Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Pat Balthrop - President and CEO

Harriss Currie - CFO

Mimi Torrington - Director of IR

Analysts

Daniel Owczarski - Avondale Partners

Stephen Simpson - Northland Securities

Dan Leonard - First Analysis

Matthew Scalo - Canaccord Adams

Brian Weinstein - William Blair

Dana Walker - Kalmar Investments

Jim Stafford -Wells Fargo

Luminex Corporation (LMNX) Q4 2009 Earnings Call February 4, 2010 5:00 PM ET

Operator

Welcome to the Luminex fourth quarter and full year 2009 earnings conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Director of Investor Relations, Mimi Torrington.

Mimi Torrington

Thank you, Regina. Good afternoon and welcome to Luminex Corporation’s conference call for the fourth quarter and full year 2009 financial and operational results. During the call we will review our financial results released today after the close of the market. Today, Pat Balthrop, our President and Chief Executive Officer; and Harriss Currie, our Chief Financial Officer will discuss our fourth quarter and full year results highlights as well as the outlook and annual revenue guidance for 2010. Following our prepared remarks, we will have time to take your questions.

In addition to the audio portion of our conference call, we have prepared slide presentation that is available on our website at www.luminexcorp.com. To access this presentation, click on the company tab, access the Investor Relations link and then click on the live conference call link. Our presentation will be available on our website for six months.

I’d like to take this opportunity to remind you that certain statements made during the course of this presentation may not be purely historical and consequently maybe forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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, 2008 and our Quarterly Reports on Form 10-Q for subsequent periods filed with the Securities and Exchange Commission. We encourage you to review these documents and the cautionary language we have included at the beginning of the slide presentation we are presenting today. 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 in this presentation. To the extent that any non-GAAP financial measures are covered, a presentation of and reconciliation to the most directly comparable GAAP financial measures will be included in this presentation and/or available on our website at www.luminexcorp.com in accordance with Regulation G.

I’ll now turn the call over to Pat Balthrop, President and Chief Executive Officer of Luminex.

Pat Balthrop

Thank you, Mimi. Welcome to our fourth quarter and full year 2009 earnings conference call. We’ll take 20 or 30 minutes to review our presentation and then take your questions. I’ll summarize the operating highlights and outlook for 2010, Harriss will read the financial data and then I’ll address the 2010 revenue guidance before we open the call for your questions.

Let me began by stating how pleased we are with our quarter and our year end results. We delivered 35% revenue growth for the quarter and 16% for the year. Under the market conditions that the industry faced in 2009, we’re very proud to deliver growth rates based on the data that we have seen appeared to be the highest in the industry and among our peers.

We delivered revenue growth in capital equipment sales and set a capital revenue record for the company in the tightest capital equipment market conditions in at least 30 years. Our quarterly instruments shipments were above our historical range at 253 and our cumulative instrument shipments now stands at 6767, the numbers that is many times the install base of any competitive multiplexing platform.

In 2009, we incurred some unique challenges and opportunity. One of these was the H1N1 outbreak and the resulting demand for our unique or RVP assay that in turn led to a record assay sales in the quarter of $12.9 million, more than double the prior year period. But in case you proceed with this RVP alone included in this reagent sales number is growth contributed by our other assay products which include our cystic fibrosis line our Ashkenazi Jewish Genetic Panel and others.

Our consumables in bead revenue as we predicted on last quarter’s call return to growth in the fourth quarter at $8 million, our fourth highest bead revenue quarter ever. And our royalties continue to be an important growth driver for the company. Our gross margins continue to be in the high 60s, as we have forecasted at 67% for the quarter and for the year

Last quarter, we discussed our investor share anticipate the release of the tax valuation allowance during the fourth quarter, Harriss will review this in detail later. Excluding the valuation allowance effect, net income for the quarter was $5.2 million or an EPS of $0.13. Luminex is a growth story. We track several metrics regularly revenue for each of our major revenue line items, included here our total revenue growth, system revenue growth, consumable revenue growth, assay revenue growth and royalty revenue growth.

And end-user assay sales are now approaching $350 million annualized and growing at a compounded rate of 38%. This expansion along with a continually growing install base of instruments on which these assays can run provide the great indictor for future growth. The company has set a strategic target of maintaining our gross margins above the mid 60s and we continue to achieve that strategic goal. The strategy is been to invest in product lines and channels where this level of profitability will be achievable and we have continued to deliver against that objective.

Our new products whether they are hardware, software new bead configurations or new assays continue to be accretive relative to our existing products. For example in 2009, we set a record for capital revenue which is traditionally a lower margin business, while we experience the temporary slowdown in bulk bead purchases by a few of our large partners in a high margin line. In spite of this unique effect on our high margin bead line and the resulting mixed shift, the company still delivered 67% gross margin overall.

Another key strategic objective that we’ve continued to focus on has been to drive higher revenue on profit growth by investment and execution within our Assay group. We continue to achieve this objective with 59% year-over-year growth. In 2009, our RVP assay was adopted at a higher rate impart because of the product’s unique capabilities in light of the H1N1 outbreak.

In addition CF and our other assay products contributed to growth in both higher volume and favorable price. The assay strategy has been an investor priority and a key growth contributed for the company and will continue to be. We are not planning for another Flu Pandemic in 2010. But one the positive effects of the 2009 outbreak has been the higher number of customers who adopted our platform in assay due the unique capabilities of RVP.

We now have over 125 customers and growing using RVP the vast majority of these being in North America. Given the number of molecular labs available, we are extremely pleased with our progress. Today, a portion of our growth, but relatively modest one has been our international expansion. Abbott is our distributor outside the U.S. and they rolled out RVP in Europe in October 2009 with the launch of RVP Fast.

So as we look to our 2010 and beyond, we expect to enjoy a full year effect of the new customers that we have added in 2009 plus the favorable effect of new international expansion. And Abbott is actively registering RVP in a number of key markets around the world. We have many growth initiatives only one of which is RVP, which are collectively critical to Luminex continuing to deliver our growth plan. Our commitment to our partnership model has provided growth across these revenue streams for the company.

Our increased R&D investment over the past few years has yielded a number of new products that will also drive near term and long term growth. Our international expansion program will allow us to grow more aggressively in Asia. And we’ve effectively leveraged the previous investments in our infrastructure for the past couple of years and we expect to continue to do so in the future.

For 2010, the areas of priority for the company include continuing to execute our platform product line strategy. One size never fits all in this business so we’ll continue to build our multi flex user base by placing LX200 systems and penetrating large new incremental market segments with FlexMAP 3D and with MagPix. To execute our automation projects, it’s also true that one size never fits all in automation. And given the significant market opportunity that we have, we’re using a combination of strategic partnerships and internal development programs to meet the customer’s automation needs.

Execution of our assay launches including the continued rollout of RVP Fast at U.S. and launch inside the U.S. with anticipated FDA clearance later this year in time for next flu season. The launch of NeoPlex4, our newborn screening assay outside the U.S. in the first half of 2010 and in the U.S. after receiving 510(K) clearance anticipated in late 2010. For launch of our initial assay life science product and Poultry Serology and strategic partnership with Tyson foods also at U.S. in the first half of 2010 and the U.S. after USDA clearance in the later part of the year. And the launch of our GI panel scheduled for late 2010.

Driving growth by working with our partners as they continue to invest and expand their xMAP based product offerings, launch of our new strategic assay initiatives, which we will describe in detail soon and of course our international expansion, which I’ve mentioned earlier with our new platforms as well as assays including RVP.

Please make note of 2Q events that we have scheduled and for which we will issue releases in the near feature. We’ll hold our Investor Day in New York on March 25th at the Nasdaq MarketSite. Please make a note of this event on your calendar. We’re looking forward to unveiling some exciting new programs and initiatives at this year’s event. And we’ll hold our Annual Planet xMAP Scientific Symposium in the United States in Baltimore in mid May.

Now I’ll turn it over to Harriss to review the financial data.

Harriss Currie

Thanks, Pat. Let’s begin with the financial review by taking a look at our consolidated revenue distribution for the fourth quarter and full year 2009. For the quarter, our consolidated revenue was $38.2 million and was distributed as follows, $9.3 million in system revenue representing the sale of 253 Luminex systems, which includes 15 FlexMAP 3D systems, $8 million in consumables revenue or microspheres, representing a returned growth following five sequential quarters of decline, $4.8 million in royalties representing 18% growth over the fourth quarter of 2008, $12.9 million in assays representing more than double the revenue over the prior year quarter, $1.5 million in service revenue and $1.7 million in all other revenue, which includes third party sales shipping fees, license amortization, and training charges.

Our quarterly revenue distribution for the fourth quarter of 2009 is shown here compared to the fourth quarter of 2008. Note that in the prior year, our higher margin items, consumables, royalties, and assays represented 63% of total quarterly revenue. In the fourth quarter of 2009, these high margin items represented approximately 67% of total revenue driven in part by the strong performance of our assay group. We anticipate these high margin items will continue to represent a significant percentage of our revenue mix.

For the full year 2009, we achieved $120.6 million of revenue distributed as follows. $30.7 million in system revenue, an increase of 9% over 2008; $28.4 million in consumable revenue, a decrease of 11% from 2008; $18.3 million in royalties, an increase of 23% over the prior year period; $31 million in assays, an increase of 66% over the prior year period; $5.8 million in service revenue and $6.3 million in all other revenue, a 13% increase over the prior year.

Now, on to our operating results for the fourth quarter and full year. I’ve already mentioned the fourth quarter 2009 revenue of $38.2 million, roughly $10 million or 35% improvement over 2008. Gross margins for the fourth quarter remain relatively steady at 67% down a couple of points from the prior year period, but absolute dollars of gross profit increased by $6.1 million from the fourth quarter of 2008.

We had operating profit of $5.3 million, an increase of $3.1 million over the fourth quarter of 2008; driven by the increase in gross profit I just mentioned offsets slightly by an increase in operating expense. Operating margins improved from 8% in the fourth quarter of 2008 to 14% in the fourth quarter of 2009. Net income was $20 million driven significantly by the release of the valuation allowance on deferred tax assets in the United States.

With effect to this release, we showed below operating income has been incorporated into our results. The effect is a benefit to net income of $14.9 million for the fourth quarter and full year 2009 and the addition of a deferred tax asset on the balance sheet in the amount of $15.8 million. As Pat mentioned earlier, adjusted net income excluding the effect of release of the valuation allowance would have been approximately $5.2 million or $0.13 a share, an improvement of $0.08 share over 2008.

For the full year 2009, we achieved $126 million of revenue or 16% improvement over the prior year. Consolidated gross margin for the year was 67%, but absolute dollars of gross profit increased by $10.3 million. Operating profit for the full year was $7.4 million, an increase of $4 million over 2008 driven again by the increase in gross profit dollars I mentioned earlier offsets slightly by an increase and operating expenses.

Operating margins improved from 3% in 2008 to 6% in 2009. Again the recent evaluation allowance had a significant effect on our 2009 full-year net income of $17.7 million. On a comparable basis excluding the release of the (inaudible) lawsuit settlement, net income would have been $7.2 million or $0.18 per share.

As Pat mentioned in the fourth quarter of 2009 our consumables return to growth mode with consumable revenue of $8 million representing 33% growth over the third quarter of 2009 although compared with the fourth quarter of 2008 consumables were down approximately 4%.

As a reminder there are number of unique factors, which contributed to the decline and consumable revenue in 2009 and resulting tough consumable comparables to 2008. This slide breaks out our consumables stream into bulk and non-bulk purchases. As a reminder purchase a net sales of $100,000 for single customers are considered above purchase.

Couple items of no due, bulk purchases on by part the largest component of our consumable revenue stream representing roughly 80% of our total consumable revenue in the fourth quarter of 2009 and 79% for the full year. However the number of customers buying in bulk to the very low percentage of total purchasing customers.

For the fourth quarter of 2009 we had bulk purchases totaling approximately $6.4 million from 14 customers ranging from 147,000 to $2 million in non-bulk purchases totaling approximately $1.6 million from 305 customers. For the full year 2009 we had bulk purchases totaling approximately $22.3 million from 21 customers and non-bulk purchases totaling only $6.1 million.

As our partners continue to their development and commercialization efforts, we expect the overall dollar amount of bulk purchases to continue to decline on a long-term basis.

Two customers accounted for approximately 23% of consolidated in total revenue in the fourth quarter of 2009 at 11 and 12% respectively. For comparative purposes the same two customers accounted for 36% of total revenue 19 and 17% respectively in the fourth quarter of 2008. For the full year these two partners for out of 26% of total revenue in the aggregate down from 36% during 2008. The decrease in percentage of total revenue represented by our two largest customers a due to several factors, including decrease in dollar amount of bulk purchases during 2009 by these two customers and the 2009 macroeconomic environment. No other customer accounted for more than 10% of total revenue in this quarter for the full year, it’s also important to note that while our top two partners are smaller percentage of sales all other customer revenue grew 33% over 2008.

We made a significant commitment in R&D. R&D expenses were 14% of revenue for the current quarter, down from 17% of revenue in the fourth quarter of 2008. For the full year 2009 R&D expenses were approximately $21 million or 17% of revenue compared with 18% revenue for 2008. The increase in absolute dollars of R&D expense is consistent with our goal of increasing our investment in R&D, and lowering R&D as a percentage of revenue towards our long term target of 15% of total revenue. Keep in mind these numbers reflect only Luminex’s internal R&D expenditures. Our partners also had significant R&D efforts on our technology underway.

We’re also committed to maintaining our expense discipline, and delivering top line revenue growth. For the fourth quarter of 2009 SG&A was 39% of revenue compared with 45% revenue for the fourth quarter of 2008, SG&A for the full year 2009 was 44% down from 47% in 2008. The increase in SG&A was primarily related to the enhancement of our sales and marketing and operates functions and enhancement of our facility to expansion to support our growth plan.

As we said before, we do expect that overtime, there will be a modest increase in SG&A, and although we expect the absolute dollar amount of SG&A expense to increase, we would expect SG&A as a percentage of revenue to decline.

During 2009, our total cash investments balance declined by approximately $4.5 million. As you can see here the largest use of cash during 2009 was a purchase of PP&E primarily a cumulative growth in (inaudible) facilities in all existing locations and new expansion in China and Japan.

PP&E purchases in 2010 are expected to return the more modest level that could be affected by the (inaudible) extent of any additional renovations or expansion require to support our growth initiative.

As I mentioned previously we ended the year with $119.6 million of total cash investments up $4.6 million from September 33, by down for the full year from $124.1 million at December 31, 2008.

Accounts receivables for the $22.1 million a year end, but DSO was 53 days down from about 60 days of September 30. We believe the sustainable DSOs for Luminex based on our current business from the low to mid 50s. Inventory year end were $17.5 million for half of which was our agents and consumables and the other half was instruments and parts.

The deferred tax assets down for 1231 total $15.8 million approximately million of which was classified as current indicating expected utilization during 2010 and $14.7 million of which was classified as long term.

As a reminder the long-term debt on our balance sheet is related to projects funded by technology partnerships Canada, but repay to royalty act arrangement on a portion of our assay sales at approximately 2%. This debt matures in 2016 if any amount remains unpaid that we’ll be for giving. Our current long-term plans anticipated the balance of the fully repaid on all the four of maturity days.

As a reminder all the initiatives Pat and I’ve discussed to design as delivered the long term financial judges from the revenue, investment and profitability perspective as you see here. Based on our current financial performance we don’t believe that these long-term targets are unreasonably. For the past several years we made great progress towards reaching these goals. We remain confident in our buildings deliver on these metrics in the long-term as acceptance and excitement of our technology and solutions provide remains in the marketplace.

Finally, as a result of the release of our valuation allowance on our U.S. tax assets our effective tax rate, which has been relatively lower historically. We’ll increase significantly in the near term. For 2010 based on the guidance Pat will discuss we estimate that our effective tax rate for 2010 will be between 40% and 50%. Keep in mind that we operate in multiple jurisdictions United States, Canada, the Netherlands, China and Japan, and which we are subject to local tax loss. In jurisdictions and which we have not released deferred tax asset valuation allowances or have no deferred tax assets we report only taxes paid and income tax expense.

Based on the currently we expected ETR, we also estimate that no more than 25% of income tax expense reported result in actual cash payments.

I’ll now turn the call back over to Pat to review the 2010 annual revenue guidance and future outlook.

Pat Balthrop

In 2010 our annual revenue guidance that we expect to finish the year with revenue growth in percentage terms in the high teens to mid 20s of above $138 million. There are number of critical factors that will contribute to Luminex delivering this level of revenue. In developing our guidance we’ve assume capital sales market conditions more comparable to those of 2007, 2008 although we had a better year in 2009.

We expect our partners actions regarding managing their bead inventories will not continue in 2010 and our bead revenue may be choppy, but will be on growth trajectory as they were in the fourth quarter. We’ve assumed a normal flu season not a pandemic and that we will achieve our product development milestones in systems and an assays and deliver these products as scheduled. There is some upside and some downside year, but we believe this is a reasonable and balanced approach given our 2009 experience.

In conclusion for 2010 we expect revenue growth percent to be from the high teens to the mid-20s will continue to execute our growth plan with the special focus on new product launches and stepping up our sales and marketing efforts.

Investment in R&D will continue with 15% of revenue as our long-term goal and leveraging our SG&A will continue to drive overall profitability.

This concludes our formal remarks today. Regina I'd like you to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question today comes from the line of Daniel Owczarski with Avondale Partners.

Daniel Owczarski - Avondale Partners

I wanted to go to the consumable bulk purchases, do you have any insight whether these bulk beads purchases are going towards R&D projects are actually for assay kits by path there was a little bit of transition from the last period as wondered if there is any other insight as to what happened this quarter?

Harriss Currie

We believe what happened in the fourth quarter Dan, was an indication of what will happen going forward because what it happen in the prior quarters was the rationalization of their inventory as you’ve heard us talk about before when we talked about the choppiness of our bulk purchases there are some portion of those beads that we sell to of our partners that they use for R&D versus manufacturing. We believe that in 2009 there was a higher percentage of those that we're going toward manufacturing then we're going toward R&D, but it’s our belief going forward that it will be more like it has been in 2008 and prior. We can't really give you a percentage term there, but its our belief that going forward the phenomenon we had seen in 2008 and prior years of purchasing beads or the combination of both R&D and manufacturing but that will continue in 2010 and beyond.

Daniel Owczarski - Avondale Partners

And then with the strength in the Assay Group and the strength in the system sales, were you saying customers that were buying systems simply so they could use the RVP?

Harriss Currie

Well, we choose as we market RVP and we work with our distributors the simple process is that we identified the prospects and then quickly determine whether those prospects have, the customers in this case, has a Luminex instrument or access to one and so as we close those customers we try to get them an instrument as quickly as possible should they need one. If your question is, is a lot of the instrument purchases driven by increased demand for RVP, the answer to that question is no, I mean we saw RVP related demand in 2008 and in 2009, but it wasn’t unduly concentrated in the fourth quarter in RVP customers.

Daniel Owczarski - Avondale Partners

Okay and then just my last question about that the FLEXMAP placements, are you saying customers buying multiple FLEXMAPs or these single FLEXMAPs going to multiple customers?

Harriss Currie

Its mostly single, FLEXMAP 3D is going to a single customer. There are a couple of examples of institutions that have multiple units, in some cases they have multiple units in the same lab literally shut side-by-side, in another cases don’t have FLEXMAP 3D is in the same building, but on different floors being used for different purposes. The majority of the FLEXMAP 3D that we ship today however are single placement units.

Operator

Your next question today comes from the line of Stephen Simpson with Northland Securities.

Stephen Simpson - Northland Securities

Look at the royalty income could you perhaps give us a sense of how much of that revenue comes from again your top one partner your top two partner and so forth?

Harriss Currie

Yeah, Stephen we actually don’t break out our royalties individually by partner, but as you might imagine our largest partners contribute the largest amount of royalty revenue, but as a percentage we don’t break it out.

Stephen Simpson - Northland Securities

The timings RVP Fast launch, I think I missed what you said earlier in the call.

Harriss Currie

RVP Fast was introduced in Europe with the CE Mark when Abbott rolled it out in late September early October. The RVP Fast has been submitted as I think we mentioned in the call three months ago, has been submitted to FDA as we said, it was not yet cleared. We expect it to be cleared in the near term, we don't anticipate launching it, however, until we start to approach in the next flu season, it's our experience that introducing a product like RVP Fast in the midst of a flu season and expecting a customer to switch to that new product is not very wise. So once we have the product available we will work with our sales organization and our distributors and roll the product out in United States and Canada as we approach the upcoming flu season.

Operator

Your next question today comes from the line of Dan Leonard with First Analysis.

Dan Leonard - First Analysis

Question on you other 2010 forecast, do you expect your Assay business growth to outpace you partnership business growth again this year?

Harriss Currie

Dan, as you know we don't provide line item revenue guidance in that regard. I think the things to think about there are, if you look at the key metrics regarding the number of new instruments that we have placed historically and we expect to place in 2010 and the royalty rate et cetera that will give you an idea of the trajectory of our technology group at least based on historical trends.

As you think about the Assay Group, obviously there is a 2009 effect associated with the H1N1 outbreak that created RVP revenue that may not necessarily repeat in 2010 although, we can really predict that for sure, but we are assuming as I mentioned in my remarks that we’re going to have a normal flu season. So if were to think about adjusting 2009 for the RVP effect is difficult to estimate, but we think the H1N1 related effect to 2009 was several million dollars and so that would drive the apples-to-apples year-over-year growth rate up by a few points.

Dan Leonard - First Analysis

Pat, it sounds like you're expecting the RVP product to grow in 2010 despite the lower flu assumption, is that correct?

Pat Balthrop

We are assuming a normal flu season and we’re benefiting from the enhanced attention and adoption of RVP in 2009 because of H1N1. As we look toward the year, as we look towards 2010 obviously having a fully year effect of the customers that adopted the product in 2009 at various stages and the full-year effect of the European launch by Abbott of RVP Fast and the international expansion et cetera.

Obviously will be tail wind, the headwind part of that will be the number of samples arriving in those current customers being related to the severity of the flu season, which obviously we cant predict, but we have assumed will be more like one of the normal flu seasons as we saw in the prior years.

Dan Leonard - First Analysis

My final question, Pat, you mentioned the [gastro] panel will launch by year end. Did you mean launch in the U.S. or just launch there?

Pat Balthrop

We expect to launch it; we hope to launch it in the U.S. right now. We’ve had the pre-IDE discussions with FDA et cetera. As you may know, Dan, the current situation at FDA is somewhat murky, because of some of the changes that are occurring there, so we’re taking a somewhat cautious approach as it relates to products that will be submitted in 2010.

Operator

Your next question comes from the line of Matthew Scalo with Canaccord Adams.

Matthew Scalo - Canaccord Adams

I want to ask you, does your 2010 guidance anticipate that your top two partners account for less and less of that total revenue?

Pat Balthrop

The short answer is not necessarily, I mean I think as we go through the year, we have assumed a growth trajectory for our bead business, but we have also acknowledged that the bead business remains choppy and of course the reason why I mentioned that is because those top two partners are among our top bead purchasers. And so as we build our bead forecast and we build the rest of our line items we contemplate the roll that our top two partners will make, but we don't necessarily assume that they will represent down to plus or minus 3% of any particular quarter or annual total, we more or less forecast overall rather than at level.

Matthew Scalo - Canaccord Adams

And I understand you cant talk about your partners per se, what percentage in fourth quarter here from your top two partners particularly one of them, does it indicate a shift in market share in there end market I'm thinking HLA here?

Pat Balthrop

No, I mean the market share position of our partners in HLA is actually growing. The one thing I would suggest, Matt is, one of the things that we have in calendar during 2009, is what we believe to be a fundamental misunderstanding of the dynamics in HLA transplant market place, that’s something that we expect to spend some time on it on investor event, so that we can do a better job of educating our investors and our analysts around the dynamics there so. If you can just fix at that for now that will cover in a fair amount of detail, I think that you will be satisfied with the results.

Matthew Scalo - Canaccord Adams

Okay perfect will do. Is it too early kind of get an accurate read on average revenue strain for the FLEXMAP 3D state your pharma account?

Pat Balthrop

Well, most of placements that we have of the systems that we have shipped and installed those are in the high volume accounts. Some of them brand household name research institution like the [Broder] Institute for example. But most of them as you acknowledge are a bio pharma type accounts. The assumption that we have suggested our investor and analysts make regarding utilization of those systems is consistent with the throughput enhancement of FLEXMAP 3D, which is as you may remember about three times the throughout of LX 200. It’ been our experience our observation that the early placements are little bit more that, but if you are thinking about the business over the longer term, we don’t have any better information than that 3X factor.

Matthew Scalo - Canaccord Adams

Terrific. Could I ask you for RVP Fast in the U.S., will that have the same target panel as the existing RVP or will you shoot for kind of an expanded menu on that test?

Pat Balthrop

I think we have to wait and see, Matt; we have the product in front of FDA now. We have a lot of experience with our current product and so, I think, what we would expect for RVP Fast is a product that will be configured consistent with what we have learned to be most important and relevant to the end-user customer. We don’t believe and don’t intend to have RVP Fast for example HINI specific target. It’s been our experience and our advice from the agency that doing so would not be beneficial, and so we are going to let the market and the agency direct us there.

Operator

Your next question comes from the line of (Inaudible).

Unidentified Analyst

Convicts on reigniting little bit consumable growth, I was wondering, you mentioned that number of non-bulk customer is 305, did I hear it correctly.

Harriss Currie

Yeah, just over 300 that’s correct.

Unidentified Analyst

So if you can kind of you know give us an idea of where they were one or two quarters ago, essentially what I'm trying to ask here is that though you have said the two largest customers will increase their purchases in the future and all, but I was wondering as there being an increase in terms of your other customers non bulk purchasing customers recently?

Harriss Currie

If you look at it on a extended period of time and that’s the way you have to look at it. You have to understand that those 300 plus we’ve had as high as 400 in the quarter down in the 200s, buy anywhere from $25 worth of (Inaudible) up to just under $100,000 worth of beads and some of those could be a large partner that typically purchase in bulk and they buy in a smaller amount in a particular quarter. So overall on an extended period we see a very modest increase of non-bulk purchase over time that it over the past two years range between 1.2 and 1.8 million. The number is growing, it’s growing very slowly because typically the customers within the non-bulk activity that get back move up in the bulk purchases that’s stimulating the bulk purchase line.

Unidentified Analyst

Okay in terms of royalty revenue growth still you will you saw a decent growth in very a good 19% but if you look historically it has significantly drowned from what you had seen in number of last quarters. Can you comment on that on that dynamic?

Harriss Currie

Yeah, I think that the way to think of that machine is that is there are number of factors that can have been effect on the growth rate calculation if you look at the absolute dollars increase quarter over quarter over quarter that actually a pretty predictable modelable number. If you pay, if you look at number in percentage growth you can get a it can through you off a little bit, and the reason for that is because for example we have some of our large partners who will have increase the number of FLEXMAP technology based assets that they sell and when they increase that number and they an installed basis several 100 instruments for example there is a onetime effect of lot of product going out into the onto that installed base they can cause spike in royalties from that partner that don’t necessarily repeat on the other hand we also have one time royalty payments when the partner wants to maintain right that they have of a products in this category in the pipeline etcetera. So, our advise would be if you look at our royalty revenue and you want to try to build from models around that you look at the actual quarter-over-quarter dollar increases and I think you would get some compared around that.

Operator

Your next question comes from the line of Brian Weinstein with William Blair.

Brian Weinstein - William Blair

Hi, good afternoon, I wondering what kind of inventory do you think hospitals have of RVP Kits at this point given the each one in the situation we are slowdown in early December, our hospital sitting with several weeks of inventory there?

Harriss Currie

We don’t think so, Brian. We yet remember that we have a distribution model. So, we have product and inventory with our distributors. But we’re also very close to the customers here and we have our own sales people that our visiting those customers and with our distributors reps, it’s our sets that the inventory that they have on hand of RVP overall is not extensive I mean there may be, if you were to walk into one customer and another you might find significant amount of inventory in one customer and none in their next one, but as we talk to our sales organization in our distributors its our strength if that is not significant either way.

Brian Weinstein - William Blair

Okay, and how has the market changed if at all RVP since Protoza was bought by Gen-Probe and others have received EUAs, have you seen shift towards for people are looking forward the market or have the market competitive dynamics changed in the last call 30 to 60 days?

Harriss Currie

Not in our experience, that’s the competition scenario for RVP is a little different then give my experience for other products, we don’t typically encounter Protoza for example in a competitive context. The reason for that is because the sub-typing capability that RVP has differentiates somewhat we have tenancy that be in the very largest more high volume institutions in contrast Protoza had there 3plex test fluA, flub, RSV and then they have their EUA H1N1 that’s a separate test all together and it’s been our experience that customers who adopt that products are not real RVP prospects and those that adopt RVP are not real prospects for them. The competition that we run into most often where it continues to be a combination of viral culture and DFA.

Operator

Your next question comes from the line of Peter Lawson with Thomas Weisel Partners.

Unidentified Analyst

Hi, good afternoon this is actually Eric fell in for Peter. I am sorry sir, this is already gone over before, I was of kind of bounce back and forth between calls, but last quarter you had mentioned kind of an indirect effect from stimulus where the customers got as an increase visibility and really some funds and you benefited from that on management placement, so that happened again this quarter or is there something else that’s change positively for you?

Pat Balthrop

No, Eric, what happen in the third quarter was unusual spike in instrument purchases that was not directly related to stimulus funds, what we described 90 days ago was that we had a biggest from a quarter primarily because we had a depressed one in the second quarter. The reason why it was depressed in the second quarter was because particularly those of our partners, who serve academic research institutions, which is where many of the NIH funds including NIH stimulus funds, flow. We’re are reducing all their capital purchases in the second quarter timeframe awaiting outcome or an indication of the likelihood of their grants being accepted and when they got comfort around that they sort of spending capital more freely. So we did 158 or 159 instruments in the second quarter, we did about 100 more than that in the third quarter, we tried to describe that has been you should think about that as an average of the two rather than either one of those being tradable. In the fourth quarter there was very little if any of our capital equipment that was related to direct stimulus funding and so I’ll conclude by saying the effect of the stimulus funding has primarily been that in the academic research institutions they have a higher degree of confidence in the fact that they can spend your capital and buy equipment that without the stimulus funding in the subsequent NIH grants they might have been more cautious about it.

Unidentified Analyst

Thank you for the clarification there. On SG&A spending it looks like it pickup a little bit was just a quarterly year end function or is there something going on in that line?

Pat Balthrop

We actually as we went through the year we had a couple of instances of sort of one time expenses that fell into SG&A, for example we had some legal expenses in the early part of the year that did repeat et cetera. So when we look at the fourth quarter there is some of that at the most significant portion of the increase was some one-time expenses associated with our international expansion in China and Japan. Part of that was PP&E, so therefore not in SG&A, but we obviously had SG&A related expenses associated with opening those offices and then we added the people there, so that would also be an incremental expense. As we look into 2010, there are some reallocation of resources that we've done and some modest incremental additions and particularly in revenue generating functions like sales and marketing as we try to continue to drive the top line, but lot of that incremental resource has been reallocation rather than just incremental adds.

Operator

Your next question comes from the line of Dana Walker with Kalmar Investments.

Dana Walker - Kalmar Investments

Could you comment if one were to take the low end of your guidance which is approximately $35 million a quarter, what type of seasonality we might see in 2010, is it fair to presume that Qs 1 and 4 might be above that level and Qs 3 and 4 might be below the average?

Harriss Currie

I would say, Dana, if you look historically at the company’s trending, it's not uncommon for the fourth quarter to be the highest quarter of any year and it’s also not uncommon for the first quarter to be less than the fourth quarter. We’ll give quarterly guidance to or anything else of course, but we believe that if you were to look at that historical trend then it would be a correct assumption on your part. And so as we look through the year we have a tendency to build revenue overall as we go through the year, buffeted a little bit by the timing of bulk purchases more than anything else and the other two factors are the timing of capital equipment purchases, which in the market not just for Luminex have a tendency to be more backend loaded in the year. And then finally any flu seasonality, which has also a tendency to be towards the backend of the year in a normal flu season and the middle two quarters being somewhat depress.

Dana Walker - Kalmar Investments

So that means that you are discounting any follow-through on RVP utilization in Q1 of this year?

Pat Balthrop

No, it just means that doing year-over-year comparisons specifically with RVPs is very difficult to do. Just because of the unique nature of 2009. So as we built our number and which is included in the guidance we assumed that we would have x number of customers that we would add y number of customers as we gone through the year and that the utilization for customer would be we are consistent with the traditional level of flu seasonality rather than endemic levels.

Dana Walker - Kalmar Investments

A variety of your point of care customers in the flu tests business appear to have very strong cues your business was good in Q3 but it was not outrages like it was in Q4 can you talk about with some reflection why that was the case what that suggest about how the use of your product is evolving and what that might mean in perspective flu seasons in terms of at what at point you are product issues and whether its now taken a different level of prominent.

Pat Balthrop

Well the number of if you think about it this way Dana the number of customers that a rapid lateral flow technology based company would have would be a very high number its and I'm not in that business but so I'm closing up to where I think I can speak intelligently about it. That as the year progress at the point of care level pediatric offices and so call doc in the boxes and so on that there was a lot of flu testing that took place in the middle part of the year as that healthcare professionals that work in those institutions were we are trying to determine are confirmed that the person who had that the (Inaudible) so called implemental like illness was specifically flu, but as the year progress they came to realize that just about every person they were seeing was an H1N1 positive person and again at the year progress that affected the rate at which they were doing testing in our case it’s a very different customer base and they are typically very sophisticated institutions by definition you can run RVP and lets your molecular lab and a molecular labs are almost always in very sophisticated large institution a significant portion of the samples that are run on RVP are actually in patient samples in contrast to our rapid test company that were they would almost all be ambulance already patients and so the utilization of the product was in our RVP in contrast as a rapid test was fundamentally different. If you look at the external sites and the levels of hospitalization and so on as suppose to that the trending of the reported positive test he would see that effect. The hospitalizations seen to increases the (Inaudible) long and the number of total positive test across any method that had a different peak to the curve.

Operator

Your next question comes from the line of Tycho Peterson, JP Morgan.

Unidentified Analyst

Hi, this is (Inaudible) and for Tycho. Thanks for taking the questions could you comment on kind of competitive landscape for the technology platform or if you seeing any increased activity from some of your competitors, this particularly Luminex.

Pat Balthrop

The short answer is no, I mean Luminex platform with which we would most often complete would bead express as you heard to say before the only time we have really discussed bead express when we are taking to analyst and investors. Because we don’t (Inaudible) Luminex in the field none of our partners talk about them, none of our customers talk about the bead express. And so we are understanding which I think is not any more detail then your is that the bead express placement they have is in a high double digit, low triple digit range, primarily in Europe, primarily in agricultural labs and as you know that’s a very different situation in hours, its also our understanding the significant portion of the bead expresses that are in the field, we are actually part of bundle deal by (Inaudible)- get a bead express for free type a thing and so, I’m not sure customers are necessarily purchasing the bead express in the same way that they would purchase a Luminex type instrument. There are no assays available in all that, so we are seeing no change in the competitive dynamics – no (Inaudible) particularly within the capital equipment purchase market that the demand for our platform FlexMAP 3D LX 200 and then in 2010 MagPlex is actually, if any thing increasing.

Unidentified Analyst

Great that was helpful. And then just some house keeping items for us, would you might break off the gross margins by segment and also how many system placement for per each segment?

Pat Balthrop

The systems placements in the Assay group as usual or very modest. The Assay group had a total success from place in the fourth quarter technology group had the remainder for the total of 253 margins in the technology group on a year-to-date basis were 66% on the Assay group on a year-to-date basis for 71%. You want those figures for the quarter. I have given to you, just giving fourth quarter technology about 66% gross margin 70% for the Assay group.

Operator

(Operator Instructions). Your next question comes from the line of Isaac Ro with Leerink Swann.

Unidentified Analyst

Hi guys, this is (Inaudible) filling it for Isaac. Just wanted to ask you if you had any update on the timing of the new handheld platform and then also any sense of gross margins at launch in kind of the progression over time?

Pat Balthrop

Yeah just to be clear Julian, we don’t have a handheld platform in development, we have an instrument that we call MagPix which is as you may recall a smaller footprint lower price point system we believe current project schedule calls for that system to be available in the second half of 2010 as the year progresses and as we have our investor day scheduled from March 25 we expect to add a little bit more detail to that and I will tell you the project itself is going very well we reviewed it in detail as recently at yesterday. We continue to head every milestone we have the out for units that we shift to our partners in October were as we’ve seen the data offer that system in comparison to our LX 200 the data that we see there looks very, very good and quite comparable, which is important because we hope to be able to execute as part of our strategy our partners to have a single Assay product that will work across all Luminex platforms and so far if we can’t make any commitments about that but so far so good I would say and so for all those regions we expect we’re ever increasingly confident in the second half of 2010 day. If you are able to come to the investor day in March we will be able to add some more details to that.

Operator

Your next question comes from the line of Doug Schenkel with Cowen.

Unidentified Analyst

Hi this is (Inaudible) for Doug, thanks for taking the questions. Just a couple of quick cleanups, I know you had a number of questions on the top two accounts and figure (Inaudible) about that and asking about the rest we had a point here we are going at 2010 you can start to think about a growth rate for them during the especially in your comments that the percent of revenue the top two are going to remain about the same.

Pat Balthrop

I think you have to wait and see what we say in our annual filings, as we move through the past several years, our top two partners have continued to be over 10%. But over the years the percentage of our revenue that goes through those top two partners as declined. And as we look at 2010, we expect that historical trend to continue. Not because they are necessarily declining in terms of their growth rates the actually opposite is true, but we have lot other product launch and a lot more others partners who are accelerating their activity and are becoming growing faster then we are faster than our other two partners are so. So the top two partners are main highly engaged, they both continue to grow, they both continue to gain share. But the percentage of all revenue they have represent has a function of how fast everybody else is growing. So we are not in a position to give you the numbers yet, but we will hear very shortly.

Unidentified Analyst

That’s helpful and appreciate the comments. Quick one FlexMAP 3D is 15 in the quarter, how is that matching with where you guys where expecting and is there a run rate maybe going forward in 2010 FlexMAP?

Pat Balthrop

Well, we expect that in the typical year, based on our long range planning we expect the number of FlexMAP 3Ds that we were placed in the year to be in a high double digit number. You have to remember that the number of labs that FlexMAP 3D will go into as a limited finite number in other value for placement is much higher. But the number of labs is much lower, so we do in a typical quarter say LX 200s and therefore about 800 a year, we would expect to do somewhere between 75 and 100 per year in FlexMAP 3Ds that number may surge and peak in value as over time as partners develop specific assay content of centre, but I think that’s a good place to start.

Unidentified Analyst

Thanks that’s great. And then just a last thing on stimulus you commit a little bit about what’s going on this year. (Inaudible) commentary that the researches are slow to spend this year and haven’t so far, but maybe the money is there just being held up. Have you seen that from your year end accounts and maybe how you thinking about that going to the first half and maybe how that spending on pay?

Pat Balthrop

Unlike other companies that you may be familiar with, Luminex is not one of the companies that has a direct linkable connection to stimulus funding I mentioned earlier in my remarks and response to another question that the primary effect that we've had from stimulus funding has been the stimulus funding has increased the confidence that partner that customers in the academic research channel have regarding their ability to aggressively spend capital. So another way of saying that is, there are some, but there is not a significant amount of each grand tight to stimulus money that are tied specifically to Luminex hardware purchases that’s different in what you may here from other companies and so therefore the rate at which someone who is received to stimulus related grand may be spending that money does really affect us in the same way might other company.

Operator

Your next question comes from the line of Jim Stafford with Wells Fargo.

Jim Stafford -Wells Fargo

I was wondering if you could comment on the sort of the breakout of bead sales during the quarter magnetic versus non.

Harriss Currie

The majority that recently sold in the quarter was nonmagnetic beads that we spoken before about some of the early peak and consume was mid to late 2008 was a result of partner wants (inaudible) just began to convert Assay, because we don't have a product yet that requires only magnetic beads there is not a significant amount of magnetic bead sales today, those magnetic beads are most likely will begin to increase pretty significantly once we official data pix launch and they began to build those commercial Assay for sale on that instrument.

Jim Stafford -Wells Fargo

And was there financial impact in terms of margin from the mix?

Harriss Currie

Nothing material.

Jim Stafford -Wells Fargo

Mid year is about when you are looking for max pix.

Pat Balthrop

Second half of 2010.

Jim Stafford -Wells Fargo

Any difference in pricing between magnetic versus non?

Pat Balthrop

We expect the magnetic beads to be at pricing premium, if you would try to model that because of the size of our nonmagnetic business I think you would find it that you would find the impact in the short intermediate term would not be material.

Operator

This concludes the question-and-answer portion of the call. I’d now like to turn the conference back over to Pat Balthrop for closing remark.

Pat Balthrop

Thank you very much. I would like to thank you for your interest in Luminex. And again like to remind you the dates of our two key events, the primarily the investor day that we have planed in the New York city on March 25, of NASDAQ market site we would very much welcome your attendance. So we look forward to see you there. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Luminex Corporation Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts