Yahoo Finance NeoGenomics, Inc. (NASDAQ:NEO) Q3 2023 Earnings Call Transcript
NeoGenomics, Inc. (NASDAQ:NEO) Q3 2023 Earnings Call Transcript November 6, 2023
Operator: Greetings. Welcome to the NeoGenomics Third Quarter 2023 Earnings Call -- Third Quarter 2023 Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. Please note this call is being recorded, and an audio replay will be available on the company's website. Kendra Sweeney, Vice President of Investor Relations, you may begin your conference.
Kendra Sweeney: Thank you, John. Good afternoon, everyone, and welcome to the NeoGenomics third quarter financial results call. With me today to discuss the results are Chris Smith, Chief Executive Officer, and Jeff Sherman, Chief Financial Officer. Additional members of the management team are available for Q&A including Vishal Sikri, President of Advanced Diagnostics; Warren Stone, President of Clinical Services; and Melody Harris, President of Enterprise Operations. This call is being simultaneously webcast. We will be referring to a slide presentation that has been posted to the Investors tab on our website at ir.neogenomics.com. Starting on Slide 2, during this call, we'll be making forward-looking statements regarding our anticipated future performance.
We caution you that such statements reflect our best judgment based on factors currently known to us, and that actual events, or results could differ materially. Please refer to our most recent forms 10-K, 10-Q, and 8-K we filed with the SEC, to identify important risks and other factors that may cause our actual results to differ materially from the forward-looking statements. The forward-looking statements made during this call speak only as of the original date of the call, and we undertake no obligation to update or revise any of these statements. During this call, in order to provide greater transparency regarding our operating performance, we refer to certain non-GAAP financial measures that involve adjustments to GAAP results. The non-GAAP financial measures presented should not be considered an alternative to the financial measures required by GAAP, should not be considered measures of liquidity, and are unlikely to be comparable to non-GAAP financial measures provided by other company.
Any non-GAAP financial measures referenced on this call are reconciled to the most directly comparable GAAP financial measure in a table available in the press release we issued this afternoon. I will now turn the call over to Chris Smith, Chief Executive Officer of NeoGenomics.
Chris Smith: Thanks, Kendra, and welcome, everyone. Thanks for joining us this afternoon to go through our third quarter financial results. As always, I want to begin with our mission, our vision statement because it’s what motivates our company and teammates on a daily basis. Our mission at Neo is to save lives by improving patient care. Before we dive in, I also want to thank the 2,200 team mates for the impact they are making on patients' lives every single day. Now, let's move to Slide 4 and get into the third quarter highlights. As you can see, we had another very strong quarter growing revenue 18% over prior year. Clinical Services revenue increased 20%, driven by strong volumes across our modalities, and an increase in revenue per test.
As a highlight, NGS grew in excess of 35%, and now represents approximately 25% of our total clinical revenue. Advanced Diagnostics revenue, which includes pharma services and informatics, increased 8% from prior year, driven by continued growth in informatics in ramp and RaDaR. As we continue to execute on the transformation of the business, our progress has outpaced our internal plans. We started the year with the outlook that we would be adjusted positive in the fourth quarter. However, in the third quarter, adjusted EBITDA significantly improved 129% as compared to Q3 of last year, to a positive $3 million. Adjusted gross profit was $67 million, representing a 25% increase over the prior year, or 44%. For the 10th consecutive quarter, we saw an increase in revenue per test versus prior year.
NGS growth continues to be a driver of improvements in revenue per test, and is growing well above the estimated market growth. In addition, revenue cycle management, and pricing initiatives also are contributing to revenue growth per test. In terms of other key quarterly business updates, we completed three submissions to MolDX including one additional breast application, as well as two new indications, one in lung, and one in head and neck. Slide 5 demonstrates the consistent performance with third quarter delivering sustained improvement in revenue, gross margin, and adjusted EBITDA. We are proud of this year-over-year accelerated growth because it's a direct result of the strong execution by our Neo teammates, and the growing demand for our products from existing clients, as well as new customers.
Our operating and revenue cycle initiatives implemented in the second half of 2022 continue to enable accelerated growth, and we believe they have the ability to continue to drive improvement in the business, through the end of the year and beyond. Let's move on to Slide 6. We've kept the narrow focus on our strategic priorities laid out at the beginning of the year, profitably grow the core business, accelerate Advanced Diagnostics, drive value creation, and enhance people and culture. Our Neo teammates are the foundation of the company, and continuing to enhance this team, and our strong mission-driven culture is critical to our long-term success. This afternoon, I'm going to focus on our other financial priorities. We continue to profitably grow our core clinical business as we execute our commercial strategy, which is protect, expand, and acquire.
This has helped us deliver strong volume and improved mix. Our continued improvement in turnaround time has allowed all modalities grow faster than the market. In addition, the mix shift towards more comprehensive panels has supported the delivery of yet another quarterly improvement in revenue per test. Clinical adjusted gross profit increased to $13 million or 28% versus the prior year. Our newest NGS CTP panel for heme malignancies, Neo Comprehensive - Heme, was launched a few weeks ago and strengthens our leadership position in the heme oncology services. We also launched a therapy selection panel, providing comprehensive overview of biomarkers for detecting early stage lung cancer. Finally, we continued our sales force expansion that we disclosed in Q2.
Within Advanced Diagnostics division, which includes pharma services, informatics, and R&D, we continue to focus on innovation. As mentioned, during the third quarter we submitted three RaDaR applications to MolDX, collectively now have 27 studies in progress utilizing RaDaR technology. Some of these are interventional trials, including Meridian in head and neck, CAN, HER2 (ph) in breast and a randomized ctDNA lung trial. In December, additional RaDaR breast cancer data will be presented at the San Antonio Breast Cancer Symposium, and we also have three posters featuring other Neo - Heme modalities accepted at ASH. We hired a new Head of R&D, who will implement a new structure, focus on accelerating new product development, and driving innovation that will benefit with our clinical and our pharma customers.
While it's still early days with RaDaR, we are very pleased that our technologies is vesting (ph) low positive clinical samples, highlighting the value of sensitivity for RaDaR. We are focused on driving value creation from a financial perspective, and are pleased that we've delivered even further margin expansion from Q2, and have generated significant operating leverage as revenue favorability fell through to the bottom line. As we continue to optimize our lab operation, we achieved approximately a 20% improvement in turnaround time over Q2. Because of several key acquisitions over the last five years, we've been operating under multiple LIMS systems. To further enhance operating efficiencies, we launched a key initiative to move the organization to one LIMS system.
This project will provide a new system, which will become the backbone of digitization of our labs, allowing for tighter integration between our CRM system, ordering systems, and ERP back end, and allow increase efficiency across our entire enterprise. We'll start to see the benefits in 2024. To further reduce costs, and improve margins, we've completed the consolidation our international labs into one lab in Cambridge, UK, and have improved processes on procurement and supply chain. We expect to see these benefits continue in 2024 and beyond. Before I turn the call over to Jeff, I want to take a minute to address the FDA's proposed unilateral regulation of lab-developed tests as medical devices. Given the substance of the proposed rule is in draft form, the agency has request public comments on the topics, that includes grandfathering.
It is important to note that many instances around this topic are still hypothetical. That being said, Neo has a strong history of complying with CAP and CLIA regulatory standards, and we have also been working with MolDX on coverage termination. We believe these factors, taken together, give us a head start over many other reference labs and providers performing similar testing. We have operated our business in preparation for regulations for some time now, and have executives and teams in place, who have experience with the FDA approval process including quality, regulatory, and R&D. Furthermore, our assay development over the last 12 months to 18 months has been incorporating FDA design control, and preparation for future submissions. As a member of ACLA, we will work with the association to ensure the continuation of patient care with limited business impact.
Now, let me turn the call over to Jeff to review our financial results in more detail. Jeff?
Jeff Sherman: Thanks, Chris, and good afternoon, everyone. I'll begin with a little more detail on our operating results for the quarter. As Chris said, we continued the year with revenue experiencing accelerated double-digit growth over prior year. Third quarter revenue was $152 million, an 18% increase over the prior year and a 3.4% increase from Q2 of '23. Revenue growth was driven by growth in clinical test volume, a continuing shift to higher complexity tests, and improvement in revenue per test driven by business mix and revenue cycle improvements. Adjusted EBITDA improved 129% from prior year to a positive $3 million. Q3 marks the fourth consecutive quarter that adjusted EBITDA increased from prior year. We generated significant operating leverage as revenue favorability fell through to the bottom line, with over 60% of revenue growth flowing to adjusted EBITDA.
Looking at Slide 8, Clinical Services revenue of $128 million was an increase of 20% year-over-year, driven by a 7% increase in volume, and a 12% increase in revenue per test. Higher volume is driven by growth within our existing client base, as well as newly acquired customers, and demonstrates that our sales force optimization strategy is enabling us to reach the oncologists, pathologists, and other physicians and providers we serve. Turning to Slide 9, average revenue per clinical test increased by 12% over prior year to $440, representing an improvement for the 10th consecutive quarter versus prior year, as we maintain our focus on higher value test, and revenue cycle management initiatives. As we've previously noted, NGS growth is a focus of our sales team, with NGS revenue approaching approximately 25% of our total clinical revenue for the year.
As a result of our strong performance in NGS, and the expansion in our sales team, we continue to see accelerated growth in NGS. On Slide 10, as we noted on our Q2 call, Advanced Diagnostics revenue growth slowed in Q3, with an increase of 8% versus prior year. ADx revenue grew slower in the third quarter due to macroeconomic conditions, and pharma R&D spend, as well as our decision to rationalize our global testing sites and low margin business. This is expected to continue into the fourth quarter and early 2024. However, the focus on profitability and margin growth is driving performance with adjusted gross profit for ADx improving by $6.4 million, or 32%, and adjusted gross margins improving by 440 basis points on year-to-date basis versus prior year.
Looking at the income statement on Slide 11, adjusted gross margin was 44.2%, an improvement of 247 basis points over the third quarter of last year. Adjusted EBITDA was positive $3 million, up $15 million, or 129% improvement over the third quarter of 2022. These significant improvements were driven by both higher gross profit, and lower operating expenses, and highlight the operating leverage in the business. Regarding operating expenses, sales and marketing expense was $17.6 million as we continue to invest in the expansion of our sales force. G&A was $61.5 million and R&D expense was $5.3 million. We did have a favorable R&D tax credit related to fiscal year 2022, of $1 million in the quarter. In addition, there was $2.1 million in restructuring costs in the quarter, related to the previously announced organizational restructuring, and footprint optimization, which is part of our value capture program to gain operating leverage.
We have revised our original restructuring plan cost and timing of projects, and as a result, now anticipate these costs extending into 2024. These charges will ultimately result in enhanced operational efficiencies, as we continue to optimize our geographic presence. Turning to the balance sheet on Slide 12, we ended the third quarter with cash and marketable securities of $402 million. We continue to make good progress in diligently managing our cash burn, and are focused on accountability and disciplined oversight of operating expenses. Cash flow from operations improved $11 million or 66% from Q3 2022. On a year-to-date basis, cash flow from operations improved by $43 million or 68%, and the year-to-date cash burn improved by $36 million or 50% over the first nine months of 2022.
Our strong financial position provides us the financial flexibility to continue to invest in the business, and achieve our strategic and financial objectives. Given our Q3 financial performance, and continued progress executing on our strategic priorities, we are revising our revenue and adjusted EBITDA guidance for the year. Turning to Slide 14, we previously had revenues of $565 million to $575 million, representing 11% to 13% growth in 2023. We are revising that range upward, and now expect total revenue between $585 million and $592 million for the year, representing 15% to 16% growth. Adjusted EBITDA was negative $13 million to negative $10 million, and is now negative $4 million to negative $1 million, and at the midpoint represents an improvement of $46 million or 95% from year-end 2022.
We continue to see strong revenue growth, and an increase in NGS product mix, and are very encouraged by the opportunities for RaDaR, and other newly launched tests, which provide accelerated leverage to the bottom line. As we stated at the beginning of the year, our year-over-year comparisons will be more difficult in the fourth quarter, but we believe we have a strong foundation, and dedicated teammates, to deliver financial results. While we continue to be focused on driving operational efficiencies, we will also continue to invest in the business to capitalize on our future growth opportunities. Our strategic focus remains to deliver long-term sustainable growth. With that, I'll turn it back over to Chris.
Chris Smith: Thanks, Jeff. As you can see, we're very pleased with our year-over-year progress, including strong revenue growth of 18% and significant improvement in adjusted EBITDA. We now have three pending submissions for RaDaR with MolDX, and we're generating additional data that will support expanded coverage in the future. We saw meaningful progress in the execution of our strategic priorities, and therefore are raising our guidance for the full year results. We are well on our way to becoming the leading cancer testing information decision support company. We'll continue to build on the foundation we have laid out over the past several quarters to deliver long-term sustainable growth. I'm excited for our teammates and our customers, but for most of all, the patients that we get to serve on a daily basis. Thanks, and we'll turn it back over the operator to open the call up for questions.
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