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Oxford Immunotec Global PLCÂ (OXFD)
Q2Â 2019 Earnings Call
Aug 6, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen, and welcome to the Oxford Immunotec Second Quarter 2019 Earnings Call. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the call over to your host, Mr. Matt McLaughlin, Chief Financial Officer. You may begin.
Matthew McLaughlin -- Chief Financial Officer
Good morning, and thank you for joining us to review Oxford Immunotec's financial results for the second quarter of 2019.
Before we begin, I'd like to caution listeners that comments made and financial information provided during the conference call include certain statements that are estimates, forward-looking, and/or subject to various risks and uncertainties. This information reflects our current expectations, assumptions and currently available data, and are neither predictions nor 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 Annual 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 results, such as adjusted EBITDA, are presented in the tables accompanying our earnings release which can be found in the Investor Relations site 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 updates on 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 filed as exhibits on Forms 8-K issued on January 7, 2019 and March 11, 2019 reflected the companies estimated revenue and cost of revenue as of the closing date of the sale of our U.S. laboratory service business to Quest had occurred prior to the respective periods. These non-GAAP financials also appear as supplemental tables in our Q2 earnings press release. The pro forma adjustments in these tables were based on the information available at the time and assumptions that management believed were factually supportable and reasonable.
With that, it's my pleasure to turn the call over to Oxford Immunotec's Chief Executive Officer, Peter Wrighton-Smith.
Peter Wrighton-Smith -- Chief Executive Officer, Director
Good morning. On today's call, I'll start by providing some general comments on our financial results and operating performance in the second quarter of 2019. I'll then hand it over to Matt who'll walk you through our financial results in detail; and once Matt's completed that, he'll hand it back to me to provide our financial guidance, and we'll then open up a line to take your questions.
Turning to 2019 second quarter results; we posted revenues of $19.6 million which was toward the top end of our expectations for the quarter. Excluding 2018 revenue from blood donor screening from the year-over-year comparison, total company revenue grew 16% over pro forma revenues for the same period in 2018. U.S. revenue was $7.8 million, excluding 2018 revenues from blood donor screening. From the year-over-year comparison, U.S. revenues grew 47% in the second quarter compared to pro forma revenue for the same period in 2018. This reflects both, the pull forward and seasonality of our U.S. business as we've moved from recording revenue on the performance of test to the shipment of kits, as well as continued strong underlying growth testing demand.
Europe and rest of world revenue of $2.2 million was essentially flat compared to last year, a strong market demand was offset by the unwinding of the Brexit stocking that occurred in the first quarter and that we called out in our last earnings call. Taking the first half of a whole, growth in this market was 11% or 18% on a constant currency basis, which more appropriately reflects the double-digit underlying growth that we're seeing in this market.
Highlights in the quarter were continued strong growth in our UK business and very strong growth in Russia as the benefits from our partnership with the Generium start to bear fruit. Asia revenues were $9.6 million for the second quarter of 2019, up 3% from the same period last year. First half growth in Asia was 7% or 8% on a constant currency basis. The relatively weaker start to the year in reported revenue growth is reflective of order patterns in Japan which are more back half weighted than last year. Underlying growth in testing volumes in Japan are significantly stronger than the current reported growth levels and we therefore expect reported revenue growth to rebalance in the remainder of the year.
Overall, we're pleased with a strong underlying momentum in the business and the continuation of double-digit revenue growth. In addition to renewed focus on driving revenue growth, we're also concentrating on driving the company's profitability metrics. Gross margin in the second quarter was strong at 72.4%, growing about 530 basis points over the pro forma gross margin in the prior year period. We saw an expansion in product margins, due to leverage from higher volumes, and as we start to see the benefits of greater automation of kit manufacturing. We also saw a strengthening in service margins, both as we've 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 around our new more focused business model. 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 in moving toward adjusted EBITDA breakeven on the bottom-line.
Turning now to our key operating priorities of 2019. Our first priority is to maximize the success of our relationship with Quest Diagnostics in the U.S. market. As you know, that transaction with Quest significantly increases the reach and competitiveness of T-SPOT TB in the U.S. market. 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. On the IT side, on our last call, we reported the Quest had just launched electronic ordering of T-SPOT TB; this has enabled phlebotomy access with T-SPOT TB now available in approximately 1,000 Quest patient service centers. Quest is also continuing to make progress integrating T-SPOT with their joint venture partners and with various GPO pricing agreements.
In parallel, we're continuing to strengthen the depth of engagement between our sales forces and we continue to see early wins from this collaboration. Whilst, it's still early and there is much still to do, we remain highly encouraged by the way the relationship with Quest is progressing and we continue to expect it to result in expanded growth opportunities once all the integration steps are completed.
Outside the U.S., 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 support our continued growth in this region, we've recently opened up a regional APAC hub based in Singapore and are significantly expanding our management depth and food resources across the region.
In on new Russian collaboration, I'm pleased to report that Generium received regulatory approval for their domestically produced kit in June, which now makes them able to access new business in the Russian market.
Turning to our product development efforts; we continue our work on the T-Cell Select product. 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 the testing volumes, and from new customers who've wanted to offer T-SPOT TB but needed a simpler workflow to do that. We're starting to order equipment for the first customer sites starting in Europe and rest of world region, and we have a strong pipeline of customers, instrument placements, and adoption of the new automated workflow.
On the operations side, we have multiple COGS reduction projects ongoing, including further automation of our kit manufacturing. We're validating new equipment to automate an additional process step and we'll be rolling that out later in the year.
So in summary, we're making good progress on executing our strategic priorities for the year, and as we continue to execute on new business model we're pleased to see continued growth and improving profitability metrics.
Before I hand it over to Matt, I'd just like to give a brief update on our share buyback climbing in steps. At our annual general meeting in June, shareholders approved the resolution giving the company the authority for a 5-year period to purchase upto $100 million of the company's shares over that period. Subsequent to that, we issued trading instructions to our financial intermediary to purchase the shares on the company's behalf and we expect the first purchases to commence late in Q3. We will continue to communicate updates in forthcoming earnings calls.
Matt will now take over to give you some more detail on our financial performance.
Matthew McLaughlin -- Chief Financial Officer
Thank you, Peter. Our full GAAP results, as shown in our press release issued today show the comparison of our Q2 2019 with the GAAP numbers of our continuing operations for Q2 2018. For the reasons I've already explained, when giving year-over-year comparisons, I'll be referring to the pro forma numbers for Q2 2018 instead to enable the comparison on a like-for-like basis to our Q2 2019 results. You can find these tables at the end of our press release after the presentation of the GAAP results.
Total revenues in the quarter of $19.6 million were up 18% versus GAAP revenues in Q2 2018, but up 10% from pro forma revenues in Q2 2018. Excluding blood donor screening revenues from the pro forma Q2 2018 revenues, total revenues were up 16%. Breaking down our reported revenues on a regional basis, U.S. revenue was $7.8 million, representing 40% of our total revenue. Europe and the rest of world revenue was $2.2 million, representing 11% of our revenue. And Asia revenue was $9.6 million, representing 49% of our revenue.
Turning to volumes in our TB business; we now count volumes in the US based on the number of tests sold to Quest and our other kit purchasers rather than on the basis of how many tests were run in the U.S. We sold approximately 400,000 tests in the U.S. via kit sales. We sold approximately 700,000 tests in our O-U.S. region, both via kit sales and test processed in our UK-ODL service business.
Gross profit of $14.2 million was up 19% from the pro forma gross profit in the prior year period. Overall, gross margin for the quarter was 72.4%, an increase of about 530 basis points from the prior year period pro forma number.
Breaking down margins by product and service split, product gross margin was 72.8%, and service gross margin was 65.1%. Product gross margin increased about 250 basis points from the prior year pro forma, as we continue to be successful in driving down cost of goods sold through, for example, increased automation of kit manufacturing. Service margin nearly 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; operating expenses reduced by almost $1 million or 6% from the prior year period. Research and development expenses increased to $2.1 million as we continue to invest in development projects aimed at pulling through our new automated test workflow, augmenting T-SPOT TB tests utility and in projects to reduce COGS. Sales and marketing expenses increased to $7.5 million, as we continue to make investments to drive channel and market expansion around the world. General and administrative expenses decreased about 3% year-over-year to $5.5 million. Operating expenses for the second quarter included approximately $815,000 of share-based compensation.
Net income for the second quarter of 2019 was $590,000 compared to a pro forma net loss of $5.9 million in the second quarter of 2018. EBITDA for the second quarter was a loss of $218,000. Adjusted EBITDA, which excludes share-based compensation, unrealized FX gains or losses, and unusual items, was essentially a breakeven showing a loss of $48,000 for the second quarter of 2019; this compares to an adjusted EBITDA loss of approximately $2 million in the prior year period. Both EBITDA and adjusted EBITDA are non-GAAP measures.
Turning to the balance sheet; we finished the second quarter with a very healthy cash position of $187 million. Cash utilization in the quarter was $2.2 million, due primarily to higher accounts receivable, in line with our quarter-over-quarter revenue growth. Notwithstanding underlying cash flow from operations, we expect cash outflows in the coming quarters as we execute our share buyback program.
I'll now hand it back to Peter who will discuss our business outlook.
Peter Wrighton-Smith -- Chief Executive Officer, Director
Thank you, Matt. Given the strong momentum in the business and the results so far in the year, we are raising our revenue guidance for the full year to between $71 million and $73 million. Turning to the outlook for the third quarter of 2019, we expect revenues of between $20 million and $21 million. In the U.S. now that we recognized revenue on the sale of kits rather than the performance of tests, we've seen a pull forward in the seasonality of our U.S. revenues from what we saw previously. Consequently, we expect to see a sequential decrease in U.S. revenues after the new seasonal peak in Q2.
We expect Europe and rest of the world revenues to increase sequentially, reflecting the growth in that region. Lastly, we expect Asia revenues to grow sequentially from Q2 as orders to Japan catch up from the weaker first half of the year.
That concludes our formal prepared remarks. We will now open up the line for questions.
Question-And-Answer Session
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Bill Quirk from Piper Jaffray. Your line is open.
Unidentified Participant
Hi, this is Rachel on for Bill. Thanks for taking the questions. Peter, you've touched on the seasonality a little bit during the call and we'd just like to understand the traditional 3Q seasonality as a service provider and shifting into to Q2 as a supplier. So can you help us understand the difference between the seasonality and the underlying growth in the U.S. results?
Peter Wrighton-Smith -- Chief Executive Officer, Director
Yes. So underlying growth in the U.S. is comfortably in the double digits in terms of test utilization. But obviously, we recognize revenue based on when we ship kits to question on other U.S. customers- And as your question states, obviously that's being pulled forward. So we expect in the U.S. now for the half one to be stronger than half two is on new seasonality with Q2 being the seasonal peak and that coming down into Q3 and Q4. So that's kind of what we expect going forward in the U.S. based on our portfolio seasonality.
Unidentified Participant
Great, thank you. And then one more question. So for Europe and rest of the world, Brexit obviously brought on the quarter. So do you expect Brexit stocking to effet to continue to the rest of 2019 or what are you baking into guidance for Europe?
Peter Wrighton-Smith -- Chief Executive Officer, Director
Yes. So we're not baking any further -- I appreciate it but -- the effect we called out was that in Q1, customers in Europe fearful of a no deal, a disorderly no deal. Brexit in March kind of stocked up as a kind of hedge against any customers disruption and obviously, when Brexit didn't happen, they kind of were holding stock because they didn't need to order so much in Q2. So that's why I gave the first half growth rates to kind of show the underlying growth in the market was when you kind of take those two factors as a wash, right. Who knows what's going to happen in the second half of the year because the prospect of a disorderly Brexit is again on the agenda. But we certainly haven't built any kind of stocking expressively into our guidance for Q3 and again, for the financial year I don't think it would make a difference, because even if it did happen in Q3, we're probably on the line again in Q4. So we're not overtly building any stocking into our guidance.
Unidentified Participant
Great. Thank you.
Peter Wrighton-Smith -- Chief Executive Officer, Director
Thanks, Rachel.
Operator
Your next question comes to the line of Sung Ji Nam with BTIG. Your line is open.
Sung Ji Nam -- BTIG -- Analyst
Hi. Sorry about that. Just maybe a quick one for Matt in terms of gross margin cadence going forward. Do you think the current level is sustainable?
Matthew McLaughlin -- Chief Financial Officer
Yes. I think-- so we talked in 1Q kind of around a 70% number. Now that we're two quarters through the year, I think we clearly see some upside to that number. The one thing I will point out it's going to vary depending on geography in terms of where the growth is. This due to different dynamics in terms of pricing and gross margin percentages by country. But we absolutely see an opportunity to over deliver on the previously commented 70% number.
Sung Ji Nam -- BTIG -- Analyst
Great. And then, Peter, could you maybe comment on the T-Cell Select kind of the timing on the U.S and rest of the world roll out there and what kind of progress are you making in terms of the U.S. development aspect of it?
Peter Wrighton-Smith -- Chief Executive Officer, Director
Yes. Thank you, Sung Ji for the question. So on T-Cell Select in Europe and rest of the world, as I said, we're ordering equipment now to place into customer side. So we are expecting to get customers operational, the first customers operational before the end of the year. As it relates to other jurisdictions, we'll have to go through additional regulatory processes in those markets. We're starting to work on those, but I'll give you a fuller update about on forthcoming earnings calls when we've made concrete steps so that we can report.
Sung Ji Nam -- BTIG -- Analyst
Okay, great. And then just lastly, could you talk about kind of your pipeline development activity, whether if there is a lot of activity going on? Just curious as to your overall cash deployment strategy understanding that there is a share buyback plan, but that would love to hear more about your overall pipeline development. Thank you.
Peter Wrighton-Smith -- Chief Executive Officer, Director
Yes. So I think as we look at the company today, we see just a fantastic opportunity ahead of us in TB. That's for a number of external factors as well as some internal factors. Externally, what's happening is that more and more data guidance are coming out showing the superiority of blood testing over the skin tests. We also have helpful tailwinds, some repeated skin test shortages. We're also seeing growth in the market as the WHO and then National Governments are getting more serious across the world about embedding latent TB screening into new countries. That's what's happening in the external environment, which makes us very positive.
Internally, obviously, we view T-Cell Select as a major new initiative for the company that will help us continue to drive growth. And so we feel very positive about the outlook in TB. And as a consequence, that's where we're deploying the majority of our investment. And our investments are really going into two areas. It's going into sales and marketing, because we want to expand our strength and breadth of our market access channels, both using direct resources and where appropriate, partnering with other companies, as we've done with Quest and with Generium in Russia.
And the second major investment area is R&D, right. And then R&D is primarily centered around TB, around pulling foot through the benefits T-Cell Select in a more automated workflow through R&D to continue to reduce our cost of goods and to exploring new ways to add utility and functionality to T-SPOT TB tests. So that's really where our investment priorities are. We do obviously have a T-SPOT CMB test, upon which we have very good data. But the company has not yet committed to launch that in a serious way, in part because we are trying to balance the distraction that that would imply versus continuing to direct R&D in sales and marketing resources on the opportunity ahead of us in TB. So I hope that gives you some sense of where our investment priorities lie.
Sung Ji Nam -- BTIG -- Analyst
Great. Thank you so much.
Peter Wrighton-Smith -- Chief Executive Officer, Director
Thank you.
Operator
Your next question comes from the line of Catherine Schulte with Baird. Your line is open.
Catherine Schulte -- Baird -- Analyst
Good morning. Thanks for the question. Just first, Peter, you guys amended your supply agreement with Quest back in June. Any color on what drove this change? Any details on pricing? And then did it have any impact on your 2019 guidance?
Peter Wrighton-Smith -- Chief Executive Officer, Director
So also second question first. No change to guidance as a result of that change. But what I would say in general, the reason that we have raised our guidance is we are being more positive about growth -- actually in all our regions around the world, including the U.S. And the U.S. has done better than we've expected earlier in the year, but it doesn't specifically read through from the contract change, that makes sense. The contract change is really an opportunity to deepen the partnership. Quest have agreed to higher growth targets and we've agreed to return to the modified pricing and we'll also be getting more granular market data, which will help us strengthen the interaction around sales and marketing and targeting. So that's what the amendment was about and the amendment alone did not change the guidance.
Catherine Schulte -- Baird -- Analyst
Okay. And then the foot on in Asia was a little bit more pronounced than we expected. You mentioned you expected this to rebound in the back half but what are you assuming specifically in your 2019 guidance for APAC growth in the second half?
Peter Wrighton-Smith -- Chief Executive Officer, Director
So the underlying volume growth in APAC is really strong, both in China and in Japan. But you've not seen that in the first half from reported revenues because Japan order timing is going to be much more back half way to this year. So you'd expect that the second half growth rates in Asia are meaningfully higher than they've been in the first half and say for the financial year as a whole. When we take that in the round that will be a better reflection of what the underlying growth in the market really is.
Catherine Schulte -- Baird -- Analyst
Okay. And is there any sort of pricing headwind this year on APAC revenue?
Peter Wrighton-Smith -- Chief Executive Officer, Director
Not specifically. Obviously, we price in China in U.S. dollars. I'm sure all of us are aware that the recent currency actions that are going on and obviously short-term that doesn't impact us because we priced in China in U.S. dollars. But obviously if that weakness of the RMB were to persist for a long period of time, we'll have to revisit our pricing strategy in China to make sure we weren't disadvantaged in the marketplace. But other than that, there is no other major pricing dynamic going on.
Catherine Schulte -- Baird -- Analyst
Great. Thank you.
Peter Wrighton-Smith -- Chief Executive Officer, Director
Thank you.
Operator
[Operator Instructions] Your next question comes from the line of Doug Schenkel from Cowen. Your line is open.
Doug Schenkel -- Cowen and Company -- Analyst
Hi, good morning. So some communication has been out there from the CDC about skin tests supply constraints in the U.S. Have you seen any impact on your business thus far and are you expecting any benefit over the balance of the year?
Peter Wrighton-Smith -- Chief Executive Officer, Director
So I think is a little premature to have seen a benefit because you need to see quite a lot of data to directly attribute that to the shortage of our results. Obviously, just to remind you, obviously, the shortage is one of the two skin tests and so it's not yet fully clear to us whether people are unable to get supplies from the other provider, for example. So it's just too early to call it out and for the same reason, we certainly haven't assumed that in our guidance for the year. So if that were to become a very significant effect in the market, then obviously that we'll have to reflect that in future updates.
Doug Schenkel -- Cowen and Company -- Analyst
Okay. Maybe have you seen any benefit from being included in the Quest electronic ordering system as of yet and I guess just on the topic of Quest. You noted that you're now in 1,000 phlebotomy centers in the U.S. What percentage of total does that represent?
Peter Wrighton-Smith -- Chief Executive Officer, Director
That's approximately all of the patients service centers. The next bit would be the in-office phlebotomist, which is a different category, and that would take a longer period of time to get into those. So we are I think predominantly all of the patients service centers right now.
Doug Schenkel -- Cowen -- Analyst
Okay. And on the electronic ordering system?
Peter Wrighton-Smith -- Chief Executive Officer, Director
Yes, the electronic ordering system is really to enable some of these other things to happen. It really increases convenience to customers. And it's been one of the factors why we've seen some early wins in the South collaboration. But it was what. Then on underpins. For example, they have been an ability to offer phlebotomy. It will also subsequently underpin logistics changes, etc. So view it as a kind of a series of things that have to happen to get fully inside Quest's platform and where we're striking those things off -- as a correction, Quest is striking these things off systematically.
Doug Schenkel -- Cowen and Company -- Analyst
Okay. Just going back to ASPs. I believe you have noted you sold 400,000 tests in the U.S. Clearly there is some rounding in this number. But it looks like U.S. ASPs may have declined slightly on a sequential basis to a bit under $20. Is that right? And if so, what drove the decline? And how should we think about U.S. ASPs over the balance of the year? We could just be completely wrong. It just could be rounding, taking us in a certain direction, but I just want to clarify there.
Peter Wrighton-Smith -- Chief Executive Officer, Director
Yes, we've got --- we keep a record of kind of volume in ASPs over the quarters. And it does bounce around a little bit. It also depends a little bit, Doug, on just kind of what quantity of accessories are ordered with the test as well, and that can vary from quarter-to-quarter. So yes, it did find slightly sequentially, but not any more than in previous quarters and in the range of normal variability. So I wouldn't be guiding you to view that there's any trend going on here other than just volatility around the medium.
Doug Schenkel -- Cowen and Company -- Analyst
Okay. And last question; it wouldn't be tools and diagnostics call in this [indecipherable]; I didn't ask a China question. So as you know, and some other companies in the group have talked about a bias toward purchasing from domestic Chinese companies due to the ongoing trade dispute. Historically, you've posted a very solid growth in China, in spite of the presence of some copycats. With that in mind, I'm just curious if you're seeing any change in purchasing or ordering dynamics in China, as a result of what's going on right now?
Peter Wrighton-Smith -- Chief Executive Officer, Director
Yes, we're still seeing a strong growth in China, but equally, like all multinationals, we're worried about the increasing economic and economic nationalism across the world. It's not just a China thing, it's happening in the U.S., it's been happening for years in Brazil, Russia, many other countries, India. And it's just, I think, an increasing theme in world economics. And so I think, now we're very mindful that we'll need to maybe deploy different strategies to address that as we go forwards. So I would view us as kind of -- my answer to you would be, no direct impact right now but we're well aware that trend is probably getting more hostile to Western companies and we need to think about how we respond to that.
Doug Schenkel -- Cowen -- Analyst
Okay. Thank you.
Operator
[Operator Instructions] And I'm showing no further questions at this time. I would now like to turn the conference back to Dr. Peter Wrighton-Smith, CEO.
Peter Wrighton-Smith -- Chief Executive Officer, Director
Yes, thank you all for joining us to discuss our second quarter 2019 results. We look forward to updating you on our next quarterly call.
Operator
[Operator Closing Remarks]
Duration: 31 minutes
Call participants:
Matthew McLaughlin -- Chief Financial Officer
Peter Wrighton-Smith -- Chief Executive Officer, Director
Unidentified Participant
Sung Ji Nam -- BTIG -- Analyst
Catherine Schulte -- Baird -- Analyst
Doug Schenkel -- Cowen and Company -- Analyst
Doug Schenkel -- Cowen -- Analyst
