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spk05: Good day and welcome to the Q-House first quarter's 2022 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then one on your touchstone telephone. If anyone should require assistance during the conference, please press star then zero to reach an operator. As a reminder, this call may be recorded. I would like to turn the call over to Caroline Corner, Investor Relations. You may begin.
spk04: Thank you, Operator. Welcome to QHealth's first quarter 2022 earnings call. Joining me on today's call to discuss our results are Ayub Kattab, 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 included 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 Q disclaims any obligation to update any forward-looking statements except as required by law. Our discussion today may include non-GAAP financial measures. These non-GAAP measures should be considered in addition to and not as a substitute for or in 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 8K today with the SEC and may also be found on our investor relations website at investors.qhealth.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 Abe for his comments on first quarter business highlights. Abe?
spk03: Thank you, Caroline, and thank you, everyone, for joining us today. This quarter, we continue to make great strides towards expanding access to the healthcare system by combining our accurate diagnostics with our integrated virtual care platform. I'm pleased with our quarter one, 22 financial results with 179.4 million revenue, almost entirely in the private sector. This performance underscores our sales team's strong commercial execution. In one year, our private sector revenue grew from 2 million in quarter one, 21 to 176 million in quarter one, 22. Today, I'm going to dive directly into the updates on 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 a key focus because the QReader 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 shift in the quarter. These readers ship predominantly to the private sector, expanding our installed base in enterprise, provider, and direct-to-consumer spaces. Q is also now used to test customers in over 1,000 retail pharmacies and distributed by most major healthcare product distributors, including McKesson, Medline, Henry Schein, and Cardinal Health. Progress on our second growth driver, menu expansion, continues to go very well. We are 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 Q-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 and 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 the third quarter. Our chlamydia plus gonorrhea multiplex test is progressing well, and as expected, we plan to begin clinical studies in the second half of 22. I'm extremely proud of the R&D team's accomplishments in a short time frame. 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 Q platform. This is a defining moment for Q and healthcare delivery in general. Q customers will soon be able to leverage virtual care and request delivery of prescriptions to their home within hours, all in the Q Health app. We expect this to launch in the second half of 22, so 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 enhancing e-commerce experience within the Q 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 are 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 Q to their employees. We recently learned about an individual whose mom was diagnosed with stage four cancer. Thankfully, the mom is cancer-free today, but she was going through all of her treatment during the pandemic. This employee also has two members who are essential workers. By testing with Q, 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 Q for the ability to test, isolate, and prevent exposing her mom. It's 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.
spk01: 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 comprised the majority of our total revenue achievement in the quarter at $175.8 million, or 98% of sales. 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. AU mentioned earlier that we shipped over 72,000 readers in the quarter, bringing our total number of readers shipped 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 we compare, product gross margin was 53.4% in Q1 of 21. 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 2 cents in the first quarter versus 8 cents 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 to $55 million. As we've said, COVID prevalence is difficult to predict, and we are 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 Q 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.
spk05: As a reminder, if you'd like to ask a question, please press star then 1. If your question hasn't answered and you'd like to remove yourself from the queue, press the pound key. Our first question comes from Tejas Devon with Morgan Stanley. Your line is open.
spk02: Hey, guys. This is Neil on for Tejas. So I just want 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?
spk01: Hi, Neil. It's John. Yeah, as we look at the quarter, so on Q2, we're providing guidance of $50 to $55 million. And what we're seeing there is 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, you know, we took that into account coupled with the contracted volumes and got to the number that we provided as guidance.
spk02: Got it. That's very helpful. And then I think last quarter you announced the official commercial launch of the Q-Reader and test in Canada and Singapore. How has commercial traction progressed internationally? And are you factoring OUS sales into your existing guidance?
spk01: Yeah, I mean, so we've been very successful with getting approvals internationally. We have them, as you noted, 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 Q 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 Q 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 piece for the moment is not a significant amount in relation to the guidance that I just mentioned. Thank you.
spk02: And so switching to the public sector, how have conversations progressed with the 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?
spk01: Yeah, 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 – It's not bad news. It's not good news. It 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 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.
spk02: 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?
spk01: 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 they're You know, when you look at the provider-customer category for us, that's 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, 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 is 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 1,000 pharmacies. And that is also an important way for us to access the point of care market.
spk02: Very helpful caller. Thank you. All right. Thank you.
spk05: Our next question comes from Matt Sykes with Goldman Sachs. Your line is open.
spk00: Hey, guys, this is Dave on for Matt. Congrats on the strong quarter. So, you know, 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?
spk01: Hi, Dave. Yeah, thanks. Yeah, as we look ahead, I mean, like you said, we're not 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, you know, we guide Q2, 50 to 55 million. We've been operating the business profitably. In fact, in Q1, did two cents of EPS, so we're proud to be able to be, you know, 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 what I'd say about looking forward for us.
spk00: Got it. Yeah, definitely one of your strengths, that strong cash position. You know, 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 yeah absolutely so the um
spk03: You know, near term, what we're really excited about is the ability to really close the loop from diagnosis to treatment. You know, we think that we have an opportunity to really do this paradigm shift and start starting with COVID and really the antivirals linked to COVID, being able to 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, you know, we said we're making really good progress on flu and flu COVID and RSV and chlamydia gonorrhea. So this pattern, this paradigm shift of diagnosis to treatment all in your own home or at the point of care but very streamlined, you know, this new paradigm shift, it's just foundational and really think has an opportunity to become a more default way of dealing with, you know, those respiratory symptoms or anything related to sexual health, just being able to turn to Q and get a result, an accurate molecular 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.
spk00: Awesome. Yeah, definitely a big, 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, governments, and providers? Yes.
spk01: Yeah, as we look at the customers, I mean, you know, we recognize that, you know, 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, Dave, of 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 times. We know that D2C, we continue to be pleased with our progress there. It does track to COVID prevalence, as you would expect. And then on 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 of new customers that we're adding here in each of the categories, you know, what the progress is that we're making.
spk00: Got it. Thanks, guys. Congrats on the good work.
spk01: Thank you, Dave.
spk05: Again, to ask a question, please press star then 1. Our next question comes from Mark Massaro with BTIG. Your line is open.
spk06: Hey guys, this is Vivian on 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.
spk01: Hi Vivian. Yeah, yeah, that is correct. So 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, you know, 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 will 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 so what that translates to us is 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.
spk06: Okay, gotcha. Thanks so much. And any updates you could provide on DDC pricing, how that's faring competitively, and just any other comments you have on the uptake since the Q4 launch? Thanks.
spk01: Yeah, 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 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 Q across what is a very, very large consumer segment? And so for that reason, we took the price action, and we've been pleased with the uptick 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 in April and through May, we're seeing lower testing volumes there, hence the guidance of 50 to 55 million on Q2.
spk06: Perfect. Thanks so much for taking the questions.
spk01: Thanks, Vivian.
spk05: Thank you. This ends today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a great day.
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