China Medical Technologies, Inc. (CMED)

F2Q 2011 (09/30/11) Earnings Conference Call

November 18, 2011 8:00 AM EST

Executives

Winnie Yam – IR

Charles Zhu – SVP, Operations

Sam Tsang – CFO

Xiaodong Wu – CEO

Analysts

Jack Hu – Deutsche Bank

Chris Lui – Morgan Stanley

Presentation

Operator

Thank you for standing by. Welcome to the second quarter 2011 China Medical Technologies’ earnings conference call.

At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions). I must advise you that this conference is being recorded today, November 18 th, 2011.

I would now like to hand the conference over to your speaker today, Ms. Winnie Yam. Please go ahead.

Winnie Yam

Good day, ladies and gentlemen. I am pleased to welcome you to China Medical earnings conference call. China Medical already announced its second fiscal quarter financial results ended September 30 th, 2011. A copy of the press release is also available on the company’s website at www.chinameditech.com.

Today, your speakers will be Mr. Xiaodong Wu, CEO; Mr. Sam Tsang, CFO; and Mr. Charles Zhu, Senior VP of Operations. After they finish with their remarks, they will be available to answer your question.

Before we continue, please bear with me as I take you through the company’s Safe Harbor policy. The discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risk and uncertainty. As such, the results may be materially different from the views expressed today. A number of potential risk and uncertainties are outlined in the company’s public filings with the US Securities and Exchange Commission.

China Medical does not undertake any obligation to update any forward-looking statements except as required by applicable law.

As a reminder, this conference call is being recorded. A replay of this conference call will be available via webcast on China Medical’s website.

Now, allow me to turn the call over to Charles, who will give remarks on behalf of Mr. Wu. Charles?

Charles Zhu

Thank you, Winnie. Looking at our FISH business, our direct sales team kept driving the sales of FISH probes revenue by increasing the test usage along our hospital customers. Besides, we have received SFDA approval for our second PCR-based companion diagnostic assay on KRAS mutation for colorectal cancer targeted therapy. The approval extends our companion diagnostic manual which includes FISH HER-2 kits for breast cancer and stomach cancer, FISH BCR/ABL kit for leukemia, FISH EGFR kit and PCR EGFR assay for non-small cell lung cancer, as well as the latest approved PCR KRAS assay for colorectal cancer targeted drug. We see huge potential on personal lives medicines for cancer patient in China and we continue to develop this market segment.

For SPR HPV-DNA business, we see the increasing recurring revenue from the sales of HPV-DNA chips among our hospital customers which conduct HPV test for their women patients. In addition we are in final stage to complete the development of our second generation SPR analyzer, which will be more compact, more user-friendly and has higher throughput. The future sales of new SPR analyzer to hospitals will add another revenue stream for our SPR HPV business line.

For our ECLIA business, we have implemented change in control of our credit sales to our distributors, in particular the slow paying distributors in view of higher risk of bad debt. As a result, we have experienced a decline in our ECLIA revenue.

As the general credit environment for our distributors is airtight [ph], we continue to maintain our control measures in the near-term. I have finished Mr. Wu's remarks and I like to turn the call over to Sam. Sam.

Sam Tsang

Thank you, Charles. Let's highlight our financial results in the second fiscal quarter.

Our 2Q '11 recurring revenues increased by 18.1% year-over-year to RMB238.5 or $37.4 million. Our 2Q '11 net income was RMB33.3 million or $5.2 million compared to net loss of RMB2.9 million during 2Q '010. Our 2Q '11 diluted earnings per ADS was RMB1.26 or $0.20 compared to diluted loss per ADS of RMB0.11 during 2Q '010.

Our 2Q '11 non-GAAP net income increased 36.9% year-over-year to RMB89.6 million or $14 million. Our 2Q '11 non-GAAP diluted earnings per ADS increased 35.2% year-over-year to RMB3.38 or $0.53.

Our 2Q '11 adjusted EBITDA increased 30.1% year-over-year to RMB151.4 million or $23.7 million. We generated cash flows from operations in the amount of RMB79.1 million or $12.4 million during 2Q '11.

Let's turn to our financial results. First, molecular diagnostic recurring revenue increased 38.5% year-over-year to RMB164 million or $25.7 million. Within molecular diagnostic system segment, our HPV chip recurring revenue increased significantly year-over-year to RMB16.3 million or $2.6 million in 2Q '11. Our ECLIA recurring revenue declined 10.8% year-over-year to RMB74.5 million or $11.7 million in 2Q '11. The decrease was primarily due to more stringent control over credit sales to distributors in order to mitigate the risk and magnitude of bad debts.

Second, our non-GAAP gross margin in 2Q '11 increased from 79.7% to 84.8% on a year-over-year basis, mainly due to more contribution from the sales of FISH probes and HPV chips, which generate higher gross margin and a substantial reduction in provision of free ECLIA analyzers and SPR analyzers.

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