China Medical Technologies, Inc. (CMED) F4Q2010 Earnings Call June 2, 2011 8:00 AM ET
Winnie Yam – IR
Xiaodong Wu – CEO
Sam Tsang – CFO
Charles Zhu – SVP, Operations
Jack Hu – Deutsche Bank
Chris Li – Morgan Stanley
Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2010 China Medical Technologies Incorporated Earnings Conference Call. My name is Isha [ph] and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)
As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Winnie Yam. Please proceed.
Thank you. Good day, ladies and gentlemen. I’m pleased to welcome you to China Medical earnings conference call. China Medical already announced its fourth fiscal quarter and full year results ended March 31, 2011. A copy of the press release is also available on the company’s website at www.chinameditech.com.
Today your speakers will be Mr. Xiaodong Wu, CEO; Mr. Sam Tsang, CFO; and Mr. Charles Zhu, Senior VP of Operations. After they’ve finished with their remarks, they will be available to answer your questions.
Before we continue, please bear with me as I take you through the company’s Safe Harbor policy. The discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Legislation Reform Act of 1995.
Forward-looking statements involve inherent risk and uncertainties. As such, the results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in the company’s public filings with the U.S. Securities and Exchange Commission. China Medical does not undertake any obligation to update any forward-looking statement except as required by applicable law.
As a reminder, this conference call is being recorded. A replay of this conference call will be available via webcast on China Medical’s website.
Now allow me to turn the call over to Charles, who will give remarks on behalf of Mr. Wu. Charles?
Thank you, Winnie. Hello, everyone. We’re pleased with this quarterly result, in particular the continued growth of our molecular diagnostic business during this seasonally weak March quarter. We expect our FISH business and SPR HPV-DNA chip business to continue driving our future growth.
For FISH business, our direct sales team kept driving the sales of recurring FISH probe revenue by increasing the test usage in existing FISH applications, in particular recent SFDA approved FISH applications in each hospital user, as well as expanding FISH applications in other clinical departments in the existing hospital users.
We have received SFDA approval for the EGFR FISH detection kit and expect to receive SFDA approval for our prostate cancer FISH detection kit and TOP2A FISH detection kit within the next two months. We have submitted application to SFDA for several other FISH detection kits and expect to receive approval within the next 12 months.
By then, we’ll further strengthen our market position as the dominant FISH player in China, but the largest and most comprehensive SFDA approval FISH product portfolio in China and are far ahead of our competitors in China. This will increase the entry barrier for our existing and potential FISH competitors in China as well.
For SPR HPV-DNA chip business, we are pleased to see the increasing recurring revenue from the sales of HPV-DNA chips to our hospital customers to conduct the HPV test for their women patients. But over a 110 Tier 1 hospitals using our SPR analyzer and HPV chips. We expect to see a growing influential group to speak for the clinical benefits of our HPV chips in conducting HPV tests for cervical cancer screening.
In addition, we’re developing our second generation SPR analyzer, which will be more compact, more user-friendly and higher throughput. We believe that many hospitals and independent laboratories will be – will have strong interest to buy the analyzer after seeing the positive feedback from our existing Tier 1 hospital users. We believe HPV test market is in early stage of development in China and there is enormous potential in this market.
For our ECLIA business, we have highlighted in previous earnings call and expected seasonal sequential decline in ECLIA revenue in March quarter due to the two New Year holidays. Although, we are facing the increasing competition in our ECLIA business, we’re encouraged to see the trend of higher usage of ECLIA test to replace ELISA test by hospitals, which give us confidence to expect a stable performance in our ECLIA business.
To summarize, we are focused on the development of our molecular diagnostic businesses, including expanding our product offering in FISH probes and the development of a new SPR analyzer. We will leverage our established sales networks to introduce our new products to our hospital customers.
Meanwhile, we’re also leveraging our brand name as the leading molecular diagnostic product provider in China to explore extensive partnership. We are actively working on several initiatives to support our sustainable growth, including discussion with the leading independent laboratory testing service group in China to promote the usage of molecular diagnostic test.
As part of the China Healthcare Reform, the government is spending a lot of efforts and funds to improve the insurance coverage and the reimbursement rate. As a result, business of independent labs have achieved tremendous growth in past few years.
These independent labs are mainly collecting test samples from smaller hospitals in the Tier 1 to Tier 3 hospitals, which are not currently covered by our direct sales network. We believe such potential collaboration will expand our customer reach more effectively.
Looking to our future, we are confident in our sustainable development in China’s in-vitro diagnostic industry.
I have finished Mr. Wu’s remarks and I’d like to turn the call over to Sam, who will review our financial results. Sam, please.
Thank you, Charles, and welcome, everyone. Let’s highlight our financial results in the fourth fiscal quarter, as well as the full year. Our 4Q ‘010 recurring revenues increased by 31.1% year-over-year to RMB230.4 million or US$35.2 million. In our 4Q ‘010 net income increased significantly year-over-year to RMB16.1 million or US$2.5 million. Our 4Q ‘010 diluted earnings per ADS increased significantly year-over-year to RMB0.61 or US$0.09.
Our 4Q ‘010 non-GAAP net income increased 45.7% year-over-year to RMB75 million or US$11.5 million. Our 4Q ‘010 non-GAAP diluted earnings per ADS increased 43.4% year-on-year to RMB2.84 or US$0.43. Our 4Q ‘010 adjusted EBITDA increased 40.8% year-over-year to RMB140.2 million or US$21.4 million.
Turing to our full year results, our full year recurring revenues increased by 16.5% year-over-year to RMB842.4 million or US$128.6 million. Our full year bottom line turnaround from net loss of RMB69.6 million in prior year to net income of RMB82.6 million or US$12.6 million. Our full year diluted results per ADS turnaround from diluted loss per ADS of RMB2.65 in prior year to diluted earnings per ADS of RMB3.40 or US$0.48.
Our full year non-GAAP net income increased 45.8% year-over-year to RMB273.1 million or US$41.7 million. Our full year non-GAAP diluted earnings per ADS increased 45.7% year-over-year to RMB$10.39 or US$1.59. Our full year adjusted EBITDA increased 27.3% year-over-year to RMB493.3 million or US$75.3 million.
Let’s discuss in specific areas. First, our FISH recurring revenue achieved both year-over-year and quarter-over-quarter growth despite two important public holidays in China during 4Q ‘010. FISH recurring revenue increased 33.5% year-over-year to RMB134.7 million or U$20.6 million.
Our HPV chip business do not have year-over-year comparison, as we start to generate small HPV chip revenue in 1Q ‘010. HPV chips recurring revenue increased 29.8% quarter-over-quarter to RMB11.9 million or US$1.8 million in 4Q ‘010.
Our ECLIA recurring revenue increased 12% year-over-year to RMB83.8 million or US$12.8 million but a sequentially decline due to the holidays.
Second, the non-GAAP gross margin in 4Q ‘010 increased from 77.7% to 82.4% on a year-over-year basis, mainly due to more contribution from the sales of FISH probe, which generate higher gross margin and a change in HPV’s business strategy from giving free SPR analyzers to increasing HPV chip usage of hospitals. This results in cost savings, result giving fee analyzer, free SPR analyzers in 4Q ‘010.
Third, Our non-GAAP operating expenses increased by 24.4% year-over-year from RMB43.1 million or to RMB53.6 million or US$8.2 million in 4Q ‘010. The increase was primarily due to increase in direct sales efforts and product research and development for new SPR analyzer and PCR assays.
In addition, our high effective income tax rate was primary due to certain expenses such as stock compensation expense, amortization of acquired intangible assets and interest expenses of convertible notes, not deductible for China income tax purpose, as well as the accrual for withholding income tax on distributable earnings generated in China.
Besides, our cash position at the end of March 2011 was above RMB1.1 billion or US$171.6 million. We generated net cash flow of RMB37.3 million or US$5.7 million from our operations in 4Q ‘010. We received a payment from Chengxuan, which increased our net cash flows from investing activities to RMB18.8 million or US$2.9 million in 4Q ‘010.
Net cash flows used in financing activities primarily related to the repurchase of our convertible notes was RMB48.9 million or US$7.5 million in 4Q ‘10. As highlighted in our earnings press release, we issued new convertible notes in December 2010 to extend our debt maturity profile. We have been focusing to improve our leverage profile and have reduced our net debt to adjusted EBITDA ratio from 5.1 times to 3.3 times.
We target to reduce the ratio to two times or below. As such, we have been very cautious in making capital expenditures and did not consider new acquisition and will continue to do so. However, we insist to maintain investment in product research and development and our direct sales network which are important to our future growth and maintaining our competitive advantages.
Regarding the receivable from Chengxuan, a major shareholder owned by Mr. Wu, our CEO in connection with the sale of our HIFU business to Chengxuan. The receivable from Chengxuan was reduced fro US$18 million to US$15 million by March 31, 2011.
Subsequently, Chengxuan paid US$8 million to the company to reduce the receivable to US$7 million and indicate that another payment will be made to the company to pay in full the remaining balance together with interest there on before end of this month.
Last but not the least, our outlook for 1Q ‘11 and fiscal year 2011, we estimate our revenue for 1Q ‘11 to range from RMB232 million or US$35.4 million to RMB234 million or US$35.7 million representing a year-over-year growth of 24.6% to 25.7%.
We estimate our non-GAAP net income for 1Q ‘11 to range from RMB73 million or US$11.1 million to RMB74 million or US$11.3 million representing a year-over-year growth of 28% to 29.8%. Our non-GAAP diluted earnings per ADS for 1Q ‘11 is estimated to range from RMB2.75 or US$0.42 to RMB2.79 or US$0.43 representing a year-over-year growth of 26.1% to 28%.
We estimate our revenue for fiscal year 2011 to range from RMB970 million or US$148.1 million to RMB995 million or US151.9 million representing a year-over-year growth of 15.2% to 18.1% which we have taken into account the expectation of stable performance in our ECLIA business.
We estimate our non-GAAP net income for fiscal year 2011 to range from RMB310 million or US$47.3 million to RMB318 million or US$48.6 million representing a year-over-year growth of 13.5% to 16.5%. The slightly lower growth rate in non-GAAP net income is primarily due to the full year impact of additional interest expenses arising from new convertible notes issued in December 2010.
Our non-GAAP diluted earnings for ADS for fiscal year 2011 is estimated to range from RMB11.70 or US$1.79 to RMB12 or US$1.83 representing a year-over-year growth of 12.6% to 15.5%.
The estimates are based on our current views of operating and market conditions and are subject to change. This concludes our remarks. We are welcome to your questions. Operator, please.
(Operator Instructions) And our first question comes from the line of Jack Hu representing Deutsche Bank. Please proceed.
Jack Hu – Deutsche Bank
Thank you. Hey, good evening and thanks for taking my question. Can you hear me?
Jack Hu – Deutsche Bank
Okay. Yes, actually I have three questions. The first one, could you give us some color on the details of this new collaboration with this diagnostic service provider, what – for example what areas are you going to collaborate with them on FISH or HPV or PCR or even include ECLIA. And secondly also the guidance you just gave, does this guidance include the future opportunity from this collaboration?
Well, Jack I will answer the second part of your questions and I'll ask Charles to translate the first of the questions to Mr. Wu and so he can answer your question. Is that okay?
Jack Hu – Deutsche Bank
And the second part is the guidance we provide, we do not take into account any potential collaboration. So, that is – not taking into account the potential collaboration with the independent lab test surface group. So, this is the guidance which we do not take into account. Charles?
Those are the largest independent labs in China, some of them may have around 10 test centers across China for each of them and they – both of them they are only performing the traditional tests like the laboratory chemistry kind of test. The molecular diagnostic tests are not included.
So, the current tests that they are performing right now are mostly the lower margin test services.
And in recent years as we are developing, we're promoting the molecular diagnostic tests, such as the FISH test in the hospitals and we had reached a level of – the high level of recognition into the new molecular diagnostic tests. Those independent labs, they also realize that the margins for those new molecular diagnostic tests are much higher than the traditional clinical diagnostic tests.
So after we reached around 400 customer base in the large Tier-1 hospital users for FISH application, as we are expecting to the new customer basis, we realize that for those smaller hospitals, they are not as interesting as those of larger hospitals to accept a new molecular diagnostic test. Because their test volumes are not high enough to justify for them to invest in the new technology platform, but to (inaudible) to this. They do have some zero test, patient tests that is required as the high level of advancement into the diagnostic test.
And at the same time, those independent labs in China, they also see the opportunities in those smaller hospitals who has some tests demand for the molecular diagnostic test and so those independent labs (inaudible), there is opportunity for them to collect those cancer test samples to perform the service of molecular diagnostic for those smaller hospitals to – as add-on service to their existing traditional laboratory chemistry test.
And at the same time, those independent labs are also doing the HPV tests as well.
And those independent labs, they have a very broad coverage on the smaller hospitals, as well as the community clinics.
We see the HPV tests are growing very fast in China and in some of the regions, for example in Beijing, it has already been included in the reimbursement policies by the government. So, we expect more and more HPV test volume, especially from those smaller hospitals, as well as the community hospital centers. And those – actually those markets are actually the – are covered by those independent labs.
So in terms of your question, we will start with the collaboration on the molecular diagnostic test products, including FISH and HPV first, and then gradually we will extend our scope of collaboration. So it’s possible for us to also include our ECLIA products in the future in the collaboration with them.
Of course, our collaboration will not be limited as roll of our products supply – or vendor. Actually we want to establish a more strategic collaboration with those independent labs and so it’s possible in future if we could develop some product solution specifically for those independent labs based on their market demand. Okay?
Jack Hu – Deutsche Bank
Okay. Thank you. My next question actually, so the last time when we met in Beijing, I remember you talked about international expansion for your Molecular Diagnostic business, is there any progress on that front?
(interpreted) Yes. We are absolutely communicating with some of the well-known multinational companies for the potential collaboration, and this kind of potential collaborations will be covering both R&D – joined R&D as well as the complementary marketing efforts.
So in the past quarter we see a great progress on the potential collaboration with those multinational companies, much faster than what happened a year ago. So we think there should be something finalized in future. Okay?
Jack Hu – Deutsche Bank
All right. (inaudible) So my last question actually – can you maybe just comment on the HPV competitive business kit [ph]?
(interpreted) In general the HPV markets – the HPV tests are increasing and the acceptance level by the patients are also increasing. And in terms of the competitors in China market, because right now HPV test market is still in early stage and there is so much potential for the growth. So, we haven't seen any dramatic action from the current existing competitors such as any price reduction on their existing products.
I am very positive on the HPV market, because as I mentioned, in some areas, like Beijing has already included HPV in the insurance program – recovery [ph] insurance program, and we think more and more provinces have stated will follow this policy as well. Okay?
Jack Hu – Deutsche Bank
Thank you Xiaodong Wu and Charles. I will get back in the queue.
And our next question comes from the line of Bin Li, representing Morgan Stanley. Please proceed.
Chris Li – Morgan Stanley
Hi, thanks for taking my question. This is Chris Lee on behalf of Bin. There are two topics I want to touch on. The first one is on the guidance. Your first quarter guidance on the top-line growth is faster than the full year fiscal year growth? Can you explain that, and also the fiscal year guidance, show that there is a leveraging trends, can you give us more color that – in that because of the interest expense and what if we exclude the interest expense, what would bottom line growth be?
Hi, Chris. This is Sam. Yeah, you are right. The first quarter top line estimated growth of about 25% is higher than the full year top-line growth of about 15% to 18%. The higher top-line growth in first Q is mainly because of the very easy comparison for the HPV business because if you recall we generated very small amount of HPV chip revenue in 1Q, the previous year, which I remember is less than RMB100,000 [ph].
So, our current one way of HPV, for example, in the previous quarter, March quarter, our 4Q the previous year we generated about 12 million RMB revenue. So – which gives the overall growth in the 1Q top-line growth is higher.
And also as we expect the care business to be stable or close to flat performance for the full fiscal year and also we have a higher base of FISH revenue and the care revenue in the prior year, so the full-year growth of 15% to 18% actually if you look at the actual number which is actually the growth in numbers is bigger than the previous year because of the higher base.
And referring to your questions about the leverage for the full year, non-GAAP net income growth rate which is small – which is lower than the top-line full year growth rate, the full year non-GAAP net income of about 13.5% to 16.5% growth, one reason is because as I – the major reason as we highlighted is the interest expenses from the new convertible notes, which only have four months impact in the previous year that the full year impact.
The additional interest for the whole year is about US$5 million – roughly about RMB 32 to 33 million RMB. So, we are picking our comp, we don’t have this additional interest impact. That means we will have additional about 30 something million RMB of that income. We will have about additional 3% higher growth rate.
So that means the bottom line comes from 13.5% to 16.5% to a pro forma 16.5% to 19.5%, so which is higher than the top line – the current top line expectation of 15.2% to 18.1%. So, for this reason as the additional interest is fixed for future years; so we expect in next fiscal year, I mean the year after this year, we will be able to see the leverage on the bottom line that is the growth rate in the bottom line should be higher than the growth rate on the top line.
Chris Li – Morgan Stanely
Thanks. On the second topic – perhaps this is for Chairman, Wu, can you talk about the status of the new SPR machines being developed and why are you developing this machine because you know – I know you're currently giving away your current machines right now. And are you developing this machine to give away as well?
Actually, we have mainly two reasons for us to develop this second generation SPR analyzers, the first one is the first generation machine is a big machine and in some of the hospitals they give us the feedback that our SPR system occupy too much space in the hospitals, so the second one will be a much compact system.
And the certain key reasons is we’re based on our experience of – from the first generation systems we designed the new generation system with reduced costs by which will give us benefits either by giving away the system or selling the system in the future. And also this new machine will have a higher capacity with the higher throughput compared with first generation machine.
And currently we made a decision to sell the second generation SPR systems to hospitals, once this is done because we have to pay for more than 100 first generation SPR system installed in those Tier-1 large hospitals already and if we focus on the utilization of the existing of more than 100 installed base with a very good utilization on those existing system, so we knew we can generate very positive feedback’s from the market to the new potential buyers of second generation system.
And so, we think it is possible for the potential users to buy the new generation SPR system, because compared to the time that we first launched our first generation SPR system, at that time if we choose to sell the products, it will have a longer process to convince the customers to buy this new technologies. Right now, it's different story we have already established the acceptance after SPR for HPV/DNA for HPV detection.
In terms of sales of this second generation machine, right now we have already built the portable system and after few months of tuning on we can start with the validation and clinical trial.
Just I forget one point the – another reason for us to sell the new SPR system did of course has another effect of reducing the capital expenditure burden for the company and the cost of the new second generation SPR system is about 60% of the cost of the old system. Okay.
Chris Li – Morgan Stanely
(Operator Instructions) And our next question comes from the line of Jack Hu from Deutsche Bank. Please proceed.
Jack Hu – Deutsche Bank
Thank you for taking my follow-up question. This is about medical insurance so based on your previous experience from actually from the time that you get into the list the provisional reimbursement at least to the time that you got into national reimbursement list, how long will that take?
This is really very hard to give you exact answer because in China different regions and cities with different level of the economics have – they have – the time for those individual provinces to update their reimbursement list will be very a lot. So we can only say that for those Tier-1 cities and provinces it will be faster for them to adopt the new reimbursement.
Jack Hu – Deutsche Bank
Okay. Thank you.
With no further questions in the queue, I would now like to turn the call back over the Sam for closing remarks. You may proceed.
Thank you for joining our call. Please do not hesitate to contact us if you have any question. Have a nice day. Thank you.
Ladies and gentlemen that conclude today's conference. Thank you for your participation. You may now disconnect and have a great day.