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Edited Transcript of LMNX earnings conference call or presentation 31-Jul-19 8:30pm GMT

Q2 2019 Luminex Corp Earnings Call

AUSTIN Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Luminex Corp earnings conference call or presentation Wednesday, July 31, 2019 at 8:30:00pm 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

* 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

* 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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Good day, ladies and gentlemen, and welcome to Luminex Corporation's Second Quarter 2019 Earnings Conference Call. My name is Sonia, 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 Harriss Curie, Senior Vice President and Chief Financial Officer, for opening remarks. Please proceed.

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [2]

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Good afternoon, and welcome to Luminex Corporation's conference call to discuss our second quarter 2019 financial and operational results. On our call with me today is Homi Shamir, President and Chief Executive Officer.

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

As a reminder, today's conference call is being recorded, and a replay will be available for 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 claims the protections provided by Section 21E of the Securities Exchange Act for such statements. These forward-looking statements speak only as of the date hereof, and are based on our current beliefs and expectations and are subject to known or unknown risks and uncertainties, some of which are beyond the company's control that could cause actual results or plans to differ materially and adversely from those anticipated in the forward-looking statements.

Factors that could cause or contribute to such differences are detailed in our Form 10-K for the year ended December 31, and our quarterly reports on Form 10-Q filed with the 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, Harriss, and welcome to our conference call to discuss our second quarter operational results. We had a very productive and successful quarter across all of our product lines, delivering $83.1 million of revenue up 4% from the prior year and just above the top of our guidance range of $80 million to $83 million.

Our success was driven mainly by a greater than 30% increase in our sample-to-answer Assay revenue and by flow revenue of $13.2 million up over 35% from the prior year period, which offset $13 million reduction of LabCorp revenue from the corresponding prior year quarter. Fortunately, the majority of the unfavorable LabCorp comps are behind us, with the much smaller sums of approximately $7 million and $3 million still to occur in Q3 and Q4.

Gross margin were in the mid-50s as expected. This reflect the loss of high-margin LabCorp revenue and it's offset with revenue from the lower margin flow business. Flow margin improved by 7 points from 36% last quarter to approximately 43% this quarter. Our leadership team remains laser-focused on improving margin across all our revenue stream, and as a result, we expect modest improvement in future quarter as well.

While we reported a loss of just under $5 million, we still generated positive cash flow in the quarter, nearly $2 million as we expected. We anticipate that we will, once again, return to profitability by the fourth quarter, and we will continue to generate positive operating cash flow.

Overall, it was very successful quarter that reflect the hard work the organization is putting into returning to Luminex -- to sustain growth and profitability. Consistent with the margin improvement, we are seeing with our flow cytometry businesses, the integration of this business is proceeded extremely well. Integration is now substantially complete, and the acquired businesses is now running on our system under our processes and completely under our administration.

As we wrap up this effort, we will be able to redirect the team, work on this integration to other outstanding opportunity that will help to improve revenue growth, profitability and cash flow generation that we know our investors value and expect.

Turning to regularity submission, as we reported on July 1, we filed our MRCA Assay with the FDA. At this time, the MRCA Assay is the last planned regulatory submission on the ARIES system, absent, the identification of other meaningful opportunity in this platform. Although ARIES revenue are small component of our sample-to-answer portfolio, customer benefit from being able to scale up and down with our unique portfolio selling approach given that we are the only company that is able to combine both targeted offering with ARIES and syndromic test with both VERIGENE and ECCMID. In addition, we anticipate filing our VERIGENE II enteric panel FDA submission later this quarter, followed by VERIGENE II respiratory panel in Q4. And we continue our R&D work on our Blood Culture portfolio, which will have gram-positive, gram-negative and fungal component. There are certainly other exciting Assays to be launched, but it's still a bit too early to discuss them at this point. We are also continuing the development for our SENSIPLEX system, and the system is ready for initial evaluation and testing by several of our partner over the next 2 quarter with a full partner evaluation in Q1 of next year. The research market is excited about this product, and we anticipate expanding the market opportunity for our bead-based multiplex platform with our commercial launch with our partner before midyear of 2020.

Given our pipeline of new innovative product, our current success in the LTG, MDx and flow businesses and the fact that we will finally have the year-over-year LabCorp comparison burden behind us, we are confident that we will return to an accelerated organic growth in 2020, while benefiting from a stable and improved gross margin position.

As we strive towards our target of $0.5 billion of revenue in the next few years as well as return of gross margin to at least 60% and operating profit target of 20%, we felt it was prudent to adjust our dividend. Given our confidence in our continued ability to generate cash, we announced today that we have increased our quarterly dividend by 50% to $0.09 per share. We are very excited and confident in the future of Luminex and want to benefit our shareholder immediately with an increased return. With that, I will turn it over to Harriss.

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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, revenue in the second quarter was above the upper end of our expected range. Consolidated revenue for the second quarter was $83.1 million up 4% for the quarter, reflecting the addition of our new flow cytometry business, partially offset by the not unexpected reduction of $13 million in LabCorp revenues. In the second quarter, flow cytometry contributed $13.2 million. This represents 37% growth over the revenue reported in the Merck financials last year, and over 30% on a year-to-date basis. This level of growth is unlikely to continue, but we still expect the flow revenue stream to grow on a double digits this year.

Our LTG revenue stream was approximately $37 million, flat for the quarter, but with 11% growth in royalty revenue and 16% growth in consumable sales that was expectedly offset by more than a 30% decline in multiplexing system placements. Our Molecular Diagnostics revenue stream was up 13%, excluding the effect of the LabCorp production, but down 23% for the quarter when that reduction is taken into account.

Our sample-to-answer portfolio increased by 29% for the quarter, and the annual utilization rate per customer for our products remains strong with our VERIGENE products at $117,000 per annum, up 8% from the prior year; and our ARIES product line down slightly at $52,000 per year.

During the quarter, we placed under contract, approximately 50 additional sample-to-answer systems, further augmenting the recurring revenue stream of Assays.

Turning to our revenue line items, system revenue increased 57% in the second 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 second quarter, we placed 219 multiplexing systems, not including ARIES and VERIGENE systems compared to 361 in the prior year quarter. This is mainly the result of several large purchase orders during the prior year quarter from several of our large partners that did not recur in the current quarter. Also as a reminder, we're expecting approximately 100 less FLEXMAP 3Ds for the full year 2019 as a result of the substantial completion of Thermo's upgrade cycle. Included in the system revenue, our sales of our xMAP systems, sales of both our ARIES and VERIGENE systems, sales of our flow systems and a raise in rental allocation for those systems placed under reagent rental agreements.

Consumable revenues increased 16% from the prior year quarter driven primarily by higher bulk purchases from several of our large partners.

Royalty revenue grew 11% for the quarter, reflecting an increase in base royalties of $1.4 million. As a reminder, total royalty revenue includes base royalties coupled with audit findings, self-reported shortfalls and accrual adjustments. Base royalties represent over $140 million of reported end-user sales reported by our partners, which were up nearly 10% for the quarter.

Similar to our molecular diagnostics revenue stream, Assay revenue decreased 22% in the second quarter, primarily driven by the expected departure of LabCorp revenues, which declined approximately $13 million from the prior year quarter. Excluding this impact, Assay revenue grew 18% over the prior year, and included a small amount of flow reagents as well.

Now turning to the income statement. We posted gross margins of 54% for the quarter, down by 8 percentage points from the second quarter of 2018. This decline was primarily driven by: number one, the $13 million reduction in LabCorp Assay sales, which typically carry a much higher gross margin than our corporate averages; number two, the absorption of the flow cytometry business, which carries gross margins below our historic corporate averages; and number three, a change in sales mix weighted heavier in sample-to-answer sales. Sample-to-answer Assays carry a lower gross margin relative to Luminex's historic gross margins as well, and therefore, cause a margin impact with changes in sample-to-answer sales mix.

Our acquired flow cytometry margins were approximately 43% for the 3 months ended June 30, 2019, an improvement of approximately 7 percentage points from the 3 months ended March 31, 2019.

Net of integration related activity during the quarter, flow margins for the quarter would have approached 47%. Additionally, our core gross margins were 57%, down from 62% last year. This was not unexpected as our sample-to-answer portfolio grew as a percentage of total core business revenue, and we incorporated the reduction in the higher margin LabCorp revenue.

Improvements in flow margins for the quarter were driven primarily by the elimination of the fair value step up of inventory that was almost fully absorbed in quarter 1 and had a little impact in quarter 2, and approximately $0.5 million of non-recurring integration expenses that hit COGS in the first quarter. We anticipate continued improvements in flow gross margin as we move forward.

Our operating expenses for the second quarter showed an increase in both R&D and SG&A expenses primarily due to the inclusion of the flow cytometry business, clinical trial activity and a number of limited integration costs.

Overall, OpEx was up $9.5 million or 23% relative to the prior year, and included just over $7 million of flow cytometry-related expenses and another incremental $2 million related to clinical trial activity. As we've mentioned previously, we were engaged in 3 clinical trials during the quarter and do not anticipate that this level of spending on clinical trials will continue. Operating profit declined $13.6 million for the quarter to an operating loss of $5.8 million, primarily due to the aforementioned gross margin compression and operating expense increases relative to the flow addition.

We anticipate that as we bring flow margins back up, continue to improve our sample-to-answer margins, benefit from further growth on our revenue streams and complete the concentrated clinical trial activity that operating margins will improve significantly.

Our effective tax rate for the second quarter of 2019 was a benefit of 17%, reflecting the projected taxable losses in the U.S. in the second quarter of 2019. This compares to the prior year effective tax rate of 28%, which included a net discrete tax expense of $9 million -- sorry, $900,000, primarily related to the results of a Canadian income tax audit.

Absent discrete significant items, we expect our consolidated full year effective tax rate to be 10% to 20%, which incorporates adjustments to the one-time 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 $63 million in cash and investments after absorbing the recent purchase of the flow cytometry business. We generated $1.6 million of cash in the quarter, inclusive of capital expenditures of $4.3 million and dividends paid in quarter 2 of $2.7 million.

Now some visibility into the third quarter of 2019. For the third quarter, we expect to deliver total revenue of between $80 million and $83 million. We expect system revenue to be up with the base business down slightly, but elevated by the contribution from the flow revenue stream as more than 70% of flow revenues are derived from system revenue. Consumer revenue is expected to be flat in comparison to the third quarter of last year. We anticipate the total royalties would be up modestly versus the prior year quarter. As you know, included in aggregate royalty revenue, our audit findings and accrual adjustments given the recent changes in accounting rules.

For Assay revenue, we expect to see a $7 million headwind from LabCorp from the third quarter. The third quarter should be the last material quarter of this headwind. With respect to profitability, we expect modest improvements in gross margin from the second quarter as the manufacturing service agreement with MilliporeSigma and its markup concluded at the end of the second quarter. The above factors will be tempered by the fact that our 2019 growth is expected to be derived primarily from our sample-to-answer franchise in the presence of the flow revenues, both of which have gross margins below our recent corporate averages and can represent 1/3 of total revenue for the quarter. Obviously, this gross margin compression affects overall profitability. We do, however, expect to be operating cash flow positive for the year.

The final step to the integration of the flow business acquired, and as you will recall when we announced the deal, is a purchase of approximately $8 million of inventory manufactured on our behalf by Merck. With this purchase, all flow manufacturing will have officially transferred to Luminex, and we will have officially completed the deal. However, it causes a significant impact on third quarter cash flow.

From an earnings standpoint, we should experience another quarter of breakeven or loss. Stabilizing factors include the volumes and margins of the flow business, returning to a steady-state, completion of integration activity and a further unexpected rise in overall volumes across the entire business, giving us the added benefits of economies of scale.

We're paying careful attention to operating expenses, margins and cash flow as our top priority, and we are committed and confident that we'll return to sustainable and growing probability by the end of the year.

Finally, we'd like to reaffirm of our full year guidance of $337 million to $343 million.

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 I mentioned earlier, we are pleased with our second quarter result, and our continued progress across the company. I'm excited about the prospect for the future, and emerging in 2020 and beyond as a much stronger company. For the rest of this year, we will continue to grow our sample-to-answer portfolio, prepare for the launch of VERIGENE II and SENSIPLEX as well as focus on supporting our partner and expanding our footprint in the life science space. By the end of this year, Luminex should demonstrate accelerated organic growth and improved gross margin position and a return to profitability and increased cash flow. Our confidence in those outcomes has provided the opportunity to increase our dividend and share our success with our investor.

I'm delighted to lead a great company with the dedicated employees, who remain committed to achieving our long-term objective. With our innovative technology and strong management team, I'm confident in our ability to achieve our objective.

This end 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 with BTIG.

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

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Congratulations on the quarter. Maybe starting with the flow cytometry business. Obviously, you're seeing very strong growth here. I -- definitely exceeding my expectation. Was curious, in terms of the growth rate here and you talked about, this is not likely to be sustainable, but is this what you had anticipated before? Or are there kind of additional insights you might have in terms of how the portfolio you have and the markets that you are adjusting are kind of playing out?

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

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No. Obviously, it's a -- we did not thought that the Q1 and Q2 will be so strong, especially Q2, okay? Sung Ji, in Q2, I think we got some benefit that we have a better control on the manufacturing, and we really manage to ship. Normally the flow cytometry business took a while to ship the product to the customer. So we've been able to get all there that normally take longer time to ship them and ship them much faster. So that's one.

Secondly, as we keep saying, I think the business will be going anything between the 10% to 20% this year compared to last year. Q3, we anticipate to be relatively flat, even slightly decline and then a strong quarter to Q4. But we are on target to where we think, we're going to do it. And now that also we are benefit to really administrating and controlling the business and ever -- financial, for example, we know now better, anticipating the forecast and don't need to Merck to enter the forecast and et cetera for us. So we have a better grip of that. Nevertheless it's turning to be a very nice acquisition. Biggest thing now is to continue to integrate it into the Luminex and improve gross margin without really the TSA that we had still to pay Merck, probably the gross margin was 46%. I'm looking forward to start seeing that some -- we start manufacturing the product across the street. But again, we have not started shipping it to customer because we need to depleted the inventory that we got from Merck. So eventually, I think, when we ship product that's been manufactured in Austin, we should start seeing also additional improvement in gross margin. But so far, maybe, beginner's luck, but it was very good for us.

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Sung Ji Nam, BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst [4]

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Great. And then maybe on the sample-to-answer side on the margins, is there still a significant headroom for margin improvement there? Just curious. Are there opportunities in terms of manufacturing, et cetera? Or is it going to be largely driven by volume at this point?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [5]

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So Sung Ji, there are -- yes, there are opportunities of the -- don't think of it in 10s of points. Think of it in single-digit point improvements from where we are now. So it's -- yes, there are opportunities for improvement, but not another 10 point jump, I wouldn't think.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [6]

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Yes. But then when you look at it, you have to look at too early on. The VERIGENE -- the VERIGENE I, for sure, it's keep improving, while ARIES is not a great margin for us. And we need to start, and we're doing a lot of things to improve. Both of them will gain full, eventually, volume of manufacturing but end of the day, when we have VERIGENE II in the field, we will gain additional point of gross margin because there is less plastic, less packaging, less labeling and I cannot wait to start seeing VERIGENE II. Although, to remind you initially we will have to I -- for the first couple of years, VERIGENE I and VERIGENE II. So again, some of them will pull the margin down, but yes, we have done a really nice progress in the gross margin there.

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Sung Ji Nam, BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst [7]

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Great. And then just lastly from me, you saw a very strong royalty-bearing end-user sales this quarter. And so was curious, do you have a sense of what's driving that? What type of customer segment might be driving that growth? If -- do you see that as sustainable going forward as well?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [8]

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We don't -- certainly, we still expect our end-user sales to grow in the high single-digit rate. So what you would expect is to see continued growth in those reported end-user sales in the long term in that 6% to 8% range. Now the current quarter was spread reasonably evenly across both the diagnostic and life sciences segment. So overall, nothing abnormal. Some spikes in the current quarter. Remember, our -- these are reported end-user sales by our partners that then contribute to both adjustments in the accruals, which is within royalty revenue because now we accrue royalties for the quarter as opposed to basing them on partners direct reported end-user sales. So there's a couple moving parts there, but overall, it was relatively evenly distributed across the markets that we serve.

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Operator [9]

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And our next question comes from Tycho Peterson with JPMorgan.

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [10]

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So this is Julia on for Tycho today. My first one maybe, following up flow cytometry. I think you mentioned that you expect flat growth in 3Q and then a strong 4Q. Just wondering, is that normal seasonality? Or are there other one-time dynamics that you'd like to call out?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [11]

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Yes. So let me clarify something that may not be completely clear, is that what we expect is for flow cytometry to be flat relative to last year's flow cytometry not flat relative to the second quarter of this year. So it's possible that it will be down a bit from where we reported in the second quarter of this year and then for the year, given a base of right at $40 million last year that was all reported in the Merck financial statements, we expect some place between 10% and 20% growth, as Homi just said. We should be someplace between $5 million and $10 million of growth off of the $40 million base from the prior year for the full year. Does that help?

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [12]

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Yes, okay. So then I'll. And...

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Nachum Shamir, Luminex Corporation - CEO, President & Director [13]

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And Julia, normally Q4 in the flow business is a strong quarter because people trying to buy capital equipment before the end of the year. They're trying to use their budget. So that's why we anticipate Q4 to be a very strong quarter.

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [14]

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Third quarters are typically lighter. Fourth quarters are typically strong. So it -- and given our ability, as Homi mentioned earlier, our manufacturing ability to take orders and ship them faster than they ever were able to do previously, it gave us a little advantage. And so there certainly could be revenue that was in the second quarter that typically would have fallen in the third quarter. So there's a little bit of shifting there and that had a little bit of effect on the second quarter as well.

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [15]

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Got it. And then in terms of gross margin, I heard you when you said you do expect the gross margin to improve once the inventory headwinds are behind you. But specifically, what do you think is a more normalized gross margin profile for our flow cytometry?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [16]

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For flow, approaching 50% without consumable revenue as consumable revenues add obviously there is the ability to step that up further. For the company, we're talking about a 60%, maybe better. Again, depending on mix and other things. So in the long term, for the company, you should think about -- in your long-term models, you're looking out several years, you're 60-plus for flow, you're looking at flow approaching 50% in the longer term without the addition of consumables. And once consumables are added, and we talked about that's an opportunity that we have given that consumables are a very small portion of the flow mix today, you could see those drift further as well.

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Ruizhi Qin, JP Morgan Chase & Co, Research Division - Analyst [17]

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And so what's your progress in terms of introducing consumables for flow cytometry?

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Nachum Shamir, Luminex Corporation - CEO, President & Director [18]

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Yes. We are evaluating what is the best approach and how to do it. And so we're still evaluating, but it will be a while until we make the decision. It's -- obviously, we need to see that we are not competing with our partners. So -- and also we are focusing a lot on the launch of the SENSIPLEX, that's our priority there. So there's a lot of things in the mix here.

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [19]

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So don't think of flow consumables as a next year event. Think of it as 2 or 3 years from now.

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

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Got it. And then finally, as you guys gear up for VERIGENE II and the SENSIPLEX launch next year, what is your expectation in terms of the gross margins impact from these 2 new product launches?

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

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SENSIPLEX is, obviously, going to be a better margin product than our current xMAP portfolio. So we think we'll get some lifts from all of that, actually. There should be -- both product sets will have gross margins in excess of recurrent margins of the systems that they are and portfolios that they're replacing. So when you think of those, you think at capacity, not for product #1, off the line. But overall in, we believe that we will have a margin advantage as those get launched and accepted in the marketplace.

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Operator [22]

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(Operator Instructions) And our next question comes from Brandon Couillard of Jefferies.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [23]

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Homi, 2-part question for you on the sample-to-answer business. First, you've sort of seen the placements, the placement trend continues to sort of trend down here quarter-over-quarter. Can you sort of give us your expectation for placements in the back half of the year? And then secondly, if I look at the 48 placements you had in the quarter, but the number of active users only grew by 15 accounts sequentially, which is much slower trend. So can you sort of help us reconcile the delta there? And whether there -- you're placing more systems with existing users? Or perhaps there is a competitive dynamic that where you may have lost some placements?

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

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We have not seen competitive that we lost, let's start with that. We are anticipating to be close to 200 system, and we are not placing, let's say, repeat something that we are different from the competitor. We are basically contracting system. It means somebody that buying it or committed to something like 3 to 5 years contractual on that. And obviously, if you look at the utilization of the system, they continue to grow very nicely. Currently, and as we look at that, we have just a number that -- a review today. We have 612 contract system in the last 30 months, meaning since the acquisition of Nanosphere, which was 3 years ago, but it was -- we say, 30 months, we contracted 612 systems. That's tremendously, and that's we're talking about Nanosphere system, we are building a very nice portfolio there. So again, I think this year we will place under contract close to 200 system. And behind that, yes, we see some customer who were under contract to decide and that's the beauty of our portfolio and that's what unique there Brandon that some customer who have a good success in VERIGENE or ARIES approaching ourselves for Austin and asked them to provide either the ARIES or the VERIGENE, which they don't have. So that's really part of the success. But Assay growth-wise during this quarter at 33%. So we continue to track and call this business extremely nicely.

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [25]

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The one thing, Brandon, you have to consider is that we talk about a contracted system, it doesn't necessarily mean yet that the contracted system is active on day 1 after that. So we contracted for a number of systems this quarter. Those systems will become active customers over the next quarter or so. Same thing as the ones that have happened in previous quarters. So there's not a direct correlation between contracted system and an increase in active customers. I recognize that active customers in the second quarter, the increase in that number is relatively low, but certainly, we're not losing customers. In our total active customer base, the one thing that you'll note, if you look all the way back, and as Homi mentioned, when we bought them, that number has gone up every quarter since we bought them for the past 3 years. So we are confident that, that will continue.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [26]

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. Okay. That's very helpful. Then 2-part question, follow-up for you Harriss. As part of the guidance goes, it implies that fourth quarter revenues are a step up about $11 million to $12 million sequentially, can you sort of speak to your level of confidence in that sequential bump? And what areas of the business that might manifest most -- all that, that can be attributable to flow?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [27]

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No. Certainly component's attributable to flow. A component is attributable to the beginning of the respiratory season and the spikes there that we see every year in revenue. We talked about some flatness in the LTG and increases in LTG as well. So we'll see increases in consumable revenue, we believe. The continued increases in royalty revenue. So effectively, Brandon, it's all across the business with more focus within molecular diagnostic, sample-to-answer and in flow.

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Nachum Shamir, Luminex Corporation - CEO, President & Director [28]

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But historically, if you look at that Q4, by far, is our strongest quarter. You have to remember now that we have a chunk of more life research coming out of the LTG and the flow cytometry. Bigger part there that it's really trending to all the time in the Q4. And on top of that, as Harriss said, the respiratory season, so that's the moment, that's our estimate.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [29]

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Okay. And then do you still feel comfortable that you'll be approaching that $100 million run rate for sample-to-answer by the fourth quarter? And then Harriss, could you give us some ballpark of where you think operating cash actually shakes out for 2019?

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Harriss T. Currie, Luminex Corporation - CFO, Senior VP of Finance & Treasurer [30]

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The exact number for operating cash flow, I'm not prepared to give you. But I'm prepared to tell you that we should be close to breakeven for operating cash flow for the full year. We think that operating cash flow in the third and fourth quarter should be positive. There are some factors there that -- for instance, I mentioned the purchase of the incremental $8 million of inventory from Merck in the quarter for inventory that they built up for us. That's a big factor in third quarter operating cash flow. But overall, our operating cash flow is healthy. We believe moving into 2020 that, that will continue to stabilize and increase as we return to profitability as gross margins continue to expand and as we continue to exert a very firm grip on operating expenses and for the entire company, the entire portfolio.

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Operator [31]

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And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call over to Homi Shamir for any closing remarks.

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

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

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Operator [33]

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