Canada to leverage our Beacon Carriage Screening technology to expand the carriage screening available to couples across on carrage centers. These organizations lack the Fujian due to our technical expertise, in particular our superior capabilities in bioinformatics and our ability to deliver timely results. We'll continue to work a number of other exciting partnerships, which we hope to can provide additional upside to our growth later this year. The increased number of opportunities that we are seeing is a testament of our superior technology capabilities and our ability to offer partner flexible and cost effective solutions for their patients. We are also able to offer unique solutions for our partners where they can leverage some of our technology from probe to processing to reporting. Many of these partnerships span over an extended period of time, which give us the confidence in our ability to maintain our momentum in the quarters ahead. Outside our partnership in the core cash business, we continue to see growth from our agreements for sequencing package with data analysis. These agreements we process large test volume for customers and leverage our technology to deliver comprehensive analysis. These improvements continue to one of the biggest driver of growth in our test volume. We have continued to expand our relationship with existing clients, while driving new customer to our platform. Overall, we have a solid start to the year and we feel good about our position as we look ahead the rest of 2019 and beyond. We expect to drive growth through consistent execution across our core business, while signing and delivering additional partnership that leverage our industry leadership technology platform. I would like to now turn the call over to Paul to provide detail on our financial performance in the Q1. He will also provide an update on our financial outlook for the full year 2019. Paul? Thanks, Ming. 1st quarter revenue totaled $5,400,000 an increase of 15% compared to the Q1 of 2018. While our international business remains strong, our U. S. Business has been seeing momentum recently as revenue from the U. S. Grew 43% year over year in the Q1, accelerating from 42% year over year growth in the Q4 of 2018. Revenue from the U. S. Represented 67% of total revenue in the Q1, up from 61% in the Q4 of 2018. Activity through our China JV remains relatively low, so revenue in the JV grew 61% year over year, while we recorded a net loss of $280,000 Longer term, we remain confident that the JV uniquely positions us to capture the large China market. As a reminder, we're using the equity method of accounting for the JV investment, which is being carried on our balance sheet. Billable tests were 7,530 in the first quarter, an increase of 63% over Q1 of last year and an increase of 18% over the Q4 of 2018. Our average selling price was $7.13 down from the Q4 as our non pediatric business continues to increase as a portion of overall revenue. While our ASP has picked lower, the costs associated with the tests have declined as we begin to scale. Cost per test for the quarter was $3.94 on a GAAP basis and 3.75 dollars per test excluding equity based compensation of $142,000 Cost per test has stabilized at lower levels due to operational efficiencies, higher volumes, better productivity and the introduction of our enhanced probe. Non GAAP gross margin was down 600 basis points sequentially, but improved 430 basis points year over year. Gross margin has generally improved and stabilized as cost per test has improved with increased efficiency. Now turning to operating expenses. We have remained focusing on controlling expenses while investing in different areas for our business. Our operating margin improved more than 13 percentage points year over year and was down about 16 percentage points sequentially. We will continue to see quarterly fluctuations in the near term as we scale. Sales and marketing expense on a GAAP basis was $1,300,000 in the quarter, up slightly from $1,100,000 in the 4th quarter. R and D expense was $1,400,000 flat with what we saw in the 4th quarter. We continue to invest in all areas of R and D from PROs to bioinformatics and in test offerings, whether it be germline or somatic. We believe we can be aggressive in our R and D investment, while still maintaining a business model that is able to demonstrate improvements in leverage over time. Lastly, G and A expense was $1,500,000 up slightly from $1,400,000 in the 4th quarter. Total GAAP operating expenses were $4,200,000 for the Q1, up from $3,900,000 in the 4th quarter. Non GAAP operating expenses totaled $3,800,000 up from $3,500,000 last quarter. Adjusted EBITDA loss for the Q1 was $712,000 compared to positive $37,000 in the 4th quarter of 2018. On a non GAAP basis and excluding equity based compensation, loss for the quarter was $1,000,000 or $0.06 per share on 18,200,000 weighted common average shares outstanding. The GAAP tax rate at the end of the Q1 was 0 and non GAAP tax rate was 0 also due to a full valuation allowance. The non GAAP loss was impacted negatively by approximately $0.02 based on recording the valuation allowance at the end of 2018. Turning to the balance sheet. We remain well capitalized to support our growth and we're comfortable with our cash position. Cash provided by operating activities was approximately $1,100,000 compared to $778,000 in Q4 of 2018. Positive cash flow was driven by strong accounts receivable collections in the Q1. We continue to manage our business around cash flow breakeven for some time with the goal of achieving sustainable cash flow generation by the end of the year. We ended the Q1 with $38,400,000 in cash, cash equivalents and marketable securities with no debt. This equates to $2.11 of cash per share. Now moving on to our outlook and guidance for the year. As Ming discussed, we anticipate on having notable growth in volume going forward. Based on our pipeline and expectations for the collaborations that we've executed, we feel confident in our growth expectations for 2019. For the Q2, as Ming mentioned, we expect to see test volume exceed 10,000 in the quarter, and we anticipate revenue will grow by approximately 20% sequentially over the Q1. For the full year 2019, we expect revenues will be greater than $26,000,000 which represents a year over year growth of more than 20 2%. We also remain focused on improving leverage while investing for growth. As we continue to scale, we still expect to return to GAAP profitability towards the end of 2019. We're excited about the opportunities ahead for Fulgent and look forward to updating you our momentum in the quarters ahead. Operator, now you can open it up for questions. Our first question comes from Bill Quirk with Piper Jaffray. Hi, this is Rachel on for Bill. Thanks for taking the questions. So could you just give us an update on your thoughts about CMS' potential changes around reimbursement for hereditary cancer and NGS? Yes. Thank you for the questions. At the present time, we are continuing to focus on our cash collection business, while we're working on the insurance contracts. As we've seen for the rest of the year, the majority of our revenue will be still cash driven business. And however, we do see the potentials to get the insurance collections. So this is Paul. I agree with what Ming said completely. I think the only thing that I would add is, as Ming indicated, revenue from reimbursement continues to be a very small portion of our business. And we recognize the fact that CMS had made some amendments and we're working very hard to get incorporated to have reimbursement be a per year portion of our revenues. But regardless of their amendment and their decision, it does not impact the guidance that we have for the year. And the volume for this business is accelerating in a quite meaningful way, as we indicated on giving color for the Q2 of 2019. Yes, great. Thank you for that color. Final question. So you touched on the Canadian partnership, but could you just give us more of an update on the carrier screening test? Thanks. The carrier screening test is continuing to see growth in the business. In Canada, we are doing the collaborations with a major institution to build partnerships in Canada, which is offered a carrier screening test. Beside Canada, we also see the momentum in Europe, South America and as well as in the U. S. For the demand of carrying screen tests. Great. Thanks. And I'm not showing any further questions at this time. I'd like to turn the call back over to our host. All right. Thank you very much for you joining our conference call, and looking forward to talk to you and update you on our business in the next coming quarters. Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.