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Luminex Corp (NASDAQ:LMNX)
Q1 2019 Earnings Call
May. 06, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Luminex Corporation's First Quarter 2019 Earnings Conference Call. My name is Karmin, and I'll 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 Harriss Currie, Senior Vice President and Chief Financial Officer for opening remarks. Please proceed.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Good afternoon, and welcome to Luminex Corporation's conference call to discuss our first quarter 2019 financial and operational results.

On our call with me today is Homi Shamir, President and Chief Executive Officer. We'll be following our standard agenda. Homi will review our corporate highlights, I'll review the financial performance, and after that, we will open the call up for 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 31st and our quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. 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 will be 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.

Nachum Shamir -- President and Chief Executive Officer

Thanks for joining us today to discuss our first quarter 2019 financial and operational results. Overall, I'm pleased with the results of the quarter which were in line with our expectation.

For the last two years, we have prepared and position ourselves well for the departure of the LabCorp Women's Health business. The first quarter was the first quarter in which the departure significantly impacted our results. Thankfully, it will only impact our comparison for the next two quarters, and then, it will be largely behind us. I'm very confident that by the fourth quarter of this year, we will be a much stronger and more diversified company, moving forward with both double-digit growth and expanding gross margin and profitability.

We continue our strategy of building Luminex into a substantial player in both MDx and Life Science businesses. As a reminder, the midpoint of our revenue guidance for this year is $340 million and as we leave 2019, we expect to be growing at double-digit rates.

Therefore, our goal remain to exceed revenue of $500 million fueled by organic growth and supported by our diversified portfolio and substantial investment in R&D. Harriss will discuss our financial in more detail later, but at high level as I mentioned in our press release, we deliver approximately $82.5 million of revenue in the first quarter. We've seen our previously communicated expectation of $82 million to $84 million.

Our LTG revenue stream grew by 1% reflecting the guidance that we previously communicated. Our MDx revenue stream was flat compared to the prior year, after the adjustment for $11 million of LabCorp departure. In the addition of $11 million of flow related revenue from the acquisition that we closed on December 31st.

We indicated previously that the departure of LabCorp Women's Health revenue could result in a headwind of about $35 million for 2019. In the current quarter, LabCorp related revenues were down approximately $11 million reflecting almost one-third of the full year's expected reduction.

Obviously, the loss of this high margin revenue affected our profitability in the quarter. As we look forward, we expect that the second quarter will reflect an additional $30 million of $35 million total reduction. This will be reflected in the guidance that Harriss will discuss later. Overall, by June 30, we expect the $24 million of the total $35 million headwind related to LabCorp will have been realized. During the third quarter, we expect an additional headwind of $7 million and at that point, the LabCorp departure will be substantially behind us. Despite the departure of this business, we are pleased to let you know that LabCorp recently extended its CF commitment for another two years to the end of 2021.

In addition, to observing the LapCorp headwind, I was pleased with our ability to deliver this result in spite of a much weaker respiratory season than expected. We understand that approximately 20% fewer patient presented with respiratory related symptom compared to prior year. We believe that the weak flu season impacted Q1 by a few million dollar as compared to last year strong comp, with the impact being felt evenly between sample-to-answer, a non-automated system.

Therefore, our growth in sample-to-answer tempered a bit in the first quarter to 16%. However, we expect to return to a growth of 30% or more in Q2. We also added approximately 50 new contracted system during the quarter. Gross margin dropped as we expected in the quarter mainly due to the LabCorp effect and the acquisition of the flow cytometry business.

We generated a modest operating loss as a result of the margin compression coupled with initial dilutive nature of the flow cytometry acquisition. Gross margins on the flow business should improve significantly in the second quarter based mainly on the absence of acquisition adjustment required as part of the first quarter result. As previously guided, we still expect the flow revenue stream to be accretive by the end of the year and to be a net contributor to the overall profitability.

With the first full quarter of activity of our newly acquired flow business, under our belt, we remain excited about the prospects for this business. The flow revenue stream grew by double-digit in the first quarter relative to what was included in the Merck revenue in 2018. We are continuing to integrate that business and anticipate that most of the process will be concluded by the end of this quarter. This includes the transfer of manufacturing from India to Austin as well as enabling flow activity we see in the financial, IT, and ERP system of Luminex.

Our new colleagues in sales marketing customer support and R&D are fully engaged and performing very well. The first quarter was also extremely busy with R&D and clinical trial effort. Although this resulted in higher than usual expenses.

These efforts are critical for future growth and as a significant impact on our profitability in Q1. We are expecting a reduction to this impact after the end of Q2. For example, we had three clinical trials in process during the quarter. This is unusual for Luminex, but accelerate our future product pipeline.

We are planning to submit to the FDA as follows. MRCA on ARIES by the end of the second quarter. The enteric panel on VERIGENE II scheduled for August and respiratory on VERIGENE II soon after. We also have a very full pipeline of sales for VERIGENE II and Verigene II-Plus in development. In R&D, development work on our new and exciting SENSIPLEX system continues.

We expect to have it available for customer testing by mid-year and expect a market launch by the end of the year. As a matter of fact, we have started initial discussion with our partners about product positioning.

I would now transfer the call to Harriss to review our financials.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Thanks, Homi. As Homi mentioned revenue in the first quarter was in line with our expectations. Consolidated revenue for the first quarter was $82.4 million flat for the quarter reflecting the expected decline in LabCorp and the addition of our new flow cytometry business.

In the first quarter flow cytometry contributed $11.4 million. This contribution was offset by the decline in assay sales for LabCorp of $11 million. Our LTG revenue stream was approximately $35 million up 1% for the quarter with double-digit growth in royalty revenue offset by a decrease in consumable and multiplexing system revenue as previously guided.

It's interesting to note that the end user sales reported by our partners continue to grow steadily.

Our Molecular Diagnostics revenue stream was down 25% for the quarter primarily driven by the $11 million impact of the LabCorp departure. Excluding LabCorp, this revenue stream was down 2% for the quarter reflecting lower respiratory sales as the current flu season was light compared to the heavy flu season in the first quarter of 2018.

As Homi mentioned, it was down approximately 20% in patient presentations. For our sample-to-answer products both the number of active customers and the utilization per customer has continued to increase. For the first quarter the annual utilization rate per customer for VERIGENE products increased to 111,000 up 6% from the prior year and for our ARIES product line average annual utilization was 51,500 up 1% from the prior year.

Turning to our revenue line items. System revenue nearly doubled in the first quarter of 2019 as compared to the prior year primarily driven by the acquisition of the flow cytometry business. Remember that the flow revenue streams are 90% plus system revenue and service.

During the first quarter, we placed 210 multiplex systems, not including ARIES and VERIGENE systems compared to 218 in the prior year quarter.

As a reminder, we're expecting approximately 100 less FLEXMAP 3Ds for the full year of 2019 as a result of the substantial completion of One Lambda's upgrade cycle. Included in system revenue our sales of our xMAP systems, sales of both our ARIES and VERIGENE systems, sales of our flow systems, and a reagent rental allocation for those systems placed under reagent rental agreements.

Consumable revenue declined 10% from the prior year quarter driven primarily by lower bulk purchases. As previously communicated, we had some large partner purchases in the first quarter of 2018 that didn't repeat at the same level in 2019.

Royalty revenue grew 16% for the quarter. This reflected an increase in base royalties of $1.2 million in addition to a favorable mix of royalty rates. As a reminder, total royalty revenue includes base royalties coupled with audit findings, self-reported shortfalls and accrual adjustments.

Base end-user sales were up nearly 10% for the quarter not including the items listed previously. Similar to our Molecular Diagnostics revenue stream, assay revenue decline 24% in the first quarter primarily driven by the expected loss of LabCorp sales which declined approximately $11 million from last year. Excluding this impact assay revenue in total remained at prior year levels.

Now turning to the income statement. We posted gross margins of 56% for the quarter down by nine percentage points from the first quarter of 2018. This decline was primarily driven by number one, a $11 million reduction in LabCorp, assay sales was typically carrying a much higher gross margin than our corporate averages.

Number two, the absorption of the flow cytometry business, which negatively impacted our margins in the first quarter, and number three, a change in the sales mix, weighted heavier in sample-to-answer sales. Sample-to-answer assays carry a lower gross margin relative to Luminex's historic margins and therefore causes an adverse margin effect from a higher sample-to-answer sales mix.

Gross margin for the acquired flow business was only 37% in the first quarter and included adverse impacts, which are temporary or one-time in nature resulting from the acquisition accounting. Excluding these temporary impacts, we anticipate gross margin for the flow business in the second quarter should improve significantly.

Our operating expenses for the first quarter showed an increase in both R&D and SG&A primarily due to the inclusion of the flow cytometry business, clinical trial activity, and a number of one-time integration costs. Overall OpEx was up $11.1 million or 29% relative to the prior year and included just over $6 million of flow cytometry related expenses and another incremental $3 million related to clinical trial activity.

As Homi mentioned earlier, we are heavily engaged in three clinical trials and we do not anticipate at this level of spending on clinical trials will continue. Operating profit declined $18.9 million for the quarter to an operating loss of $3.6 million primarily due to the aforementioned gross margin compression and operating expense increases.

We anticipate that as we bring flow margins back up continue to improve our sample-to-answer margins and benefit from further growth in our LTG revenue stream. The margins will climb further, but are not likely to completely return to historical levels.

Our effective tax rate for the quarter ended March 31st was a benefit of 184% reflecting a discrete benefit of $6.6 million related to reduction in unrecognized tax benefits related to the U.S. transition tax as a result of an IRS ruling for certain aspects of the calculation of our Canadian subsidiaries earnings.

Absent significant discrete items, we expect our consolidated full year effective tax rate to be between 10% and 20%, which incorporates adjustments to the one-time impacts of the US tax reform in the current quarter and adjustments to our overall tax expectations based on jurisdictional distribution of revenues and expenses.

We continue to assess our business model and its impact in various taxing jurisdictions. Our balance sheet remains strong with over $61 million in cash and investments after absorbing the recent purchase of the flow cytometry business. We use $14.8 million of cash in the quarter, inclusive of the payment of annual commissions and bonuses that occur in quarter one. Capital expenditures of $3.8 million and dividends paid of $2.7 million.

And now some visibility into the second quarter of 2019. For the second quarter, we expect to deliver total revenue between $80 million and $83 million with over 10% coming from our new flow revenue stream. We expect system revenue to be up, but the base business down slightly, elevated by the contribution from the flow revenue stream as more than 70% of the flow revenues are derived from system revenue. Consumable revenues remain robust in comparison to the second quarter of 2018.

We anticipate that total royalties will be flat to down relative to the first quarter, but up modestly versus the prior year quarter. As you know, included in aggregate royalty revenue, our audit findings and accrual adjustments, given the recent change in accounting rules. We should see growth in base end-user sales and therefore growth in base royalty revenue.

However, coupled with these other elements royalty revenue can be volatile from quarter-to-quarter. For assay revenue, we expect to see an additional $40 million headwind from LabCorp in the second quarter. In addition, we anticipate another challenging comp and respiratory given last year's exceptionally strong and long flu season.

With respect to profitability, we anticipate modest improvements in gross margins from the first quarter as a result of several factors. First, as a result of accounting rules, all acquired flow inventory had been mark-to-market. So, the gross margins on the flow revenues were artificially low in the first quarter.

But we'll exhaust all the acquired inventory in the second quarter ending this negative impact. Second, the manufacturing service agreement with MilliporeSigma and its markup is expected to conclude at the end of the second quarter.

The above factors will be tempered by the fact that our 2019 growth is expected to be dry primarily from our sample-to-answer franchise and the presence of flow revenues, both of which have gross margins below our recent corporate averages and could represent a third of total revenue for the quarter. Obviously, this margin compression affects overall profitability.

Although, we expect to be cash flow positive for the year, from an earnings standpoint, we could experience another quarter of break even or loss. Stabilizing factors include the volumes and margins of the flow business returning to a steady state, completion of integration activity, and a further than expected rise in overall volumes across the entire business, giving us the added benefits of economies of scale.

One thing to keep in mind is that mix is still a significant driver to our ultimate reported gross margins. We still experience quarter-to-quarter volatility mix, which can push gross margins up or down depending on the relative line item contributions. We have a lot of clinical trial activity occurring in 2019 and as a result R&D expenses are higher than 2018 further affecting current profitability, but as we demonstrated through the integration of Nanosphere, we pay careful attention to operating expenses, margins and cash flow.

We do not take these matters lightly. It is our top priority and we are committed to returning to a sustainable and growing profitability by the end of the year. Finally, we believe we will show positive cash flow in the current quarter.

Now I'd like to turn it back over to Homi for some final comments.

Nachum Shamir -- President and Chief Executive Officer

Thanks, Harriss. As I said earlier, we are pleased with the first quarter results and the progress we continue to make across the company. I'm very excited about our future. We have about two more quarters to go until we are substantially pass the loss of LabCorp and has emerged as a much stronger diversified company.

During this time, we will continue to build a solid foundation in our sample-to-answer portfolio as well in the Life Sciences businesses. By the end of this year Luminex will again be positioned for double-digit growth, improved gross margin and a return to profitability and increase cash flow.

To conclude I'm really happy to lead the great company with extremely dedicated employees who are committed to achieving our long-term objective. With our innovative technology and a strong management team, I'm very confident that in the near term, we will demonstrate in Luminex one of my favorite phrase, "show me the money."

This ends our formal comments. Operator, please open the line for questions.

Questions and Answers:

Operator

Thank you. (Operator Instruction) And our first question is from Sung Ji Nam with BTIG. Your line is open.

Sung Ji Nam -- BTIG -- Analyst

Hi. Thanks for taking the questions. Homi, could you remind us again in terms of your sample-to-answer expectations for the balance of the year. You're still guiding to over 30% growth you know realizing that the first quarter you had a tough comp. Could you just remind us again kind of what you think the drivers could be for the balance of the year especially given that VERIGENE II will be submitted by the end of the year but not available until next year?

Nachum Shamir -- President and Chief Executive Officer

That's we have felt. VERIGENE II is going to submitted in August, hopefully three months after that it will be available. Until now, we follow our submission. We got it within the 90 days. So, hopefully, we continue on this track record.

Yes, we are still targeting to be on a running rate for $100 million before the end of the year which means Q4 of this year it should be under $24 million, $25 million. Nothing change in our assumption and we keep pushing for that.

We see the continuous growth of new customers and existing customer. That's what I said in the call that we comfortably about going back to the 30% growth on the VERIGENE. As a matter of fact if you really compare our 16% growth, I compare it to some of our competitors. Again, they have not been there in this level.

So, we're feeling good where we are going and the business is doing well there. So, I think, MRSA is going to help us as well. So, there is nothing changing in our assumption to be in the running rate of the -- by the end of the year of $100 million.

Sung Ji Nam -- BTIG -- Analyst

Great. And then for the flow cytometry business, obviously, seeing a lot of good growth there. Could you also talk about kind of where you're seeing strength in terms of the end market you're targeting maybe some applications you might want to highlight there as well. Just kind of curious as to kind of what's driving the strength there?

Nachum Shamir -- President and Chief Executive Officer

The strength is, I think, we are more focusing the business, OK. And I think we are lucky to the sales force was integrated very quickly, and we basically bought all of them already to our kickoff meeting that we had in February in San Diego.

They interact with our rest of the team, learn about Luminex. Again I don't know if it was beginning lack or not, but we had a very nice increase year-over-year. We have close to 25%. I don't think it will repeat, but as we said earlier during the acquisition, we anticipate this business to grow over 10% throughout during the year also in years to come.

But behind that it come across the product line, it came from the Guava, and it came also for the Imaging side. So, it came across and we're just looking forward to continue to finish the integration by the end of this quarter. It's obviously will help us a lot in the gross margin. We anticipate that at least another 10 point of gross margin to add. We transfer manufacturing from India to Europe. As a matter of fact, we start seeing initial system being built here. So, we feel good about where the business is going. We just need to start building more strategy going forward with this business, but beyond that it's performing very well.

Sung Ji Nam -- BTIG -- Analyst

Great. And then just, lastly, could you give any updates on SENSIPLEX, if the timeline is still on track for that launch next year?

Nachum Shamir -- President and Chief Executive Officer

Yeah, as I said, in the call that we have already two major of our partner in the last one or two months. They came to see the system. As a matter of fact, we have our team flying to see one of them and talking with them about the system and actually demonstrating to them the system. So, I think, we are on track that by the end of the season, early next year, we'll provide them the system hopefully even earlier than that, but they will start testing it now.

Here, we are losing control because it's in their hand, and we are trying emphasize to them how to really bring it to the market as soon as possible. And we have some leverage there, but I don't want to go to the call about that.

Sung Ji Nam -- BTIG -- Analyst

Great. Thank you so much.

Nachum Shamir -- President and Chief Executive Officer

Thanks, Sung Ji.

Operator

Thank you. And our next question is from Brian Weinstein with William Blair. Your line is open.

Brian Weinstein -- William Blair -- Analyst

Thanks for taking the questions. On the flow business, was it a little bit better than expected in Q1 and the reason I asked that it sounds like the guidance for Q2 was about, if I heard you right about 10% of the 80 or so million would imply, it's down sequentially. So, was there anything kind of in Q1 that was better than expected or pulled forward anything from Q2. Am I thinking about that right?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

So, actually Brian, the Q1 business was in line with our expectations and what we said was, we expect the flow business to be 10% or more of the revenue not 10%. So, it certainly, it will be in excess of 10% in the quarter.

So, based on our guidance range, you would expect it to be you know approaching the same level or above where it was in the first quarter. Now, we grew significantly in the first quarter that we mentioned 25% plus over the prior year numbers that were reported not in our financial statements, obviously, but in the Merck financial statements, that rate of growth is certainly not going to grow at that rate for the over the course of the year, but we still remain really comfortable with our mid $40 million projection for the flow business for the full year.

Brian Weinstein -- William Blair -- Analyst

Great. Thanks for the clarification on that. And then as a follow up, can you talk about the customer additions that you guys are targeting on sample-to-answer and what you guys think you need to add still to that customer base to get to your year-end goals and then more broadly speaking can you just talk about the penetration of the customers on your sample-to-answer systems versus kind of where you think they could ultimately be. Where do you see your penetration at this point?

Nachum Shamir -- President and Chief Executive Officer

Yes, we continue, Brian. We added, I believe, close to 50 system during the quarter. If you look at the numbers that we added Q3 and Q4, few of them just coming online, and we bring them up. So, they continue to drive the business.

As a matter of fact, we could see it even in the when we look at the respitority on the sample-to-answer even in Q1 when you compare it to Q1 last year, we saw a very nice growth in the overall number. Obviously, an average is below because we have more customer, but you continue to see our new customers coming and it's coming both from new customers and some competition.

So, and we are on track to achieve what we wanted for the year and I hope that answers the question.

Brian Weinstein -- William Blair -- Analyst

Okay. That's it from me. Thank you.

Operator

Thank you. Our next question comes from Dan Leonardo with Deutsche Bank. Your line is open.

Daniel Leonard -- Deutsche Bank -- Analyst

Thank you. I was hoping you could elaborate a bit on the sample-to-answer performance in the quarter. It came in a little bit later what we were looking for. And Homi I thought, you internally were looking for $20 million plus in the quarter, and it seems to have come in a bit light versus that, and I appreciate the flu season, but I had thought a year ago flu wasn't a big driver of the results there. So, can you maybe tie the lose ends for me?

Nachum Shamir -- President and Chief Executive Officer

No, you're right. It came shy in about $600,000 to $700,000 where we talked about, and it mainly came from the respiratory season. So purely, as I say, in the call we probably were a little bit more aggressive when we came with the guidance not only in the automated system or sample-to-answer also in the non-automated especially in the respiratory that impact us probably about $2 million.

But I can tell you that, for example, in the last quarter, we have over $600,000 or $700,000 on the sample-to-answer the three-corner shape. So that's moving into obviously Q2. So, I'm not worried about not achieving where we wanted to achieve on our sample-to-answer. We see the pipeline. We see the growth. So, I feel very confident where we're going there.

Daniel Leonard -- Deutsche Bank -- Analyst

Maybe just a quick follow-up. Can you talk a bit since you're going to submit this product in Q2 here. The pipeline for your MRSA test. Do you have customers that are actively clamoring for that test. Is there a pipeline do you expect it would contribute in a relatively short order or how are you thinking about that roll out?

Nachum Shamir -- President and Chief Executive Officer

I'm not so sure how much MRSA is going to add as a stand-alone as a revenue, but it creates more opportunity. Our customers that are using (inaudible) for other things, they are asking for that. So, it's a door opener for us. But I'm not so sure then if it's going to add substantial jump in our revenue, I would say. From the beginning when we came with the product design and that's why we bought it a slightly later than the rest of the menu. We saw it's a door opener.

Daniel Leonard -- Deutsche Bank -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Tycho Peterson with JPMorgan. Your line is open.

Tycho Peterson -- JPMorgan -- Analyst

Hey, thanks. Maybe I'll start with LabCorp, I mean, I know you guided for $35 million headwind for the year. You saw $11 million of that this quarter now with the contract extension, can you maybe just talk about how we think about this flowing through and should we still be assuming a $35 million headwind?

Nachum Shamir -- President and Chief Executive Officer

Yes, Tycho, it's two different issue. The Women's Health was a $50 million headwind, that $50 million we go to basically the Q3 and Q4 of last year. And we remain $35 million to go to the year, which is $11 million, this quarter, $13 million in Q2, $7 million in Q3, and the balance $4 million in Q4. The extension of the contract is CF.

If you recall even five years ago or four and half years ago when I joined the Company, we announced in October 2014, we already alerted you guys that we might lose the CF business and it's been extended regularly at least four or five times. Recently, they committed with us to another two years of extension of the CF, which mean until the end of December 2021 roughly the CF business is $10 million per year, OK.

Tycho Peterson -- JPMorgan -- Analyst

That's helpful. And then on flow, I think, you talked last quarter about some disruption on the sales channel and maybe adding more people. Can you just talk to where you are in terms of stabilizing the sales force. And then, yes.

Nachum Shamir -- President and Chief Executive Officer

Yes. Go ahead.

Tycho Peterson -- JPMorgan -- Analyst

And then a follow-up I just wanted to ask how much of the headwind from the accounting change to the margins for flow. I don't think you quantify that?

Nachum Shamir -- President and Chief Executive Officer

First, we had the additional sales people then for the places where we lost them and they did not join us. And I think we have one or two more in the state, a few left maybe five in the rest of the world. The impact of the margin is actually and ARIES can jump.

That is part of that is the TSA of all the agreement we had with Merck, which cost us a substantial amount of money because they're still running the businesses for us. That will be most of that when I say most of that 90% of that will be gone by the end of this quarter, obviously, and again, I would say, how to predict and you will see more impact probably coming from Q3 and beyond when we start manufacturing here in Austin across the street.

I believe that we will see a better improvement in the Guava products and the Muse product. And, Harriss, did I miss something.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Yes, so the biggest effect on the flow margins comes from the markup of that acquired inventories, which is, by far overwhelms the TSAs and MSAs that are in there that are still a component. But we mentioned that in the call that our expectation is as we move from the first quarter to the second quarter or in the first quarter the margins on the flow business were in the 30s.

Then in the second quarter absent just the inventory markup that almost all that's gone. We estimate they could jump as much as 10 points from the first quarter to the second quarter. So we could be in the mid 40s. As we move into the second quarter, if you sort of do the math on the roughly the same amount of revenue that passes you know additional $1 million of gross profit down to cover operating expenses and doesn't you know consider the eliminations of the TSAs and MSAs and another thing.

So, the flow business should move toward profitability pretty quickly, as we grow the revenue of some of these, I'll call them one-time these more unusual items associated with the acquisition burn themselves off. And especially as Homi mentioned, we're looking to be substantially finished with the integration activities where we have to enlist Merck MilliporeSigma for help by the end of this quarter, the second quarter. Does that help?

Tycho Peterson -- JPMorgan -- Analyst

Okay. Yeah, that's helpful. And then just last one on LTG, you know, the consumable decline. Can you just elaborate on that a little bit, I mean, was that all from One Lambda or was there something else there?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

There are some big purchases by a couple of partners that it comes down to that bulk purchase phenomenon where partners purchase you know once every 1.5, 2.5 quarters, and they lined up well in the first quarter of last year and this year there's a decline, but the expectation is that those same partners are going to come back and order in the future.

Nachum Shamir -- President and Chief Executive Officer

Yes, but the strength of the business is reflecting in the royalty or in the end users, and it's consistently continued to go to us. Yes, we keep start finding, audit that every quarter they find somebody that pay us less and that's adding to the audit.

But if we could go back in the last five or six quarter, you can see that every quarter we were anything between 5% to 12% or even more growth in royalty. So, we see the royalty, you know, if I take average we are probably around 7%, 8% in the last year and a half to two in royalty, which mean our end user using it more than we are getting more out of that. At the end of the day, last you know a year ago, the first quarter was mainly One Lambda partly because of some operational issue they were anticipating.

So, every quarter, it's very hard to predict, but at the end of the day, we are getting into the growth of the royalty. One more thing about the LTG. I think, LTG was slightly better than we anticipate. For the first quarter, it's actually came up 1%. Initially, we thought it will be below to flat. It's performed very well during the quarter and gave us more hope that may be will be some upside during the rest of the year.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Another interesting piece of information, Tycho, is that you may recall a year or so ago us really getting excited about getting $0.5 billion of annualized sales on our partners from our partners royalties. Well, in this quarter, our partners reported $149 million. So, let's just call it $150 million to round it.

That's almost $600 million end user sales by our partner. So, that number continues to grow, continues to grow steadily and that's the primary indicator of our partners engagement and use of our technology in the marketplace, and we remain excited and expect continued growth there because of the engagement that we have with our partners and their indications of the desire to use our technology in the marketplaces in which they're very well established.

Tycho Peterson -- JPMorgan -- Analyst

Okay. Thank you.

Operator

Thank you. (Operator Instructions) And our next question is from Bill Quirk with Piper Jaffray. Your line is open.

Danny Macek -- Piper Jaffray -- Analyst

Thank you. Hey Homi and Harriss. This is Dan on for Bill.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Hey.

Danny Macek -- Piper Jaffray -- Analyst

First of all. So, you guys placed 50 sample-to-answer instruments in the quarter, but the (inaudible). What's that?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Yes, let me be clear. We contracted 50 sample-to-answer systems. So, we placed them in the market under contract with reagent commitments over a three to four-year period and moving forward.

Danny Macek -- Piper Jaffray -- Analyst

Got you. Okay.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Big difference from, as you know, from a place of another system with no negotiated levels of -- no negotiated commitment from the customer. In these cases all 50 boxes came with a negotiated commitment.

Danny Macek -- Piper Jaffray -- Analyst

Okay. Got you. So, that speak to the active installed base only going out by 25 instruments?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

I think you heard the customer base went up by 25. The system number, if you're doing math on the, what we talk about active customers that you may have -- you're seeing 25, but when you average 1.7 systems per customer. The math gets you up to that 50 contracted systems.

Danny Macek -- Piper Jaffray -- Analyst

Got you. Okay. Perfect, great. Thank you. Okay. And then one more from me. BMU sponsoring some PLA codes for multiplex testing to be reviewed June 24th. If they were to potentially get better reimbursement for those codes. How do you think that would affect the overall market?

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Well, for us, obviously, we think it could benefit us. Our tests are not necessarily directly affected by those reimbursement changes. Our reimbursement is pretty well established, if the reimbursement goes up certainly in the cases where we can up charge for the -- for reimbursement, not for reimbursement up-charge in the face of reimbursement.

Remember, we don't deal with the reimbursement agencies. Our customers do. So if our customers were able to get a higher reimbursement for a product. It still comes down to the math of what do they have to pay for the product and what's the spread between the reimbursement that they can realize and the cost of the assay that they have to perform and obviously all the intricacies involved in the cost of the workflow and all the rest.

So, it's our estimation that if those codes or the other codes are reimbursed at a higher rate that it really won't have a material effect on us. We think, we'll be OK.

Nachum Shamir -- President and Chief Executive Officer

Yes, and you have to remember, we have the flex pricing capability and beyond that the VERIGENE II will be completely flex pricing that make us very unique in the market.

And that's one of the reason, we continue to see more momentum in the marketplace opening door to us with new custom that are coming either from never used the technology or customers that they are coming from the competitor. So, I think the flex is giving us a huge capability to adjust the pricing in the market, and obviously when VERIGENE II will launch it, if the environment will be good, we can increase the prices, if the environment is not so good for investment, we'll remain where we are.

Danny Macek -- Piper Jaffray -- Analyst

Thank you guys.

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

I mean a lot of the work here revolves around the coverage won't change without evidence of proving clinical utility of any additional targets that get added, and clinical utility often times comes down to statistics. So, without sort of definitive clinical application demonstrated. It's going to be difficult for the reimbursement agencies to raise what they are reimbursing for, what in effect is the same result or the same treatment. So, that's something you should consider as well.

Danny Macek -- Piper Jaffray -- Analyst

Got you. Thank you.

Operator

Thank you. And I don't see any further questions in the queue. I would like to turn the call back to Homi Shamir for his final remarks.

Nachum Shamir -- President and Chief Executive Officer

Thank you, Karmin, and thank you everyone for your attendance on our earnings call. We look forward to see you in person in the very near future. Have a great evening. Thank you.

Operator

And with that ladies and gentlemen, we thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.

Duration: 47 minutes

Call participants:

Harriss T. Currie -- Chief Financial Officer, Senior Vice President, Finance and Treasurer

Nachum Shamir -- President and Chief Executive Officer

Sung Ji Nam -- BTIG -- Analyst

Brian Weinstein -- William Blair -- Analyst

Daniel Leonard -- Deutsche Bank -- Analyst

Tycho Peterson -- JPMorgan -- Analyst

Danny Macek -- Piper Jaffray -- Analyst

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