May 8, 2017
Operator
Good day, ladies and gentlemen, and thank you for your patience. You've joined the Fulgent Genetics Q1 2017 Earnings Conference Call.
[Operator Instructions] As a reminder, this conference may be recorded.
Operator
I would now like to turn the call over to your host, Ms. Nicole Borsje with Investor Relations.
Ma'am, you may begin.
Nicole Borsje
Great. Thank you.
Good afternoon, and welcome to the Fulgent Genetics First Quarter 2017 Financial Results Conference Call. On the call today is Ming Hsieh, Chief Executive Officer; and Paul Kim, Chief Financial Officer.
Nicole Borsje
The company's press release discussing its financial results is available in the Investor Relations section of the company's website, fulgentgenetics.com. An audio replay of this call will be available shortly after the call concludes.
Please visit the Investor Relations section of the company's website to access the audio replay.
Nicole Borsje
Management's prepared remarks and answers to your questions on today's call will contain forward-looking statements. These forward-looking statements represent management's estimates based on current views and assumptions, which may prove to be incorrect.
As a result, matters discussed in any forward-looking statements are subject to risks, uncertainties and changes in circumstances that may cause actual results to differ from those described in the forward-looking statements. The company assumes no obligation to update any of the forward-looking statements it may make today to reflect actual results or changes in expectations.
Listeners should not rely on any forward-looking statements as predictions of future events and should listen to management's remarks today with the understanding that actual events, including the company's actual future results, may be materially different from what is described in or implied by these forward-looking statements.
Nicole Borsje
Please review the more detailed discussions related to these forward-looking statements, including the discussions of some of the risk factors that may cause results to differ from those described in these forward-looking statements contained in the company's filings with the Securities and Exchange Commission, including its quarterly report on Form 10-Q for the first quarter of 2017 and the related press release announcing its financial results for that quarter, both of which are available on the company's website.
Nicole Borsje
Management's prepared remarks, including discussions of earnings and earnings per share contain financial measures not prepared in accordance with the accounting principles generally accepted in the United States or GAAP. Management has prepared these non-GAAP financial measures because it believes they may be useful to investors for various reasons, but they should not be viewed as a substitute for or superior to the company's financial results prepared in accordance with GAAP.
Nicole Borsje
Please see the company's press release discussing its financial results for the first quarter 2017 for more information, including the description of how the company calculates non-GAAP earnings and earnings per share and a reconciliation of these financial measures to net loss and net loss per share, the most directly comparable GAAP financial measures.
Nicole Borsje
With that, I'd now like to turn the call over to Ming.
Ming Hsieh
Thank you, Nicole. Good afternoon, and welcome to Fulgent Genetics First Quarter 2017 Earnings Conference Call.
We would like to thank you, all, for joining us today as we discuss our financial results and the accomplishment for the quarter. I will discuss the highlights from the quarter and then provide updates on our strategies and objectives.
Then Paul will go through our financial results and provide an update on our outlook for the year.
Ming Hsieh
Let me first provide an overview of our financial results in the quarter. Revenue grew 50% year-over-year to $5.3 million.
Billable test end of quote in the quarter were 4,422, an increase of 82% year-over-year and 14% sequentially. GAAP income was $233 -- $232,000 and non-GAAP income was $560,000.
Although we saw strong billable test growth, revenue came in slightly below our expectation due to product mix and a lower ASPs.
Ming Hsieh
Our ASP during the Q1 was $1,200, a decline of 20% from Q4 2016. As we have discussed in the past, we expect our average cost per tests to be impacted by the mix of tests we saw during the given quarter.
In Q1, we saw the fewer exome-based test with higher price points and the -- this dynamically impact our overall ASP.
Ming Hsieh
However, even with the lower ASP, our non-GAAP gross margin in the quarter increased to 68%. Our gross margin remains high as a result of our technology platform and operational efficiency.
Including lower overall cost to our -- per test. We believe this gives us a distinct advantage as we seek to increase volume going forward.
Ming Hsieh
Diluted non-GAAP income per share was $0.03 in the quarter and the cash flow from operation was $707,000. We believe we remain well positioned in the genetic testing market due to our differentiated approach and the proprietary technology.
Ming Hsieh
Our extensive test menu of approximately 18,000 single gene and the more than 300 test panels allow us to cater to the specific needs of our customer and to provide clinically actionable results. Our current test menu could actually test approximately 7,700 genetic conditions including various cancers, cardiovascular disease, neurological disorders and pediatric conditions.
Ming Hsieh
Our strategy remains focused on multiple level for growth. One of our primary goals is further penetrate into large hospital market and extend it into the research institute and to maximize our impact in the cash paying side of the market.
Ming Hsieh
To this end, we made a number of changes in our sales organization in the quarter to strengthen our overall sales efforts. We hired 6 senior individuals, each with approximately 20 years of experience in this industry.
Their previous positions include directors, senior directors and vice president. These individuals will officially begin their employment with Fulgent in the next few weeks.
We also restructured the right size of the existing sales team. We now have restructured sales organization into following 3 areas
cash paying cost results; cash paying research institute; reimbursements and the group purchase organization. By the end of June, we expect to have approximately 13 people in our sales organization and we will anticipate making additional hire where appropriate.
We also restructured the right size of the existing sales team. We now have restructured sales organization into following 3 areas
We expect to -- the new member of our sales team will [ really ] quickly gain their background in the industry and will have a positive impact on our business in the coming quarters. With this new sales team in place, combined with the introduction of our new tests over the course of the year, especially as carrier screening test that we introduced in Q3 2016 and is designated to address the market for the microwave-based genomic test, we are optimistic in our ability to expand our existing customer base while also building new customer relationships.
We also restructured the right size of the existing sales team. We now have restructured sales organization into following 3 areas
In addition to restructuring and the reinforcement of our sales team, we expect to drive growth by further expanding our test menu and to develop additional relationships with third-party payers. We continue to make programs with our status as a subscriber with the Medicare/Medicaid programs and to continue to contract with additional third-party payers.
We also explore traditional relationships and initiatives, establishing ourself as an OEM provider of genetic test for large labs and exploring our opportunities in pharmacogenomics and the drug discovery.
We also restructured the right size of the existing sales team. We now have restructured sales organization into following 3 areas
Lastly, we remain focused on expanding our business internationally. One of the key components of our international expansion strategy is our joint venture with Xi Long USA, one of our larger shareholders in China.
We recently finalized a term of the joint venture and released of the licensing agreement as we disclosed from 8-K filed on April 26.
We also restructured the right size of the existing sales team. We now have restructured sales organization into following 3 areas
We anticipate the capital contribution we are obligated to make the JV will be gradual over the next 3 years and the consumer remains with the anticipated activities of the joint venture. We believe that this strong strategic relationship for the JV, of long-term visits, based on our belief that opportunity for the genetic testing in China could be as -- larger than the United States.
We also restructured the right size of the existing sales team. We now have restructured sales organization into following 3 areas
I would now turn over the call to Paul to go over a brief detail on our operational and the financial performance in the first quarter and to provide updates on our outlook. Paul?
Paul Kim
Thanks, Ming. Revenue for the first quarter was $5.3 million, an increase of 54% over the first quarter of 2016.
As Ming mentioned, we continue to see strong growth in our billable test volume, our revenue declined from Q4 2016, due to an increase mix of lower priced tests. Billable tests were 4,422 in the quarter, an increase of 82% year-over-year and 14% from Q4 2015.
Paul Kim
Our average selling price was approximately $1,200, down meaningfully from last quarter due to our product mix. Cost per test for the quarter was $420 on a GAAP basis and $387, excluding equity-based compensation of $146,000, representing an 11% decrease from Q4 2016 on a non-GAAP basis.
Paul Kim
Despite the ASP and revenue decline from last quarter, as Ming mentioned, our non-GAAP gross margin remained consistent at 68% for the quarter. We expect our gross margin may fluctuate as our test mix varies quarter-to-quarter.
However, we expect to focus on continuing to drive down cost per test via increased volumes and continued automation and productivity in the lab, which will continue to counter any pricing degradation we may see in our business or in the industry generally.
Paul Kim
Moving to operating expenses. We made meaningful investments in the quarter with the hiring of senior members to our sales team, which Ming discussed.
We added 6 individuals to our sales and marketing team and anticipate having approximately 13 sales employees at the end of our second quarter. Though the changes may not impact our top line numbers in the coming few months, we anticipate the restructuring and reinforcing of the sales organization will be highly beneficial for the company longer term.
Paul Kim
On research and development, we remain focused on advancing our technology platform and we'll continue to efficiently invest in research and development. Lastly, we saw greater than expected administrative expenses of legal and accounting expenses from the annual audit exceeded our initial estimates.
Paul Kim
With the hiring across all departments, combined with our joint venture's operational lab in China, we now have increased capacity to handle any spike in volume. We also believe we can continue to decrease our cost per test as we increase our operating efficiencies.
Paul Kim
Adjusted EBITDA for the first quarter was $1.2 million compared to $2.2 million last quarter and $1.2 million last year. On a non-GAAP basis and excluding equity base compensation expense, non-GAAP income for the quarter was $560,000 or $0.03 per share based on 18.2 million shares outstanding.
The GAAP tax rate at the end of the first quarter was 31% and non-GAAP tax rate was 38%.
Paul Kim
In sum, although we're not pleased with lower than anticipated revenue, we posted another quarter of GAAP income and positive cash flow, and we believe we're well positioned to continue scaling our business in the future.
Paul Kim
Turning to the balance sheet, we remain well capitalized to support growth and expansion plans. We finished the first quarter with $47 million in cash, cash equivalents and marketable securities with no debt.
Paul Kim
Now, I will move to our outlook for the next quarter and the balance of the year. The biggest factor we have taken into consideration in providing our outlook is the time needed for our new sales organization to have an impact on revenue generation.
Though we do not expect it would take much time for these senior individuals to get up to speed, it will take a few months for them to develop familiarity with our products, tests, pricing, lab process and systems. Also there'll be a lag between obtaining any new customers and recording revenue from those customers.
Paul Kim
Also, although we have been talking about uncertainty regarding product mix and pricing for some time, we did not anticipate a 20% drop in ASPs in one given quarter. Based on these factors, we anticipate second quarter revenues will be slightly lower than Q1 revenue.
We also anticipate our revenue for the full year will be lower than our initial guidance. We now expect the revenue for the full year 2017 to be in the range of $24 million to $28 million.
Paul Kim
Given the dynamic nature of our new sales organization, we plan on providing greater color into our business in the coming earnings calls, including order volumes and traction from new cash paying customers. Also, should product mix shift into our favor and we sell a greater portion of exome-based test, this dynamic would provide upside our guidance.
Regardless of product mix or timing on how quickly the reinforced sales force can produce results, we expect we will maintain our strong gross margin as well as GAAP income for the year due to our technological and operational efficiency, even as we continue to make aggressive investments in our business.
Paul Kim
Despite our lower outlook for the year, we remain confident in our business and opportunities ahead. We expect that the changes we have made to our sales organization will pay dividend in the long term and we are optimistic about what can be accomplished with the differentiated technology and platform in a rapidly growing market.
We have a solid balance sheet and remain one of the few companies in the genetic testing space able to demonstrate GAAP profits while still investing for growth.
Paul Kim
Operator, now we'll open it up for questions.
Operator
[Operator Instructions] Our first question comes from the line of Bill Quirk of Piper Jaffray.
William Quirk
A couple of questions. So I guess, first off, on the lower test ASPs, you cited several times that this was mix.
And so should we read into that then that there was -- that the overall ASPs on an apples-to-apples basis, the pricing remained the same and it was simply that we're moving to more like single-gene test versus panels and exomes like we saw on previous quarters?
Ming Hsieh
You're correct. It's purely the product mix.
It depends on the cost of the customer or the single gene test, that we do have lowered the ASPs versus the whole genome or whole exome test.
William Quirk
Okay. And then I guess based on your -- the guidance and a fairly significant cut to that guidance, it sounds like this unfavorable mix has continued into April.
The reason I bring it up, of course, is that your fourth quarter call is at the end of February, and so I'm assuming that you start to see this in a pretty meaningful way in March and it continued into April?
Ming Hsieh
Bill, that is also correct. But we do give the -- also, and try to give our new sales team some time to develop further, to [ enhance ] some of those tests, especially in the whole exomes and whole genome tests.
William Quirk
Sure. And that's a fair point, Ming.
Obviously, the new team will need some time to bed in and start generating some incremental performance. Lastly for me, just on reimbursement, could you just remind us kind of where we are with respect to lives in the coverage and lives under contract?
Ming Hsieh
Yes. Bill, we -- in the quarter, we also signed a contract with Blue Shield Blue Cross for a contract in Texas.
And also, Paul?
Paul Kim
We have it in 2 other states in the Midwest and then we are getting relatively close with 2 other national payers.
Operator
[Operator Instructions] The next question comes from the line of Erin Wright of Crédit Suisse.
Erin Wilson
How are -- a follow-up to Bill's question on reimbursement. How are these third-party relationships, third-party payer relationships influencing kind of your outlook for the year in terms of both pricing and volume?
Paul Kim
So the short answer is not much. The -- going back to hiring the senior sales individuals, they come from other genetic companies and they come from other genetic testing companies, where they have a very strong positioning in the institution of the cash side of the market.
So our primary focus with those individuals isn't necessarily to beef up what we've been doing on the reimbursement side. It's really to beef up on the cash paying portion of the market.
And then as a follow-up to that, a number of these individuals have a lot of experience in the cash paying side of the market for institutional and exome-based test. So although we believe that it will take a little bit of time for them to get up to speed, we are very optimistic about what they could potentially deliver for the company.
Erin Wilson
Okay. And I guess as a follow-up to that one, can you speak to kind of the hiring strategy as it stands now?
And what have you specifically added, I guess, quarter-to-date? And how big should we think about kind of the sales force being by the end of the year?
And just broader size, kind of over the longer term, had some processes or strategies there have been expedited at all?
Paul Kim
Yes. So I can give you numbers, and then Ming can follow-up on our overall strategy as to how we're going to continue to invest heavily in the sales and marketing space.
So at the beginning of the year, we had approximately 10 salespeople. We had 4 international salespeople headed by a VP, and then we had 6 U.S.
salespeople headed by a senior director. We have maintained and are in the process of adding another couple of people on the international side.
On the U.S. side, we added 6 senior people, 2 VPs, 3 senior directors, 1 director.
And then we rightsized the existing organization down to approximately 3 individuals. So we have a net add of 3 for -- on the United States side.
And then if you sum that up with what we have on the international side, that gives you a total 13. We believe that will add a couple more people bringing that 13 to approximately 15, that's our target by the end of June.
And then for the remaining portion of the year, we plan on adding another between 5 and 10 individuals, bringing the total number of people in the sales organization to somewhere in the low 20s to mid-20s by the end of this year.
Operator
[Operator Instructions] As there are no more further questions in queue, at this time I'd like to conclude the program. Thank you, everyone for your participation.
You may disconnect your lines at this time. Have a wonderful day.