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Marty Chilberg
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I'm a retired CPA who spent the majority of his working career in technology companies. My work included management stints at Atari Inc, Daisy Systems Corp, Symantec Corp and Visio Corp. My last position at Visio (VSIO) was as CFO and VP Finance and Operations.
  • Sequenom Q4-13: Do You Feel Lucky? 10 comments
    Dec 18, 2013 12:25 AM | about stocks: SQNM

    Sequenom (SQNM) doesn't provide quarterly or annual guidance. That combined with their cash revenue recognition process and erratic collections makes holding the stock into earnings a virtual crap shoot. This blog is an attempt to set the table and look at a range of revenue outcomes. First a look at the revenue trends to date:

    Sequenom reports revenues in two reporting segments:

    Quarter Revenues (M)
     Q4-12Q1-13Q2-13Q3-13
    Biosciences$12.6$ 9.4$10.3$10.7
    Diagnostics$21.1$29.1$24.5$33.3
    Total$33.7$38.5$34.8$44.0

    My estimate of Q4-13 revenues is:

    • Downside risk $45m ($10m + $35M)
    • "Consensus" $48m ($11.5m + $36.5M)
    • Upside opportunity $53m ($13m + $40m)

    The Biosciences (Genetic Analysis) segment is currently Research Use Only and has been flat over the past several quarters. The 4th quarter is seasonally higher. The company recently submitted premarket 510(k) notification to the FDA, preparing to sell their systems to clinical labs. They also hired Jefferies to look at strategic alternatives to partner or sell this segment to a larger company looking to invest in this emerging growth opportunity. Given these data points and the fact that this segment records revenue consistently and on an accrual basis, it's seems reasonable to assume a revenue range as follows:

    • Downside risk $10m
    • "Consensus $11.5m
    • Upside target $13m

    The downside level assumes the company has been distracted or that customers are slowing deliveries until the FDA decision is received and the disposition of the segment is made clear.

    The consensus target assumes no disruption to the business with normal seasonal uplift in revenue this quarter.

    The upside target assumes company actions to pull business into the quarter showing strength to potential buyers.

    The diagnostics segment is much harder to analyze but I'll start by laying out what the company has already disclosed:

    Diagnostic Revenues ($M)
     Q4-12Q1-13Q2-13Q3-13
    Domestic earnedUNKUNKUNK37.5
    UnrecognizedUNKUNKUNK(26.3)
    Domestic revenues in quarter8.89.59.011.2
    International (in quarter)0.70.73.03.8
    Total revenues-tests in quarter9.510.212.015.0
    Collections from prior tests    
    CY-1211.618.93.03.3
    CY-13009.515.0
    Total diagnostic revenues21.129.124.533.3

    Note the company disclosed their estimate of $46-51M of future collections of prior tests as of Q3-13, net of allowances for uncollectibles and discounts They stated that this did not include any amounts for government billings. They also disclosed that this total increased during Q3-13 by $8m. Increase consistent with 26.3 unrecognized in quarter less 18.3 recognized from prior quarters.

    Another look at diagnostic revenues:

    Diagnostic Revenues ($M)
     Q4-12Q1-13Q2-13Q3-13
    Government payersUNK2.31.41.2
    Major commercial payersUNK10.07.89.7
    Other commercial payersUNK16.012.418.6
    Total domestic payers20.428.321.6

    29.5

    Using these components, the diagnostics segment range could be outlined as:

    • Downside risk $35m
    • "Consensus" $36.5M
    • Upside target $40M

    The downside risk assumes:

    1. International contributes $5m, similar to trend
    2. Domestic payers flat at $30m due to continuing reimbursement issues and end of year hold backs. Includes $1m government payers and $29m commercial payers (including major).
    3. This would likely represent an increase of $10m in the collectible unrecognized revenues.

    The "consensus" target is $36.5m and assumes:

    1. International of $5m. Similar to downside risk as this is on accrual basis. Trend line intact.
    2. Domestic payers $31.5m. This assumes $13m for in-quarter tests up sequentially by 17% (vs 24% in Q3), and $18.5m from prior quarters.
    3. This would likely represent an increase of $6-8m in the collectible unrecognized revenues.

    The upside target is $40m and assumes:

    1. International of $5m. No change though this could prove conservative
    2. Domestic payers $$35m. Assumes $15m for in-quarter tests and $20m for prior tests.
    3. Assumes collectible unrecognized revenues increased by $3-5m.

    These targets do not include:

    1. Revenue recognized from conversion to accrual for any significant new domestic payers.
    2. Any significant increase in government payer recognized revenues. Note company has stated that conversations with several state agencies are showing progress that could result in short term collections.

    A final note on Q3-13: When the company disclosed the $8m estimated increase in their balance of unrecognized revenues, they provided investors enough data to approximate accrual basis revenues of $52m. This estimate is very crude , as it largely ignores government payers. They represented 21% of the domestic tests for the quarter but only $1.2m was collected and recognized.

    Disclosure: I am long SQNM.

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Comments (10)
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  • AndrewGreenBull
    , contributor
    Comments (5) | Send Message
     
    I do feel lucky on SQNM. It is a typical low-risk high-return play at current price $2.22
    22 Dec 2013, 01:32 AM Reply Like
  • sethlemay
    , contributor
    Comments (197) | Send Message
     
    What about EPS? a slight loss?
    6 Jan, 05:43 PM Reply Like
  • sethlemay
    , contributor
    Comments (197) | Send Message
     
    Or is SQNM ready to turn a profit?
    6 Jan, 05:44 PM Reply Like
  • Marty Chilberg
    , contributor
    Comments (340) | Send Message
     
    Author’s reply » I'm expecting a sizable albeit smaller loss this quarter.

     

    Q2 loss $31m
    Q3 loss $28m (includes $6m restructuring chrg)
    Q4 consensus loss $17m

     

    My estimate is for a loss of $13-15m. Forecasting this company is really challenging though because of the reimbursement inconsistencies.
    6 Jan, 05:54 PM Reply Like
  • davis_kenneth66
    , contributor
    Comments (4) | Send Message
     
    Nice call Marty. That was exactly what I had also was a loss of about -.12 a share. Looking forward to Q1 with about a -.09. I CNN Money has this estimate at -10 while Yahoo has Sequenom at -.14.
    26 Jan, 03:24 AM Reply Like
  • Marty Chilberg
    , contributor
    Comments (340) | Send Message
     
    Author’s reply » $SQNM prelim earnings out today. Revenues came in at "downside risk" category.
    Diagnostic revs around $33.4m Q4-13. Govt payor continued to decline. 14% all LDTs. Intl processed in US appears down as well as domestic patients. Missed total year MaterniT21 accessions goal of 150k. Did 148,500

     

    Bioscience revenues around $12m

     

    Cash burn was $14m in Q4. Better than expected. Balance sheet not released so could be expense management or inventory/payables management.

     

    2 goals for C14 announced:
    1) quarterly break-even and cash flow positive by Q4-14
    2) Launch low price NIPT on different platform. Will help in international markets and low risk population.
    12 Jan, 12:35 PM Reply Like
  • sethlemay
    , contributor
    Comments (197) | Send Message
     
    So despite being at the downside risk we should likely see a bump in share price as the Q4 guidance shows a more positive outlook than previously expected?
    13 Jan, 08:44 AM Reply Like
  • Marty Chilberg
    , contributor
    Comments (340) | Send Message
     
    Author’s reply » Key this week is "what's next"? The revenue and accessions seem to indicate a limitation to the high risk NIPT market growth. Not a big surprise but stand alone reason for concern. However, the progress in cash flow management reduces the uncertainty relating to dilution so that is a large positive.

     

    The news about a planned low cost NIPT for low risk market by Y/E is pretty significant. Net/Net this seems pretty positive but let's see what else comes out this week leading into JPM on Thursday
    13 Jan, 08:56 AM Reply Like
  • davis_kenneth66
    , contributor
    Comments (4) | Send Message
     
    Since your interview with Bill Welch how do you see the outlook for 2014 for Sequenom?
    26 Jan, 03:23 AM Reply Like
  • Marty Chilberg
    , contributor
    Comments (340) | Send Message
     
    Author’s reply » I'll wait to review the 10k and actual earnings release before I update my forecast. Reg FD makes any discussion of unreleased financial information impossible so I avoided those types of questions. There are a ton of trends that I need to look at including:
    - Opex for a full quarter after the staff reductions in Q3
    - IP legal costs given the court calendar
    - International tests from Japan, LifeCodexx and Lab Cerba
    - Major customer disclosures
    - Disclosures about CF revenue contribution
    - Description of new tests including NextView and the low cost NIPT development.
    - Any update on the bioscience segment including the FDA submission, new panels and the strategic review.
    26 Jan, 10:12 AM Reply Like
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