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No. of Recommendations: 63
First quarter earnings were well-received. I covered a lot of the details in my “First Impressions” posts, but there is new information in this post, as well as tables of numbers that might help you see trends. Can blood make you see green? Let’s find out!

Earnings Report Headline Items

Earnings press release: Seeking Alpha’s conference call transcript: (Thanks, Seeking Alpha.) Unless stated otherwise, all italicized quotations are from the Seeking Alpha transcript.

[Please note: GAAP stands for Generally-Accepted Accounting Principles. U.S.-based companies must report GAAP figures. Some companies also report “adjusted” or “non-GAAP” results. Please also note: A “basis point” is one-hundredth of 1%. Language around comparing percentages can be confusing; if operating margin went from 10% to 11%, is that a 1% increase or a 10% increase? Saying that the operating margin increased 100 basis points, however, is unambiguous.]

1Q20 Revenue: $67.5 million This is a record amount, as usual. Wall Street expected revenues of $56.5 million, so this is a nice beat.

Revenue in $ millions
1Q 2Q 3Q 4Q FY Comments
2017 8.5 10.2 11.1 20.0 = 49.8

2018 16.7 19.4 21.7 32.9 = 90.6
Y-o-Y 96.1% 90.1% 94.9% 64.3% 81.9%

2019 36.7 54.0 60.8 62.9 = 214.4 Early 2Q NILE results published
Y-o-Y 119.6% 178.5% 180.5% 91.3% 136.5%

2020 67.5
Y-o-Y 84.2%

1Q20 Tests: 15,257 clinical; 5,266 biopharmaceutical; 20,523 total Chief Financial Officer (CFO) Derek Bertocci noted, “… first quarter test volume was adversely impacted by the COVID-19 pandemic starting in March, resulting in no growth from the prior quarter … average daily clinical US sample volume declined steadily across the last three weeks of March, bottoming approximately 30% below the average level in the first 10 weeks of Q1 2020. Clinical US sample volume steadied at this level in the first three weeks of Q2, then picked up approximately 10% across the next two weeks of the second quarter. We believe this reflects the acute nature of care for late stage cancer patients, whereby diagnosis and treatment cannot be delayed for too long. While encouraging, there is still too much uncertainty of the impact of COVID-19 to provide a forecast for clinical volumes at this time.

1Q 2Q 3Q 4Q FY
2015 11,805

2016 18,643
Y-o-Y 57.9%

2017 25,754
Y-o-Y 38.1%

2018 7,027 8,596 29,592
Y-o-Y 14% 14.9%

2019 9,521 11,875 13,259 15,270 = 49,925
Y-o-Y 31% 77% 88.7% 77.6% 68.7%

2020 15,257
Y-o-Y 60.2%

1Q 2Q 3Q 4Q FY
2016 1,830

2017 6,286
Y-o-Y 243.5%

2018 2,505 3,009 10,370
Y-o-Y 67% 65.0%

2019 3,762 5,285 5,280 6,316 = 20,643
Y-o-Y 61% 112% 110.8% 109.9% 99.1%

2020 5,266
Y-o-Y 40.0%

1Q 2Q 3Q 4Q FY
2015 11,805

2016 20,473
Y-o-Y 73.4%

2017 31,895
Y-o-Y 55.8%

2018 9,532 11,605 39,962
Y-o-Y 25.3%

2019 13,283 17,160 18,539 21,586 = 70,568
Y-o-Y 94.5% 86.0% 76.6%

2020 20,523
Y-o-Y 54.5%

1Q20 Average Selling Price: $2489 clinical; $4230 biopharmaceutical; $2936 total Clinical’s sharp increase was due to improved reimbursement for Medicare non-lung tests under the new Local Coverage Determination (LCD). Biopharmaceutical’s ASP improvement was due to a mix toward OMNI.

1Q 2Q 3Q 4Q
2019 $1800 $1839 $2319 $2049

2020 2489
Y-o-Y 38.3%

1Q 2Q 3Q 4Q
2018 $2966 $3286 $3491 $3571

2019 3109 3827 4052 4142
Y-o-Y 4.8% 16.5% 16.1% 109.9%

2020 4230
Y-o-Y 36.1%

1Q 2Q 3Q 4Q
2018 $1920 $2421

2019 $2171 $2451 2812 2660
Y-o-Y 46.5% 9.9%

2020 2936
Y-o-Y 35.2%

1Q20 Gross Margin: 69.6%: I am happy to see gross margin hovering around record highs.

Revenue in $ millions
1Q 2Q 3Q 4Q
2017 25.1% 27.1% 22.2% 54.3%
2018 44.6% 48.6% 53.7% 57.6%
2019 63.1% 68.8% 69.6% 65.3%
2020 69.6%

1Q20 Earnings: $-27.7 million ($-0.29 per diluted share) : I start this series in 2019 because the share count was meaningfully different in 2018. I will omit year-over-year comparisons until earnings consistently turn positive. Earnings are mostly pretty uninteresting right now except to the extent that (1) they differ from Wall Street’s expectations, and (2) we can find trends that point toward eventual profitability. Wall Street expected $-0.39.

Earnings per Share (non-GAAP)
1Q 2Q 3Q 4Q
2019 -0.30 -0.13 -0.14 -0.84
2020 -0.29

1Q20 Cash Flow From Operations (CFFO): $-13.3 million; Free Cash Flow (FCF): $-22.9 million As you can see, CFFO and FCF are both negative. Positive cash flow is probably a precursor to profitability, but we’re not there yet. Both numbers are worse than their average of the prior two years. These numbers may very well get worse before they get better as previously-announced clinical trials ramp up.

FY20 Guidance
Like many companies, Guardant has withdrawn their guidance citing uncertainties related to the COVID-19 pandemic. Previously, they had forecast full-year revenue of $275-285 million, or a 31% increase at the midpoint. This is a major slowdown from recent revenue growth rates. Revenue growth in 2019 was fueled by additional clinical volume driven by positive NILE clinical trial results, improved reimbursement rates (perhaps also influenced by the NILE study), and a marked shift among biopharmaceutical purchasers toward the more expensive OMNI test. They don’t envision (or at least aren’t willing to predict) a confluence of drivers like that again in 2020. If 1Q20 revenue is treated as a “run rate”, 2020 revenue would be $270 million, so their withdrawn guidance doesn’t seem to be far off the mark. What remains to be seen is the impact of the pandemic on test order rates. As highlighted in my “First Impressions” posts, another thing that remains to be seen is the effect of the expanded Medicare Local Coverage Determination (LCD) on test volumes. As discussed later, there might be a new revenue stream later this year.

GH earnings day share price: $88.15 +5.00% (vs. S&P 500 +1.69%) The market was in a good mood, and I’m sure that helped.

1000 Days of Ratios Analysis
This is an analysis that I invented, although it draws heavily from the work of Tom Engle (TMF1000) and VTDave. Rather than trying to buy at a historically low price, they focus on buying at low ratios. For example, if after an earnings report, the stock was up 5% but earnings were up 10%, you’re buying at a better PE ratio after earnings. I collect 1000 days of trading history in a spreadsheet. The round number makes calculations easier. I also like that the ~4-year period often includes a recession. The choice of 1000 days is also a tip-of-the-hat to TMF1000. For each trading day, I calculate the value for a handful of financial metrics based on what numbers the market knew that day. Then I sort the spreadsheet, in turn, on each of the calculated ratios to see where current data falls in the sorted list. When the current value falls in the best 25% of results, I feel as if I am probably seeing a good price. When looking at a company I want to own, I’d rather buy at a good price than wait for a great price that never appears.

The ratios I analyze are Enterprise Value to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), Price to Earnings, Price to Adjusted Earnings, Price to Sales, Price to Gross Profits, Price to Free Cash Flow, and Price to EBITDA. For different companies and/or industries, certain of these ratios are going to be more important than others, so I calculate the coefficient of variation to identify which ratios are sending a strong signal for the company I’m analyzing.

Although I like the theoretical underpinnings of this approach, there are some warnings I want to offer. First, all the data is backward looking, and the market, of course, is forward looking. Second, this analysis works best with companies that are in a steady state, churning out the same kinds of products and/or services year after year. Conversely, it works least well with businesses undergoing a transformation, be that entering an adjacent market, experiencing a binary regulatory approval event, or making a major acquisition. Nevertheless, I wanted to present the analysis and you can choose to take it or leave it. I would urge that – at best – it should be one of many inputs into your decision making.

Guardant Health presented special challenges. First the obvious: Guardant hasn’t accumulated 1000 days of trading history yet. While suboptimal, I’ve worked with that before. But with Guardant Health, I encountered something I’d never seen before: the coefficient of variation analysis for the metrics indicated that each and every one was about as useful as a column of random numbers. Now, I wasn’t expecting much from the Price Earnings or Price to Free Cash Flow ratios, given all the negative numbers. But Price to Sales? As I pondered this anomaly, the only conclusion that made sense to me was that GH stock hasn’t been trading based on financial metrics. If not, though, then what drives prices? A dyed-in-the-wool value investor might say that this is a story stock, pure and simple, and its trading is based on hopes and dreams, not reality. There may be an element of truth to this. Instead though, my theory (as mentioned in my “First Impressions” posts) is that GH has been trading based on supply and demand – especially in 2019 as shares owned prior to the IPO began to flood the market. As such, I will not present any of the data from the spreadsheet, at least not this quarter.

Right about now you may be wondering, “Bob, why did you make me read four paragraphs about your methodology and then present nothing?” Sorry. First, I may present data from the GH spreadsheet in the future, when it is sending a strong signal. I’ll provide a link to this explanation at that point in time. Second, my theory that GH is trading based on supply and demand, not fundamentals, may seem outlandish on the face of it. But I’m explaining that I do have data to support that GH isn’t trading on fundamentals – at least often enough to skew the data badly. Third, I am offering my methodology to Motley Fool subscribers at no cost. If you feel it might be useful for other companies that interest you, please feel free to adopt it for your own use. You might “pay it forward” by presenting the results of your analysis on The Motley Fool message boards and/or sharing with me any modifications to the methodology that you found improved it.

Pipeline and Clinical Trials
I mostly covered those topics in my “First Impressions” posts, but there’s a little to add from the first quarter earnings report.

ECLIPSE is the clinical trial pitting the LUNAR-2 assay against colonoscopy in patients with average-risk of colorectal cancer. Guardant achieved the milestone of onboarding 100 sites in the clinical trial, but also saw a slowdown in patient enrollment due to COVID-19. Many hospitals are refusing all work that isn’t emergency in nature and healthy patients with colonoscopy on their, ahem, “to do” lists might see COVID-19 concerns as an excuse to put it off for a while. In response, Guardant has expanded the number of target facilities to 150, and they’ve been getting interest from some facilities that had initially turned them down. Upon further reflection, I can see where some facilities might be hesitant to participate in a study that – at worst – could turn the colonoscopy market into an edge case. When they’re hurting for business, though, maybe participation in the clinical trial starts to look palatable. CFO Bertocci notes that this expansion of trial sites is not expected to add materially to the anticipated trial cost.

Other Random Musings
Deemed Essential
Guardant’s testing lab has been deemed essential and remains open. Of course, they are adhering to state-mandated policies, and have adopted some additional ones including frequent COVID-19 testing of lab employees to help ensure they all remain healthy.

Blood Draw from Home
Guardant has a mobile phlebotomy (blood draw) team. Doctors who are concerned about bringing a patient into the clinic for tissue biopsy during these pandemic times might find better risk/reward in sending a phlebotomist to the patient’s home for a blood draw to be used in Guardant’s tests.

Guardant May Introduce a COVID-19 Test
Guardant is still only in feasibility tests with this, but they are working on a saliva-based test for the presence of the COVID-19 virus. [Please note: the Seeking Alpha earnings conference call transcript repeatedly transcribes “feasibility” as “visibility”; be forewarned.] At first, I was a bit concerned, from the perspective that they’re getting away from cancer, which is their strength. But they seem to be taking a very thoughtful approach here. First, they realize that there is a huge gap between the number of tests available and the number needed on a daily basis (think: front-lines workers and those in facilities and occupations deemed essential). They are seeing this firsthand as they themselves run a facility deemed essential. They have expertise in developing diagnostic tests and evaluating the results efficiently. They maintain that they are not being opportunistic but, instead, see an urgent need and recognize that they have the capability to step in and help. They noted that they chose saliva since they wanted a completely differentiated product whose introduction wouldn’t draw resources from already-strained existing COVID-19 test supply chains. They sincerely seem to be taking the high road here. It sounds as if they could have a test ready to go in a number of weeks, and that the cost wouldn’t be prohibitive. CFO Bertocci was quick to note that they’d be happy to exit the COVID business as soon as there is no longer a need.

Concluding Thoughts
The crosscurrents are strong, and it is difficult to know which will emerge as most important. I think the expanded LCD is a big deal, although it may take a few quarters to play out. COVID-19 could limit appointments with oncologists, although telehealth trends may mitigate that – anyone who is concerned that they might have cancer will press hard for some kind of contact with an oncologist. Cancer is probably scarier to most people than the coronavirus. Mobile phlebotomy could tip the scales toward liquid biopsy in a “shelter in place”/“safer at home” world. COVID-19 could also dent biopharmaceutical sales to the extent that clinical trials are occurring in settings (like hospitals) that are eschewing all non-emergency activities. If Guardant’s COVID-19 test proves feasible and comes to market, it could generate revenues that offset revenues lost for other COVID-19-related reasons.

I hope this was useful for you. If you have any questions or comments, please post them.

Fool on!
Thanks and best wishes,
TMFDatabaseBob (long: GH)
Maintenance Coverage Fool
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Please note: I am not a member of any newsletter team. My opinions are my own and do not necessarily reflect those of the TMF advisers. I am not an investment professional, merely an investor.
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