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Edited Transcript of LMNX earnings conference call or presentation 4-Nov-19 10:00pm GMT

Q3 2019 Luminex Corp Earnings Call

AUSTIN Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Luminex Corp earnings conference call or presentation Monday, November 4, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Harriss T. Currie

Luminex Corporation - CFO, Senior VP of Finance & Treasurer

* Jeff Christensen

Luminex Corporation - Senior Director of IR

* Nachum Shamir

Luminex Corporation - CEO, President & Director

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Conference Call Participants

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* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* Brian David Weinstein

William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst

* Ruizhi Qin

JP Morgan Chase & Co, Research Division - Analyst

* Sung Ji Nam

BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Luminex Corp. Earnings Conference Call. (Operator Instructions)

Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Jeff Christensen, Senior Director of Investor Relations. Thank you. Please go ahead, sir.

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Jeff Christensen, Luminex Corporation - Senior Director of IR [2]

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Thank you, and good afternoon, everyone.

I joined Luminex in September, and look forward to working with you. My contact information is in our financial results release.

The slides of our third quarter 2019 results are available for viewing or download from our Investor Relations website at investor.luminexcorp.com.

On the call today are Homi Shamir, President and CEO; Harriss Currie, Senior Vice President and CFO.

We'll be following our standard agenda today. Homi will review our corporate highlights, Harriss will review the financial performance, and after that we will open the call up for your questions.

As a reminder, today's conference call is being recorded. The conference call replay and the slides will be available for 6 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's claims, the projections 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 on our Form 10-K for the year ended December 31 and our quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. 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 on 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 measure will be included in our press 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.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [3]

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Thank you, Jeff.

Good afternoon, and once again, welcome to our third quarter 2019 earnings call.

Earlier this afternoon, we posted our results for the third quarter of 2019. As you can see from previous results, we continue to work through the departure of most of LabCorp businesses, which created a $7 million drag on the current quarter and $31 million revenue impact on a year-to-date basis as well as the profitability challenges that their departure presented.

Despite the LabCorp departure, we grew total revenue by about 9% over the third quarter of 2018. Continued progress in our molecular sample-to-answer portfolio led our growth this quarter, with revenue growing by 27% in this product line. We also demonstrated continued success with our licensed technology group with revenue growth of 7%.

While the new flow cytometry revenue stream contributed $8.7 million in the third quarter, this was about $3 million below our expectation and is the primary reason we missed our revenue guidance for the quarter.

Given the timing of sales in these businesses, we anticipate Q4 to be much stronger in the neighborhood of $12 million. When we combine our year-to-date flow sales of $33 million, this will bring us to about $45 million target for the year, which is a growth rate of more than 10%, consistent with our initial projection. In addition, during the third quarter, we saw gross margin improvement in our flow cytometry portfolio.

Gross margin once again were in line with our expectation in the mid-50s. This is a reflection of both the growth of our sample-to-answer businesses and the replacement of the high-margin LabCorp revenue with the lower margin from sample-to-answer and flow cytometry revenue. Obviously, revenue mix still plays a large part in our gross margin variability. While we generated a loss in the quarter, we were, as expected, cash flow positive.

Overall, it was a successful quarter that reflects the hard work the organization is putting into returning Luminex to sustained growth and profitability.

Today, I would like briefly to touch on 2 topics. First, an update on our robust product pipeline; and secondly, our longer-term expectation for the businesses. Regarding our pipeline, I'm very proud of the progresses we have made with VERIGENE II and ARIES in our molecular diagnostic businesses as well as with the SENSIPLEX, Guava Next-Generation and CellStream [Fast] in our Life Science businesses, which is how we refer to our non-MDx business generally and includes our LTG and flow cytometry portfolio. These next-generation platforms represent significant technology advancement in every major area of our diversified businesses.

With VERIGENE II, I'm excited to say that our VERIGENE II GI panel has now been submitted to the FDA, and I'm happy to let you know that we also expect to submit VERIGENE II respiratory panel by the end of this year. As I have said previously, we are planning on launching those 2 panels next year as close together as possible to generate maximum market impact once we receive FDA clearance.

In addition to those 2 assay, we are also actively working on the development of our gram-positive, gram-negative and its blood culture panels to expand the menu on our VERIGENE II system.

As a reminder, VERIGENE II is Luminex' next-generation multiplex, fully automated sample-to-answer IVD system that builds on the success of the current VERIGENE system. It features expanded panels and fully integrated sample processor reader and data analyzers. The unique flex capability of this system give us advantages in the current reimbursement environment and allow user to test and report only their pathogens of interest resulting in cost-effective clinical-relevant results.

Lastly, in our MDx segment, we received FDA clearance for our ARIES MRSA assay on September 25. This represents the 8th ARIES assay to be cleared globally and the 7th in the U.S. As you likely know by now, the ARIES system is a sample-to-answer, real-time instrument that can run both IVD and lab development tests. Designed to increase laboratory efficiency and show result accuracy and fit seamlessly into the modern laboratory, the ARIES system improves the laboratory workflow while ensuring rapid, actionable patient results. Luminex today remains the only company offering both targeted and syndromic testing for its customers.

In our Life Sciences businesses, we have previously communicated our plans to introduce a next-generation xMAP platform to the market in the second half of 2020. This new system is the next-generation of Luminex multiplex bead-based readers. It leverages our market-leading xMAP technology which is supported by more than 16,000 systems shipped over the last 20 years.

We are excited to launch a modern compact instrument that offers enhanced performance, supports the complete xMAP Assay menu with backwards compatibility and introduce new and exciting features such as the second reported channel to spark research innovation. We are making solid progress in meeting development milestones and have received positive feedback from our partners. We are involving partners in the development process to ensure that the product we bring to the market will meet the needs of their customers who are the backbone of our businesses.

We are also excited about our flow cytometry pipeline with expected launches of both Guava Next-Generation and CellStream Fast early next year. We are focusing resources on the image stream, which is a completely differentiated technology with no current competition. Our technology images sales inflow, allowing visual validation of scientific claims and producing statistically relevant imaging results with an ability to see rare populations that other imaging technology cannot.

In terms of our expectation of our businesses, we continue to expect that in the next 4 to 5 years, we will grow Luminex to more than $500 million in annual revenue with gross margin around 60% and operating margin near 20%. All the revenue growth contemplated to get there is organic, with any future acquisition opportunity being incremental to these figures.

We expect our molecular franchise, both automated and nonautomated, to grow around 15% to 20%, our partnership business to grow in the high single-digits and our flow cytometry businesses to grow in the low double digits. This revenue growth, coupled with margin expansion resulting from economy of scale we see in manufacturing, should provide the expected level of gross margin. And continued strong control of our OpEx, including our R&D spending will allow us to increase our operating margin to our projected levels.

Now Harriss will review the financial data, and afterwards, I will return with some final thoughts.

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [4]

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Thanks, Homi.

As Homi mentioned, consolidated revenue for the third quarter was $78.7 million, up approximately 9% for the quarter while absorbing the decline in LabCorp revenues of approximately $7 million. This reflects the addition of our new flow cytometry business which contributed $8.7 million for the quarter.

Flow cytometry revenue for the third quarter did fall short of our expectations, and as Homi mentioned, this is the primary driver to our missed revenue guidance for the quarter. However, on a year-to-date basis, the flow cytometry business is on track with our full year expectations, with over 10% growth in revenue over the revenue reported in the Merck financials on a year-to-date basis last year. We still expect the flow revenue to meet our $45 million target for the year which maintains our growth rate above 10%.

Our LTG revenue stream was $38.7 million, representing a 7% growth over the prior year quarter, mainly driven by growth in both consumable and royalty revenues. Our total molecular diagnostic revenue stream, which includes both automated and nonautomated products, was up 6%, excluding the impact of the LabCorp reduction in the current quarter. But the comparable was down 15% for the quarter with the LabCorp results reflected.

We had another strong quarter with our sample-to-answer portfolio which increased 27% over the prior-year quarter. The annual utilization rate per customer for our VERIGENE products increased 16% to approximately $121,000 per annum from the prior year. And for our ARIES product line, the annual utilization rate remained roughly flat to the prior-year quarter at approximately $55,000 per year.

We placed 31 additional sample-to-answer systems under contract in the quarter, light by our own standards, but which, as discussed previously, continues to support growth in future assay revenue. Interestingly, in the first 2 weeks of the fourth quarter, we closed contracts on almost 20 additional systems. We expect to finish the year with a total of approximately 200 additional systems under contract.

Turning to our revenue line items. System revenue grew 52% in the third quarter of 2019 as compared to the prior year driven by the acquisition of the flow cytometry business. Remember that the flow revenue streams are 90-plus percent system revenue and service.

During the quarter, we placed 255 multiplex systems, not including ARIES and VERIGENE systems, compared to 284 in the prior year quarter. Current quarter placements were within our previously communicated expectations of 225 to 275 multiplex systems per quarter.

Consumable revenue increased 15% from the prior year quarter driven primarily by higher bulk purchases from some of our large partners. Royalty revenue grew 8% for the quarter. As a reminder, total royalty revenue includes base royalties, coupled with audit findings, self-reported shortfalls and accrual adjustments. Base end-user sales reported by our partners were up more than 10% for the quarter to $149 million.

Similar to our molecular diagnostics revenue stream, assay revenue decreased 13% in the third quarter primarily driven by the expected departure of LabCorp revenues, which declined $6.9 million from the prior year quarter. Excluding this impact, assay revenue grew approximately 11% over the prior year and included a small amount of flow reagents as well.

Now turning to the income statement. Gross margin for the quarter was 53%, lower by 8 percentage points from the third quarter of 2018. This decline was primarily driven by the $6.9 million reduction in LabCorp assay sales and a change in sales mix weighted towards -- weighted heavier towards lower gross margin items.

Excluding the amortization of intangibles, OpEx was up $6.4 million or 17% relative to the prior year and included approximately $6.5 million of flow cytometry-related expenses not present in the prior year figures. We incurred an operating loss of $5.7 million,primarily due to the aforementioned gross margin compression and the operating expenses from the flow addition.

Our effective tax rate for the third quarter of 2019 was a benefit of 8%, reflecting the projected taxable losses in the U.S. in the third quarter of 2019. This compares to the prior year effective tax rate of 54%, which included impacts from the Tax Act provisions for the U.S. federal taxation of foreign intangible income and our mix of earnings in the U.S. and Canadian jurisdictions.

Absent significant discrete items, we expect our consolidated full year effective tax rate to be 10% to 20% which incorporates adjustments to the onetime impacts of the U.S. tax reform in the current quarter and adjustments to our overall tax expectations based on jurisdictional distribution of revenues and expenses. We continue to assess our business model and its impact in various tax jurisdictions.

Our balance sheet remains strong, with over $66 million in cash and investments after absorbing the recent purchase of the flow cytometry business.

During the quarter, we generated $9.4 million in cash from operations, incurred capital expenditures of $5 million and paid dividends of $2.7 million. This continued generation of cash in the face of modest losses is a great indicator of the residual strength of our business after LabCorp and shows our business model's capacity to adapt and to continue to fund operations on an organic basis.

And finally, some visibility into how we expect to finish the year. As we've indicated in our press release, we are adjusting our full year expectations to a range of between $334 million and $337 million. For some additional clarification into our adjustment, please consider that at the midpoint of our previous range of $340 million, we contemplated a more robust flu season, of which we have seen little impact so far relative to initial expectations.

As a reminder, in the first half of this year at the end of the 2018, '19 season, we saw a reduced volume of respiratory presentations. In the current season, we're seeing slight elevation compared with last year. We also took into account a slightly higher rate of growth within flow cytometry that was validated by our first half success, which was growing in excess of 30%. All of these factors have been incorporated into our modified range with an obvious narrowing as we approach the end of the year.

With respect to our particular revenue streams, currently, for 2019 we expect more strength in our LTG than initially contemplated. And where in prior calls we've called for total LTG revenues to be slightly down, we now believe that we could benefit from LTG revenues coming in flat to slightly up.

Secondly, and as we've mentioned previously, we expect our flow revenues to recover in the fourth quarter and to deliver approximately $45 million for the year, a growth rate in excess of 10% as initially expected.

And with respect to our molecular revenue, we expect our sample-to-answer revenue to be up in the mid-20s for the full year. But obviously, when LabCorp revenue is factored into the consolidated molecular revenue, we expect total molecular revenue to be down in the mid-teens.

One important factor to keep in mind is that we have experienced a lower-than-average respiratory season. The strength of the respiratory season and how it presents in the fourth quarter is the primary factor in how we might move from the bottom to the top of our range.

With respect to profitability, we anticipate that when we deliver on the significant revenue growth anticipated in the fourth quarter relative to the third quarter that we could be breakeven or better with continued control of our overall expense position.

Now I'd like to turn it back over to Homi for some final comments.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [5]

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Thanks, Harriss.

As we said at the beginning of this year, 2019 was going to be a transition year for Luminex. We have owned the majority of the financial impacts associated with LabCorp departure, which has impacted our revenue growth and our bottom line and cash flow this year.

However, as a company, I am proud to say that we have weathered the storm and are entering a new and transformative era for Luminex, a much stronger diversified company that will be offering exciting opportunities and new platforms across each of our product lines. In fact, next year will be the first time in Luminex' history, where we are launching 3 exciting new platforms across all of our portfolio, and I'm personally very excited for what is going to be happening here at Luminex over 2020 and beyond.

This ends our formal comments. Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Sung Ji Nam from BTIG.

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Sung Ji Nam, BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst [2]

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Sorry about that. I'm juggling multiple calls here, so apologies if I missed this. But going back to your sample-to-answer molecular platform for the quarter and for the year, I think -- just curious, are you still expecting roughly $100 million run rate exiting the year? Or is that -- has that been now revised given the -- your expectations for a lighter flu season?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [3]

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Yes. So Sung Ji, certainly -- let me actually start off by apologizing to everybody on the call. Our press release actually got out on the wire about 15 minutes early before market close, and we're working with our provider to determine exactly what happened. So I want to, number one, apologize to everybody.

Now to turn back to your question, is that yes, the $100 million run rate, obviously contemplated what I'll call a normal flu season. As of right now, we're hardly seeing anything. We're hearing bits and pieces of people seeing modest upticks in different regions around the country, but to be honest with you, here in the United States anyway, we're just not seeing much. And as a result, that number certainly could be lower than the $25 million that we projected in the fourth quarter, possibly $21 million, $22 million.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [4]

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Yes. Sun Ji, when we set up this target, we set it up about 2.5 years ago. And I believe the first couple of years, we grew the business very nicely in the range of over 30-something percent year-over-year.

Earlier, when we came this year, as Harriss mentioned in his script, we did not enjoy a strong respiratory season in the beginning of the year, neither we have seen it so far. We have seen it slightly elevated compared to last year, but it's not justified why -- or the reason why we are going to be in the $25 million for the quarter. And that's really the main reason to us to adjust guidance for the year because we've been impacted by that. I hope that answered the question.

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Sung Ji Nam, BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst [5]

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Yes, it does. Could you also maybe talk about was there any potential impact from -- given that your VERIGENE II is launching very soon, was there any impact from that in terms of your potential customers delaying their purchasing decisions?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [6]

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Yes. Actually, not. I actually indicated in my comments that for the quarter, we placed just over 30 systems, and why by our standards we placed another 15 or so in the first half of -- or the first -- yes, the first half of October. As of today, we've almost matched what we placed in the prior quarter only a month into the quarter.

So your worry is that we're cannibalizing sales or people are waiting to buy VERIGENE II because we filed and they're waiting. They're not waiting. They actually continue to sign up customers, and we continue to see success there.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [7]

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Yes. And also, just to remind all of you, when we are saying that we place, when we say place, it's contracted. It means somebody either paying for that or somebody's committed to basically a lease or a reagent agreement for many years. And actually, we believe we'll be very close to 200 systems, similar to the number contracted last year.

So the business in this respect, going well. I'm also expecting maybe we get some orders before the end of the year for the international market for the VERIGENE II. But again, I don't think that's a big impact on our number.

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Sung Ji Nam, BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst [8]

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Okay, great. And then lastly from me, just on your gross margins in the quarter. If I remember correctly, I believe you guys guided to a slight sequential increase this quarter versus last quarter. And then given a lot of the shortfall -- a significant portion of the shortfall is due to the flow cytometry business, was curious as to what was the kind of the driver of the lower-than-expected gross margin performance.

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [9]

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Well, if you look -- yes, if you look at the components of gross margin and you look at the concentration of system revenue and the additional concentration -- the incremental concentration of assay revenue, of which the majority of that is sample-to-answer revenue, that all 3 of those carry gross margins that are significantly less than where we fall, it becomes a mix challenge for us.

So as sample-to-answer increases, until sample-to-answer revenues, which are the fastest-growing component of all of our revenues, get up to the level in the aggregate, both ARIES and VERIGENE combined, where we sit today, increase there faster than anyplace else is going to create a modest drag on margins that are being offset by economies of scale as we grow. So it's sort of a push as they grow. But as they increase in concentration, it just -- the math pulls the margins down a little bit.

We're not worried where they think they're going to be. We think we have plenty of opportunity to increase margins, both in our sample-to-answer revenues but also within flow. And also, to be honest, within LTG and some of the systems we're producing. And with the launch of SENSIPLEX, we have opportunities to launch a system that should carry significantly better margins than the multiplex systems that we offer today.

So overall, I think you would expect -- as Homi mentioned in his 5-year target, you'd expect to see gross margins moving, incrementing towards that 60% level and beyond. Does that help?

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Sung Ji Nam, BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst [10]

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Yes.

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Operator [11]

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Our next question comes from Brian Weinstein from William Blair.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [12]

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Just to clarify a couple of the gross margin questions that were just asked. So where are you guys right now as it relates to sample-to-answer and flow on gross margins? And I recognize what you said on SENSIPLEX could carry higher gross margins, but Homi, you and I had a discussion about VERIGENE II and the impact that, that could potentially have as well. So can you give us an idea, when that product is launched, what that gross margin trajectory would look like as well?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [13]

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Okay. Let me start, and then I'll let Homi talk to you a little bit about SENSIPLEX.

So our aggregate flow margins are less than our reported margins today that are in the mid- to low-50s. So our flow margins are down in the 40s. We're working those up. But there's a high concentration of equipment. As you know, in most businesses that are equipment-heavy, gross margins aren't typically as high as where there's a significant consumable stream behind them. And we've committed to finding ways to find a recurring revenue stream there and drive those margins up.

In our sample-to-answer portfolio, it's still startup business-like. And those margins, although they do continue to increment upwards, in the aggregate, ARIES and VERIGENE margins added together are also down in the low-40s. And so as a result, the significant concentration of those margins, coupled with the aggregate system margins on our xMAP systems, when you add all those up, the math ends up getting you to margins that fall where we are today. But with opportunities, absent mix shifts, to continue to improve on those as the volumes increase across each of those portfolios. Does that help?

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [14]

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Yes, it does. And Homi, if you could talk a little bit about the opportunity with the VERIGENE II and the SENSIPLEX and what those potentially will look like from a margin standpoint when you launch them, and what the trajectory of those could look like as well?

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Nachum Shamir, Luminex Corporation - CEO, President & Director [15]

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Yes. Obviously, with VERIGENE II, there is less component of plastic, less packaging, et cetera. So we believe that the margin will have more than a couple of points compared to the VERIGENE I. And when Harriss mentioned that we are in the total sample-to-answer, around the 40s, obviously, VERIGENE I is a little bit above that.

Where we are pulled down a little bit is in the ARIES. But nevertheless, we think with the VERIGENE II, we will gain more than a couple of points in the gross margin. However, initial launch, it's all about volume. And as you know, we will have to own initially 2 lines. We will have to continue to support VERIGENE I as well as launching VERIGENE II. So I expect next year, we will be kind of remaining in this kind of similar gross margin. But when the volume of VERIGENE II will start exceeding VERIGENE I, then we'll see a significant improvement in the gross margin.

Now SENSIPLEX. And again, we are hoping, and I say hoping because we have not really released the prices to our partner, but we are taking an approach that the gross margin should be higher compared to what we are doing in the LX200 and FM3D, which are the equivalent kind of technology we are planning to do a launch into this space. So yes, we are, at least at this stage, contemplating higher gross margin in those items.

Also, a quick word about the flow cytometry. So flow cytometry business is, if you look at the equipment, is divided almost equally between image stream, which carry actually a fairly large gross margin, over 60%. Those main units are being sold between $0.25 million to $0.5 million, and they carry a very hefty gross margin. The lower end of that, which is more the Guava -- the Muse carries a lower gross margin. So it's, again, depending on the mix of the product, and et cetera.

So our overall benefit is, if we continue to -- the trend that we had actually almost in the last 2 quarters -- last 2 years, the royalties continue to grow nicely to us. And all of them, I think, in the last 2 years, at least, in average, they grew 5% to 7% on an annual basis. And I think the royalty will reach well over the 50s this year. That's also helping in the gross margin. So overall, I think as I said in my opening remarks, I think the storm is behind us and we are coming now to a much quieter water. And I think we are just -- from here, just moving forward almost to the promised land. You got it.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [16]

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I like the analogy there. And then as a follow-up, I just want to make sure I heard your comment appropriately. You obviously talked about the respiratory season. I hear you there. But did you say that even the flow business was maybe a little bit lower or a little bit lighter than what you guys had initially potentially expected based off of what you had seen early on? First, did I hear that comment right? And if I did, just what some of those variances might be relative to what your initial expectations were?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [17]

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Yes. So Brian, the way to -- let me give you a way to -- another way to think about it. Is at the midpoint of our range -- our expectations for flow, obviously, were a range as are the ranges that we provide. At the midpoint of our range, our expectations were that flow would produce a little more than the $45 million that we've talked about. Obviously, at the top end, that would have been higher. At the bottom end, it would have been a lot closer to almost exactly $45 million. So as we'd adjusted our range, we had to, number one, pull out. But the strength of the flow business remains, our ability to manufacture there remains.

The primary contributor to the low number in the third quarter was purely around order timing, and our expectation, as Homi said, was to rebound back into the fourth quarter, back up to that $12 million or so level, which is where we were in the prior 2 quarters.

So with that, I'm going to let -- if Homi has anything -- okay. So that's really it. I think that's what's going on there in flow. The business is strong, it's healthy, the sales force is engaged, the customers want what we have to offer, the image-based flow cytometers are being sold well and carry high margins. And overall, it continues to be a good business for us.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [18]

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That's good clarification.

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Operator [19]

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Our next question comes from Tycho Peterson from JPMorgan.

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [20]

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This is Julia on for Tycho. So maybe just to hone in on margins a little bit. I believe last quarter, you had flow cytometry gross margin of 43%. And this quarter, you were expecting an improvement because you basically ran through the inventory headwind. So just wondering why you're seeing a deterioration in the gross margin there contrary to prior expectations. And has there been any pricing deterioration on the product front,outside of the mix dynamics that you talked about?

And also, on VERIGENE, I believe several quarters ago, you actually called out the gross margin improvement there to be above 50% already. And obviously, now with margins at low-40s, as you talked about, just wondering has there been any sort of pricing deterioration on the VERIGENE front as well?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [21]

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Yes. So let me help you understand. Let's start with VERIGENE first. So what I said were the aggregate sample-to-answer margins were in the low 40s. That includes VERIGENE, that's well below 40% -- and I'm sorry, VERIGENE that's above 40% and ARIES that's well below 40%. You average those, you bring those 2 together, and you end up with aggregate flow -- sorry, VERIGENE II gross margins that are just above 40%.

With respect to flow, flow margins actually incremented up in the current quarter. They actually improved. But what they didn't do is improve up to the level where our gross margins were for the quarter. So as a result, you end up with a downward pull, an averaging down, if you will, mathematically that pulls the aggregate margin down as both sample-to-answer and flow are higher contributors to the total revenue mix than they had been historically. Does that help?

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [22]

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Okay, got it. And then regarding the sample-to-answer placement, the 31 systems, are you seeing any sort of changes in the mix of ARIES versus VERIGENE? And as we sort of look at the placement sort of cadence, obviously, this year, we'll continue to see a trend-down versus last year. So just -- I mean, we appreciate that you talked about the placements so far in 4Q. But just wondering, in general are you seeing any changes in the competitive dynamics? Are you changing any -- seeing any changes in your win rate?

And as we look at VERIGENE II, are you still targeting a multiplex launch once you have all the panels sort of approved? And now that you're targeting the RP panel approval by year-end, it does look like you'll miss most of the flu season and meanwhile, your new competitor entrant got their RP approval early this year.

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [23]

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So Julia, hang on, hang on. Let me stop you. Let us answer the -- this is a really, long complicated question, obviously. So let's -- let Homi answer the first one and then ask the second half of your question and we'll start over with a new question.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [24]

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A couple of things. First, as I said earlier, we're anticipating this year to have a similar system under contract as last year. So we have not seen a competitive -- and I've seen the survey you're saying about one of our competitors recently. But no, we have not seen any change in the dynamic in the market, neither the mix, okay? And actually, we are very, very surprised about that because our VERIGENE I is, as we said, it's not a fully automated system like some of our competitors. And we believe with the VERIGENE II, as a matter of fact, we can gain even a market share because it's a fully competitive system and capable of running flex pricing, as I say.

Secondly, it wasn't clear to me what you asked about the FDA. We submitted recently to the FDA our GI panel, and we are planning to submit to the FDA before the end of the year, the respiratory. As you know, the FDA taking at least 90 days to review it, so we are not planning to have respiratory until before the end of this year. The latest it can be, it can be by the end of the first quarter of 2020. We are obviously also hoping to receive before the respiratory, the GI panel that we just submitted late last month.

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [25]

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Got it, got it. The second part of my question was actually related to that. So I mean, given the new entrant, your competitor, they had their RP panel approved earlier this year. How concerned are you with your competitor front-running you for placement during the upcoming flu season?

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Nachum Shamir, Luminex Corporation - CEO, President & Director [26]

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I mean, so far, we continue to perform very well in this. We delivered a 27% growth. So I'm not seeing any different in this environment. We know our main competitor, but I think we have a big advantage compared to them with our pricing and flex pricing.

And this business, as I said, almost grew 30%-plus year-over-year in the last 3 years, so it will continue to be that. And we believe actually the VERIGENE II, who will be a fully automated system, with a full flex capability in pricing will continue to gain market share. So that's the only thing I can say here, Julia.

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Operator [27]

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(Operator Instructions)

Our next question comes from Brandon Couillard from Jefferies.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [28]

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A couple of clarifications on the fourth quarter guide, Harriss, if you would. Are you assuming that all $3 million of that flow order that was pushed out gets recaptured in the fourth quarter? Can you give us a little more color on whether that's just a couple of imaging instruments or a handful of Guava systems?

Number two, just to confirm the LabCorp headwind, I think, is maybe another $4 million in the fourth quarter?

And then thirdly, are you assuming what seems to suggest about 70 sample-to-answer placements in the fourth quarter?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [29]

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Yes. So let me help you with a couple of things. Number one, the question you're asking is how do you get from 78.7% up to 88% or above to deliver into our guidance range. And the answer there is, #1, our expectations are that flow shifts from the high-8s up to 12-plus in the quarter.

And it wasn't a delay of an order, because remember, there's lots of orders that go into a $3-plus million number. It's the timing of the closing of orders that we can then manufacture and fulfill, given that everything, with us, is pretty much manufactured on an order basis, so custom manufacturing, because the system configurations are very different. So we can prebuild a lot, but not everything.

And so as a result, because of the time it takes from initial engagement of a customer to close, which can be 6, 9, 12 months, the timing of when you'll finally close an order can vary. We found ourselves in the third quarter this year, where because we've accelerated or sped up our manufacturing process, yes, we could deliver faster, but our backlog coming into the quarter obviously was reduced a little bit. And the orders we had to fulfill were a little lower than expected, but that's all filled back up. So now, the expectations are we move back up to 12 so we get 3 or 4 of the $10 million growth that we're talking about.

The balance of that comes from growth in the Molecular diagnostics portfolio, from both flu revenues and incremental contracted systems that we've talked about, that we said many times, there seems to be a little confusion here between a placement and a contracted system.

But last quarter, we placed 31 contracted systems, which are systems that were part of a contract with committed reagent utilization over the next 3 to 5 years. We also sold some systems, too. Don't get me wrong. We placed more than 31. We just haven't talked about those in the aggregate because we're primarily concerned with the contracting because those -- there's what I'll call guaranteed recurring revenue there. In the first 2 weeks of this quarter, we placed another -- we closed another 15. In the first month of this quarter, we were almost to 30.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [30]

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Yes. But the idea is you are right about your number. We are targeting to be about 70 systems under contract for the quarter. That's what's going to bring us there, Brandon.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [31]

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Okay. And then just one for you, Homi. I understand you may not be in a position to really talk too openly about guidance for next year, but you had kind of talked about maybe a double-digit revenue growth number next year, given all the new product flow. Do you still think that's viable at this point as the LabCorp headwinds kind of anniversary next year?

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Nachum Shamir, Luminex Corporation - CEO, President & Director [32]

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Yes. Organically, yes. We are targeting to be in the low double-digit organically. But we have to remember, we still have some small impact of LabCorp for next year that can be between 2% to 3%. But overall, yes. We're also planning -- concerning OpEx, to hold the OpEx on the similar level of 2019 of 2020. And so we will hold the OpEx.

So the whole idea is that next year, we'll have a strong organic growth, as I said earlier in my day. We start improving our operating profit by basically holding OpEx and generating more revenue. And hopefully, we'll start seeing also a trend with the gross margin climbing 1 or 2 points mainly because of efficiency, more volume, as I said, maybe we'll be getting more royalty coming to the mix, a better improvement in the margin, and especially if you start seeing margin coming out of the VERIGENE II system that Brian asked before. So all of that.

So I'm really very feeling very good that the -- really the LabCorp departure and what it's created to our company, relative small company. When you have somebody with a $50 million revenue departing with such high gross margin, we survived it very nicely. And I'm feeling really good that we now are -- really, from Q4 even this year, we are stepping now to the new Luminex. We sold the new product line coming, and et cetera. There is no reason why we should not start seeing all those improvements helping us with the top, bottom line and gross margin so -- and cash flow, obviously.

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Operator [33]

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This concludes our Q&A session.

At this time, I'd like to turn the call over to the President and CEO, Homi Shamir, for closing remarks.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [34]

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Thank you, operator, and thank you, everyone, for your attendance on our earnings call.

We look forward to seeing you in person in the very near future. Have a great evening.

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Operator [35]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Good day.