OraSure Technologies, Inc. (NASDAQ:OSUR) Q3 2023 Earnings Call Transcript
OraSure Technologies, Inc. (NASDAQ:OSUR) Q3 2023 Earnings Call Transcript November 7, 2023
OraSure Technologies, Inc. beats earnings expectations. Reported EPS is $0.15, expectations were $0.07.
Operator: Good day, and thank you for standing by. Welcome to the OraSure Technologies Inc 2023 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Jason Plagman, Vice President of Investor Relations.
Jason Plagman: Good afternoon and welcome to OraSure Technologies third quarter 2023 earnings call. Participating in the call today for OTI are Carrie Eglinton Manner, our President and Chief Executive Officer; and Ken McGrath, our Chief Financial Officer. As a reminder, today’s webcast is being recorded, and the recording can be found on our Investor Relations website. Before we begin, you should know that this call may contain certain forward-looking statements, including statements with respect to revenues, expenses, profitability, earnings or loss per share and other financial performance, product development, shipments in markets, business plans, regulatory filings and approvals, expectations and strategies. Actual results could be significantly different.
Factors that could affect results are discussed more fully in the OTI’s SEC filings, including its registration statement, its annual report on Form 10-K for the year ended December 31, 2022, its quarterly reports on Form 10-Q, and its other SEC filings. Although forward-looking statements help to provide more complete information about future prospects, listeners should keep in mind that forward-looking statements are based solely on the information available to management as of today. OTI undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call. With that, I’m pleased to turn the call over to Carrie.
Carrie Eglinton Manner: Thank you, Jason and thanks to everyone for joining us today. We are pleased to provide an update on the progress OraSure's making on the three pillars of our strategic transformation. One, strengthening our foundation; two, elevating our core growth; and three accelerating profitable growth. A few notable highlights during the quarter include, we generated $37 million of operating cash flow in Q3 and grew our cash balance to $225 million. We continue to execute on our COVID-19 contract and we delivered stronger-than-anticipated NTELOS volumes during the quarter. And in September, we received an award for $5.7 million for future orders of IntelliCabCOVID-19 test from the U.S. government as part of the reopening of covitest.gov.
We delivered core revenue growth of 7% on a year-over-year basis. We continue to unlock cost savings as part of our enterprise-wide focus on driving improved operating efficiency. And with our stronger balance sheet we are investing in our internal innovation road map and evaluating external partnerships and investments to expand and strengthen our portfolio of assays and sample management solutions and services in order to accelerate our long-term growth. Starting with cost as we continue to strengthen our foundation we remain highly focused on delivering greater operating efficiency, including reductions in our cost structure for both production and nonproduction related expenses. During the quarter, we successfully completed the final milestones included in our contract with the U.S. Department of Defense related to the completion of our automation capabilities and capacity expansion at our Opus Wave facility in Batam Pennsylvania.
Additionally, we have already collected the final $24 million of milestone payments here in Q4. With this phase of the expansion completed, we expect to make further progress in consolidating our manufacturing footprint to drive additional efficiencies and cost savings. Over the last year we have made tremendous progress in establishing an enterprise-wide mindset that is focused on continuous improvement in operating efficiency. We expect to generate additional productivity enhancements over the coming years including further leveraging our automation capabilities consolidating facilities and controlling our nonproduction costs. These initiatives give us confidence that we will achieve our target of operating cash flow breakeven for our core business by the end of 2024.
Moving to COVID-19, our Intelliflo volumes were stronger than expected generating $50 million in revenue in Q3. Our relationship with the U.S. Department of Health and Human Services continues to be positive. and we have good visibility to order trends that could complete the remaining portion of our existing contracts during the first half of 2024. Additionally, as I mentioned earlier in September we received an award for $5.7 million for future purchase orders from the US. government four Covent tests that are available for free to households across the US as part of the reopening of covidtest.gov. And on the product side the US FDA approved the shelf life extension of Intellis Slob from 18 to 24 months in September. Looking at our core business which excludes COVID-related products total core revenue in Q3 grew 7% on a year-over-year basis.
In our HIV franchise the Together take Me Home program continues to demonstrate strong traction in expanding access to HIV testing to at-risk and underserved populations. And we look forward to continuing to collaborate with our partners as we enter the second year of this important 5-year initiative. We believe the positive outcomes from this program could create additional opportunities for our infectious disease business. Our differentiated HIV product also continues to resonate in international markets which contributed to our growth in Diagnostics in the quarter. Additionally, we are expanding our menu of tests available in international markets through a new partnership agreement that will launch late this year. Through this partnership, our international team will be able to offer three new infectious disease tests for syphilis hepatitis B and hepatitis B in key markets through our existing sales channels and existing client relationships and new opportunities.
We believe this expansion of our international test portfolio can provide additional fuel for future growth. Additionally, in our substance abuse testing portfolio we are pleased to announce the expansion of our point-of-care toxicology offerings through a distribution agreement with the manufacturer of these devices. This agreement allows us to leverage our sales team and channel presence and expand our services in the substance abuse testing market. As part of this agreement we will add several oral toxicity panels covering a range of drugs including THD opiates and amphetamine. Shifting to molecular. We continue to see signs of stabilization in our sample management solutions, despite softness in some end segments that we've discussed previously.
And we are seeing positive momentum in establishing new partnerships and commercial relationships as well as extending existing relationships. As an example, we are pleased to announce, a multiyear extension of our relationship with Ambry Genetics. Ambry will be using our Oragene Dx device for a variety of testing related to hereditary cancer, rare hereditary disease, reproductive health and pediatric disorders. As we continue to expand and diversify our customer base, we're also proud to share the recent success we've delivered in the Companion Animal segment. Our PERFORMAgene product has been selected as the sample collection device for new canine health offerings that are being launched by two leaders in the space. Overall, we continue to make progress on our initiatives to accelerate profitable growth, through investments organically and inorganically including, external investments and potential acquisitions.
Our strong balance sheet and positive cash flow generation are key differentiators in the current market and economic landscape. We believe that these factors as well as our strong client and channel relationships, our track record of execution and consistent delivery for our customers plus our experience navigating complex regulatory approval processes, positions OTI to be the partner of choice to help power precision health into the future. With that, I'd like to turn the call over to Ken, to discuss our financial results and guidance.
Ken McGrath: Thanks, Carrie. I'm happy to discuss our results for the third quarter of 2023 and provide updates on our financial outlook. In Q3, we delivered total revenue of $89.2 million. COVID-19 products predominantly InteliSwab contributed $50.2 million of revenue in the third quarter. Purchasing patterns under our contract with the US federal government were stronger than expected during the quarter. Total core revenue, which excludes COVID-19 products was $39 million in the third quarter. representing 7% year-over-year growth. Within core revenue our diagnostics products generated $19.6 million of revenue in Q3 and grew 59% year-over-year. This growth was driven by HIV test sales in the US and international markets. Looking at our molecular sample management products.
Revenue in the third quarter of $15.2 million, decreased 4% on a year-over-year basis but increased 17% sequentially, which was in line with our expectations. We continue to see muted purchasing patterns, from a few large customers during the quarter. That said, we are also seeing some signs of stabilization with current customers, as well as opportunities in new areas as Carrie discussed. From a gross margin perspective, our GAAP gross margin in the third quarter was 49.7%. Non-GAAP gross margin was 50% in the third quarter due to improved operating efficiencies including lower manufacturing scrap expense. Looking ahead to the fourth quarter, we expect gross margin to moderate back to the mid-40% range due to product mix shifts including, the anticipated reduction in InteliSwab volumes.
As a reminder, we have expanded our gross margin from the high 30% range at the beginning of 2022 to the mid 40s in 2023. And we believe we can drive additional margin expansion over the coming years. We remain focused on delivering efficiencies across our enterprise, including consolidating sites, standardizing products, driving procurement savings and further leveraging our automation capabilities at our Opus Way facility. Shifting to operating expenses. Our GAAP operating expenses in the quarter were $33.4 million, which includes $6.2 million for impairment of acquired intangible assets. Our non-GAAP operating expenses were $24 million in Q3. The sequential decline in non-GAAP operating expenses was primarily due to a significant decrease in external legal fees.
We continue to focus on driving additional efficiencies in our non-production expenses in coming quarters. These cost savings are important as we look to utilize our cash to invest in growth and in our goal to achieve operating cash flow breakeven in our core business by the end of 2024. Our GAAP operating income was $10.9 million in Q3, which is up from $0.9 million in the year ago quarter. Non-GAAP operating income was $20.6 million in Q3, which is an increase from $11.7 million in Q3 2022. We ended the quarter with zero debt and total cash, cash equivalents and short-term investments of $225 million, which is up from $186 million last quarter. The increase in our cash balance during Q3 was primarily driven by $37 million of operating cash flow including a reduction in our inventory levels.
We also received $6.5 million in Q3 related to the achievement of milestones at our Opus Way facility. Furthermore, during Q4 we collected the final $24 million in milestone payments related to this project. Turning to guidance. We are guiding to fourth quarter revenue of $71 million to $76 million, which includes InteliSwab revenue of $38 million to $41 million. We expect Q4, core revenue of $33 million to $35 million and the midpoint implies core revenue is approximately flat on a year-over-year basis. Finally, as part of our ongoing focus on enterprise-wide operating efficiency, we are on track to exceed the $15 million of annualized cost savings announced in Q1 2023. With that, I'll turn the call back to Carrie to conclude.
Carrie Eglinton Manner: Thanks Ken. During the third quarter, we delivered significant progress on our strategic imperatives. We continued to strengthen our foundation through strong cash flow generation and improved operational efficiency. We delivered some examples of our plan to expand the portfolio of tests that our sales team can provide to our clients and we completed the final milestones included in our contract with the US Department of Defense related to our capacity expansion at our Opus Wave facility. Overall, we are confident OraSure is well-positioned to execute on our vision of transforming health through actionable insights, powering the shift that connects people to health care wherever they are, and our mission of improving access quality and value of healthcare with innovation in effortless tests, sample management solutions and services is aligned with where health care is headed in the US and globally over the coming years.
With that, I'm pleased to turn the call over to the operator, for Q&A. Operator?
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