Luminex Corporation (NASDAQ:LMNX) Q4 2017 Earnings Conference Call February 12, 2018 4:30 PM ET
Homi Shamir - President, Chief Executive Officer
Harriss Currie - Senior Vice President, Chief Financial Officer
Matthew Scalo - Senior Director of Investor Relations
Sung Ji Nam - BTIG
Steven Paul Reiman - JP Morgan
Bryan Kipp - Citi
Bill Quirk - Piper Jaffray
Brian Weinstein - William Blair
Brandon Couillard - Jefferies
Good day ladies and gentlemen and welcome to Luminex Corporation, Fourth Quarter 2017 Earnings Conference Call. My name is Bryan and I will be your coordinator for today.
Today’s call is being recorded. At this time all participants are in a listen-only mode. Following the prepared remarks there will be a question-and-answer session. [Operator Instructions].
I would now like to turn the call over to Matthew Scalo, Senior Director of Investor Relations for opening remarks. Please proceed.
Thanks Bryan, and good afternoon and welcome to Luminex Corporation's conference call for the fourth quarter and full year 2017 financial and operational results.
On the call today are Homi Shamir, President and Chief Executive Officer; and Harriss Currie, Senior Vice President and Chief Financial Officer. We’ll be following our standard agenda today. Homi will review our corporate highlights. Harriss will review the financial performance, and after that we'll open the call for your questions.
As a reminder, today's conference call is being recorded and a replay will be available for six months on the Investor Relations section of our website.
Certain statements made during the course of today's call may not be purely historical and consequently may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and the company claims the protections provided by Section 21E of the Securities Exchange Act for such statements.
These forward-looking statements speak only as of the date hereof and are based on our current beliefs and expectations and are subject to known or unknown risks and uncertainties, some of which are beyond the company's control that could cause actual results or plans to differ materially and adversely from those anticipated in the forward-looking statements.
Factors that could cause or contribute to such differences are detailed in our Form 10-K for the year-ended December 31, and our Quarterly Reports on Form 10-Q filed with the SEC. We encourage you to review these documents and we undertake no obligation to update these forward-looking statements.
Also, certain non-GAAP financial measures as defined by SEC Regulation G may be covered in this call. To the extent that any non-GAAP financial measures are covered, a presentation of and reconciliation to the most directly comparable GAAP financial measures is included in our earnings release, which is available on our website in accordance with Regulation G.
I'll now turn the call over to our President and CEO, Homi Shamir.
Thank you, Matt. Good afternoon and welcome to our fourth quarter 2017 earnings call. On January 7 we preannounced strong result for 2017. Our performance was driven mainly by our molecular diagnostic franchise. We delivered over 40% growth in our sample-to-answer molecular testing businesses.
Given last month’s release I will keep my prepared comments short and focused on the future. Earlier this year we announced five field financial targets for our businesses. In 2022, we expect to achieve total revenue of between $425 million and $500 million, a CAGR of between 7% to 10%. This revenue range take into account, they anticipate departure of LabCorp NuSwab in May 2018 and doesn’t include any contribution for future M&A activity. We issued this five field target to provide the investor better long term visibility.
As we enter 2018, Luminex is well positioned due to the following: We have a comprehensive molecular offering, both in platforms and test menu. With this offering and unique positioning, Luminex is able to provide the right solution to the right customer. This offering provides exceptional clinical value and efficiency that our competitors cannot match, supporting our impressive double digit growth.
Our molecular portfolio will soon include our next gen VERIGENE 2 system. We continue to target clinical trial commencement for the system and its fair to say, a GI panel by the end of the second quarter of 2018.
A comprehensive format incorporating many additional clinical studies on VERIGENE and other molecular platforms will follow in 2018 and beyond. In addition, we expect our license technology group to continue to generate LT mid-single digit annual revenue growth, while contributing significant profitability.
We continue to work on our commitment to introduce our next gen S&P platform by the end of 2019. We plan to provide additional details about this platform by our second quarter conference call.
In summary, we are very excited about our core growth driver, even while we continue to search for M&A opportunity to further accelerate our current organic growth projection.
We issued 2018 revenue guidance of $310 million and $316 million, a growth of 2% at the midpoint of this range. This guidance incorporates the anticipated mid-year departure of NuSwab businesses from LabCorp which impact our second half by approximately $20 million compared to the prior year.
As of today we have no further updates about this departure. Excluding the NuSwab revenue from both 2017 and 2018, we would expect the reminder of our businesses to approach double digit growth in 2018, which demonstrate the strength of our underlying businesses going forward.
Now Harriss will review the financial data and afterwards I will return with some closing comments.
Thanks Homi. As Homi mentioned, we ended the year on a high note with consolidated fourth quarter revenues up 8% and full year revenues up 13%. Our LTG revenue stream was $34 million for the quarter and a $142 million for the year, up 4% and 2% for the quarter and year respectively.
As previously discussed, LTG performance was effected by the absence of an initially expected $2 million consumable order from a customer who as a result of lack of funding had to suspend the project.
Our molecular diagnostic revenue stream was $44 million for the quarter and $162 million for the year, up 12% and 26% respectively. Performance here was driven by the continued successes of our sample-to-answer franchise which was 31% and 47% for the quarter and year respectively. For reference, the annual growth rate of our sample-to-answer franchise includes the full year of VERIGENE related revenues for 2016.
Turning to revenue, line items during the fourth quarter, we placed 288 multiplex systems not including ARIES and VERIGENE systems, above the high end of our communicated expectation of 225 to 275 per quarter.
Included in system revenue are sales of both our ARIES and VERIGENE systems, although the majority of those are placed under reagent rental. In line with our prior communication, consumer revenues were down for the quarter. We previously guided to both a wider contribution of consumables in the second half of 2017 and the effects of the timing of orders from our larger partners.
Royalty revenue grew 12% over the prior year, reflecting an increase in audit findings and minimum royalty payments. End user sales reported by our partners for the quarter were up 7% and up 2% for the full year.
Assay revenues were up 14% for the quarter with a 42% increase in our automated products and a 6% increase in our non-automated products. We received a number of questions regarding the impact of the current strong flu season on fourth quarter results. I can confirm that our respiratory testing franchise did experience strong growth in the fourth quarter and that this momentum has carried into the first quarter, as it has for our entire infectious diseases testing menu.
Please remember that our respiratory panel business tends to be less volatile than the point of care of food testing business, so we do not see the boom or bust type performances driven by dramatic fluctuations in the flu season.
We posted gross margins of 64% for the quarter, up more than three percentage points from the fourth quarter of 2016 and over two percentage points from the third quarter of 2017. The primary reason for this increase can be attributed to improving margins and our sample-to-answer portfolio through a combination of increasing volumes for both VERIGENE and ARIES and internal manufacturing process improvements.
As we’ve indicated, our automated products currently have margins below corporate average, but I want to highlight that VERIGENE gross margins are now approaching 50%, almost triple what they were when we acquired the asset 18 months ago. We continue to control our operating expenses displaying a decline in R&D expenses of $3 million, primarily attributable to the timing of clinical trials and flat SG&A expenses.
Overall OpEx was down 11%, but included $7 million of integration related expenses in the prior year. Operating profit was a healthy $9 million or 12% operating margin, driven by revenue growth, gross profit expansion and operating expense control as discussed previously.
As a result of the passage of the Tax Cuts and Jobs Act, we were required to make several adjustments to our tax estimates and accounts in the fourth quarter. The effective tax rate for the fourth quarter 2017 was 132% as compared to 45% in the fourth quarter of ’16. As a reminder, the quarterly effective tax rate typically represents adjustments necessary to arrive at the appropriate year-to-date rate that reflects current expectations for the full year.
As you can see from our financials, the current expectation for our 2017 effective tax rate is 21%, which incorporates adjustments driven by one-time impacts of U.S. tax reform in the current quarter and adjustments to our overall tax expectations based on jurisdictional distribution of revenues and expenses.
Included in our one-time impacts driven by the Tax Cuts and Job Act, our expenses of $7 million related to repatriation charges associated with foreign earnings not previously taxed by the U.S., approximately $3 million for re-evaluation of differed U.S. tax assets and approximately $3 million adjustment of Canadian differed tax liabilities offset by tax benefit of $2 million for release evaluation allowance on Dutch and acquired U.S. losses.
The prior year quarter included tax benefits from Nanosphere book losses and acquisition related expenses which were partially offset by $1.4 million of tax expense related to Dutch and the U.S. valuation allowances.
Excluding the adjustments to tax expense, net income would have been $7.6 million or $0.18 a share, up significantly from the prior year. Obviously the effects of reaching accretion with the Nanosphere acquisition quickly just had a significant effect on our profitability improvement.
Our balance sheet remains strong with solid DSOs on accounts receivable, no debt and over $125 million in cash and investments. We generated over $16 million of cash in the quarter, inclusive of the payment of dividends of $2.6 million. As Homi mentioned, we expect to deliver between $310 million and $316 million of revenue for 2018. We look at our revenue in three distinct buckets.
The first is our partner business that delivered approximately $142 million of revenue during 2017. Our expectation here is growth roughly equivalent to the growth rates of the markets in which our partners operate of mid-single digits. This includes the majority of our system revenue and consumer revenue and all of our royalty revenue. It also includes the service component and a number of smaller categories like shipping, parts, sales, etcetera. We continue to expect between 225 and 275 multiplexing system placements per quarter.
Second, our molecular sampled answer solutions that include VERIGENE and ARIES, we expect this revenue stream which was $47 million in 2017 to continue to grow at a high rate approaching 50% and putting us in great position to achieve our goal of leaving 2019 on a $100 million a year run rate. This growth will be driven by continued ARIES uptick as our menu offerings continue to rapidly expand and sustain growth to the VERIGENE portfolio.
The third grouping is our non-automated molecular solutions, which we currently expect to contract by a little over 10% as a result of the loss of LabCorp NuSwab in mid 2018.
If you look at our consolidated revenue line items, we expect the following: System revenues should be stable as a result of both healthy multiplexing system placements within our expected range and the inclusion of both ARIES and VERIGENE system sales. Consumer revenues are expected to grow at mid-single digit rates. Royalties should continue to grow at mid single digit range, a direct function to the growth rates of the markets in which our partners participate.
Asset revenues in the aggregate are expected to grow in the single digits and will obviously be affected by the LabCorp NuSwab departure in mid-2018, but buoyed by the growth of our sample-to-answer portfolio I mentioned previously.
Gross margins on our automated revenue stream should continue to improve as volumes increase and overall gross margins are currently expected to hold steady. Cash flow generation is expected to continue as should our quarterly dividend. Finally, a little visibility into the first quarter of 2018. First quarter revenues are currently expected to be between $79 million and $81 million.
Now, I’d like to turn it back over to Homi for some final comments.
Thanks Harriss. So in closing, our diversified business model continues to drive meaningful growth in 2018. We remain committed to investing wisely in further pipeline development across our entire businesses. This will be done through both organic and inorganic means, while never loosing focus on the bottom line.
I am proud of the progress we have made in transforming the company. Since I joined the company in late 2014 we became more focused on MBX, particularly in sample-to-answer solution while continuing to build on our leadership position in our highly profitable LTG business. As a result, during my tenure our revenue has grown $80 million to $307 million in 2017. We are now a solid diversified business, which need double digit growth. We have a strong balance sheet that allows us to search for attractive M&A opportunities like we demonstrated with the Nanosphere acquisition while we remain focused on building shareholder value.
This ends our formal comments. Operator, please open the line for questions.
Thank you, sir. [Operator Instructions] And our first question will come from the line of Sung Ji Nam with BTIG. Your line is now open.
Sung Ji Nam
Hi, thanks for taking the question. I don’t know if you can hear me, because there seems to be a lot of background noise.
Yeah, we can hear you Sung Ji.
Sung Ji Nam
Okay, fantastic. So I was wondering about just a clarification on the LabCorp NuSwab. Is that pretty much a done deal at this point or are you just saying there are no updates and you know your assuming that to happen before [inaudible].
No, Sung Ji as we keep saying, LabCorp entered with NuSwab over a year ago in agreement to portray for the next – for 18 months, which the next six months is expiring by the end of June. They are committed to buying $63 million and they are tracking into their commitment.
From our point of view, we did not hear further from them, do they want to buy some more and by the way, we are not so sure if we want to sell them some more, because it’s been big things over ranking our share. So they are a good customer. We try to support if they want, but at this stage follow our guidance and follow what we sent to the market almost a year and a half ago, this business is going to depart our revenue, potential revenue in the future.
Sung Ji Nam
Okay, that’s helpful. And then for the sample-to-answer platform, your assumption for next year, guidance for next year if I am kind of looking at it correctly, kind of contemplate a bit of a growth acceleration and was wondering kind of what could be the key driver? Where the key driver is for that? Thank you.
Look, I mean as you know there is two key drivers there; one, continuation of the VERIGENE one. It’s been done very well for us and we continue to grow 30%, 40% at least next year being driven by three assays that are continuing to grow, which is the blood culture, the gastro EP and respiratory, but they have like a raise. A raise where they now have six IBD clearance.
We installed a system in the field and some of those IBD are a major assay. We’re getting a fairly good feedback how that’s ramping up with customer. As a matter of fact, I came back from a sales meeting, a kick off meeting that we have done for the sales team. They are very, very excited about both, ARIES opportunity and the VERIGENE opportunity. So we see those numbers growing very rapidly to us during net sales and as we keep saying, we believe that by the end of 2019 we will be – the sample-to-answer will be close to a running rate of $500 million by the first quarter of 2019.
So I think things are looking very strongly to us and don’t forget also that during 2018 we are going to have six clinical trials, three on a rise and three major ones on the VERIGENE 2. And you know I’ve been in Chicago by the way a few days ago. We are very busy there, which is the VERIGENE area.
Sung Ji Nam
Fantastic! Thank you so much.
Thank you. And our next question will come from the line of Tycho Peterson with JP Morgan. Your line is now open.
Steven Paul Reiman
Hey guys. Its Steve on for Tycho, thanks for taking the question. Maybe just – and sorry if I missed this, but did you guys give updated revenue per system or revenue per active customer for both VERIGENE and ARIES and then how do you expect kind of the ARIES consumer revenue per system to trend as you kind of continue to build the menu out?
Yes Steve, I think we presented. We did not get an update here, but we presented at the New York conference. We talked that VERIGENE per customer is now, its $100,000. I think it’s up $5,000 or $6,000 from the previous quarter and if I am not mistaken, the rate is close to [inaudible] couple of thousand, so things have started moving. We’re seeing those numbers with the customer.
Obviously I am very pleased that during 2017 we contracted and that’s when I say contracted, different from what either company are saying. Contract for me is when a customer sign a contract which is a re-rental agreement or sign a purchase agreement. We had like that of 224 contracts during 2017. 88 of them are open in 2000 in the fourth quarter. Just for comparison, during 2016 we have contracted about 80 something. So this number went up close to 300%.
Again, when I am looking forward, I am not sure those multiplication will continue, because we are focused on contract that we are going to make money out of them and eventually we’ll see more and more utilization out of the system. So let’s all keep saying, less on the quantity and more on the quality of the contract.
Steven Paul Reiman
Got it. And then Harriss maybe on Nanosphere gross margins or the VERIGENE gross margins. I mean obviously a lot of progress being made there. How are you thinking about the roadmap over the next year or so?
So there is obviously a little more room for improvement there. The primary improvement should come from number one, volume. The Nanosphere volume since we acquired them has obviously more than doubled, and as a result of that, you get a lot of efficiencies and cogs that aren’t there at lower numbers. We’ve also streamlined manufacturing and improved the manufacturing process which helps us there. So you should see – we should see the margins there continue to improve as volumes increase. Obviously they’ll max out, but we certainly have additional headwind.
And one more thing, Steve. When we have VERIGENE 2 we will continue to see, but again which will be a mentor for few years, but VERIGENE 2 sales will carry much better gross margin on the instrument and on cassette. And also by the way we invested in Chicago, a little over $5 million to $6 million already synced their position in improving the facility, expanding the facility, putting some automation that are not yet fully inline.
So I see a lot of room here to bring the gross margin higher and higher in both the products, VERIGENE 1 and VERIGENE 2. And as Harriss mentioned, when we bought it the gross margin there was almost like 10% or 15%. Last year we ended Q4 close to 25% and now we doubled it a year time. Yes.
Steven Paul Reiman
Got it and then just lately of capital allocation, you mentioned kind of stone hunt from M&A. Nanosphere is obviously a really successful deal. So what kind of assets are you looking at and kind of how far long are you.
Look, I mean I’ve been spending most of my time looking at things, and you know we are looking at a acquisition that will be strategic acquisition like Nanosphere. Some of them can be revenue bearing like Nanosphere that we can grow them very fast while [inaudible]. But some of them could be even technology, but we are looking at growth. It’s not only from a local diagnostic, it can be even in the LTG area and so far we had a few that we like, but eventually we did not materialize for some reasons. But we keep searching and rather not having a gun to my head, which by the way we don’t have a gun to our head to do the right one and when we find the right one, we will announce it.
Steven Paul Reiman
All right, I’ll leave it at that, thanks a lot guys.
Thank you, Steve.
Thank you. And our next question will come from the line of Daniel Arias with Citi. Your line is now open.
Hi guys, this actually Bryan Kipp on behalf of Dan. Just a quick question with the VERIGENE data that’s supposed to come out, that’s in the VERIGENE 2. How are the conversations going with customers right now? Do you guys have any beta sites up and running and then how should we thinking about the customer’s potentially waiting or differing on purchases just in light of upcoming clinical data and thinking about maybe differing until a new system comes out?
Sure Bryan. We don’t have yet any customers using the system. The first customer who will use the system will be 12 or 13 sites that will be on the clinical trial which will be somewhere in the second quarter happening.
Beyond it, as we said our strategy is when eventually VERIGENE comes, VERIGENE 2 will get approved, is to try to launch at a very similar time or maybe a few months. Even there, we sell bout two assays together and because most of our customer, our reagent rental, we just replace those systems and people who would like to have them, but then again, I depend what will be the pricing by then for the SA etcetera. But that’s our philosophy. At the moment we don’t anticipate any slowdown whatsoever during 2018 in system contract.
Helpful and then just on 1Q, I guess I’m surprised just given the cadence that we’ve seen historically in the commentary around the back half slowdown from LabCorp. Is there any seasonal headwinds in 1Q that we should be thinking about embedded in numbers.
In the current year?
In 1Q ’18.
Yeah there is – we are certainly. We are seeing really. We are seeing the capital purchase patters obviously are often times heaviest in the fourth quarter as folks use up budgets that are expiring and then they fall off in the first quarter.
The consumable revenues. If you look at year-over-year, you recall last year we had a very large set of consumer purchases in the first half in the year that aren’t going to repeat in the first half of this year and so it’s a touch comp with respect to consumables.
Base royalties are expected to continue to progress as they have over the past decade, as our partners continue to sell new assays and new systems to new customers.
Our partners more or less own that life science research protein market and are doing a great job in protecting it and further establishing that market.
Our molecular diagnostic franchise continues to grow. Our non-automated assays, not including the genetic assays continue to get traction. Our automated assays both VERIGENE and ARIES are doing very well in the market place. Both are growing. So the only real macro headwind if you want to call it one, is the fact in the first quarter – first half of last year we had some pretty significant consumable purchases that didn’t repeat in the second half of the year. Hope that helps.
Helpful, thanks guys.
Thank you. And our next question will come from the line of Bill Quirk with Piper Jaffray. Your line is now opened.
Hey thanks. Good afternoon everybody.
So I guess first question, Homi I want to go back to recurring theme I’ve asked about in the past. Is there anything new to report from CMS and Palmetto concerning the draft guidance around the respiratory GI assays?
Not since the New York conference, we discussed it. There is further news. The news we have, they are differing it due to. They are getting more territory now, from Florida territory. The Florida area that we will hear from them somewhere in the mid filed.
Got it, okay, thank you, that’s helpful. And then just two quick ones, first off just overall pricing trends in the automated molecular stage and then Harris forgive me I missed your comment on tax rate for ’18 could you repeat that. Thanks guys.
Sure. So let me answer the tax rate first. The expected effective tax rate is expected to be in the mid to high 20s for 2018. Obviously a little bit higher than the U.S. regulatory rate but because we have taxes in other jurisdictions, and other state taxes in the U.S. and things add to the federal rate end up in the mid to high 20s.
With respect to pricing, our pricing has been really pretty stable. We have a number of longer term agreements with our reagent rental agreements that we are not finding ourselves having to discount further. We have very well established GPO agreements with a number of large GPOs or pricing there is well established over the long term. So we haven’t seen any real downward pressure on our pricing other than the eminent announcement of Palmetto's decision on how they are reimburse for multiplex assets.
It should be positive to us…
And due to our flex pricing. So think one of the reasons we are winning in growing so fast in the field is the customer like our pricing, like our flexible pricing. So I think it’s going to be an advantage for us.
Got it, thank you.
Thank you. And our next question will come from the line of Brian Weinstein with William Blair. Your line is now open.
Thanks. So first on the sample-to-answer you placed 88 systems under contract. Can you talk about what you're hearing about how those are going to be used? Are those more respiratory focused or blood culture focused and then I’m curious also about the type of customer that you are seeing now. Are you starting to see things that are competitive wins or is this potential accounts that are new to multiplexing in general?
Brian, they're all over. I don't have the statistic here, but all over there are competitive win for sure. They are being used. People are not buying our system to respiratory only. They are buying the system for blood culture, they are buying for our GTP and also they are buying, some of them are buying for CD for any of the ARIES assay. But they are across the broad and I refer you to a slide that we showed earlier this evening our press conference you can see they are across the board.
Okay, and then on gross margin, Harris you said to expect gross margin to be steady next year. I would think with the growing margin profile on the sample-to-answer that you might be able to get some margin expansion despite NuSwab, and then as you think about that as well your five year target calls for only 60% to 65% and you are ready at 64%. So can you addresses kind of where you see – why we can’t see some additional margin expansion potentially as we start to get more margin out of sample-to-answer thanks.
Sure, so to answer the long term first, the long term is a conservative assessment based on where we are, to give us an opportunity to absolutely achieve that and if we can better that, our goal is to better it.
Now with respect to the near term margins, we note that our sample-to-answer margins are lower than our current corporate average. Yes, we can improve on those, but as those numbers grow and they are growing significantly faster than the other revenues streams that have higher margins, you end up with a lower margin item comprising a higher percentage of total revenue, so its math. So as we improve the margins there, but it becomes a bigger percentage, the math holds you steady around that 65% absent other mixed changes across the entire revenue stream.
And roughly what was the NuSwab gross margin if you had to kind of give a broad range on it?
Higher than corporate average.
Okay. Great, thanks guys.
Thank you [Operator Instructions]. And our next question will come from the line of Brandon Couillard with Jefferies. Your line is now open.
Thanks, good afternoon. Homi relative to more than 425 active sample-to-answer customers, you have could you give us a sense of what the installed based looks like between the VERIGENE 1 and ARIES, in terms of like number of boxes per customer.
Yeah, with the majority by sure VERIGENE, majority of the revenue of 2017 are coming from VERIGENE. But as we had a couple of new IVB clearances and the successes of even the LTBs and ASR, we have seen more and more system being used of ARIES and placed in the field. But the majority of those systems are VERIGENE system.
Thanks, and a couple for Harris. Just to make sure I got this right, so it’s the NuSwab headwind for the year about $17 million as we thinking about 2018 versus ’17 and then...
Yeah, that’s in the neighborhood. Yeah.
Then how can we be looking at the operating expense line you know given the additional clinical trial activity planned for VERIGENE 2 for the year, just in terms of growth.
Yeah, so operating expense absent changes in clinical trials will be roughly flat. So the only variation you will see and operating expenses will be related to the performance of those clinical trials of varying costs of the six that Homi talked about. For the year we obviously don’t guide operating expenses, so what I can tell you is that you think less than $10 million, but in the mid single digit millions of costs associated with clinical trials.
Very good, thank you.
Thank you. And I’m showing no further questions in the queue. It’s my pleasure to hand the conference back over to Mr. Homi Shamir, President and Chief Executive Officer for some closing comments and remarks. Sir.
A - Homi Shamir
Thank you Bryan and thank you everyone for your attendance on our earnings call. We look forward to seeing you in person in the very near future. Have a great day.
Ladies and gentlemen, thank you for your participate on today’s conference. This will conclude our program and we may all disconnect. Everybody have a wonderful day.