Fulgent Genetics Inc (FLGT) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 Fulgent Genetics Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms. Nicole Borsje. Ma'am, you may begin.

Great. Thanks. Good afternoon, and welcome to the Fulgent Genetics Second 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 website, fulgentgenetics.com. An audio replay of this call will be available shortly after the call concludes. Please visit 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 results, including the company's actual future results may be materially different in 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 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 these non-GAAP financial measurements 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 second 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.

And with that, I'd like to turn the call over to Ming.

Thank you. Good afternoon, and welcome to Fulgent Genetics' second quarter 2017 earnings conference call. We would like to thank you all for joining us today as we discuss our financial results and the development for the quarter. I will discuss the highlights from the quarter and then provide updates on our business, then Paul will go through our financial results and then provide additional color on our outlook.

Let me first provide a brief overview of our financial results for the second quarter. Revenue totaled $4.6 million, growing 17% year-over-year. Billable tests grew 39% year-over-year to $3,871 in the quarter. Our ASP was $1,198, which is consistent with what we saw last quarter.

GAAP loss was $25,000, and the non-GAAP income was $284,000. We were generally pleased with our results this quarter as revenue was in line with our expectations and that we're again achieving non-GAAP profitability and a generated cash from operations.

As we discussed last quarter, we made a number of changes to our sales organization in order to better position ourselves to capture shares in the NGS genetic testing market. As expected, it has taken time for us, our new sales team, to fully ramp, and we expect to see these changes to our sales organization positively impact our revenue growth in the second half of the year.

Non-GAAP gross margin in the second quarter was 61%, a modest decline compared to 68% last quarter. Our margins in the quarter were impacted by the new hires and the investment we made in our net operations in anticipating the highest test volume going forward. These expenses, combined with the lower billable test volume results, increased our overall cost of goods sold. However, our gross margin remained the highest in the industry as a result of our technology platform and the operational efficiencies, including lower overall cost to us per test. We then expect gross margin will remain strong in the coming quarters as we increase our volume. We believe we have one of the most comprehensive test menu in the industry, which enable us to provide various options for test customizations and clinically actionable results. Our test menu could actually test for approximately 7,700 genetic conditions, including various cancers, cardiovascular disease, neurological disorders and pediatric conditions.

We are excited to announce in August we have the launch of a new carrier test, which is allowing us to better address needs for the large and the growing prenatal market.

We expect a further penetration into our customer bases with the addition of the carrier test. We see meaningful opportunities in this market long-term and expect the carrier test volume to begin during the third quarter. We believe we are well positioned in capturing shares in this market, especially in our generally flexible test menu, comprehensive test panels and a competitive price.

We remain focused on growing our business through a number of vectors. In particular, we expect to leverage our newly reorganized sales force to further penetrate the cash paying side of the market, including expansion with the larger hospital market, other labs and the research institutions.

On the reimbursement and the purchasing side, we continue to make progress by increasing the number of coverage life and are working with various outpatients to gain adoption to sustain long-term growth. In addition to building relationship with new customers, we remain focused on expanding our test menu. Following the launch of our carrier testing orders, we expect to introduce additional tests to address other adjacent markets in the future.

Finally, we see, additionally, opportunity for international expansion as the patients that we're getting of next-generation sequencing technology are growing globally. With the JV up and running, we believe we are now really well-positioned to benefit from the growth of genetic testing in China.

I would like now to turn over the call to Paul to provide brief details on our operation and the financial performance in the second quarter and to provide additional color on our outlook. Paul?

Thanks, Ming. Revenue for the second quarter totaled $4.6 million, an increase of 17% over the second quarter of 2016. As Ming mentioned, our newly organized sales force has taken time to ramp and this had an adverse impact on our top line momentum in the quarter as expected. However, we're confident in our new sales team's ability to perform in the second half of the year, which should reaccelerate revenue growth. I would also like to note, revenue recognized from Asia customers continues to decline as a proportion of our total revenue, given our Asian customers are now ordering tests through our JV with Xi Long in China. Revenue from Asia represented only 11% of overall revenue in the quarter compared to 36% in the fourth quarter and 29% in the first quarter of 2017. Even with lower overall revenues, we did have growth in our U.S., Middle Eastern and European customers in the quarter, and we anticipate this will accelerate in the second half of 2017 with the efforts by our new sales organization and continued introduction of products.

Billable tests were $3,871 in the second quarter, an increase of 39% over Q2 last quarter and a decrease of 12% in Q1. Our average selling price was $1,198, consistent with what we saw in the first quarter. Cost per test for the quarter was $485 on a GAAP basis and $469, excluding equity-based compensation of $62,000. We saw a modest increase in the cost per test in the quarter compared to the first quarter. We hired numerous employees and made capital investments in our lab operations to equip us to handle the increased volume we anticipate going forward.

As a result of our higher costs, we saw a dip in our non-GAAP gross margin, which was 61% in the quarter. Our gross margin will continue to fluctuate as our test mix varies and our volumes scale. Longer term, we both expect to see a lower average cost per test as we ramp volumes and continue to improve productivity and automation in the lab. We believe that our differentiated technology and operating efficiencies will give us an advantage with margins long-term despite pricing degradation we may see in our business or in the industry overall.

Moving to operating expenses, we continue to make investments to grow our business while controlling expenses. On the sales and marketing side, our expenses were lighter than expected as a result of our sales restructuring. The bulk of our new salespeople began their employment in the latter part of the second quarter. Our sales and marketing team now consists of 15 individuals, which includes net additions made in the second quarter. We believe our sales and marketing team is now right-sized to approach the lucrative cash market.

On the research and development side, we continue to invest in enhancing our technology platform, as Ming mentioned, and are pleased to release our carrier test in August. Lastly, our general and administrative expenses were slightly higher than expected due to a legal and accounting work associated with the finalization of the JV. Non-GAAP operating expenses totaled $2.5 million for the quarter, consistent with the $2.8 million in expenses we saw last quarter. We also recorded $105,000 portion of loss associated with the joint venture. We remain confident that with our current staffing levels, coupled with our joint-ventured operational lab in China, we have excess capacity to handle increased volumes going forward on all fronts.

Adjusted EBITDA for the second quarter was $685,000 compared to $1.2 million in the first quarter and $1.2 million in Q2 of last year. On a non-GAAP basis, excluding equity-based compensation expense, non-GAAP income for the quarter was $284,000 or $0.02 per share on 17.7 million shares outstanding. The GAAP and non-GAAP tax rate at the end of the second quarter was 38%.

We're pleased once again to post non-GAAP profit despite a temporary slowdown in our top line revenue growth.

Turning to the balance sheet. We remain well capitalized to support our growth and are very comfortable with our cash position. We ended the second quarter with $46.1 million in cash, cash equivalent and marketable securities with no debt.

Now moving to our outlook, before I get into the specifics, I want to reiterate that our new sales team is still developing familiarity with our products, tests, pricing, lab process and systems. There is also a lag between when we bring new customers on and when we begin to generate revenue from those customers. Given these dynamics, we expect the third quarter revenue will be between $5.5 million and $6 million. We're also confident in our ability to ramp sales in the second half of the year and are tightening our full year revenue guidance to $24 million to $25 million. We expect that our revenue contribution from Asia will continue to decline and will ultimately represent a very small portion of our overall revenue for the year. We have noted that product mix could shift from quarter-to-quarter as we experienced in the first 2 quarters of the year. That being said, we still expect to maintain strong gross margin and achieve GAAP income for the year even as we continue to invest in our business.

Overall, with the new personnel additions and growing test menu, we remain confident in our growth potential for the next few quarters and years ahead. We're well capitalized and are making measured investments for growth while remaining one of the only profitable companies in the genetic testing space, particularly with the low volume.

We look forward to reporting on our successes in the quarters ahead. Operator, we now open it up for questions.

(Operator Instructions) And our first question comes from Bill Quirk with Piper Jaffray.

So we've seen ASPs here relatively flat over the last couple of quarters. Can you just comment on, I guess, maybe the sustainability at this roughly $1,200 level?

Bill, thank you for the questions. We are, given the -- our sales force's ramp-up now and trying to bring some of the new tests into the -- our labs. We do see we have a benefit of continuing to use the new technology to reduce our costs. I do not believe our costs help what we have with the issue. Now the issue is that we need to bring up higher test samples. So we remain where we're confident that we can continue driving down the cost as we bring the samples, I think.

And then a little bit more color on the ASPs. So yes, ASPs were $1,200 last quarter. It was $1,200 this quarter, even with the portion of our revenues to Asia getting materially lower. We took a look at the composition of the types of tests that we sold during this quarter to last quarter, and excluding the Asia revenue, it remains largely consistent. So the same proportion of exome, same proportion of panels, customized panels and other tests. So everything equal. We anticipate seeing ASPs right around $1,200. The thing that can actually change that variable would be how fast we grow the carrier side of the business because that has a different ASP than, say, exomes. But I think what Ming mentioned is absolutely true, meaning that we invested heavily into our lab operations, we purchased a lot of equipment in the last couple of quarters, we made numerous hires. So from a margin perspective, whether it would be the carrier test, whether it would be the other test that we have, if you also incorporate the lower cost of sequencing by the industry that's out there and the additional automation that we can have with the lab, we feel very comfortable sustaining high gross margins.

Okay. And then just thinking here a little bit about 3Q and 4Q guidance, obviously, it implies a pretty big step-up here in the fourth quarter. Can you just talk about the confidence in that number, Ming or Paul? And the reason why I'm asking is because, Paul, you did say as your -- in your prepared comments that, obviously, with the sales force reshuffling and bringing those reps up to speed and then getting fine, there can obviously be some delays, natural delays in the process. So maybe just speak to the confidence in that implied 4Q guidance.

Yes, Bill. We are ramping up the sales teams. They are working with the various tests and others to bring the sample into the lab. We're also working with various other opportunities with OEMs, with research institutions, and some of those are -- they are quite sizable opportunities. So the teams we bring in, they are pretty experienced, and that also, with the existing sales team, they also were a part of the team we needed to get all those opportunities to close. And we see some good opportunities to be closed in the third quarter and the fourth quarter.

Okay. And then just lastly for me. In terms of the loss from the JV, it's about -- I think it was $105,000. Help us think a little bit about how long you think that will be operating in a loss for the trends over to profitability?

Bill, the labs are set up, so we are going through the credential and certification stage. We've tried to get the lab over there also be [CEF] certified. And then now, they are studying, trying to look in the sample now. We do reported models of the license revenue for this quarter. So the lab is starting in operation and that we expect the profitability in next year.

And our next question comes from Erin Wright with Crédit Suisse.

Outside of the sales force investment, you also mentioned significant investments in equipment and some other items. What did that specifically entail? And do you think you have what you need in place? And what incremental investments are sort of embedded in your expectations near term?

Erin, that's a very good question. We did purchase new sequencing machines. We also bought a new lab equipment. We're also starting to remodel the lab, trying to add in additional capacity to -- for the quick ramp-up of the sample size for the production. And in addition, we are leasing additional -- the lab space and office space. So with all those in the preparation, we're ready to handle the large volume increase.

Okay. Great. And how should we think about the transition to kind of third-party payors and how those relationships are evolving so far? And did you sign on any new relationships? And when should we expect that to contribute more meaningfully? And I guess, what's embedded in your near-term expectations there as well?

Yes, Erin, we expect to see some of the results in the third quarter and hopefully, the quick ramp-up in the fourth quarter of this year.

And were there any, I guess, new relationships that evolved in the quarter?

Yes.

(Operator Instructions) And our next question is from Andrew Cooper with Raymond James.

They hit on a couple of mine, but just a quick one on kind of test mix and the competitive environment. I know the mix last quarter saw whole exome come down. I just kind of wanted to do get your color on what you think, if the competitive environment is any different for those tests, with one of your main competitors introducing that relatively recently, just kind of how you think about attracting new customers with those sorts of tests?

Yes. Andrew, I think if you take a look in terms of what we offer in terms of pricing, our exome pricing, we offer one of the most comprehensive and the more aggressive pricing in this market. So if you compare us, what is our ASP in this quarter versus last quarter, it is pretty consistent. So we do believe that we still have a strong competitive position in this market. Paul, do you have anything to add on?

No. We -- yes, I think I made a comment about this a little earlier. And I was just agreeing with Ming, that from an ASP's perspective, for those particular tests, there is always some potential of a pricing degradation, but we don't see anything drastic.

At this time, I'm showing no further questions. So ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.