Precipio Inc (PRPO) 2005 Q2 法說會逐字稿

Welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during our Q&A session. I will now turn the program over to the moderator, Mr. Mitch Murphy. Go ahead, please.

Thank you. I'd like to welcome all participants to our second quarter 2005 conference call, and also to any who may be listening on the web cast. Hopefully, everyone's had a chance to look over the press release we issued earlier today. This call will be archived and accessible via telephone and internet. You can refer to our press release from earlier today or go to our website at Transgenomic.com for details.

I'll take a couple minutes here to take care of some necessary legal issues regarding forward-looking information that may be given during this call, then I'll turn it over to our CEO, Collin D'Silva. Certain forward-looking statements may be made during this call that reflect management's current views and estimates of future economic circumstances, industry conditions, Company performance and financial results. Such statements are subject to certain factors, risks and uncertainties described from time to time in Transgenomic, Inc.'s reports to the Securities and Exchange Commission. Any change in such factors, risks and uncertainties may cause the actual results, events and performance to differ materially from those referred to in such statements. Accordingly, the Company claims protection of the Safe Harbor for forward-looking statements contained in the Private Securities and Litigation Reform Act of 1995 with respect to all such statements.

With that, I'd like to turn the call over to Collin.

Thanks, Mitch. I'd like to welcome everybody for joining us today on this call. I'm going to lead off with some general comments and then turn it over to Mike Summers, our CFO, to review the financial results of the quarter in greater detail. We'll then open up the call for questions and answers.

We're extremely pleased to report important milestones in our Company's financial performance. Loss from operations as well as net loss for the quarter narrowed to historic lows since our Company went public. And for the first time, we also achieved positive earnings before interest, taxes, depreciation, amortization. Please refer to our press release from earlier today in which we more fully discuss this non-GAAP measure and reconcile it to appropriate GAAP measures. We believe this kind of financial performance will differentiate us from many other companies in our industry sector.

Our performance in the second quarter of 2005 reflects renewed focus on our BioSystems business, which in our view, offers the best mix of current and future opportunities going forward. Ongoing progress in our BioSystems business, coupled with restructuring activities completed at the end of 2004 should position Transgenomic to achieve neutral to positive operating cash flow by year end, driven by expected acceleration in BioSystems revenue growth in the second half of this year.

Over the first two quarters of 2005, we've been preparing for the launch of several new products and product line extensions during the second half of the year. Most notable among these is the third quarter launch of our WAVE Model 4500, our fourth generation WAVE platform. The WAVE 4500 platform will offer enhanced flexibility, speed and ease of operation, enhanced through-put and enhanced sensitivity. We also expect the technology improvements embodied in the WAVE Model 4500 to drive a meaningful upgrade opportunity in the second half of '05 and into 2006. Importantly, we expect a number of these activities to drive improvement in our North American sales during the second half of the year, while we expect continued strength in our European and Asia-Pacific markets.

In the first half of this year, we have also invested significant time and effort aimed at further enhancing our visibility and presence in key market segments relevant to the support of personalized medicine. We see increasing opportunities for more clinically-oriented application of our technologies, as evidenced by several factors. One, an increasing number of customer publications have documented work performed with the WAVE system that is of direct clinical relevance. Particularly to the development of targeted therapeutics in hematology and oncology. For example, we issued a press release yesterday detailing a study with significant implications for the management of patients with gastrointestinal stromal tumors treated with imatinib. Another example is provided by a study we highlighted in a June press, a study in which the WAVE system facilitated detection of drug-resistance mutation in acute myeloid leukemia, at time points one to two months earlier than could be achieved with current approaches. The genetic information provided by our technology in setting -- settings such as these is becoming increasingly important as emerging treatment options are growing with additional targeted therapeutics, advancing the pipelines of several pharmas and biopharmas. Two, our Discovery Services project mix is moving toward a greater volume of work performed in support of specific clinical trials for cancer drug candidates. Going forward, we expect opportunities of this nature to increase as the total proportion of our service contract revenue. Finally, we believe that there's an accelerating interest in applying knowledge gained from translational and clinical studies of this nature to develop meaningful diagnostic strategies that can impact patient care in oncology. We will be speaking about some of these opportunities in the near future.

In conclusion, we believe that our unique technology embodied in our products and services is well-positioned to take advantage of emerging markets relating to disease management in the rapidly evolving oncology field. In addition, we believe we have significant operating leverage with our existing expense structure to support expected revenue growth over the next 6 to 18 months. All of this coupled with our strong intellectual property base gives us cause for true belief in the exciting opportunities as we go forward.

With that, I'd like to turn it over to Mike Summers.

Thank you, Collin. Let me provide some highlights regarding our second quarter financial performance.

First, consolidated net sales grew 3.5% from the first quarter to $7.6 million. Second, recurring net sales from consumables and service contracts related to our increasing installed base of nearly 1250 world-wide units continued to grow and represented approximately 48% of consolidated net sales and 54% of net sales in our BioSystems operating segment. Third, we are growing net sales while maintaining operating expenses at historically low levels. Even so, we continue to invest nearly 10% of BioSystems' net sales into research and development. Fourth, our loss from operations of $935,000 and our net loss of $998,000 included depreciation and amortization of slightly more than $1 million.

Now on to the details. Net sales for the quarter ended June 30, 2005, totalled $7.6 million representing a 15% decrease from the same period in 2004, as a result of an expected 70% decrease in sales in our Nucleic Acids operating segment, offset by a 5% increases -- increase in sales in our BioSystems operating segment. Net sales for the six months ended June 30, 2005, totalled $15 million, representing a 15% decrease from the same period in 2004, as a result of an expected 75% decrease in sales in our Nucleic Acids operating segment, offset by a 7% increase in sales in our BioSystems operating segment. Recurring revenues consisting of consumables and service contracts associated with our increasing installed base, and a strong performance from Discovery Services fueled the revenue growth in our BioSystems operating segment. The expected decline in net sales from our Nucleic Acids operating segment is largely the result of the sale of our Boulder, Colorado, facility, which generated net sales of 708,000 and 1.4 million during the three and six months ended June 30, 2004, respectively; and lower net sales of chemical building blocks from our Glasgow, Scotland facility.

Gross profits were 3.2 million or 42% of total net sales during the second quarter of 2005, compared to 3.2 million and 35% during the same period of 2004. Gross profit was 6.2 million, or 41% of total net sales for the six months ended June 30, 2005, compared to 6.0 million and 34% during the same period of 2004. This investment -- this improvement, rather, in gross profits reflects the positive effects of our 2004 restructuring plan, including the sale in November 2004 of our facility in Boulder, Colorado. Our gross profits continue to be adversely affected by excess manufacturing capacity in our Nucleic Acids operating segment, which generated gross margins of $305,000 and $731,000 during the three and six months ended June 30, 2005, respectively. This compares favorably to gross margin losses of 405,000 and 514,000 for the three and six month ended June 30, 2004, respectively. Recent orders from chemical building block customers should result in significant improvement in these results in the second half of 2005.

Operating expenses totaled $4.1 million during the three months ended June 30, 2005 compared to 17.9 million during the same period of 2004. Operating expenses totalled $8.3 million during the six month ended June 30, 2005, compared to 24.1 million during the same period of 2004. Operating expenses for the three and six months ended June 30, 2005 included charges of 228,000 and 428,000, respectively, related to foreign currency charges. Operating expenses in 2004 included a charge of $12 million related to impairment of our Nucleic Acids operating segment. The incremental improvement in operating expenses after considering the impairment charge in 2004 also reflect the positive effects of our 2004 restructuring plan.

Loss from operations for the three months ended June 30, 2005 was 935,000 compared to 14.8 million in the comparable period of 2004. The 2005 loss from operations included depreciation and amortization of $1 million. The 2004 loss from operations included impairment charges of nearly 12 million and depreciation and amortization of 1.2 million. Loss for operations for the six months ended June 30, 2005, was 2.2 million, compared to 18.1 million in the comparable period of 2004. The 2005 loss from operations included depreciation and amortization expense of 2.1 million. The 2004 loss from operations included impairment charges of nearly $12 million and depreciation and amortization of $2.4 million.

Other expenses, which primarily include interest and other charges related to our Laurus loans were $49,000 during the three months ended June 30, 2005. They totalled 1.7 million for the six months ended June 30, 2005, compared to 1 million for the same period of 2004. The 2005 expenses included a charge of 1.1 million related to previously reported conversions in March 2005 of Laurus loans with a gross value of $2.5 million into 4.85 million shares of our common stock. This was an non-cash, non-recurring charge, representing the fair value of incremental shares received by Laurus plus accelerated amortization of related debt discounts and premiums.

Net loss for the three months ended June 30, 2005, was $998,000, or $0.03 per share, compared to 15.1 million or $0.52 per share in the comparable period of 2004. Net loss for the six months ended June 30, 2005 was 3.9 million or $0.12 per share compared to 19 million or $0.66 per share in the comparable period of 2004. We currently have 34.2 million shares outstanding. At June 30, 2005, our net working capital position was $181,000, compared to 761,000 at March 31st, 2005 and a negative 816,000 at December 31st, 2004. At June 30, 2005, we had cash and cash equivalents of $1.7 million and available borrowings under our credit facility of $1.4 million.

In closing, we're excited about the progress, but we have much to do. First, we did not meet our operating cash flow target for the quarter. While historically low, we used $1.1 million. This was primarily necessary to fund working capital demands. Our investment in receivables and working capital in general is not satisfactory to us. Day sales outstanding and receivables exceeds 100 days. This is due largely to an increasing proportion of European sales where we have had traditionally longer collection cycles. As we enhance processes and increase sales outside Europe, we expect DSO and working capital demands to return to more acceptable levels.

Second, we're not satisfied with our margins. On a blended basis, margins for the quarter were nearly 42%. Our BioSystems operating segment generated 51% margins while our Nucleic Acids operating segment generated negative margins. We continue to aggressively target 60-plus percent margins for our BioSystems operating segment and expect that existing back log will bring margins in our Nucleic Acids operating segment closer to 0. It is important to note that while our Nucleic Acids operating segment will likely generate operating losses for 2005, we do expect this segment to generate positive cash flows during the year.

Lastly, as you see on the press release, and as Collin earlier mentioned, we began to report EBITDA this quarter. Given the scrutiny of this type of information, it was not necessarily an easy decision to make. However, we believe EBITDA does provide stakeholders with an indicator of operating performance, especially given the significant capital investment in, and the related depreciation of, our Glasgow, Scotland facility. Our net investment in property and equipment related to this facility is $8.3 million, which represents approximately 70% of consolidated net property and equipment. This facility has significant excess capacity and is not expected to require significant recurring investment. Additionally, net sales originating from this facility represent a much smaller portion of the consolidated net sales, less than 10% during the three months ended June 30, 2004. EBITDA is not a measurement supported by accounting principals generally accepted in the United States, and may not be used by other companies, including the Company's competition. EBITDA should not be considered in isolation or as a substitute for consolidated statement of operations and cash flow data, prepared in accordance with generally accepted accounting principals. EBITDA is not a complete measure of an entity's profitability, but it does -- because it does not include certain cost and expenses nor is EBITDA a complete measure of cash flows because, in our case, it does not include cash payments to service debt, fund working capital, capital expenditures or income taxes.

At this time, I'd liked to turn it back to Collin.

Thanks, Mike, for your view of the quarter's financials in detail. At this time, I'd liked to open up the floor to any questions that our listeners may have.

[OPERATOR INSTRUCTIONS]. Matt Arens, Kopp Investments.

Thank you very much. A couple questions here. First of all, in the first half of the year, on a year-over-year basis, the Nucleic Acid business was off. Can you give us a sense as we go into the third and fourth quarter what our level of expectations for that business should be?

Yes, Matt, this is Mike. As we look at -- as we look at the first six months of the year, we generated Nucleic Acid's revenue of $1.2 million. We released -- really we've issued -- we've executed addendums with our largest customer and I think that we've released those to the public. As I mentioned in my remarks, we would expect this business to cash flow for the year. That number is not so magical to determine. It's about 3 to $3.5 million in revenues we need to get there to get there. And most of that's back logged right now.

Okay. So 3 to 3.5 in the -- in the second two quarters?

No. 3 to 3 -- 3.5 on a -- 3.5 to 4, really, on a year-to-date basis.

Okay. So 3.5 to 4 is an annual number.

Correct.

Okay. Can you speak a little bit to going in -- as we're currently in the third quarter here and you guys do a fair amount of business in Europe. What type of seasonality do we generally see in Europe and -- and what are you expecting in the third quarter this year from Europe?

Europe this year -- Matt, this is Collin, we expect to continue to see normal sales as we've seen in Q2. Traditionally, we don't see much of a -- a slowdown. We see some slowdown, but generally whatever slowdown we do see, we see that being taken up by other regions of the world, namely North America and Asia. So, we don't -- do not expect a significant slowdown in systems revenue into the third quarter of this year.

Good. Mike, you mentioned getting to 60% margins on the BioSystems business, is that correct?

Correct.

And what -- what's a reasonable time frame to think about that -- that goal?

We -- we've -- actually it's not something we just started to focus on. We've been focusing on -- this is one of our primary business objectives. We've been focusing on this now for the better part of 6 to 12 months. I think -- I'm very confident that we've implemented measures you'll begin to see immediately. Whether you begin to notice 60% margins right away, I'm not willing to commit to. But I -- but I am relatively confident that you'll begin to see, especially on our instrument side, you'll be able to see -- you'll begin to see some -- some improvement instantly.

Is the 4500 system a part of that?

It is.

Okay, good. Your operating expenses are at historical lows and the restructuring seems to have been very effective in really pushing those down. We have been able to do that in an environment where the growth has been somewhat slower I think than the BioSystems side, 5 to 7% -- 5% for the quarter, I think, and 7% for the year. We're looking for that growth to accelerate as we get into the third and fourth quarter here. What should we expect in terms of operating expenses and are those likely to -- to move up to help attain this type of growth, or what should be our expectations there?

Yes. Collin can really speak to your operating leverage, but let me just point out, too, that one thing that i made a point to mention on this call was we've actually got a better job on our own mind on the OE level. Unfortunately, we've had to manage through foreign currency adjustments and losses that we did not expect. And they're not insignificant. They're about $250,000 each of the first two quarters. Take those out of the equation, which is obviously easy for me to say, but they're real. And we did even much better than we had, frankly, anticipated. From an operating leverage perspective, we think we can leverage on our existing cost structure to grow this Company into roughly a $40-plus million type company with the existing operating cost structure in place.

Okay. Okay. So we -- we shouldn't look in the near term with this growth. We shouldn't look for, really, a dramatic change in the operating expenses that we've seen as of late here?

It continues to be our expectation that we can leverage on our cost structure to grow revenues to the point in the next 12 to 18 months.

Good. And looking at my notes here, for the year, we're looking for 20% revenue growth from the BioSystems business. Is that about right?

That's correct, Matt. We should be definitely approaching that level on a year-over-year basis.

Okay. Well -- and so I'm pleased to hear you're sticking with that because with the 7% growth in the front half, obviously, as we're sitting here on the call today, almost halfway through the third quarter, you're clearly seeing business trends that support significant growth here in what's obviously a vital second part of '05 for you.

That's correct. As I mentioned in my commentary earlier, Matt, we really positioned several products, several product extensions, the launch of the 4500 system and the upgrade opportunities with the enhanced 4500 system going into Q3 and Q4. We see that as significant opportunities to raise revenues in our BioSystems side going into the latter half of the year.

You've mentioned that upgrade opportunity a couple times. I would think that that would be a pretty compelling sale for people who are already using the system and like it to roll out the advantages. And I'm sure some pretty reasonable economics for them to -- to upgrade to the 4500?

That's correct. And actually, as part of our beta trials on the 4500 system, the last two quarters at various customer sites worldwide, we saw the significant interest by existing customers that trials the 4500 versus our 3500 system. And gave us a really good feel for the added value and the value proposition of the 4500 as an upgrade path for our existing 3500 users. And historically, we've seen roughly a third of our customers opt to upgrade to the latest generation and as part of that philosophy, we've always had a modular upgrade pack available to our existing installed base. So we never leave our existing customers behind. We always provide them an upgrade path to the current level of technology.

Okay. And -- okay, great. Thank you. And, Mike, once you guys get through all these charges, which it seems like we're, for the most part, at the end of the road there, we're going to be hearing a lot less from you on the call?

Yes. I'm fatigued.

You'll -- you'll have to give us an update on your family or something like that?

Let me just speak to that. Not my family.

All right.

The quarter, though, was using a fairly simple word, very clean.

Yes.

There's nothing in this quarter that approaches anything that you've seen in the previous three, four, five quarters that -- that was hard to explain. So I -- as we release our results more clearly through our Q on Monday, it'll really be a pretty clean filing for the first time in awhile, which we're pretty excited about.

Great. Well, we will look forward to more of that, along with this acceleration in revenue growth as well. So, thanks, guys.

Thanks, Matt. And just to follow up on that, Matt, we've really been trying hard to get increased transparency in our financial results, and as Mike said, we're very excited about being able to get to that point as we have this quarter.

Great.

[OPERATOR INSTRUCTIONS]. It appears at this time we have no further questions. I would like to turn the program over to Mr. Mitch Murphy for any closing remarks.

Thank you. I'll mention one more time that this call is being archived and it will be available for listening to either over the internet or on a dial-in basis. The information as how to do that is contained in our press release that we issued earlier today. You can refer to that release or you can also visit our website at Transgenomic.com.

Also, for the benefit of those who may have joined us after this call was already in progress, I'll reiterate that certain forward-looking statements may have been made during this call that reflect management's current views and estimates of future economic circumstances, industry conditions, Company performance and financial results. These statements are subject to certain factors, risks and uncertainties described from time to time in our reports to the SEC. Any change in these factors, risks and uncertainties may cause the actual results, events and performance to differ materially from those referred to in such statements. Accordingly, the Company claims protection of the Safe Harbor for forward-looking statements with respect to all such statements. I'd like to thank all for listening and/or participating in the call today.