Neogenomics' (NEO) CEO Douglas VanOort on Q1 2016 Results - Earnings Call Transcript

| About: NeoGenomics Inc. (NEO)

Neogenomics, Inc. (NASDAQ:NEO)

Q1 2016 Earnings Conference Call

April 27, 2016, 11:00 ET

Executives

Douglas VanOort - CEO

Steve Jones - EVP, Finance

Maher Albitar - Chief Medical Officer & Director of R&D

Analysts

Bill Bonello - Craig-Hallum Capital Group

Amanda Murphy - William Blair & Company

Drew Jones - Stephens Incorporated

Raymond Myers - The Benchmark Company

Jeff Bernstein - Cowen Prime Advisors

James de Bangler - Boenning & Scattergood

Bill Marsh - Janney Montgomery Scott

Operator

Welcome to the NeoGenomics' First Quarter 2016 Financial Results. [Operator Instructions]. It is now my pleasure to turn the conference over to your host, Mr. Douglas VanOort, please begin.

Douglas VanOort

Thank you, Rob. Good morning, everyone. I would like to welcome you all to NeoGenomics' first quarter 2016 conference call and introduce you first to the NeoGenomics team that's here with us today.

Joining me in our Fort Myers headquarters, we have Steve Jones, our Executive Vice President for Finance, George Cardoza, our Chief Financial Officer, Fred Weidig, our Controller and Principal Accounting Officer and Jessica King, our Manager of SEC Reporting. Also joining us here is Steve Ross, our Chief Information Officer and Mark Machulcz, our Vice President of Operations. Dr. Maher Albitar, our Chief Medical Officer and Director of Research and Development is joining us from our Irvine Lab in California.

Before we begin our prepared remarks, Steve Jones, will read the standard language about forward-looking statements.

Steve Jones

This conference call may contain forward-looking statements which represent our current expectations and beliefs about our operations, performance, financial condition and growth opportunities. Any statements made on this call that are not statements of historical facts are forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control.

Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Any forward-looking statement speaks only as of today and we undertake no obligation to update any such statements to reflect events or circumstances after today.

Douglas VanOort

Thank you, Steve. I'm going to comment briefly on first quarter performance. The status of our integration Clarient, growth initiatives and conclude with our expectations for the remainder of 2016. This morning's quarter one earnings press release is the first time we're reporting combined Neogenomics and Clarient results for our full quarter and we're very pleased with the company's financial performance.

Revenue growth was very strong and exceeded our own expectations. Similarly adjusted EBITDA also exceeded our projections as we drove cost per test down in part because of earlier realization of Clarient acquisition synergies. Cash flow from operations was also very strong as we began to realize improvements in the Clarient billing process. Steve will describe this more fully but I'd like to give you a high level review of our performance and comment on some trends and dynamics. Revenue and volume growth were excellent. Separate industry and distinct comparisons of the old Neogenomics and the old Clarient will become less appropriate for us in the future as we integrate customers and lab systems but we still have fairly good visibility to those separate results for the first quarter.

Clinical genetic testing volume growth at old Neogenomics in the first quarter was outstanding. It was up about 36% compared with last year. Perhaps just as important we were able to stabilize the Clarient volume which had been on a steady decline over the last three years. We're all pleased to report that the volume of test processed per day increased each month during quarter one. So there is good solid momentum in the business. Our new combined sales team is performing even better than we expected. We evaluated, restructured and organized the entire sales organization within three weeks of closing the Clarient acquisition. The team then had to understand their new territories, learn new sales prophecies, develop sales strategies and rebuild their pipelines. Given all this disruption to our normal sales process they worked very hard and we're fortunate to have achieved strong results so quickly. We have the most experienced and highest quality sales team I've ever had the privilege of working with and we have high confidence in their ability to grow and gain market share going forward.

In addition to the strong sales performance we also benefited from a stable reimbursement environment in quarter one. This is a welcome relief from the situation we faced over the past six years. Expected increases in Medicare FISH reimbursement were slightly offset by slight Medicare decreases and other testing areas. We reported that our overall average revenue per clinical genetic test declined by about 6% year over year. This was driven by our changing tests mix and not by declines in average reimbursement. This text mix change is a result of the addition of Clarient's larger mix of lower average revenue in immunohistochemistry test.

Our operations team is also doing a very good job, despite the disruption of reorganizing and integrating our operations team delivered very high levels of service and client retention has been outstanding so far. In fact we just received customer feedback from our semiannual customer survey and the results showed the highest levels of satisfaction ever achieved by our company.

We’re also beginning to see some early synergy benefits. Cost per test in our core clinical genetic testing business was down 13% and some of that reduction was caused by the inclusion of Clarient's higher %age of lower cost immunohistochemistry in that mix. However cost per test in base Neogenomics was down 11% compared with last year. Our total employment level dropped about 2% from the year end level even though we processed 13% more clinical genetic test in quarter one than were processed by the combination of Clarient and Neogenomics in quarter four.

So we were very pleased that productivity improved even with our focus on service and employee retention. Some of the improvement in cost per test was driven by a significant process change we implemented shortly after closing. Previously Clarient's more limited test menu required a large number of molecular tests to be sent out to other labs for processing. Our teams quickly made the changes necessary to redirect all test send outs to Neogenomics Irvine laboratory. This had the impact of both improving client service through better turnaround time and reducing our overall costs. As you read in the press release adjusted EBITDA was up 442% over last year's first quarter as a result of the strong operational efforts and this gives us confidence that our strategies are working. We commented in our last earnings call that our approach to integration was to be deliberate, extensive and to move in speed. As we told our Board last week so far so good. We're pleased with the organizational integration, former Clarient and Neogenomics senior and middle management people and teams have been effectively reorganize to manage our combined operations.

People are getting to know each other better, are working well together on teams. We have common aligned goals and objectives and incentives plans has now been established for every single person in our company. Our organization is focused and is begging to get results. There's a lot more to do but teams are stable organized and settling in nicely. Our teams have done an excellent job integrating the basics of payroll benefits, accounts payable, email, security and countless other areas typically taken for granted but this is changing the way nicely for us to tackle some more difficult and challenging integration areas such as billing, laboratory information systems and the consolidation of our two Southern California facilities, billing is a challenge for our industry and we needed to make changes in the former Clarient billing process as this has been source for Clarient customers and sales representatives.

So far we're very pleased with our progress in billing. We're fortunate to have excellent billing management and many of the outstanding issues are being aggressively resolved. While much work remains in billing we're seeing tangible progress in many areas. Cash collections have been strong and we were even able to pay off the $10 million balance at our credit line during the quarter.

Laboratory information systems are extremely important to smooth operations and efficiency and we're integrating two similar but different lab systems. We're making system changes to accommodate best practices we identified in our planning and we're working to execute these changes as quickly as possible. After enhancements are made to our laboratory information systems we will begin migrating some customers and expect to have all customers on a common laboratory formation and billing system with a single test menu and a uniform service offering by the fourth quarter.

We're also making changes to our 78,000 square foot Aliso Viejo facility and are very excited about the facility plans. We expect to fully combine our Irvine operations into the Aliso Viejo facility around the end of the year. Our lease in the Irvine facility expires next April, so the timing is good and we're very focused on meeting this deadline. We still have a lot to do to fully execute our integration plans, but the project teams are working diligently and we're optimistic about executing our plans on schedule. I'm going to comment now on growth initiatives. We want to emphasize first that the foundation for growth is great client retention.

So far we've had very strong client retention and very positive feedback from clients. By delivering excellent service, we expect to maintain this rapport with our customers. Our sales representatives are doing an excellent job building out their respective pipelines of growth opportunities and we're using the same sales management tools and processes and the same sales incentive systems we're -- or used to at NeoGenomics in the past. During the quarter we added specialized representatives to serve academic centers, large oncology groups and other clinical specialties.

Overall, all our sales team is focused on growth and our list of prospects is very healthy. We've also kept focus on managed care and large accounts. We've expanded our list of Blue Cross Blue Shield individual state plan contracts by leveraging our relationship with the national Blue Cross Blue Shield Association. And we have several additional payor agreements ready to close. In addition, new contracts with large hospital groups are also helping to drive growth. We believe that our combined portfolio of over 175 managed care and large account arrangements is strong and a key foundation for continued growth. We continue to compile results in the development of our NeoLAB liquid biopsy prostate cancer test and early analysis supports the results of the first two studies.

We're currently offering this test commercially and have just hired two sales representatives and a product manager to more aggressively market the tests. For now, we're billing the prostate cancer test using a miscellaneous CPT code and generally not receiving insurance reimbursement. But we believe it's important to start to get commercial feedback, even in advance of the publication of results from our latest trial. After we have the results of this latest trial, we'll start to work with payors to establish reimbursement for the test. Biopharma services is another important area of growth for us and we're building on a successful and much larger client presence in this market.

Revenue was slightly below our expectations in the first quarter for biopharma services, as sales efforts needed to be reenergized. However, so far this year we've hired four experienced sales managers to accelerate growth. Our pipeline is already improving and we anticipate improving revenue as the year progresses. With strong client relationships, a comprehensive test menu and an experienced team, we're confident in our ability to make this an important area of growth for NeoGenomics this year and in the future.

I'll conclude by commenting on our expectations for 2016. It's early in the year and we still have much to do to successfully complete our integration activities. As part of this, we're working very hard to create a one-Company culture with a common understanding of values and behaviors and attributes of a high-performance team. We're laser-focused to retain all our clients, integrate our laboratory information technology systems and realize cost savings. At the same time, we remain driven to grow by deploying our high-performance sales team, making investments in biopharma and clinical trials business and continuing to build our leading oncology-focused testing menu.

Our first quarter volume growth, cost trends and synergy realization all were above our expectations. As a result, we announced this morning that we're raising guidance for 2016. We now believe cost and revenue synergy realization will be in a range of $8 million this year, with increasing realization as the year progresses. We expect to see additional gains when the lab information systems and lab facilities are consolidated around year-end. Our new revenue guidance for 2016 is $242 million to $252 million which is an increase of $2 million to the top and bottom end of the range. For adjusted EBITDA, we've also increased the top and bottom end of the range by $2 million and now expect between $35 million and $40 million. We're very excited about our plans and opportunities in 2016 and beyond.

Now we're going to turn the floor over to Steve Jones, our Executive Vice President for Finance, to review our first quarter results in more detail and lead us through a Q&A session.

Steve Jones

Thanks, Doug. Before we open it up for questions, I would like to briefly touch on a few financial highlights from the quarter. We're pleased to report $59.7 million of revenue in quarter one, a 159% increase over the prior year, driven by the inclusion of Clarient in the results. Approximately $52.7 million of this revenue was derived from the core molecular and genetic testing business, $1.9 million from PathLogic and $5.1 million from biopharma and research.

Consolidated gross margin was 45.5%, a 400 basis point increase from the 41.5% reported in Q1 2015. This increase in gross margin was driven by the 12.7% decrease in average cost per clinical genetic test. Gross margin in the core molecular and genetic testing business was a very strong 47.2% and PathLogic gross margin was 10.4%. Consolidated SG&A costs increased by $15.2 million or 150% from quarter-one 2015. However, as we discussed in the press release, $2.2 million of this increase was due to non-cash variable stock-based compensation and non-cash amortization of intangibles directly related to the acquisition.

Importantly, SG&A as a percentage of total revenue fell to 42.3% from 43.9% in Q1 2015. Given the reduction in cost per test and the economies of scale we achieved on the cash portion of our SG&A expenses, consolidated adjusted EBITDA increased by 442% to a record $8.2 million as compared to the prior year. First quarter GAAP net loss available to common shareholders was negative $5.4 million and GAAP diluted EPS was negative $0.07 per share. This compares to GAAP net loss available to common shareholders of negative $761,000 and diluted EPS of negative $0.01 per share in Q1 2015.

As we discussed in the press release and on our last earnings call, we believe that in order to compare the net income related to the true operations of the Company on a more consistent basis across periods, it is appropriate to adjust GAAP net income or loss available to common shareholders to exclude, one, the non-cash amortization of intangibles, such as the customer list acquired with both the PathLogic and Clarient acquisitions; two, non-cash stock-based compensation expenses that are mostly driven by changes in the Company's underlying stock price in any given quarter; three, other one-time or nonrecurring items, of which there were actually none in quarter one; four, the deemed preferred stock dividend rate by GAAP accounting; and, five, the amortization of the beneficial conversion feature related to the preferred stock that is required by GAAP accounting.

We refer to this measure as adjusted net income and on a per-share basis, adjusted earnings per share. And we've included a table with how this is calculated in our earnings release. In the first quarter, adjusted net income was $2.9 million versus negative $267,000 in last year's first quarter. And adjusted EPS was $0.03 per share compared to zero cents per share in Q1 2015. We're also pleased to report that we had very strong cash flow from operations in the first quarter of $6.8 million and were able to pay down the full $10 million balance on our revolving credit facility.

This is an accounts receivable backed, working capital facility and the full $25 million under the facility remains available to us. We finished the quarter with 877 full-time equivalent employees, contract doctors and temps versus 896 FTEs as of December 31, 2015. At this point I'd like to close down our formal remarks and open it up questions. Incidentally, if you are listening to this conference call via webcast only and would like to submit a question, please feel free to email us at sjones@neogenomics.com during the Q&A session and we will address your question at the end if the subject matter hasn't already been addressed by our call-in listeners.

Operator, you may now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from Bill Bonello with Craig-Hallum. Please proceed with your question.

Bill Bonello

You were really thorough with the information, but just a couple of follow-ups. I'm wondering, first of all, are you finding that you're adding customers that are new to both NeoGenomics and Clarient, given the combined product offering? And any color you can add around that. And then, if I can, I had a couple others.

Douglas VanOort

Yes, we're still adding customers, although I must say that there was some disruption in the sales team during the first quarter, as I mentioned. But we added good customers, new customers. And we stabilized the decline at Clarient which we really feel very good about. So the pipeline of opportunities is very strong. We review that rigorously. And I think we're going to see continued market share gains as we look forward now.

Bill Bonello

And on the synergy side, now that you are in it a few months, is there anything that you've discovered that -- sort of an unexpected opportunity in either cost or revenue synergy relative to what your initial plans were?

Douglas VanOort

Well, I must say that we're lucky we haven't really experienced any surprises so far. I think we did a pretty good analysis and the planning was pretty good and pretty comprehensive. If anything, in each of the areas I think we're finding that we were maybe a bit conservative. For example, test send-outs. I think that's a little bit better than we thought. And we're finding through best practices, as our teams get together and work with one another, we're finding a lot of little opportunities. So we hope to mine those opportunities over time.

Bill Bonello

And then I guess the last thing is just -- obviously the test growth on the legacy core Neo business is pretty phenomenal. And you're saying that you had some sales force disruption in the quarter and you had this sort of record growth despite that.

Can you give us any sense of, one, why has the growth accelerated so much over the last couple of quarters? And two, sort of the sustainability of, you know, if not this kind of growth, maybe 20%-ish plus growth?

Douglas VanOort

So I think in the last quarter, we had mentioned to everyone that we had very strong pipelines at NeoGenomics and we had a number of customers that were starting. We also had made some very good progress with some large oncology groups which were very healthy and very much helped our volume growth in the first quarter and we had a fairly large customer start in/around -- beginning of February or so. So that helped. But I think that we can't expect that kind of volume growth going forward. And we would be quite pleased, I think, in the 20% area as we get the sales force fully on board and build the pipelines back and so forth. But I think we've got a very good team and we've got an opportunity to sustain that kind of growth.

Steve Jones

There's one other sort of contributing factor. We mentioned on our last conference call that the large oncology practice that had been insourcing FISH was largely annualized at the end of Q4. So we don't have the same sort of drag on the organic volume growth that we've had throughout 2015 and so that's a contributing factor as well.

Operator

Our next question is from Amanda Murphy with William Blair. Please proceed with your question.

Amanda Murphy

I just actually had a follow-up to Bill's question. I'm wondering if maybe, just given the acquisition and all the dynamics of the customers that you're adding and different types of customers that you're bringing online now -- could you just take a step back for us and just kind of review your value proposition for clients?

So obviously you're becoming one of the lowest-cost providers of FISH, have a broader test menu, et cetera. You know, you also have a growing test menu that perhaps pathologists can't directly participate in terms of revenue. I'm thinking about the TC/PC split. So I think it would be helpful just to kind of reiterate how you all think about yourselves in the overall lab market.

Douglas VanOort

So one of our key value propositions is that we offer the most comprehensive oncology-focused test menu, we think, anywhere potentially in the world. And so we're very much a one-stop shop for clients. And increasingly we're getting work not only from pathology groups but from hospitals, oncology groups, academic centers, research centers and others. So that's one thing. The second thing is that we're highly focused on service. So in this business, it really is about delivering consistently every single day good service to clients and when that happens, not only do you retain clients but this is a small community.

Our customer survey results the other day -- we measure something call the Net Promoter Score. Many of our clients rated us very, very highly and are essentially promoters of our service. So good service leads to word-of-mouth referrals in some respects. And I think that's very important to us. So I think those are two key drivers of our value proposition. Now, pathologists use us as their laboratory. And we allow them to perform their professional interpretation of a wide range of FISH tests as well as digital pathology now and flow cytometry.

And our offering in each of those areas is very, very strong. And pathologists are able to participate in the diagnostic process and be relevant to their local oncologists as a result of using us as their reference lab. So I would say those are three important value proposition drivers that is affecting our ability to grow and do well in this market.

Amanda Murphy

Are you able to provide a perspective on what the breakdown is now between pathologists, hospitals, oncology groups, something to that extent?

Steve Jones

We haven't really looked at that yet, Amanda. The systems are still separate. Clarient is still running their LIS system and billing system separate from Neo's systems. We will be integrating those later this year. And in order to give you combined statistics, we'd really need to have everything on an apples-to-apples basis. So we're going to gently demure on answering that for a few more quarters. I don't expect it will be too different from where Neo was on a stand-alone basis, though.

Amanda Murphy

And then, Doug, just given your comments, then, one of the things we get asked a lot about is competition. Just given your success and the growth that you are experiencing, maybe you could address sort of how difficult would it be for existing players to develop the offering that you have and then new players as well?

Douglas VanOort

Competition in our industry is fierce. There are a lot of very good, capable laboratories out there. The big laboratories, obviously, are among the best competitors, but there are a lot of others. I think what we have is difficult to replicate in many ways. One is that it's not easy to develop the comprehensive test menu that we've developed. That takes a lot of time and it takes a lot of effort. So that's not something that is easy to replicate, but there are 100 other things in this business that are difficult to replicate.

It's not easy to have a world-class sales team that's really experienced. It's not easy to have laboratories that have the kind of capabilities and service levels that we have. You know, we've got a team of experienced people; they don't fall off the trees. You know, it's difficult to hire and train and develop those people.

The other thing that we mentioned in the script was we have a managed care and large account portfolio of contracts that are about 175 in total. And that's something that doesn't happen very easily as well. So I'm not sure I could point to one thing. But I would say it is the cumulative number of these barriers that we've, I think, created which give us, I think, a sustainable competitive advantage.

Amanda Murphy

And then just, actually, on the managed-care contract point, two questions there. One, as you integrate the two companies, anything there that is a positive or negative just in terms of, one, managed-care and Neo managed-care contracts vis-a-vis legacy Clarient's that has been helpful or hurtful? And then also just wondering how the private side of handling the FISH changes this year.

Steve Jones

We're working very closely with the payors. I know the sales team was extremely excited when we brought them together in terms of the Clarient reps seeing the list of hospital -- you know, large purchasing groups that Doug mentioned that NeoGenomics has. So that's already been a positive in terms of them being able to go out to hospitals they had relationships with and now be in the purchasing agreement. So we're working with the managed-care plans, but I'd already say I think it's helping our volume growth in terms of -- especially the large hospital systems.

Amanda Murphy

Okay. And then just last one for me on the billing side. Did you give a timing for when you expect to complete the Clarient billing conversion? I don't know if that's correct word, and then is there anything to think about over the course of that time from a modeling perspective, even in terms of revenue rec dynamics that maybe just temporal in nature?

Steve Jones

Well, I guess I'll start with the second one. In terms of the revenue recognition, we focus a lot of energy around revenue recognition. So I really don't expect that to be a change. In terms of actually potentially picking up more cash and Doug mentioned we're working hard on Clarient's billing processes to try to get them to match NeoGenomics. We've already modified several policies and we're putting quality control and other things in place.

So I do believe long term there will be an improvement there. The full billing conversion is really going to go hand-in-hand with the laboratory conversion, because as clients migrate from the Clarient laboratory system over to the NeoGenomics laboratory system, de facto, the billing conversion is going to happen at that point as well. So they're really linked together. And certainly the goal, as Doug mentioned, is to complete them by the end of the year.

Operator

Our next question is from Drew Jones with Stephens Incorporated. Please proceed with your question.

Drew Jones

Kind of dialing into the legacy Neo growth a little bit further, is it safe to assume that there was really no headwind for you guys in terms of customers maybe insourcing some FISH tests as a result of the improving reimbursement environment there?

Douglas VanOort

Yes, it's pretty safe to assume that. We had that one large customer, I think, is down to a couple hundred thousand dollar impact in Q1. And so that one has largely annualized and nobody else is insourcing FISH or has ever indicated that they are even thinking about it. I need to emphasize here that that large customer is a multibillion-dollar amalgamation of oncology practices. In fact, it's the largest independently owned oncology practice in the United States and so they have kind of scale that you would need in order to insource FISH testing.

Most clients, including pathology groups, just simply don't have the scale to do that, because the equipment is expensive; the techs are very specialized and they're not easy to hire; and there is a lot of process around doing FISH. And doing multiple FISH menus, like we have over 60 different FISH probes on our menu and panels, it's very difficult to put that together. And so we don't expect to really see any additional insourcing of FISH testing.

Drew Jones

And then, Doug, you touched on kind of re-energizing maybe the sales effort on CRO side. You added four reps. Can you tell us where, how experienced and kind of impact maybe you expect this year?

Douglas VanOort

Sure. Yes. So we were very fortunate, Drew, to have added four very experienced sales reps. I think the team in our biopharma group did a very good job of servicing good people, good talent out there. And we have very strong capabilities in biopharma. So these people have a lot of experience in contracts and they were excited about our portfolio of products. And we're pretty hopeful and confident that we can re-energize the quarter-one performance was, as we said, not up to our expectations there.

Drew Jones

And then last one for me, will you have any presence at AUA next month for NeoLAB?

Douglas VanOort

Dr. Albitar, I'm not sure if you are able to answer that question and I don't know the answer.

Steve Jones

We'll be at AUA, but I don't that we're doing anything specific for the prostate test. Go ahead.

Maher Albitar

Simply because -- remember, we're doing prospective studies. The data is not ready. We didn't present abstracts or a scientific presentation, but we're going to have our salespeople for the prostate at the meetings, talking to various urologists and getting some feedbacks on our tests and talking about our tests, but we didn't really submit scientific abstracts for this meeting because of the data. It wasn't there for the deadline for the abstract submission.

Operator

Our next question is from Raymond Myers with Benchmark. Please proceed with your question.

Raymond Myers

Let me just pick it up right there about the prostate cancer study. When do you expect to be releasing that data?

Maher Albitar

Again, this is very difficult study, because it is prospective. And it was designed to be unbiased. So not all the patients that we collected samples and tested will have the biopsy results, because performing biopsy might take longer times. So, for 2005 [indiscernible] samples, it might take us longer time; but we might do, like, early analysis of the data currently. I think hopefully within a few weeks, I can have 400 or 500 samples with data on them, so we can publish it and announce the results.

But as Doug said, you know, so far we looked at 250 samples of patients that we tested and the results really look very good. And based on that we feel very comfortable with the tests. And this is why it is being offered as a clinical test. But for publications, as soon as I have about 400, 500 samples, I'm going to try to publish it as well.

Raymond Myers

So can I have a better sense of time frame there? Do you mean in a few weeks, a few months? Or can we just expect it this year?

Maher Albitar

Definitely this year.

Raymond Myers

And then moving on, Doug, there was excellent gross margin leverage exhibited in the first quarter. Can you give us a sense of how much more leverage might we expect throughout the course of 2016? Or was that leverage primarily driven by a one-time effect of the combination of the businesses?

Douglas VanOort

Well, Ray, there's no one-time effect of the combination of the businesses. There's no one-timers in there. So I think the quarter-one gross margin levels should be relatively sustainable. If anything, we should realize more cost synergy as we go through the integration. Now, we mentioned that this is not going to happen overnight. We've got to combine laboratory systems; we've got to make changes in our LIS system. We've got to integrate the labs around the end of the year. And that's when we'll start to see some more significant gross margin improvement.

Raymond Myers

And then let's talk about your synergy guidance for a moment. You've increased the synergy guidance from $6 million to $8 million for 2016. And in some of your past presentations, you had given guidance for 2017 and 2018 synergies. Could you give us a sense of how the improvements that you've seen so far would directionally affect the guidance that you had given for synergies in 2017 and 2018?

Douglas VanOort

Yes, they don't, really. We've just accelerated the realization. The total amount of cost synergies that we provided is still what we believe.

Operator

Our next question is from Jeff Bernstein with Cowan Prime Advisors. Please proceed with your question.

Jeff Bernstein

My congratulations on a good start. When you talked about the competitive moat, you didn't mention the cost per test reductions that you guys have been able to do which seems like one of the more important ones. And I know part of that is the kind of management practice, but you're also trying to bring some technology to bear there. Can you just talk about both of those?

Douglas VanOort

Sure. So we're very, very focused on automation, quality and we're on a quality journey which is we're continuously improving our -- everything we do. And so we expect that our cost per test is going to continue to decline as we go through that. I didn't list that as a competitive moat because we don't really compete on price that much. We compete on service and we're not the low-priced guy in the marketplace. And we don't intend to be.

Operator

We have a question from James de Bangler with Boenning & Scattergood. Please proceed with your question.

James de Bangler

I just was wondering if you had any kind of an idea what you think the impact of flow cytometry would be in your future revenues. Could you comment at all on that? Thank you.

Douglas VanOort

Yes, we can. So flow cytometry is a very important part of our product mix. We think we've got a terrific capability in flow cytometry. We're actually adding some capability through work that we've done with the support vector machine capability that we have. But we have very high service levels. We're continuing to offer new testing ideas for flow cytometry clients. And we expect that it's going to be -- continue to be a very important part of our product mix.

Steve Jones

Operator, we have one more analyst who's trying to get in and can't get into the queue for some reason. Is it star one is the command?

Operator

That is correct; it is star one to ask a question in the queue.

Steve Jones

Maybe just give it a minute. I know Paul Knight is trying to get into the queue and has had some trouble.

Operator

Absolutely.

Steve Jones

I don't have any other comments on via email questions at this point, either. So after we hear from Paul, we'll go ahead and wrap it up. I guess we will wrap it up, then. So here he is now. Operator?

Operator

Our next question is from Bill Marsh with Janney Montgomery Scott. Please proceed with your question.

Bill Marsh

This is Bill filling in for Paul. Maybe if you could, as you think about the sales volume growth, how do you think about it maybe from new tests versus existing tests? How does -- you know, you guys have been very innovative with new product rollouts. How does that help support future volume growth? Could you put some color around that?

Douglas VanOort

We have not broken out new test growth from other growth. It's a little bit difficult for us to do now this early with the Clarient and NeoGenomics numbers coming together. I will say this, that the comprehensive nature of the menu is driving growth in all the testing modalities.

So a client may come to us because of a unique test that we have and discover our service and then begin to use us in other testing areas. That's been a very important driver of our growth. So while individual new tests may not appear as very significant, the significance of our offering and innovation that we have is very important to our overall test growth.

Bill Marsh

And then maybe just on the cost per test reduction that we saw from core Neo declining 11% -- with Clarient now 3 to 4 months into the integration, how do you think about the opportunities there to kind of integrate practices and maybe drive similar types of test reduction pricing for their test menu? Or since it's kind of a different test profile, is it maybe not as easy?

Steve Jones

Well, it's difficult to say what the cost per test decline will be on an individual basis, because we're combining the operations. But on a combined basis, we have internal goals that are in the 10% range this year for cost per test reduction. We think that that's doable. There are, as you point out, a lot of best practices that are available. We've got a whole laundry list of IT enhancements that can help us automate. We're on the journey for quality improvements. There are a lot of things that we're doing to improve our cost per test and that affects the combined business.

Douglas VanOort

I need to emphasize something we have talked a lot about in the past. Cost per test improvements tend to be a little bit lumpy. It's not going to be a smooth trend. There are -- the areas where we unlock some synergies and we unlock some productivity gains in one quarter and might be less the next quarter and whatnot. So our internal goal is 10%. I hope that when you guys model this, don't use anything close to that. Because we really try to set expectations and meet or exceed them, not just meet them. That's a very big stretch goal and there are a lot of labs that wouldn't come anywhere close to that. I think Steve just told me I shouldn't have said that.

Operator

There are no further questions at this time. I would like to turn the call back over to Douglas VanOort for closing remarks.

Douglas VanOort

Thank you, Rob. So as we end this call, I'd like to recognize the 877 NeoGenomics team members around the country for their dedication and commitment to building this world-class cancer genetics testing program. And on behalf of the whole NeoGenomics team, I want to thank you for your time joining us this morning for our quarter-one 2016 earnings call and let you know that our second quarter 2016 earnings call will be held on or around July 27.

So for those of you who are listening that are investors or are considering an investment in NeoGenomics, we thank you for your interest in our Company.

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!