Fulgent Genetics, Inc. (FLGT) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter Two 2018 Fulgent Genetics Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this call will be recorded. I’d now like to introduce your host for today’s conference, Nicole Borsje. Please go ahead.

Great. Thank you. Good afternoon and welcome to the Fulgent Genetics second quarter 2018 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 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 from what is described in or implied by these forward-looking statements. Please review the more detailed discussions related to these forward-looking statements included – including the discussions of some 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-Q for the first quarter of 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 second quarter 2018 for more information, including the description of how the company calculates non-GAAP earnings and earnings per share and a reconciliation of these financial metrics to loss and loss per share to 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 conference call today to discuss our second quarter 2018 results. I will spend a few minutes discussing the highlights of our second quarter before Paul discuss our financial results in detail. Let me first provide a brief overview of our financial results for the second quarter. Revenue totaled at $5.4 million, up 16% on the second quarter last year and also up 16% sequentially. Billable tests in the quarter grew 47% year-over-year and 23% sequentially to our new quarterly record of 5,700. Our ASP was $947, down 6% compared to the first quarter of 2018. Non-GAAP gross margin in the quarter was 55.7%, up 12 points from 43.1% in last quarter. Cost per test decreased by 27% during the quarter from Q1. GAAP loss was $1 million and a non-GAAP loss was about $200,000. Non-GAAP loss per share was $0.01 in the second quarter. Adjusted EBITDA was a positive over $100,000 in the second quarter. We are pleased with our second quarter results. As revenue growth, billable test volume and gross margin, all improved in the quarter. In addition compared to Q1 on a non-GAAP basis, operating expense decreased by 6%. Cost per test decreased by 27%. Cash used in operations decreased by 96%, and we went back to EBITDA positive in Q2. Continue on the progress we demonstrated in the first quarter, we are seeing more stable in our business, as our new initiatives start to gain traction. In the second quarter, we saw continued growth in our Beacon carrier tests, while our core pediatrics and sequencing service continue to do well. Over the last year, we made a number of investments across our business to expand our test menu, increase capacity, and the restructure our sales organization. And this investment are beginning to payoff. We feel good about the progress we have made in the recent quarters, but I recognize that we still have a large opportunity ahead of us and a lot more to do before we reach scale. We will continue to focus on driving growth through our recent initiatives, while extending our core business. I’ll now go through some updates on these key drivers. First, we have continued to see strong demand for our recently launched test, in particular, our Beacon carrier screening and the cardiology test. Second, our international business is doing well. And looking ahead, we see good opportunity in the area such as Europe as we’re getting deeper into 2018. Third, we continue making progress on securing reimbursement agreement and building our RCM organization. As more of our business comes from the insurance market or continued with the three lease agreements and strengthen our internal capability. Fourth, service revenue from biopharma and the research organization continue to drive our growth. We see growth opportunity in this area as well. Fifth, with the launch of our somatic test, we now have comprehensive offerings in the field of oncology along our strong germline testing menus. Sixth, China JV is fully operational and we’re beginning to record relative – related to this JV itself. Lastly, investment that we made to expand our lab and increased capacity are paying off. We’re seeing increased operational efficiency and effectiveness. We’re once again, pleased with the improvement we’re seeing and are encouraged by the manageable progress we have demonstrated in each area of our business. We believe we’ll remain solidly positioned to capture in the NGS market and look forward to build our growth in these quarters ahead. I’d like now to turn over the call to Paul to provide the details on our financial performance in the second quarter. He’ll also provide an update on our outlook for 2018. Paul.

Thanks, Ming. Second quarter revenue totaled $5.4 million, an increase of 16% compared to both the second quarter of 2017 and the first quarter of 2019. As Ming discussed the top line momentum we’re seeing is a result of the successes we had with the recent initiatives, as well as stability in the core areas of our business. Revenue from Asia is now a very small part of our business and represented 1% of our total revenue in the second quarter, compared to 12% in the second quarter of 2017. As a result, our growing business in the U.S. continues to offset the declines we’ve seen in Asia. Going forward, our year-over-year growth will be more normalized, as the comparable quarter in the second-half of 2017 had a much lower contribution from Asia. Billable tests were a record 5,700 in the second quarter, an increase of 47% in Q2 of last year and an increase of 23% sequentially. Our ASP was 947, down slightly from the first quarter, due to insurance being a larger portion of our revenues. Cost per test for the quarter was 446 on a GAAP basis and $420, excluding equity-based compensation of 151,000. We’re pleased to see the 27% decrease in cost per test on a non-GAAP basis, which was driven by increased operational efficiencies, higher volumes, better productivity, as well as the introduction of our enhanced probes this quarter. Our lower cost per test drove a 12 percentage point improvement in our non-GAAP gross margin, which was 56% in the second quarter, compared to 43% last quarter. Similar to variabilities and cost per test, the gross margin may fluctuate, as our test mix varies and our volumes scale. That being said, we feel additional efficiencies could lead to further lower average cost per test going forward. Turning to operating expenses. We saw a notable decrease in operating expenses in the quarter as we leveled off in the investments we’ve been making in the business. We’ve seen nice growth in revenue and test volume with the investments we made over the last year and feel that we’re spending responsibility – spending responsibly to drive sustainable growth. Sales and marketing expense on a GAAP basis was $1.3 million in the quarter, up from $1.1 million last quarter. Our sales organization has been stable for sometime now and it’s starting to show their impact by winning deals and driving volume on a positive trajectory. On research and development, we continue to invest to maintain our technology advantage and expanding our test menu. R&D expense in Q2 was $1.2 million, down from $1.5 million last quarter. As indicated on our last call, we had expenses associated with upgrading our probe design in Q1. Lastly, G&A expense was $1.4 million, down from $1.5 million in Q1. Total GAAP operating expenses were $3.9 million for the second quarter, down from $4.1 million last quarter. Non-GAAP operating expenses totaled $3.4 million, a decrease of 6% sequentially. Adjusted EBITDA for the second quarter flipped to positive territory of $100,000, compared to a loss of $1.1 million in Q1. On a non-GAAP basis and excluding equity-based compensation expense, loss for the quarter was $200,000, or $0.01 per share based on $17.9 million common shares outstanding. GAAP and non-GAAP tax rate at the end of the second quarter was 22%. Turning to the balance sheet. We remain well-capitalized to support our growth and we’re comfortable with our cash position. Cash used in operating activities was flashed to approximately $57,000, a 96% decrease compared to $1.3 million used last quarter. We ended the first quarter with $38.1 million in cash, cash equivalents and marketable securities with no debt. This equates to $2.12 of cash and marketable securities per share. Turning to our outlook. We’re pleased with the momentum we’ve seen in the first-half of the year and we’re optimistic about our opportunity for the balance of the year. We remain focused on improving on results in the quarters ahead and our guidance reflects our confidence balanced with our conservatism. Based on what we see in our pipeline, we anticipate both year-over-year, as well a sequential revenue growth in both Q3 and Q4 of 2018. We expect that our gross margin will continue to be above 50 points in the second-half of the year. We’re also remained focused on responsible spending, while investing for growth. The improved leverage we saw this quarter is a testament to our viable business model even more at low capacity. With growing revenues, volume, gross margin improvement and balanced spending, we expect to turn to non-GAAP profitability in the coming quarters. We’re encouraged by the recent trajectory and believe we still have a lot of runway ahead of us. We look forward to building on our success and delivering in the second-half of the year. Thank you, again, for joining us on our call today. Operator, you can open it up for questions.

Thank you. [Operator Instructions] And our first question comes from Erin Wright with Credit Suisse. Your line is now open.

Great, thanks. A couple of questions. We saw a nice pickup in test volume this quarter. Can you speak to any other major mix shifts in terms of take the test? And maybe just generally, what are the major drivers there? And how we should think about the quarterly progression of volume trends in the coming quarters? Thanks.

Thank you, Erin. In general, we do see the volume growth with our newly introduced test, Beacon test, which is the carrier screening with a cardio test. But besides that, we also see the growth for the all [ph] our business, pediatrics as well as our research samples. Paul, do you have anything to add?

No. The other thing that I would comment on is on the international side of our business that also looks promising. We’ve been working hard over the course of the last year and in the first quarter to pursue the opportunities international. We have converted on some and they look really nice in our pipeline for Q3, Q4, as well as setting up the stage for 2019.

Okay, that – that’s helpful. And then how should we think about where you’ve seen in terms of your sort of sales force ramp? And should this – it seems like it should set the stage for a more profitable growth in the coming quarters and into 2019. But how much an incremental cost, I guess, should we – should continue here in the coming quarter versus what, I think, you mentioned the plateau to some extent?

Thank you, Erin, for the question. When we builded the growth and we continue to invest in sales forces, but we do build with a balance. If we will see, we see more salespeople we bring in into the – our organization. They all carry the responsibilities. They always bring the revenue with profitability. So if you hear us, we have a tremendous increase in the salespeople, but we do believe that will also bring the tremendous revenue and the profitability for the organization. Paul, do you have anything there?

No. The other color that I would put on it is our sales organization. They’ve been very, very stable for the last nine to 12 months. All of them are fully up to speed and are fully in tune with our capabilities now and what we’re going to be doing in the future. They all know what tasked of them to do. So we feel very, very good about the results that they have shown so far. The other thing that I would say is the number of sales individuals of the company, that’s at a record. We have sales individuals that are in the high-teens and we’re very pleased with the performance that they have shown so far.

Okay, great. Thank you so much.

[Operator Instructions] And our next question comes from Bill Quirk with Piper Jaffray. Your line is now open.

Hi, everyone. This is Dan on for Bill today. I have one question and then a follow-up. So you mentioned that China joint venture is fully operational. But could you just provide a little more color on that? And when you guys expect to see profitability? Thanks.

Thank you, Dan, for the question. That’s one of the areas that we do invest quite a lot. And actually, we are taking a quite a bit of revenue down, I think, towards the end of 2016 or 2017. It is a strategic investment. We’re starting to see a modest royalty payback versus our large revenues before. But important – the issue for our venture in China is we’re bidding several major opportunities. It requires a diagnosis company has the capabilities not only for the outside of China, but inside the China to provide such services. We believe the China investment is strategic, this is long-term, but we’re continuing building our momentums over there. It is very, very competitive market in China as you might know. The sum of those are Chinese genetic testing companies, they have valuations even higher than our pharma companies here. But the capability to deliver the results, which is using the – this CAP-certified method from the outside of China is critical to bring such policy and such diligence and this service for China market. I think, we’re making good impressions to set an example in that market and we feel good about the future in other markets sector.

Okay. Thank you. And then my next question. Given the CMS change in oncology reimbursement. Could you update on your plans to potentially take an asset through FDA? Thanks.

Dan, we’re working in other area now, try to go through the FDA certification. It is a lengthy process. Actually, we’re looking as not only one test, many tests. We are taking in the rock and working on those kind of approach now.

Thank you.

All right. And I’m not showing any further questions at this time.

All right. Thank you, again, for joining us in the call today, and we’re looking forward to update you in the coming quarters. Again, thank you very much for your participation. Operator, you can close the call.