Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the.
Q4, 2019, Fulgent Genetics earnings conference call at this time, all participants are going to listen only mode. After the speaker presentation, there will be a question and answer session.
Good question during the session you will need to press Star then one on your telephone.
Please be advised that today's conference is being recorded.
If you're acquiring you further assistance. Please press star then.
No.
I'd now like to have the converts over to your speaker today, Mr. Colborne out with Investor Relations. Thank you. Please go ahead.
Great. Thanks, Good afternoon, and welcome to the present genetics fourth quarter and full year 2019 financial results Conference call on today's call is namesake, Chief Executive Officer, Paul Kim Chief Financial Officer.
Brett in part D Chief commercial officer accompanying press release assessing its financial results is available in the Investor Relations section of the company's website also genetics dot 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 answers your questions on today's call contain forward looking statements. These forward looking statements represent management's estimate based on current views and assumptions, which may prove to be incorrect.
As all 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 statement.
The company assumes no obligation to update any of the forward looking statements made today to reflect actual results or changes expectation.
Listeners should not rely on any forward looking statements such as predictions of future events I should listen to managements remarks today.
And with the understanding that actual events.
Putting the company's actual future results maybe materially different.
What is described or implied by these forward looking statement. Please review the more detailed discussions related to these forward looking statements, including the discussions of some of the risk factors that may cause results to differ from those are starting to forward looking statements contained in <unk>.
Companies five surety is an exchange commission, including the previously filed 10-Q for the third quarter 2019, which is available on the company's Investor Relations website management's prepared remarks, including discussions of earnings and earnings per share.
International measures not prepared in accordance with accounting principles fairly that's for the United States or go.
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 or superior to the companys financial results prepared in accordance with GAAP. Please see the company's press release regarding discussing its financial results for third quarter 20, Nike for more information.
Including description of how the company calculating non-GAAP earnings and earnings per share in a reconciliation of these financial measures the income an income per share.
The most directly comparable GAAP last summer but.
With that I'd now, let's turn the call over to me.
Thank you Nicole.
Good afternoon.
And thank you for joining Ross.
Today to discuss our fourth quarter and the full year 2019 results.
I will review the highlights from the fourth quarter.
Sure people Henry.
Brendan.
Pretty you.
Our newly.
<unk>.
Chief commercial officer.
To provide updates on our war go to market strategies.
Finally, Paul Kim our Chief Financial Officer will discuss our financial results.
In 2020 outlook in detail.
We finished the year was a good fourth quarter.
As it run you.
For the full year disease, our most recent guidance range.
I'm aware repreve stuff.
We achieved the organic growth.
Both of them more than 50% for the year and.
That's a warning molten hundred 60% year over year.
And it seems fine we saw strong.
Baltimore and have generated approximately $5 million.
Adjusted EBITDA.
For the year.
Along with positive.
Operating cash flow.
Specifically regarding the fourth quarter.
Revenue rose, 40% year over year to be plan for many dollars.
<unk> increased 118% year over year, who 13977.
Alright.
E.S.P. was $600.
Increase over 20% compare to the third point or 2019.
Benefit from the shipped off a mix of our test the want him to higher yes be pest.
At the same time.
Our cost per test increased.
Modestly in the quarter.
Permit and review to both shift the mix of attacks as well as reduce the benefit from economics, Oh food skill as our coastal walking in the fourth quarter decline from the rights. The reward him we saw in Q3.
None.
GAAP gross margin in the fourth quarter Watson was 59%.
Approximately six percentage point from the fourth quarter last year and that down approximately 5%.
Point sequentially.
GAAP loss was 200.
I can 6000, and the non-GAAP income was signed 178000.
Adjusted EBITDA was positive 1.1 really.
In the fourth quarter.
[noise] coming off record third quarter.
For the company.
We were piece.
The with the resolved we achieved in the fourth quarter.
We should benefit you in line with our expectation.
Well I work, that's a warning coming down to a.
Normalized level into fourth quarter <unk>.
So less contribution from any single customer.
We are bringing.
See the benefit of our work.
Diversifying customer base and adoption of our war brought test menu.
As discussed on our recent burning coal we began to see an increase in case the warning.
<unk>, probably through the year and the we'd be we are now reached a new.
And with the level of sustainable wanting for Fujian based the along.
The of up availability of our extensive offering.
Additionally, new customer and our aggressive.
<unk> show like position strategy.
To give well summer you sign long, though.
Long term.
Right, where some of our group I will provide additional color on four key areas. So how our business.
First.
Yeah, our traditional.
In coal business, we continue to see good demand for pediatric rare disease reproductive health and extended dependent.
Our true deep neural critical business remains a significant contributor to our business.
Representing approximately.
How our revenue this year.
With a brilliant portion coming from oncology and reproductive health.
Rather than rear disease.
Moving forward peak and to speed the additional growth.
From Penn related to what whereas the other key.
Condition.
Such as cardiovascular Parkinson's and the other disease.
Second.
Our sequencing as a service business.
So strong broad.
This quarter.
As you farmer customers.
Who are.
Infogenesis genetic testing capabilities.
And then with the therapeutic discovery and that the Wellington.
We continue to see a significant opportunity for extension.
Area.
As we bring more customer.
That'd be increased their test.
Walking with Ross.
As a reminder.
Business lunch or from scratch, that's a year ago and the world to a month accounted for approximately $4 million you revenue in 2019.
Based on a robust pipeline, we and.
This would be the continue the hype wrote for this business in 2020, particularly in the second half 2020.
Third.
I've been focused on adding cash paying commercial.
Gentlemen, laboratories that as customers well last quarter.
The one large genomic customer that represents a significant portion of our past want him. We so contribution.
More than that worsened by the mix of customers.
This quarter.
With the silicon.
Third quarter consumer represent.
Seem to sandal <unk> revenue this quarter compared to 40 person in the third quarter.
We also getting the or work doesn't new customers in recent months, who haven't started the all time record or from.
We anticipate does the new customer will contribute to our group and.
Visibility going forward.
Based on the quarterly.
Quality of our test turnaround time, and the service intensity the strength and stability.
This is relationships.
They should the per why the more stability.
In yes piece in 2020 worst decline overall, yes piece, which we saw because here.
Fourth.
Our China, drawing Troy heat treat.
How did we hear a g., we posted revenue of $4.1 million.
For us, which wasn't an increase over 223% on 1.3 any in 2018.
Our laws.
Also being decreasing was oh portion.
Being less than 200000.
Right.
This quarter.
As a remainder the g., we utilizes our proprietary technology platform in 17 is operations to meet growing demands.
From the customers bids in train.
We all.
Hopeful.
Oh, Gee, we were able to drive that large.
And the growing Chinese market it in a long run.
Aside from our China TV, we are targeting.
Youre in the Middle East.
As a group area in 2020.
Which she Brendan will.
Correct you in a moment.
On the topic of Oh, we're trying not JV.
I would like to briefly address.
Subject that has been.
And on top of the people at the mine, but around the world.
The test kits.
For the CRO no worse, all cobot Nike.
Like Cerro.
Of our peers.
Are being actively working on test kits.
That could help that.
The presence of worsen in.
You expected any beach.
Our presence.
On the wrong.
In China.
Coupled with a more flexibility and rapid test the weapon technology Nick.
Well position to develop pest.
Leverage at the most relevant data to generate a highly actually that meets up.
Our primary focus at this time is you want a test kits that meet.
FDA approval standards for use.
In the U.S. United States.
Oh, Sobi, followed by a more comprehensive more active.
No I agree pest.
For the.
Technology using in that.
Long articles.
Well it is too early to see whether this will test kits might have an impact on.
Our business.
In the coming month.
Well see these the a meaningful opportunity data we are working on.
To address.
Given the uncertainty over the approval process and the need to follow all applicable procedures.
We can now.
For what any estimate.
But a timing oh visibility he will bring this task is to market at this time.
And the finally as we have recently discussed.
We also see an opportunity to make an acquisition to expand.
And our reach.
The pipe from data, we have built leveraged our proprietary technology and approaching two genetic testing and we'd be the would this platform is the replicable and expand the both to the lesson that would have.
Got.
I haven't insufficient process in place.
As we think about an hour oral approach to expand.
So in a year ahead.
We remain committed to maker you mentioned.
Responsibility to drive with a sustained.
The world.
Many with this the you mentioned one will be our commercialization strategy, which you could the international expansion further building our sequins seen as the service business experienced bring additional color I. Appreciate it was a key medical institutions.
And expand our reimbursement capabilities.
To help us better navigated. This next phase of growth, we recently promoted Brendan.
Virtu to a new rule, Oh food Chief commercial officer.
Brendan hasn't been with potency.
Seem to me Oh, 2017, and has made a great contribution to our business and the sales of and I used in June this time.
We are pleased to and excited to bring him more.
Response Pete.
In this new role as the he is one.
On the call today to talk more about this initiative.
Hi transformation.
In summary.
Our approach to address this large but competitive market has there been piece on the fine and our technology price.
We continue to make additional [noise].
Hard way.
Into the new and exciting area of genetic and looking forward to share our progress.
With that.
Differentiation.
And the strength of our leadership position in this industry.
We had a very good of Phoenix.
For the.
Here and the I'm pleased with the strength Foundation, we have built to feel the future growth.
I wouldn't Dol Taro, the cold who Brendan.
Who walked through some of our.
Go to market initiatives you more detail.
Brendan.
Thank me.
Before I dive into update on our go to market strategy I'd like to take a minute to briefly introduce myself to those of you may not have met.
I joined Fulgent in mid 2017, after spending 10 years at Baylor College of Medicine, and Baylor genetic in Houston, Texas had been overseeing the commercial activities in sales.
Nation at full Jane for the last two and a half years.
During my time full Jane I've come to understand how our technology and approach truly set us apart from other laboratories in the market.
Specifically, the Folgers laboratory information management system or Flynn for short Sir.
First as the engine that drives many of our efficiencies.
These include proprietary pipeline and alignment tools to tackle the difficult areas of the genome such as pseudo gene.
Twins, reducing labor time procuration in fine now using computer learning and suppression algorithms to help.
Our scientists to the hands or faster with less need for confirmatory study.
Our technology platform also allows us to be the only lab that enable our position client to customize genetic test in real time.
We also recently became the first lab to routinely.
You next generation sequencing for parental study, which we have shown to be critically important in detecting clinically relevant germline mosaic is on.
This was recently published in the journal of molecular diagnostic.
Finally, our technology platform third as the engine for rapid product.
<unk> in R&D, which allow fulgent to maintain one of the largest test menu in the industry.
On the go to market front, we've been focused on expanding our test menu.
Improving report with robust clinical content improving turnaround times.
Security in.
Got it with the payers and expanding our global sales organization to capture share in markets, where we see opportunity for growth.
Specifically, we have made key international hired to better support existing clients and penetrate those market.
At the time of our IPO in 2000.
He holds it with a rare disease company today, we are a comprehensive lab offering testing that spans all areas of genetic hell, including prenatal.
Pre implementation reproductive carrier screening cardiovascular disease neuro degenerative disease.
In both hereditary Anthematic cancer, we are excited to see the new opportunity. Our expanded you had three eight.
And finally, we've talked a lot about partnerships in the past with organizations such as the Parkinsons Foundation and Columbia University defines the partnership's remain a key part.
Part of our growth strategy going forward and we intend to continue to build deep relationships with clients around our technology and services.
These types of relationship include bio pharma laboratory in contract research organization.
I am excited to take on the opportunities that.
With my new role as Chief commercial officer, and I look forward to continuing to contributing to the future growth of our business.
I'll now turn the call or to Paul to provide the detail on our financial performance in the fourth quarter. So also introduced our financial outlook for the full year.
Many 20 Paul.
Thanks, Brandon [laughter] fourth quarter revenue totaled 8.4 million, an increase of 48% compared to the fourth quarter of 2018.
Are you watch business remains the most significant driver of our momentum revenue from the U.S. grew 79% year over year and the fourth quarter.
Representing 74% of total revenue in the quarter.
Down from 82% in a third quarter billable tests in the quarter totaled.
13997, growing 118% over Q4 last year as Mike mentioned, we had one customer last quarter that represented a significant.
Portion of our tough volume.
That we were not expecting to see again to that extent this quarter. Our test volume declined sequentially from more normalized level this quarter as expected due to less concentration from this one customer.
Our ASP in the fourth quarter was $600 up 20% from the third quarter copper tough.
For the quarter, what $260 on a GAAP basis.
And $246.
Excluding equity compensation of 193000.
While we continue to see increasing efficiencies across our business, we recorded a slightly higher cost per tonne this quarter compared to third quarter due to overall volume.
Well personnel costs and other costs remain largely consistent.
Our non-GAAP gross margin improved six percentage points year over year remains at a healthy 59%, while our gross margins will continue to fluctuate quarter to quarter, what ramping test volumes, we expect to maintain.
Strong gross margin overall in the quarters ahead.
For operating expenses, our disciplined cost structure and commitment to managing expenses, while investing in growth. We again delivered a positive non-GAAP operating margin in the third quarter for the third quarter in a row.
Our non-GAAP operating margin was.
Well over 6% in Q4, an improvement of 14 percentage points year over year, well continue to see quarterly fluctuation in the near term as we scale.
Sales and marketing expense on a GAAP basis was 1.6 million in a quarter down from 1.7 million a third quarter.
As we recently discussed we plan to invest.
Aggressively and hiring self professionals, specifically in Europe, the middle Eastern Canada, and expect this will increase our sales and marketing spend going forward.
R&D expense in Q4 was 1.8 million up slightly from 1.7 million in a third quarter.
As many discussed we continue to make investments in R&D.
As we grow our tough menu and expand our market reach but they're offering.
Lastly, GNS expense was 1.7 million up from 1.5 million in the third quarter.
Total non total GAAP operating expense was 5.2 million in the fourth quarter up from five knowing that third quarter.
Non-GAAP operating.
Sponsors totaled 4.4 million up from 4.2 million last quarter.
We remain pleased with the growth we're able to demonstrate on the topline was minimal incremental investments in our business.
Stopping sad that Brandon discussed we're focused on methodically expanding our sales organization in the coming quarters.
Adjusted EBITDA for the fourth quarter, one deposit of 1.1 million compared to 37000 in the fourth quarter of 2018.
On a non-GAAP basis, excluding equity based compensation expense income for the quarter was 778000 or four cents per share based on a 20 million weighted average common shares.
Outstanding during the period.
The effective tax rate at the end of the fourth quarter was 23% and non-GAAP tax rate was zero due to a full valuation allowance we recorded earlier in the year.
Turning to the balance sheet, we completed a primary stock equity offering in the.
Order, which added roughly $28 million toward cash position net of expenses.
We expect to utilize excess cash to make opportunistic investments in our business, including M&A, that's coming to Scott.
We ended the fourth quarter, what 40, what 70 to 70.2 million in cash.
Cash equivalents and marketable securities with no debt.
And some for the full year 2019 revenues grew 52% year over year to 32.5 million.
That gap.
Loss was 411000 compared to one that loss of 5.6 million last year.
Adjusted EBITDA was a positive 4.9 million compared to our EBITDA loss of 700 747000 last year.
And cash generated from operations was 5.5 million compared to cash used in operations of 675000 last year.
Moving onto our outlook.
Looking at our test volume this quarter relative to the outperformance we found a third quarter, we remain measured in our approach to guidance as well and test volume normalized says.
I thought a strong start to the year, thus far and expect to generate 40 million in revenues for fall here.
2020, which represents a growth rate of approximately 23%.
For the first quarter, specifically, we expect to see revenues between seven and a half to 8 million growing approximately 1.5 million each quarter thereafter.
For the full year, we anticipate GAAP.
Gross margins to be approximately 55%.
We also anticipate continuing to generate cash.
Hosting non-GAAP profit.
However, given our proven business model and ability to capitalize on opportunities leveraging our technology platform. Our priority this year will be.
Scaling our business by aggressively investing.
And our research and development and our sales and marketing organization.
Overall, we're pleased with the result, we achieved this year, which demonstrate that our commitment.
So responsible growth is paying off we strongly believe better technology platform and differentiator.
Our approach to genetic testing open to stop.
A broad market opportunity, which were just beginning to tap into we're still very early here in the here and recognize that we could see incremental opportunities as the year unfolds. We look forward to keeping your updated on our progress in the quarters I had operator now you can open.
Set up for questions.
Thank you as a reminder, if you'd like to ask a question. Please press Star then one on your touched on telephone to withdraw your question from Nick You press the pound key please standby will weaken policy culinary roster.
Our first question comes from Rachel about installed with fiber Sandler Your line is now open.
Good afternoon. Thank for taking the questions. So first off I have a few questions related to Corona virus. We appreciate the comments you made and so what are you assuming a guidance related to Corona virus, if anything and also I know you have minimal exposure in China, but can you talk about if you have any exposure for <unk> from a supply chain or manufacturing standpoint.
Okay. So first take the guidance then I'll turn it over to man, who can talk about where we set what the tape trusting as well as her capabilities and the opportunities we have zero amount built into our guidance related to the Corona virus opportunity.
Yeah. Thank you Paul Thank you Rachel so even.
<unk> for Kronos, wherein resumed reduce the protest.
Oh were JV in China has been well it did seem to ccrone, though on wireless test, we do see the or what JV in China in this year will be helpful.
Oh my.
Why don't you better than the expected growth in 2020 in terms that they are a test walliams and up there.
World.
Specifically in terms of Pearl no wires or we knew the current to test method.
Wishes to use globally.
Has the rust roughly about 30% 40 per cent you pack a rate.
The <unk> are worth team here have been the web of new test the mattered.
No one method or does it will be more accurate than the current one we did have some either the are were test it based on the regular master P.C.R. two F.D. already.
And that we were sent me the the are new comprehensive matter to in the next few weeks.
Hopefully this one will be dress with the concerns oh for the detection rate for the Corona wires. So forms thing <unk> the the <unk> the the point of view.
We're proud for our capabilities to the D., while such tests <unk> quickly.
<unk> how to use either we are looking for once we get to the F.D. approval an item.
Great. Thank you and then my next question I'm <unk>, we've heard from other companies that current events is pressuring hospital volumes since it's impacting applications willingness to come into a hospital setting. So can you talk about if you or your customers have seen that and if it's pressured any of your test.
Or if you expect it to crash red in the coming months.
I think the ratio the in terms of so full regular test, though we are on the same position with Oh the other.
Diagnosis, let Theresa based on the standard pets.
<unk> C.D.C.'s guidelines.
In terms of the our work comprehensive test is mainly use the that hospitals.
<unk> is related to the hard to do better detection and associated with treatment. So in that sense of it is not subject to the concern you have yeah. Thanks. Rachel This is Brandon I'll just add that you know we continue to use.
Tele medicine when necessary when there was impressed today about you know further using tele medicine to address any restriction to hospitals into into clinics.
You know <unk> does have the ability to do at home collections I sampled if necessary vs alive or buckle sample. So I I think thing is correct that in general we don't expect any sort of a disruption to a patient pigeon flow or patients access to our types of services.
Got it makes sense X. question, so you've talked about building out your international and local sales team. This year. It's like you just give us an update on how that's progressing and when do you expect to have those teams fully hired mid year and if you're just any color on that would be great wine with how many people you plan on hiring thank you.
Hi, Rachel branded again and thanks for the question, we have already put key higher in place.
We are approximately a half way there and we expect to have the remaining have in place sometime early this summer.
Great. That's just for me think so much.
Thank you are next question comes from Errand right was credit Suisse airline is how often.
Hi, This is Katie for.
Can you can you talk for speak to some of the key drivers.
For volume and a quarter, particularly across college in reproductive health. Thanks.
Sure as we indicated on a per call. We introduced many tests and 2000 in 19, the where I'm much more diversified company. Then we have then having said that our traditional rare disease and the pediatric part of the market.
Okay holding in the strong about if you take a look at the composition of what we're selling that's much beyond pediatric and rare disease. During the quarter, we had a nice mix of products in the area of on College G.. We also had a nice a mix of products M.B.S.
Area of cardio as well as a women's reproductive health and our sequencing as a service business also time done very strongly I know that I'm talking about strength here I'm Katie.
But the results for the fourth quarter. It was below what we achieved and the third quarter and I like to take a moment to 'em explained that.
As you remember and afford third quarter, we had one particular customer that comprised of approximately 40% of our business. During my quarter that one customer was down to 13 person that the reason why that happened was because this one customer had a significant amount of backlog.
And Q3, which we've adjusted we still have this customers are very important customer, but we believe that word on more normalize amount. If you actually a strip that away and take a look at the remaining portion of our business during the fourth quarter. It actually grew by more than a million dollars that combined with.
Fact that we signed on over a dozen a core customers who have started to order regularly from us, particularly in the last four weeks <unk> gives us confidence and conviction and our guidance $40 million for this year.
The fact that you know we're at a elevated state volumes as well as business and capabilities for fold, yet and we have four we anticipate that each other quarters that we post and 2020 won't be sequentially higher we believe the other concerns and questions that we've gotten about.
B.A.S.P.'s swinging around and 2000, a 19 you know was of a question to a certain people. We think based on a breath of what we're selling a mix of what we're selling as well as the customers and the contracts that we see that the A.S.P.'s will be more normalized.
And 2020, and we should continue to see the progression the <unk> going down in each of these quarters.
Okay. That's that's really helpful. And then just separately can you remind us of some of your recent collaboration.
New York State Department of Health and what those are contributing in terms of volume, which collaboration so I really moving the needle for your now thanks.
Katie things with a question Brandon with regards to the the New York State, especially this you saw that was really a a validation of our laboratory. So after a multiple years of to be to get approval by New York State. We were recently able to obtain that so you know we're now able to do business in New York State with very few.
<unk> restrictions as you probably they made aware, it's very sort of owners process. It very detailed profit to get New York State approval enforcing was able to obtain that license here in New York State. It stems from the other collaboration isn't partnerships you know we continue.
<unk> to be in a tight partnership with the bargain since foundation, which we've announced late last year, we're beginning to see an increase in the recruitment for that study and we're very happy to be a part of that study and then the Columbia University is another strategic partner.
Bars, where we have actually license <unk> to them to help run they're laboratory operation in New York. So in addition, you know we continue to see deep collaboration with bio pharma around our sequencing as a service business.
Great. Thanks, so much.
Thank you and I'm sure I know further questions in the queue at this time.
Ladies and gentlemen, thank you for your participation in today's conference you Ain't no disconnect.
Yeah.
Yeah.
Yeah.
[music].
Yeah.
Yeah.
[music].
Yeah.
Hmm.
[noise].