May 19, 2008
Executives
Marcy Graham - Senior Director, IR Tina Nova Bennett - President and CEO Doug Schuling - SVP and CFO Sam Riccitelli - EVP and COO
Analysts
Adam Feinstein - Lehman Brothers Robert Willoughby - Banc Of America Securities Kemp Dolliver - Cowen and Company Justin Fiorani - Tamaric Capital Management
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2008 Genoptix, Inc. Earnings Call.
My name is Angela and I will be your coordinator for today. At this time, all participants are in a listen only mode.
(Operator instructions). As a reminder, this conference is being recorded for replay purposes.
And now I would now like to the presentation over to your initial host for today's conference, Ms. Marcy Graham, Senior Director, Investor Relations.
Please proceed, ma'am.
Marcy Graham
Thank you. Welcome to the Genoptix quarterly conference call to discuss operating results for the first quarter of 2008.
Joining me on today's call is Dr. Tina Nova Bennett, Genoptix's President and CEO; Doug Schuling, SVP and CFO; and Sam Riccitelli, EVP and COO.
This call is also being broadcast live over the Web and will be available for replay through Monday, June 9, 2008, on the Investor Relations section of our website at www.genoptix.com. Before we begin, please note that statements made today, including statements about guidance, expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by any forward-looking statement.
Any non-GAAP financial measures presented during today's call should be considered in addition to and not as a substitution for the information prepared in accordance with generally accepted accounting principles. For reconciliation of GAAP to non-GAAP financial measures discussed today, please access the "Overview" page of the Investor Relations section of our website.
Information about the risks and uncertainties that Genoptix faces, please refer to the 'Risk Factors' section of the Genoptix' Form 10-Q for the quarter ended March 31, 2008, filed with the Securities and Exchange Commission earlier today as well as other subsequent filings with the SEC. Genoptix assumes no obligation and expressly disclaims any duty to update any forward-looking statements to reflect events or circumstances after today's call or to reflect the occurrence of unanticipated events.
At this time, I'd like to turn the call over to Dr. Tina Nova Bennett, President and CEO of Genoptix.
Tina?
Tina Nova Bennett
Thank you, Marcy. Good afternoon, everyone, and thank you for joining us today to discuss the financial and operational results for the first quarter of 2008.
We are pleased to report first quarter revenues of $22.3 million, a 20% increase over the fourth quarter of 2007 and a 109% improvement from the same period one year ago. This was our 15th consecutive quarter of significant growth in sales and in the number of cases managed.
As volumes for the first quarter increased by 78% from one year ago, to 7,828 total cases. We ended our first full quarter operating as a public company with approximately 800 ordering physician customers per month, up from approximately 700 reported at the end of 2007.
This expansion in our customer base led to outstanding performance for the quarter, as we closed with our highest case volume and revenues to date. Our growth strategies are working, as we continue to expand our ability to reach new customers and deliver sophisticated diagnostic services to an even greater number of communities and the hematologist/oncologists that support them.
Our increase in customer base is a testament not only to our persistence in providing greater coverage nationwide. But also to our commitment to servicing the needs of physicians who manage patients with hematomalignancies.
As our sales teams, gain greater exposure to a growing number of physicians. We are seeing increased demand for services, reaffirming the value and importance of bringing patient focused academic level support to community-based hematologist/oncologist.
We are increasingly called upon to act as a partner to these physicians. Who are seeking, more than just test results.
The patients they serve and the progressive complexity of their diseases require a different approach. One that encompasses all elements of a particular case and benefits from the cooperation between their doctor and ours.
Due to the explosion, of information surrounding the understanding of leukemia and lymphoma. Our customers are looking to us for support, as they navigate through myriad of therapeutic options in front of them.
We take our role, as a partner seriously and continue to invest in the development of our business to support this effort. Servicing the unmet needs of our customers, and more importantly their patients, from diagnosis to treatment.
At the end of the first quarter, we had 17 hematopathologists on our Cartesian medical team, and our sales force grew to 42 members. Up from 34, at the end of the fourth quarter 2007.
We are providing greater support to our sales team, by developing additional channels of communications with our prospective and current customers. Recently, we launched the first of a regular series of targeted marketing campaigns focusing on specific disease states, giving us the opportunity to develop deeper connections beyond the traditional sales channel.
By reaching out in parallel with our representatives in the field, we are putting greater resources to work, adding depth to the relationships with our customer physicians. By taking on these initiatives and by adding infrastructure, expanding operational capacity and increasing our field coverage, we believe our capabilities are growing in line with our customer base and should continue to do so in the foreseeable future.
I will now turn the call over to our CFO, Douglas Schuling to talk about our performance during the first quarter of 2008. Doug?
Doug Schuling
Thanks Tina. As Tina noted, we started this year with strong financial results and are pleased to report continued improvements in our revenues and margins, achieved through the effective execution of our operational strategies.
Our revenue on a per case basis increased by about 4% to approximately $2,800, an improvement of over $100 per case as compared to the fourth quarter of 2007. This increase is driven primarily by a net increase in Medicare reimbursement rates for our key service offerings.
For the first quarter, our total revenues of $22.3 million included $651,000 benefit from changes in accounting estimates relating to 2007. These changes resulted from differences between the actual collected amounts associated with our non-contracted payers and our original estimated revenues.
Gross profit for the first quarter of 2008 was $13.1 million, up a 118% from the same period in 2007 improving from 56% of revenues to 59%. This improvement is largely attributable to the increases in revenues, but as we continue to recognize costs associated with rapid growth and higher stock-based compensation expense, we still expect gross margins to settle in the mid-50% range going forward.
We recorded increases in all expense lines for the quarter, as compared to prior periods, which were expected and attributable to the expense associated with our growth and the costs of operating as a public company. As a percentage, however, operating expenses were down from 43% of revenues in the first quarter of 2007 to 40% of revenues in the first quarter of 2008, an improvement resulting from the leveraging of existing personnel and infrastructure across the organization.
Stock-based compensation expense was $881,000 for the first quarter of 2008, an impact of $0.05 on diluted earnings per share. Approximately 34% of this cost was included in cost of goods sold, with the remainder in operating expenses.
More than half of the $6 million in stock-based compensation forecasted for 2008 is expected to be recognized in the first half of the year. Due to the mechanics of the initiation of our employee stock purchase plan, recognition of expense will be delayed from the first to the second quarter as per technical accounting guidelines.
This one time delay in expense recognition is expected to apply substantial downward pressure on diluted earnings per share for the second quarter as stock based compensation charges are currently estimated at approximately $2.8 million for the second quarter, before leveling out for the remainder of the year. Cash and investment balances, resulting primarily from our IPO proceeds, generated interest income of approximately $930,000, reflecting the first full quarter of investment.
This is a trend we expect to continue, as these higher cash balances result in investment cash flows throughout 2008, subject to general market fluctuations. First quarter income tax expense was approximately 2.1% of our pretax earnings, primarily reflecting alternative minimum tax for the period and the utilization of net operating losses.
GAAP net income for the quarter was $5 million, compared to net income of $1.3 million in the first quarter 2007. Diluted earnings per share for the first quarter were $0.29, based on 17.5 million weighted average common shares outstanding including the $0.05 impact from increased costs associated with our equity incentive plans.
Applying a 40% tax rate would decrease diluted earnings per share for the first quarter by $0.11. Our DSOs averaged 64 days in the first quarter of 2008, down from 72 days in first quarter of 2007.
As of March 31, 2008, our DSO was 71 days, higher than in recent quarters, due to our increasing revenues, as well as the timing of specific payments that were received in early April rather than in March 2008. Consequently, cash generated from operations was $581,000 for the first quarter of 2008, down primarily due to this temporary increase in accounts receivable, which was offset by an increase in net income.
Additional cash collections since the close of the first quarter of 2008 have reduced our DSO to below 55 days. A level consistent with previous operating trends.
We ended the first quarter with bad debt provision of 2.8% of revenues. As of March 31, 2008 our cash, cash equivalents and short term investment balance was $84.7 million, which includes the remainder of $72.5 million in net proceeds from our IPO.
Purchases of capital equipment for the quarter totaled $1.3 million and was used to purchase lab equipment, computers and software necessary to support our staffing initiatives. For more detail, on our operational results.
I would like to turn the call over to our head of operations. COO, Sam Riccitelli.
Sam?
Sam Riccitelli
Thank you. We have had a great start to 2008 as we welcomed new employees in virtually every function of the organization.
Building the foundation to support our growth, as we continue to see top line improvements driven by our success in developing new customer relationships. We believe the work of our sales reps in the field has been exceptional, particularly when considering the increase in new additions to our team, since the start of this year.
Our hiring has been front-loaded for the year, enabling us to stay on track with our revenue goals, and hiring plan for 2008. For which we forecasted, an average sales staffing level in the mid 40's for the year.
We continue to fortify the structure of our sales force. As we train and deploy new sales representatives.
We have been adding leadership positions and account managers to facilitate their efforts. These new roles keep our sales team focused on enhancing existing customer relationships.
While continuing to broaden our market foot print in a manner that rewards efforts to drive growth in their regions. The rapid addition of new customers, and increased case loads necessitates increased operational scale to ensure we can manage the greater number of cases coming into our lab on a daily basis.
We continue to add laboratory personnel, customer service representatives, clinical service coordinators and billing and reimbursement personnel. Most notably, we've significantly increased the number of hematopathologists on staff since the end of 2007.
We have added three new physicians who began working with us in the first quarter and accepting commitments from others who will start later in the year. Thanks to this new active hiring strategy, we believe we are on plan to reach our goal of housing a staff of hemapaths numbering in the mid-20s by the end of 2008.
Our financial plan for the year incorporates these personnel increases, additional public company costs, and costs associated with expansion of our facilities, as we implement our growth strategy. We intend to continue seeking out efficiencies in our business by leveraging our current operations and making proficient use of the resources we have at our disposal.
The process of expanding laboratory space by 75% within our existing Carlsbad, California facility has begun and we expect to make use of previously unimproved warehouse space by the fourth quarter of this year. The added lab capacity expands our ability to process testing on all fronts and should support our growing operations throughout 2009.
In coordination with those expansions, we also signed a lease on new administrative space, enabling us to move these functions out of our existing offices and dedicate the whole of our current facility to the science behind identifying and diagnosing hematomalignancies. We are also on track to identify the site of our second laboratory operation near the eastern half of the country and are committed to having the second site online by the middle of 2009.
Based on these strategies, we are currently forecasting approximately $6 million in capital expenditures for the full year 2008 to cover the costs associated with expanding our current lab facility, including requisite new equipment and the upgrades to our newly leased administrative space, which we expect to occupy by the end of this year. When considering our performance beyond the first quarter, we are moving our revenue outlook upward, with an expectation of between $90 million and $95 million for 2008.
This reflects a slight contribution from recent changes to the CMS physician fee schedules for the first half of 2008 and the uncertainty that surrounds its permanence as the year progresses. A determination as to further implementation of the proposed fix to the fee schedule is expected mid-year, after which we will further update our guidance for 2008.
Our continued growth is expected to result in net income at the high end of our previously provided guidance range of $15 to $17 million for 2008. Included in this is the impact of stock-based compensation charges of approximately $6 million.
Due to our strong first quarter performance and anticipated additional leverage of existing resources, we also anticipate ending the year with diluted earnings per share at the high end of our previously provided range of between $0.85 and $0.95. With that, I'll turn the call back over to Tina.
Tina Nova Bennett
Thank you, Sam. We are pleased with the results we have achieved and we'll move forward with the same drive and commitment to providing the best customized diagnostic solutions and quality integrated services for our customers.
With that, we're now ready to take questions. Operator, please open the line.
Operator
(Operator Instructions) And our first question will come from the line of Adam Feinstein with Lehman Brothers. Please proceed.
Adam Feinstein - Lehman Brothers
Okay, thank you. Great quarter here.
Just a few questions, I guess, just first it seems like you guys added new sales people and hemapaths, the ramp has been faster than what we were forecasting. Just curious if you could just provide some more color in terms of, the process and certainly just you'd mentioned that the challenge of bringing all of these new people on at once.
Just maybe just talk about the ramp up, and how we'll see this translate into revenue? Thank you.
Tina Nova Bennett
Sure nice to hear from you Adam, thank you, it's Tina. Yes, our plan this year, and in previous years, has always been to do a little bit more front-loading in the year to get people in to get them trained, to get them trained in the Genoptix way early in the year and then to hopefully gain from that productivity as soon as possible, as the year progress.
We did that last year and we did it again this year and that's just kind of a philosophy that we've continued to use.
Adam Feinstein - Lehman Brothers
Okay and just a couple of follow-up question here also. And then, just on the pricing side the number was very good for the quarter and just curious, as you guys think about pricing longer-term, when do you think we start to see that number just flatten out?
I mean, obviously you've talked about this being more of a volume growth story in the long-term, but just curious as you think about the pricing number?
Sam Riccitelli
Hey Adam, this is Sam. Good to hear from you.
Yes, in the first quarter, we really benefited from the CMS fee schedule changes and that's the majority of what we saw contributing to improvement and case average selling price. Also I will point out to you there was a little bit of out of period revenue that we recorded in the first quarter that was about $651,000 that also contributed a bit to our case ASP.
So we are still, sort of forecasting growth being driven primarily by volume. And we are not really anticipating a great deal of benefit from additional pricing increases.
And we are still very much uncertain about, what's going to happen at CMS relative to, maintaining these price increases throughout the rest of the year.
Adam Feinstein - Lehman Brothers
All right. And just one more question here, may be just talk a little bit about the competitive landscape just to curios to get your thoughts in terms of what's going one.
Are you seeing new competition and so just any commentary there would that be helpful. Thank you.
Tina Nova Bennett
Yeah I think it's pretty much been, exactly the way it has been Adam, nothing new. But obviously, there is a lot of competition out in the field that's nothing out of the ordinary.
Adam Feinstein - Lehman Brothers
I agree. Okay.
Thank you very much.
Tina Nova Bennett
Thank you.
Operator
And your next question will come from the line of Robert Willoughby with Banc of America Securities. Please proceed
Robert Willoughby - Banc of America Securities
Hi I guess I am having, I am struggling on the earnings guidance a bit. I think you've crushed me about $0.13 yet you maintain sort of $0.10 guidance range.
All the data points I saw were positive in terms of sales repetitions, pricing, the public company cost not so onerous. I guess I am struggling to find that where the concern is on the EPS, why that guidance range wasn't pushed up a little bit more.
Sam Riccitelli
Yes, Bob this is Sam again. It's not so much concern on our part as it is still just a bit too much uncertainty.
The two things that and by the way we have lifted guidance at tad just to give credit where credit is due. We have both increased our top line and we are now guiding much more towards the higher end of our initially stated range of $15 to $17 million.
But in any case we are still uncertain about CMS and what's going to happen in the middle part of the year and whether or not these price increases are going to be maintained for the back half. And then secondarily, stock based compensation charges are still looming out there for us, we still are planning on $6 million for the full year.
And the majority of that is going to happen in the first half, we gave you some indication what we are anticipating for the second quarter. So given those two things and our uncertainty right now it wasn't prudent really to change our guidance anymore than we already have.
We will come back to this topic obviously when we have a lot more certainty on these two items by the end of the second quarter, we will be recommunicating with all of you.
Robert Willoughby - Banc of America Securities
Well, Sam. Two questions on that.
Do your second half assumptions here assume no physician fix then or is there, there is a physician fixed in the numbers?
Sam Riccitelli
The way we think about it is we are committed to making $90 million to $95 million at the top line no matter what happens at CMS. That's really how we think about it.
Robert Willoughby - Banc of America Securities
Okay. The other question.
I thought there was, wasn't there a nickel of stock based compensation expense, realized in the first quarter already or was that, Doug, something on the accounting side, there was, I guess I don't know you lost me on that. So I thought there was a nickel in the first quarter, you seemed to suggest me may be it's in the second quarter?
Doug Schuling
No, we did experience nickel worth of stock based compensation in the first quarter that's related to regular stock-based compensation, regular stock options. Here is also a portion of the $900,000 or $881,000 worth of stock-based compensation that we had in Q1.
We still had some employee stock purchase plan-related stock-based compensation, about $529,000 related the second, third and fourth purchase periods. In Q2, what we're going to see is a catch-up.
Fundamentally, relating to this first purchase period, we're unable to recognize any stock-based compensation related to and we therefore have to defer it to Q2. So, again, approximately $2.8 million in Q2 which is equivalent to about $0.16 EPS in Q2 alone relating to stock-based compensation.
Robert Willoughby - Banc of America Securities
And that had not been anticipated, your preliminary guidance, your quarterly progressions, things like that, not that you've provided that much. But was this consistent with your expectation or was it a surprise that this was not in the first quarter?
Doug Schuling
It was, total year it still is very much in line with our expectations, approximately $6 million of stock-based compensation, a little heavier on the first half of the year, perhaps, than we had originally anticipated. Then again, as Sam point out, as we move closer here to July and finishing the second quarter, so many more of these variables will become clear to us as it relates to a, employee participation, the actual stock price and then also the CMS guidance on the other issues as you were asking on revenue.
Robert Willoughby - Banc of America Securities
Okay. And the tax rate came in lower.
It's trivial, but I think we were kind of modeling a 5% sort of GAAP tax rate. You came in well below that, unless I'm doing the math wrong, which is entirely possible.
Is that a rate we carry forward, what you reported here in the first quarter?
Doug Schuling
We would still guide you to utilize the 5% and what happened in Q1 is there was a bit of disqualifying dispositions of employee stock that pulled it down a little bit. But still, for the entire year 2008, we would guide you in the 5%.
Robert Willoughby - Banc of America Securities
Okay, that's it, thank you.
Operator
(Operator Instructions) Your next question will come from the line of Kemp Dolliver with Cowen and Company. Please proceed.
Kemp Dolliver - Cowen and Company
Hi, thanks. A couple of questions first with regard to your volume growth and your sales force expansion.
What are you seeing in terms of say the ramp up of new sales people versus your expectation, particularly say going into the newer markets versus your more established markets?
Sam Riccitelli
Yeah Kemp These folks are operating pretty much as we anticipate and I'll draw your attention to some of the comments we made during the call and that we're not only hiring senior sales representatives. We're also hiring account managers to help us protect the fort, so to speak, and also increasing leadership responsibilities for many of our senior sales reps, but any case, beyond all of that, this team is performing at our expectations, if not above our expectations in all territories.
Tina Nova Bennett
Our criteria for hiring Kemp of people that are experienced and that understand oncology has not changed over time. We continue to hire very, very high quality salespeople and that has not changed.
Kemp Dolliver - Cowen and Company
All right, super. A couple times you all referenced the increase in the Medicare fee schedule as a factor or the most significant factor in the increase in revenue per session.
The fee schedule only went up around 1% on January 1st, and your revenue per session went up 18%. Granted, it looks like it was probably $80 per session that came from the year-over-year adjustment.
But could you talk a little more detail just what exactly went on with the fee schedule that you would see that sharp an increase?
Sam Riccitelli
Hey, Kemp, this is Sam again. There were two factors in the fee schedule that were adjusted, both RVU's and the conversion factor was lifted a bit for the CPT Codes that we utilize.
It was really both those, a combination of those two things that generated, the increased ASP.
Kemp Dolliver - Cowen and Company
Okay, so most of this was an increase in the RVU's?
Tina Nova Bennett
Yes, a little heavier on RUV's.
Kemp Dolliver - Cowen and Company
Okay that's good. And then just a final question.
I wanted to double check the number you gave for the hemapaths, were you essentially at 18 at the end of the quarter.
Sam Riccitelli
No, we were at 17 at the end of the quarter. We were at 14 at the end of December and 17 at the end of March.
Kemp Dolliver - Cowen and Company
Alright, thanks a lot.
Sam Riccitelli
Thank you Kemp
Operator
(Operator Instructions) And gentleman your next question will come from the line of [Justin Fiorani with Tamaric Capital Management]. Please proceed.
Justin Fiorani - Tamaric Capital Management
Good afternoon, everybody. Nice quarter .
Can you hear me?
Tina Nova Bennett
Yes, thank you. Justin
Justin Fiorani - Tamaric Capital Management
I believe you received the State of New York licensure at the turn of the year and I was wondering how much business it kind of contributed in the first quarter from New York, if that's the case?
Sam Riccitelli
Yes, actually we got the New York license towards the end of last year. You are correct on that.
Justin we don't disclose revenue by geography. That's just not something we are comfortable doing.
So I just can't get you that level of detail.
Justin Fiorani - Tamaric Capital Management
Have you, can you say if you had any contribution at this point yet, whatsoever?
Sam Riccitelli
Cases from New York. Yes.
Justin Fiorani - Tamaric Capital Management
Okay, great. Thank you very much.
Sam Riccitelli
Thank you.
Operator
And ladies and gentlemen at this time this now concludes our Q&A session. I would like to turn the conference back over for closing comments.
Doug Schuling
Thank you everybody.
Tina Nova Bennett
Thank you for joining the Genoptix call and we will see you next quarter.
Operator
Thank you for your participation in today's conference. The conference has now concluded.
Have a wonderful day.