Fulgent Genetics, Inc. (FLGT) Earnings Call Transcript & Summary

Thank you. Welcome to the Folger Genetics second quarter, 2026 conference call and webcast. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star 1 on your telephone keypad. As a reminder, this conference is being recorded. If anyone should require operator assistance, please press star zero. It's now my pleasure to turn the call over to Lauren Sloan, Investor Relations. Lauren, please go ahead.

Good afternoon and welcome to Fulgent's second quarter 2026 financial results conference call. call are Ming Hsieh, Chief Executive Officer, Paul Kim, Chief Financial Officer, and Brandon Perkins, Chief Commercial Officer. The company's press release discussing the financial results is available on the investor relations section of the company's website, ir.FulgineGenetics.com. A replay of this call will be available shortly after the call concludes on the investor relations section of the company's website. Management's prepared remarks and answers to your questions on today's call will contain forward-looking statements. These forward-looking statements represent management's estimates based on current views, expectations, and assumptions, which may prove to be incorrect. As a result, matters discussed in any forward-looking statements are subject to risks, uncertainties, and changes in circumstances that may cause actual results to differ from those described in the forward-looking statements. The company assumes no obligation to update any of the forward-looking statements it may make today to reflect actual results or changes in expectations. Listeners should not rely on any forward-looking statements as predictions of the future and should listen to management's remarks today with the understanding that actual events, including the company's actual future results, may be materially different than what is described in or implied by these forward-looking statements. Please review the more detailed discussions related to these forward-looking statements, including the discussion of some of the risk factors that may cause results to differ from those described in the forward-looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10-K for the year ended December 31, 2025, and the previous year ended December 31, 2025. and subsequently filed reports, which are available on the company's investor relations Management's prepared remarks, including discussions of non-GAAP profit, loss, operating expense, margin, earnings, and earnings per share, and adjusted EBITDA, contain financial measures not prepared in accordance with accounting principles generally accepted in the United States. gap. Management has presented these non-gap financial measures because it believes they may be useful to investors for various reasons, but these measures should not be viewed as a substitute for or superior to the company's financial results prepared in accordance with gap. Please see the company's press release discussing its financial results for the second quarter of 2026 for more information, including the description of the company calculates non-GAAP income and loss, non-GAAP earnings and loss per share, non-GAAP gross profit, non-GAAP income and loss per share, and non-GAAP gross profit. non-GAAP gross margin, non-GAAP operating profit and loss, and margin and adjusted EBITDA, and a reconciliation of these financial measures to income and loss, earnings loss per share, and operating margin, the most directly comparable GAAP financial measures. does not provide reconciliations of forward-looking non-GAAP measures to the most directly comparable GAAP measures because the information necessary to calculate such reconciliations, including equity-based compensation, tax effects, acquisition-related items, and potential impairments, any which may be material, is unavailable on a formal basis without unreasonable effort and the probable significance of those items cannot be predicted.

With that, I'd now like to turn the call over to me. Please go ahead. Thank you, Lauren. I will start with some comments on our two business lines. Then Brandon will review our product and go to market update for our laboratory service business. And Paul will conclude with the financials and other before we take your questions. I'm pleased with the momentum in our therapeutic development business. as we progress on our clinical pipeline. In June, we presented the finding from the phase two trials and data for FID-07, which demonstrate encouraging activity in in recurrent or metastatic head and neck sycoma cell carcinoma. Ho-Jun has taken a differentiated approach with FID-07. is a novel nano-incalcified pachycloxacsoid candidate developed with the full-chain clean chemo platform. The platform is designed to reduce toxicity typically associated with conventional chemotherapy while maintaining or improving A profile, Fulgian belief is preferable in combination oncology arrangements. With phase two complete and the encouraging data now presented properly at the ESCO, we We are focused on the next milestone. We have confirmed the end of phase two meeting with the FDA, which is scheduled later this summer. We believe the phase two we have generally to provide a strong foundation going into the FDA's discussion. Our phase three study is in preparation, and we hope to enter into a phase three registration trial for the treatment of recurrent or metastatic head and neck cecumar cell carcinoma patients in the first half of 2027. We are encouraged by our clinical trial progress achieved so far, and I believe entering into the phase three registration trial will further increase the probability of the success of the commercialization of IVD-07 for treatment of recurrent metastatic head and neck sequelae. of cell carcinoma patients who currently have very few effective treatment options. We also want to reiterate our position on partnerships. we have financial strength to advance through the phase two with our own. we are open to collaboration discussions. We intend to approach those conversations with a focus on partners who between both resources and long-term strategic alignment. Our second clinical candidate, FID022, progressing to the phase one dose escalation with the fourth dose level successfully completed. We expect to determine the maximum tolerated dose level later this year. FIV-022 is a nanoencapsulated SN38 for the treatment of solid tumors. including potentially colon, pancreatic, ovarian, and the bile duct cancers. Please note that both IVD-07 and O2-2 are derived from the same property clean chemo delivery platform, tightened and fully owned by Zorgin. Similar to FID07, FID022 can also be used in ORIs and the cost drug combinations. In the laboratory service business, we continue to see our AI and the digital pathology solution work at an accelerated pace and continue to expand our AI portfolio. As we drive the innovation across our business and have seen sustained demand and a consistent testing warning, We are also managing the transition of our billing and revenue cycle management system. This transition has caused delays in billing and the process of claims and the impact our ability to collect data our historical rates and reduce the amount of revenue we are able to recognize from the tests we have performed. Addressing revenue cycle management is our top operational priority, and we are making progress. I would like to thank our employees, partners, and stakeholders for your hard work and loyalty. I will now return the call over to Brandon Perthews, our chief commercial officer, to talk more about our laboratory service business.

Thank you, Ming. We ended the quarter at $85.4 million, an increase of 4% year over year and 20% sequentially. The second quarter, In the second quarter, we did have the new acquisitions of Bako and Strata DX integrated, which contributed to the overall performance. Breaking it down further, precision diagnostics ended at $41.5 million, a decrease of 13% year over year. but increased 3% sequentially. Anatomic pathology came in at $37.5 million, an increase of 33% year-over-year and 50% sequentially. And biopharma services ended the quarter at $6.4 million, an increase of 3% year-over-year and 11% sequentially. These numbers were affected by delays in billing and a decline in collection rates related to the ongoing transition of our revenue cycle management and billing system, which I will address in more detail shortly. We will also discuss the related financial impact. We continue to see a real impact on operations from the development and use of AI. we expanded our AI portfolio with a novel stain-aware algorithm designed to automate mass cell quantification in gastrointestinal biopsies, an important biomarker in diseases such as systemic mastocytosis and mastocytic enterocolitis. Traditional AI approaches have struggled to accurately quantify mast cells due to diffuse tryptase standing associated with cell degranulation, limiting the reliability of automated analysis. Our proprietary mass AI platform overcomes this challenge through a DAB-guided deep learning approach that accurately separates individual mass cells from surrounding extracellular staining. In validation study, the platform demonstrated strong performance across multiple staining methods delivering highly accurate and reproducible quantification without requiring manual perimeter adjustments. This represents another example of our ability to solve complex pathology challenges using proprietary AI. Beyond improving workflow efficiency and diagnostic consistency, the technology establishes a foundation for advanced spatial biomarker analysis and quantitative pathology applications in eosinophilic esophagitis and other gastrointestinal inflammatory diseases. As we continue to expand our AI-enabled diagnostic portfolio, we believe capabilities further differentiate our end-to-end digital pathology platform and create additional opportunity to deliver value to clinicians, pharmaceutical partners, and healthcare systems. The second quarter was our first full quarter of having Baco and StrataDX integrated. From the operations perspective, things have gone incredibly well. There has been minimal disruption to turnaround time and client ordering patterns. The focus going forward is to move the operation to digital pathology so we can both use and develop new AI tools to improve efficiency and quality. I would like to congratulate the operation teams on both sides for doing such an excellent job. These represented our fourth and fifth acquisitions. We believe we have proven we can successfully acquire and integrate new assets. In terms of the sales team, the Baco and Strada DX teams have been fully cross-trained and are now selling our legacy anatomic pathology services in dermatology and GI, in addition to their previous services. So far, the initial progress has been encouraging with the team building a robust pipeline of opportunities quickly. The new combined anatomic pathology team is at approximately 40, which is nearly double our size pre-acquisition. Previously, we mentioned we entered into an agreement with Epic to be added to their ARA platform. ARA is Epic's specialty diagnostics platform offering genetic testing services within health systems electronic medical records to send orders and receive results. Both sides have been working diligently to complete the integration, and we are scheduled to go live with early adopters in the third quarter. Once live, it streamlines the process of interfacing with clients and improves access to genetic testing information within the EMR. We look forward to going live with Aura and using it as a conduit to make ordering easier for our clients and strengthening our client relationships. We continue to push the envelope related to what can be accomplished with whole genome sequencing. Our standard whole genome sequencing service is now on the Illumina TruePath system, which is a short-read-like technology that maintains high accuracy while providing long-range genomic insights not achievable with standard short-read sequencing. With this new approach, our mean sequencing coverage increased from 40X to 60 to 70X. In addition, we are now able to expand the number of repeat expansions we cover. Coverage grew from 21 to 64, broadening the diagnostic scope for patients presenting with a wide range of neurological, neuromuscular, and other expansions. associated conditions. This new whole genome sequencing test can be ordered with our RNA integrated sequencing evaluation, or RISE. RISE provides functional insights into genetic variants, enabling deeper characterization of pathogenicity. RISE also detects aberrant gene expression, monoallylic gene expression, and aberrant splicing. of express target genes. These features combine to cast the widest net possible, enabling improved diagnostic yield for those patients and families seeking answers to complex phenotypes. As Ming touched on, we are managing the final phase of the transition of our billing and revenue cycle management system. We originally undertook this transition to achieve greater consistency across our operations and to drive long-term efficiency, and we successfully finished phase one and phase two of the implementation. However, the most significant impact has been in the final phase of this transition. The system is very complex, and we have encountered challenges mostly related to implementing the customizations needed in this new system to maximize reimbursement that were not fully built into the initial launch. That customization work remains ongoing today. We have made progress implementing a number of the required customizations and remain completing the remaining work as quickly as possible. As the remaining customizations are completed and integrated across our revenue cycle, we expect our collection rates to improve, though we cannot predict the exact timing of that improvement. Thanks for your time today. We appreciate you joining our call. I'll now turn it over to Paul Kim, our Chief Financial Officer. Paul?.

Thank you, Brandon. Revenue in the second quarter of 2026 totaled $85.4 million, including $16.9 million from BACO Diagnostics and StrataDX, compared to $71.1 million in the first quarter of 2026. The increase in our Q2 revenue was primarily due to the integration of Baco Diagnostics and StrataDx for the full quarter. Gap gross margin was 30.1%, and non-gap gross margin for the second quarter was 31.3%. The decline in gross margin reflects fixed costs spread over a lower revenue base, driven by the lower collection rate. We expect gross margins to normalize as our collection rate returns to historical norms and as revenue increases. Now turning to operating expenses. Total GAAP operating expenses were 61.8 million for the second quarter, which increased when compared to 56.1 million in the prior quarter. The increase in operating expenses was due to Bako Diagnostics and StrataDx being integrated for the full quarter. The GAAP operating expenses also include a one-time impairment charge on customer relationship and tangible asset of $2.2 million related to loss of a customer in the therapeutic development segment. Non-GAAP operating expenses also increased in Q2, totaling $49.2 million compared to $42.6 million in the previous quarter. Gap operating margin improved to a minus 42.3% in Q2 compared to a minus 48.7% in Q1. Non-gap operating margin improved sequentially to a minus 26.2% in Q2 compared to a minus 27.7% in Q1. Our gap loss in the current quarter was $29.5 million, an increase from prior quarter's gap loss of $24.8 million, and a gap loss of $1.05 per share based on 28 million weighted average diluted shares outstanding. On a non-gap basis and excluding equity-based compensation, compensation expense, intangible asset amortization, impairment loss, and acquisition-related costs and severance. Loss for the quarter was approximately $16.2 million, or 58 cents per share, based on 28 million weighted average diluted shares outstanding. Adjusted EBITDA for the second quarter was a loss of approximately $17.1 million compared to a loss of $15.2 million in the prior quarter. In the second quarter, we repurchased over 1.5 million shares of our stock repurchase program. Since Since the inception of the stock repurchase program in March 2022, a total of over 7.5 million shares of our common stock has been repurchased under the program with approximately 75.8 million currently remaining available for future repurchases of our common stock. Turning to the balance sheet, we with approximately $551.5 million in cash, cash equivalent, restricted cash and marketable securities. The 53% of the total decrease in cash from the previous quarter is primarily driven by $23.8 million spent on our stock repurchase program for one time service. $13.5 million payment towards a legal settlement, which was originally discussed and accrued in Q4 of 2025, and a $14.1 million cash used in operations in CapEx. As of quarter end, we have not yet received the $106.1 million federal income tax refund, which has been delayed due to a constrained resources at the IRS. Before providing our guidance for 2026, I'd like to provide an update on certain drivers shaping our expectations for the year and anticipated impact. acquisition of Spockle Diagnostics and StrataDx. Our revised outlook for 2026 is based on lower than originally anticipated rate of collections. Core customer volume assumptions remain consistent with the original outlook, but we're looking at a new outlook. moderated our new business growth expectations. Additionally, we anticipated and mentioned on our call in the In February and April, we saw a decrease in revenue from our largest customer. which is moving its testing capabilities in health revenue from this customer, this, quarter decreased $4.6 million from the prior quarter. We anticipate a continued decline in revenue from this customer through the second half of the year. We believe this decrease in revenue from our largest customer will be partially or fully offset by the estimated contribution of approximately $53 million from Baco and Strata DX. contributing to overall revenue growth in the second half of the year. FACO's revenue will primarily be categorized as anatomic pathology. We continue to forecast that for full year 2026, no single customer will account for more than 10% of our total revenue, reflecting an improvement in our customer concentration profile. We are revising our full year revenue guidance. We now expect total revenue to be in the range of $330 to $340 million for 2026, down from our prior guidance of $350 million. This represents a year-over-year growth of 2.3 and 5.4%. We now estimate precision diagnostics revenues to be approximately $161 to $166 million, anatomic pathology to be approximately $146 to $150 million, and biopharma services to be approximately $23 to $24 million. On margins, we now expect full-year non-GAAP gross margins to be in the mid 30% range, reflecting product mix shifts tied to our changing customer composition and lower collection rates associated with the transition of our revenue cycle management and billing system. We expect non-GAAP operating margins to be in the mid-20% for the year. We continue to prioritize investment across two key areas, R&D, where we are advancing our laboratory testing capabilities, and clinical study pipeline and sales and marketing, where we have grown the team. year reflects a full year of our expansion that began last year, combined with the recent Baco and Strata DX acquisition, which more than doubled their sales team. The anticipated spend for the therapeutic development business remained at approximately $26 million in 2026. advancing clinical trials for FID 022 and FID 007. We remain committed to strategic investment in our business, including operational improvements and targeted upgrades to our laboratory infrastructure. These investments are designed to strengthen our competitive position in and enhanced throughout capacity over time. We believe our foundational technology platform is highly scalable, capable of driving meaningful operating leverage and margin expansion as volumes grow. The updates to our EPS and cash guidance are attributable to our revised revenue guidance and the decreased shares result in a better performance. resulting from the stock repurchase program and the cash used for these repurchases. Our forecasted average fully diluted share account for 2026 has decreased from approximately 29 million shares to approximately 28 million shares due to additional shares purchased under our stock repurchase program since our last earnings call. Using the updated average share count of $28 million and revised revenue guidance, we now expect full year 2026 non-GAAP EPS guidance to be a loss of $2.22 to $2.25. This excludes stock-based compensation, impairment loss, acquisition-related costs, and we're also looking at the cost of the project. of intangible assets and any further share repurchases, as well as any one-time charges. For fiscal year 2026, assuming capital purchases of $12 million, spend on our therapeutic development business of $26 million, and excluding any future stock repurchases or other expenditures outside of ordinary course, which could include additional M&A, we anticipate ending the year with a $10 million increase in revenue. with approximately 610 million of cash, cash equivalents, restricted cash and investments, and marketable securities. The decrease from our prior forecast of 636 million is mainly attributable to the 15.2 million of stock repurchases made since our last earnings call and revised revenue call. guidance. We continue to have conviction in the strength of our business and our technology platform and are remedying the internal operations challenge. We're executing against our strategic initiatives to drive AI and digital solutions across our laboratory services business and are proud of the We believe we're well positioned for longer-term growth as our strategic investments, innovations, and expanded offerings deliver value. Thank you for joining our call today. Operator, you may now open it up for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to be placed into question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. One moment, please, while we poll for questions. our first question today is coming from David Westenberg from Paper Sandler your line is now live.

Hi, guys. This is Karan Patel on for David Westenberg. I guess I'll start with some of the RCM transition issues. Maybe if you could help us pinpoint what are the specifically in this final phase is causing these maybe delayed issues and do you have maybe an estimated timeline for resolution here and I have a beautiful.