Fulgent Genetics Inc (FLGT) 2017 Q1 法說會逐字稿

You've joined the Fulgent Genetics Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-session and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, Ms. Nicole Borsje with Investor Relations. Ma'am, you may begin.

Great, thank you. Good afternoon and welcome to the Fulgent Genetics First Quarter 2017 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 in the Investor Relations section of the company's Web Site, 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 Web Site 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 from 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 its quarterly report on Form 10-Q for the first quarter of 2017, and the related press release announcing its financial results for that quarter -- both of which are available on the company's Web site.

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 prepared 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 first quarter of 2017 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 net loss and net loss 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 welcome to Fulgent Genetics First Quarter 2017 Earnings Conference Call. We will like to thank you all for joining us today as we discuss our financial results and [accomplishment] for the quarter. I will discuss the highlights from the quarter and provide updates on our strategy and objectives. Then, Paul will go through our financial results and provide an update on our outlook for the year.

Let me first provide the overview of our financial results in the quarter. Revenue grow 15% year over year to $5.3 million. Billable test in the quarter were $4,422, an increase of 82% year over year in the 14% sequentially. GAAP income was $233 -- $2,000 and non-GAAP income was $560,000.

Although we saw strong billable test growth, revenue came in slightly below our expectation due to product mix and a lower ASPs. Our ASP in Q1 was $1,200, a decline of 20% from Q4 2016. As we have discussed in the past, we expect our average cost per test to be impacted by the mix of tests we saw during our [ending] quarter.

In Q1, we saw a fewer [exome] based test with higher price points and this dynamically impact our overall ASP. However, even with the lower ASP, our non-GAAP growth margin in the quarter increased to 68%. Our gross margin remains high as a result of our technology platform and operational efficiency including lower overall cost to our [per] test.

We believe this give us the distinct advantage as we seek to increase [volume] going forward. Diluted non-GAAP income per share was $0.03 in the quarter and the cash flow from operation was $7,700. We believe we remained well-positioned in the genetic testing market due to our [different] approach and the proprietary technology.

Our extensive test menu of approximately 18,000 single-gene and the more than 300 tests panels are [asked] to cater to the specific need of our customer and to provide the clinically actionable results. Our current test menu [practically] test approximately 7,700 genetic condition including various cancers, cardiovascular disease, neurological disorders and pediatric conditions.

Our strategy remains focused on multiple levels of growth, and one of our primary goals is further [penetrating] into large hospital market and extend it into the research institute and to maximize our impact in the cash paying side of the market. To this end, we made a number of changes in our sales organization in the quarter to strengthen our overall sales efforts.

We hired six senior individuals, each with approximately 20 years of experience in the industry, their previous positions including directors, senior directors and vice president. These individuals officially begin their employment with Fulgent in the next few weeks. We also restructured the right size of the existing sales team.

We now have restructured the sales organization into following three areas -- cash paying hospitals, cash paying research institute, reimbursement and the group purchase organization. By the end of June, we expect to have approximately 13 people in our sales organization and we will anticipate of [making] an additional higher with our [profit]. We expect to -- the new member of our sales team will (inaudible) quickly in their background in the industry and will have a positive impact on our business in the coming quarters.

With this new sales team in place, combined with the introduction of our new tests over the course of the year such as carrier screening [gene test] that we introduced it in Q3 2016 and is designated to address the market for [the macro-based] genomic test, we are optimistic in our ability to extend our existing customer base while also building new customer relationships.

In addition to restructuring and reinforce our sales team, we expect the driving growth by further expanding our test menu and the development of additional relationships with third-party payers. We continue to make a program with our status as a subscriber with the Medicare/Medicaid programs and to continue to contact with additional third-party payers.

We also [expressed a tertiary] relationship and the image (inaudible) strengthen ourselves as an OEM provider of genetic test for large labs and expanding our opportunities in pharmacogenomics and the drug discovery.

Lastly, we remain focusing and [expanding] our business expansion. One of the key components of our international expansion strategy is our joint venture with Xi Long USA, one of our larger shareholders in China. We recently finalized the term of the joint venture and released the licensing agreement as we disclosed from 8-K filed on April 26.

We anticipate the [careful] contribution we are obligated to make the [teaming] will be gradual over the next three years and the consumer we made with the anticipated [activities] of the joint venture.

We believe our -- this strong strategy relationship for the JV a long term business, based on our belief that option [is] for the genetic testing in China could be as larger than the United States.

I will now turn over the call to Paul to go over a brief detail our operational and the financial performance in the fourth quarter, and to provide updates on our outlook. Paul?

Thanks Ming. Revenue for the first quarter was $5.3 million, an increase of 54% over the first quarter of 2016. As Ming mentioned, we continue to see strong growth in our billable test volume, a revenue declined from Q4 2016 due to an increase mix of lower priced tests. Billable tests were $4,422 in the quarter, an increase of 82% year over year and 14% from Q4 2015.

Our average selling price was approximately $1,200 down meaningfully from last quarter due to our product mix. Cost per test for the quarter was $420 on a GAAP basis and $387 excluding equity-based compensation of $146,000, representing an 11% decrease from Q4 2016 on a non-GAAP basis. Despite the ASP and revenue decline from last quarter as Ming mentioned, our non-GAAP growth margin remained consistent at 68% for the quarter.

We expect our growth margin may fluctuate as our test mix varies quarter-to-quarter. However, we expect to focus on continuing to drive down cost per test via increased volumes and continued automation and productivity in the lab, which will continue to counter any pricing degradation we may see in our business or in the industry generally.

Moving to operating expenses, we made meaningful investments in the quarter with the hiring of senior members to our sales team which Ming discussed. We added six individuals to our sales and marketing team and anticipate having approximately 13 sales employees at the end of our second quarter. Though, the changes may not impact our top line numbers in the coming few months, we anticipate the restructuring and reinforcing. Now, the sales organization will be highly beneficial for the Company, longer term.

On research and development, we remained focused on advancing our technology platform and we'll continue to efficiently invest in research and development. Lastly, we start greater than expected administrative expenses as we go on accounting expenses from the annual audit exceeded our initial estimates.

With the hiring across all departments combined with our joint venture operational lab in China, we now have increased capacity to handle any spike in volume. We also believe we can continue to decrease our cost per test as we increase our operating efficiencies.

Adjusted EBITDA for the first quarter was 1.2 million compared to 2.2 million last quarter at 1.2 million last year. On the non-GAAP basis and [excluding] equity base compensation expense, non-GAAP income for the quarter was 560,000 or $ .03 per share based on 18.2 million shares outstanding.

The GAAP tax rate at the end of the first quarter was 31% and non-GAAP tax rate was 38%. In some, although we're not pleased with lower than anticipated revenue, we posted another quarter of GAAP income and positive cash flow and we believe we're well-positioned to continue scaling our business in the future.

Turning to the balance sheet, we remained well-capitalized to support growth and expansion plans. We finished the first quarter of what 47 million in cash, cash equivalent and marketable securities with no debt.

Now, I will move to our outlook for the next quarter in the balance of the year. The biggest factor we have taken into consideration in providing our outlook is the time needed for our new sales organization to have an impact and revenue generation. Though, we do not expect that it would take much time for the senior individuals to get up to speed, it will take few months for them to develop familiarity with their products, tasks, pricing, lab process and systems.

Also, there'll be a lag between attaining any new customers and recording revenue from those customers. Also, although we have been talking about uncertainty regarding product mix and pricing for some time, we did not anticipate a 20% drop in ASPs in one given quarter. Based on these factors, we anticipate second quarter revenues will be slightly lower than Q1 revenue. We also anticipate our revenue for the full year will be lower than our initial guidance. We now expect our revenue for the full year 2017 to be in the range of 24 to 28 million.

Given the dynamic nature of our new sales organization, we plan on providing greater color into our business and the coming Earnings Calls including order volumes and traction from new cash paying customers. Also, should product make shift into favor and we sell a greater portion of [exon-based] tests, this dynamic would provide upside to our guidance.

Regardless of product mix or timing on how quickly the reinforced sales force can produce results, we expect we will maintain our strong growth margins, as well as GAAP income for the year, due to our technological and operational efficiencies, even as we continue to make aggressive investments in our business.

Despite our lower outlook for the year, we remain confident in our business and opportunities ahead. We expect that the changes we have made to our sales organization will pay dividends in the long-term and we are optimistic about what can be accomplished with the differentiated technology and platform in a rapidly growing market.

We have a solid balance sheet and remain one of the few companies in the genetic testing space able to demonstrate GAAP profits while still investing for growth.

Operator, now we'll open it up for questions.

(Operator Instructions)

Bill Quirk of Piper Jaffray.

Great, thanks and good morning. A couple of questions, so first off, on the lower test ASPs, you said it several times that this was mixed and so should we read into that then that there was, that overall ASPs on apples-to-apples basis, the pricing remained the same and it was simply that we're moving to more like single-gene task versus [panels and exons] like we saw in previous quarters?

You are correct. That is purely the product mix. It depends on the cost of the customer or the single-gene test, but we do have lowered the ASPs versus the whole genome -- whole [exon] test.

Okay, and then, based on your -- the guidance and the fairly significant cut to that guidance, it sounds like this unfavorable mix has continued into April. The reason I bring it up, of course, is that your fourth quarter calls at the end of February and so I'm assuming that you start to see this in a pretty meaningful way in March and then it continued into April?

Bill, that is also correct. But we do give the -- also, and try to give our new sales team some time to develop further to [restand] some of those tests especially in the whole [exons], whole genome tests.

Sure, no that's a fair point, Ming. Obviously, the new team will need some time to vet in and start generating some incremental performance. Lastly for me, on reimbursement, can you remind us where we are with respect to lives under coverage and lives under contract?

Yes, Bill. We, in the quarter, we also signed a contract with Blue Shield Blue Cross contract in Texas. And, also, Paul --

We have it in two other states in the Midwest and then we are getting relatively close with two other national payers.

Okay, great. Thank you very much. Appreciate it.

(Operator instructions)

Erin Wright of Credit Suisse.

Thanks for taking my questions. How are -- a follow up to Bill's question on reimbursement -- how are these third-party relationships, third-party payer relationships influencing your outlook for the year in terms of both pricing and volume?

So, the short answer is not much. The -- going back to hiring the senior sales individuals, they've come from other genetic companies and they come from other genetic testing companies where they have a very strong positioning into the institution of the cash side of the market.

So, our primary focus with those individuals isn't necessarily to beef up what we've been doing on the reimbursement side. It's really to beef up on the cash paying portion of the market. And then as a follow up to that a number of these individuals have a lot of experience in the cash paying outside of the market for institutional and [exon-based] tests.

So, although we believe that it will take a little bit of time for them to get up to speed we are very optimistic about what they could potentially deliver for the Company.

Okay. And, as a follow up to that one, can you speak to the hiring strategy as it stands now? And what have you specifically added quarter-to-date? And how big should we think about the sales force being by the end of the year? And in broader size, over the longer term? Have some processes or strategies there been expedited at all?

Yes, I can give you numbers and then Ming can follow up on our overall strategy as to how we're going to continue to invest heavily in the sales or marketing space. So at the beginning of the year we had approximately 10 sales people. We had four international sales people headed by a VP and then we had six US sales people headed by a senior director.

We have maintained in our MV process of adding another couple people on the international side. On the US side, we added six senior people, two VPs, three senior directors, one director -- and then we right sized the existing organization down to approximately three individuals. So, we have a net add of three, four on the United States side.

And then if you sum that up with what we have on the international side that gives you a total of 13. We believe that we'll a couple more people, bringing that 13 to approximately 15 -- that's our target by the end of June. And then, for the remaining portion of the year, we plan on adding another between 5 and 10 individuals bringing the total number of people on the fields organization to somewhere in the low 20s to mid-20s by the end of this year.

Okay, great. Thank you.

(Operator instructions)

As there are no further questions in queue at this time, I'd like to conclude the program. Thank you, everyone, for your participation. You may disconnect your line this time.