Q3 2019 Earnings Call

Then turn the conference. Please press Star then zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your hopes Robert Jaffe Investor Relations firm that's held.

On the call today are Dr., Patrick soon Shiong, Chief Executive Officer.

<unk>, Chief operating Officer, Bob control, Chief Financial Officer, and Dr., Sandeep ready, our Chief Medical Officer.

This call is being broadcast lie www dot dot dot com playback will be available for three months on that helps the website.

I would also like to make the cautionary statement I remind everyone that all the information discussed on todays call is covered under the safe Harbor provisions of the litigation Reform Act.

The company's discussion today will include forward looking information.

Reflecting management's current forecast of certain aspects of the company's future and actual results could differ materially from those stated or implied.

In addition, during the course of this call we may refer to non-GAAP financial measures that are not prepared in accordance with U.S. generally accepted accounting principles and maybe different from non-GAAP financial measures used by other companies.

Investors are encouraged to review Nantel to press release announcing its full 2019 third quarter financial results for the company's reasons for including those non-GAAP financial measures in its financial results announcement.

The reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is also contained in the company's earnings press release issued earlier today.

Today, Ron will provide a brief overview of the quarter and discuss the business lines, followed by Bob will discuss the financial results in more detail. We we'll then open the call for questions with that said I'll now turn the call looked around looks Ron.

Thanks, Robert Good afternoon, everyone and welcome to <unk> 2019 third quarter financial results Conference call.

For the 2019 third quarter total revenue was $22.4 million or SaaS revenue was $18.3 million, a 15% increase over last year's third quarter shops revenue of $15.9 million.

Our consolidated gross margin significantly improved to 63% total net revenue from 50% in last year's third quarter.

Total operating expenses were $20.8 million decrease of 9% or approximately $2.1 million from $22.9 million and the same period last year, Bob will further discuss your financial results in more detail shortly.

Turning briefly to our balance sheet, our cash position at September 30 grew by more than $2 million from the end of Q2. This increase is a positive development for business and reflects our efforts to keep a close eye on costs.

Turning to software and service business.

And our clinical decision support dimension, we renewed a partnership contract with a leading provider of clinical solutions.

Contract as a three year term at a minimum estimated told all your $38.4 million.

We signed an agreement with Wexford health sources, one of the nations largest correctional health care companies, which will bring evidence based standards and value based oncology care to watch search patients.

We renewed an agreement to large national health plan for federal employees retirees and their families that will allow plan members continue to receive streamline pre authorization of cancer care.

We launched several enhancements to our equity platform. The new features are designed to provide payers with additional information about care management, including the intended use of brand name drugs in visibility into settings, where cares provided pairs with multiple plants can now from other users to you multiple dashboards, which saves time.

Every platform receive full accreditation from Iraq, which has allowed through September 1st 2022, the accreditation, which recognizes those companies abiding by evidence they standards and value based care means everything continues to meet your eye health utilization management standards.

For now run out and payer engagement solution.

We had an NAV and that's authorization attachment application tour implementation on one of the nations largest health insurance organizations. This feature insurers providers received the right supporting documentation to make more informed timely decisions.

We expanded now but not open functionality to provide additional notifications what the authorization application. This enables users to receive information timely and respond quickly to critical request lending potential delays and caring for patients and.

In addition, our now but that's all payer product completed the conversion of 3602 provider offices equal to approximately 80% of all thier customers from a legacy pricing model. This will generate more than $1 million of additional annual recurring revenue.

And for access to care product line, we introduced species Threed auto formally vitals Kodaks, which is designed to reduce patient overstating facilitate faster decision, making vcs three though accelerates automated vital sign capture provides easy entry of other customized observations at the point of care updates to the product includes tree.

In line data validation and a touch species interface to document vital signs quickly and easily vsix read out I would now supports smart patient vital signs monitors, including GE V.C. 150.

We announced new show cable features to help improve data collection efficiency inaccuracy using a medical grade material to us be interface cable.

Signed a contract with Baxter expanding medical device driver development. This enables baxter coming back to additional devices to electronic medical record Itamar systems and in Q4 at the EMS Asia Pacific 2019, leading man health led the interoperability showcase along with GE healthcare airstrip, an eye procedures to kevin's accompany showcase how clinicians can spend.

Less time on documentation them more time analyzing data then near real time to improve patient outcomes.

Turning to our sequencing and molecular analysis business, we presented a poster on GPS cancer at the International Association for the study of lung cancer World Long meeting in Barcelona, Dr. Hussein bore Guy of Fox Chase Cancer Center and authors from NAND Health Anantha always presented a poster. The poster include concludes man health and Anto.

In U.S GPS cancer to identify unique subset of patients who are likely to be resistant to conventional immune checkpoint inhibitor therapy using a method that has not previously being well characterized this clinical setting.

And finally, we presented a poster at the European Society.

Medical oncology E similar meeting and health and Anto makes together with investigators from Moffitt cancer Center presented a poster entitled differential expression of immuno regulatory molecules and highly associated cancer genes may provide novel insights into strategic trial design for therapeutics. The poster describes novel associations.

Immune checkpoint gene expression with cancer related genetic mutations be on tumor mutational burden TMB as a biomarker for immunotherapy response.

To sum up we reported a solid quarter spearheaded by continued growth of our SaaS business, our cash position grew reflecting our efforts to manage cash and whats watch costs, our window to receive final ftn comments for the only score Nellix filing is our current fourth quarter of 2019, assuming the she had no additional questions regarding the content of this summer.

And our teams continue to present, an important medical scientific conference around the world without over your business lines I'll turn the call over to Bob to discuss our financial results in more detail Bob.

Thank you Ron as Ron mentioned earlier for the third quarter 2019 revenue increased slightly to 22.4 billion them from 22.3 million the same quarter. The prior year as a reminder, we divested our home health business at the end of 2019 second quarter. Consequently, we did not record any revenues.

For this business in the current your third quarter on an apples to apples comparison, which excludes Robert just from the home health business from last year's third quarter revenues grew 8% to 22.4 million from 20.7 million a third quarter of 2018.

For the first nine months of 2019 revenue from all categories, Excluding home health and sequencing was up over 13% from the comparable period last year.

SaaS revenue continued its positive growth trajectory with revenues, increasing 15% to 18.3 million from $15.9 million last year's third quarter. The primary drivers for the improved performance, where the addition of key contracts and partners. As previously noted in Q3, we renewed too.

Contracts and signed a new customer combined the contract when customer renewal solidify more than 40 million in total GAAP.

Q3 sequencing in molecular analysis revenue was approximately 276000 down from 742000, the same quarter. The prior year DFT is currently reviewing GPS cancers whole exome test under a five 10-K submission.

As we have referenced in the past we expect to continue to see a decline in sequencing revenue until we received FDA clearance and a positive coverage determination from CMS.

[noise] Q3 revenue from our connected care products declined 6% to 3.8 billion from 4 million in the third quarter 2018.

A year to date basis, we're up 16% in revenue compared with the same period last year.

As we've mentioned before revenue from this line item often burned some quarter to quarter due to the time make a completion of connected care implementations.

Q3, gross profit grew to 14 million or 63% of revenue, which was a substantial increase compared with 11.1 million or 50% of revenue in the same quarter a year ago.

The gross margin improvement was primarily due to changes in product mix, specifically the continued growth of our software related businesses.

Q3, total operating expenses declined 9% at 20.8 billion from 22.9 million the prior year third quarter, reflecting our continued cost management effort for the nine month period total operating expense decreased by 6.7 million year on year.

For the third quarter net loss from continuing operations was 16.4 billion or 15 cents per share a significant improvement from 97.4 million or 89 cents per share in the prior year third quarter.

On a non-GAAP basis net loss from continuing operations was 7.4 million or seven cents per share down from 10.8 million or 10 cents per share for third quarter last year.

Finally cash cash equivalents were 9.3 million at September Thirtyth 2019, compared with 7.1 million at the end of our second quarter, representing an increase in excess of $2 million. There's a significant accomplishment in are continuing efforts to improve our financial performance.

We remain focused on prudently managing our cash and we have not drawn on our 100 million line of credit with that I will now turn the call back over to Robert.

Thanks, Bob Operator, where we're we're prepared to open up the line for questions.

Please form the Q.

Ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your telephone keypad. If your question has been answered or you wish to remove yourself from the Q. Please press the pound Keith.

Your first question comes from line of Brendan truly are well Jefferies. Your line is open.

Hey, Thanks, good afternoon.

Patrick any update you can share with us in terms the nature of your dialogue with FDA any back and forth or or additional questions that they might have been asking and your level of I guess confidence visibility on kind of a fourq you decision from them.

[noise].

Patrick you have your look I think we've been in constant dialogue with them.

And a very recently as well so I think.

Pretty confident beginning didnt close we say for Q decision for Q. This yeah, you're talking about the.

Cps approval as opposed to participate.

Yeah, that's right I think that's what.

You alluded to prepare to markets yeah, exactly I think we.

We will.

Yes, shortly I mean I don't have.

Any.

[noise] reason to believe we know that track.

[noise], Okay, no maybe Bob could you share the number of GPS test orders in the period.

From a tough perspective, we are sub them.

Within this quarter.

Okay, and a few of the operating cash flow figure for the third quarter as well.

I well again from an overall cash perspective, we grew the cash position our.

Cash flow Oh grew and then from an operating cash flow perspective, Oh, again, I'll need to pick that up but overall, we continue to grow our attached from where we were previously.

Within this quarter.

Okay, Opex is absolutely been trending lower year to date and again in the third quarter, how much more room, you sort of see to pare back expense.

I really isn't significant more a change in that line we.

As we've kind of referenced before I do we want to continue to grow the business will invest where it makes more sense. So I anticipate that the probably start growing.

Marginally in the next year, so, but not a not such that it's out of control and beyond our means we're obviously going to take everything into consideration alone will make those investment decisions, but I don't foresee it declining drastically more but.

Staying flat and growing through the next year.

[noise] right. Thank you.

[noise] once again, if you would like to ask the question over the full line. Please press Star then one of your telephone Keypad. Your next question comes from line of Charles rate of Cowen. Your line is open.

Yeah, Hey, thanks for taking the question just maybe following up there the cash balance in improving for the quarter can you can you tell us where what drove the increase because if I. Obviously, we are lowering expenses gross margins, improving but still we're running a net net loss that operating income.

And certainly a pre tax income.

Yeah.

It's really just give themselves there.

Yeah, it's really a subset of the the continued efforts from the entire organization and the management team. We've been focused on this for some time throughout this year, we've improved our d. So we continue to manage the expenses on the outflows as expenses stabilized but.

It's a subset of everyone get onboard from a company perspective, and ensuring that they understand the cash is important part of our business and we set goals internally and we've improved various processes and cash collections dsos et cetera that have driven that net increase.

Ah throughout this quarter.

So it sounds like what you're saying, it's the improvement in working capital here kind on the but it's basically in operating cash flow improvement that's driving most of it.

Yes, okay.

Is that is there more room, you think on working capital to to drive further at this point or are you.

It's going to be a challenge again various quarters, we have various one time outlays.

He interest payments et cetera, and a certain quarters that that caused us to fluctuate throat various quarters within in the year. So there's some puts and takes an ups and downs, but we are yeah trying to continue to improve that working capital I think theres, a little bit more opportunity within.

The organization do that but it's not going to be a.

Droves and drones of a significant improvement.

Great and then.

Brendans question about the if you get a positive response from the agency.

Can you just remind us.

Again at this point, what does the commercial strategy post that.

How are we looking to sort of reengage in the commercial market.

Hey, Charles this is Bobby ready I think we don't want to put that to be honest I just want to put the cart before the horse on this so that will I think we'll address some of that in more detail if and when we have.

Clear determination from the agency, but.

The reality is that we know.

Coverage coverages great coverage is important reimbursement is a secondary issue after that that follows on I think we can learn a little bit from what happened with myriad earlier. This week in terms of we don't want to mislead anyone with guidance around what the potential reimbursement strategy would be.

Until we can until we have that in hand.

But suffice to say coverage is the first most critical step and then will ensure that we have further reimbursement I think were a little bit better positioned than others. Because we do have some existing contracts around reimbursement that gives us a bit more favorable position.

Okay. That's helpful and then.

The the inevitably the the contracts that you kind of the partnership you announce along with the renewals you talked about contract value at 38 million in change how much of that is.

The renewals is there is there incremental revenue coming from the renewals or is that just it maintains our the revenue base year like how much of the 38 is incremental.

That is very little would be incremental though with this renewal we drove opportunities as the business grows and as a as a we gained further coverage that we do have further opportunity but from that one in particular it is.

A flat a view from where we are today.

Okay. So then the growth that we're seeing right now in the South line.

Is that just from the I guess, maybe just characterize what the existing backlog that looks like in terms of new implementations.

As we kind of build out our models the rest of the year into next.

So we implemented I think weve references previously late last year, a significant partnership with a customer last year, we bring it on some of these new customers that we identified this year, we've got significant pipeline for other equity contract.

Coming through or through the end of this year and into next year. So we're very bullish on where that business and the size side of the things are growing.

Again, there there are definitely are several other new pipeline opportunities that we feel bullish on then will materialize in the next 69 months.

That's great because we've seen revenue growth inside Ics.

Pick up sequentially in terms of growth rates.

You know sort of what how are you think about what the sustainable growth rate of this this division should be given what you know what the market looks like for anybody in particular.

To be conservative where were.

15% to 20% annualized growth over the next couple of years is a a general view of where we would anticipate 70 going or for the next couple of years or we are bullish and do see opportunity beyond that but from a general conservative view, it's definitely in.

Got a 15 to 20 ish type range.

Okay, Great and I think last quarter, you said you expect to end the year.

Cash positive a couple of million dollars.

Obviously with the increase this quarter.

Would you revised are you thinking that kind of you a little bit better now for the year end.

Yes, a lot better, but again I think we are believing and and feeling confident that we will and as we had referenced before again is probably in the four to 5 million range versus the one to two that we had referenced earlier so again, we anticipate Stan.

Cash haven't cash throughout this year.

Great. Thank you.

Your next question comes from the line of Brendan Schoolyard of Jefferies. Your line is open.

Hi, Thanks.

Patrick just a high level question for you understanding GPS is hasn't quite tough played out that as you kind of we kind of hope for a few years back and these are scenario in which you just double down and focus on the software business and deemphasize GPS for the time being given what you seem to be having a good hand in terms of the software business.

There are scenario, which you might pivot your your focus of Nancy to just being software oriented.

Yeah look I think thats good question, Brendan because clearly.

Street gets very confused when you have two different businesses in the GPS may be very.

Very very different business and.

We remain very seriously looking at that the software business as you could see the team is not as an amazing job and as a as we build this into more of assess type business.

It has had a very different valuation for the from the streets perspective.

So yeah we.

We contemplating but I think that that could be good strategy.

As we evolve that.

This is something will do.

And even with the GP as if it got approved this still low a hotel road because of the reimbursement and other issues and.

So we will think through a strategy that makes sense to rationalize a company into really the software business.

Thank you.

I'm showing no further questions at this time I would like to turn the conference back to the presenters.

Thanks, Ian Thank you all for joining US today, we look forward to giving you an update on our next call have a great weekend. Thanks, everyone.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation have a wonderful day you may now disconnect.

Right.