Earnings Transcript for HLTH - Q1 Fiscal Year 2022

Operator: Good day and welcome to Cue Health's First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers ' presentation, there will be a question and answer session. [Operator Instructions]. As a reminder, this call maybe recorded. I would like to turn the call over to Caroline Corner, Investor Relations. You may begin.

Caroline Corner: Thank you, operator. Welcome to Cue Health's First Quarter 2021 Earnings Call. Joining me on today's call to discuss our results are Ayub Khattak, Chairman and Chief Executive Officer, and John Gallagher, Chief Financial Officer. Our prepared remarks will be followed by a Q&A session. During this call, we'll be making forward-looking statements, including statements related to the expected performance of our business, future financial results and guidance, strategy, long-term growth, and overall future prospects, as well as the impact of the COVID-19 pandemic. We wish to caution you that such statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those we projected or implied during this call. In particular, those described in our risk factors including in our final prospectus related to our initial public offering dated September 23, 2021, and in our March 31, 2022 Form 10-Q that will be filed following this call. You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of the date hereof, and Cue disclaims any obligation to update any forward-looking statements, except as required by law. Our discussion today will include non-GAAP financial measures. These non-GAAP measures should be considered in addition to, and not as a substitute for, or an isolation from our GAAP results. Information regarding our non-GAAP financial results including a reconciliation of our historical GAAP to non-GAAP results, can be found in our earnings release, which was furnished with our Form 8-K today with the SEC and may also be found on our Investor Relations website at investor.cuehealth.com. Finally, a recording of this call will be available on our Investor Relations website shortly after this call has ended. With that, I would like to turn the call over to Ayub for his comments on first quarter business highlights. Ayub?

Ayub Khattak: Thank you, Caroline and thank you everyone for joining us today. This quarter, we continue to make great strides towards expanding access to the health care system, by combining our accurate diagnostics with our integrated virtual care platform. I'm pleased with our quarter one, 2022 financial results with $179.4 million revenue, almost entirely in the private sector. This performance underscores our sales teams strong commercial execution. In one year, our private sector revenue grew from $2 million in quarter one, 2021 to $176 million in quarter one, 2022. Today I'm going to dive directly into the updates and our key growth drivers. As a reminder, these are first broadening our customer base. Second, test menu expansion and third, building out our digital services and capabilities. Our first growth driver of expanding our installed base is the key focus, because the Cue Reader will run all of the future tests in our pipeline. I'm particularly proud of the growth of our installed base to nearly a quarter million readers with over 72,000 readers shipped in the quarter. These leadership predominantly to the private sector, expanding our installed base in enterprise provider and direct-to-consumer spaces. Cue's also now used to test customers in over 1,000 retail pharmacies and distributed by most major health care product distributors including McKesson, MEDLINE, Henry Schein, and Cardinal Health. Progress on our second growth driver menu expansion continues to go very well. We're on track to meet all the pipeline milestones we laid out last quarter. I'm thrilled to tell you that last week we submitted our first full De Novo application to the FDA for the Cue COVID-19 molecular test. If FDA cleared, we would likely be the first fully cleared molecular test for at-home use for infectious disease testing of any kind. This is a real milestone in the movement of healthcare information access into the home and into the point-of-care. And it paves the way for future submissions as we seek to address a wide range of diseases and conditions. We are in the final stages of our Flu De Novo Clinical Studies and plan to submit to the FDA in the third quarter for full clearance. Our flu plus COVID multiplex test is ahead of schedule. We are slated to begin clinical studies during the second quarter through our existing network of clinical sites. RSV is on track to begin clinical studies in third quarter. Our Chlamydia + Gonorrhea multiplex test is progressing well, And as expected, we plan to begin clinical studies in the second half of 2022. I'm extremely proud of the R&D team's accomplishments in a short timeframe. The expansion of our digital capabilities is our third growth driver. We continue to invest heavily in building technology enhancements for our integrated care platform. These capabilities like telemedicine and prescription delivery services make our diagnostic results more actionable, which we believe translates to better outcomes for patients. We're excited about our upcoming launch of test-to-treat initiatives on the Cue platform. This is a defining moment for Cue and healthcare delivery in general. Cue customers will soon be able to leverage virtual care and request delivery of prescriptions to their home within hours, all in the Cue health app. We expect this to launch in the second half of 2022. We look forward to updating you on this next quarter. Our software development team continues to lay the foundation for more integrated virtual care and enhance the ecommerce experience within the Cue Health app. In summary, we're proud of the progress on all of our growth drivers. With continued expansion of our customer base, test offerings and software and services, our team is making great strides towards our mission of making healthcare more timely and accessible. I look forward to updating you next quarter on our Flu De Novo submission, and in app test-to-treat capabilities. As we continue to build out the business, we're excited by what we have in store. Lastly, I'd like to share a touching story about how our products have benefited our customers. As you know, many of our customers are private companies who provide Cue to their employees. We recently learned about an individual whose Mom was diagnosed with Stage-4 cancer. Thankfully, the mom is cancer free today, but she was going through over treatment during the pandemic. This employee also a two members who are essential workers. By testing with Cue, they discovered three family members had COVID during the holidays and took action to avoid any contact with their immunocompromised mother. Since then, she reached out to thank you for the ability to test, isolate and prevent exposing her mom. Stories like this that make me so proud of our team and what we do, putting actionable health information in people's hands to make a difference in their lives. With that, I'll turn it over to John to walk through our financial results. John Gallagher Thank you, Ayub, and good afternoon everyone. In Q1, we had total revenues of $179.4 million, a significant increase from revenues of $64.5 million in Q1 of the prior year. The Omicron surge led to strong demand for testing throughout the first half of the first quarter of this year. Notably, private sector revenues comprise the majority of our total revenue achievement in the quarter at $175.8 million, or 98% of sale. This is up from $2.4 million in Q1 and up from $104 million in the prior quarter. Public Sector revenues were $3.6 million during the quarter. Ayub mentioned earlier, that we shipped over 72,000 readers in the quarter, bringing our total number of readership to over 235,000 units as of March 31, 2022. Please note that as we onboard new customers, and because of the linkage to COVID prevalence, we expect reader sales to fluctuate quarter-to-quarter. Disposable test cartridge sales in the quarter were $163.2 million. Moving down the P&L, product gross margin was 51.1% for the first quarter reflecting operating efficiencies versus the prior quarter as compared product gross margin was 53.4% in Q1 of 2021. We've mentioned our ability to navigate global supply chain constraints and we continue to be successful in obtaining necessary components and meeting our customers expectation for supply of our product. Operating expenses for the first quarter of 2022 were $89.9 million, compared to $19.7 million in the first quarter of 2021. Sales and marketing expense was $34.2 million in the first quarter. We ramped our spend as planned with a focus on digital marketing and advertising. R&D expense was $28.8 million in the first quarter. Again, as planned, we have ramped investment in R&D with a focus on menu expansion and software development. G&A expense was $26.9 million during Q1 of this year. We continue to be profitable on the bottom line net income for the first quarter of 2022 was $2.8 million, compared to $13 million in the first quarter of 2021. This translates to diluted EPS of $0.02 in the first quarter versus $0.08 in Q1 of the prior year. Moving to the balance sheet, we ended the first quarter with cash of $426.5 million, an increase of $16.6 million from year end 2021. This cash positions us with a strong balance sheet and the ability to invest in the business to execute on our strategy and vision. I'd now like to move to our guidance. For the second quarter, we expect revenues of $50 million to $55 million. As we've said, COVID prevalence is difficult to predict and we're not providing full year guidance, but similar to this quarter we will provide an update on the next call. Like Ayub, I am pleased with our progress on the three growth drivers, most notably our COVID-19 de novo submission and the acceleration of the flu plus COVID multiplex clinical studies starting in Q2. These are important milestones for Cue as we continue to make progress on the menu. I look forward to updating you on our continuing commercial success and consistent execution on these growth drivers. With that, I would like to thank you for your attention. And I'll turn the call over to the operator for questions.

Operator: [Operator Instructions] Our first question comes from Tejas Savant with Morgan Stanley. Your line is open.

Neel Ram: Hey, guys. This is Neel on for Tejas. So I just wanted to get started on the guide. So the 2Q midpoint implies around a 70% drop in private sector revenue. Can you speak to some of the month-over-month demand trends you're seeing for COVID testing on the private sector side?

John Gallagher: Hi, Neil, it's John. Yes. As we look at the quarter, so on Q2 we're providing guidance of $50 million to $55 million. And what we're seeing there is that, the majority of that revenue is contracted. And then we're also looking at run rates, and then we look at the rest of the quarter for how we think it'll play out. And that's how we landed at that number. I'd take you back to what we said on the last call, as we were exiting Q1, we saw testing volumes lower at that point in time, which shouldn't be a surprise to anybody at this stage. And so, as we stepped through April and into May, we took that into account coupled with the contracted volumes and got to the number that we provided as guidance.

Neel Ram: Got it. That's very helpful. And then, I think last quarter, you announced the official commercial launch of the key reader and test in Canada and Singapore. How is commercial traction progress internationally? And are you factoring U.S. sales into your existing guidance?

Ayub Khattak: Yes, I mean, so we've been very successful with, getting approvals internationally. We have them -- as you noticed in Canada and Singapore, we also have in India, and we have a CE mark in Europe. So those are important for us as we seek to globalize Cue on an ongoing basis. The sales to date so far have been predominantly in Canada. And we've seen that associated both with our enterprise clients, as well as selling directly into the country. And that's part of the model actually. When you think about international, the value proposition that we offer is one where we have enterprise clients that have global employee bases. And as they seek to roll out the Cue platform, across their employee bases, that will take us into different geographies. And some of those geographies that are important and notable to us would, in fact, be Canada and Singapore. And we'll provide more of an update on that as we move forward. But the international peace for the moment is, is not it's not a significant amount in relation to the guidance that I just mentioned.

Neel Ram: And so switching to the public sector, how have conversations progressed with DoD on contract renewal? And how should we be thinking about the deferred revenue adjustment in terms of how it may impact the P&L in the second half of the year?

John Gallagher: Yes. So we continue to be in discussions with the government. We are in an RFP process, as you recall correctly. We don't have an update today on the status of that. So it's not bad news, it's not good news. It's just continues to be the same. So, we'll be eager to give you an update as soon as we have more information there. As it relates to the deferred revenue associated with the initial contract with the DoD then that deferred revenue is not a portion of what I just gave us as guidance. In fact, that deferred revenue won't be recognized until some kind of decision has been made. And so, you should think about that. There's not any in Q1 and there's none contemplated in what I just described for Q2.

Neel Ram: Got it. And one last for me. You previously highlighted expansion to distributors such as Cardinal, McKesson, MEDLINE and HSIC. Which of those do you typically see the most traction with?

Ayub Khattak: Well, some of them we've had for longer than others. We've been with Henry Schein now for the better part of a year and a half whereas Cardinal and McKesson have been added just recently. So naturally, there's a bit of an uptake there. But I think probably the important takeaway here is that as you look at the stable of distributors right now, we have all the important players in that space. And we're very pleased to have those contracts because, when you look at the provider customer category for us as accessing the point-of-care. And we attack that in three ways. One is through large healthcare networks. So that's like think of the recent ads that we had during Q1, Johns Hopkins, University of Pittsburgh Medical Center as examples. That's the first way that we attack is through our agreements directly with large healthcare networks. The other way is through the distributors that we just talked about. So that allows us to access more fragmented end users, I think doctor's office, urgent care clinics, and that's why we've added these distributors. But then the third piece too, which is more recent for us, but it's an important part of how we get to point-of-care is related to retail pharmacies. And so our agreement with Albertsons, although still early stages, because it's just began. We started with 900 pharmacies, we're now over a 1,000. And that is also an important way for us to access the point-of-care market.

Neel Ram: Its very helpful color. Thank you.

John Gallagher: All right. Thank you.

Operator: Our next question comes from Matt Sykes with Goldman Sachs. Your line is open.

David Delahunt: Hey, guys, this is Dave on for Matt. Congrats on the strong quarter. So, totally understand no full year guide. But any qualitative color you could give us on your outlook for the rest of the year, the cadence, how you're forecasting the upcoming virus season?

John Gallagher: Hi, Dave. Yes, thanks. So, as we look ahead, I mean, like you said, we're going to provide full year guidance. I think that's not a surprise, as you said Dave, given the unpredictable nature of the virus and the prevalence of it. So, we guide to $50 million to $55 million. We've been operating the business profitably. In fact, in Q1 did $0.02 of EPS. So we're proud to be able to be watching expenses, continuing to post a strong gross margin. And then, the other thing I'd want to add is that cash, we have $426 million of cash on the balance sheet, that's actually an increase from year end. And that's because of the profitable nature that we're running the business right now that we're actually able to generate cash rather than burn it during Q1. And so that $426 million as you look forward, so to your question about as we look forward, is sufficient, more than sufficient cash to allow us to continue to operate the business, invest in menu expansion and our technology capabilities. And that's I'd say about looking forward for us.

David Delahunt: Got it. Yes. Definitely one of your strengths, that's strong cash position. Thinking about the software services side of the business. Could you give us a little bit more color there, on the progress there? What you're working on the demand you're seeing? And how you see that evolving and progressing going forward?

John Gallagher: Yes, absolutely. So the near term, what we're really excited about is the ability to really close the loop from diagnosis to treatment. We think that we have an opportunity to really just paradigm shift and starting with COVID, and release the antivirals linked to COVID. Mi will make that pathway of going from diagnosis to treatment, really streamlined. And so that's the most exciting thing for us, because it's foundational, because it is you think, We said, we're making really good progress on flu and flu COVID and RSV, and Chlamydia gonorrhea. So this patterns, paradigm shift of diagnosis to treatment all in your own home, or at the point-of-care, but very streamlined. This new paradigm shift is foundational and really think has an opportunity to become more default way of dealing with those respiratory symptoms or anything related to sexual health, just being able to turn to Cue and get a result and accurate molecule result, communicating that to a physician, and then getting things delivered to you at home where you won't be necessarily infecting others. I think that's a really good model for the future. And so, we expect to be able to see some significant progress there early in the second half of this year. So that's the next major milestone that we're really looking towards as a very significant moment for us.

David Delahunt: Awesome. Yes, definitely big opportunity for you guys. Last one for me. Any additional call you can give on the outlook for the customer mix between D2C private enterprise, government and providers?

John Gallagher: Yes. As we look at the customers, I mean, we recognize that, as you look at Q1, then it's predominantly or almost entirely at 98%. It's our private sector revenues, which is comprised, as you're saying, gave up the provider category, the enterprise category and direct-to-consumer. We've been pleased with our progress in each of these categories. I already talked about point-of-care some. We know that the D2C continue. We continue to be pleased with our progress there. It does track to COVID prevalence as you would expect. And then on at the enterprise side, we've added important customers and we're continuing to talk with those customers about renewals going forward. So we're not at a point quite yet where we would split them out individually, but you can tell from our press releases, and the namings of new customers that we're adding here in each of the categories what the progress is that we're making.

David Delahunt: Got it. Thanks guys. Congrats on the good work.

John Gallagher: Thank you, Dave.

Operator: [Operator Instructions] Our next question comes from Mark Massaro with BTIG. Your line is open.

Unidentified Analyst: Hey guys. This is Vivian for Mark. Thanks for taking the question. So, how does your partnership funnel look on the private and public side? Last quarter, you had discussed signing individual states for COVID testing. So, just curious as to how those conversations are progressing? Thanks.

John Gallagher: Hi, Vivian. Yes, that is correct. So, it was it was about 2% of our revenue on the quarter, or $3.6 million was the public sector revenue, a portion of that is comprised of us working directly with states. So as you can imagine, the good news here is that the states have an installed base. Thanks to the contract that we had with the DoD when we delivered 6 million test units and 30,000 readers, which got us into many, many states. But it does take some time. So we're seeing demand signals from some of those states. But it does take some time to directly contract with those states. And so, I would say that it'll take a bit more time for that to continue to play out. And in the meanwhile, we are awaiting word on the RFP that we have directly with HHS and DoD. So that's how to think about the public private sector breakout. So in the meantime, the way to see it is, our private sector revenues comprised 98% of our revenues on Q1. And that -- so what that translates to us, so it was tremendous growth, when you look at that category alone, meaning, the private sector revenues in Q4 were $104 million, up to $176 million in Q1. So that's 70% growth that we saw just in the private sector alone. So, we feel really good about the private sector for that reason, across each of the categories within it. And then stay tuned for more on the public.

Unidentified Analyst: Okay. Got you. Thanks so much. And any updates you could provide on D2C pricing? How that squaring competitively? And just any other comments you have on the uptake since the Q4 launch? Thanks.

John Gallagher: Yes. So this is a category that we've been very excited about. We launched it, as you said, Vivian, in mid November. So we're really just a couple of quarters into it. So I'd say, it's, it's still, we're still in the early stages of direct-to-consumer. We did take a price action back in January, where we lowered price for direct-to-consumer, both on an a la carte and a membership basis. And the reason why we took that action is one of the key points of feedback that we received related to direct-to-consumer was just accessibility, how can we broaden the accessibility of Cue across what is a very, very large consumer segment. And so, for that reason, we took the price action, and we've been we've been pleased with the uptick that we that we've seen. But as I mentioned before, direct-to-consumer is going to track with COVID prevalence and that's part of the reason why as we exited Q1 and even in April and through May, we're seeing lower testing volumes there, hence the guidance of $50 million to $55 million on Q2.

Unidentified Analyst: Perfect. Thanks so much for taking the question.

John Gallagher: Thanks, Vivian.

Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a great day.