Q3 2019 Earnings Call
Ladies and gentlemen, and welcome to the Oxford, Immunotec third quarter 2019 conference call.
As a reminder, this conference is being recorded it is now my pleasure to turn the call ever to match Mcglaughlin Chief Financial Officer.
Before we begin I'd like to caution listeners to comments made in financial information provided during this conference call.
Certain statements that are estimates forward, looking and or subject to various risks and uncertainties.
This information reflects our current expectations assumption assumptions and currently available data and are neither predictions nor guarantees of future events or performance.
Actual results could differ materially from those stated or implied by these forward looking statements due to risks and uncertainties associated with our business, including those under the heading entitle the risk factors in our annual report on Form 10-K for the year ended December 30, Onest 2018, and our quarterly reports on Form 10-Q the company.
He disclaims any obligation to update or revise any forward looking statements, except as required by applicable law.
During the call will also refer to certain financial information on a non-GAAP basis, we believe that non-GAAP financial measures taken in conjunction with GAAP financial measure measures provide useful information for both us and investors to evaluate the company's performance. These include pro forma revenue gross margin operating expenses.
Loss from operations EBITDA and adjusted EBITDA.
Reconciliations between certain gap and non-GAAP results such as adjusted EBITDA are presented in the tables accompanying our earnings release, which can be found in the Investor Relations section of our web site.
As a reminder, in early November last year, we completed the sale of our U.S. Laboratory services business to quest diagnostics as such the now divested U.S. Laboratory services business is shown in discontinued operations in the historical financials in our press release in forthcoming Form 10-Q .
The discussion of our results in business updates on today's call will be focused on our continuing operations into insist investors and understanding the underlying performance of the company's continuing operations will be comparing to certain pro forma non-GAAP financials for the prior year periods.
These non-GAAP financials for 2018, which were filed as it as exhibits the forms 8-K filed with the Securities and Exchange Commission on January 7th in March 11th 2019 reflect the company's estimated revenue in cost of revenue as if the closing date of the sale of our U.S. Laboratory services business to question had occurred prior to the risk.
Specter periods.
These non-GAAP financials also appear as supplemental tables in our Q3 earnings press release.
Pro forma adjustments in these tables were based on the information available at the time and assumptions that management believe we're factually supportable and reasonable.
With that it's my pleasure to turn the call over to Oxford, Immunotecs, Chief Executive Officer, Peter Wrighton Smith.
Good morning.
Today's call I'll provide some general comments on our financial results and operating performance and the third quarter of 29 team well then handed over to Mount Who'll walk you through our financial results in detail.
Well, it's Matt has completed that he'll hand, it back to meet to provide financial guidance and we'll then open up alliance type your questions.
Turning to 2019 third quarter results, we posted revenues of $21.2 billion, which was just about the top end of our expectations for the quarter.
Excluding 2018 revenues without doing a screening from the year over year comparison.
Total company revenue grew 12% of a pro forma revenues for the same period and 2018.
You asked revenue was $5.7 million, excluding 2018 revenue split donor screening from the year over year comparison, U.S. revenue was flat in the third quarter compared to pro forma revenues in the same period of 2018.
This reflects the pull forward of seasonality in our U.S. business as we move from recording revenue on the performance attests to the shipment of kids and was expected given our Q2 results.
For the year to date U.S. revenue is up 23% versus the same period pro forma revenues and 2018.
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Europe in rest of World revenue of $2.7 billion was up 19% compared to last year or 24% on a constant currency basis.
The lights in the quarter were continued strong growth in our UK business and very strong growth in Russia, which more than doubled versus the same period last year as the benefits from our partnership with generic install to bear fruit.
Asia revenues were 12.8 million for the third quarter 220, 19 up 17% from the same period last year with 15% constant currency basis.
As expected we saw significant pickup in revenue in Japan, and we shipped our first orders to China Undrawn, you will direct operating model that.
I will comment some more on that later.
Well they still small by comparison were also seeing strong growth out of South Korea.
Overall, we're very pleased with a strong underlying momentum in the business and the continuation of double digit revenue growth.
In addition to a continued focus on driving revenue growth. We also concentrating on driving the company's profitability metrics gross margins continue to expand with the third quarter coming in 73% growing about 340 basis points over the pro forma gross margin in the prior year period, we saw an expansion of product margins you to leverage from Hong.
Volumes and as we start to see the benefits of greater automation of manufacturing.
We also saw a strengthening in service margins, both as we've eliminated the drag on margins from the blood screening service and as we continue to grow volume is not UK service lab.
We continue to re purpose the company spending around on new more focused business model with delivering opera Opex leverage west also increasing investments in sales and marketing initiatives.
Opex leverage combined with gross margin expansion is leading to meaningful progress in moving to adjusted EBIT EBITDA breakeven on the bottom line.
Turning now to walkie operating priorities for 2019.
In the U.S., we continue to focus on the success of our relationship with Quest diagnostics.
As you know a principal rationale for this transit transaction with quest was to significantly increase the reach and competitiveness of T spot TV in the U.S. market.
Now seen this strategy bearing fruit.
Quest continues to make progress on implementation expanding availability of T spot CMV through that commercial team and the joint venture network.
Q3, they initiated T spot TV at Michael in Indianapolis. The final of is three Laborde tree joint ventures.
As a result, all sales growth request is increasingly coming from new ordering providers.
Finally in physician offices.
Over the last three quarters question added over 19000, new prescribers of T spot TV.
Our teams are working well together and partner, especially effectively on national accounts, where we can leverage T spot TB to win competitive accounts.
For example in Q3, we want to National an agreement for a major physician office chain and continue to add new hospitals to national contracts, we won in previous quarters.
We remain highly encouraged by the way the relationship with quest is progressing and continue to expect it to result in further expanding growth opportunities.
[noise] outside the U.S., we're executing on our plan to strengthen our voice and channels into new and existing markets.
Both through direct hire as I'm through the use of commercial partnering to expand orange.
In China, we've taken a decision to get more direct into the markets by hiring already in sales and marketing Medical affairs regulatory and back office teams.
We believe the by taking this move we can drive higher volume growth over the coming years and recapture margin that we can use to offset the cost of our infrastructure as well as to have more flexibility of a product pricing as we aim to penetrate new segments of the market.
In conjunction with this move we've also agreed to terms with Shanghai pharmaceuticals to be on Nonexclusive third party logistics or Threepl Provida in China.
Shanghai Pharma is a 23 billion plus global company listed in Shanghai, and Hong Kong stock exchanges, they have significant reach across China, and we've been very impressed with that capabilities as we work through setting up on new business model.
In the new model, we will have direct control of a sales marketing medical affairs reimbursement strategy and regulatory activities.
We now have a direct presence in China of approximately 20 people across these functions supported by a back office space out of our new Singapore a pack hub.
We've now taken on direct relationships with our customers rather than having those customer relationships controlled by our former distributor.
Threepl will perform importation warehousing and distribution to customers.
Customers will place orders with all Threepl and the Threepl were shipped to them and collect from that.
It has only been a month since we made this switch so it's clearly early days. However, we're very pleased so far but how the market is responding to this move.
On near term focus remains on supporting the migration of our customers to the new model.
Once we're through that will be turning our attention to using our direct resources to driving greater usage of T spot TB into what is a massively underpenetrated market with huge potential for long term growth.
As we see the results must go to market approach, we will continue to prudently add resources in China to fully benefit for the market opportunity that.
More generally across Asia, we see other opportunities for growth and expect to increase our resources to expand our presence and reach into other countries.
In the European rest of World region on New Russian collaboration continues to track According to plan.
Following regulatory approval for generic EMS domestically produced products based on technology T spot TBS now eligible for a broader roster of public tenders on our partners are seeing strong demand for the domestically, but you see spot TB in both routine testing and screening programs.
As mentioned earlier revenues of more than doubled since last year, we believe that Russia has significant market potential for continued expansion in the years to come.
Yeah.
Turning to our product development efforts, we continue our work on the T. cell select product I'm pleased to report that we've just just recently began shipping product to our initial customers in Europe .
Short lead to begin U.S. clinical studies with the aim of gaining FTC approval.
Plans for provision of T cell select an additional countries are also well advanced.
Our customers remain very interested in T cell select and the resulting ability to automate the T spot TV workflow. This interest the stems both from existing customers, who see this is a means to increase that testing volumes and from new customers, who wanted to offer T spot TV, but can you get a simpler work flow to do that.
On the operation side, we have multiple Cogs reductions projects ongoing including further automation to bucket manufacturing.
We've now validated new equipments to automate the labeling and label QC on reagent files.
Given that we label millions of balls per year. This is a major step forward and productivity, which also enables us to scale up manufacturing to meet the growth in demand for our products.
Furthermore, inline with our commitment to continue to streamline the business and re purpose I'll spend around a more focused business model. We've taken the decision to discontinue off these fixed line product.
This product currently represents about $1 billion of revenue to the company, but it isn't gradual decline on the cost of producing it means that it is a drag on both gross and bottom line margins.
And taking this decision will be working to wind up our activities at all Norwood, Massachusetts site consolidate our us operations into a new smaller footprint size and 2020 .
This decision will improve gross margins improved bottom line profitability and enable us to improve our focus by eliminating the destruction from a non core product, Matt will give a little bit more detail later about the impact at this decision on the financials.
So in summary, we're making good progress in executing on our strategic priorities this year.
And as we continue to execute on on new business model. We're pleased to see continued growth on improving profitability metrics.
Having just come out of our annual strategic planning session. I can tell you that our excitement about the future the business on a product roadmap in TV has never been higher.
Matt will now take take Orbitz give you some more detail our financial performance.
Thank you Peter.
Our full GAAP results as shown in our press release issued today show. The comparison of our Q3 2019 with a GAAP numbers of our continuing operations for Q3 2018 for the reasons have already explained when giving year over year comparisons I'll be referring to the pro forma pro forma numbers for Q3 20, t. instead to enable the comparison on a like for like basis with our Q3 two.
The 19 results you can find these tables at the end of our press release after the presentation of the GAAP results.
Total revenues in the quarter of 21.2 million were up 32% versus GAAP revenues in Q3, 18, but up 12% for pro forma revenues in Q3 team.
Breaking down our reported revenues on a regional basis, U.S. was 5.7 million representing 27% of our revenue.
Europe in rest of World revenue was 2.7 million, representing 13% of our revenue in Asia revenue was 12.8 million representing 60% of our revenue.
Turning to volumes in our TV business, we now count volumes in the U.S. based on the number of test sold to request and our other kit purchasers rather than on the basis of how many tests, we're running the U.S.. We sold approximately 300000 tests in the U.S. via kit sales.
We sold over 800000 tests in our O U S region, both via kit sales in test process in our UK Odell service business gross profit of 15.5 million was up 17% from the pro forma gross profit in the prior year period.
Overall gross margin for the quarter was 73% an increase of about 340 basis points from the prior year period pro forma number.
Breaking down margins by product service split product gross margin was 73.6% and service gross margin was 62.1%.
Product gross margin increased about 260 basis points from the prior year pro forma as we continue to be successful in driving down cost of goods sold through for example increased automation of kit manufacturing.
Service margin grew 1800 50 basis points from the prior year period pro forma as we no longer have the drag from our blood donors screening service and we grew volumes in our UK service lab.
Turning to operating expenses operating expenses reduced by almost 1.2 million or 7% from the prior year period sales and marketing expenses increased to 7.4 million as we continue to make investments to drive channel and market expansion around the world.
Research and development expenses reduced slightly to 1.6 million due to reprioritization spending.
Notwithstanding this quarter's numbers, we continue to invest in development projects aimed at pulling through our new automated test work flow augmenting T spot TB test utility and in projects to reduce our Cogs.
General and administrative expenses decreased about 30% year over year to 5.7 million, reflecting run rate savings in our spend resulting from a more focused business model as well as nonrecurring transactional expenses relating to the quest transaction in Q3 of 2018.
Operating expenses for the third quarter included approximately $983000 of share based comp.
Turning to a couple one off items, we reached a settlement with Oxford University innovations, which extinguishes their rights to claim a share of the 27.5 million. We received in our successful outcome of our patent litigation against Qiagen in Q4 of 718.
This is reflected in our settlement expense line.
Additionally, given our decision to exit the C. Six line product, we took a one off charge of approximately $200000 to cost of goods sold to write off inventory of that product that we think will be on sellable.
With approximately 1 million of annual revenue at significantly dilutive margin rates. We see this decision is a long term positive for the financial profile of the business.
Net income for the third quarter of 2019 was $717000 compared to a pro forma net loss of 4.5 million in the third quarter of 2018.
EBITDA for the third quarter of 2019 was a $956000 profit adjusted EBITDA, which excludes share based compensation unrealized FX gains or losses and unusual items was a $1.9 million profit for the third quarter of 2019.
This compares to an adjusted EBITDA loss of approximately 1.4 million in the prior year period.
Both EBITDA and adjusted EBITDA, our non-GAAP measures.
Turning to the balance sheet, we finished the third quarter with a very healthy cash position of 184 million.
We generated nearly $900000 of operating cash flow from continuing operations in the quarter.
During the quarter, we also repurchased $3.3 million of shares at an average price of approximately $13.67 under our share repurchase program.
I'll now hand, it back to Peter who will discuss our business outlook.
Thank you, Matt given the strong momentum in the business and the results. So far the yet we're raising our revenue guidance for the full year to between $70 million to $73 million.
Turning to the outlook for the fourth quarter of 29 team, we expect revenues of between 16.4 and $17.4 million.
In the US now that we recognize revenue on the sale of kids rather than the performance of tests, we've seen a pull forward and seasonality of our U.S. revenues from what we saw a previously consequently, we expect the fourth quarter to be our lowest for the year.
We expect Europe and rest of world revenues to be approximately the same in Q4 as we saw in Q3, reflecting the strong underlying growth in the region.
Lastly, we expect Asia revenues to be strong in Q4, but full but sequentially given the peak in Q3 from Japan.
That concludes our formal prepared remarks, we'll now open up in line for questions.
Yes.
And.
Hi.
To ask a question. Please press Star then that number one on your telephone keypad again that star one to ask a question.
And our first question comes from the line of Bill Quirk with Piper Jaffray.
Hi, this is.
Okay.
Yes.
Yes.
Third.
Okay.
Okay.
Right.
So I got good morning, Rachel I didn't quite hear the question would you mind repeating that slightly more loudly.
Yes can you just elaborate on the U.S. strength, we had thought but the shipped across that third quarter be less pronounced in terms of performance.
If you could give us some additional color on outperformance that would be great.
Yes, I think I would say the performance was in line with our expectations.
And.
Q4, as I said it will be besides the weaker than than Q3, I guess, just John down to the timing of orders rather than the demand in the market, which remains strong.
So I I think more generally we're very happy with how the the policy of the questions going and I think some of that the day. So I gave on todays call about the number of new ordering providers I think bodes very well for this partnership increasing all reach into the markets and so I think we feel very.
Positively about what that means for the company as we look to 2020 and beyond.
Great and then with your new partner in China, How are you thinking about fourth quarter performance given that transition.
So we're concentrating obviously on on migrating.
Our customers over from the old business model to the new business model.
We're not anticipating any some change to stocking in the markets were any signs that we want to keep up with the kind of run rate of consumption in the markets.
And so our intention is to keep selling into the market. It kind of level that reflects the underlying consumption of the test.
Great. Thank you.
Thanks, Michael.
Our next question comes from sung Ji Nam with BP I gene.
Hi, Thanks for taking the questions just congratulations on the quarter I'm just a couple of quick one on your gross margins, obviously continues to see really good.
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Was wondering.
I think you had talked about kind of low 70%.
Potentially.
Your guidance for the year I was curious as as you look out you.
Profitable yet that I'm quite happy that further.
Yes. Some do you think thanks for the question I think as you look at.
See Threeq you and then just sequentially Q1 through Q3, we've continued to expand gross margins I think Peter and I broke both touched on it in terms of our cost outperformance.
We see no reason to believe that's going to change at all in the fourth quarter or moving forward. So I do think it's it's reasonable to believe that kind of the Q3 gross margin performance is indicative of what we can achieve in Q4 and then obviously for.
2020, we'll update that as we get into early next year and we talk about guidance.
Okay great.
And then in China, you talked about.
Growing your sales force there et cetera.
Are there additional plans in terms of your commercial structure in China.
In the foreseeable future or do you think you have oh, yes.
Them all.
Sites currently.
Okay, No I think the.
We think that we think the 20 people we've called provides adequate coverage to affects the transition, but clearly China is a massive opportunity and the company does intend to prudently add additional heads.
Tim I fully maximize that opportunity. So you should expect.
The company sales and marketing spend two to GAAP in general because in sales and marketing globally, but apart of that is clearly to continue to.
Hello.
Hello, J. Joseph a follow up.
Oh no sorry, that's all thank you.
Thank you Tony.
And your next question comes from Thomas Peterson with Baird.
Yes. Thanks, guys. This is Tom on for Catherine.
A little bit more color on U.S. growth flat versus last year as you expected due to the shift in seasonality, but once the question integration is complete and annualize where do you think you asked revenue growth should normalize around.
Yes, we're going to step stop short of providing guidance for 2020, and we'll do that in due course, but what what I would comment on I think is the fact that they're domain rationale. We did the deal was that we saw this is a meaningful opportunity to increase the reach and competitiveness of all test in the U.S. and I think.
We're starting to see that thesis play out with some of the early results I shared today certainly in terms of reach and quest has made excellent progress on making the test available nationally as evidenced in part by.
What I talked about today, which is hitting all that joint venture partners also on board with the tests.
I think we've also been encouraged to see the numbers of new providers.
The ordering the test.
Since a little of those are also physician offices.
That's great to see because that's a very large segment of the market. While we're not test before is extremely well.
Where we were unable to really cover.
With our own Salesforce and side, we see those is very encouraging things for the outlook for the for the business in the U.S.
Great. Thanks, and then a little bit on the line makes it.
In margin.
Understanding it's a pretty small portion of the business going forward, but.
Can you just flush out a little bit more about what do you expect margin impact of Fedex it might be.
Yeah, I think just from a an overall margin impact if you just take a step back and look at the business on a total of your basis, it's going to be immaterial I mean, we're talking about a million dollars or revenue.
This year dropping to about a half a million dollars revenue next year as we exited and will be fully out by 21. So the associated margin with that we'll have a negligible impact on the total.
Great. Thanks, guys.
And your next question comes from Doug Schenkel with Cowen.
Hey, good morning, guys.
First on China. The decision to go direct in China. It didn't seem to have any negative implications in the quarter as you made the transition given what we saw in broader asiapac.
Just want to make sure. That's the case and looking ahead you guys were updating our models.
Should we give you a little more room for error I mentioned, we think about China or based on what you're seeing right now should we assume the transition to go as well as it does seem to go in the early going.
Yeah, I mean, obviously is a major change to our business model in China, We spent a little bit time, assessing and planning the risks I would say, it's still early days, but we all we are very happy with how things have been going.
In total you've assumed a bit of disruption from the transition, but I think offsetting that is the fact that price in China. It is going to be going up slightly obviously because.
We are recapturing the margin that formally went to our distribution partner clearly, we'll be paying some of that to Shanghai, Shanghai foam up at a level at a lower level. So there is some offset in terms of price that also abrogate disruption. So thats the way that we were thinking about internally.
Okay. That's helpful. Peter Thank you.
Maybe sticking with Asia Pac for one more.
I'm just wondering if you saw any pull forward of orders ahead of the Japan value added tax increase that was implemented on October onest, we heard that from some of your peers I'm wondering if that impacted your business at all.
Yeah, Doug I'll take that we did not see that at all.
If you think about it it's the end user that actually gets hit with the value added tax on our case it would be the person actually procuring the test and paying for it. So it would be immaterial to someone paying for it TB test and be to actually flow it through the full.
Supply chain, if you will if they would have had order significantly or earlier than kind of right now in Q3, So we didnt see it okay.
And I guess, one more for you in that DNA expense for the company just tracking to 30% of total sales this year.
And that that's high relative to your peers.
And clearly this is largely a function mathematically of.
Really just the transition and business model.
With that in mind.
Or some of the initiatives that you've talked about in your prepared remarks, you and Peter.
Sure in terms of operational changes should we think that ultimately that does lead to a rationalization at the Gionee line and longer term is it possible that DNA could get down to something closer to 10% of total revenues versus what you're tracking to this year.
Yeah, I think as it relates to DNA theres, absolutely opportunities for us to particularly now that we do have a kind of a much more focused business model there's opportunities to.
To reduce the overall spend but I think broadly speaking you know as we think about growing the top line. The Gionee line will will not have nearly the growth rate is the topline would so I just think to your point beyond just the math working out as we become bigger and get a lot more scale, you're going to see that percentage come in line I won't comment if I see it getting the 10%.
In the clearly not in the near term, but as we continue to grow the business and rationalize the cost I think you'll see that that percentage come in line with peers. Okay. That's great. Thank you very much.
Yes.
And our next question comes from the line of Tycho Peterson with JP Morgan.
Hi, This is really all that I talked thanks for taking my question.
Just to start of on T cells, and that's the could you give us an update on your.
Hi, my understanding that approved and I don't think about the long time, how significant is that automation in terms of unleashing market demand.
Does that.
And new product happening.
So for their margin accretion.
Yes. Thank you Judy excellent questions. So T cells that is now has regulatory approval and is being sold in Europe , obviously different jurisdictions have different regulatory cost ways. I commented today on the fact that we are shortly to begin our studies for.
Clinical studies with the aim of getting FDA approval in the U.S.
It gets a little too early to comment on approval timings given enrollment speeds can vary and we still have to understand the kind of review cycle from Sta. So I think we'll update you on that as we get close at two to launch in terms of the impact you know we see T cell. So that is being a significant driver of future growth and the company.
Because it does a couple of really important things. The first is it dramatically by automating the test it dramatically improves things for our customers in terms of that work flow increases that capacity reduces their labor cost to run the tests.
Juices that walkaway times, Metex, which uses skill levels.
But as the same time. It also expands all block storage time from 32 to 54 hours and so that extent further extends our best in class Preanalytical advantages and that will enable customers all over the world actually to increase that reach all samples and I will further increase operational efficiencies. So we see this is a.
Meaningful benefits customers and one that we think will support the growth rate at the company for for many years.
Your last question about margins.
I think there are there some puts and takes that so.
The the put saw that we'll be taking out a bunch consumables cost and labor cost from the customer and we expect to take share some of those games with the customers in the form of of selling to selling select as an accessory.
The takes might be that in some jurisdictions, we might get involved in.
Providing automation under reagent rental deals et cetera that would at least initially be.
Headwinds to gross margin.
So we've got to sell those things play out, but I, but I you shouldn't assume that we'll have a material impact on gross margins.
In the near term not least because obviously is going to take some time to get a meaningful potential customers fully owned automation.
Got it that's very helpful. Thank you and maybe just to dovetail on a gross margin.
Thesis on how much of your manufacturing is currently automated how should we think about the additional vonlay from automation.
Yes. This this significant run rates still a you know we have had a long track record as a company of reducing cost of goods through doing where you'd expect which is to look at the components of our costs and rank stack rank them and welcome the top ones and keep working nom lists and so we are benefiting today from projects that.
He works on a year or two years ago Tomorrow will benefit on the from the projects are working on today and we have a loan pipeline of other projects for the future years. So I think we feel very confident as a company that will be continues to take cost out of our test as we look forward.
Great. Thank you.
Thank you Judy.
And we have no further questions at this time.
Okay. Thank you all for joining us to discuss our third quarter 2019 results and we look forward to updating you on next quarterly call.
Thank you again for joining US today. This does conclude today's presentation you may now disconnect.
Oh.
And.