Q2 2019 Earnings Call
Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone I would now like to turn the conference over to your host Mr., Matt Golfing, Chief Financial Officer, you may begin.
Good morning, and thank you for joining us to review, Oxford Immunotecs financial results for the second quarter of 2019.
Before we begin I'd like to caution listeners that comments made in financial information provided during the conference call includes certain statements that are estimates forward looking and or subject to various risks and uncertainties.
This information reflects our current expectations assumptions and currently available data and our 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 entitled Risk factors in our annual report on Form 10-K for the year ended December 30, Onest 2018, and our annual reports on Form 10-Q .
The company disclaims any obligation to update or revise any forward looking statements, except as required by applicable law.
During the call. We'll also refer to certain financial information on a non-GAAP basis, we believe that non-GAAP financial measures taken in conjunction with GAAP financial measures provide useful information for both the 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 GAAP 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 website.
As a reminder, in early November last year, we completed the sale of our U.S. Laboratory service business to quest diagnostics.
As such the now divested U.S. Laboratory service business is shown as discontinued operations in the historical financials in our press release and forthcoming 10-Q.
The discussion of our results and business updates on todays call will be focused on our continuing operations into assist investors in understanding the underlying performance of the company's continuing operations.
We 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 exhibit on forms 8-K issued on January 7th in March 11th 2019 reflected the company's estimated revenue and cost of revenue is that the closing date of the sale of our U.S. Laboratory service business to quest had occurred prior to the respective periods.
These non-GAAP financials also appears supplemental tables in our Q2 earnings press release.
The pro forma adjustments in these tables were based on the information available at the time in assumptions that management believes were 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.
On today's call I'll start by providing some general comments on our financial results and operating performance in the second quarter 29 team.
I will then hand, it over to Matt Wholl walk you through our financial results in detail and once that's completed that he'll hand, it back to me to provide our financial guidance and we'll then open up the line to take your questions.
Turning to 2019 second quarter results, we posted revenues of $19.6 million, which was towards the top end of our expectations for the quarter.
Excluding 2018 revenue summed up there in the screening from the year over year comparison total company revenue grew 16% over pro forma revenues for the same period in 2018.
You ESS revenue was $7.8 million, excluding 2018 revenue some blood screening from the year over year comparison, U.S. revenues grew 47% in the second quarter compared to pro forma revenue for the same period in 2018.
This reflects both the pull forward and seasonality of our U.S. business as we've moved from recording revenue on the performance of tests to the shipment of kids.
As well as continued strong underlying growth testing demand.
Europe and rest of world revenue of $2.2 million was essentially flat compared to last year, a strong market demand was offset by the unwinding of the Brexit stocking that occurred in the first quarter that we called out in our last earnings call.
Taking the first off as a whole the growth in this market was 11% or 18% on a constant currency basis.
Which more appropriately reflects the double digit underlying growth that we're seeing in this market.
Highlights in the quarter were continued strong growth in our UK business and very strong growth in Russia as the benefits from our partnership with generic them start to bear fruit.
Asia revenues were $9.6 million for the second quarter 2019 up 3% from the same period last year.
First off growth in Asia was 7% or 8% on a constant currency basis.
The relatively weaker starts to the year and reported revenue growth is reflective of older patents in Japan, which are more back half weighted than last year.
Underlying growth in testing volumes in Japan, a significantly stronger than the current reported gross levels and we therefore expect reported revenue growth to rebalance and the remainder of the year.
Overall, we're pleased with the strong underlying momentum in the business and the continuation of double digit revenue growth.
In addition to renewed focus on driving revenue growth will also concentrating on driving the company's profitability metrics.
Gross margin in the second quarter was strong at 72.4% growing about 530 basis points over the pro forma gross margin in the prior year period.
We saw an expansion and product margins due to leverage from higher volumes and as we start to see the benefits of greater automation of kit manufacturing.
We also saw a strengthening and service margins both as Weve eliminated the drag on margins from the blood screening service and as we continue to grow volumes and all UK service lab.
We continue to refocus the company spending around on new more focused business model, we're delivering opex leverage while also increasing investments in sales and marketing initiatives.
This opex leverage combined with gross margin expansion as leading to meaningful progress and moving towards adjusted EBITDA breakeven on the bottom line.
Turning now to our key operating priorities are 29 team.
Our first priority is to maximize the success of our relationship with quest diagnostics in the U.S. market.
As you know the transaction with quest significant increases the reach and competitiveness of T spot TB in the U.S. market.
Our focus for now remains on bringing the former Oxford Immunotec operation on the Quest platform. This is a staged process covering all righty phlebotomy access logistics a managed care.
On the T. saw it on our last call we reported the quest to just launched electronic ordering of T spot TB.
This isn't able to the ball to me access with T spot TB now available in approximately 100000 requests patient service centers.
Quest is also continues to make progress integrating T spot with that joint venture partners and with various GP pricing agreements.
In parallel we are continuing to strengthen the depth of engagement between our sales forces and we continue to see early witness in this collaboration.
Well it is still early in this much still to do we remain highly encouraged by the way the relationship with quest is progressing and we continue to expect it to result in expanded growth opportunities. Once all the integration steps are completed.
Outside the U.S., we are executing on our plan to strengthen our voice and channels into new and existing markets both through direct clients and the use of commercial partnering to expand our reach.
In Asia, we remain confident in the size of the opportunity both in the DOCSIS three markets, but also from expanding into new geographies.
To support continued growth in this region. We've recently opened up a regional hub based in Singapore, and most significantly expanding our management debt Anfield resources across the region.
In our new Russian collaboration I'm pleased to report that generic them receive regulatory approval for that domestically produced in June , which now makes them able to access new business in the Russian market.
Turning to our product development efforts, we continue our work on the T cell select product.
Our customers remain very interested in T cell, so that and the resulting ability to automate the T spot TB workflows.
This interest stems both from existing customers, who see this as a means to increase that testing volumes and from new customers, who wanted to offer T spot TB, but needed a simpler work flow to do that.
We are starting to order equipment for the first customer site, starting in Europe , and rest of World region, and we have a strong pipeline of customers instrument placements and adoption of the new automated workflow.
On the operations side, we have multiple co production projects ongoing including further automation of our kit manufacturing.
We are validating new equipment to automate and additional process step and we'll be rolling that out later in the year.
So in summary, we're making good progress on executing our strategic priorities for the year and as we continue to execute on our new business model. We are pleased to see continued growth and improving profitability metrics.
Before I hand, it over to Matt I'd, just like to give a brief update on our share buyback climbing and steps.
At our annual General meeting in June shareholders approved the resolution, giving the company the authority for a five year period to purchase up to $100 million of the company's shares over that period.
Subsequent to that we issue trading instructions to a financial intermediary to purchase the shares of the company's behalf and we expect the first purchases to commence late in Q3.
We will continue to communicate updates and forthcoming earnings calls.
Not one I'll take over to give you some more detail on our financial performance.
Thank you Peter.
Our full GAAP results as shown in our press release issued today shows a comparison of our Q2 2019 with the GAAP numbers of our continuing operations for Q2 2018.
For the reasons I've already explained when giving year over year comparisons I'll be referring to the pro forma numbers for Q2 2018, instead to enable the comparison on a like for like basis to our Q2 2019 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 $19.6 million were up 18% versus GAAP revenues in Q2, 2018, but up 10% from pro forma revenues in Q2 2018.
Excluding blood donor screening revenues from the pro forma Q2, 2018 revenues total revenues were up 16%.
Breaking down our reported revenues on a regional basis.
U.S. revenue was $7.8 million, representing 40% of our total revenue Europe and rest of World revenue was 2.2 million representing 11% of revenue.
And Asia revenue was 9.6 million, representing 49% of our revenue.
Turning to volumes in our TV business, we now count volumes in the U.S. based on the number of tests sold to quest and our other kit purchasers rather than on the basis of how many tests were run in the U.S.
We sold approximately 400000 tests in the U.S. via kit sales.
We sold approximately 700000 tests in our O us region.
Both via kit sales and test process in our UK audio service business.
Gross profit of 14.2 million was up 19% from the pro forma gross profit in the prior year period.
Overall gross margin for the quarter was 72.4% an increase of about 530 basis points from the prior year period pro forma number.
Breaking down margins by product service split product gross margin was 72.8% in service gross margin was 65.1%.
Product gross margin increased about 250 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 kit manufacturing.
Service margin nearly doubled from the prior year period pro forma as we no longer have the drag from our blood donor screening service and we grew volumes in our UK service lab.
Turning to operating expenses operating expenses reduced by almost a million or 6% from the prior year period.
Research and development expenses increased to $2.1 million as we continue to invest in development project projects aimed at pulling through our new automated test work flow.
Augmenting T spot TB test utility and in projects to reduce Cogs.
Sales and marketing expenses increased to seven and a half million as we continue to make investments to drive channel and market expansion around the world.
General and administrative expenses decreased about 3% year over year to 5.5 million.
Operating expenses for the second quarter included approximately $815000 of share based compensation.
Net income for the second quarter of 2019 was $590000 compared to a pro forma net loss of $5.9 million in the second quarter of 2018.
EBITDA for the second quarter was a loss of $218000.
Adjusted EBITDA, which excludes share based compensation unrealized FX gains or losses, and unusual items was essentially a breakeven showing a loss of $48000 for the second quarter of 2019.
This compares to an adjusted EBITDA loss of approximately $2 million in the prior year period.
Both EBITDA and adjusted EBITDA are non-GAAP measures.
Turning to the balance sheet, we finished the second quarter with a very healthy cash position of $187 million.
Cash utilization in the quarter was 2.2 million due primarily to higher accounts receivable in line with our quarter over quarter revenue growth.
Notwithstanding underlying cash flow from operations, we expect cash outflows in the coming quarters as we execute our share buyback 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 in the year, we are raising our revenue guidance for the full year to between 71 and $73 million.
Turning to the outlook for the third quarter of 2019, we expect revenues of between 20 and $21 million.
In the U.S. now that we recognize revenue on the sale of kits rather than the performance of tests, we've seen a pull forward and the seasonality of all us revenues from what we saw previously.
Consequently, we expect to see a sequential decrease in us revenues after the new seasonal peak in Q2.
We expect Europe , and rest of world revenues to increase sequentially, reflecting the growth in that region.
Lastly, we expect Asia revenues to grow sequentially from Q2, as the oldest to Japan, the catch up from the weaker first half of the year.
That concludes our formal prepared remarks, we'll now open up a line for questions.
Ladies and gentlemen, if you have a question at this time. Please press the Star then.
Berlin.
Touchtone telephone if your question please.
Are you wish to remove yourself from the queue. Please.
Your first question comes from the line of Phil correct.
Piper Jaffray.
Hi, This is rich on for Ben Thanks for taking the questions.
Peter you touched on the seasonality a little bit during the call and we just like to understand the traditional three key seasonality is the service provider in shifting into Twoq as a supplier. So can you help us understand the difference between the seasonality and the underlying growth in the U.S. results.
Yes so.
The underlying growth in the U.S. is comfortably in the double digits in terms of test utilization, but obviously, we recognize revenue based on when we ship kits to quest and all of the U.S. customers and as your question.
States, obviously, that's been pulled forward. So we expect in the U.S. now for the half one to be stronger than half two is on new seasonality with Q2 being the seasonal peak and not coming down into Q3 and Q4. So that's kind of what we expect going forwards in the U.S. by some of the portfolio seasonality.
Great. Thank you and then one more question so.
For Europe , and rest of World Brexit, obviously brought on the quarter. So do you expect forgets talking five to continue through the rest of 2019 or what are you baking into guidance for Europe .
Yes, so we're not baking any further.
Essentially the.
The effect, we called out was the in Q1 customers in Europe fearful of a new deal a disorderly no deal Brexit in March kind of stopped off is that kind of a hedge against any customers disruption and obviously when Brexit didnt happen, they kind of holding stock because they didnt need to order. So much in Q2. So thats why I gave the first half growth rates to kind of show the underlying growth in the market was when you kind of you take those two factors are the Walsh.
Right, who knows what's going to happen in the second half of the year because the prospect of a disorderly breakfast again on the agenda.
But we certainly haven't built any kind of stocking it explicitly into our guidance for Q3.
And again for the financial year I don't think you would make a difference because even if it did happen in Q3, but probably on the wind again in Q4, so I would not overtly.
Building any stocking into our guidance.
Great. Thank you.
Thanks Ryan.
Your next question comes from the line of some Dino.
Your line is open.
Hi, sorry about that just maybe a quick one for Matt in terms of gross margin cadence going forward do you think the current level is sustainable.
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Yes, so we talked Q1 kind of around that 70% number.
Now that were two quarters through the year I think we clearly see some upside to that number.
You know the one thing I will point out is it's going to vary depending on geography in terms, where the growth is just due to different dynamics in terms of pricing and gross margin percentages by country, but we absolutely see an opportunity to over deliver on the previously committed 70% number.
Great.
And then Peter could you maybe comment on the T cell select kind of the timing.
And your rest of the world rollout there.
And what kind of progress are you, making in terms of the U.S. development.
Aspects of it.
Yes.
Thank you since you asked the question so yes on T. cell sites in Europe from rest of auto said were ordering equipment now to place into customer sites. So we are expecting to get customers operational the first customers operational before the end of the year.
As it relates to other jurisdictions will have to go through additional regulatory processes in those markets.
You know, we're starting to work on those but I'll give you a further update on forthcoming earnings calls when Weve made concrete steps that we can report.
Okay, Great and then just lastly could you talk about kind of your pipeline development activity you know whether if there is a lot of activity going on just curious as you.
You overall cash deployment strategy, you know understanding that there's this share buyback plan, but that would love to hear more about your pipeline overall pipeline development. Thank you.
Yes, so I mean, I think as we as we look at the company today, we see just a fantastic opportunity ahead of us in TB.
And Thats for a number of external factors as well as some internal factors externally, what's happening is that more and more data and guidance to coming out showing the superiority of blood testing over the skin tests. We also have been helpful. Tailwinds some repeated skin test shortages.
We're also seeing growth in the market is a W show and then.
National governments are getting more serious across the world about embedding latent TB screening into new countries. So that's what's happening the external environment, which makes us very positive internally, obviously, we view T cell selected.
It is a major new.
Initiative for the company that will help us continue to drive growth and so we feel very positive about the outlook in TB and as a consequence, that's where we're deploying the majority of our investment and our investments are really going into two areas, it's going into sales and marketing because we want to expand our strength and breadth of all our market access channels, both using direct resources and where appropriate partnering with other companies as we've done with questar and with generic in Russia.
And the second major investment area is R&D right and in R&D is primarily centered around TB.
Around pulling for through the benefits of T cell select in a more automated work flow through R&D to continue to reduce our cost of goods.
And to exploring new ways to add utility and functionality. So T spot TB test, so thats really where our investment priorities are.
We do obviously have our T spot CMV test upon which we have very good data.
The company has not yet committed.
To to launch that in a serious way in part because we are trying to balance the.
Distraction that that would imply versus continuing to direct to R&D and sell them auction resources on the opportunity ahead of us in TB. So.
I hope that gives you some sense of where our investment priorities lie.
Great. Thank you so much.
Thank you.
Your next question comes from the line of Kathryn.
Baird Your line is open.
Good morning, Thanks for the questions.
Just first Peter you guys amended your supply agreement with quest back in June any color on what drove this change any details on pricing and then did it have any impact on your 2018 guidance.
So.
On the second question first no there's no change to guidance as a result of.
Of that change.
But what I would say for what I would say in general you know the reason that we've raised our guidance as we are.
Speaking more positive about growth actually in all our regions around the world, including the U.S.U.S. has done better than we have expected earlier in the year, but it doesnt specifically read through from the contract change that makes sense.
The contract change is really an opportunity to deepen the partnership.
Quest have agreed to higher growth targets and we've agreed to return to the modified pricing.
I will have to be getting more granular market data, which will help us strengthen the interaction around sales and marketing and targeting so that's what the the amendment.
But was about and the amendment alone did not change guidance.
Okay, and then the foot on Asia was a little bit more pronounced than we expected you mentioned you expect us to rebound in the back half, but what are you assuming specifically in your 2019 guidance for a pet growth in the second half.
So the underlying volume growth in apacs really strong both in China and in Japan.
But youve not seen that in the first half and reported revenues because Japan order timing is going to be much more back half weighted this year. So you should expect that the second half growth rates in Asia are meaningfully higher than they've been in the first half.
And so for the financial year as a whole.
When we take that as in the round that will be a better reflection of what the underlying growth in the market really is.
Okay and is there any sort of pricing headwind this year on on APAC revenue.
Not specifically, obviously, we price in China in US dollars I wish all of us are aware that.
With the recent currency actions that are going on obviously short term that doesn't doesn't impact us because reprice in China are in us dollars, but obviously if that weakness of the RMB were to persist for a long period of time, we obviously have to revisit our pricing strategy in China to make sure we were disadvantaged in the marketplace.
But other than that.
There is no other major pricing dynamic going on.
Okay, great. Thank you.
Thank you.
Again, ladies and gentlemen, if you have a question at this time. Please press the star and the number one key on your Touchtone telephone.
Your next question comes from the line of Doug Schenkel from Cowen Your line is open.
Hey, good morning.
So some communication has been out there from the CDC about skin test supply constraints in the US have you seen any impact on your business. Thus far and are you expecting any benefit over the balance of the year.
So I think it's a little premature to have seen a benefit because to.
You did see quite a lot of data to deliver directly attribute that to the shortage of Aptar Sol obviously just to remind you. Obviously the short is only have one of the two skin test and so is not yet fully clear to us whether people are unable to get supplies from the other provider. For example, so it's just too early to call that out and for the same reason, we certainly haven't assumed in our guidance for the year arms, if that were to become very significant effect in the market. Then obviously that we'd have to reflect that in future updates.
Okay.
Have you seen any benefit from being included in the questar electronic ordering system as of yet and I guess just on the topic of question. You noted that you're now in 1000 Phlebotomists centers in the US what percentage of total does that represent.
That's approximately all of the patient service centers.
The next bit would be the in office Phlebotomists, which is is there a different category and that that will takes a longer period of time to get into those so.
But were in I think predominately all the patient service centers right now.
Okay and on the electronic ordering system.
Yes, I mean definitely older systems really to enable some of these other things to happen it clearly increases convenience for customers and as being one of the the fact is why we've seen some early early wins and sales collaboration but it which was then underpins.
For example, the EBIT immediate ability to offer phlebotomy. It will also subsequently underpin logistics changes et cetera. So view it is a kind of.
A series of things that have to happen to get fully inside quests platform and where we're striking those things off.
I should correction quest is striking those things off.
Systematically.
Okay, and just going back to ASP is I believe you noted you sold 400000 test in the us.
Yes, clearly there is some rounding in this number but it looks like you FSP may have declined slightly on a sequential basis to a bit under $20.
Is that right and are so what drove the decline and how should we think about USA asps over the balance of the year, we could just be completely wrong. It just could be rounding taking estimates are in direction, but just want to clarify there.
Yes, no I mean, we've gone, but we keep a record of kind of volumes and Sps over the quarters and it does bounce around a lot, but it also depends a little bit Doug on just kind of what quantity of accessories. All did with the test as well and that can vary from quarter to quarter. So.
Yes, it did decline slightly sequentially, but not not.
Any more than in previous quarters and that is in the range of normal variability. So.
I wouldn't be guiding you to view that as a trend going on here other than just just volatility around the mean.
Okay and my last question it wouldn't be a tools and diagnostics call understand Egypt.
Right in Africa, China question.
So as you know a handsome some other companies in the group had talked about a bias towards purchasing from domestic Chinese companies due to the ongoing trend trade dispute.
Historically, you've posted very solid growth in China.
In spite of the presence of some copycat.
With that in mind I'm, just curious if you're seeing any change in purchasing ordering dynamics in China as a result of what what's going on right now.
Yes, we are still seeing strong growth in China.
But equally light or multinationals, we are worried about the increasing economic and economic nationalism across the world. It's not just the China thing is happening in the US it has been happening for years in Brazil, Russia, and many other countries India.
And then just I think an increasing theme.
In World Economics, and so I think we're very mindful that we'll need to maybe deploy different strategies to to address that as we go forward.
So I would view it as kind of my answer to you would be some no direct impact right now, but we're well aware that that trend is probably getting more hostile to western companies and we need to think about how we respond to that.
Okay. Thank you.
Again that is star one to ask a question.
[noise] [noise].
And I'm showing no further questions at this time I would now like to turn the conference back to Dr., Peter Wrighton Smith CEO .
Yes. Thank you all for joining us to discuss our second quarter 2019 results. We look forward to updating you on our next quarterly call.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.