China Medical F1Q07 (Qtr End 6/30/07) Earnings Call Transcript

Sep.21.07 | About: China Medical (CMEDQ)

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China Medical Technologies, Inc. (CMED)
F1Q07 Earnings Call
August 28, 2007 8:00 am ET

Executives

Winnie Fan - Investor Relations
Charles Zhu - Vice President, Business Development
Sam Tsang - Chief Financial Officer
Xiaodong Wu - Chairman of the Board, Chief Executive Officer

Analysts

Vicky Yun Chen - UBS
Ben Lee - Merrill Lynch
Jinsong Du - Credit Suisse
Joy Yuan - Goldman Sachs
Rahul Gupta - Oak Tree Capital
Alex Yu - Breen Murray
Luke Langford - Langford Capital Management

Presentation

Operator

Good day, ladies and gentlemen and welcome to the China Medical Technologies Incorporated first quarter earnings conference call for the fiscal year ending March 31, 2008. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Winnie Fan, Senior Manager of Finance and Investor Relations. Please proceed, Madam.

Winnie Fan

I am pleased to welcome you to China Medical Technologies’ first quarter earnings conference call. China Medical Technologies announced its first quarter results about two hours ago. A copy of the press release is also available on the company’s website at www.chinameditech.com. Today your speakers will be Mr. Charles Zhu, VP of Business Development, and Mr. Sam Tsang, CFO. After they finish their remarks, they will be available to answer your questions.

Before we continue, please bear with me as I will 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 Litigation Reform Act of 1995. Forward-looking statements involve inherent risks 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. The company does not undertake any obligation to update any forward-looking statements 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 the company’s website.

Now allow me to turn the call over to Charles. Charles.

Charles Zhu

Thank you, Winnie. Ladies and gentlemen, welcome to China Medical's earnings call. This is the first quarter of IVD revenue comprising FISH and ECLIA exceeded our HIFU revenue. This is the result of a recent FISH acquisition and the strong growth of the recurrent ECLIA reagent business.

Our diagnostic revenues are the major driver for future growth in the next few years. I am going to share with you the update on each of our operations.

For FISH, we commenced to sell our FISH equipment in June and expect more than 100 units of the equipment will have been installed with tier one hospitals by the end of September. The sales of lower margin FISH equipment will help us capture the potential FISH users as early as possible, which will drive the sales of our higher margin FISH probes thereafter.

We have trained a number of technicians from the hospitals and they’ve been using our FISH probes for testing. We plan to commence the sales of FISH probes under the R&D label in the September quarter and we are confident to achieve the target of $20 million of FISH revenue in this fiscal year.

We’ve also commenced the application for SFDA approval process and expect the approval in about one year. Building on the FISH technology platform, our R&D team is also developing more applications to target broader markets, such as the probes for early diagnosis of prostate cancer.

Now let’s move to our ECLIA operation. Recurrent sales of ECLIA reagents increased to 80% of our total ECLIA revenue in the first quarter. We believe this trend will continue, following the introduction of new fertility related reagents and thyroid disorder reagents to the market in the September quarter. The reagent kit offering will be expanded to 74 after the new reagent introduction.

There are also other reagents under development, including reagents related to infectious diseases and cardiovascular disorders. The current average quarter reagent consumption per system already exceeded our target and we are reassessing a new internal target for the reagent consumption.

Let’s talk about our HIFU operation. We are maintaining the dominant position in the HIFU market in China and we are also actively looking for exploring opportunities in the overseas market. For the potential sales of HIFU system in the Korean market, our Korean distributor is still working with Korean FDA for the clearance and have paid us a non-refundable deposit equivalent of 50% of the selling price of a HIFU system. Besides, we have received the conditional approval for the U.S. FDA for our IV application that allows us to start the human clinical trial in the U.S.

This is a key milestone for the overseas regulatory approval process, which will certainly increase the market recognition for our HIFU system on an ongoing basis, both in domestic and international markets. We are now preparing ourselves for the commencement of human clinical trials in the U.S. in accordance with the approval.

I have finished my update on each operation and I would like to turn the call over to Sam and he will give you an overview of our first quarter results. Sam.

Sam Tsang

Thank you, Charles and welcome, everyone. Since most of you should have seen our earnings release, I will try to keep my comments short and take your questions afterwards. Let’s have a recap first.

Our 1Q revenues were up 66.6% on a year-over-year basis. Our non-GAAP 1Q adjusted net income was up 37.4% on a year-over-year basis. Our GAAP 1Q net income was up 12.6% on a year-over-year basis. Our 1Q adjusted diluted EPS on a non-GAAP basis was up 42.6% on a year-over-year basis, while this diluted EPS on a GAAP basis was up 15.7% on a year-over-year basis.

Let’s look at more specific information for the quarter. 1Q revenues were up 66.6% year over year to RMB 151.5 million, or $19.9 million. Our revenues are generated from our ECLIA system, FISH system, and HIFU system. 1Q revenues from sales of our ECLIA business were up 54.7% year over year to RMB 79.1 million, or $10.4 million. The key driver in our ECLIA operation is the recurring revenue from the sales of reagent kits, which account for about 80% of our total ECLIA revenue.

We expect this trend to continue because of the increasing number of the equipment placement and new reagent kits over to the market. We have introduced new fertility related reagents and thyroid disorder reagents in the September quarter, which we believe will continue to stimulate our reagent sales.

Regarding equipment sales, we sold 257 units in 1Q07 compared to 292 units in 1Q06 and we expect the equipment unit sales to be stable at the current level in the following quarters.

1Q revenues from the sales of our FISH business were RMB 14.4 million, or $1.9 million, upon the recent launch of our FISH system. We sold 42 units of FISH equipment and expect to sell FISH probes in 2Q.

1Q revenues from the sales of our HIFU business increased 20.5% year over year to RMB 58 million, or $7.6 million. We sold 20 new HIFU units in this quarter compared to 17 units in 1Q06. Just a reminder; our HIFU sales are affected by seasonality and the June quarter is typically the slowest quarter for HIFU sales. We had a backlog of about 30 units at the end of June.

Gross margin decreased to 62% this quarter from 70.7% in 1Q06. The decrease was because of the amortization of FISH intangible assets of RMB 11.9 million, or $1.6 million, and the sale of FISH equipment, which generates lower gross margin.

FISH probes are high gross margin products and are recurring in nature and the sales of FISH equipment will drive up the sales of FISH probes, the use of FISH probes by hospitals. Excluding the impact of FISH amortization, gross margin would be 69.9%, a year-over-year decrease of less than 1%.

1Q operating expenses increased 36.8% year over year to RMB 29.5 million, or $3.9 million. R&D expenses increased 66.8% year over year, due to our HIFU study with MOH, our collaboration with research institutions and new product development, including ECLIA reagents for infectious disease and cardiovascular disorder, and FISH probes for prostate cancer.

Sales and marketing expenses increased 38.3% year over year, due to greater participation at exhibitions and more promotional events organized by us during the quarter.

G&A expenses increased 21% year over year, due to an increase in headcount for expansion and stock compensation expense arising from recent stock grants. Stock compensation expenses for financial year 2007 are estimated at about RMB 20 million.

Operating expenses as a percentage of revenue were 19.5% for the quarter, compared to 23.7% in 1Q06.

1Q amortization of convertible notes issuance costs of RMB 2 million, or $0.3 million, related to the issuance of convertible notes of $150 million in November, 2006. The total issuance costs are amortized over a five-year period.

1Q interest expenses of RMB 10.1 million, or $1.3 million, related to the interest expense for the convertible notes. The coupon of the notes is 3.5% per annum. 1Q other interest expenses of RMB 1.6 million, or $0.2 million, related to the notional interest from the present value discounting of long term other payable of $10 million for FISH acquisition, which is due in February 2009.

1Q interest income increased 12.3% year over year to RMB $8.7 million, or $1.1 million, primarily due to interest income generated from the cash proceeds received from the convertible notes. We expect the interest income to decrease due to the cash payments for the FISH acquisition.

1Q income tax expense increased 72.1% year over year to RMB 7.9 million, or $1 million, primarily due to an increase in revenue.

1Q effective tax rate was 13.3%. The increase in effective tax rate was primarily because certain expenses, such as convertible note expenses, are [not deductible] for PRC income tax.

1Q net income increased 12.6% year over year to RMB 51.7 million, or $6.8 million. 1Q non-GAAP adjusted net income, which excludes stock compensation expense and amortization of acquired intangible assets, was up 37.4% to RMB 68.7 million, or $9 million. The lower growth rate compared to revenues was primarily due to convertible notes interest expense and amortization of RMB 12.1 million, or $1.6 million in this quarter.

For the computation of diluted EPS, the potential shares from the conversion of convertible notes were not included in this quarter because they are anti-dilutive. Our cash flow from operating activities was RMB 73.3 million, or $9.6 million, in 1Q07. At June 30, 2007, we have a cash balance of approximately RMB 1.1 billion, or $150.5 million.

Accounts receivable at June 30, 2007 was RMB 215.3 million, or $28.3 million, representing a 6.7% increase from the March ending balance last quarter. The accounts receivable turnover days improved to 129 days for the June balance from 135 days for the March balance.

We are reassessing our financial year 2007 targets based on better-than-expected ECLIA reagent sales and smooth progress of the FISH business. We will complete our assessment and revision on targeted revenues and non-GAAP adjusted net income when we report our 2Q results in November 2007.

This concludes our remarks. Now we will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Vicky Chen with UBS. Please proceed.

Vicky Yun Chen - UBS

Congratulations on a very strong quarter. Now, my first question is really regarding the FISH technology, FISH sales. So you mentioned that currently about 42 units of microscope sold for FISH and the probes are going to be sold in the second quarter of this fiscal year. Now, overall for this whole year, what do you expect the FISH microscope -- how many are going to be sold? Is there any target in your mind?

Sam Tsang

No, we actually right now are only providing the overall revenue target for the FISH business for $20 million. We don’t break down into the unit sales and probe sales at this moment.

Vicky Yun Chen - UBS

Also, when you see your -- well, this is a follow-up question; between FISH and ECLIA, now currently your ECLIA equipment I believe are still to be the second tier hospital and third tier hospitals. Do you expect to where you have fully automatic ECLIA systems, expect any cannibalization between your two systems in terms of sales?

Charles Zhu

For our fully automatic ECLIA system, we’ll be targeting the large tier one and tier two hospitals.

Sam Tsang

And you know, Vicky, the approach for the sale of the fully automated may not be to sell the equipment but to one on a leased equipment basis, which means we may not sell the equipment to the hospital but lease the equipment with the hospital to generate much higher consumption of reagents from these large hospitals. So the launch of the equipment may not generate equipment sales for the company but it will generate a large amount of recurrent reagent revenues for the company longer term.

Vicky Yun Chen - UBS

I guess my question is really because FISH is mainly targeting the top tier hospitals, correct? And that also, in terms of some of the tests, are they going to have any redundancy in terms of diagnostic areas between FISH and ECLIA?

Charles Zhu

No, actually FISH technology and ECLIA technologies are targeting different applications and therefore different diagnostic purposes. For example, for the ECLIA, we have the reagent for the Down’s Syndrome prenatal screening purposes, and the same for FISH; we also have prenatal applications but it’s for the confirmative diagnosis. So there is no cannibalization between the FISH and ECLIA business.

Naturally, we think they are very good complementary technologies to each other.

Vicky Yun Chen - UBS

Thank you, and the next question is on the tax rate. Now, going forward, because I see this quarter and also mentioned in your press release, the tax rate, the effective tax rate actually went up. Is it going to apply for the whole year for this year?

Sam Tsang

Yes, except for the -- our tax rate will increase from currently 10% to 15%, starting from January, 2008.

Vicky Yun Chen - UBS

Okay, great. Thank you.

Operator

Your next question comes from the line of Ben Lee with Merrill Lynch. Please proceed.

Ben Lee - Merrill Lynch

Thank you. The first question is on your earnings guidance. Sam, you said you are reassessing your earnings guidance because the ECLIA and FISH business is doing better than your expectations. I was wondering, what are the things that you need to know before you can raise your guidance? If you have to raise your guidance, what is the timing? Would you raise it in the middle of the quarter or you would rather wait until the next earnings release?

Sam Tsang

Currently we expect to release the revised target in our next earnings call.

Ben Lee - Merrill Lynch

Okay, so I guess my question is what are the parameters that you need to look at before you feel comfortable raising the guidance?

Sam Tsang

Actually, we are getting more information. You know, now is the first quarter, we know the trend, which is very obvious, but the numbers, we would like to get more numbers information so we can give a more accurate revision in our numbers. For example, the ECLIA sales, we expect the reagent sales will continue its momentum because of the introduction of more reagents and the FISH business; this is the first quarter we sold our FISH system and this quarter, we installed quite a number of FISH equipment units and we will have FISH probe sales this quarter, and so it will be better for us to give more accurate numbers when we revise our targets in the next quarter.

Ben Lee - Merrill Lynch

Okay. Let me ask a question on the HIFU business. The growth rate for this business has slowed down from 33% we saw last year to about 21% this quarter. Can you explain that? And perhaps more importantly, what is your growth expectation for this business? What is a sustainable growth rate going forward in your perspective?

Sam Tsang

Actually, we already expect a steady growth for our HIFU business instead of a high growth rate, as we mentioned in our last quarter earnings release. Actually, 20% is not a bad number, given the much larger base of sales units.

And so, the longer term view for HIFU is positive. As we mentioned, we already received conditional approval from the FDA which actually not only helps us for the international market but also helps us to promote HIFU technology in the PRC local market as well. And the study of HIFU efficacy with MOH will also provide long-term benefits for the use of HIFU in the China market.

So the long-term view for HIFU is still very positive.

Ben Lee - Merrill Lynch

Great, and I just want to go back to the previous question asked by Vicky on the FISH business. Can you tell us how many units you’ve shipped so far this quarter? And if you can disclose how many outstanding orders do you have in hand right now at this moment?

Sam Tsang

As we mentioned, we expect more than 100 units accumulated total by the end of September. That means we are finished the 100 unit orders we received in June by the end of this quarter and also we will fulfill some additional orders we receive in this September quarter.

Ben Lee - Merrill Lynch

So just to clarify, you’ve already fulfilled about 100 units up to the first two months, which is the June and July months? Now, you are expecting how many more for this quarter?

Sam Tsang

We are expecting to fulfill some of the additional orders we have received in this September quarter, but we don’t think it is good to disclose now our expected units at this stage for the September quarter. Of course, you will know the numbers that we report in our second quarter.

Ben Lee - Merrill Lynch

Okay, great. Thank you. I’ll go back to queue.

Operator

Your next question comes from the line of Jinsong Du with Credit Suisse. Please proceed.

Jinsong Du - Credit Suisse

Regarding the days of receivables, just now you mentioned as well that there’s a slight increase in the days receivables. Could you give us more color on that?

Sam Tsang

I’m sorry, you are asking about?

Jinsong Du - Credit Suisse

The days of account receivables, since there is a slight increase in the --

Sam Tsang

Given our sales revenue increase, 66%, accounts receivable just increased slightly. Also, I think the point is to look at the accounts receivable turnover days. We moved from 155 to 129 days.

Jinsong Du - Credit Suisse

Okay, but of the total revenue figures, essentially, if you look at the quarter-to-quarter comparison, the days of accounts receivable is actually increased a little bit. Not the year-on-year, but the Q-on-Q. Is it just because it is lumpy because we have more things in the June quarter? Or is it because of the changes in the product mix, especially the FISH business?

Sam Tsang

Even though the HIFU sales is a slower quarter for June, you know that a collection period of our HIFU is much longer than the other two product lines, and so the current accounts receivable is actually composed of HIFU sales, which happens in the March quarter, December quarter, and some in the September quarter.

Jinsong Du - Credit Suisse

Right. Understood, so it’s purely, you know, largely because of this lumpy HIFU business?

Sam Tsang

It is mainly related to the HIFU business.

Jinsong Du - Credit Suisse

Are we going to -- I think -- sorry for getting back to this FISH question as well. I understand the other two analysts have been asking this, but it seems that people are very interested in knowing in terms of the forecast of the FISH business. Are we going to -- because last quarter basically we said, you know, mentioning that we had 100 units in backlog in the FISH. Now we sold, for the quarter ending in June, we sold 42 units. I understand that we are not saying right now the numbers for this September quarter but from an ongoing basis are we going to talk about the backlog of the FISH units, the microscope units, the same as we are talking about backlog for HIFU as well? Or was last quarter just that one time kind of guidance?

Sam Tsang

Actually, the backlog for FISH equipment, actually we have announced last quarter, you’ll remember, we had our earnings call in very late June. And actually, we mentioned 100 units and we expect to sell 40 units and actually the backlog by the end of June was 58 units. We mentioned that we received additional orders in this quarter and we expect to fulfill or complete delivery of some of these additional orders we received in this quarter. And so of course the number of units sold for FISH equipment will be much higher than the June quarter.

Jinsong Du - Credit Suisse

I appreciate that explanation. I just want to understand that going forward, like for example in the next earnings results, are we going to say how many FISH microscopes are going to be in the backlog?

Sam Tsang

We will talk about the expectation of equipment level or some, and also information about the units in the next quarter call, which will have some indications for the following quarter.

Jinsong Du - Credit Suisse

Okay, great. That’s great. Just maybe going back to, just one last question before I jump back to the queue, going back to the big picture issue, we did a very big M&A, acquisition this year, the FISH. For the financial year, basically starting from this quarter to March next year, what’s our current plan in terms of potential acquisitions?

Sam Tsang

You know, we just finished the quite big FISH acquisition, but it does not mean we stop reviewing the acquisition opportunities. But the focus will be more in diagnostic and also smaller sized acquisition opportunities.

Jinsong Du - Credit Suisse

Thank you.

Operator

Your next question comes from the line of Joy Yuan with Goldman Sachs. Please proceed.

Joy Yuan - Goldman Sachs

Thanks for taking my question. My first question is regarding SG&A. Both the selling expense and the G&A only increased slightly year over year. Given the FISH segment just launched and the whole platform was just acquired, my understanding is more staff have been added for FISH and there have been quite a lot of marketing activities. I just wonder why SG&A still could be kept at such a low level in the first quarter.

Sam Tsang

Because the expenses related to the promotional activities happened in late June quarter and actually the current selling expenses level does not reflect the full operations, including when we were actively selling the FISH probes to the hospitals. Actually, we expect our sales expenses will be higher than the current level.

As we expect, the selling expenses level, which currently is about close to 4%, the expected selling expenses level should probably be in the range of 4.5% or even 5% when the FISH business is in more fully in operation, including the sales of FISH probes.

Joy Yuan - Goldman Sachs

Are you talking about the full year guidance or for the remaining quarters?

Sam Tsang

For the whole year.

Joy Yuan - Goldman Sachs

Okay, thank you. The next question is there is a note in the announcement right after the financial statements that the final purchase price of FISH is still subject to adjustment. I don’t quite understand what kind of adjustment it is.

Sam Tsang

It is because we have updated our internal valuation on the intangible assets valuation and so we adjust the purchase price allocations in this quarter.

Joy Yuan - Goldman Sachs

But wasn’t the purchase price set when the acquisition was made?

Sam Tsang

Actually, the purchase price allocation involved valuation on different assets -- tangible, intangibles, and also assessment of each intangible asset valuation by ourselves and also by our auditors. So it involved a lot of professional parties and discussions and so typically, it will be determined in a much longer period.

Joy Yuan - Goldman Sachs

Okay, so the purchase price is likely to be adjusted upward or downward, in your view?

Charles Zhu

Because we are still awaiting the final valuation from independent [valuer], so it is not really appropriate to conclude or to expect the final numbers. But at the current level, this is the best estimate based on the management’s estimation and we believe even though there may be some changes, the changes should not be significant.

Joy Yuan - Goldman Sachs

Like, less than 10%?

Charles Zhu

It is not really appropriate to indicate a fixed number yet. I would like to reemphasize first the purchase consideration does not change. The FISH acquisition is still the same. It is just to allocate the amount of the purchase consideration between intangible assets, tangible assets and good will. It is just the allocation to different types of assets.

Joy Yuan - Goldman Sachs

Okay, thanks. That’s all for me.

Operator

Your next question comes from the line of Rahul Gupta with Oak Tree Capital. Please proceed. Mr. Gupta, your line is open. Your next question comes from the line of Ben Lee with Merrill Lynch. Please proceed.

Ben Lee - Merrill Lynch

Thanks for getting questions from me. I just want to ask another question on FISH. I understand that you communicate that you’ve shipped about 42 units and the backlog at the beginning of the quarter was 58 units. I think many investors are interested in knowing or getting more visibility on FISH technology, understandably, because this is your growth driver.

I was just hoping if you could comment on of the 100 units that you’ve communicated so far, what is the real demand? In other words, I would think there must be some pent-up demand here. If I do a calculation of a true run-rate on the back of envelope, it is indicating a true run-rate might be 50 units but I suspect that that number is somewhat higher, inflated because of, like I mentioned, the pent-up demand. So what is the real demand going to look like for the next month or next two months? Is it going to be along the magnitude of 50 units, as I mentioned? Or is it substantially lower?

Sam Tsang

Can you repeat the -- you would like to know what is our expectation for the number of FISH equipment units sold in this quarter, or actually, what would you like to know?

Ben Lee - Merrill Lynch

Basically, my question is around if you look at the 100 units that you have shipped in the first two months, and the average is about 50 units per month. But like I said, there might be some initial pent-up demand. So if you take out that pent-up demand, the true run-rate for the demand in the future might be somewhat below that. Have you evaluated that internally to see what is the real demand?

Charles Zhu

I think the run-rate estimation for the FISH system is less important than the utilization rate of the FISH probes run on the microscopes in the future, because at a certain point in time, the key drivers for the FISH business will be the probes eventually. But as we mentioned before, right now it is too early for us to give you a reasonable estimate because we are still at the early stage of promoting this technology in this new market in China.

Ben Lee - Merrill Lynch

Okay, maybe if I can ask another question on the same business. Of course, the 100 units that you’ve shipped so far is a very good number but perhaps if you can tell us, what is the bottleneck for the FISH business right now? Is it the education process or is it just your resource constraint? Can you give us more color on that?

Charles Zhu

I don’t think we have any significant bottleneck for the FISH business rollout right now. As we expected, actually, at the early stage the key business driver will be the placement of the systems and later on in the future, the drivers are the FISH probes. Right now, we are in the process of getting the Chinese FDA approval for the FISH probes. Before we get the FISH probes SFDA approval, we can only sell probes under the R&D label and of course, the volume for that kind of sales is obviously limited. So that will limit the FISH probes sales before we get the SFDA approval, but the whole process, we have already expected this process. Right now, the schedule of getting the SFDA approval as well as the ramping up of some placements is as we expected.

Ben Lee - Merrill Lynch

Okay, I understand you can’t control SFDA and they are basically not approving anything now, but is there an expectation from you or from other people in the industry when they will be coming back to work and start the approval of products?

Charles Zhu

Based on the process and timelines that SFDA disclosed through the website, we estimate that we can get the Chinese FDA approval for FISH probes in about one year’s time. Of course, you are right, some of the process is out of our control but that is our best estimate so far.

Ben Lee - Merrill Lynch

So one year from today, or is it --

Charles Zhu

A year from today.

Ben Lee - Merrill Lynch

Okay, and just one more question on FISH; can you break down the sales of FISH into different specialties, meaning in gynecology versus oncology and how does that mix look versus your expectation?

Charles Zhu

Long term, we think the two key segments or categories that will generate most of the reagent or FISH probes revenues will be coming from the prenatal tests, and the other big segment will be coming from the cervical cancer diagnosis reagents. Those are the two largest applications.

Of course, we are also expanding our test menus for the other oncology related tests. As we are promoting our FISH probe, for example, for the HER-2 test for the Herceptin therapy, we realize the market opportunities might be growing as this kind of application test can be used for other applications. Also, we are developing some other FISH probes, for example, for the prostate cancer. This is also quite a large application with a very large patient population, both in China and other countries.

Ben Lee - Merrill Lynch

Okay, great. And perhaps just one more question, a financial question for Sam; the other income line, you had about RMB 100,000 as income for the quarter, which is way below last quarter and previous quarters. Is that just the timing of the payments that you are receiving and what is your expectation for the rest of the year for that line?

Sam Tsang

Actually, the other income relates to government subsidies, which is not regular in nature. It depends on the government subsidized projects.

Ben Lee - Merrill Lynch

And do you get an indication from the government for the whole year and then it’s just up to them when they will give you the money?

Sam Tsang

Actually, it is a very insignificant amount to the company’s operation. Normally, we do not really expect internally how much we would like to get. We don’t have any targets for a government subsidy because it is a kind of non-recurring revenue, non-recurring income.

Ben Lee - Merrill Lynch

Okay, great. Thanks.

Operator

Your next question comes from the line of Alex [Yu] with Breen Murray. Please proceed.

Alex Yu - Breen Murray

I have a couple of questions, still on the FISH. I’m still confused, actually. Last quarter when you reported earnings, you said you had backlog of FISH about 100 units. If I remember correctly, in your prepared call, Sam said that you shipped about 46 units for this, during that second quarter. Is that right, the right number?

Sam Tsang

We sold 42 units in the June quarter, and we expect by the end of this September quarter, we will have more than 100 units because we will finish the 100 units orders received in June and also finish some of the additional orders we receive in September.

Alex Yu - Breen Murray

Receive in September, okay. When you provided that 100 unit order guidance in your earnings release, that was as of the time you released earnings or as of what, the end of March?

Sam Tsang

The 100 units number is the latest number by the time we had the earnings call on 18 June.

Alex Yu - Breen Murray

Okay, and then what was that 58? Is that just the 100 minus the 42 you already shipped? You also mentioned the 58 backlog. What is that?

Sam Tsang

The 100 units of orders received in June, we will finish that in this quarter. So in addition to that, we will also finish some additional orders we received in the September quarter.

Alex Yu - Breen Murray

Okay. If I look at your number for the FISH sales revenue this quarter, about RMB 14.4 million, if I divide that by the 42 units you shipped, your average selling price is about RMB 32,000, RMB 33,000, roughly. If, say you shipped 100 units by the end of September for the accumulated number, which means by the end of September, your total FISH revenue on the probe side will only come about RMB 32 million -- RMB 32 million, RMB 33 million by the end of September.

I don’t know what kind of a mix you have in terms of probe versus the equipment. For the full year, you are still targeting $20 million sales. I’ll just make a rough assumption and say if you ship the $20 million, two-thirds are coming from the equipment, you have to generate about RMB 100 million sales for the full year.

Yet by the end of the September quarter, you only can have RMB 30 million to RMB 33 million in sales, which means the next two quarters you essentially need to double the sales on the equipment side, if I assume two-thirds of the sales from FISH are coming from the equipment. What do you see that you haven’t told us in terms of demand picking up for the second half of this fiscal year? Do you see a good acceptance in terms of your equipment?

Charles Zhu

Your calculation is just based assuming we only finished 100 units by the end of September. We will finish more than that because we mentioned that we also received additional orders in this quarter and we expect we will fulfill that and we also will have FISH probe revenue and -- of course, you are correct; we expect also a large number of microscopes to be paid in the second half of the financial year.

Alex Yu - Breen Murray

So you are expecting a pretty strong pick-up in terms of demand for the second half of this fiscal year?

Charles Zhu

We expect an increasing number of microscopes pacing and also a very fast increase in FISH probe revenue in the following quarters.

Alex Yu - Breen Murray

Okay, and then next question is on the HIFU side of things. This quarter you reported a backlog of about 30 units and last quarter was 20, and your actual shipment for this quarter is 20. Normally if I look at it historically, you normally ship maybe a couple of units, a few units more than the backlog but it didn’t happen this quarter. Is there any change in terms of HIFU demand trend?

Secondly, if you look at the year before in the September ’06 quarter, your HIFU shipment is 28 units and if I based it on your backlog right now, it’s 30 units. The growth rate on a unit basis is less than 10%. I just wanted to know, is there any change in the overall demand trend for HIFU?

Charles Zhu

The backlog is only a reference, so the actual units will be different, but not too much. Also, we already expect a steady growth instead of the high growth, and so the growth rate actually we already expect will be lower than previous years. We are happy with the 20% growth we achieved in the June quarter.

Alex Yu - Breen Murray

But on a full year basis, are you still looking at 10% to 15% HIFU growth?

Charles Zhu

Actually, we do not guide the growth rate for each product. We only guide for overall revenue, so we do not actually communicate the growth rate expectations for a particular product.

Alex Yu - Breen Murray

Okay. The last one is just kind of a housekeeping item. In the press release, you said the HIFU amortization total, the acquisition is about RMB 15.6 or some million, but you only basically in the cost of goods sold, you only have 11.6. There’s like 2 million, 3 million missing. Where should I put that in terms of an amortization expense?

Sam Tsang

Actually, the difference relates to ECLIA because ECLIA amortization has been there and so the FISH amortization is a new item, so we like to highlight the new additional amortization arising from FISH.

Alex Yu - Breen Murray

Okay, so all of those should be in the cost of goods sold?

Sam Tsang

That’s right.

Alex Yu - Breen Murray

Okay. Thank you.

Operator

Your next question comes from the line of Luke Langford with Langford Capital Management. Please proceed.

Luke Langford - Langford Capital Management

Before I start, is Mr. Wu in the room as well, or is he not there?

Charles Zhu

Yes, he is here.

Luke Langford - Langford Capital Management

Okay, so I’m going to have a question for him at the end. I have a few today. First of all, is there any update on various testing out of the University of Washington and what’s going on in the U.S. in terms of the FDA, or are we sort of in status quo right now?

Charles Zhu

We received the conditional approval for the IDE and there are several questions that we need to clarify with the FDA officials. So right now, the teams are working on getting back to the FDA officials as well as preparing themselves to start the human pilot studies.

Luke Langford - Langford Capital Management

How about HIFU outside of China this year? Any plans there in terms of whether you think you will be in Korea or Japan this year? Or are we still a couple of years out?

Sam Tsang

Actually, our projection does not take into account overseas sales for HIFU units.

Luke Langford - Langford Capital Management

Is it still a possibility in ’07 and ’08?

Sam Tsang

I think that near term, it will be the Korean sales because the Korean distributor already paid us a non-refundable deposit, and so we understand they are working hard but there are -- sometimes it is a little bit hard to determine the timing of Korean FDA clearance.

Luke Langford - Langford Capital Management

So in other words, it is fairly safe to say you guys are being extremely conservative in your HIFU projections, considering that you have zero international forecast? Fair enough. So on the 1.9 million in FISH sales this quarter, that is equipment only, correct? No probes?

Charles Zhu

Yes, only equipment.

Luke Langford - Langford Capital Management

Okay, and maybe a note to the Breen Murray guy, if you go look at [Vices’] growth rate in the past, when they launch in half the market size, you’ll probably see pretty quick that the growth we are expecting here is conservative, very conservative.

I have a couple more questions. Are you updating your guidance on the reagents you are predicting this year for the ECLIA system in terms of the number, total number you will be at by the end of the year? Or do you have a number? I don’t know if -- I didn’t see anything in the release today.

Sam Tsang

It is because the ECLIA reagent business is better than expected but this is only the first quarter of the year and we already see the trend and we feel the numbers, the actual numbers should be higher than the guidance. But we need more time to finalize the revised number, and so we will talk to the market, the revised number, in next quarter.

Luke Langford - Langford Capital Management

You guys misunderstood me, I’m sorry. I’m not at all worried about your revenue. I’m completely comfortable there. I’m talking about the number of kits you think you will have on the market at the end of the year, whether it is going to be in the high 70s. I know that you are adding a few this year. I was just wondering if you have a projection of what number you’ll be at, total number of reagent kits that you will be able to sell.

Charles Zhu

The total number will be 74.

Luke Langford - Langford Capital Management

Okay. Last couple of questions; collaborations, you guys have a couple of collaborations. Are those generating any interesting research that you can comment on or are they still in the infancy stage?

Charles Zhu

The collaborations are still in the early stages, so right now there is nothing particular to disclose.

Luke Langford - Langford Capital Management

Okay, so my last question, this one is for Mr. Wu, if you will translate for me; when he is out in the market talking to the big guys in terms of the fully automatic systems and the FISH systems, is there anything that the large hospitals are asking him for, or any other complementing products that they are mentioning would be a nice fit in your portfolio, or any insights that he’s gained in the last few months?

Xiaodong Wu (Translation)

For example, when we talk with some of the large OBGYN hospitals, we feel that technologies related to the HPV diagnosis has very large market opportunities and is also very good complementary technologies to our FISH and ECLIA technology.

Luke Langford - Langford Capital Management

That’s very interesting. Okay, and what were the two products you said primarily on the FISH revenue? It was cervical cancer and the HER-2? Is that what I heard when Ben asked?

Charles Zhu

Our largest segment is cervical cancer and prenatal diagnosis.

Luke Langford - Langford Capital Management

Okay. All right. That’s all I had. Thanks, guys. We’ll be in touch.

Operator

I would now like to turn the call over to Mr. Tsang.

Sam Tsang

Once again, thank you for joining us today. Please don’t hesitate to contact us if you have any further questions. Have a nice day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a good day.

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