Here’s the entire text of the prepared remarks from China Medical Technologies’ (ticker: CMED) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Executives:
Tip Fleming, Investor Relations Advisor, Christensen
Charles Zhu, Vice President, Business Development and Investor Relations
Sam Tsang, Chief Financial Officer
Analysts:
Richard Lou (ph), RJC Capital Management (ph)
Weidong Huang, TimesSquare Capital Management
Matt Wyden (ph), Stafford Capital (ph)
Patrick Lin, Primarius Capital
Operator
Good day and welcome ladies and gentlemen to the September China Medical Technologies Earnings Conference Call. My name is Audrey and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call, you require assistance press “*” followed by “0” and an operator will be more than happy to assist you. As a reminder ladies and gentlemen, this conference is being recorded for replay purposes. I’d now like to turn the call over to Tip Fleming, China Medical Investor Relations Advisor at Christensen. You may proceed.
Tip Fleming, Investor Relations Advisor, Christensen
Hello everyone. Thank you for joining us today. I’m pleased to welcome you at China Medical’s second quarter earnings conference call for their 2005 fiscal year. China Medical announced its second quarter results yesterday morning in US. You may find a copy of the press release in the company’s website at www.chinameditech.com.
Today, your speakers will be Charles Zhu, China Medical’s VP, and Sam Tsang, China Medical’s CFO. After they finish their prepared remarks, they will be available to answer your questions.
Before we continue, please bear with me as I take you through their Safe Harbor policy. The discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such the results maybe materially different from the views expressed today. The number of potential risks and uncertainties are outlined in our public filings with the US Securities and Exchange Commission. China Medical does not undertake any obligation update, any forward-looking statements expect this required under applicable law.
As a reminder, this call is being recorded and replay of this conference call will be available via webcast on China Medical’s website. Now, let me to turn over the call to Charles Zhu. Charles?
Charles Zhu, Vice President, Business Development and Investor Relations
Thank you, Tip. Hello everyone and welcome. Thank you for joining us on our first earnings call. The July to September period marked the second quarter of our fiscal year, and it’s our first quarter as a public company following our successful IPO (indiscernible).
Overall, we are pleased with our results and our continued growth momentum. Top line revenues increased to 81.6% year-on-year, and 43.3% from the previous quarter to RMB88.1 million. And net income increased 51.3% and 42.1% respectively to RMB42.9 million. For the High Intensity Focused Ultrasound or our HIFU business, we continued to penetrate the China market and further extending our leadership in the market. We’re adding a greater number of sound product distributors to improve our coverage. In second quarter, we increased the number of distributors from 10 to 16 and are targeting to have about 30 by the end of March 2006. Most of these distributors have the experience in selling big budget medical equipment such as CT and MRI scanners. We believe these distributors will help drive our revenue growth and also reduce our risk of relying on a more number of dealers. We continue to invest inaugurating our current product. In the past quarter, our R&D team has successfully developed a non-invasive temperature monitoring technology using ultrasound. The prototype was demonstrated at the World Congress of Ultrasound in Beijing, where the test results were validated against the measurement by invasive thermal sensor. We are trying to apply this novel technology to clinical procedures by end of this year.
We’re also investing more resources on sales and marketing events to promote the awareness of HIFU technology in both systemic and clinical communities. In the past quarter, we attempted a series oncology product (indiscernible) and attended conferences both in China and abroad. Overall, our HIFU technology have become more and more trusted, accepted globally and has attracted more new ventures into the market, including one of the largest medical equipment company in the world.
We believe it’s good to be improving the exposure of such a emerging technology and into uptake the new player, in several years to complete the regulatory approval processes.
There is currently very little penetration in market and we’re in a very strong position to acquire complementary technology and businesses to capitalize on our first mover advantage. We are closely studying the development on HIFU technology not only in tumor applications but also in cardiovascular and diagnostic applications.
For the Enhanced Chemiluminescence Immunoassay or the ECLIA-IVD product and their reagents business, we are on target to develop more reagents to be used with our analyzers. Since our IPO, we have added 10 reagents to the 27 types which are in different stages of getting final regulatory approval. We expect some of the key reagents will bring in higher recurring revenue including tests for hepatitis B. We’ve also obtained 5 purified proteins out of the 7 HIV proteins in collaboration with China CDP. We expect to finish the development of all 7 proteins within 6 months, which will be used as the key raw material to develop HIV test reagents.
In terms of sales and marketing, we increased the number of ECLIA distributors from 20 in the previous quarter to 40 and we expect the number to be about 50 by the end of March 2006.
Although our strategies to sell our current semi automatic system to maintain small type hospitals, we have managed to successfully penetrate some larger hospitals because of our competitiveness in pricing and customer service quality. These experiences have helped us to be more prepared to compete with the imported products in high end-markets when our fully automated systems is introduced in the second half of 2006.
At this time, I would like to turn the call over to Sam, so he can give you an overview of our second quarter financials. Sam?
Sam Tsang, Chief Financial Officer
Thank you Charles and welcome everyone. Our financial performance in the second quarter demonstrates our strong growth. Net revenues were up 81.6% year-over-year and 43.3% sequentially to RMB88.1 million, or US$10.9 million. Net income was up 61.3% year-over-year, and 42.1% sequentially to RMB42.9 million or US$5.3 million.
I would like to focus my comments on the major line items of our income statement. I have mentioned our strong growth in the net revenues. We are operating 2 quarter late. One is, HIFU and the other is ECLIA. Revenue from our HIFU was up 45.9% year-over-year and 61.4% sequentially, to RMB59.4 million or US$7.3 million. The increase in the HIFU sales was due to the increased awareness and acceptance of our HIFU technology in the medical community in China. It was also, what we saw of typical seasonal practice, due to the timing of capital spending at Chinese hospitals during the calendar year.
Historically, our June quarter tends to be the richest quarter for HIFU sales. The September quarter is better followed by the March quarter. The December quarter is usually our best quarter. Therefore, you can see that the sequential increase of 61.4% is higher than the year-over-year increase of 45.9%. After the introduction of our ECLIA product September last year, we believe this seasonal impact on our quarterly results will be reviewed.
Revenue from our ECLIA was not more than 2 times year-over-year and 16.2% sequentially to RMB28.7 million or US$3.6 million. So, significantly, year-over-year growth for our ECLIA business was due to the expansion of our distribution network and the significant increase in the sales of our ECLIA product, following their introduction September last year. The sequential growth was primarily generated by the recurring revenue from the sales of our ECLIA reagent kits that are used with our ECLIA equipment.
Moving on, our gross margin decreased slightly to 69.8% this quarter from about 71.1% last quarter. The slight decrease was due primarily through the sales mix and the incremental raw material cost. Our operating expenses more than double, year-over-year and were up 45.3% sequentially to RMB12.5 million or US$1.5 million, it’s the increases were, due primary with the substantial addition of staff; in relation to the expansion of our operations, following the acquisition of our ECLIA technology in August 2004.
Our headcount almost doubled to about 270 people. The commencement of our FDA project in the US for the HIFU will increase promotional activities for our product and additional expenses after the public listing of our company, all contributed to the increases in operating expenses. Our operating expenses as a percentage of revenue increased to 14.2% this quarter. Our interest income increase substantially, to RMB1.1 million of US$0.1 million for this quarter. This was primarily due to the interest income that was generated from the net profits received from our IPO.
The income tax expense increased to RMB7.2 million or US$0.9 million for this quarter. The increase was due primarily to our higher taxable income for this quarter. Our effective tax rate for this quarter was 14.4%. Our December income tax rate is 15%. Also, we saw of every thing I’ll just mentioned, net income was up 61.3% year-over-year and increased 42.1% sequentially to RMB42.9 million or US$5.3 million.
Well, let’s turn to our operating cash flow and cash position. Our cash flow from operating activities was RMB64.1 million or US$7.9 million for this quarter. At September 30, 2005, our cash and cash equivalents were RMB771.8 million or US$95.4 million. For our projection, we are projecting net revenues for the financial, for the fiscal year ending March 31, 2006, to fall between RMB360 million and RMB400 million or US$44.5 million and US$49.4 million. We believe our net income for this fiscal year will be between RMB175 million and RMB190 million or US$21.6 million and US$23.5 million.
That concludes our prepared remarks. Now, we’re happy to take your questions. Operator, please?
Question-and-Answer Session
Related:
- The Q&A from this call is here.
- A list of full conference call transcripts available on the Seeking Alpha Network.
- The complete list of China stocks (and links to articles about them) covered by The China Stock Blog.
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