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Edited Transcript of FLGT earnings conference call or presentation 5-Aug-19 8:30pm GMT

Q2 2019 Fulgent Genetics Inc Earnings Call

TEMPLE CITY Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Fulgent Genetics Inc earnings conference call or presentation Monday, August 5, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ming Hsieh

Fulgent Genetics, Inc. - Chairman, CEO & President

* Paul Kim

Fulgent Genetics, Inc. - CFO

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Conference Call Participants

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* Erin Elizabeth Wilson Wright

Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst

* William Robert Quirk

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Nicole Borsje

The Blueshirt Group, LLC - MD of IR

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Q3 2019 Fulgent Genetics Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Nicole Borsje from Investor Relations. Ma'am, please go ahead.

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Nicole Borsje, The Blueshirt Group, LLC - MD of IR [2]

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Great. Thank you. Good afternoon and welcome to the Fulgent Genetics Second Quarter 2019 Financial Results Conference Call. On the call today is Ming Hsieh, Chief Executive Officer; and Paul Kim, Chief Financial Officer.

The company's press release discussing its financial results is available on the Investor Relations section of the company's website, fulgentgenetics.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 and answers to your questions on today's call will contain forward-looking statements. These forward-looking statements represent management's estimates based on current views and assumptions, which may prove to be incorrect. As a result, 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 statements. The company assumes no obligation to update any of the forward-looking statements it may make today to reflect actual results or changes in expectations. Listeners should not rely on any forward-looking statements as predictions of future events and should listen to management's remarks today with the understanding that actual results, including the company's actual future results, may be materially different in what is described in or implied by these forward-looking statements. Please review the more detailed discussions related to these forward-looking statements, including discussions of some of the risk factors that may cause results to differ from those described in these forward-looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10-Q for the first quarter of 2019, which is available on the company's Investor Relations website.

Management's prepared remarks, including discussions of earnings and earnings per share, contain financial measures not prepared in accordance with the accounting principles generally accepted in the United States, or GAAP. 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 for or superior to the company's financial results prepared in accordance with GAAP. Please see the company's press release discussing its financial results for the second quarter 2019 for more information, including the description of how the compare -- how the company calculates non-GAAP earnings and earnings per share and a reconciliation of these financial measures to income and income per share to the most directly comparable GAAP financial measures.

With that, I'd now like to turn the call over to Ming.

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Ming Hsieh, Fulgent Genetics, Inc. - Chairman, CEO & President [3]

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Thank you, Nicole. Good afternoon, and thank you for joining us on our call today to discuss our second quarter 2019 results. I will review the highlights from the second quarter before Paul discuss our financial results and outlook in detail.

We had a record second quarter, [easily] achieving quarterly results for both test volume and revenue. At the same time, we saw meaningful results margin and achieved a record cost per test, which is unique to leveraging and the [stacked] profitability in the quarter. Especially, revenue grow 56% year-on-year to a record $8.4 million.

Billable test increased 187% year-over-year to a new record high of 16,369, far exceeding the [community] we achieved last quarter for at least 10,000 tests. With the strong volume we have now, we reported more test in the first half of 2019 than we did in all of 2018. Our [GAT] was [515.] Our ASP was $516, down 28% compared to the first quarter of 2019. However, this was offset by the record low cost per test of $221, which was an improvement of 44% from [compared] to the first quarter. The lower ASP is due to product mix, volume and the efficiency, which we will be discussing further in a moment. Non-GAAP gross margin in the second quarter was 69%, up approximate 333 points from the second quarter last year and up approximately 12% sequentially. Net income was $331,000, and the non-GAAP income was $1.2 million. Non-GAAP earning per share was $0.06 in the second quarter. Adjusted EBITDA was a positive $1.5 million in the second quarter.

The strong result was (inaudible) in the second quarter were achieved [off] ongoing tractions we have -- having in the breadth of our offering across our booming customer base and with our collaboration agreement. The majority of growth in the test [run] that we saw this quarter was driven by demand from our core clinical business (inaudible) increasing level of momentum with our oncology test while our reproductive health and the service for sequencing and research data analysis continued throughout. The large volume test, we were able to, especially in the quarter, demonstrate how our investment in technology, capability and the [human] structure has set [us] up [well] for the future success.

In addition to the strong volume growth we have achieved in this quarter, we are (inaudible) please with the leverage we saw in our business, which results in (inaudible). We saw a meaningful improvement in gross margin, resulting from our improved cost per test, which benefited from scale, automation and the efficiency with [working] volume. Our cost per test, including stock-based compensation, was a record low of $211. We believe this enable us to drive more opportunities as well as we [distinctly advantaged] for compares in any environment. We also saw good leveraging with operating expense, generally, in volume and revenue with a minimum incremental sales and overhead costs. As we have discussed in the past, we have invested meaningfully in our technology, infrastructure and talent in the last few years to create a scalable business capable of handling higher volumes.

Now that we are capturing the demand for the increase in our test volume, we're pleased with our speed and [and ability to meet] this demand in an efficient manner with [highest] (inaudible) opportunity -- operationally to have more -- to achieve these results. The market for the next generation sequencing and a genetic test is large and growing. We are uniquely positioned to capture this market share with our differentiated technology and approach. The collaboration agreement that we have continued to -- have now demonstrated the organization and the institution when (inaudible) because our unique technology and activity, also wide range of customized tests that meets individual [needs]. And with [the expediency] of our offering, partners are able to better leverage our sequencing to deliver more informed and actual care for their patient on attending basis.

Another example of a partnership agreement that we have announced recently was with the Parkinson Foundation. The foundation was looking for a genetic testing partner to help them with a nationwide initiative that we will launch to provide eligible individuals who -- with genetic test for clinically relevant Parkinson-related gene. After a competitive process, the foundations like to partner with Fulgent because we offer the best customer solution and overall value for the organization. We'll be compensated for the processing, sequencing, analyzing and the storing each DNA sample for the patient in the initiative. In addition to performing individual tests, we were able to use data that we gathered to assist the Parkinson Foundation a do research and development of new treatment for the disease. We are having ongoing dialogue with number of other large organization and institution for potential future collaboration and that we are pleased with the our scope and geographic reach that we are seeing with this opportunity.

[The huge] number of opportunities that we are seeing is a testament of our work, [superior] technology, capabilities and our [preview] of our partners' flexible and oncology [backable] solutions. We believe this type of partnership will continue to drive momentum to our business. We also have concluded several collaboration agreement with our sequencing-as-a-service business with the [world] of biopharma and with research institution and that we expect to see revenue from this collaboration in the second half of this year. Moreover, we have made additional progress with our reproductive health care and with introducing new offerings to the market, I think, a later part of this year.

We have one more [reason] to highlight to discuss. Last week, we were very excited to announce that we have received approval from New York State Department of Health for NGS testing in the State of New York. This, of course, is notarized [difficult] to achieve and [recognizes] things that we have a process and the approach [meeting] the rigorous standards set by the state. As a testament to our differentiated technology, we believe this will extend our presence in the Northeastern U.S. and open other additional opportunities for collaboration with our partners and institutions in New York.

Finally, we are pleased to welcome Linda Marsh to our Board of Directors, which we announced in a press release this month. We are excited to have Linda joining us. Her knowledge in -- and expertise in the health care industry, government relations and reimbursement will bring insight to our Board. We look forward to working with Linda in the years ahead.

In summary, we had a very strong start to this year. And as we look ahead the rest of 2019, we feel confident in our market condition and opportunity. We have [established] where we started to [pipeline] to fill up, and we expect to continue this strong [test run] and [prosperity] in the quarters ahead.

I would now like to turn the call over to Paul to provide details on our financial performance in the second quarter and also for update on our financial outlook for the full year 2019. Paul?

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Paul Kim, Fulgent Genetics, Inc. - CFO [4]

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Thanks, Ming. Second quarter revenues totaled $8.4 million, an increase of 56% compared to the second quarter of 2019. While our international business remained stable, our U.S. business has continued to be a significant driver of our momentum. Revenue from the U.S. grew 103% year-over-year in the second quarter, accelerating from 43% year-over-year growth in the first quarter of 2019. Revenue from the U.S. represented 79% of total revenue in the second quarter, up from 67% of the first quarter.

Billable test reached a new record high of 16,369 in the second quarter, growing 187% over Q2 of last year and increasing 117% from the first quarter of 2019. Our average selling price was $515, down from the first quarter as our non-pediatric business represented the majority of revenue in the quarter. While our ASP has declined due to product mix, the cost associated with these tests have continued to decrease proportionately at a greater speed -- at greater pace as we scale.

Cost per test for the quarter was a record low of $221 on a GAAP basis and $211 excluding equity-based compensation of 167,000. We're pleased with the improvement we've seen in our cost per test, which has increasingly benefited from operational efficiency, higher test volume, better productivity and the use of our proprietary technology, including probe.

The leverage we generated from a lower average cost per test has resulted in a meaningful improvement in our gross margin. Non-GAAP gross margin improved 12 percentage points sequentially and 330 basis points year-over-year. We expect that we reach the new normal for quarterly test volumes while exceeding 10,000 tests per quarter. And with this volume, we expect that our gross margin should remain strong in the coming quarters.

Now turning to operating expenses. We remain committed to managing expenses while investing in for future growth. Our top line outperformance this quarter resulted in the first positive operating margin that we've seen in over 2 years. Non-GAAP operating margin was 12.3% in Q2, an improvement of more than 20 percentage points year-over-year and 35 percentage points sequentially. We will continue to see quarterly fluctuations in that figure in the near term as we scale. Sales and marketing expense on a GAAP basis was $1.3 million in the quarter, flat what we saw in the first quarter.

R&D expense in Q2 was $1.6 million, up slightly from $1.4 million in the first quarter. We continue to invest in all areas of R&D, from engineered chemistry to competitive analytics powered by artificial intelligence and machine learning to the speed of development for next product and service offering. Our results this quarter demonstrate that we have the ability to be aggressive in our R&D investments while still maintaining a business model that demonstrates improving leverage over time.

Lastly, total G&A expense is $1.6 million, up from $1.5 million in the first quarter. Total GAAP operating expenses were $4.5 million in the second quarter, up from $4.2 million in the first quarter. Non-GAAP operating expenses totaled $3.9 million, up from $3.8 million last quarter. We're very pleased we've been able to demonstrate strong momentum on the top line while only marginally increasing expenses, a testament to the long-term sustainability of our model and show the discipline we've had in building our business is finally paying off.

Adjusted EBITDA for the second quarter was a positive $1.5 million compared to $99,000 in the second quarter of 2018. On a non-GAAP basis and excluding equity-based compensation expense, income for the quarter was $1.2 million or $0.06 per share on 19 million weighted average common shares outstanding. The effective tax rate at the end of the second quarter was a benefit of 1%, and non-GAAP tax rate was 0 due to a full valuation allowance recorded earlier this year.

Now turning to the balance sheet. We generated strong cash flow in the second quarter on strong results. Cash provided by operating activities was approximately $675,000. Now that we reached profitability, it's our intention to generate cash from operations during each reporting period. We ended the second quarter with $38.7 million in cash, cash equivalents and marketable securities with no debt. This equates to $2.03 in cash, cash equivalents and marketable securities per share.

Now moving on to outlook. As Ming discussed, we've seen strong momentum across our business, and we expect test volumes to build through the end of the year. Given the outperformance we demonstrated in the second quarter as well as the confidence we have in our pipeline for the second half of the year and our growing network of partnerships, we're raising our full year revenue guidance.

We now expect revenues for the full year to be at least $29 million, which represents a year-over-year organic growth of approximately 40%. We also remain focused on improving leverage while investing for growth. While we're pleased with the positive operating margin on net income that we generated, we may see near-term fluctuations in profitability. We remain confident in our ability to demonstrate sustainable GAAP profitability by the end of the year.

We're excited about the momentum we've been seeing and the opportunities ahead for Fulgent. The results we demonstrated this quarter validates that our technology and operational differentiation and approach to the market is sustainable longer term in this growing but competitive environment. We look forward to continuing on this momentum in the second half of the year.

Thank you, again, for joining our call. Operator, now you can open it up for question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Erin Wright from Crédit Suisse.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [2]

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Can you speak to some of the key factors that drove that sizable acceleration in volume in the quarter? Were there any of your new partnerships or collaborations that were a notable meaningful contributor? And -- or were there any sort of timing factors that we should be thinking about in terms of the quarterly progression? Or do you think this sort of you hit a longer term sort of inflection point here?

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Ming Hsieh, Fulgent Genetics, Inc. - Chairman, CEO & President [3]

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Erin, thank you for the question. We have several collaboration with partners which should contribute the significant amount of revenue for this quarter. So -- and that we -- as I talked to earlier, we continue expanded our reach and [we hope] some of more of the -- our new partners will be joined [us] and to continue [spread] the service further.

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Paul Kim, Fulgent Genetics, Inc. - CFO [4]

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Yes. Erin, as you very well know, we made a significant expansion in the product offering -- the product and service offerings that we've had over the course of the last 12 months, whether it be in the area of cancer or reproductive health. It takes some markets some time to adjust that we do have those capabilities.

The second thing is with the new sales organization and the success that they've had, forming these collaborations, long-term collaboration and partnerships, that takes time.

The other thing that we've done is because we need our calibration of our operation, we made the pricing in this very competitive environment competitive. So whether it be service offering, the result of the test, the quality of the test, the turnaround time, the prices, we made all those things available, and we believe that's what's causing the inflection point.

As far as sustainability, we feel confident enough, based on the pipeline that we see and the traction that we have with these collaboration agreements, for us to be confident about raising our outlook for the year. And we believe the second half of the year is going to be even more successful than what we achieved in the first half of the year.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [5]

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Okay. That's really helpful. And then you're clearly seeing some of the leverage here with the building volume. But I did want to ask on the ASP front, and I think you just mentioned some of that. But how much of that was a proactive effort versus test mix in terms of the decline in the ASP? It just was a little bit lower than what we were expecting, but -- I mean clearly, you're seeing the leverage thereon. But curious what the dynamics were from an ASP perspective. And is that a rate that we should kind of continue going forward? Or how should we be thinking about that?

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Ming Hsieh, Fulgent Genetics, Inc. - Chairman, CEO & President [6]

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Yes. Erin, thank you for -- this is a tough question. As we -- as [everybody] worry about the decline in the ASP, I think for the drop-off of the ASP, it is a proactive act from our end to respond at the market change in the industry. You haven't seen some of the -- our competitors has been -- lowered their cost per test recently regardless of their alluding [attention] for money, meaning money per quarter.

From our end, due to the efficiency of our cost reduction, we would like to share some of those success with our partners. So we have lowered our cost, average cost, to make our product look more competitive. But we are not lowering the cost to sacrifice the quality and the service. So we reduced our turnaround time, and then we increased our volumes. And also, we lowered our cost. I think that, overall, our partners [were] happy to see our response to [marketed mix] and proactive services that the industry was looking. I think that if you take a look at the overall, as we continue to increase the overall test volumes, we'll continue to see the cost reduction in terms of cost from our side. We'll continue investing in new technology, new artificial intelligence to make more automation for the entire process. So we could be in this market as comfortable as anybody.

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Operator [7]

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Your next question is from Bill Quirk of Piper Jaffray.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [8]

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Great. Couple of questions. So I guess with respect to the volumes, is there any way to break out what the new lower ASPs did in terms of driving some of that volume as compared with, say, looking at same-store sales with existing customers as an example?

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Ming Hsieh, Fulgent Genetics, Inc. - Chairman, CEO & President [9]

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Bill, as you probably know, our test is designed to be flexible. So we do not -- almost every test comes in is a customer from our workflow. So we couldn't track that much in terms of which they come or what test. But overall, our tests is a combination of clinical, the test -- our collaboration tests and the research [samples]. They are all mixed together.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [10]

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I see. Okay. Well, then maybe different way of asking a question, Ming, would be is there any way to talk about the volume growth from, say, new customer versus existing customers?

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Ming Hsieh, Fulgent Genetics, Inc. - Chairman, CEO & President [11]

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Yes. I think, Bill, for this quarter, the majority of our tests are cancer tests. We see that that's the area [that has] most [urgency], whether it's some of the quarter -- depending on quarter-to-quarter. If you recall that last few quarters, we have a strong demand in terms of reproductive carrier screening test. But this quarter comprised to test, the more test will come from cancer-related tests.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [12]

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I see. Okay. And then 2 additional ones from me is -- I guess one for Paul. The guidance implies that the third and fourth quarter, I guess the low end of guidance, so at the $29 million, that you have a slight sequential decline in revenue. And I guess I'd be curious as to why we would see a scenario like that given the really nice momentum you're seeing with volumes. And then separately and perhaps for Ming, any update on latest with respect to your China joint venture?

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Paul Kim, Fulgent Genetics, Inc. - CFO [13]

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So Bill, we did, in the first half of the year, close to $40 million of revenues. And I think what you're commenting on is if we get $40 million and if you're guiding to $29 million, then doesn't that equate to a sequential decrease of sales? So the short answer is no. We don't anticipate that that's going to happen. Based on what we see, we think business will continue to grow in each of the quarters that we have for the year.

And that's the reason why we set the guidance to at least $29 million. So we certainly expect internally throughout the company that our overall business will be greater than $29 million. But we are being very cautious because we missed estimates during the past couple of years, and we certainly don't want to do that going forward.

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William Robert Quirk, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [14]

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Understood. And then Ming, just the question on the latest with respect to the China joint venture?

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Ming Hsieh, Fulgent Genetics, Inc. - Chairman, CEO & President [15]

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Yes. Thank you, Bill. For the China joint venture, we do [need to go through rebuild theory]. This year, as you see from our financial results, the [loss] has been narrowed in China operation. We continue seeing the -- -- that the growth and the new opportunities right in our China joint venture, and we're looking forward to this year's sales in China as [intended entity] will be at least double or triple in this year. However, as you may know, last year's revenue wasn't' that high, [but at] of $1.5 million. But this year, we expect a significant increase in that market. The JV in China has [sell] major institution to start [to ramp up] clinical test. So we do see the business will grow. Last year was stable. I think this year, you'll see the -- a growth.

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Operator [16]

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I am showing no further questions at this time. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.