23andMe Holding Co. (ME) 2023 Q3 法說會逐字稿

Good day, and welcome to 23andMe's Fiscal Year 2023 Third Quarter Financial Results Conference Call. (Operator Instructions)

I would now like to turn the call over to (inaudible) at Argo Partners to lead off the call. Thank you. Please go ahead.

Thank you, Justin. Before we begin, I encourage everyone to go to investors.23andme.com to find the press release we issued this afternoon reporting our financial results for the quarter. A replay of today's webcast will also be available on our website for a limited time within 24 hours after the event.

Please note that certain statements made during this call regarding matters that are not historical facts, including, but not limited to, management's outlook or predictions for future periods are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the section titled Forward-Looking Statements in our press release, which applies to this call. Also please refer to our SEC filings, which can be found on our website and the SEC's website for a discussion of numerous factors that may impact our future performance.

We will also discuss certain non-GAAP measures. Important information on our use of these measures and reconciliation to U.S. GAAP may be found in our earnings release.

Joining us on our call today are Anne Wojcicki, our Chief Executive Officer and Co-Founder; and Joe Selsavage, our Interim Chief Financial and Accounting Officer; Kenneth Hillan, our Chief Therapeutics Officer, will join us for Q&A.

And with that, I'll turn the call over to Anne.

Thank you. We made significant progress in both our consumer and therapeutics business this past quarter, as we continue to focus on leveraging our genetic database, the world's largest recontactable database for genetic research, to unlock the potential of the human genome to treat and prevent disease like no other company.

Starting with the consumer business, we made significant progress this quarter and continued to enhance our efforts to provide our customers with a leading genetic health service that focuses on prevention and wellness. We added 2 new genetic health reports for our 23andMe+ subscribers on asthma and Hashimoto's disease, an autoimmune disorder. The reports are generated using data and insights gathered from millions of customers who have consented to participate in our research. As a reminder, 23andMe is the only company with multiple FDA authorizations for direct-to-consumer genetic health reports, and the only company that the FDA has authorized to provide genetic cancer risk reports and medication insights without physician involvement. In total, we have over 60 health reports in our personal genome service that estimate a person's genetic likelihood of developing a specific condition.

We also added finer ancestry composition detail for people of Ashkenazi Jewish ancestry. Our product can now enable members to trace their family connections back to 7 genetic groups corresponding to regions within Eastern and Central Europe. During the past quarter, we also celebrated the 1-year anniversary of our acquisition of Lemonaid Health. We are continuing the integration of the telemedicine and online pharmacy platform into 23andMe to enhance our genetic health service, and we look forward to continuing to create new customer experiences that combine genetics with our telemedicine and pharmacy services.

Turning to our therapeutics business. In November, we announced that 23ME-00610 will be evaluated as a monotherapy in tumor indication-specific expansion cohorts. These include clear cell renal carcinoma, epithelial ovarian cancers, neuroendocrine cancers, small cell lung cancer and microsatellite instability-high or tumor mutational burden-high cancers that have progressed on standard therapies. We also intend to present an update from the Phase 1 dose escalation portion of the study at a scientific conference later this year.

In addition, we presented 7 scientific posters at the American Society of Human Genetics Conference, including new insights into conditions such as cataract, systemic sclerosis, pericarditis and others. We also presented preliminary data from what we believe is now the largest and most diverse genetic study of sickle cell trait ever conducted at the American Society of Hematology Conference, the largest annual medical conference dedicated to hematological malignancies. The consumer and therapeutics teams have again made great progress this last quarter and I look forward to the enhanced personalized health offerings we are working to deliver for our customers.

And with that, I'll turn the call over to Joe to review our financial results for the quarter.

Thanks, Anne. I'm pleased to report continued solid revenue growth in our consumer business in the last quarter that puts us on track to exceed our previously disclosed full-year financial guidance for fiscal 2023. I am pleased to report on our performance in Q3, which is typically our busiest of the year operationally on the consumer side. We had good execution on the consumer side as we maintained focus on improving profitability. Despite the challenging macroeconomic environment, consumer demand remained strong during the holiday season. We carefully controlled discounting and promotional spending, which led to improved contribution margin versus the prior year, all of which gives us confidence in raising our full-year guidance, which I will talk about more shortly.

Along with our current cash position and an opportunity to sell additional shares through our recently announced ATM program, we are sufficiently positioned to continue our plans to enhance our genetic health service and advance our therapeutics programs for 23andMe. Our revenue for the 3 and 9 months ended December 31, 2022, was USD67 million and USD207 million, respectively, representing an increase of 18% and 21% respectively, over the same periods in the prior year.

Third quarter revenue growth was primarily due to an increase in telehealth services revenue from the Lemonaid acquisition last November. Growth in our subscription services revenue and Personal Genome Service, PGS revenues and an increase in Research Services revenue primarily related to the GSK collaboration. 9-month revenue growth was primarily due to an increase in telehealth services revenue, higher Research Services revenue from the GSK collaboration and research contracts with third parties and growth in our subscription services revenue, partially offset by lower PGS revenue.

Looking at the composition of our revenue, Consumer Services revenue represented approximately 80% of the total revenue for both the 3 and 9 months ended December 31, 2022. And Research Services revenue, which was primarily derived from the GSK collaboration, accounted for approximately 20% of total revenue for those same periods. Our gross profit for the 3 and 9 months ended December 31, 2022, was USD31 million and USD95 million, respectively, representing a 13% and 10% increase over the same periods in the prior year. The 3- and 9-month year-over-year increase was driven primarily by the previously discussed increase in revenue, offset by lower margins from the telehealth revenues as well as increased supply chain, logistics and labor costs.

Operating expenses for the 3 and 9 months ended December 31, 2022, were USD128 million and USD349 million, respectively, compared to USD124 million and USD271 million for the same periods in the prior year. The increase in the 3- and 9-month periods was primarily attributable to increased personnel-related expenses driven by increased salaries and related taxes as a result of inflation and growth in headcount, along with an impairment charge for intangible assets and the addition of sales and marketing expenses from the previously acquired telehealth business.

Looking at the bottom line, net loss for the 3 and 9 months ended December 31, 2022, was USD92 million and USD248 million, respectively, compared to net losses for the same period in the prior year of USD89 million and USD148 million. The increase in the 3- and 9-month periods was primarily attributable to the increase in operating expenses previously noted and the benefit from the changes in the fair value of warrant liabilities of USD3 million and USD33 million, respectively, recorded in the prior year.

Next, our adjusted EBITDA. For details on how we define adjusted EBITDA as well as the corresponding reconciliations to GAAP, please see our earnings press release. Total adjusted EBITDA for the 3 months ended December 31, 2022, improved to a deficit of $43 million, compared to a deficit for the same period in the prior year of $64 million. Total adjusted EBITDA deficit for the 9-month period was comparable to the same period for the prior year. We ended the quarter with $433 million in cash and cash equivalents compared to $553 million as of March 31, 2022. As we recently announced, we now have an ATM program providing us with the option to sell an aggregate of up to 150 million of shares of Class A common stock from time to time, subject to market conditions.

We are increasing our full-year guidance following our fiscal year 2023 third quarter financial results. Full-year revenue for fiscal 2023, which will end on March 31, 2023, is now projected to be in the range of USD290 million to USD390 million, with a net loss in the range of USD325 million to USD335 million. The full-year adjusted EBITDA deficit is projected to be in the range of USD170 million to USD180 million for fiscal year 2023. As a reminder, this guidance includes the full-year impact of the consolidation of the company's acquired telehealth business into its overall consumer segment as well as the current and anticipated effects of general inflation on certain of our costs.

And now, I'll turn the call back over to Anne.

Thank you, Joe. We continue to make significant strides in our mission to help people access, understand and benefit from the human genome. We are continuing to see consumer demand as we offer more personalized and actionable genetic reports and innovative customer experiences that are helping to drive growth in revenue and profit margin. Our proprietary genetic database is also directly translating to the development of personalized medicine and we look forward to providing more updates in the future as we advance our clinical trial of 23ME-00610 in advanced solid tumors.

We are making great progress in our efforts with genetics-based health care and therapeutics as we strive towards delivering on the promise of true personalized health care. 2023 is the year for DNA-powered health and we are excited to be kicking it off with these exciting updates.

Thank you. Now let's open up the call for questions.

(Operator Instructions)

Before we go into questions, I'd like to just make sure that one thing was clear and on my -- when I was giving full-year guidance, the full-year revenues for fiscal year 2023, which will end on March 31, 2023, is now projected to be in the range of USD290 million to USD300 million, with a net loss in the range of USD325 million to USD335 million. I think I may have misspoken, so I just wanted to make sure that was clear.

And our first question comes from Daniel Grosslight from Citi.

Congrats on a strong quarter here. I just want to kind of dig into guidance real quick. So you beat my expectations for the quarter, but you raised guidance even more than the beat for the full year. So I'm just curious if you're seeing some outsized demand in any one of your core consumer products. And if this kind of reflects a stronger-than-expected holiday season, given that you'll recognize most of the revenue in your fourth fiscal quarter from the holidays?

Thank you, Daniel. We were seeing strong demand and strong revenue growth in prior quarters and we were conservative and before -- and raising -- before we raised guidance in last quarter's earnings call. We did see our holiday sales and that met our expectations and we were expecting that with inflationary and other macroeconomic conditions that they may have been -- we could have saw some degradation there, but we did not see that and we saw a strong demand. And in addition, we were able to hold on discounting and promotions. So we also saw revenue growth there because we're doing less discounting and less promotions.

Yes, got it. And on the cost side of the equation, I noticed that your advertising and brand expense has come down nicely this quarter year-over-year. What's driving that decrease? Are you seeing CAC come down? Have you changed your advertising funnel and strategy at all? And related to that, the full-year guidance now implies a bit of an increase in EBITDA loss. So perhaps costs are increasing in the fourth quarter. Curious what's driving that increase in EBITDA loss for the fourth quarter?

Okay. So on the marketing spend, we've actually changed and we're really being very cautious in how we actually deployed marketing throughout fiscal year 2023. We actually were looking to shut off all inefficient channels and really making sure that our marketing spend was efficient, which really has helped our bottom line. And there was no really other big change in Q4 -- Q3 and nothing really big changes in -- coming in Q4 as well. On the EBITDA standpoint, we actually continue to really -- no additional large expenses coming in Q4. This is just a result of just the expectations for revenue and expenses in Q4.

And our next question comes from Steven Mah from Cowen.

Congrats on the quarter. I had a question on the telehealth services revenue strength. Is that a reflection on the Lemonaid acquisition and the fact that, that integration is fully complete now? And if so, can you provide any color on the genetic space primary care service. When would -- should we expect a launch or details on that new product offering?

So I'll take the first part of that question, Steven. The first -- with telehealth revenue, we still continue to see growth in telehealth revenue. However, we also had a comp -- because we actually did the Lemonaid acquisition in November 1st of last year, so we basically had additional revenue this fiscal year, 1 month additional in telehealth. And then we are continuing to look and work on the integration of Lemonaid into 23andMe. And we'll actually be launching and discussing more our products in the summer of -- this calendar year 2023.

Yes, I would say, Steven, just the integration is -- it's not complete yet as you sort of define this, the integration is still underway in terms of definitely putting all those various services on the 23andMe type platforms. And I think you can expect a more material update from us in the summer. So that's what we hope to be able to talk more -- in more detail about the plans, what we want to do and what that could look like. And I hope also at that time probably to have [Nora] who I don't think we have had on any calls or I don't think you've met her yet, but nor I'd be able to talk more details about sort of the clinical genomics and the direction we're going to go.

And then maybe on a similar note, on the 23andMe+ subscription services revenue, I appreciate you said you're only giving annual updates, but could you give us any sort of color on how that 23andMe+ subscription business is going? Any sense for uptake rates by existing customers or retention rates of customers already subscribing?

Sure. We only give guidance on our subscriptions on an annual basis, so we'll be talking more about that in our Q4 earnings call. We did note in this quarter, in the earnings release that we are seeing increased subscription revenues that is really helping our revenue line. So we're pleased with growth and retention in that product but --

Let me also just make clear, like it's -- the subscription and the acquisition of Lemonaid, it's definitely like that whole combination is the future that we are building towards. So how you actually have a genomic experience where you can get access into services like pharmacy or care and putting that into a subscription product. So just to flag to you, you should expect our subscription product as it is today to evolve relatively substantially over the next 12 months. Does that make sense?

Yes, it makes sense. I guess I was just trying to dig in to see if it's -- if the subscription was coming more from existing customers or people that are buying the kit de novo and just signing up for the subscription then and there?

It's a combination of new kit sales as well as existing renewals as well as upsells into the subscription product.

And our next question comes from Gaurav Goparaju from Berenberg Capital Markets.

Just 2 kind of big picture trend questions for me. The first on the consumer side, right? I mean, have you seen any correlation between members who leverage your PGS platform with those who leverage a telehealth platform basically are entirely new 23andMe users tending to adopt both PGS and telehealth services or does it seem to be one versus the other?

As Anne mentioned, we're really looking to integrate both the telehealth and genomics health services into genomics health services. And so we will be seeing cross population between those 2 customer bases over time.

I mean, right now, it's still 2 different logins. So I think that's -- at some point, it will definitely become that experience where you could go -- you could have different ways of entering and cross over to the other groups.

And then the last thing for me, right, should we expect any new future partnership announcements before the GSK exclusive period occurs or is that just something that we should just kind of remain on standby until the July date?

Well, we cannot announce any new partnerships until the exclusivity ends in July of 2023. So we will need to just hold on any announcements until that time.

And I'm showing no further questions.

We have a few questions from investors that came in through our Q&A platform that we used Say Technologies. I'm now going to ask those top questions that we got on the platform for the management team to answer. The first question is, what is a top priority for management for the year 2023?

I'll take that. This is Anne. So I would divide this into three sections. So first, the consumer side. Consumer, we are focused on fully integrating Lemonaid, making sure that there's a single experience for customers that they can get access to their genome, they can get access to care, pharmacy, potentially loves other features in the future. So that is a single experience and we can really help evolve and enhance our customers' experience when they learned about their genome and they want to do more with it. Secondly, I am definitely thinking, we got the last question, just about what is in a post-GSK world. It is definitely a top priority to make sure that we are always doing what we can on behalf of our customers to make sure that we are making discoveries and that we are advancing therapeutic opportunities.

So we will absolutely be evaluating different opportunities to partner the database that can take in a number of different types of forms. We definitely think about programs that we want to be able to own and how we're going to move that forward. But thinking about a post GSK world is also a top priority. And last, our therapeutics programs are -- the wholly-owned programs are incredibly exciting and I'm very eager to continue to support those and look forward to the time period when we're going to have more clinical data on it.

Okay. Second question is, what is your plan to better market DNA test?

So, this is Anne, I'll take that one as well. I'm very excited about our opportunities for marketing the DNA test and I have to just call out here that it is the year '23 is the year that is absolutely made for us. We do have a new Chief Marketing Officer, John Ward, who has a mix of a number of people who have been here for a while as well as some new players. It is an incredibly exciting time to think about how we are going to market right now with the fully integrated experience between 23andMe plus Lemonaid additional services. And just to remind people, we are the only platform out there that has the FDA-cleared tests where they can go without a clinician, without a health care provider intervening either in the beginning or in the end.

So there is a huge opportunity for John and his team to be able to market, and I am very excited about the year of '23. We have things like our Times Square (inaudible) when you'll see various moving the 23andMe pop-up experiences coming around the country.

All right. Next question is, do you plan on other collaborations with pharmaceutical companies or from other industries?

Let me hand that to Kenneth.

Yes, happy to take that, thanks. You have to -- in terms of new partnerships, the exclusive target discovery period with GSK will be ending in July. As we've said, of course, we're still focused on fulfilling the obligations of that collaboration through that end date. But I'm also very excited about preparations we're making in terms of pursuing other opportunities, as Joe said, that we could potentially announce towards the second half of the year, if we're successful with that. It's certainly a top priority for me and for the team to really think about those partnerships and collaborations that will help us to continue to leverage the 23andMe database to bring real value to our customers and to patients. So just we'll obviously look to provide further information when and if those are announced.

Okay. And next question, what kind of add-ons upsells do you have in the works to help raise profits?

I can take that one. For our consumer business, we've made significant progress this quarter and continue to enhance our efforts to provide customers with the leading genetic health service that focuses on prevention and wellness. We added 2 new genetic health reports for our 23andMe Plus members on asthma and Hashimoto's disease and autoimmune disorder. We also added finer ancestry composition detail for people of Ashkenazi Jewish ancestry. Our products can now enable customers to trace their family connections back to 7 genetic groups corresponding to regions with -- in the Eastern and Central Europe. And we continue to expand on these offerings and it's a key objective for our consumer team.

And as Anne mentioned earlier, we'll be talking a little bit more this summer about our expanded offerings, combining both genetics and the telemedicine business.

Last question is, in terms of the workforce, have there been any cost synergies realized after the Lemonaid deal?

Just a reminder, both of these businesses, 23andMe and Lemonaid are very complementary. And since the integration of Lemonaid's telemedicine platform, our focus has really been on enhancing our genetic health service. And going forward, we'll continue to create new customer experiences and looking to increase lifetime value for every customer over time.

All right. That's our last question. I'll turn it back to you Anne to wrap up the call.

Great. Just want to say thanks for joining and we look forward to updating you on our progress on both the consumer business and our therapeutic efforts. Look forward to talking to you next time.

This concludes today's conference call. Thank you for participating. You may now disconnect.

Goodbye.