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Sequenom Q4-13: Do You Feel Lucky?

|Includes:Sequenom, Inc. (SQNM)

Sequenom (NASDAQ: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 (NYSE:M)
  Q4-12 Q1-13 Q2-13 Q3-13
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)
  Q4-12 Q1-13 Q2-13 Q3-13
Domestic earned UNK UNK UNK 37.5
Unrecognized UNK UNK UNK (26.3)
Domestic revenues in quarter 8.8 9.5 9.0 11.2
International (in quarter) 0.7 0.7 3.0 3.8
Total revenues-tests in quarter 9.5 10.2 12.0 15.0
Collections from prior tests        
CY-12 11.6 18.9 3.0 3.3
CY-13 0 0 9.5 15.0
Total diagnostic revenues 21.1 29.1 24.5 33.3

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)
  Q4-12 Q1-13 Q2-13 Q3-13
Government payers UNK 2.3 1.4 1.2
Major commercial payers UNK 10.0 7.8 9.7
Other commercial payers UNK 16.0 12.4 18.6
Total domestic payers 20.4 28.3 21.6

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.

Stocks: SQNM