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Oxford Immunotec Global PLC (NASDAQ:OXFD)
Q1 2019 Earnings Call
May. 9, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello ladies and gentlemen, and welcome to the Oxford Immunotec's First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

I'd now like to turn the call over to your host. Mr. Peter Wrighton-Smith, our CEO.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Yes. Good morning and thank you for joining us to review Oxford Immunotec's financial results for the first quarter 2019. Joining me on today's call is Matt McLaughlin, our new Chief Financial Officer who's taken over from Rick Altieri, given Rick's recent retirement.

I'd like to take this opportunity to thank Rick for his seven years of service with the company, and his role in the transformation of the company over that period. We wish him well in his retirement. At the same time, I'd like to formally welcome Matt to the company.

Before we begin, I'd like to caution listeners the comments made and financial information provided during this conference call includes certain statements that are estimates, forward looking and are subject to various risks and uncertainties.

This information reflects our current expectations, assumptions and currently available data and are neither predictions or guarantees of future events or performance. Actual results could differ materially from those stated or implied by these forward looking statements due to risks and uncertainties associated with our business, including those under the heading entitled Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018 and our quarterly reports on Form 10-Q.

The company disclaims any obligation to update or revise any forward looking statements, except as required by applicable law. During the call, we'll also refer to certain financial information on a non-GAAP basis. We believe that non-GAAP financial measures, taken in conjunction with GAAP financial measures, provide useful information for both us and investors to evaluate the company's performance.

These include pro forma revenue, gross margin, operating expenses loss from operations EBITDA and adjusted EBITDA. Reconciliations between certain GAAP and non-GAAP such as adjusted EBITDA are presented in the tables, accompanying our earnings release, which can be found in the Investor Relations section of our website.

As a reminder, in early November last year we completed the sale of our U.S. Laboratory Service business to Quest Diagnostics. As such, the now divested U.S. Laboratory Service business is shown as discontinued operations in historical financials in our press release and forthcoming 10-Q. The discussion of our results and business update from today's call, will be focused on our continuing operations and to assist investors in understanding the underlying performance of the company's continuing operations.

We'll be comparing to certain pro forma, non-GAAP financials for the prior year periods. These non-GAAP financials for 2018, which were also filed as exhibits on Form 8-K issued on January 7 and March 11, 2019 reflected the company's estimated revenue and cost of revenue, as if the closing date of the sale of our U.S. Laboratory Service business to Quest had occurred prior to the respective periods.

The pro forma adjustments in these tables are based on information available at the time, and assumptions that management believe are factually supportable and reasonable. However, assumptions are always subject to change and the methodology used may not be indicative of our future consolidated results, operations or the future timing of revenue.

On today's call, I'll start by providing some general comments on our financial results and operating performance in the first quarter of 2019. I'll then hand it over to Matt who will walk you through our financial results in detail. Once, Matt has completed that, he'll hand it back to me, to wrap up the call and provide our financial guidance, we'll then open up the lines to your questions.

Turning to 2019 first quarter results; we posted revenues of $14.8 million, which was slightly above our implied guidance range of $13.4 million to $14.1 million. Excluding 2018 revenue from blood donor screening from the year-over-year comparison, total company revenue grew almost 20% over pro forma revenues for the same period in 2018.

US revenue was $5.5 million, again excluding 2018 revenues from blood donor screening from the year-over-year comparison, US revenues grew over 20% in the first quarter, compared to pro forma revenues for the same period in 2018. This continues acceleration in growth and strong momentum from Q4. Europe and rest of world revenue was a new record of $2.8 million.

Europe and rest of world revenues also grew over 20% year-on-year, due to strong volumes in our UK service lab, growth in continental European markets and early dividends from our continued expansion into new countries such as Russia. Revenues were aided, in part, from stocking by our customers as a hedge against the possibility of a disorderly exit by Britain from the EU.

Asia revenues were $6.5 million and showed low teens growth year-over-year, underlying growth trends remains strong in both China and Japan. We're really pleased to see such a strong start to the year, and an acceleration in growth. In addition to a renewed focus on driving revenue growth as a pure play kids business.

We're also concentrating on driving the company's profitability metrics. Gross margins in the first quarter were strong at 71.4% growing 900 basis points over the prior -- pro forma, prior year period. We saw an expansion in product margins as we start to see the benefits of greater automation of kit manufacturing. We also saw a strengthening in service margins, both as we have eliminated the drag on margins from the blood donor screening service and as we continue to grow volumes in our UK service lab.

We continue to repurpose the company's spending about being -- around being a pure play kit company. We're delivering OpEx leverage, while also increasing investments in sales and marketing initiatives.

This OpEx leverage combined with gross margin expansion is leading to meaningful progress on the bottom line. The company halved its loss from operations on a pro forma basis from the same period last year. Turning now to our key operating priorities for 2019, our first priority is to maximize the success of our relationship with Quest Diagnostics in the US market. As you know, the transaction with significant increases the reach and competitiveness of T-SPOT.TB in the US.

Our focus for now remains on bringing the former Oxford Immunotec operation onto the Quest platform. This is a staged process covering IT, phlebotomy access, logistics and managed care. The initial priority has been on integrating the Memphis lab operations to Quest software platform. This will allow physicians to order T-SPOT.TB directly from their EMR or Quest ordering interface, just like any other Quest test and receive results and invoices the way they used to. Quest has made great progress on this and has just launched electronic ordering of T-SPOT.TB.

This opens up access to Quest patient service centers, managed care plans and logistics capabilities. Activity on these initiatives is also proceeding well. In parallel, we're continuing to strengthen the depth of our engagement between our sales forces and we've seen some exciting early wins from this collaboration. Whilst, it's still early we remain highly encouraged by the way the relationship with Quest is progressing, and continue to expect it to result in elevated growth in the US market, once all these integration steps are completed.

Outside the US, we're executing on our plan to strengthen our voice and channels into new and existing markets, both through direct hires and the use of commercial partnering to expand our reach. In Asia, we remain confident in the size of the opportunity, both in our existing markets but also from expanding into new geographies. To that end, we're adding meaningfully to the number of people we have in that region to strengthen our market development and capabilities there.

In the quarter, we also signed a major new collaboration in Russia. We're excited to add the manufacturing and distribution capabilities of Generium to our existing distributor PharmLine. Generium has a strong presence in the TB screening market and we look forward to working with them and PharmLine to drive further growth of T-SPOT.TB in the Russian market.

We continue our work on our T-Cell Select product and have made progress in validating automation of our test workflow for customers. Our customers remain very interested in T-Cell Select, and the resulting ability to automate the T-SPOT.TB workflow. This interest stems, both from existing customers who see this as a means to increase their testing volumes and from new customers who have wanted to offer to spot TB, but needed a simpler workflow to do that.

So, this remains a key focus of our R&D efforts and we continue to invest here to pull through the benefits of T-Cell Select for our customers. On the operations side, we have multiple COGS reduction projects ongoing, including further automation of our kit manufacturing.

We've just taken delivery of new equipments to automate an additional process step and will be rolling that out later in the year. So, in summary we're making good progress and executing on our strategic priorities for the year, and as we continue to execute on our new business model, we're pleased to see the emergence of higher growth and improving profitability metrics. Before I hand over to Matt, I'd like to give a brief update on our share buyback timing and steps.

As laid out in our recently filed proxy statement, we intend to ask shareholders for approval for a resolution giving the company the authority for a 5-year period to purchase up to 100 million of the company's shares over that period. We'll find out the results of voting on this resolution at our Annual General Meeting on the June 18. Assuming that resolution passes, then the company will have to wait to issue -- wait until trading instructions can be validly implemented in order for a financial intermediary to purchase the shares on the company's behalf. We'll continue to communicate updates in forthcoming earnings calls.

Matt will now take over, and give you some more detail on our financial performance.

Matthew McLaughlin -- Chief Financial Officer

Great. Thank you Peter. Our full GAAP results, as shown in our press release issued today show the comparison of our Q1, 2019 with the GAAP numbers of our continuing operations for Q1, 2018. For the reasons already explained by Peter, when giving year-over-year comparisons. I'll be referring to the pro forma numbers for Q1 2018 instead, to enable the comparison on a like-for-like basis to our Q1 2019.

Total revenues in the quarter of $14.8 million were up 26.6% versus GAAP revenues in Q1, 2018, but up 12% from pro forma revenues in Q1, 2018. Excluding the blood donor screening revenues from the pro forma Q1, 2018 total revenues are up 19%. Breaking down our reported revenues on a regional basis, US revenue was $5.5 million, representing 37% of the total.

Europe and rest of world revenue was $2.8 million, representing 19% of the total and Asia revenue was $6.5 million representing 44% of the total. Turning to volumes in our TB business. We now count volumes in US based on numbers of tests sold to Quest and our other kit purchasers, rather than on the basis of how many tests were run in the US.

We sold approximately 275,000 tests in the US kit market. We sold approximately 475,000 tests in our OUS region, both via kit sales and test process in our UK ODL service business. Gross profit of $10.6 million was up 28% from the pro forma gross profit in the prior year period. Overall gross margin for the quarter was 71.4% an increase of 900 basis points from the prior year period pro forma number.

Breaking down margins by product and service split, product gross margin was 71.7% and service gross margin was 67%. Product gross margin increased 480 basis points from the prior year pro forma, as we continue to be successful in driving down cost of goods sold; for example, through increased automation of kit manufacturing. Service margin more than doubled from the prior year period pro forma, as we no longer have the drag from our blood donor screening service, and we grew volumes in our UK service lab.

Turning to operating expenses, we reduced our operating expenses by $1.4 million or almost 10% from the prior year period. Research and development expenses reduced by 1.8% to $2.3 million. Sales and marketing expenses reduced by 12% to $6.3 million. The year-over-year decrease was due to a reduction in overhead in related support costs, given that our US sales force is significantly smaller since, the Quest transactions.

Having said this, sales and marketing expenses grew 7% sequentially from the fourth quarter, as we continue to focus on channel and market expansion, particularly in Asia. General and administrative expenses decreased by 6% year-over-year to $5.2 million. Operating expenses for the first quarter included approximately $850,000 of share-based compensation.

Net loss for the first quarter of 2019 was $1.5 million, an 81% reduction compared to a pro forma net loss of $7.9 million in the first quarter of 2018. EBITDA for the first quarter was a loss of $3.8 million with adjusted EBITDA, which excludes share based compensation, unrealized FX gains or losses and unusual items with a loss of $2.3 million for the first quarter of 2019. Both EBITDA and adjusted EBITDA are non-GAAP measures.

Turning to the balance sheet. We finished the first quarter with a very healthy cash position of nearly $190 million. Cash utilization in the quarter was $3.3 million due both to our operating performance and a build of inventory ahead of the threat and disorderly exit by Britain from the EU and ahead of the expected seasonal volume peak in Q2.

I'll now hand it back to Peter who will discuss our business outlook.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Thank you Matt. We're pleased with the positive results in Q1 and we are maintaining revenue guidance for the full year of $69 million to $72 million. Turning to the outlook for the second quarter of 2019. Based on the midpoint of our annual revenue guidance, we expect 27% to 28% of full year revenues to fall in the second quarter. In the US, now that we recognized revenue on the sale of kits rather than the performance of tests, we consequently expect a pull forward in seasonality of our US revenues from what we saw previously.

We therefore expect a sequential increase in US revenues as quest builds up kit inventory, ahead of the usual seasonal peak in testing volumes in Q3. We expect Europe and rest of world revenues to decline sequentially as after having stocked up in Q1 in fear of a Brexit that didn't happen -- we expect orders from Europe to be lower in Q2. Lastly, we expect Asia revenues to grow sequentially from the usual seasonal low in Q1.

That concludes our formal prepared remarks, we'll now open up the line for questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Doug Schenkel from Cowen. Your line is open.

Chris -- Cowen -- Analyst

Hey, good morning. This is Chris (ph) out for Doug today. Thanks for taking my question. Just start maybe, could you just comment on gross margin? Gross margin was very strong in the quarter, despite what it was typically the lowest volume quarter of the year. Should we expect gross margin to improve further as volume ramps for the balance of the year. And could you also just talk about some of the manufacturing automation initiatives you have in place, specifically how much do you expect those to benefit gross margin going forward?

Peter Wrighton-Smith -- Chief Executive Officer and Director

Good morning Chris (ph). Thanks for the question. So, I'll take the manufacturing automation and then I'll hand over to Matt to give us a commentary on gross margin. So yeah, in terms of what we're doing on the COGS reduction initiatives, there are a number of things that we have under way. We have been progressively working to automate what was previously a pretty manual kit manufacturing process.

We have already implemented one piece of automation and that's starting to become reflected in our numbers, but we've just taken delivery of a second piece of automation to look at additional process steps as well. Alongside that, obviously we're doing things you might expect like increasing batch sizes, which reduces QC costs on a per test and so on.

And so those will give you a little bit of color into what we're doing in terms of cost reduction initiatives. But, I'll hand it over to Matt now to talk about Q1 and kind of cadence of gross margins for the rest of the year.

Matthew McLaughlin -- Chief Financial Officer

Yes, Chris (ph), I think as you think about gross margin for the remainder of the year, I think we still look at the 70% range as kind of a reasonable expectation. I think in terms of the first quarter, there's a couple of dynamics, particularly round mix to take into account. The first is, we talked a little bit about service growth. So the UK lab had a very strong quarter in Q1, which drove some of that gross margin performance.

And then the other two pieces are, obviously from a geography standpoint depending on which countries are growing with the pricing differences in those geographies, you're going to see a mix shift there. And then last just the amount of accessories versus the number of kits sold. So, I think when you kind of take those three things into account that drove up the gross margin in the first quarter. But, we're still looking at a 70% type of number for the balance of the year.

Chris -- Cowen -- Analyst

Okay great. And then Matt, specific questions, specific for you. So, you joined Oxford as CFO from a much larger company. What are your key priorities at Oxford, and how do you expect to leverage your finance and operating experience in your new role?

Matthew McLaughlin -- Chief Financial Officer

Yeah that's a good question. I mean obviously my initial priorities are just learning the people and learning the business and obviously learning the industry. So that's where I'm spending a significant amount of time. I've already been to our UK headquarters, I'm in Europe next week to kind of meet the rest of world commercial team. So, I think that's first and foremost. And then obviously getting into the underlying operations to just understand how we run the business. So, what metrics do we use. What's the cadence that we use them.

I do think, I can take some of the things that I have experienced over my 19 plus year career and bring some of that discipline and operating cadence here. So, I think those are kind of the initial thoughts and things that I'm focusing on.

Chris -- Cowen -- Analyst

Okay. And for my last question. Curious, if you have data that suggests the lack of electronic ordering has been a limitation to ordering or market developments. We have seen where this is a big deal with others, in other areas of diagnostics. So, we're really just trying to assess how big of a deal that Quest Diagnostics' e-ordering inclusion could be over the coming quarters. Thank you.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Yes. I think we -- that is clearly. Let me go back stage. I think electronic ordering is really all about convenience for ordering prescribers, right. And the more barriers you put in the way of convenience, for busy professionals the higher the barrier to adoption of your test is. And when we were a stand-alone lab, obviously although we had built interfaces with a number of our largest customers, for kind of smaller customers the economics of that just didn't make any sense. Typically, let's say that physician offices or smaller hospitals, right and that was limiting our ability to win those accounts.

So, I think it is profoundly important that having that capability available through the Quest channel for T-SPOT.TB greatly increases people's ability to access the test in a convenient manner. Having said that, it's not just electronic ordering. It's also being in that -- payers, it's also simple phlebotomy access. So, there are some other steps that we're working on with Quest as well on that will also benefit the business. And so, our view is that we start to see the full benefits of that kind of as we get to the end of the year, when all of those things have been put in place and look forward to that impacting growth in 2020 and beyond.

Chris -- Cowen -- Analyst

Great. Thank you.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Thank you.

Operator

Thank you. Your next question comes from the line of Tycho Peterson from JPMorgan. Your line is open.

Eleni -- JPMorgan -- Analyst

Hi this is Eleni (ph) on for Tycho. Thanks for taking our questions. First, on the Quest transaction. You have previously commented that you expect connectivity with Quest managed care plan, patient service centers and logistics during Q2 with benefits starting to accrue by end of 2019. I was just wondering where you stand right now and what needs to happen before full integration?

Peter Wrighton-Smith -- Chief Executive Officer and Director

Okay, that's a great question. Thank you. So, there are really kind of four independent things or parts of being fully integrated inside Quest, right. The first is the availability of a kind of electronic -- national test code and the ability for doctors to order the tests electronically and receive results electronically, that has now gone live. But there are three other bits; one is in access to phlebotomy through Quest patient service centers. That's a process that can now start to roll out. Now, that this code is live inside the Quest systems so that will start to be rolled out now over the next few months.

Logistics, also stems from that -- different, independent process where you know Quest can move from using FedEx which was our logistics provider into more of their traditional logistics mechanisms. And then lastly, managed care contract that's about negotiating the CPT code here into their payer contracts, and given all the (inaudible) dynamics going on, that's something Quest is appropriately doing in a staged and very deliberate manner. And so, our commentary has really been about the vast majority of those four steps, we expect to be complete by the end of the year. But the first one -- electronic ordering is now complete, as of Q2 -- or as of now.

Eleni -- JPMorgan -- Analyst

OK that's helpful color. Thanks. And then in terms of Europe and disruption you're seeing there. You mentioned expecting some softness in Q2. What are you incorporating in guidance for the remainder of the year?

Peter Wrighton-Smith -- Chief Executive Officer and Director

Yes. So, we think the stocking dynamic from Brexit hedge by our customers in Europe was less than $500,000, but we expect that to kind of unwind in Q2 and potentially elevate in Q3. So, that was one of the factors why Europe was so strong in Q1, but not the only factor, we did see very strong growth in the UK for example, and we saw strong growth outside of core continental Europe as well. But that's certainly -- we do expect some destocking now that the immediate threat of Brexit has dissipated.

Eleni -- JPMorgan -- Analyst

Okay. And last one from me, in terms of the channel and sales expansion in Asia. How much is left to get it to the level, you're aiming for?

Peter Wrighton-Smith -- Chief Executive Officer and Director

I would say, we're kind of about halfway through our plans for this calendar year in terms of hiring and we're on track with our plan. Longer term, we may decide that even more resources are appropriate in Asia or indeed other countries. But certainly, as it relates to this year's operating plan, we're making good progress.

Eleni -- JPMorgan -- Analyst

Thank you.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Thank you.

Operator

Your next question comes from the line of Bill Quirk from Piper Jaffray. Your line is open.

Dan -- Piper Jaffray -- Analyst

Great. Thanks. This is Dan (ph) on for Bill. Congrats on the quarter guys. So, you beat your guidance on the Street. Quest integration, sounds like it's on track, it sounds like gross margins are in good shape with that manufacturing automation, OpEx is under control. Could you just flush out the puts and takes in the system to maintain the full year guidance? Thanks.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Yeah. I think there's a few things to comment there. I think what we'll see is that our revenues this year are going to be more and growth is going to be more front end loaded and a half one versus half two and that's because of the pull forward and seasonality in the US business. And so, our Q2 guide obviously is a significant step up in Q2. So, I think the first thing that we have to realize is that there's going to be a pull forward in revenues and therefore year-over-year growth, we're going to face tougher comps as we get into Q3 and Q4. That's the first thing.

I think the second thing is of our guidance for the year, obviously reflects -- the ranges of what we think is appropriate for revenue growth in different jurisdictions, but we also have to be increasingly mindful that you know our revenues now are affected by the ordering patterns of three primary orderers, and what our revenues for the calendar year will be can depend greatly on just exactly how many orders fall in December, let's say versus January.

And so, our guidance for a range also reflects the degree of that volatility. Obviously, we get pretty good line of sight, orders as we get closer and closer to that -- as we get further down the year, we should have much greater certainty around Q4, we'll then tighten our guidance range accordingly.

Dan -- Piper Jaffray -- Analyst

Great, that's fair. Thank you. And then lastly, you guys previously communicated positive cash flow as the Quest integration progresses; how are you thinking about that for the rest of the year, and then with that, supplementing a really strong balance sheet. Appreciate the share buyback program, is there anything else we should be thinking about in terms of capital deployment going forward?

Peter Wrighton-Smith -- Chief Executive Officer and Director

Yes. I think what we said is not about cash flow, we've actually talked about adjusted EBITDA, but our view on that is that -- as we look at the dynamics from the P&L, right we are seeing obviously strong revenue growth. We're seeing gross margins expand year-over-year, and we feel pretty good about being able to at least maintain those gross margin levels, we're starting to see operating leverage and all of that means that the bottom line is improving. I think it's going to take a little while for us sustainably in the -- on the bottom line from an adjusted EBITDA perspective.

And I think we also have to be mindful that, we as a company are going to continue to face opportunities to invest, particularly in sales and marketing to drive further revenue growth, and we don't want to set guidance on the bottom line that would preclude the company from otherwise making sensible decisions to invest further in sales and marketing to drive revenue growth.

Any other comments?

Matthew McLaughlin -- Chief Financial Officer

Yeah. I think, just as it relates to cash flow in the quarter, if you think about working capital and the dynamics around Q2 being a big revenue quarter for us, we built up a couple million bucks of inventory in the quarter. So, I think you'll see that start to unwind through the back half of the year. You know, obviously as we burn through some of that inventory, so that would be the only other add I'd have there.

Dan -- Piper Jaffray -- Analyst

Thank you guys. That's great.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Thank you Dan (ph)

Operator

Your next question comes from the line of Sung Ji Nam from BTIG. Your line is open.

Sung Ji Nam -- BTIG -- Analyst

Hi thanks for taking the question. Congrats on the quarter and welcome on board Matt. Curious about US growth this quarter, obviously very strong. I realize that there is some impact from Quest order timing et cetera. So, I was wondering if you're seeing also kind of maybe potential underlying strengthening of the market, given all the updates to the guidelines last year, et cetera. If you're starting to see any impact there if you could talk on that.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Yes. I think it's a function of two things, I think one is we're seeing a (inaudible) seasonality, so you know Q1 is now stronger than it would have been under the old way that we thought about volumes. So, Quest is bought in Q1 for Q2 and is buying even more in Q2 for Q3. And so, part of it is just a pull forward to seasonality, but even the underlying sell-through to the market is very strong and I think that's because -- toward toward the end of last year, we've really started to drive an acceleration in the business and we're still seeing the benefits of that acceleration, as customers we brought on in the back half of last year continue to accelerate.

I think, we still see that there is -- yes, it's going to take some time for the full benefits of the Quest transaction to appear in growth. And so, we don't necessarily view that as necessarily sustainable through the back half of the year, but we'll have to wait and see.

Sung Ji Nam -- BTIG -- Analyst

Okay, great. And then maybe you talked about T-Cell Select kind of making good progress there. Would you be willing to share kind of the timing of when that might be available. Kind of what your strategy might be in terms of where you might roll that out from a geographic standpoint?

Peter Wrighton-Smith -- Chief Executive Officer and Director

Yes. We're thinking about the regulatory pathways now, and preparing for clinical studies that'd be required. I think it would be it would be logical to conclude that Europe might be the first market because they regulate the timing of the regulatory pathway there is somewhat less than it is in other jurisdictions around the world. But, as those plans start to become more concrete, you know we'll talk to you a little bit more about concrete timings, but it's a bit premature for that.

Sung Ji Nam -- BTIG -- Analyst

And then lastly on gross margins, or just in terms of the automation of kit manufacturing you guys have been talking about that for a while. Was curious as to kind of what inning are you, in terms of using the baseball analogy -- what inning are you in terms of rolling that out and what's the painting in terms of -- is it -- how many years, I guess to kind of get to where you think the optimization of that process will be?

Peter Wrighton-Smith -- Chief Executive Officer and Director

Okay. I think that you have to view this as a continuum. We have been steadily reducing cost of goods for a decade now. So, this is just part of a long chain of things we've systematically always looked to cost of goods. We've systematically always taken out -- had the ranking of the things in our cost of goods and systematically worked on the top ones and not those off the list and then move down the list. So, this is just a continued execution really of a long playbook for the company. I think, as it relates to the automation piece specifically, we're in the early innings or in the early innings for a couple of reasons.

The first is the automation that we've already brought on board, because you don't get the gross margin benefit until the kits that you've manufactured doing the new process start to actually be sold. You've got to work through essentially the inventory of -- that was booked at a higher cost of goods before you start to see the benefits, so we're just starting to see the benefit of that -- the first piece of automation that we brought on board.

The second piece of automation that we are validating in the moment, kind of won't be really live and impacting our numbers for the inventory lag until 2020. And so, you should view this as there's at least two, three years of kind of horizon of cost reductions ahead of us through the things we already are working on, let alone things that we'll then work on for the longer term future.

Sung Ji Nam -- BTIG -- Analyst

Great. Thank you.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Thank you.

Operator

Your next question comes from the line of Catherine Schulte from Baird. Your line is open.

Catherine Schulte -- Baird -- Analyst

Hey guys, thanks for the question. Just curious. It looks like you've recently started a clinical trial in South Africa to look at T-SPOT's ability to identify patients with active TB. Any detail you can give on the pipeline opportunity?

Peter Wrighton-Smith -- Chief Executive Officer and Director

Catherine, good morning thank you for the question. Yes. So, as we've alluded to on prior calls, as well as working on automation of our tests we're also looking at increasing the utility of our test and, we're not saying very much about that for competitive reasons, but clearly, there is further work that we're doing in the TB space to expand label claims of the test and expand what the tests can do and that South Africa study is part of that initiative. It's too early to talk about that with any greater clarity, at this stage, but we're clearly working on utility as well as just workflow.

Catherine Schulte -- Baird -- Analyst

Okay great. And then do you see the potential for additional partners like Generiums, the local manufacturing in other geographies or was that something that just really specifically makes sense for Russia?

Peter Wrighton-Smith -- Chief Executive Officer and Director

So, I think that model could make sense in different parts of the world. You know, we're seeing -- that model could make sense in different parts of the world. You know, we're seeing the world generally becoming more economically nationalist and that could lead to local manufacturing strategies actually being preferred for some parts of the world.

So, this is a very interesting test case for us of that business model, and something that once we've done it once, we might better replicate elsewhere. Certainly as it relates to Russia, you know there clearly are significant advantages from being a locally manufactured product in terms of access to government tenders and government contracts. And you know, I think there are other parts of the world that may also be true it's too early to comment on that.

But, I think that this is -- we're clearly seeing this is a new potential way that we could grow the business in some of those jurisdictions. More generally, I think it's a demonstration of our commitment to increasing the reach and channel of the company, across the world, as blood tests continue to enter into new geographies.

Some of those will be -- direct to our own sales forces, but others, it will make sense to do commercial partnerships and with Quest and now with Generium and in collaboration with PharmLine, we're executing on that as well. So, you know we view that as something that the company -- is something that we're looking to do more often of as we proceed.

Catherine Schulte -- Baird -- Analyst

Okay. And then just going back to electronic ordering for a second with Quest, from a timing perspective, was this on schedule, ahead of schedule, and then just wanted to confirm, it sounds like from your comments haven't really baked this in back half. So, any potential earlier impact with the upside to guidance?

Peter Wrighton-Smith -- Chief Executive Officer and Director

So I think that, yes. This was on schedule, I think Quest -- there's a huge amount of hard work that Quest is doing to integrate T-SPOT.TB into the channel and we thank them for all their hard efforts they're doing there, and I would say that, that project is proceeding almost exactly on plan. So, we're really thrilled about that. In terms of a lift in the second half of the year, I think it's too early to comment on that. We think, it's an important step, but there are other steps that needs to take place and so -- we've included some of that in our thinking about guidance for the year. But, as I said, we view -- primarily the benefit of increased growth from Quest coming in 2020.

Catherine Schulte -- Baird -- Analyst

Okay. Great, thank you.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Thank you.

Operator

(Operator Instructions) There are no further questions at this time. I would now like to turn the conference back to you Mr. Peter Wrighton-Smith. Please go ahead.

Peter Wrighton-Smith -- Chief Executive Officer and Director

Yes. Thank you all for joining us to discuss our first quarter 2019 results. We look forward to updating you on our next quarterly call.

Operator

This concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.

Duration: 38 minutes

Call participants:

Peter Wrighton-Smith -- Chief Executive Officer and Director

Matthew McLaughlin -- Chief Financial Officer

Chris -- Cowen -- Analyst

Eleni -- JPMorgan -- Analyst

Dan -- Piper Jaffray -- Analyst

Sung Ji Nam -- BTIG -- Analyst

Catherine Schulte -- Baird -- Analyst

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