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spk00: Good day, and thank you for standing by. Welcome to the Burning Rock Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in listening mode. Please be advised that today's conference is being recorded. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and as defined in the U.S. Private Securities Litigation Reformed Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, target, confident, and similar statements. Statements that are not historical facts, including statements about burning rocks, beliefs, and expectations, are forward-looking statements. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties, and other factors all of which are difficult to predict, and many of which are beyond Burning Rock's control. Forward-looking statements involve risk and certainties and other factors that could cause actual results to differ materially from those contained in any such statements. Burning Rock does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under applicable law. I would now like to hand the conference over to your speaker today, Mr. Yushan Han. Please go ahead.
spk02: Thanks, Shannon. This is Yuzheng Han, the CEO and founder of Burning Rock. And today you also have our CFO Liu Li and CTO Zhou Zhang online. So very glad to share the annual financial report with our investors. So let's turn to page three that explains how we started and how we evolved. We started from a server-based action from 2014. And then with the development of NGS technology, we expanded our market to early detection, to MRD, and also to biopharma services. And let's turn to page four. So with the microenvironment changes in the past three years, we have a makeup strategy dedicated to to the efficiency gain driving towards profitability. And we want to deliver in the early last year, we want to deliver the result on driving sales efficiencies, improving gross margin, reducing GMA expenses, and also reducing R&D expenses. And all the target is making the company profitable first. And in terms of the driving sales efficiency, we're going to, we plan to increase the sales productivity perhaps, and also with the capital market cooling down, we benefit from more rational industry competition. And the second is improving gross margin. So the first thing we do is we have a scale of sales. So we leverage that on that. And also we delivered our margin improvement project, including cutting various sales and marketing expenses and also cutting the cost of goods by bargaining with the suppliers. The third is reducing GMA expenses. We cut the overhead lowering fixed cost base. And the fourth thing is reducing R&D expenses as our major clinical programs such as multi-cancer early detection complete and the burning rate is cooling down. And so in terms of new investment, we are very disciplined counting on the MPV carefully, but we still invested in MRD and also CDX and also MCD in a conservative way. So page five explains how we achieved about driving sales efficiency. You can see that in the Q2 of 2022, we reached the highest point of of sales expense percentage to a 77 percentage. And then, from there, we gradually and significantly drove the number down to the Q4 of 2023 to 38 percent. So, there is a significant change, and we expected in the coming 2024, the number will go down further. that increased our sales expense efficiency increased a lot. In page six, index and our non-GAAP gross profit as percentage of revenue. We, you know, cost of goods is a significant cost of NGS industry, especially for OnCollege. So we continuously to replace the uh uh uh two suppliers uh and also bargain with a shipment and other issues in terms of uh in terms of cost of goods so we can see that the gross margin continues to increase uh from the 72.5 percentage in 2021 to 74.3 percent percent of 2023 and we expect that that rate the gross margin will continue to grow in 2024. In page 3, I explained how we reduce our GMA expenses. We can see that the major cut is reduction in headcount and related costs. And then the professional services fees such as legal fees And the third thing is the reduction in office spaces. We closed part of the Shanghai office. And also in 2024, I think we can see further reduction by bargaining with the owner of the land to see the reduction in office space. And there's other reduction as well. So overall, in 2023, we can see that the G&A expenses reduced in terms of RMB of around over 60 million. So in page eight, let's see page eight, and from page eight to page, I will hand it to our CFO, Leo Lee, to explain the chart and numbers. Leo, please.
spk01: Sure. Thank you, Yusheng, for taking us through the initiatives we've taken through and what has that translated into the P&L lines. On page eight, we're trying to supplement that by starting from operating profit and break that down into what is the commercial aspects versus the investment in R&D, and also what's cash and non-cash. So on page eight, we start with our reported operating profit of a negative 166 million RMB. We first add back our R&D expenses of 73 million RMB. So this is to separate what's already at commercial stage versus what's in the investment. So first we take our R&D expenses. Then we take out non-cash items, the three major items are share-based compensation, depreciation and amortization of our fixed assets. And lastly, the provision of receivables and contract assets. So these three, we actually expect to decrease going forward. But here, just for illustrative purposes, we take out these three non-cash items and get to where we are on the commercial business, excluding non-expenses and non-cash provisions. And on that measure, we are at a positive 4 million RMB for the fourth quarter, of 2023. So on that basis, excluding R&D and excluding non-cash costs, we are at profitability already in the fourth quarter of 2023. And we expect this to further improve as we head into 2024. Page nine talks about our cash position. So this is a slide that we have been going through on each of our quarterly calls. At the end of the year 2023, we ended with a cash balance of 615 million RMB. In the year, we had cash outflow of about 265 million RMB. This is a significant reduction compared to the cash outflow of 532 million RMB in the year of 2022. So a lot of Yusheng has described did deliver to results and positive impact on reducing operating cash outflow for the year 2023. Going forward, there are still a few very selective investment areas that we want to keep on going. and we expect the commercial operation to reach profitability in the first half of 2024. So these two factors combined, we expect an outflow in a range of 150 to 200 million RMB in a year 2024. We expect this outflow to further decrease in a year after 2024. So on that basis, we have very good visibility on our cash runway for at least three years. So reducing operating cash outflows, ample cash balance, and continued progress towards profitability. That's what we're trying to show by numbers here on page nine. Then page 10 breaks into our P&L in more details. First, looking at the top line, which is at 121 million in aggregates. And by the different segments, first, central lab had a substantial decrease. This is our active efforts going away from central lab, but also industry change that we saw starting July in 2023. So fourth quarter for the central lab is pretty much a continuation of the trends that we described on our previous earnings call. So we expect in-hospital to take greater and greater share going forward. For the in-hospital line, we did have one-off adjustments in the fourth quarter. That's described in detail in a footnote. And if we take out that one-off adjustments, we are pretty much flat or negative 1% growth in the fourth quarter in 2023 compared to the fourth quarter 2022. And even for the adjustment, if we look at the two hospitals related to that adjustment, their underlying demand remains robust and roughly stable. So we're not seeing deterioration on the underlying business demand, but it's mostly to do with one-off adjustments. Our pharma segments grew very well in the fourth quarter. It grew double digits in the fourth quarter, and it grew double digits in the year of 2023. It grew 59% in the year of 2023, and we expect continued growth for that line going forward. Now, on the operating expenses, we have taken time to go through that in the previous slides, so I'm not going to walk through them in detail. And finally, to note here, I think on the operating cash outflow side, We have seen improving operating cash flows quarter over quarter, and that is the result of what Yusheng has described of a number of projects and initiatives that we have taken through. And our operating cash outflows have improved significantly throughout the year in 2023. So that concludes our prepared remarks. For any questions, please feel free to reach out to us. And that would conclude the call here today. Thank you, everybody, for joining us today.
spk00: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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