Earnings Labs

OraSure Technologies, Inc. (OSUR)

Q1 2024 Earnings Call· Wed, May 8, 2024

$3.04

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Transcript

Operator

Operator

Good day, and thank you for standing by. Welcome to the OraSure Technologies First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Jason Plagman, Vice President of Investor Relations. Please go ahead.

Jason Plagman

Analyst

Good afternoon, and welcome to OraSure Technologies' First Quarter 2024 Earnings Call. Participating in the call today for OTI are Carrie Eglinton Manner, our President and Chief Executive Officer; and Ken McGrath, our Chief Financial Officer. As a reminder, today's webcast is being recorded, and the recording can be found on our Investor Relations website. Before we begin, you should know that this call may contain certain forward-looking statements, including statements with respect to revenues, expenses, profitability, earnings or loss per share and other financial performance, product development, performance, shipments, end markets, business plans, regulatory filings and approvals, expectations and strategies. Actual results could be significantly different. Factors that could affect results are more -- are discussed more fully in OTI's SEC filings, including its registration statements in the annual report on Form 10-K for the year ended December 31, 2023 or quarterly reports on Form 10-Q and its other SEC filings. Although forward-looking statements help to provide more complete information about future prospects, listeners should keep in mind that forward-looking statements are based solely on information available to management as of today. OTI undertakes no obligation to update any forward-looking statements to reflect events or circumstances after this call. With that, I'm pleased to turn the call over to Carrie.

Carrie Eglinton Manner

Analyst

Thanks, Jason, and thank you to everyone for joining us today. We are pleased to provide an update on the progress OraSure's making on the three pillars of our strategic transformation. And before I talk about the quarter, I just want to frame what's strengthening our foundation, elevating our core growth and accelerating profitable growth look like in our business. Strengthening is our organizational restructuring and cost rebalancing that has improved our balance sheet and cash flow generation. Elevating is the focus on our core capabilities and leveraging these strengths internally and in strategic partnerships to expand our product portfolio and the market segments we serve. Accelerating is about investing for profitable mid- and long-term growth while our end segments rebuild momentum. A few notable highlights during the first quarter include, we delivered Q1 revenue that exceeded our guidance ranges for both core revenue and COVID-19 products. As part of strengthening our foundation and our enterprise-wide focus on operational efficiency, we are taking next steps to streamline our operations, including in-sourcing, third-party manufacturing activities into our Bethlehem facilities, exiting our microbiome laboratory and analytical sequencing services business known as Diversigen, and consolidating our Novosanis site in Belgium into other locations. These initiatives are expected to result in significant cost savings over the next 2 years and are important steps to align around our strength rightsize our cost structure and achieve our target to breakeven and operating cash flow from our core business by the end of 2024. Next, our strategic partnerships with Sapphiros and Diagnostics Direct that we announced earlier this year are off to a strong start. And with our healthy balance sheet, we are investing in our innovation road map and partnerships to leverage our existing strength in order to position OTI for profitable growth. Starting with operating…

Kenneth McGrath

Analyst

Thanks, Carrie. I'm happy to discuss our results for the first quarter of 2024 and provide updates on our financial outlook. In Q1, we delivered total revenue of $54.1 million. Core revenue, which excludes COVID-19 products, was $31 million in the first quarter. Within core revenue, our diagnostic products generated $16.4 million of revenue in Q1 and decreased 4% year-over-year. Looking at molecular sample management solutions. Revenue in the first quarter of $10.8 million decreased 16% on a year-over-year basis, which was consistent with the expectations embedded in our guidance range. COVID-19 products, predominantly in InteliSwab contributed $23.1 million of revenue in the first quarter. Purchasing patterns under our contract with the U.S. government are slightly stronger than forecasted. We expect to fulfill the remaining $17 million of our largest contract with the U.S. government during the second quarter. From a gross margin perspective, our GAAP gross margin in the first quarter was 44.5%. Non-GAAP gross margin was 45.2% in the quarter, which was consistent with our expectations. While we anticipate some quarterly fluctuations in gross margin percentage during 2024 related to the timing of the restructuring initiatives we've discussed and the tapering of InteliSwab volumes, we continue to believe we can drive additional gross margin expansion over the coming years. And we remain focused on delivering efficiencies across our enterprise, including consolidating facilities drive and procurement savings and further leveraging our automation capabilities. Shifting to our operating expenses. Our GAAP operating expenses in the quarter were $31.2 million, which includes $2.8 million of noncash stock compensation expense, $3.3 million for impairment of assets related to Diversigen and Novosanis and $173,000 for reduction in workforce severance. Our GAAP operating loss in Q1 was $7.1 million and non-GAAP operating loss was $300,000. As Carrie discussed, as part of our transformation journey,…

Carrie Eglinton Manner

Analyst

Thanks, Ken. As we detailed today, we are taking important steps to continue to strengthen our foundation by rightsizing our cost structure, streamlining our operations into our centers of excellence, and focusing our investments in areas that leverage our existing strength in order to accelerate our core growth in the mid- to long term. Overall, we are confident that OTI is well positioned to execute on our vision of transforming health through actionable insights, powering the ship that connects people to health care wherever they are. And our mission of improving access, quality and value of health care with innovation and effortless tests and sample management solutions is aligned with where health care is headed in the U.S. and globally over the coming years. With that, I'm pleased to turn the call back over to the operator for Q&A. Operator?

Operator

Operator

[Operator Instructions]. Our first question comes from the line of Jordan Adler with Evercore ISI.

Jordan Adler

Analyst

Maybe for the first one, you guys have mentioned the strengthening of your balance sheet as a priority. Can you talk to some of the opportunities that you've been targeting, whether it be for partnerships and/or inorganic opportunity?

Carrie Eglinton Manner

Analyst

Yes. We have announced 7 partnerships, Jordan, that I know you're aware of, but that we're really excited about. So we've talked every quarter about this journey and I love that you asked about it. But starting with that strength in the foundation, the point really is to position us for investing in the future. That's internal and as I just reiterated, the sort of strategic partnerships that we've talked about with Sapphiros that span our portfolios with Diagnostics Direct that launches and allows us to enter the U.S. Syphilis Testing Market and other opportunities. We have five others. I won't list them all, but opportunities like that, that allow us to plug directly in our strength today, our strong commercial team, the great customer relationships we have and provide more comprehensive product offering. So we are very interested in the M&A opportunities, but we think partnerships are a really good way to create that momentum and build on the success that works while being very open, we're investing internally, but also being very open to other M&A that makes sense for our business.

Jordan Adler

Analyst

Understood. And maybe one quick follow-up. You mentioned the restructuring initiatives that are expected to result in a $15 million of annualized expense reduction. You also mentioned some additional operational efficiencies that you're looking to utilize over the course of the midterm to longer term. Can you talk about some of the additional levers that you have left to pull following these three actions that you mentioned this quarter.

Carrie Eglinton Manner

Analyst

Yes, absolutely. So thematically, you'll hear the site consolidations in those three actions, right, really bringing into our centers of excellence, some -- our facilities globally and even from in-sourcing third-party manufacturing. Some of the other operating efficiency we get in the center of excellence are things like the automation that we -- capabilities we built during COVID in our government-funded Opus Way facility that we can translate to other platforms. So we talked about the three actions site consolidation, then you get those next steps like automation. Another example on all this list, this one because it's another big deal, is like repackaging and the redesign for smaller packaging, we had announced those significant gross margin improvement. And our InteliSwab product last year, we're making those types of changes into our HIV product line as well. So it's those types of operational efficiencies, we use site consolidation and then we leverage the capabilities we've built, and we extend that into the rest of our portfolio. And we've said this, but since we've only -- looked like we got two questions this time, I'll just add. We've also brought a process improvement mindset across the business. Implemented a Lean Six Sigma methodology have trained well over 100 people in the organization as white belts and every function now has expertise and process improvements. And so we're really thinking about this holistically planning for the future so that we can invest in innovation for the long term.

Operator

Operator

Our next question comes from the line of Jacob Johnson with Stephens Inc.

Unknown Analyst

Analyst · Stephens Inc.

This is Mac on for Jacob. Just a few quick ones for me as well. With regards to the wind down of Diversigen, it appears this is mainly a cost decision. But can you discuss why this offering was no longer strategic, and will it have an impact on anything else within the broader portfolio?

Carrie Eglinton Manner

Analyst · Stephens Inc.

Yes. We were excited in acquiring the Diversigen and CoreBiome 5 years ago with the potential of microbiome. As we talked about in the scripted remarks, COVID -- after a really good start and growing the revenue in the beginning, COVID really put a lot of pressure on microbiome as an industry. And we did not see that sort of path to a scaling that we think is necessary in sequencing services. So while our core strength really is in the device side, on diagnostic devices, and sample management collection devices, the sequencing services at the scale we were at just meant that we were losing significant dollars and that, that path to a build was far enough out that we have -- are just so focused on our core strength. We think it makes more sense to wind that down, save the operating cost and overall expense and focus on our device strength. So what it means, Mac, is microbiome kits, we're trying to emphasize are still very much within our sample management strategy and the customers will serve in that space. So we do not think it has negative impact on other parts of the business. In fact, we think it allows us to invest in our core, leverage our core strength, that includes microbiome kits, but it just means the sequencing services that require scale. We can take that savings and invest it in stronger parts of the business.

Unknown Analyst

Analyst · Stephens Inc.

I appreciate the color there. And just in light of everything that's -- all the moving pieces within the portfolio at the moment and your expectations for growth at the end of the year, how should we think about cash flow trending as you complaint the wind down of inventories and accounts receivable.

Kenneth McGrath

Analyst · Stephens Inc.

Yes. We mentioned on a previous call that we think there is upside for cash flow when it comes to our accounts receivable and inventory. We saw some of that in Q1, and we'll continue to see more. I think what we stated in the past was we expect our inventory and accounts receivable to be in that 30%, 35%, mid-30s range on an ongoing basis from a cash flow perspective. And then also, our goal is to get -- and our target is to get to our core business being cash flow from operations breakeven. And with that, we think we're in a pretty strong position from a cash wise. Where we would then deploy the cash, if there's any opportunities to invest, as Carrie mentioned, both internally and externally in opportunities for growth.

Operator

Operator

I'm currently showing no further questions at this time. I'd like to turn the call back over to Carrie Eglinton Manner, for closing remarks.

Carrie Eglinton Manner

Analyst

Thank you. Thank you to everyone for joining, for your interest, and we look forward to our follow-up. With that, we'll close.

Operator

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.