Luminex Corporation
Q1 2016 Earnings Call Transcript

Published: 3 May 2016

[Operator:]

Good day ladies and gentlemen and welcome to Luminex Corporation's First Quarter 2016 Earnings Conference Call. My name is Sabrina and I will be your coordinator for today. Today's call is being recorded. [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 Sabrina, and good afternoon and welcome to Luminex Corporation's conference call for the first-quarter 2016 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 first-quarter corporate highlights and provide an update on our pipeline products. Harriss will review the financial performance. And after that, we'll open up the call for your questions. As 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. Part of our discussion today will include forward-looking statements for which the Company claims the protections provided by Section 21E of the Securities Exchange Act. Such forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today's release. Others are discussed in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available at www.SEC.gov. Also, certain non-GAAP financial measures 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. 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 first-quarter 2016 earnings call. I am pleased with our ability to execute on our financial goals from revenue all the way to earnings. We generated first-quarter revenue of $63 million, up 9% from a year ago. This was another record for Luminex and exceeded the high end of our quarterly guidance range. Luminex achieved record quarterly assay and royalty revenues. I'm especially pleased to see that the current acceleration in revenue growth, 9%, represents a level which we have not seen since 2014 and is approaching our longer term double-digit target. First-quarter gross margin remained very healthy at 71%. Operating profit is approaching 20% of our total revenue, and we generated strong net income of $8.8 million, 18% growth over last year. While Harriss will discuss our financial results in more detail, our strong overall performance reflects Luminex business model or what we call the full three levels of growth. We believe this business model sets Luminex apart and provides a dynamic platform to drive long-term growth and shareholder value. When comparing the first-quarter performance to our 2016 goals, I would point out the following. For the first pillar of growth, our partners business demonstrated another quarter of outstanding growth. Partner’s revenue grew 18% year-over-year, far ahead of our annual growth target range of 6% to 9%. We attribute this quarter's momentum to healthy demand in life science markets. For the second pillar of growth, the molecular diagnostic business, which submitted for emergency use authorization for our molecular tests for the Zika virus last week. When EUA is received, we anticipate this will be the first commercial available multi-target molecular tests for Zika. I look forward to being able to provide our customers with this important test at this crucial time. For the first quarter, our molecular diagnostic business generated approximately $28 million in revenue driven by 20% growth in our infectious disease test portfolio. The healthy growth was partially offset by softness in our genetic test portfolio. As for our third pillar of growth, ARIES, we enjoyed a successful market introduction and are aggressively targeting evaluation in commercial sites. In April, I attended ECCMID in Amsterdam and came away very impressed with the high level of interest in the ARIES system in our SYNCT software package for which we recently received FDA clearance. As an update to our ARIES FDA submission, on flu A/B RSV, we have submitted to the FDA last week which clearance expected before the 2016/2017 flu season. On GBS, we have started a new clinical drug and anticipate submission to the FDA later in the year. We also continue to make progress on the higher multiplex ARIES chemistry and remain on track with clinical drugs for the first assay commencing in the second half of 2017. We are very excited about this opportunity, as we believe it is a significant step forward. And onto the fourth pillar of growth, our strong financial position. We have $154 million in cash, no debt and a business model that generates significant cash flow. This enables us the ability to take advantage of strategic M&A opportunities that may become available. Now Harriss will review the financial data and afterwards I will return with some closing comments.

[Harriss Currie:]

Thanks, Homi. Let's begin the financial review with a look at revenue. Total revenue for the first quarter was $63 million, an increase from the prior-year period by 9% driven by strong double-digit growth in system and consumable revenue. Assay revenue grew 6% year-over-year to $27 million as strength in infectious disease assay revenue, which grew at more than 20%, was offset by moderate headwinds in genetic assay revenue with PGx facing difficult comparisons to the prior-year period and order timing in the remainder of our genetic portfolio. For the quarter, infectious disease assay sales comprised 72%, with total assay sales with genetic testing sales comprising 28%. Royalty revenues were up 7% to $11.5 million quarter-over-quarter and then grew 21% sequentially. Consumable revenues were up 20% for the quarter to $11.8 million, primarily attributable to strong demand across our partner base, which included healthy bead volume orders from our largest partner. With that said, we continue to expect 2016 consumable revenue to face headwinds from this same partner with current-year aggregate consumable purchases expected to be down from 2015 levels by up to $5 million. This is consistent with comp material on our fourth-quarter call but for modeling purposes, we recommend spreading the decline over the remaining quarters of the year. In the aggregate, our higher-margin items, consumables, royalties and assays, comprised 80% of total revenue in the quarter and have played a significant role in helping us maintain our gross margins in the low 70% range. System revenues were up 39% for the quarter as we shipped 255 multiplexing analyzers, above our 200 to 250 historic quarterly range, due to a combination of new demand and the underlying replacement cycle. As previously stated, we no longer plan to provide a breakout of the multiplexing analyzers. We continue to place ARIES evaluation systems in the field and, as Homi mentioned, the early introduction is proceeding as expected. Now let's turn to the income statement. Gross margin for the quarter was 71%, primarily due to continued concentration of our higher-margin items, consumables, royalties and assays. We remain confident in our abilities to sustain gross margins in our strategic range of high 60% to low 70%. Operating expenses increased 8% for the quarter and reflects the results of our continuing focus on efficiency while growing the business. R&D expenses for the quarter were up 9% over the prior year and represented 17% of revenue. As a reminder, we bolstered our assay development groups in the middle of 2015. SG&A costs were up 5% for the quarter from the first quarter of 2015 and represented 32% of total revenue. Of the components of SG&A, sales and marketing costs increased 17% as a result of incremental resource investment associated with our direct sales activities. However, G&A costs declined 6%, primarily from lower litigation and settlement expenses. For the first quarter, operating margin was 19% driven by the increase in revenue and operating leverage realized through efficient management of our expenses. Our consolidated effective tax rate was 26%, in line with our longer-term expectations. For the first quarter, we achieved net income of $8.8 million, or $0.21 per diluted share, compared with income of $7.5 million, or $0.18 per diluted share, in the prior-year period. On a non-GAAP basis, we generated net income of $12.2 million, or $0.29 per diluted share, for the first quarter. Now, turning to the balance sheet, we ended the first quarter with $154 million in cash and investments, generating approximately $6 million in net cash and investments during the quarter. At March 31, DSO on accounts receivable was a respectable 42 days. With solid performance in the first quarter, we are raising the lower end of our 2016 revenue guidance range by $2 million, resulting in a revised range of between $247 million and $255 million. We expect consumables overall to be up in the mid-single digits for 2016. We expect royalties to grow in the low single digits and roughly mirror the aggregate growth rate of the markets in which our partners currently sell our products. We expect assay revenue to grow in the mid-single digits range in 2016. This includes our current expectation that LabCorp CF will be with us for the entirety of 2016 but down from prior-year levels as they prepare for their ultimate switch to NGS near the end of the year. This continues to be an active situation and we commit to keeping you fully informed. Our third pillar of growth is our new ARIES product offering, and we continue to expect a couple million dollar contribution from ARIES in 2016. And our final pillar of growth is our financial strength and current focus on identifying opportunities in the marketplace. We have assumed no contribution from acquisition related activity in our current guidance range. As we've done previously, we also want to provide revenue guidance for the second quarter of 2016 of between $60 million and $62 million. I'll now turn the call back over to Homi for some final comments.

[Homi Shamir:]

Thanks, Harriss. In summary, 2016 has started off strongly and we are all positioned to take advantage of growth opportunities ahead. Moving forward, we are focused on executing our four pillars of growth strategy, which should return us to double-digit revenue growth over the next few years. Finally, and before we open the line for Q&A, I would like to briefly address two events within our organizational structure and the related refinement of our management team focused on dollar four pillars of growth strategy. First, we continue to evaluate candidates for our open SVP of R&D position, and we have both outstanding internal candidates and impressive interest from external candidates. We hope to have an announcement regarding a new SVP of R&D in the near future. Second, I would like to take this opportunity to thank Russell Bradley, our Senior Vice President of Corporate Development and Chief Marketing Officer, for his more than 10 years of service to Luminex. While he will be departing for personal reasons at the end of June, he will be available to us in a consultancy role until September. We wish Russ the best in his future endeavors and I sincerely thank him for his contribution to the Company. Additionally, we look forward to seeing you at the Berenberg Diagnostic Day in London May 10, the Bank of America Merrill Lynch Healthcare Conference in Vegas May 11 and 12, and the UBS Global Health Conference in New York May 23 to 25. This ends our formal comments. Operator, please open the line for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of Dan Arias of Citigroup. Your line is now open.

[Dan Arias:]

Hi, good afternoon, guys. Thanks. On the Zika panel, Homi, when do you expect to have that product offered commercially, and do you think that that's something they can generate the material level of revenues in the back half if we just think about the Olympics and the overall spread of the epidemic?

[Homi Shamir:]

Thanks, Dan. We are in current discussions with the FDA. In the next week, probably we'll get some more stable where we are going with them and how long it will take them to approve. But I must say they are doing their best to move quickly. From a revenue point of view, I don't, I mean it's very hard to know what is going to happen mainly because of, you know, if it's going to be an epidemic or not. Brazil Olympics can help but it's not significant revenue. As a matter of fact, we might even domain there or try to help them, which we have done already a month or two ago. But really seen as we get FDA clearance, we will talk about that. Obviously, our big customers are asking us about it. They're showing a lot of interest. But we all know it's an epidemic. And when it fits, then we'd be able to provide a little bit more color on that.

[Dan Arias:]

Okay, very good. And then Harriss, on the system placements, you were a little bit above the high end of the range there in 1Q. And I think 1Q is typically your lightest quarter. So how likely would you say it is that the next three quarters are between that 200 and 250 box placement level?

[Harriss Currie:]

I would say it's most likely, you may not recall, I believe we may have mentioned it in passing last time through a raise in our expectations on system placements, multiplexing system placements to be between 225 and 275. And so we fell right in the middle of that range. So we've had a modest lift in our overall system placement expectations. And so, we certainly would expect to be within that range for the rest of the year, all the quarters in the rest of the year.

[Dan Arias:]

Okay, appreciate the reminder there. And then on the ARIES system, not to split hairs here but does a couple of million in ARIES revenues still mean the $2 million to $3 million that you talked about last time? I'm less concerned about the number and more just about whether the initial assumptions on the initial commercialization thought was correct.

[Harriss Currie:]

Yes, I mean we feel really good about the commercialization of ARIES. ARIES isn't the whole company obviously. And even at $2 million to $3 million, you're talking about 1% or less of total revenue. So from a contribution standpoint, ARIES is not going to be significant this year, materially significant, obviously, but the rest of the business is really growing well. The partnership business is doing well. The assay business is doing well. Financially, we are profitable. We are generating a lot of cash. So I know that there's a lot of focus on the ARIES, but Luminex is a lot more than just ARIES today.

[Dan Arias:]

No, the reason I ask is just because I'm sort of trying to understand whether the thoughts that you had pre-commercialization still hold today in terms of validation timelines and just how you're thinking about the early days of the product.

[Homi Shamir:]

Yes, I mean it's done great. As I said in the call, we just submitted flu A/B. We still - I don't know if we should be happy or not, but none of the system in the field have been returned. We placed more systems in the field. So it's progressing very well. But obviously, in order to really ramp up the revenue, we need eventually to have more assay in the field, and they will generate what we need. But so far, things are going very well.

[Dan Arias:]

Okay. Thanks guys.

[Harriss Currie:]

You bet.

[Operator:]

Thank you. And our next question comes from the line of Tycho Peterson of JPMorgan. Your line is now open.

[Unidentified Analyst:]

Hi, guys. This is Steve. Thanks for taking my question. First, just quickly on guidance, you mentioned you are now expecting mid-single-digit growth in consumables and I believe previously you've been expecting a mid-single-digit decline. So can you just give a little bit more clarity around what drove that shift in your thinking?

[Harriss Currie:]

Well, primarily you saw how we performed in the first quarter with pretty good growth over the prior year. Obviously, we're not going to grow at that rate for the rest of the year. Order timing, that bulk purchase phenomenon where partners buy in large quantities one quarter and then maybe fall off for a quarter or two afterwards continues. It's just as a relatively, it doesn't create as large a variance in consumables. So we are comfortable with a modest amount of consumable growth in the current year. The headwinds still exist with our largest consumable purchaser but we are confident in that number. It's just really - it's more the health of the partner business that I think manifested itself in our results is quarter.

[Unidentified Analyst:]

Got it. And then can you just talk a little bit more about the need for the new GBS clinical trial and what type of incremental OpEx expense you guys expect to see from this trial?

[Harriss Currie:]

Yes.

[Homi Shamir:]

I don't think there is any incremental OpEx to what we've been running so far, and that's going as we planned. So obviously we took to some of the assumption during this year, earlier this year, that this year, we will run at least four to five clinical trials and the same times for the risk and that's in our numbers.

[Harriss Currie:]

Expectations are still, and we said before that we'd be just under 20% of total revenue in R&D. Those expectations continue. So the first quarter was a little light relative to that number. And so certainly, you would expect R&D expenses over the rest of the year to pick up a little bit. Some of that will be clinical trial expenses and continued assay development, and the rest of the area is portfolio.

[Unidentified Analyst:]

Got it. Thanks for the color.

[Harriss Currie:]

You bet.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Bill Quirk of Piper Jaffray. Your line is now open.

[Bill Quirk:]

Thanks. A couple of ARIES questions. I guess, first off, you said qualitatively that you're pleased with the launch. I guess I'm curious when we might start to get a little more color on how many placements you have out there and then maybe you can just talk to those initial placements, perhaps some additional details around who's buying them. Are these new to molecular? Are these replacements for existing systems? Are these additions? Just any color there would be great. Thanks.

[Homi Shamir:]

Bill, it's the same thing what we keep saying, the same kind of type of customer, large hospital, midsize hospital. The number is growing. Initially, we had 30 systems by the end of the year. This number continues to grow. And for competitive reason, at this stage, I'm not going to throw any more numbers. We have a goal to have close to 100 systems by the end of the year, and we are tracking into that. We are doing other things. We are putting a lot of effort behind the developing on what we call the low single PLEX assay, the three or four. We are working also developing what we call a more complicated assay that can run up to 12 or 15 PLEX, which we are hoping to launch or not launch, to take to the FDA in the middle of next year. And we think it's going to be fairly fundamental to us. On top of that, we are going to - we are working on the ASR. Those came - we have I think as of now more than 10 ASRs in the field and we are working on another 10 to be available to our customers. And obviously, we might take the Zika and put it also on the raise and offer it to our customers. Because they were asking, either it will be a EUA or ASR. We have not concluded that. But there is a lot of activity behind that. I've been visiting customers. I'm getting really good feedback about ARIES. You have seen our press release about the SYNCT. That's also becoming instrumental to stimulated growth in the markets. So everything is going the right way. So I'm very happy about that.

[Bill Quirk:]

Okay. And then just actually on the highly multiplex, the 12 to 15 PLEX assays, [Technical Difficulty] you guys had talked about having multiple iterations of ARIES instruments, some that would run low multiplex, some that would run high. Is that still the plan, Homi or…

[Homi Shamir:]

Let me just say, you know, I'm talking about the [indiscernible] typing in the companies, so I would not go previously. But our idea here is the same system. No change for the cassette, no change to the configuration of the system. It's really a more complicated chemistry running on the same instrument. And that's a beauty. We don't need to go and replace the box at the customer, et cetera.

[Bill Quirk:]

Okay, good. Certainly good news to hear on that. And then sorry, last one for me, but the Zika submission, which system was that for? Thanks.

[Homi Shamir:]

It will be going on our MAGPIX system. It will be going either to some of the major labs, hospitals or some of the different customers, or the Department of Defense that we have as customers.

[Bill Quirk:]

Okay, got it. Thanks guys.

[Operator:]

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

[Brian Weinstein:]

Hi, guys, having some connection difficulties here, so hopefully you can hear me okay. Can you just talk on ARIES? And forgive me if I'm asking something that somebody has already asked. But can you just talk about how you view your own assays versus the LDTs and how you expect utilization to play out there? Is there any change in how you're thinking about that in terms of the total utilization by your customers?

[Harriss Currie:]

So, Brian, the LDTs are effectively a key that can get you into the door in a laboratory that wants to use your platform but maybe your cleared menu is not broad enough yet. As you know, laboratories, the majority of their menu is of the laboratory developed test variety, not of the volume but of the menu. And as a result, any opportunity you can give a lab to automate the performance of the harder to perform assays is certainly a plus for the ARIES system that really today only we can do. You then couple that with a menu that is slowly expanding and then by the end of next year, we talked about 10 plus FDA cleared applications on the system by the end of 2017. Then you have a pretty compelling offering. If all we had were one FDA cleared application today, right, HSV 1&2, that's a lot more difficult sale. So the unique features that the ARIES system offers a laboratory as they wait for additional FDA clearances provides pretty significant grease, if you will, to get yourself into the laboratory early.

[Brian Weinstein:]

Got it. You mentioned on the replacement cycle as far as the systems go. Do you guys have some sort of visibility that indicates that that replacement cycle is going to accelerate in any way or what kind of visibility do you have to that replacement cycle?

[Harriss Currie:]

So, what we know is that it's happening from a discussion with our partners. Unfortunately, a lot of our partners take delivery of their systems and they turn around and ship them to their end-users. There are others that we ship systems directly to the end users. And for those, we have better visibility as to whether or not they have an instrument or not. So it's more of a qualitative - I don't want to call it a judgment, qualitative criteria that we are aware of that our partners are telling us that there are systems being replaced. Now, it's not the lion's share of the placements. There are several 5, 10 a quarter maybe. But nonetheless, it is providing some lift in the overall system placement statistics, which is why we talked about, previously about raising that those placement expectations a little bit.

[Homi Shamir:]

What you can see also Brian is the timing of [Technical Difficulty]. Although we are not making it anymore, we are selling more and more FM into the field, which the customer needed it, it's a more productive unit. So, for example, one of our customers who is into organ transfer is seeing more and more, even a customer in the life science school start ordering those units. So it's really, it's not only a unit that we see start replacing our traditional LX 100 to 200 to the MAGPIX. It also eventually will create I'd say more bids and royalty in the future.

[Brian Weinstein:]

Yes, of course. Last ones from for me, on the fourth pillar of growth, the cash balance and your flexibility there. Can you just give some indication as to kind of how you're thinking about that net cash utilization? Are there deals that you're looking at this point? Are they kind of in similar markets that you are in today, or would you potentially look to maybe expand a little bit into different marketplaces? Just how are you thinking about use of cash and in particular your thoughts on M&A? Thanks.

[Harriss Currie:]

So, as you can imagine, Brian, there's a lot of bankers out there that throw a lot of deals at us every day. So, the majority of those we have to unfortunately pass on. But there are a number of exciting opportunities that are available to us and we continue to evaluate those on a regular basis, some right in our wheelhouse in the markets in which we play, others that are on the periphery but would certainly make sense in expanding our footprint overall in the life science marketplace. Homi mentioned previously on our call, our end of the year call, that if we don't find something within about a year, we're going to have to start giving some back. Whether it's in a buyback, whether it's a dividend, whatever, we're going to have to find a way to start sharing some of the cash that we are generating with our shareholders if we can't find an opportunity. So I hope that answers your question.

[Brian Weinstein:]

Okay. Thank you.

[Harriss Currie:]

You bet.

[Operator:]

Thank you. And our next question comes from the line of Jeff Bernstein of Cowen Prime. Your line is now open.

[Jeff Bernstein:]

Great. Thanks, guys. Just a couple of questions for you. On the partner revenues, I think you attributed the strength partly to healthy demand in life sciences. Can you just elaborate on that a little bit?

[Harriss Currie:]

Well, the life science industry, as you know, is very broad. So, it includes both research, diagnostics, everything in which our partners play. Molecular diagnostics is included in that life sciences industry but because we play there ourselves, it's not really applicable. So what we're talking about is the research protein market primarily, HLA and immuno diagnostics in which several of our partners have assays developed there. And what we're seeing is that they are, with the kits that they've developed, are having incremental success in placing these boxes with their customers as they develop additional menus. Because recall that all the beads that we sell can be used both for commercial production, for a kit that they sell to an end user, but those exact same beads can also be used for the development of additional assays. And our partners, partners like Bio-Rad, Millipore and others, continue to expand their menu, their bead-based multiplexing menu. And as a result, the product becomes more and more compelling with each passing day. The utility of Luminex system increases. And that's really what's driving the success in the partner business. But recognize that that can be modestly volatile as you go quarter to quarter, so you have to look at it on a longer-term basis on a more - really on an annual basis.

[Jeff Bernstein:]

Got you. And then I think you still have 25 partners or so in various stages of development. Is there anything in there that you would identify as a better kind of opportunity, or is it sort of just a statistical distribution of things going on with partners?

[Harriss Currie:]

The majority of our partners in development are smaller than the partners that we have in our commercial, our 50 or so commercial partners. So they are certainly incremental opportunity but they are not, today, material incremental opportunity. Collectively they are but individually they are not.

[Jeff Bernstein:]

Got you. And then I think since Homi has been there, you guys have expanded international distribution. I think there's been some M&A too, et cetera. Could you just give us a little update on what's going on internationally?

[Harriss Currie:]

We are trying to get more and more supplement to our partners in some of the areas that the presence of our what's called USA partner on also strong. Particularly that's a small part of the business. I mean, overall, our traditional partner or our big partner are doing very well and that's helped us to continue to drive the business. But you have here and there a few of some of the deals that we are doing in those international territory. It gives us a here a few, another pennies to the overall, but it's really been helpful to us.

[Jeff Bernstein:]

That's great. Thank you.

[Homi Shamir:]

And by the way, concern [Technical Difficulty] partner and again I wanted to repeat something Harriss said earlier. We have not had any abnormality in this quarter of one partner giving us a large order in equipment or in systems or in beads. It's just straightforward business.

[Jeff Bernstein:]

Perfect. Thank you.

[Harriss Currie:]

You bet.

[Operator:]

Thank you. And I'd now like to turn the conference back to Homi Shamir for closing remarks.

[Homi Shamir:]

Thank you, Sabrina, and thank you, everyone, for your attendance on our earnings call today. We look forward to seeing you in person in the very near future.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.