NeoGenomics, Inc. (NASDAQ:NEO) Q4 2023 Earnings Call Transcript

NeoGenomics, Inc. (NASDAQ:NEO) Q4 2023 Earnings Call Transcript February 20, 2024

NeoGenomics, Inc. beats earnings expectations. Reported EPS is $0.03, expectations were $-0.01. NEO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the NeoGenomics Fourth Quarter and Full Year 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 fourth quarter and full year 2023 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; and Ali Olivo, General Councel and Head of Business Development. 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 : Hey, thanks Kendra, and welcome everyone. Thanks for joining us this afternoon to go through our fourth quarter and full year financial results. As always, I really want to begin with our mission and vision statement because it is what motivates our company and our teammates on a daily basis. Our mission in Neo is to save lives by improving patient care and we just had our Global Sales Meeting at the end of January and many of our teammates shared how cancer has impacted them or their families, and how we’re making a difference in their lives? It’s always a great reminder of why we do what we do, and I’m so proud of the impact we’re having on patients in local communities we serve. Now let’s move to Slide 4, and get into the fourth quarter highlights.

As you can see, we had another strong quarter growing revenue, 12% over prior year to $156 million. Clinical services revenue increased 20% driven by strong volumes across all our modalities and another increase in revenue per test. As a highlight, NGS grew in excess of 40% and now represents over 25% of our clinical revenue. The strong growth in clinical services helped to mitigate the expected lower revenue in ADx due to a strong comparable in ADx in Q4 of 2022, as well as macro conditions in pharma sector and margin optimization initiatives that we took in 2023. From an adjusted EBITDA perspective, our progress has outpaced our internal plans. We achieved positive EBITDA in the third quarter of 2023 and significantly improved again this quarter.

Adjusted EBITDA was up 900% as compared to Q4 last year to a positive $9 million. Adjusted growth profit was $73 million representing a 46.7% margin, an improvement of 225 basis points compared to Q4 in 2022. Turning to Slide 5 for the full year 2023 results, revenue was up 16% versus prior year to $592 million driven by penetration in the community oncology market, higher volumes, a shift to higher margin modalities and improvements in revenue cycle management. Adjusted gross profit was $264 million, representing adjusted gross margins of 44.7% and adjusted EBITDA was positive $3 million for the full year, an improvement of $51.5 million or 107% versus prior year. Now on Slide 6, I’m pleased that the fourth quarter continued the trend that we’ve seen throughout 2023, a consistent sequential improvement in revenue, adjusted gross profit, and adjusted EBITDA.

Notably, our revenue growth has been strong each quarter of the year. We’ve built a momentum of reaching positive adjusted EBITDA in Q3 and carried that into Q4. We believe that we’ve laid solid foundation for growth in 2023 and expect that momentum to continue as we move throughout 2024. Let’s move on to Slide 7. As you may recall, at the beginning of the year, we laid out our four focus areas for 2023. They included profitably growing the core business, accelerating advanced diagnostics, driving value creation, and enhancing our people and culture. The more time I spend in the business, the more impressed I am with our unique competitive position in the marketplace with a breadth of cancer tests, our operational capabilities and passionate teammates that lead our business every single day.

We are a leader in oncology testing with significant share of patient test volume in the U.S. Our deep relationships with community pathologists and oncologists provide us an advantage in the market, and our focus on oncology testing has allowed us to develop extensive patient databases and relationships, and we view ourselves as a collaborative partner to pathologists, oncologists, hospitals, and biopharma companies we serve. Beyond these market conditions, it’s a strong execution by our teammates that enable us to deliver such strong quarterly and full year results to our stakeholders. Our teammates are the foundation of our company, and we have strengthened our team throughout the year with key hires at all levels of the organization, including sales, lab operations, corporate functions.

These new hires joined a highly talented group of individuals of varying backgrounds and experiences contribute towards distinguished culture that reflects our commitment to diversity, equity, and inclusion. This afternoon, I’m going to focus on our three financial priorities. We continue to properly grow our core business as we execute on our commercial strategy. Protect, expand, and acquire, which has contributed to our strong volume growth increased AUP and improved mix. Execution of this strategy enabled us to serve more than 600,000 patients during the year. Our continued improvement in turnaround time has contributed to or at — at or above market growth rates across all modalities. In addition, the mix shift towards higher value modalities in tests has supported the delivery of yet another quarterly improvement in revenue per test.

Over the last 18 months, we’ve doubled the size of our sales force increasing coverage and penetration. We also introduced NeoAccess and NeoSeek software solutions to support providers in their clinical decisions and inform patients with upfront benefit checks, as well as to identify patients who may be marked biomarker eligible for new therapies or a clinical trial. As a result of our increased coverage, clinical support, and patient-centric mentality, we maintained our customer experience leadership in the market with a three point improvement in net promoter score, which is now at 70. Within our advanced diagnostic division, which includes pharma services, informatics and R&D, we continue to focus on acceleration of innovation in R&D. ADx gross margins improved 368 basis points over Q4 of 2022.

We built a robust product development roadmap to maintain a competitive position in solid tumor therapy, selection, MRD and heme, with the goal to gain market share and solid tumor and maintain our leadership position in heme. On the R&D front, we launched 12 new or upgraded assays across heme and solid tumor in 2023. Within informatics, we announced a collaboration to advance heme research and AI solutions with a data set that covers over a million patient lives across more than a thousand oncology clinics. The progress and innovation was displayed throughout the year as we presented new data at several conferences. We have focused on driving value creation from a financial perspective, and we are pleased that we have delivered even further margin expansion in Q4 with efficiencies driving enhanced operating leverage.

Our enterprise operation team has delivered yet another quarter progress and turnaround time, ending the year with 28% improvement over Q4 of 2022. We have now completed the consolidation of three international labs primarily into our Cambridge UK location. Earlier this year, we kicked off our LIMS project that will bring all of our prior acquisitions that were utilizing separate LIMS systems onto one platform, which will further enable our digital transformation strategy. We have now completed the first phase of user requirements and expect to begin to see the benefits of LIMS in the back half of 2024. Before I hand it over to Jeff, I do want to address the ongoing litigation regarding RaDaR. It’s our policy not to comment on ongoing litigation.

However, I will say that Neo is committed to serving cancer patients with MRD testing and we believe that we have several viable pathways to accomplish that. We’ve appealed the preliminary injunction to the Federal Circuit and have been granted an expedited hearing, which will occur on March 29th. We intend to vigorously pursue the appeal. In addition, we have moved for an administrative stay and a stay pending appeal from the Federal Circuit Court. That briefing was completed February 20th. Now, let me turn the call over to Jeff to review our Q4 and full year financials 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 double-digits growth over prior year. Fourth quarter revenue was $156 million, a 12% increase over the prior year and a 2.4% increase from Q3 ’23. Revenue growth was driven by growth in clinical test volume, a continuing shift to higher value tests and improvement in revenue per test, driven by business mix and revenue cycle improvements. Adjusted EBITDA improved 900% from prior year to positive $9 million. Q4 marks the fifth consecutive quarter that adjusted EBITDA increased from prior year. We generated significant operating leverage as revenue favorability flowed through to the bottom line with over 60% of revenue growth flowing to adjusted EBITDA.

Looking at Slide 9. Clinical Services revenue of $130 million was an increase of 20% year-over-year, driven by a 13% improvement in revenue per test and a 6% increase in volume. The growth and optimization of our sales force, along with the effective execution of the commercial strategy, resulted in higher volume growth. Turning to Slide 10. Average revenue per clinical test increased by 13% over prior year to $4.41 representing an improvement for the 11th consecutive quarter versus prior year, as we maintain focus on higher value tests and revenue cycle management initiatives. As we shared with you in the past, NGS is a strategic priority and accounts for over 25% of our total clinical revenue for the year. New NGS portfolio additions and the focused effort of our sales team continue to fuel accelerated NGS growth.

Turning to Slide 11, as we forecasted on prior quarterly calls, Advanced Diagnostics revenue declined 17% over the prior year in Q4, but was up 5% sequentially to $26 million. ADx revenue did grow each of the first three quarters of 2023 versus 2022. However, Q4 of 2022 was an unusually strong ADx quarter, with revenue growth of over 40% versus prior year. The expected decline in revenue was partially due to macroeconomic conditions and pharma R&D spend, as well as our decision to rationalize our global testing sites and low margin contracts. The focus on profitability and margin growth is driving performance in ADx, with adjusted gross margins expanding by 368 basis points versus the prior year. Similar to our clinical strategy in 2023, we are expanding our ADx sales organization in 2024 to further accelerate profitable growth and expect to see benefits from this initiative as the year progresses.

Looking at the income statement on Slide 12, adjusted gross profit increase 17.8% over prior year, and adjusted gross margin was 46.7% and improvement of 225 basis points over the fourth quarter of last year. Adjusted EBITDA was positive $9 million and $11 million or 900% improvement versus prior year. These significant improvements were driven by both higher gross profits and discipline cost management, which highlight the operating leverage in the business. Regarding operational expenses, sales and marketing expense was $18.1 million as we continued to increase our commercial investment, G&A was $59.8 million and R&D expense was $7.1 million. Turning to the balance sheet on Slide 13, we ended the fourth quarter with cash and marketable securities of $415 million.

We continue to make good progress in diligently managing our cash and are focused on accountability and discipline oversight of operating expenses. Cash flow from operations was up positive $18 million in the quarter and improvement of $21.5 million or 583% from Q4 of ‘22. Now let’s review our full year in 2023 financial results. Starting on Slide 15, for the year, we increased revenue by 16% over prior year, driven by increases in test volume, revenue per test, and NGS revenue in clinical services. Adjusted gross profit increased by 27.5% to $264 million as a result of higher revenue and effective cost management. Adjusted EBITDA improved $51.5 million versus prior year due to improvements in revenue and gross profit. Looking at the balance sheet on Slide 16, we ended the year with cash remarkable securities of $415 million.

Cash flow from operations improved $64 million or 97% from 2022. This strong performance in reducing our cash burn provides us with multiple avenues to address our upcoming convertible notes due in 2025. We expect to provide more clarity on our near term maturities on our Q1 2024 financial results call. Now turning to our 2024 outlook. We continue to see strong revenue growth and an increased NGS product mix and are very encouraged by our new and updated tests, which provide higher operating leverage to the bottom line. We have made the necessary and appropriate investments in our teammates to ensure that we have a world class group of people who are aligned with our mission of serving patients and saving lives. As we continue to build this business brick by brick, I am more confident in our future than ever.

Moving on to Slide 18. For the full year 2024, we expect revenues of $650 million to $660 million, representing 10% to 12% growth, and adjusted EBITDA to be in a range of $21 million to $24 million, representing 600% to 700% growth. In summary, 2023 represented a strong year of execution and financial performance, which positions us well to continue to momentum in 2024. We will continue to invest in growth initiatives, including investments in Sales force optimization and expansion in our clinical and ADx businesses, and increasing investments in R&D, product and business model innovation to further enhance our menu of tests. In addition, we’ll be making targeted investments and operating efficiencies, including automation and consolidating our multiple LIMS systems into one consolidated platform over the next 24 months.

These investments will drive long-term margin growth in the future and are reflected in our annual adjusted EBITDA guidance range. Based on our cost structure, the revenue growth in 2024 will drive operating leverage and our adjusted EBITDA growth will exceed our revenue growth. We anticipate the seasonality of our business to be reflected in each quarter of 2024. Therefore, we expect revenue to be down sequentially in Q1 ‘24 in a range of $148 million to $151 million, representing 8% to 10% growth over prior year, and expect our strategic initiatives to drive a higher growth rate as the year progresses. Based on our strong performance in 2023 and our confidence in our strategic initiatives in 2024 and beyond, we are increasing our long range revenue growth target and outlying years from 7% to 9% to 10% plus in our core business excluding MRD.

Chris Smith : Thanks Jeff. I’m very proud of our teams Q4 and full year progress including strong revenue growth of 16% for 2023, and significant improvement in adjusted EBITDA and cash flow from operations. We saw meaningful progress in the execution on our strategic priorities, and therefore we’re able to reach the high end of our raised guidance. Our guidance for 2024 and beyond reflects our confidence in our business. We believe we’re well on our way to becoming the leading cancer testing information and decision support company. We’ll continue to build on the foundation we have laid over the past several quarters to deliver long-term sustainable growth. I’m excited for our teammates and our customers, and most of all for the patients we serve on a daily basis. Thanks for taking time to connect with us today, and I’ll throw it back to the operator.

Operator: [Operator Instructions] The first question comes from Alex Nowak with Craig-Hallum.

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Q&A Session

Alex Nowak : Congrats on the results. I’m sure there’s going to be a lot of questions on the call around the guidance and digging into it, but I guess I want ask one around the FDA and the LDT and the potential of FDA coming out and issuing final rules. Depending on the definition of an LDT, Neo could have a wide variety in its portfolio. I’m just curious what, you talked a little bit in the past, but what does the team internally doing now, just in case the FDA does decide, we’re going to move forward and issue a final rule?

Chris Smith : Yes, thanks for that. Look, I mean obviously, like other companies in our sector are watching that closely. We’re on the HCLA Board and so I think we’ve seen it coming. Look, I would say a couple of things. I would say our progress or our focus on this started probably 18 months ago when we came together as a management team, and we started bringing in people who come from regulated backgrounds. So if you think about, like the folks on this call, the three division presidents, myself, Jeff, all of us come from FDA regulated backgrounds. I think we started to build the quality system that way. We moved to one quality system, we took all the acquisitions and moved them to one. All of our R&D projects are now under design control.

We’ve kind of been starting to operate believing this is coming. That being said, there’s still a lot to unfold, once a ruling comes out. I think there’s a lot of people in the industry who wonder if it’s constitutional. But from our perspective, we think it’s probably not, if it’s probably when. It looks like even if all these things occur, companies are going to have three to three-and-a-half years to get prepared. We feel very confident in our ability to manage that as it comes on. Look, a lot will depend on what is grandfathered and what is not, but I think we feel really good about our position in the marketplace. And we think for companies like us, it could be end up becoming a competitive advantage.

Operator: The next question comes from David Westenberg with Piper Sandler.

David Westenberg: So I really like the update on the — if I heard it right, you updated the long-term plan to 10% growth. Can you talk about specifically, because that’s a big 150 basis point at least swing there? What specifically is happening versus that long-term growth plan where you feel confident that this is not just trend, this is multiyear and long-term? And that’s assuming I heard that correctly.

Chris Smith: Yes, you did. I mean, Jeff put it in there at the end. I’ll it’s kind of like some of the best news, and it was like right at the end. I’ll say something and then maybe I’ll have Jeff comment more. But look, I think when we gave long-term guidance in April of last year, we were a pretty new management team and I think as we’ve come together and now had well over a year under our belts, we understand the levers to pull in the business much better. We understand the market significantly better. We understand things around revenue cycle management and accelerated growth and where the gaps are in the products. And so, we guided this year for ’24, 10% to 12%. But what we’re seeing in that core business, just because of the market dynamics, the market growth, our leadership position, the things that we can do, we feel very confident in that 10 plus number. But do you want to?

Jeff Sherman: Yes. I would add to that. We’ve made multiple comments about adding sales force people to our team and then sales force optimization. We are really focused on how do we help them be more efficient. And so we actually think we can get a lot of operating leverage just through technology and back office support for our sales people, both in our clinical team and in our ADx team. I think that’s another big component. We’ve been growing faster than the market across all modalities. We have a strong focus on NGS and are clearly seeing positive results there. I think our view is — our confidence level has increased based upon our performance in 2023, as well as, as Chris said, team overall just getting more comfortable with our teams, with our position in the market and where we’re investing dollars to raise our long-term growth target to that 10% plus.

Chris Smith: Yes. And David, I’d say the other one. I mean, if you look at NGS, especially solid tumor, we’re incredibly under indexed and you can see that business is growing rapidly. And that market is still relatively penetrated, but growing double-digits. So I think there are a lot of factors that we feel really good about where we are from a position perspective.

David Westenberg: Great. That’s a great segment and a second one because I think you’re launching into liquid. Could we expect an accelerated timeline into liquid or like a market traction just given what you’re doing right now in hematological malignancies and then you transfer that into solid tumor, which has been growing really fast?

Chris Smith: Let me obviously, a lot going on, but that sits in kind of the R&D group with Vishal and under development. Vishal, do you have anything you want to share just kind of what we’re doing with liquids and some of the products that we’ve disclosed?

Vishal Sikri: So on the liquid side, we will plan to launch CGP assay for liquid biopsy going into 2024, probably towards the second half of 2024, but we’ll accelerate on the clinical side also that we’re looking into. But I do think there is the place for liquid on both the pharma and the clinical side, which we’ll see an acceleration in terms of penetration into that market, especially on the pharma side in particular because we’re hearing a lot from pharma companies that they just don’t have enough tissue to spread along with all the testing they want to do. So this really gives them the opportunity to choose both liquid or solid from that perspective.

Chris Smith: And you’ll probably see that in pharma in late half of the year and then moving into clinical in early ‘25.

Operator: Up next, we have Puneet Souda with Leerink Partners.