Jul 31, 2008
Executives
Marcy Graham – Senior Director, IR Tina Nova Bennett – President, CEO and Founder Douglas Schuling – CFO Samuel Riccitelli – COO
Analysts
Robert Willoughby – Banc of America Securities Kemp Dolliver – Cowen and Company Adam Feinstein – Lehman Brothers Bud Leedom – Global Hunter Securities Balaji Gandhi – Oppenheimer & Co. Brendan Strong – Lehman Brothers
Operator
Good day, ladies and gentlemen and welcome to the second quarter 2008 Genoptix Incorporated earnings conference call. My name is Stacey and I’ll be your moderator for today.
At this time, all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of the conference.
(Operator instructions) I would now like to turn the presentation over to your host for today.
Marcy Graham
Thank you and welcome to the Genoptix quarterly conference call to discuss operating results for the second 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, August 7, 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 substitute 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. For information about the risks and uncertainties that Genoptix faces, please refer to the Risk Factors section of the Genoptix Form 10-Q for the three and sixth months ended June 30, 2008, filed with the Securities and Exchange Commission earlier today, July 31, 2008 as well as other subsequent filings with the SEC.
Genoptix assumes no obligation and expressly disclaims any duty to update any forward looking statement 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 second quarter and our expected performance for the balance of 2008.
We are pleased to report revenues of $27.8 million for the second quarter and $50.1 million in revenues for the first half of 2008, a 104% increase over the same period one year ago. For 16 consecutive quarters, we have grown in both revenues and case volumes managing more than 9,300 cases in the second quarter, an increase of 77% from the second quarter of 2007, bringing the total number of cases processed to more than 17,000 in the first half of 2008.
We ended the second quarter of 2008 with more than 850 ordering physician customers per month, up approximately 800 reported at the end of the first quarter. We have also observed during the past quarter that doctors are slightly increasing the percentage of cases that they are sending to us as compared to our historical experience with physician ordering patterns.
As part of our strategy to provide to a complete array of services and to deepen our relationships with our hematologist/oncologist customers, we recently reduced a targeted campaign focusing on case reviews related to specific disease dates. This new communications platform enables us to go beyond providing personalized laboratory services acting as an educational medium to bring academic level resources to the community physician.
Our case review of myeloid proliferative disorders launched in the second quarter of this year with the first of our bi-monthly outreach programs diagnosing and sub-classifying this disease state is a complex process. So we developed the case studies discussing the diagnostic algorithms and mutation analysis applied to solving these challenges providing a Web accessible slide show narrated for our physician customers.
Our most recent case review focuses on testing using the detection and diagnosis of Tcell malignancies, a challenging category of diseases due to their ability to mimic other less serious hematologic conditions. Because the most widely used diagnostic tools like immunohistochemistry and fluocytometry are limited in their ability to characterize Tcell lymphomas, there is a strong need for specific molecular test to aid physicians in the precise diagnosis and management of these T-cell malignancies.
Since then, Genoptix is among the first commercial labs to offer the beta chain version of the T-cell gene rearrangement tests which offers a substantial improvement in sensitivity and specificity over conventional or first generation molecular test. Beta chain catenin is also useful in monitoring patient therapy in addition to aiding in the diagnosis of these lymphomas.
We are also working to maintain the high quality diagnostic services to which our customer physicians have become accustomed, primarily by continuing to increase capacity each quarter by hiring additional staff members. We ended the second quarter with 19 hematopathologists on the Cartesian medical team and expanded our sales force to 44 members, up from 42 at the end of the first quarter 2008.
For further details on our latest initiatives and financial performance for the second quarter, I will now turn the call over to our CFO, Douglas Schuling. Doug?
Douglas Schuling
Thanks Tina. We ended the first half of 2008 with strong financial results and are once again pleased to report improvements in top and bottom line performance, a product of the effective execution of our operational strategies.
Our total revenues for the second quarter were $27.8 million which includes an $864,000 benefit from changes in accounting estimates relating to prior periods. For the first half of 2008, revenues totaled $50.1 million including a $1.3 million total contribution from changes in accounting estimates relating to 2007.
As in previous quarters, these positive changes in accounting estimates related to differences between the actual collective amounts associated with our non-contracted payers and our original estimated revenues for services rendered in a prior period. Gross profit for the second quarter of 2008 was $16.6 million or 59.7% of revenues and for the first half of 2008 was $29.7 million or 59.3% of revenues, fundamentally flat as compared to 59.2% in the first six months of 2007.
For the second quarter of 2008, increased volumes and slightly higher average case pricing helped to offset the impact of higher expenses associated with our rapid growth namely increased staff-based compensation cost and other costs associated with our growing personal base. With our planned facilities expansion, the addition of hematopathologists and laboratory personnel and continued staff-based compensation expense, we expect gross margins to settle in the mid to upper 50% range going forward.
Operating margins for the second quarter and first half of 2008 were both 18.6% of revenue down from 21.3% for the first half of 2007. We recorded increases in most expense lines for the quarter as compared to prior periods which we expected in attributable to the expense associated with our growth and the cost of operating as a company.
As expected, stock-based compensation expense was higher in the second quarter ending in approximately $2.3 million for the quarter and $3.2 million for the first half of 2008. Approximately 32% of this cost for the second quarter was included and cost of good sold with the remainder included in operating expenses.
Cash and investment balances generated interest income of $677,000 for the second quarter down slightly from the first quarter as we moved funds out of auction rate security in to more liquid investment alternatives and encounter declining interest rates as a result of shifts in the overall economy. Interest income generated during the first half of 2008 totaled $1.6 million, an increase over the $127,000 earned in first half of 2007, primarily due to the increased cash balances resulting from our IPO proceeds and cash generated from operations.
We continue to expect our higher cash balances resolve in investment cash flows throughout 2008 subject to future capital expenditures and general market fluctuations. Second quarter income tax expense was 5.1% of our pretax earnings while our effective tax rate for the first half of 2008 was 3.7%, primarily reflecting alternative minimum taxes and state taxes for the period and the utilization of net operating losses.
As previously discussed, we expect our effective tax rate to average approximately 5% for the remainder of the year. We will continue to assess our evaluation allowance against the remaining deferred tax asset.
Upon reversal of the allowance, our tax rate will increase to 40%. We estimate that this tax rate change could occur as early as January 1, 2009.
GAAP net income for the quarter was $5.6 million compared to net income of $3.8 million in the second quarter of 2007. Diluted earnings per share for the second quarter was $0.32 based on 17.5 million weighted average common shares outstanding including the $0.14 per share impact from increased costs associated with stock-based compensation.
Applying a 40% tax rate would decrease diluted earnings per share for the second quarter by $0.12. For the first half of 2008, net income totaled $10.6 million with diluted earnings per share of $0.60 including a $0.19 impact from cost associated with stock-based compensation.
Applying a 40% tax rate would decrease diluted earnings per share for the first half by $0.22. Our DSO’s averaged 53 days in the second quarter of 2008 down from 59 days in the second quarter of 2007.
We ended the second quarter with a bad debt provision of 3% of revenues. As of June 30, 2008, our cash, cash equivalents, and short-term investment balance was $96.1 million including $7.5 million of auction rate securities.
Following the second quarter, one of two remaining auction rate security positions was fully redeemed, leaving $5 million in holdings currently. We have not booked any impairment against this holding and believe that it will be liquidated without any significant loss in the short term.
Purchases of capital equipment during the first half of 2008 totaled $2.6 million related primarily to purchases of laboratory equipment, facility expansion initiatives, and technology necessary to support our accelerated hiring and continued growth. For more detail on our operational results, I’d like to turn the call over to our head of operations, COO, Samuel Riccitelli.
Sam?
Samuel Riccitelli
Thank you. The first half of 2008 has been marked by tremendous growth and solid performance throughout the company.
Managing the increase in cases and addition of new customers required a great deal of dedication on the part of our physicians and lab personnel. As we continually worked to ramp up our capacity, our operations teams absorbed a significant increase in volume without any disruption to our functional capability or the quality of services we provide our hem/onc customers.
Our central focus on quality of service remains our highest priority. We have increased the number of hematopathologists on staff with Cartesian since March adding two new physicians in the second quarter bringing the total number of hemapaths on staff with Cartesian to 19.
We have also accepted commitments from others who will start later in the year, most during the active summer hiring season. We expect this recent additions and those scheduled to join us in the coming months to bring us close to our year-end goal, and we believe we are on plan to have the staff of hemapaths numbering in the mid to upper 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 are in the process of completing intended improvements to our newly leased administrative offices and we will be moving all administrative functions out of our current facility into the new space, which we expect to occupy before the end of this year.
By making this move, we free up space to expand the laboratory functions in our current facility as we add physicians, lab personnel, clinical service coordinators, and support staff. The opportunity to grow in this manner has ultimately resulted in greater capacity at a faster rate without requiring immediate development of a second laboratory facility, though some capital expenditures originally slated for 2009 have moved in for 2008.
So based on these strategies and our continued growth, we are currently forecasting approximately $11 million in capital expenditures for the full year 2008, up from prior estimate of approximately $6 million. Our strong performance in the second quarter resulted not only from the continued increase in case volumes but also the benefit gained due to the timing of seasonal inflows.
First, the Easter holiday fell on the first quarter of this year as opposed to April which is more typical. Also, the second quarter included an increased number of sales days versus the first quarter and the remaining quarters in 2008.
Taken together, these factors served to effectively increase revenues for the second quarter ahead of what we would normally have anticipated. The seasonal activity associated with the holiday is expected to impact year end results as it has historically.
The weeks of Christmas and New Years have traditionally seen a slow down in test ordering as patients are less likely to schedule visits with their doctors during this time. This year, both holidays occur in mid week rather than adjacent to or on a weekend potentially amplifying this effect and resulting in a decrease in case volumes for that time period.
When considering our performance beyond the second quarter, factoring in the recent confirmation of Medicare reimbursement rates and taking into consideration the year end seasonality inherent in our business, we are looking forward to surpassing the $100 million mark in annual revenues for the first time. We are moving our revenue outlook upward, now expecting to reach between $105 million and $108 million for 2008 representing an average increase of 18% over our initial guidance this year of approximately $90 million and 80% over last year’s revenue of $59 million.
Our continued growth is expected to result in net income of approximately $20 million for 2008 including the impact of stock-based compensation charges which are now expected to be approximately $7 million. Stock-based compensation expense in the second quarter was in line with expectations that will be higher than our previous outlook of $6 million for the full year due to increased cost associated with equity grants to new and existing employees and directors to support our rapid growth.
Due to our strong performance in the first half of 2008 and the expectation of continued performance in the coming quarters, we also anticipate ending the year with diluted earnings per share between $11 and $16 based on an average annual tax rate of 5% and diluted shares outstanding of 17.6 million. With that, I will turn the call back over to Tina.
Tina Nova Bennett
Thank you, Sam. We are pleased with the results we have achieved and we will 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
(Operator instructions) Your first question comes from the line of Robert Willoughby with the Banc of America Securities. Please proceed.
Robert Willoughby – Banc of America Securities
Thank you. Just one, I guess.
The query on the tax shield, Doug, I think you said it basically used up by the end of the year. I guess if that’s the case then the earnings guidance you gave really doesn’t jive with that.
We would have to be at some numbers considerably above that range throughout there. Can you help me put those two pieces together?
Douglas Schuling
Absolutely. I understand why you come to that conclusion but that is not the case.
From a technical accounting standpoint, what you have to do is evaluate the actual deferred tax asset and you’re not allowed to book it as a deferred tax asset on the balance sheet until you meet certain requirements which include multiple quarters of cumulative profit and so what we’re doing is we are reviewing this. Our tax consultants and tax accountants are reviewing this consistently.
At some point in time, we would expect, perhaps as soon as the end of this year, where we would book this deferred tax asset onto the balance sheet which would create a favorable tax expense and that you would have that asset on the balance sheet to then apply on a going forward year, so you can’t necessarily take to start the $28 million if you will at the beginning of the year and deduct the re-estimated net income or pre-taxed income against that you come up with the exact number. So it’s really about when do you classify that net operating loss onto the balance sheet and the guidance that we’re giving is we expect by the end of the year we will rebooking whatever is left at that point in time.
It could be million of dollars, don’t know exactly what it would be, depends on the rest of our performance and then we would use that asset and bleed it off into 2009. That helped?
Robert Willoughby – Banc of America Securities
I think so. Yes.
I still had the sense you are going to come in comfortably above my guidance range but perhaps, is it on the SG&A line item? How you say there is only an incremental million bucks coming from the stock-based compensation expense?
Douglas Schuling
In the second half, again, we have booked about $3.2 million here in the first half and we’re estimating about a little over $7 million here.
Robert Willoughby – Banc of America Securities
Okay. So we really should not be ratcheting down our operating expense assumptions as yet there is still more to go on that Doug?
Douglas Schuling
Right.
Robert Willoughby – Banc of America Securities
Okay. That’s it.
Thank you.
Douglas Schuling
Thanks, Bob.
Operator
Your next question comes from the line of Kemp Dolliver with Cowen and Company. Please proceed.
Kemp Dolliver – Cowen and Company
Hi, good afternoon.
Tina Nova Bennett
Hi, Kemp. How are you?
Kemp Dolliver – Cowen and Company
Good. The revenue per case was up sequentially even taking into consideration the revenue adjustments from prior period.
Is anything going on with your test mix that’s worth note or any other explanations for that?
Douglas Schuling
Not really, Kemp. A large portion of it still has to do with the changes in estimates that we recorded obviously.
And then we did have some favorable benefit on one of our test, just some improvement in the reimbursement around our circulating tumor cell assay which also contributed to that but the largest contributor really was our period revenue.
Kemp Dolliver – Cowen and Company
Okay. Secondly, historically, I think you have said that you do your sales force hiring somewhat front-end loaded and you came in, I think, up only two FTEs from Q1.
Do you still intend to, I guess, get over 50 by the end of the year, to your mid-40s or is that changing?
Tina Nova Bennett
No. I think that’s about right, Kemp.
I think we will be a little bit higher than that. We’re estimating now at the end of the year to be in the mid-50s instead of low-50s so we will be adding more sales force because of the growth.
Kemp Dolliver – Cowen and Company
Okay, that’s great. And then the last question is you referenced some changes in ordering patterns.
I know you’ve talked about physician market share previously. Can you give some color on where the delta is in terms of the volume per ordering physician?
Samuel Riccitelli
Yes. That actually increased just the tad Q1 to Q2 and we think its a reflection on the hiring of account managers that are – as we’ve stated in the past, they are out there really protecting our fort and also trying to drive same-store sales within our physician accounts.
So, it increased between 3.3 and 3.4 cases per physician per month to a little over 3.5 cases per physician per month.
Kemp Dolliver – Cowen and Company
That’s great. Thank you.
Samuel Riccitelli
Thanks Kemp.
Operator
Your next question comes from the line of Adam Feinstein with Lehman Brothers. Please proceed.
Adam Feinstein – Lehman Brothers
Okay. Thank you.
Very good quarter here, Just – I guess to start it of, any commentary on the recently proposed Medicare rule for fiscal 2009? I know we just got through the doc fix which impacts the back half of 2008, but just curious in terms of your thoughts around Medicare reimbursement for 2009.
Samuel Riccitelli
Well the physician fee fix, this is Sam, Adam, and thanks for the comment – the physician fee fix that was passed by the senate here in mid July did include a 1.1% increase for 2009. So, we would expect for that to occur for us next year.
The things that are being discussed and bantered about relative to the clinical lab fee schedule really don’t affect our business that much because 90% to 95% of our revenue does come from the physician fee schedule. It is also important to remind everybody that it is only 40% of our business that is affected by Medicare directly.
Of course, the other payers do reflect what Medicare does but Medicare itself is only 40% of our business.
Adam Feinstein – Lehman Brothers
Okay, great. And then I guess just next in terms of the competitive landscape, I mean clearly, you guys are taking a lot of market share.
Just curious in terms of what you’re seeing out there in terms of – is your success breeding more competition? So, just curious as you think about the competitive landscape.
Tina Nova Bennett
Yes, Adam. It’s a great question, I mean, really we’re not seeing anything significantly different from what we’ve seen in the past, but I think the thing to note is that there has always been a very healthy competition, a very healthy competitive environment in the beginning and it remained so today, and we really haven’t seen the changes.
It’s always been there.
Adam Feinstein – Lehman Brothers
Okay, great. And then just in terms of expansion, just what your update thoughts on opening another lab?
I know you guys are moving your corporate office, as you talked about before to free up some space. But what are your thoughts in terms of opening up a second lab in terms of the timetable for that?
Samuel Riccitelli
Yes, Adam, we’re still on schedule to announcing the location of our second lab here towards the end of year 2008 and we’re still aiming to have it online late second half of 2009.
Adam Feinstein – Lehman Brothers
Okay great. And then just a final question here is just, in terms of the bad debt expense.
Just clearly with the economy being much weaker and bad expense going up in other parts of the sector, just what are your thoughts there? I now you guys – your collections have been very strong, so I know you’ve been reversing some prior period but just how are you thinking about that in the current environment?
Thank you.
Douglas Schuling
Adam this is Doug. Our bad debt expense just increased ever so slightly here in Q2.
Again, a reminder it’s related primarily to our contracted payers and as you expected the piece attributable to the patient themselves. But from an economy standpoint and just bad debt in general, we’re not seeing a tremendous amount of movement there.
As far as the economic effects, we’re pricing utmost like everyone else’s is on the interest income, lower yields on our investments but bad debt really just a slight movement for us but nothing that we’re concerned about.
Tina Nova Bennett
And I think the other thing is we deal primarily with community doctors and they don’t typically service patients who are covered by Medicare or those that are more likely to be impacted by economic downturn. Medicaid not Medicare, Medicaid, excuse me.
Medicaid and so it’s a little bit different on the sectors. We don’t appear to be as influenced by the downturn in the economy.
Unfortunately, our patients still need to be diagnosed with cancer.
Adam Feinstein – Lehman Brothers
Sure. Okay.
Thank you very much.
Operator
Your next question comes from the line of Bud Leedom with Global Hunter Securities. Please proceed.
Bud Leedom – Global Hunter Securities
Hi. Nice quarter and thanks for taking my question here.
I guess, if you could discuss just some of the transition you are seeing on the ordering physician’s side where up 50 ordering physicians sequentially in the second quarter and then obviously in the first quarter, you are up a 100. Does this reflect may be a different focus from the sales force in terms of trying to drive this nice number you saw obviously for the monthly case volume per physician order, something else is taking place in the market?
I’m just wondering if you could shed some color on that?
Samuel Riccitelli
Sure. This is Sam again.
I think it does reflect the fact that in the second quarter, the FTEs that we did bring in to the sales team were more account managers than sales representatives and it’s just a matter of how the business evolves over time and how territories are growing and our desire to make sure that we fortify the relationships with customers that we have established and so I think that’s why we saw a little bit of a kickup in the same store sales or cases per physician per month, metrics that we track and that’s may be partly explaining the difference between the delta between Q2 and Q1 increase in physician customers ordering at the end of the quarter versus what happened between Q1 and the end of last year.
Bud Leedom – Global Hunter Securities
Okay. Then obviously, you had a nice kick-up in the gross margin there and it seems just by virtue of your guidance now, it’s a sort of mid-upper 50s on a go-forward basis, is there any change in dynamic?
What’s influencing that number higher?
Samuel Riccitelli
The increase in margin that we experienced here in Q2 was primarily a driven issue with respect to your imagined volume and that’s the key driver to the increased gross margin here in Q2 and as we provided guidance again back in mid to the high 50s for gross margins. Again, we’re anticipating as we spent it for the ongoing stock-based compensation expense and continued investments in our laboratory and Cartesian physicians and also as we expand our facilities, in particular, the laboratory facilities here in Carlsbad, the depreciation expense related to that will be affecting our gross margins.
Bud Leedom – Global Hunter Securities
Okay and then just finally, are you seeing any greater pressures from third party payers to form a contract or that still, pretty much what you’ve seen in the past?
Samuel Riccitelli
Pretty much, what we’ve seen in the past as it relates to those relationships we are continuing pursuing opportunities where we can strengthen our relationships with our payers, and we certainly in some situations it may include entering into a contract and negotiated fee schedules going forward. We spent a lot of time, working on these relationships but at this point in time, everything is pretty consistent.
Bud Leedom – Global Hunter Securities
Great. Well, thanks again.
Nice quarter.
Samuel Riccitelli
Thanks Bud.
Operator
Your next question comes from the line of Balaji Gandhi with Oppenheimer & Co. Please proceed.
Balaji Gandhi – Oppenheimer & Co.
Good afternoon.
Tina Nova Bennett
Hi Balaji.
Balaji Gandhi – Oppenheimer & Co.
How are you doing? A couple of questions here, just – did you give us the depreciation and amortization expense?
Samuel Riccitelli
You mean as far as –
Balaji Gandhi – Oppenheimer & Co.
Just for the quarter.
Samuel Riccitelli
We did not provide but I can give it to you. The depreciation and amortization related to Q2 was $299,000.
Balaji Gandhi – Oppenheimer & Co.
Okay. The other one that I was looking for is the cash flow from operations?
Samuel Riccitelli
Year to date cash flow from operations was $12.9 million to June 30th.
Balaji Gandhi – Oppenheimer & Co.
Okay. Great.
And then just looking at your guidance, I appreciate those comments about the, the holidays and some of the seasonality there, but I guess what I’m trying to understand is if we are thinking about your revenue guidance for the rest of the year – Is volume really the variable with pricing probably holding in with what you reported in the second quarter?
Samuel Riccitelli
That is correct, Balaji. The fact is here that relative to our business, we actually have a significant number of less selling days and operational days in the back half of the year than we do in the first half, four days in fact and that is potentially material to us, and then on top of that, we have the holidays happening here in the middle of the week towards the end of the year and we are concerned about the effect that it is going to have in our volume.
Balaji Gandhi – Oppenheimer & Co.
Okay.
Samuel Riccitelli
But they seem to be stable.
Balaji Gandhi – Oppenheimer & Co.
Okay. Because with the price, you had earlier question about this.
If I am looking at this right, even if you back out the accounting adjustment, it was about $100 per case improvement from the prior quarter?
Douglas Schuling
Yes. And – this is Douglas.
As Sam had mentioned, a couple of things there – technology, the circulating tumor cells in particularly, had an increase there in the reimbursement rate based on new and improved CPT codes for that particular technology and that was coupled with an increase – a bit of an increase in the technology in volume. Additionally, in Q2, we saw a little bit of benefit from fee schedule adjustments – internal fee schedule adjustments here to Genoptix related to – in the fee schedules for – or payers that we collect from, namely the non-contracted payers as we balance the changes in accounting adjustments.
Balaji Gandhi – Oppenheimer & Co.
Okay. Understood.
So, then – so, with that CPT code or new code or adjustment for the circulating tumor cells, is that – so that was something I would probably continue through the rest of the year – did it take effect in the second quarter?
Douglas Schuling
Yes.
Balaji Gandhi – Oppenheimer & Co.
Okay.
Douglas Schuling
That is correct. It should continue and – but fine large, the biggest impact to ASP in Q2 really is the phenomenal team during our billing and collections and our ability to collect on all of our accounts and that also has an impact on this.
Balaji Gandhi – Oppenheimer & Co.
Okay. Just two – two more questions.
One was the capital expenditure guidance you gave us of $11 million. Does that include any type of additional lab you might require in the second half of the year?
Is that separate from this?
Douglas Schuling
The thing we do want to point out is we are basically moving all of the administrative functions out of the current facility and so that frees up this facility to become 100% dedicated to laboratory and so that is effectively helping us increase capacity here.
Balaji Gandhi – Oppenheimer & Co.
Okay. So, but if you were to do anything outside of that physical plan, that – would that be additional to $11 million or?
Douglas Schuling
That will be in 2009.
Balaji Gandhi – Oppenheimer & Co.
In 2009. Okay.
Douglas Schuling
Second site.
Balaji Gandhi – Oppenheimer & Co.
Okay. And my only other question – deferred compensation looked like it was up on the balance sheet by like – by $2 million.
I just want to understand that line item.
Tina Nova Bennett
One moment. We are going to go check on that.
Samuel Riccitelli
Give us a second, Balaji.
Balaji Gandhi – Oppenheimer & Co.
Sure. This was accrued compensation, I am sorry.
Samuel Riccitelli
Accrued compensation.
Balaji Gandhi – Oppenheimer & Co.
Yes.
Samuel Riccitelli
What falls in the accrued compensation primarily would be our annual – or it is sales compensation that would commissions and also just a payroll from period to period depending on when the cutoff is for the year so it would be your typical payroll, (inaudible) commissions for sales representatives, and then any bonus and profit sharing in (inaudible).
Balaji Gandhi – Oppenheimer & Co.
Okay. Great.
Thank you very much.
Samuel Riccitelli
Thank you.
Operator
Your final question comes from the line of Brendan Strong with Lehman Brothers. Please proceed.
Brendan Strong – Lehman Brothers
Hi. Good evening.
May be just a few follow-up questions here. One question I have, just again going back to guidance.
When I looked at the guidance and I looked at what you guys did in the first half of the year, it seems like guidance would presume that margins come down substantial amount in the second half of the year and just want to try to understand that a little bit better.
Douglas Schuling
Yes. As I have mentioned already, Brendan, the items that we are trying to make sure to focus are sensitive to going forward are stock-based compensation.
Expense will continue and be slightly up in the second half and so that will affect obviously not only gross margins but operating margins. Also the bringing in additional facility depreciation relating to our laboratory facility and our new administrative facility, the tenant improvements related to those activities, and then we continue being a growth company.
We continue to invest significantly not only in laboratory personnel, partition physicians, and then across the board through our operating departments as well. And so, all of those things told are items that continue to put pressure on our margins.
Again, these are investments as we look at them as we continue to maintain this growth.
Brendan Strong – Lehman Brothers
And then, in terms of the number of doctors that you actually calling on at this point, I’m curious how that may have change over the past few quarters. Just trying to understand better how that sort of ramp up in your businesses just coming around.
Clearly, the revenue growth has been very strong. Curious if that is coming from – you’re calling on some new doctors in new areas or if you just had an opportunity with the new sales people to be more aggressively calling on some of the doctors you’ve been calling on for awhile.
Samuel Riccitelli
It’s a little bit of both Brandon. This is Sam again, and we remind you of some metrics we’ve shared in past.
At the end of 2007, we have 700 physicians’ ordering in the most recent 30-day period at the end of that quarter, 700 then; and again in the first quarter, we had 800 and then; this most recent quarter, we reported 850. So, we are increasing the installed base.
But as what I’ve already said, we’re seeing some real benefits from the hiring of account managers to go back into these physicians’ that have already established relationships with Genoptix and ensuring that we can service them in everyway that we can achieve all the business potential from those accounts.
Brendan Strong – Lehman Brothers
Sure, just I’m thinking about – from maybe a different way – coz I think in the past you have talked about 8,700 community-based team that’s out there. I’m curious, at this point, what percentage of those you maybe calling on?
Samuel Riccitelli
Right, we don’t disclose that and the ways you can think about it though are how we increased our geographic footprint and that’s indicative of a number of FTEs we have in the fields of organization. And I think that the telemetric speaks to it most clearly is the number of docs we have ordering up.
Brendan Strong – Lehman Brothers
Okay and then maybe just one last question. I think the Medicare contractor that all the payments go through recently changed for you guys in California.
Any comments on – if there’s been any change in cash collections related to that or in reimbursement policies on anything at all?
Douglas Schuling
Yes. We will be switching approximately September timeframe as when this will fully convert over from Natural Heritage to Palmetto and we’re not expecting any differences in our reimbursement related to that change.
Brendan Strong
Okay. Thanks a lot.
Lehman Brothers
Okay. Thanks a lot.
Douglas Schuling
Thanks Brandon.
Operator
With no further questions in the cue, I would like to turn the call back over to Senior Director Investor Relation, Ms. Marcy Graham.
Marcy Graham
I just want to thank you all for joining us on today’s call and for your continued interest in Genoptix. If you have any further questions about today’s results or if you need additional information, feel free to contact the investor relations department 760-930-717.
Thanks.
Operator
Thank you for your participation in today’s conference. This does conclude your presentation.
You may now disconnect. Have a great day.