Luminex Corporation
Q3 2017 Earnings Call Transcript

Published: 31 Oct 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to Luminex Corporation Third Quarter 2017 Earnings Conference Call. My name is Carmen and I will be your coordinator for today. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Matthew Scalo, Senior Director of Investor Relations, for opening remarks. Please proceed.

[Matthew Scalo:]

Thanks Carmen and good afternoon, and welcome to Luminex Corporation's conference call for the third quarter 2017 financial and operational results. On the call today are Homi Shamir, President and Chief Executive Officer; and Harriss Currie, Senior Vice President and Chief Financial Officer. We'll be following our standard agenda today. Homi will review our corporate highlights. Harriss will review the financial performance, and after that, we'll open the call for your questions. As a reminder, today's conference call is being recorded and a replay will be available for six months on the Investor Relations section of our website. Certain statements made during the course of today's call may not be purely historical and consequently may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and the company claims the protections provided by Section 21E of the Securities Exchange Act for such statements. These forward-looking statements speak only as of the date hereof and are based on our current beliefs and expectations and are subject to known or unknown risks and uncertainties, some of which are beyond the company's control that could cause actual results or plans to differ materially and adversely from those anticipated in the forward-looking statements. Factors that could cause or contribute to such differences are detailed in our Form 10-K for the year-ended December 31, and our Quarterly Reports on Form 10-Q filed with the SEC. We encourage you to review these documents and we undertake no obligation to update these forward-looking statements. Also, certain non-GAAP financial measures, as defined by SEC Regulation G, may be covered in this call. To the extent that any non-GAAP financial measures are covered, a presentation of and reconciliation to the most directly comparable GAAP financial measures is included in our earnings release, which is available on our website in accordance with Regulation G. I'll now turn the call over to our President and CEO, Homi Shamir.

[Homi Shamir:]

Thank you, Matt. Good afternoon, and welcome to our third quarter 2017 earnings call. We continue to execute well in the third quarter led by another strong performance in our molecular diagnostic business and the ex-revenue go 15% driven by 55% growth we've seem our Sample-to-Answer molecular portfolio. We placed over 60 Sample-to-Answer systems this quarter and now have over 600 molecular Sample-to-Answer systems under contract at over 400 active customers. In addition, in average VERIGENE customer now generates approximately $95,000 in assay revenue a year, while ARIES is generating over $40,000 a year as a reference. Multiplying factors contribute to this positive ongoing trend is our molecular business, including our extensive molecular product offering and differentiated pricing strategies. These strategies provide our customers with a solution that address the specific lab needs while potentially minimizing unnecessary cost. On VERIGENE 2 we've made good progress and overcome obstacles discussed on our second quarter call. Our platform is walking very well and due to the ongoing success of our VERIGENE 1 platform our go-to-market strategy for VERIGENE 2 we now focus on a multi essay lounge. We will commence multiply clinical trials in 2018 with the first trial commencing in the second quarter of 2018. Before we move on to other areas of our business I wanted to also highlight the multiyear extension our CF product LabCorp. This amount to approximately $10 million to $12 million in revenue a year. Our License Technology Group remained positive although not as strong as earlier in the year. This business posted year-to-date 2017 growth rate of 1%. Strong demand for our FLEXMAP 3D system continue in the third quarter offset by tough year-over-year comparison. We continue to selectively invest in support of future growth opportunity for LTG. In addition, we generated cash flow of over $7 million and our balance sheet is strong with no debt and a cash balance $111 million post our third quarterly dividend payment. Now Harriss, will review the financial data and afterwards I'll return with some closing comments.

[Harriss Currie:]

Thanks, Homi. As Homi mentioned, revenues were up 4% for the quarter and 15% for the year-to-date period. Obviously, the year-to-date period included two quarters of VERIGENE-related revenues, not present in the prior year. For the quarter, we placed 266 multiplex systems, not including ARIES and VERIGENE systems down from the prior year, but well within our communicated expectations of 225 to 275 per quarter. Also included in system revenue are sales of both our ARIES and VERIGENE systems although the majority of those are placed under rental and their total contribution to system revenue is minimal. Consumer revenues were down for the quarter but this was not unexpected as we have guided to about the lighter contribution of consumables in the second half of 2017 and the effects of the timing of orders from our large partners. These timing effects are illustrated by the almost $2 million decline in bulk purchases quarter-over-quarter. Royalty revenue was flat with the prior year, but was affected by a reduction in audit findings and minimum royalty payments offset by increases in base royalties. End user sales reported by our partners for the quarter were up 5%. Assay revenues were up 17% for the quarter with a 55% increase in our automated products and a 7% increase in our nonautomated products. We posted gross margin of 62% for the quarter, down two percentage points from the third quarter of 2016. This decline can be attributed to several factors. First, our sample answer portfolio increased from 9% of revenue in the third quarter 2016 to 14% of revenue in the current quarter. As we've indicated, our automated products currently have margins well below the aggregate of our remaining products. Although we worked diligently to improve those margins and further increases in volume will subsidize further margin expansion, they still remain well below the aggregate of our other revenue streams. Secondly, overall mix changes other than assays contributed to the decline as well. Our highest margin line items, consumables and royalties fell from 30% of revenue to 29% of revenue. And finally, we made some standard cost adjustments related to improvements in labor utilization in the quarter to drive improvements in product margins in future quarters, but the necessary adjustments to inventory in the current quarter impaired gross margin. We continue to control our operating expenses during the quarter, displaying a decline in R&D expenses of $2.1 million, primarily attributable to the timing of clinical trials and had flat SG&A expenses. Overall, OpEx was down 6%. Operating profit improved by $2.5 million or 62%, driven by revenue growth, gross profit expansion and operating control as discussed previously. During the quarter and as a result of the extension of the LabCorp CF commitment, we released the remainder of the deferred tax asset at our Canadian subsidiary. The extension of the LabCorp commitment made it more likely than not that the asset would be utilized, which was not so previously and therefore, called for the release of the remaining 12.4 million deferred tax assets. Adjusting for this release, net income would have been $5.2 million or $0.12 a share up 90% from the prior year. With respect to consensus, we felt dead center of our guidance range of $73 million to $75 million and we're in line with analyst consensus. Our gross margins fall short of consensus by about three percentage points, but OpEx is favorable to consensus by over $2 million. Net income is well above consensus on a reported basis, but is in line when we adjust for the release of the VA on our Canadian tax assets. Our balance sheet remains strong with solid DSOs on accounts receivable, no debt and over $110 million in cash and investments. We generated over $7 million of cash in the quarter, even with the payment of dividends of $2.6 million. Looking into the fourth quarter we expect the following; fourth quarter revenues are currently expected to be between $76 million and $78 million. Our MBX franchise boosted by the automated component is expected to be the highest growing revenue segment, our LTG is expected to be roughly flat for the current year with consumables favoring the first half of the year. Gross margins on our automated revenue stream should continue to improve as volumes increase and overall gross margins should hold steady and finally cash flow generation should continue. Now I'd like to turn it back over to Homi for some final comments.

[Homi Shamir:]

Thanks, Harriss. We feel the strength of our MBX business in particular, the Sample-to-Answer group is just now showing its true momentum and will offset the near term tough comps in our LTG group. We are very confident we'll achieve the midpoint of 2017 revenue guidance range of $305 million 13% growth over 2016. So, in closing, our diversified business model continues to drive meaningful double-digit goal in 2017. We remain committed to investing wisely in product pipeline development across our entire business. This will be done through both internal and external means, while never losing focus on the bottom line. This end our formal comments. Operator, please open the line for questions.

[Operator:]

[Operator instructions] And our first question is from the line of Tycho Peterson with JPMorgan. Your line is open.

[Tycho Peterson:]

Homi, can you update -- or can you just give a little bit more color on how these multiple trials of how you're prioritizing the launch assays? What the actual timing will look like on the menu and what assays do you expect to be prioritizing here?

[Homi Shamir:]

Yes, as I mentioned also last week when we had some investor wave, we're planning to start preclinical trial next year. During Q2, we'll start with our enteric assay soon after we start with the respiratory and hopefully before the end of next year we will go basically the two-blood culture, the gram negative and the gram positive and we're hoping that some of them longer, some of them are shorter. But all things for these that in 2019, when we get FBI approval, we would like that our customer to add soon after only assay cleared by the FDA but to have all of the two cleared by the FDA. I think it's very compelling proposal to our customer especially when mentioning the call, we have 400 active customers currently and hopefully this number continue to grow nicely as demonstrate during this quarter, we have close to 40 new customers in the VERIGENE. So, we'll continue to put a lot of effort basically three clinical trial next year. Obviously, it will impact and I don't want to talk about next year, but it will impact a little bit our expenses on the R&D side for next year, but I am sure we'll talk about that in the next call during your conference.

[Tycho Peterson:]

Okay. And then shifting gears to PAMA, I know you don't necessarily have a ton of direct exposure, but two questions here. One, are you seeing any change in behavior just on the part of your customers on CapEx budgets? And then number two, can you just remind us what percentage does the VERIGENE customer in patient versus outpatient?

[Homi Shamir:]

I've not seen neither I have from the sales folks that PAMA is influencing any of our trajectory of forecast going forward. So, in this respect many of the sales folks, hopefully they're not listening, they're not complaining, usually it's not changing any of our thinking going forward. Concerning how much is in the hospital, yeah majority of that is in the hospital. It's a relatively high number, but we're not really seeing any influence there.

[Tycho Peterson:]

Okay. And then just lastly on new swaps, can you just update on what you're thinking there?

[Homi Shamir:]

No new news. I keep saying, I'll be very -- as soon as we know, the moment we're targeting that LabCorp will depart from us by exactly middle of next year. That's our plan. If something will happen differently, I'll let you know. Obviously, the CF now secure till end of 2019 and to be seen what will happen after that, but with new [suburb] we don't know and we're not planning at this stage to do anything else beyond that.

[Tycho Peterson:]

Okay. Thank you.

[Homi Shamir:]

Thanks, Tycho.

[Operator:]

Thank you. And our next question comes from the line of Brian Weinstein with William Blair. Your line is open.

[Andrew:]

Guys, this is Andrew on for Brian today. First question is on the royalty revenue, this looks like the second quarter in a row where you've had some slightly negative revenue growth. Any pressures or color on why that?

[Harriss Currie:]

So, you might want to I guess redefine negative revenue growth. Royalty revenues themselves, base relatives that are amounts that are paid based on partner submitted end-user sales were actually up 5%, but through the ebbs and flows of the reality audits that we perform and minimum payments that come and go from time to time. So base royalties were up, base royalties continue to be up on a sequential and year-over-year, quarter-over-quarter basis and expectations are that'll continue.

[Andrew:]

Great. And then just on VERIGENE 2, last quarter you said that you're kind of pushing the launch back due to some things in the market and then couple that with manufacturing. This quarter it seems like it's back on track. Any color on what's going on in the market that makes you more comfortable in bringing it back sooner?

[Homi Shamir:]

There in nothing in the market. It's just we see how things are performing here, the system is performing very well in our labs and we're ready to go to the clinical trial. And again, as I said, in the previous three months ago, we were having some small issue. We got more confidence where we are in the level, but it wasn’t only because of the system. It was influenced by other things as well as the reimbursement. It was some other strategic decision we had and that's why we're ready now to move forward with that.

[Andrew:]

Okay. Thanks guys.

[Homi Shamir:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Dan Arias with Citigroup. Your line is open.

[Daniel Arias:]

Good afternoon, guys. Thanks. Homi, I know that individual experiences vary here, but at this point what is the time to ramp that you're using when you think about how long it takes for customers to get to that 95,000 pull-through level on the VERIGENE?

[Harriss Currie:]

Yeah so Dan, this is Harriss. I think it depends. So, we have a number of accounts that when we signed them up there were 100,000 plus annualized accounts. What we're referring to is the annual commitment that these customers have made over the course of their deal. So today that average annual commitment for those customers stands at over $90,000. And so, the time it takes for them to ramp up obviously is from a volume standpoint. There is startup time for those accounts, but in year one there are deals they made a commitment to buy on average $90,000 plus of reagents of that first annual period. So that's how I have to think about it, hope that helps.

[Daniel Arias:]

Yeah, that's okay. Maybe just for 4Q, safe to say that the step up there on the top line is due to the assay business. And if so, how much of that would you say is seasonality as we start to work up through volumes versus the momentum that it looks like you have with VERIGENE?

[Harriss Currie:]

So, there's certainly a component to seasonality. You would expect a lift there, but we continue to add accounts. The expansion of our ARIES venue has helped drive upwards the ARIES utilization and we've experienced average ARIES utilization of a five-point increase over the last quarter. And so, per system, sorry, per account, per quarter. So, for annualized basis sorry and so, we continue to see step ups in utilization because of the expansion of the ARIES menu. We continue to gain accounts, new accounts for both VERIGENE and ARIES and then obviously there is the seasonal component. It's tough to break out because there is for instance, the seasonality you're referring to is primarily respiratory I assume. There is a respiratory component of VERIGENE. There is a respiratory component to ARIES and there is a respiratory component to the nonautomated systems. So, it's a blended number there that some of the placement of additional VERIGENE systems could very well be a function of the need to do flex respiratory testing for instance. And as a result, it's difficult to totally quantify that, but you can certainly attribute a portion of that increase to seasonality.

[Daniel Arias:]

Okay. That's helpful too. Maybe if I could since I have one more on just the earnings line, pretty good performance relative to consensus on the bottom line. So, I guess as we push towards 2018 here and you guys are providing your forecast. Any thought on when you'll put some guidepost to earnings expectations?

[Harriss Currie:]

We really haven’t thus far. Obviously the first key for us is to get the gross margins on our sample answer franchise higher and then fully stable, and our revenue mix more predictable. As you know that changes, still changes from time to time. What we hate to do is put a number out there and miss it by a couple pennies because right now it's relatively insignificant as our earnings are it's difficult to to do that in a meaningful way, but I think as they grow and we certainly expect them to grow, we'll start to move ourself down the income statement and we'll ultimately get there. I wouldn't expect it next year.

[Daniel Arias:]

Very good. Okay. Thanks, Harriss.

[Harriss Currie:]

Thanks.

[Operator:]

Thank you. And our next question is from the line of Bill Quirk with Piper Jaffray. Your line is open.

[William Quirk:]

Great, thanks. Good afternoon, everybody.

[Harriss Currie:]

Hey Bill.

[William Quirk:]

First question Homi, any update or anything you're hearing regarding CMS' proposed draft line reimbursement around multiplexing for things like G.I. and respiratory beyond biomarkers?

[Homi Shamir:]

No, we since last call or since the news of Palmetto, we have not had anything. We submitted our opinion to that and our draft and we're patiently waiting for that, but again I think whatever will be the decision, we'll position ourself at Luminex and especially with the solution, with the flex solution in the pricing as a superior economic value there. We provide value to our customer. We see how the business has continued to grow over 50% year-over-year in this business. So, I think whatever will be the decision, I don't think we'll get impacted negative debt. I would even dare to say that if they will reduce the reimbursement, we might get even positive impact out of this decision, but really, we don't have any further news. We are waiting for that.

[William Quirk:]

Okay. Got it. And then just a question on VERIGENE 2, I certainly appreciate the improvement to the workflow that you're designing into that. Can you tell us and forgive me if you've mentioned it in the past, but does this have any effect around turnaround time and I'm just thinking about that in the contact of some of the competitive changes that have happened and obviously if one of the competitors get trying to reduce the turnaround time. So just trying to get a better understanding of where the chips are going to fall there, there?

[Homi Shamir:]

This stage could be some improvement in the respiratory, but I am not willing to speak about it from the current and again that's not something that we are now top priority. Our top priority first is to deliver what we've now seen polymer pathogens than the current system and that's really what we're there. Through this one, we'll be able to reduce some of the turnaround time for currently most of them it's two hours in the respiratory inventory, that will be additional value, but it's really not our -- we're having a different approach to that and apart from our point of view is to provide better pricing, better efficacy in a way and proper solution to the customer. So that's how we're approaching.

[William Quirk:]

Got it. And then just lastly for me, just thinking a little bit about the upcoming respiratory season, I am curious because it does touch you mentioned in reponse to Dan's question, touch several parts of your business. How are your customers treating this at this point? Are they looking at it like a traditional flu season and if stocked appropriately, are we seeing any indications of a stronger or weaker season from the customer's perspective?

[Homi Shamir:]

You're pushing me now into the Q4, we see some, I need to be careful what I am speaking here. We see a little bit more intake slightly, but this is beginning I don't know where it's eventually ended up. So, I don't want to predict here, but we've seen some cases that there was a quick turnaround with the customer orders. But again, from my point of view, I really don't want to dive into what it means to us or not mean to us. We continue to deliver what we wanted to deliver for the year and this quarter and it will be an upside view to the fact of more flu season or respiratory we'll probably gain out of that, but that's really my, that's what we're focusing here.

[William Quirk:]

Understood. Thanks a lot for the color Homi, appreciate it.

[Homi Shamir:]

Thanks Bill.

[Operator:]

Thank you. [Operator instructions] And our next question is from Dan Leonard with Deutsche Bank. Your line is open.

[Dan Leonard:]

Thank you. My first question, Homi can you talk about what you're finding opportunities on the operating expense line and how we should think about that opportunity going forward?

[Homi Shamir:]

Let's talk about the integration. We've finished the integration very well here and when I look forward, again I am trying to be careful 2018, but we're not going to add sales people to the organization. So, we'll continue to run almost maybe here one or two, but overall our sales flows will continue to carry the same territory in the same area. Now obviously we're planning to grow very nicely next year taking into account that as you know, we'll have some LabCorp at the moment. We will lose a certain amount of from LabCorp, but without LabCorp, the company will be growing very, very nicely. So again, we're trying to get more efficient out of that. Obviously, the other side of the efficiency is you'll see improved gross margin on the sample to answer, more volume and the reason the Nanosphere and especially and Nanosphere becoming bigger number, but also the ARIES number we anticipate next year will be growing up and that will improve the gross margin. So overall, we're feeling that we are in the right direction. We know where we're going. We're just finishing our planning for the next year and behind that. So, we have a fairly good visibility to say that we'll continue to improve, take in mind that we have LabCorp that will grow, we'll lose this revenue at this stage and also it reduce some of the earning. But overall if you look at Luminex, I believe Luminex will continue to grow and I keep saying it even if we lose LabCorp next year and after that.

[Dan Leonard:]

Okay. And just a quick follow-up, on the $40,000 and pull through per ARIES box, can you remind me where you expect that to trend over time when you have a full complemented menu on the ARIES?

[Harriss Currie:]

So obviously it depends Dan on the assay portfolio with the addition of Group A any time now, there should be a modest step up per account. With the clearance of next year sometime, obviously, that's a pretty big assay. We had originally, you'll recall long time ago talked about an ARIES per boxes of in excess of 100,000. I think that may have been overreaching a little bit especially with the menu that we're talking about today, but that number would be well over 50, sure it could and ARIES utilization overall, but when you look at ARIES utilization per account, when we look at not one but you with the math is for at least for the third quarter the annual increase per account, the per account revenue generated per account is increased by almost 20% from the third quarter of last year and that's all about menu expansion. So as the menu continues to expand we would expect it to step up further and we obviously would expect the number of accounts that we have to grow as well. So, once we again get a little more stable performance there because we obviously -- averages are a dangerous thing. So, we had accounts that are well over 50 a quarter, a year and we add accounts that are less that. So, it all depends on what they need, but the averages we expect to continue to trend up.

[Homi Shamir:]

And one more thing here Dan, I keep saying and I am saying it all the time to the sales force, we're in the business of making money. So, we're not giving system a way or rental a way unless we are sure we can generate substantial revenue from them. So, I'm hoping that the number will continue and the number will continue to grow. I am actually very, very pleased with the Nanosphere number although I still see some room there to improve, but there is certainly will continue to improve as we move forward. So, we're feeling very good. The portfolio growing at 55% year-over-year we're feeling that it will continue the momentum and we see it. If you look at the filing that we've done last week after we had done the presentation here, you see all the accounts that we are winning. Some of them new accounts, some of them are competitive and I speak a lot of time with customer and the sales force and we got a very, very positive feedback where we're going. So, I think that will help us with ARIES as well.

[Dan Leonard:]

Okay. Thank you for all the color.

[Operator:]

Thank you. And this concludes our Q&A session for today. I would like to turn the call back to Homi Shamir for this final remarks.

[Homi Shamir:]

Thank you, Carmine and thank you everyone for your attendance on our earning call today. We look forward to seeing you in person in the very near future. Have a great day.

[Operator:]

And ladies and gentlemen, with that, we conclude the program. You may disconnect. Have a wonderful day.