Youdao, Inc. (DAO) CEO Feng Zhou on Q2 2020 Results – Earnings Call Transcript


Youdao, Inc. (NYSE:DAO) Q2 2020 Earnings Conference Call August 13, 2020 6:30 AM ET

Company Participants

Pei Du – Investor Relations

Feng Zhou – CEO & Director

Peng Su – VP of Strategies & Capital Markets

Yongwei Li – VP of Finance & Senior Financial Controller

Conference Call Participants

Sheng Zhong – Morgan Stanley

Alex Xie – Crédit Suisse

Thomas Chong – Jefferies

Binnie Wong – HSBC

Jessie Xu – Nomura

Operator

Good day and welcome to the Youdao 2020 Second Quarter Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Pei Du, Investor Relations Director of Youdao. Please go ahead.

Pei Du

Thank you, operator. Please note the discussion today will contain forward-looking statements related to future performance of the company, which are intended to qualify for the safe harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of the future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company’s control and could cause actual results to differ materially from those mentioned in today’s press release and this discussion. A general discussion of the risk factors that could affect Youdao’s business and financial results is included in certain filings of the company with the Securities and Exchange Commission, including our annual report filed on from 20-F. The company doesn’t undertake any obligation to update these forward-looking information, except as required by law.

During today’s call, management will also discuss certain non-GAAP financial measures for comparison purposes only. For the definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the 2020 second quarter financial results news release issued earlier today.

As a reminder, this conference is being recorded. Besides, a webcast replay of this conference call will be available on Youdao’s corporate website at ir.youdao.com.

Joining us today on the call from Youdao Senior management is Dr. Feng Zhou, our Chief Executive Officer; Mr. Lei Jin, VP of Operations; Mr. Peng Su, our VP of Strategy and Capital Markets; and Mr. Wei Li, our VP of Finance.

I will now turn the call over to Dr. Zhou to review some of our recent highlights and strategic direction.

Feng Zhou

Thank you, Du Pei, and thank you all for participating in today’s call. Before we begin, I would like to remind everyone that all numbers are based on renminbi.

Our business continues to grow at a rapid and healthy pace. Our second quarter shows the strength of our online education courses and products. And despite the current uncertainty of macro environment, the online education industry’s transformation is well underway. Youdao is well positioned to emerge as a leader among this change.

First, looking at online courses. Our gross billings have more than tripled year-over-year, reaching RMB 542 million in Q2. Gross billings from K-12 reached RMB 307 million, up to 29% year-over-year and up 60% quarter-over-quarter. driven by strong retention and larger scale marketing. In addition to junior high school, math and physics are strong and several other courses contributed significantly to our second quarter growth, primarily high school Chinese and primary school math. Our retention rate also improved by 1,000 basis points in the April to May retention season due to more and better courses and more streamlined service.

Summer enrollment for high school students, which used to start in Q2, were pushed back to Q3 due to COVID-19 as the semester ended later in most cities in China. Gross billings from our adult segment also increased to RMB 150 million, up 189% year-over-year based on the strong performance of our practical English courses. We released another new practical English course title in Q2, bringing the total to 5 courses, catering to different customer groups. Young, white-collar workers are increasingly looking to learn English language and other SKUs online. We’re working hard to capture this opportunity and drive growth by focusing on creating high-quality content.

Building up our servicing capacity is the current priority for the company, as we work to significantly scale our business this year. In Q2, the total number of tutors increased to 2,699, in part to prepare for summer enrollment. This is also 3x the number of tutors we had in Q1. Our new tutors have been integrated smoothly as we focused on leveraging hiring managers and improving our experienced tutors last year to prepare for a larger team this year. We also significantly increased our ability to offer more personalized service in Q2 by offering stratified services to students within different grades.

For the second quarter, gross margins for learning services were flat with Q1 at 52%. While we continue to benefit from economies of scale, margins were partially offset by expenses from more servicing personnel. In the meantime, with improving unit economics, we maintained the positive cash — operating cash flow for the second quarter in a row, which came in at just under RMB 93 million.

We continue to invest in product and technology innovation. We’re in a year-long process of rolling out more interactive large class features to more subjects and more grades. In our high school Chinese courses, we launched a feature called Intelligent Memorization Plan [Foreign Language] using ASR technology. This is highly integrated to its cost content and students can practice efficiently at their own pace. This contributed significantly to our double-digit increase in retention in high school Chinese.

Similarly, our primary school math has highly tailored interactive exercises that can be generated real-time for different levels of students, all based on feedback data. For instance, in order to develop kids’ number fluency, we offer interactive exercises using a vertical strategy playbook, gamified role player to player games. All are fill in the blanks equation solver. After we made these upgrades, our conversion rates in primary school math increased by 4%.

Turning to our intelligent learning devices. Sales in this category also developed, reaching RMB 86 million, up 2.5x year-over-year. We released a Dictionary Pen 2.0 Pro in June, with more premium content and Japanese and Korean language supports, which were the #1 requested feature. Our Dictionary Pen 2 Pro also carries a higher selling price than its early versions. During the online shopping festival on June 18, the Youdao Dictionary Pen 2 series were ranked the #1 electronic dictionary in terms of sales by both JD.com and Tmall.

As for our learning apps, in Q2, we grew our MAU to 122 million, up 11% year-over-year. We continued to build our Youdao Dictionary app to incorporate more comprehensive offerings as we work to bring this popular tool into the realms of super apps in the learning category. Some of the new features included an English oral proficiency assessment feature, an English listening mock test and a post-graduate admission Internet portal.

In addition to launching a number of new features, we have strengthened the connection between Youdao Dictionary and our premium courses in Q2. Gross billings of new paid enrollments from internal traffic increased by 127% year-over-year.

Turning to our marketing business. Our online advertising revenue reached RMB 103 million, down 28% year-over-year, up 4% from Q1. We expect to see continued volatility in this segment with the ongoing impact of macro uncertainties.

Looking ahead, the summer enrollment season is already underway. Our experience shows that customers acquired in the summer are more willing to pay for more courses and renew in the future. And our data in the first half of this year shows that the positive trends in online learning is accelerating regardless of the fluctuating impact of COVID-19.

With this in mind, we are moving ahead with the summer campaign we talked about in Q1. We plan to significantly increase our paying customer base this year and Q3 is an important quarter for achieving this goal. We’re taking a threefold approach to this campaign: First, a brand marketing campaign with TV ads, residential and community ads, et cetera. Second, we’re engaging in online multichannel performance-based customer acquisition activities. And third, user conversion on our owned and operated assets. Our goal with our marketing activities in the second half of the year will be to acquire significantly more customers and increase our brand equity while maintaining a focus on healthy unit economics and return of investment over the longer term. The investments we are making now are designed to support our stable and sustainable growth as we build our student community and brand reputation.

With that overview, I will now turn the call over to Su Peng to review our financial results. We will then open the call up for questions. Su Peng?

Peng Su

Thank you, Dr. Zhou, and hello, everyone. Today, I will be presenting some financial highlights from our 2020 second quarter. We encourage you to read through our press release issued earlier today for further details.

We continue to scale our operation in second quarter, achieving considerable year-over-year growth across our business. We are well poised to continue to our growth trajectory supported by our strong technology and the curriculum and as we amplify our marketing effort to further bolster our student base for the second half of the year.

For the second quarter, total net revenue were RMB 623.3 million or $88.2 million. This represents an increase of 93.1% from the second quarter of 2019. Looking at this growth by segments. Net revenue from our learning services and products grew 190% year-over-year to RMB 520.1 million or $73.6 million. We attribute this growth to a sharp uptick in K-12 paid student enrollments and the gross billing per paid student enrollments of youdao Premium Courses on a year-over-year basis.

Net revenue for online marketing services were RMB 103.2 million or $14.6 million, a decrease of nearly 28.1% compared with the same period of 2019.

For the second quarter of 2020, our total gross profit greatly improved, reaching RMB 281.5 million or $39.8 million, up 165.4% compared with the second quarter of 2019. Gross margin for learning services and products improved to 48.5% for the second quarter of 2020, up from 29.5% for the second quarter of 2019. The large margin growth was primarily attributable to improved online courses margin, better economics of scale and the further optimization of our business and the faculty compensation structure.

Gross margin for online marketing services was 28.5% for the second quarter of 2020 compared with 37% for the second quarter of 2019. The decrease was mainly the result of the lower gross margin revenue generated from the increased distribution of advertisements through the third parties’ Internet properties.

For the second quarter, total operating expense were RMB 564.6 million or $79.9 million compared with RMB 189.2 million for the same period of last year. We continue to invest in technology, student acquisition and acquiring talented teachers to support our growing business over the long term. In tandem with this investment, we are increasing our top line, structuring our model to become more efficient and recognizing economics of scale.

With that in mind, sales and marketing expense for the second quarter were RMB 445.2 million compared with RMB 122.2 million in the second quarter of 2019. Research and development expense for the second quarter were RMB 91.4 million compared with RMB 56.3 million in the second quarter of 2019.

Our operating loss margin was 45.4% in the second quarter of 2020 compared with 25.7% for the same period of last year. For the second quarter of 2020, our net loss attributable to ordinary shareholder was RMB 257.8 million or $36.5 million compared with a loss of RMB 87.6 million for the same period last year. Non-GAAP net loss attributable to ordinary shareholders for second quarter was RMB 250.5 million or $35.5 million compared with a loss of RMB 86.2 million for the comparable period last year. Basic and diluted net loss per ADS for second quarter was RMB 2.3 or $0.33. Non-GAAP basic and diluted net loss per ADS for second quarter was RMB 2.23 or $0.32.

Our net cash generated from the operating activity for second quarter was RMB 93 million or $13.2 million. Looking at our balance sheet. As of June 30, 2020, our contract liability, which mainly consists of the deferred revenue for our online courses, were RMB 711.5 million or $100.7 million compared with RMB 456.8 million as of December 31, 2019.

At the end of the period, our cash, cash equivalents, time deposit and short-term investment totaled RMB 1.8 billion or $253.4 million.

This concludes our prepared remarks. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] The first question today comes from [Brian Wong] of Citigroup.

Unidentified Analyst

[Foreign Language] I will translate myself. Congratulations on the solid results. I have 2 questions. First is regarding how is the new format of interactive beta classes progressing? And the second is regarding the summer promotion like the student enrollment and the student acquisition cost?

Feng Zhou

[Foreign Language]Yes. So for the first question regarding interactive big class model features. So this is one of our most important projects on the product side this year. So we actually have a video presentation about this on our IR website. So I encourage you to go take a look. So essentially, after 2 quarters of actually releasing features on this front, we are more than encouraged. We have routinely seen the percentages of students participating in these interactions and also participating in these classes increased by — participation in these classes increased by 20%, 30%, yes. So that’s really good because more participation leads to more satisfied customers and leads to more — better retention. So naturally, we’ve seen retention rate up significantly in some of these classes.

So let me give you 2 examples. One is in high school Chinese, we added — I just talked about in the prepared remarks about a feature called Intelligence Memorization [Foreign Language]. So this is essentially to help students memorize a lot of the Chinese content they need for their exams. So we use ASR for that. And this is — this really helps the student. And overall, our high school Chinese retention rate has been increased by double digits. So that’s one.

Another example is for primary school math. So we added — remember, in Q1, we already have interactions during live class for primary school math. But in Q2, we added more types of questions, so right now to actually over 20 different types of questions. Because of this, the conversion rate of primary school math has increased by more than 4%. So if you have time, take a look at the video. Thank you.

Yes. The second question, regarding the summer campaigns, yes. So I can say a few words and maybe Su Peng can add to that. So basically, what we did in Q2 is that we talked about we allocated resources, allocated budgets for the summer campaign in Q1. And what we did in Q2 is that we collected a lot of data, did some trials and then essentially decided that we would go ahead with the plan to use that budget because the data supports doing this. Really, it’s a really good time to get students, acquire students for online courses. And of course, we also see that some offline tutoring centers see actually students turning to online courses. So it’s a really good opportunity.

And for the summer, we are focusing mostly on junior high school courses in high school, yes. So we used to focus on these segments, and we are still focusing on these 2 segments for this summer. We really like junior high school because it’s a large segment for us and our teams are good at making high-quality courses here. And also, we can — when students kind of retain, they become high school students, and this is really nice. And also, we have some primary school students acquired this summer. So we have grade 6 and grade 5 math class that’s really getting fantastic feedback.

So that’s a quick update. And yes, I don’t know, Su Peng, if you have anything to add.

Peng Su

Thank you, Dr. Zhou. And Brian, this is Su Peng. We believe the summer enrollment business is already under way, I think, as Dr. Zhou mentioned in the early call. And we think — we believe, as we mentioned, we expect to significantly increase our paying customer base in this year, especially in the K-12 segment. So I think the summer is a key time — is a key period for these goals. And we are — in the Q1 and Q2, we are refining our models. And we just leveraged up our — quality of our courses, and I think we’ll be ready for that.

And by now, we think — if you need some color, so we think right now it’s so far so good and for all the summer marketing campaign. And I believe you have — probably you have seen our advertisements with branding as well as the [Indiscernible] space advertisements through the different channels. We think we are on the way. And right now, we see the positive feedback from the market. So we think because a very special year for this in 2020. The total industry changed a lot because of the COVID-19. So we expect that we are — that we’ll take these opportunities to grow our business.

Operator

The next question comes from Sheng Zhong of Morgan Stanley.

Sheng Zhong

My first question is about the gross billing. Q2 still — we still see a very strong gross billing growth while the momentum compared with last 2 quarters seem slightly slowed down. So wondering can you share more color about this growth? And what the outlook for the growth momentum in next 2 quarters this year? This is the first question.

And second question. Dr. Zhou mentioned that the K-12 retention rate improved by double digits. So wondering if can you share with us what the actual range now? And except for the technology improvement, I believe the teacher system should be a very important part of this. So wondering if you can share something about your teacher assistance numbers now and what the further hiring plan?

Feng Zhou

Yes. Thank you, Sheng Zhong. So regarding gross billing. So yes, so if you look at our K-12 gross billing, so it’s RMB 307 million, up 229% year-over-year and up 60% Q-o-Q, yes. So yes, we think this is healthy for Q2. Seasonally, Q2 is a little bit weak, but we think this is good for Q2.

And yes, so for our adult segment, because in Q1 we had this very positive push from the — from a lot of white-collar customers staying at home and some of them go look for opportunity to learn online. So we had a really strong adult — second quarter for our adult courses in Q1. And in Q2, if you look at year-over-year, we are still quite strong. It’s RMB 150 million, up 189% year-over-year. So we still really like the segment. And we think in — we added a new course, so up to 5 quarters now. So we expect our adult segment to continue to have healthy year-over-year growth in the coming quarters.

So a couple of more points for K-12. So one of the key focus for us is that we look at our subjects or courses and decide on their competitiveness. So we have this so-called Class A subjects internally, which means really competitive and unit economic-wise really working well, these courses. So we have added new Class A subjects in Q2. So we have a couple of more courses that achieve the Class A status, and we think this will really help with our growth in the coming quarters.

So for Q3, we are quite bullish. We think — what we see is that demand in the summer is really strong. So kind of in Q1, we look at — we can look at it both ways. So maybe it will be strong or maybe not. But now we know that the demand is really strong. And so — and overall, we think the summer campaign is going on really well. So we are really seeing parents actually move to online courses, a lot of them at quite a large scale. So we are trying to capture this opportunity. So we’ll basically double down on the summer.

I’ll talk about the tutors first, and we can talk about retention. So the number of tutors has grown substantially, if you look at it, from 800 to over 2,500. So it’s about 200% growth. So we’ve actually added new operating centers in Hangzhou and in [Jinan], in addition to the existing 4 of them. So we already — we used to have [Jian], Nanjing, [Xinxiang] and [Indiscernible]. Yes, now we have 2 more, Hangzhou and Jinan . So we think things are going smoothly. So we expect to continue to grow that tutor team and to train more personnel and to pay them well and meet the increasing demand of servicing and the conversion.

So in Q2, so there were some projects actually getting positive results, like we improved the collaboration between these tutors and the instructors. We designed new mechanisms for them to work better. Kind of the first time a new course is released, the tutors will already be very ready to service the students. And we also talked about — we have improved our stratified or tiered servicing strategy so that for different students with different levels of learning, we get — they get tailor-made service based on their learning level, yes. So that’s for the tutors, yes.

Su Peng, if you can talk about the retention?

Peng Su

Yes. For the — thank you, Dr. Zhou. And as Dr. Zhou mentioned, we increased substantially our tutors from the 865 to the — over 2,000. And I think in this year, so we expect to provide more services to our clients to enhance our retention rates. And especially, in this year, we are dedicated on what we call the grade level class. That means the grade 6, grade 9 and grade 12. So I can — I think we are improved a lot grade class retention rates in our business. And for example, our grade 6 to grade 7 retention is around 60% during this retention period. We expect to improve more in the next retention season. I hope that answered your question.

Feng Zhou

Yes, grade 6 and Grade 7. So this is basically going from primary school to junior high school. Yes. So this is kind of a more challenging grade to have retention on. So we think our number there is really competitive.

And yes, maybe I can give another data point is that, yes, so we really like our — so this is not a curriculum course. We really like our kids programming course. So in — with adding more interaction and more features, we’ve been able to achieve actually over 85% of retention for these courses because of our collaboration between the instructor and the tutors and also with the interactive large class model. Yes, so that’s one of the points we can share.

Operator

The next question comes from Alex Xie of Crédit Suisse.

Alex Xie

Congratulations on a very strong growth momentum. I have 2 questions. So my first question is about the enrollment and ASP. It seems to me that ASP in terms of gross billings divided by student enrollments decreased. And would you please share if there’s any special reason for that? Did you change the — say, the definition for enrollments? And what’s your actual ASP after adjusting such changes?

Secondly, I would like to know more about your plan to further improve or keep your margins of your online courses business. Do you have a target, say, in the future or in the long term? What kind of GP margin can you achieve? So maybe I’ll just ask the first question in Chinese again. [Foreign Language]

Peng Su

The pick-up in enrollment growth is very fast. It was over 300% growth in Q2. And this is mostly driven by the number of students, especially in our junior high school segment. There are also some impacts from maybe 2 other reasons, right, the enrollment split. Last year, the regulator issued a requirement on the cost duration. So this is the summer and 4 courses into more enrollment to be in compliance. Also, we add some — as Dr. Zhou mentioned, a Class A subject. It makes more cross-sell per student as well. And ASP, maybe…

Feng Zhou

Right. Yes. And also one additional comment for ASP. So for this year — for the first half of this year, our kind of price increase, if you look at for our precision price. So our price increase is really modest. So we didn’t increase our price for our courses a lot. So — and if you look at the splitting effects due to compliance — and yes, so that’s why you see ASP lower a little bit, yes.

Peng Su

Yes. And also, we think — and also there’s in the spring matters, we also offer a different type of the products to our student. We launch of some, we call them short-term course. And we have short-term concentrated class, and they will be less than — shorter than our regulars, we call them semesters. So that’s the total package will be cheaper than the regular price. So I think that’s the combined reason why you see the average ASP going a little bit down compared with last year.

Yongwei Li

Okay. This is Wei. I will take your second question regarding to the gross margin outlook. In second quarter, our gross margin for learning services was 52%, significantly improved when compared with last quarter, 29%. Going forward, we still expect an improvement on our learning service on annual basis based on 3 primary drivers: First, further access from economics of scale were expected. We believe our large class teacher model will continue to gain more benefit as we achieve even more economic of scale. For example, we expect to have bigger class size due to our increased paid student enrollment from our summer campaign.

Secondly, more room to achieve the higher ASP. Just mentioned by Dr. Zhou, our ASP is modest. And the average selling price or ASP for our premium courses was around RMB 1,140 in second quarter, up 30% year-over-year. However, ASP was relatively cheaper when compared with some of our online and off-line peers. This summer, we understand that our peers such as [The NT Group] and [Indiscernible] charge 10% to 80% premium price compared with last year’s ASP. So we still have a lot of room to charge higher price for our courses as well. In addition, even for some of our courses with higher ASP, we’re receiving excellent feedback from our users. For example, kid program courses, we have a relevant retention rate of over 80%.

Finally, better compensation structure. The better compensation structure, we’ve aligned — our sales will help us to get better GP margin as well. Although the GP margin may be negatively affected by modular courses in the short term, we believe our GP margin will rise to industry average level in the longer term, which this is helpful.

Operator

The next question comes from Thomas Chong of Jefferies.

Thomas Chong

[Foreign Language]I have 2 questions. The first one is about our operating cash flow. Can management comment about the direction that we should think about in terms of the cash flow as well as the timing to profitability? And my second question is about our synergies with our existing product offerings. Given the fact that Youdao Dictionary also demonstrate very good results, how should we think about our strategies in generating synergies with our K-12 going forward?

Yongwei Li

I will take your first question. This is Wei. In terms of the operating cash flow, we have positive operating cash flow in first quarter and this quarter, totaling over RMB 140 million in the first half year, which can be attributed to our overall improvements to our business fundamentals. For example, the higher GMV level achieved, the better GP margin and more healthy unit economic effects are realized.

While we don’t provide any quantitative guidance on our operating cash flow, it is safe to say that our increased marketing and promotion expenditures to acquire more users during the summer promotion season will place pressure on our operating cash flow for the next 1 or 2 quarters. We think this seasonal fluctuation is acceptable for the online learning market. We are keen to take advantage of the growth opportunity in the online learning industry. And we expect a healthier longer-term operating cash flow in the near future.

For the profitability, I’d like to give you some color without giving any positive guidance, which we don’t provide. You can see our business fundamentals have improved across the board as mentioned. We increased our GMV as well as our operating cash flow. We are also realizing the increased benefit from economic of scale quarter-over-quarter. And our current growth stage profitability is not our first priority. We believe now is the time to continue to invest more in our technology and marketing activity and continue to improve our servicing capability to enhance our user learning experience. Thank you.

Peng Su

Thomas, for your second question about the synergy between our apps as well as hardware with our courses. So I think if you recently open our — for example, if you recently open our Dictionary app, you will see that it’s not only everything we’ve just tried to just upload a new page for our Dictionary thing. We’ll just add more functions on that. It’s not only for the translation in the future, we believe. It will be more useful for the student to looking for learning information and material to help them to find more information. So we think we will hold more seminar things online and it will help them to know more about the learning as well as the test information. That will also help us to know the profile of students. And it will be more easier for us to convert them from our learning apps to our online courses products.

On the other hand, for our hardware aspect, for example, for our Dictionary Pen, most of our customer is a student from the primary school to high school. So I think that’s the — will be the same users pool with our online courses. We are on the way to develop more functions on our hardware to try to lead them to convert them from our hardware to our online process products. And I think that will be the next step in this year. We will show you more data in the second half of this year.

Operator

The next question comes from Binnie Wong of HSBC.

Binnie Wong

Just a question for Dr. Zhou. Is there like — remember, I guess last quarter, also since IPO, we talked about like more in terms of Youdao is really differentiated with this technology using the AI-driven interactions and also provide more personalized exercise. Is that one of the reasons that we have seen an improvement in the conversion rate because we see an uplift in the conversion rate this quarter? And then how do you see where we can use technology even more to drive to meet up the conversion rate because our conversion rate is still lower? And then we can — if there’s a lot of more room we can deepening the conversion here? So that is my first question.

And the second question is on the sales and marketing. It seems that the sales and marketing dollar per student, if I just look at the sales and marketing efficiency, it seems that it’s getting higher and higher. Is that just because of a user base? Because our user base is getting bigger, so that’s why the incremental marketing dollar spend will be higher? Or is that because competition for users has been intensifying again, again, again? Because we have been seeing like the industry or everyone is stepping up in sales and marketing in online education. So how do you see the rest of the year and how that will position you differently?

Feng Zhou

Thank you, Binnie. Yes, you’re absolutely right that — so we view technology as one of our key differentiation factors to compete in this industry. And we truly believe that — so the long-term competitiveness of any online education company is — so technology is a key factor there. So we are called a tech industry for that reason, right? So it’s the key thing.

So — and if you look at our projects that we talked about, so last year, we actually talked a lot about the smart pen that we use. And we’ve shipped more and more smart pens to our students last year and more this year. And this year, the interactive large class model is actually sort of an upgraded version of the smart pen project last year. So it contains more ways to improve the students and parents experience. So we talked about improved retention, improved conversion.

And I can give you — one more example is in the programming course I talked about. So we’ve actually successfully deployed some of the special made hardware for students to program on. And that’s what helped us achieve the over 85% retention rate for that particular course. So you can imagine that the dynamics within the teams, when they look at these numbers and when they do these projects and improve the retention, improve the conversion and the parents are generally thanking our instructors for providing them with this experience. So we think this is a really good direction. And it will take quarters and years, but we think this is what kind of gets up — what every one of us gets up to work thinking about every day. So we think this is a really good point.

Yes. So about sales and marketing, yes, so maybe Su Peng can talk a little bit, and I can add.

Peng Su

Yes. And Binnie, for the sales marketing efficiency, as you mentioned, if you see the numbers, for real, it looks like efficiency going down compared with the first quarter. But there are 2 things impact for this one. First is about just like you see, the number of tutors increased a lot. And in the Q2 compared with Q1, we also — to prepare for the summer campaign, we also have to, in advance, hire more sales in our team to prepare for the summer’s promotions because we expect there will be more students coming out from — in the summertime.

On the other hand, and also for the marketing side because for the K-12, June, this will be the season to spending the money for the marketing to acquire the new users. So we have — for the marketing, we have to make the — spend marketing dollars at once and to convert them in the next few weeks after we spend marketing dollars. So that we’ll show in the June. We’re spending the money, and they will show the results in July. And I think that’s also impacted our quarterly numbers of other sales and marketing. So I think that’s the 2 factors we believe impacted efficiency.

Feng Zhou

Yes. What I would add is that for sales and marketing, we take a really disciplined and data-driven approach to this. So because we have more and more data, so we now kind of have data for every team. For every team, we will look at how long the investment will be made back, what time of profitability horizon we are looking at for each team. So we think this year, it’s a good opportunity to acquire more users. So that’s why we ramp up the spending on sales and marketing.

Peng Su

Yes. Yes, I think so. For my team, that will be dedicated on we call the healthy unit economics. So I believe that will be the fundamentals for the whole business.

Binnie Wong

Okay. May I just have a very quick follow-up here It’s that if — do you see this year, just on the industry wide, is it getting more aggressive than last year in terms of spending? Or is it rationalizing? Because as — of all these like online players, they probably have been navigating ready find an optimal way for them to acquire users. So do you think it’s relatively speaking, just compared to last year, is it rationalizing all more aggressive? And then I guess with that, Youdao here is that what is kind of like an ROI level that we are seeing versus the industry?

Feng Zhou

Yes. I think every company needs to decide for herself, yes. So what strategy, what kind of customer acquisition cost they are willing to take, right? So for us, we are essentially looking at the numbers and looking at kind of — if we get more users, what value we can provide them, how confident are we can retain them. And also with better scale, how much cost reduction can we get and what more data we can get to improve their experience. So it’s a holistic thing to look at. So every company, I think, have their own thinking.

And the thing I would point out is that we are still kind of at the really early stage. So there are like over 90% of students in China that are not taking online courses. Yes. So the ceiling is really high. So we think given the current market dynamics, yes, our decision is we should take the initiative to acquire more customers.

Operator

The next question comes from Jessie Xu of Nomura.

Jessie Xu

I understand that we rolled out more stronger subjects this year. I suppose we can do more combo sales or cross-selling now. So may I ask what is the average number of enrollment per student? Could you share your cross-selling strategy or some of your thoughts here?

Peng Su

Thank you, Jessie. And our cost retention, cross-selling and so rates for 2 semesters commonly are all in the improving trends. For instance, the number of subjects signed up by the enrollment students in high school increased by over 20% quarter-over-quarter and 6% year-over-year. We expect the number of subjects signed up by the enrolled students for our middle school segments to continue to increase with more Class A, we call Class A subject coming out by using a bundle of the marketing strategy. I hope that answers your question.

Jessie Xu

I have a second question. We noticed that the revenue growth of smart devices was pretty strong in 2Q. Could you share with us some updates or more details?

Feng Zhou

Sure. Yes. Smart hardware sales were RMB 86 million in Q2, up to 50% year-over-year and 63% quarter-over-quarter. So our supply chain and also sales channels were affected by COVID-19 during January and February in Q1 but was back to normal since March. Yes. So mostly back to normal. So in Q2, we also released a new product, Dictionary Pen 2 Pro version. So this is — yes, so this is well received because a lot of our customers actually wanted to learn Japanese and sometimes use and learn Korean language. So these features are really well received. And therefore, we are able to charge a higher unit price, actually, about RMB 1,200 compared to RMB 800 with the original non-pro version. So this is really helpful, so to contribute actually higher gross margin for the hardware segment in Q2.

And well, I can say, we’re not done yet for this year. So we have more new products coming in second half of this year, and we think kind of education-oriented and especially AI-enabled. Our Dictionary Pen is actually AI-enabled smart device. So they present a large opportunity for us because these students, young folks, they’re really kind of digital natives, working with smartphones and everything. And when they are learning, they — sometimes they cannot use their cell phones. The student — the school doesn’t allow them to use smartphones. And they need these special devices for them to do that. And the parents are really willing to pay for these devices, just like parents are willing to pay for courses. Yes. So they’re not price-sensitive on that front.

So we think we really like our product pipeline. So in the second half of this year, we’ll have new products. And yes, we will continue to innovate, which we are — we think we are kind of quite ahead in this area. So we’ll continue to innovate. And yes, so we were bullish on this.

Operator

In the interest of time, this does conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Pei Du

Thank you once again for joining us today. If you have any further questions, please feel free to contact at Youdao directly or reach out to TPG. Good night.

Feng Zhou

Thank you.

Peng Su

Thank you.

Feng Zhou

Check out our videos on the apps.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.





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Hut 8 Mining Corp (HUTMF) Interim CEO Jimmy Vaiopoulos on Q2 2020 Results – Earnings Call Transcript


Hut 8 Mining Corp (OTCQX:HUTMF) Q2 2020 Results Conference Call August 13, 2020 10:00 AM ET

Company Participants

Jimmy Vaiopoulos – Interim CEO

Conference Call Participants

Operator

Welcome to the Second Quarter 2020 Earnings Call. My name is Hilda, and I’ll be your operator for today. At this time, all participants are in a listen-only mode and later we will conduct question-and-answer session. [Operator instructions] Please note that this conference is being recorded.

I’ll now turn the call over to Jimmy Vaiopoulos. Sir, you may begin.

Jimmy Vaiopoulos

Thank you. Hi, everyone. This is Jimmy Vaiopoulos, Interim CEO of Hut 8. Before continuing, I’d like to remind everyone that all amounts in the financial statements and disclosed on this call are in Canadian dollars unless stated otherwise.

This was a difficult quarter in many respects in positive and others. We started the quarter in the fallout of the novel coronavirus pandemic in the shelter-in-place orders that shook global capital markets and bitcoin. It took almost until May for bitcoin to recover the pre-coronavirus bitcoin price levels. We then were braced for the bitcoin halving event on May 11th, where the bitcoin block reward was reduced by 50%.

We saw subsequent drop in network difficulty by 15% shortly after, but it quickly recovered to pre-Hut 8 levels in June. This is not just difficult for Hut 8, but all bitcoin miners across the industry. In the second quarter of 2020, Hut 8 mined 795 bitcoin, resulting in revenue of 9.2 million. This decreased from the same period of the prior year to reasons I mentioned primarily the bitcoin halving event.

Mining profit margin for the quarter was 6%. Despite the difficult quarter, we were able to maintain positive mining operations after all operating expenses as we keep a lean and flexible operating strategy. We benefited from the increase in bitcoin price this quarter of 42% from over $6,400 us to over $9,100 at the quarter end, resulting in a $10.1 million revaluation gain. This shows that our strategy of mining and holding bitcoin is paying off and is a strategy we plan to continue.

We had positive net income of $2.8 million and negative adjusted EBITDA of $86,000 showing a near breakeven quarter from an EBITDA perspective. Our balance sheet remains strong with a working capital surplus of $16.4 million including $7.4 million that was committed to make a purchase of bitcoin mining equipment.

Beyond this we’ve also had many positive developments that occurred both during the second quarter and subsequently. This includes closing an oversubscribed $8.3 million round where 100% of the net proceeds are committed to purchase 275 petahash of the latest generation equipment for MicroBT. We now have possession of 1,000 M31S and a 1,000 M31S Plus units, which are on their way to the Medicine Hat facility and it will be up and running in the next three weeks.

We’re also preparing for the 1,600 M30S units that will be arriving later this year as well. In addition, transferring the management of the Madison Hat site from Bitfury to Hut 8 which saves us over $500,000 per year, we’ll be transferring the management of the Drumheller site at the end of this month, which provide even more savings. We negotiate our loan agreement with Genesis to reduce the annual interest rate from 9.85% to 8.5% as long as bitcoin is over $6,500, saving Hut 8 approximately $500,000 per year.

We’re also transferring the Clarke chips from Drumheller to Medicine Hat, which will combine our most efficient equipment that we have on site currently with our best electricity price to increase mining margins. And finally, Hut 8 has stepped into hosting, starting with six block boxes, which diversifies our income with more recurring revenue and this brings a large potential for future growth as a natural extension of our core business.

I’ll now pass the call back over to the operator and open it up to Q&A.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from Edison Lay [ph]. Please go ahead.

Unidentified Analyst

The first question is related to the new hosting agreement that you guys have with the client at Medicine Hat. I was wondering, if you can give a little bit more color on the contract, what the payment terms are, how long the contracts for anything there would be great? And then I have a quick follow up on that.

Jimmy Vaiopoulos

For sure, we haven’t put out all the details here yet just for confidentiality reasons. But what I’ll say about it is, it is a long-term contract. These are latest generation equipment that we are hosting. So, the intent is that these will be profitable for some time. This is lower risk for us in the sense that we do have fluctuations in our electricity price, and those electricity prices are flowed through whatever they are to the client, and there is a fee on top of that, but we haven’t disclosed that at this time.

Unidentified Analyst

Okay. Just to clarify, so there’s no risk at all on the fluctuations in electricity price there. And there’s —

Jimmy Vaiopoulos

That’s right.

Unidentified Analyst

And there is risk on the payment as well. It’s paid in USD or CAD?

Jimmy Vaiopoulos

Exactly, paid in CAD, and of course, we’ve done our calculations to make sure we’re making a fair margin on top of that. And we’d have collateral over the units as well. So, there is lowered risk in terms of even a downturn being paid.

Unidentified Analyst

That’s definitely — that’s really helpful. Obviously, it’s a major shift in your strategy for going from a pure play mining company to doing hosting as well. So, I was wondering, if you could talk about the shift there? And is there a long-term revenue target mix between hosting and mining?

Jimmy Vaiopoulos

And it’s a good question. And this is our first client that we’ve signed up. So, we’re in the early stages. So, in terms of mining, in terms of hosting, I don’t see this limiting or putting it — this shouldn’t limit our self mining side of our business at all. This is all in addition to, and so we will always prioritize. And if we are able to self mine, that’s where our capacity is going to go to. We want to continually grow that business as fast as possible. But with excess capacity and with our ability to source new sites, we think it’s a very natural extension.

We’re used to running sites where we’ve run some of the biggest sites in the world and we have access to very cheap energy in good jurisdictions, so people want access to that. And so with our excess capacity and ability to find new sites, we think this could be a growth factor on top of ourselves mining, we don’t have a mix in mind. We intend to grow both as much as we can, but then we still get to see the appetite on both sides just because it is such a volatile market to be able to predict the mix just yet.

Unidentified Analyst

Okay, awesome. The next question is related to the halving event in the quarter. Obviously, Q2 was the first quarter post rewards halving. How did you guys manage capacity after the rewards were cut by 50%? And then, what happened post Q2 in terms of utilization, if you can kind of give some percentages there that would be great? And also, what you’re seeing in terms of the general mining community or our miners shutting off because of the having any color there it would be great?

Jimmy Vaiopoulos

For sure, so, I’ve mentioned this before we are very — we have of course prepare for halving but we’re watching every minute with the — what the difficulty rate is with the bitcoin prices or electricity price, and we’re constantly adjusting and have our foot on and off the throttle in between standby eco and full mode for all our miners at all times. And so, after the halving, we saw a lot of volatility in the difficulty rate. And so, we were watching that very closely. We did see a lot — we had expected approximately 25% drop because we have seen in mid-March when bitcoin price dropped by more than half we saw over 25% drop in difficulty so we thought that that was a good test for what the halving event may be.

But with a drop of only 15% and reversing back after that, it’s clear that a lot of the miners that we expected to shut-off didn’t shut-off. And we have a good idea also in terms of the new equipment that’s coming to site, when we did our last order, we had talked to many different manufacturers, it’s especially the large ones, and we understand the capacity and it’s quite limited, actually. And so, there’s a few speculative things that have been said in terms of why the hash difficulty rate has remained high, and some of them being the wet season in China was exceptionally good this year, which is going to be finishing soon and also the limited demand from the coronavirus around the world, which is — which should expect to drop electricity prices globally as well.

Those speculative hard to prove, but could be answers to why the difficulty rate has remained as high as it has. And so, for Hut 8, we did limit our capacity for periods of time there. For example, in March we had to temporarily go to standby mode for some of our equipment there just because it was such a sudden drop that difficulty couldn’t adjust and it was very similar for the halving event right it took some time for the difficulty to adjust. And so, we did have to adjust down our some of the production on our older equipment for a period of time in there, which is why you see a smaller amount of bitcoin mining there because we are kind of adjusting down to these times, but with the bitcoin price returning and bitcoin economics returning especially, after Q2 where we see bitcoin is hitting, 52-week highs . Our equipment is all running in those periods of good bitcoin economics recently.

Unidentified Analyst

Okay. That’s really helpful. I wanted to jump over to the cost reductions that you guys press release recently. Can you guys — can you give us the run rate for your new operating costs post this transfer of site? And was that half a million dollars already included in the $2 million that you guys previously announced in January or is this on top of that?

Jimmy Vaiopoulos

Yes. So, this affects different levels, I would say. So, you have the operating level, which a lot of the transfer of management at our sites is going to affect. So you see an improving mining margin related to those. And then you have the reduction in interest rates that we’re paying, which is separate from our G&A and our operating costs, which we’re going to see a $500,000 savings bottom line there.

And then you have our overhead, which we are going to see slight improvements from $2 million that we have there. I would say, close to 1.75, is our better run rate from overhead costs at this point. As we’ve been again slowly making ourselves as lean of a company as possible and trying to be a low cost lean bitcoin miner. And so, we really focused internally on our cost per bitcoin as much as we can.

Unidentified Analyst

Okay. I have one more question for me and I’ll pass the line. I was wondering if you could quantify the — sorry, the margin accretion or efficiency gain from the transfer of Clarke chips. So if you were able to transfer them today, what would be the percentage increase or efficiency gain?

Jimmy Vaiopoulos

Yes. So, in terms of — so just to be clear there, so the efficiency of the equipment doesn’t change, but we do have better pricing in Medicine Hat. So, what we’re doing is we’re taking our most efficient equipment and putting it in a spot that has better pricing, which means that we can run it in a level between full and equal, much longer than it would be at a different site. And so, efficiency remains unchanged and it’s a bit difficult to put a number on it right now in terms of dollar value of the benefit.

Mostly because we’ve yet to see where the steady state of electricity prices in Drumheller are. There are a lot more fixed in Medicine Hat. So we have a good idea there. But, they’ve been quite volatile mostly to our benefit. And so, it’s a bit difficult right now to put a number to that. But very soon, we will as we see things steady out as everything is opening back up in many respects.

Operator

Thank you. Our next question comes from Ivan Garabedian [ph]. Please go ahead.

Unidentified Analyst

Hi. I have two questions. One, I’ve noticed that, the cost of the bitcoin in U.S. dollars in the last two quarters basically was $8,400 and $7,800. I’m wondering, what is the primary driver behind this? Is it strictly the difficulty level? Or is there more because it is significantly higher than historical cost? And also, can give us an update on who’s going to be the next CEO? And how does that search go?

Jimmy Vaiopoulos

Sure. And just to clarify, your first question was about cost of bitcoin, right?

Unidentified Analyst

Yes. Cost of bitcoin. It was $8,411 in Q1 and just about $7,800 in Q2.

Jimmy Vaiopoulos

Perfect. Yes. So, in terms of our cost of bitcoin, there’s a lot of factors — the main three factors that affect that are, the bitcoin price, network difficulty rate, and our electricity price. Those are the main three. There is, of course, the more efficient equipment that we start putting online. For example, this new equipment that we purchased that, a good chunk of that we have in possession. And so, that is going to be reducing our cost per bitcoin quite significantly, just because they’re much more efficient equipment than especially some of our older stuff.

And, so, that will reduce the efficiency of equivalent would be kind of the fourth on that list. And so, the way that we also talk there are costs to bitcoin. Some other competitors just use our electricity. We want to provide a fulsome number. So, we put our full operating costs, which are employees on site and everything related to actually bringing that Bitcoin to the Company. And so a lot of these measures that we’re doing in terms of reducing costs at site are also going to be reducing the cost per Bitcoin as well. So, that’s another factor that that I would mention.

So, that’s answer your question there and I can move on to question number two as well. I’ll take that as a yes.

Unidentified Analyst

Yes.

Jimmy Vaiopoulos

Thank you. In terms of the second point, the first thing I’ll mention about the CEO search is that I’m not an active part in it. So, I can only speak to a certain level to it. The Board I know is active in the search. It is taking some time as it is a key decision. But thinking through, I think that’s about all I can say, they are actively working on it. And it is a priority to them. But, I don’t have more detailed information that, I personally have or even can disclose. So I have to leave it there.

Unidentified Analyst

Okay. I have one final question. The sites that you operate are awesome. And I’m just wondering, in terms of expansion, aside from swapping out the actual machines. Is it possible to either expand this site either horizontally or even vertically because they are essentially cargo containers, but possibly could be stacked up? I’m just wondering, how much you can expand capacity physically.

Jimmy Vaiopoulos

Yes. So, in terms of vertical, this is — remember a question that came up one-time. And there’s provide, it causes certain difficulties because a big part of managing those block boxes and our mining equipment is airflow and managing the heat and cold that that exists in there. And so, we put it a lot of engineering into the pressure of those boxes and how the air flows, and they we have heat corridors and cold — hot corridors and cold corridors between each of the boxes.

When you start stacking on top of each other, the heat from one box is going to go into the one above it. And then you start losing some benefits because obviously you never want this equipment to overheat. And so, we have a good design here and the way that we have it where it’s all spread out, keeps it — keeps our costs low because we’re using a lower cost way of keeping the chips at the right temperature.

One thing I’ll say here, so for example in Medicine Hat, we have over 10 — around 10 acres there. And our cost is around $1,400 per month. So it’s very minimal when you take the scale of our operations. There’s nothing around this, like we can get more land if we wanted it. The biggest thing is constraints of electricity and capacity there. And so, we feel — so at our sites, we are at capacity.

There are ways that we have thought through and talked about ways to increase that, if we wanted. But land is the easiest thing to deal with in the whole thing. That was the hardest part is just getting more electricity, and we also make sure that we have other sites that we’re always keeping in mind and the electricity and sites are stuff that we do have access to. But it’s a good question.

Operator

Thank you. Our next question comes from Frank Sukumari [ph]. Please go ahead.

Unidentified Analyst

Yes. Good morning. I’m just trying to understand the rationale for the Company issuing deferred units and restricted units to yourself and the Board vis-à-vis the traditional stock options that are provided? And secondly, what are the terms and conditions of those units?

Jimmy Vaiopoulos

Yes. So the DSUs, so the DSUs are to the Board. And it’s actually something you see in many public companies. And the thought there is still provide alignment with the board. And, you can get something similar with stock options, but DSUs for the board also provides similar tax incentives as well, but it’s getting ownership into the directors’ hands so that there’s alignment between shareholders and the board. There is no long-term we want to get the board members to have a minimum amount of ownership as well. So, this gets them that overtime.

And then in terms of the RSUs, which were to myself this is all related to my role as interim CEO. This has been the way that we have — it is such a quick comment again, for CEOs across many different industries, I do have stock options as well and we do utilize stock options. And so, that is a powerful tool in terms of alignment, but we feel RSUs do have a similar effect and in also put ownership in addition to the stock options. So, in combination, we feel we’re using a good mix.

Unidentified Analyst

What are the terms for the RSU and the DSU?

Jimmy Vaiopoulos

Yes, so typically whenever they are issued they at the CEO and Director level that takes a year to vest. So, that’s and stock options vest over three different years. So, whenever you see those getting issued, they’ll vest a year later. And if it’s a bigger package, it’ll vest over three years.

Unidentified Analyst

Okay, good luck. Okay, so but these ones are for one year?

Jimmy Vaiopoulos

One year. That’s right.

Operator

Thank you. [Operator instructions] We have a question from Andreas Fuhrmann [ph]. Please go ahead.

Unidentified Analyst

Thank you very much for having me. Thank you very much for receiving my questions. I’ve got — my first question is, what is the book value of your current mining equipment?

Jimmy Vaiopoulos

Yes, so on the balance sheet, we have it there — it’s about 21 million. And so that’s from — when we take our equipment, it depreciates over two years and our infrastructure over four years, so just to give you some context there.

Unidentified Analyst

Okay. And the 21 millions do not include the new mining equipment which we just acquired. This is not included in it yet.

Jimmy Vaiopoulos

That’s right, exactly. So, see at June 30th, this was days after we closed the financing. We had not put in an order or received the equipment and installed it so that when that gets installed, that’s going to then go into our equipment.

Unidentified Analyst

Okay, next question, which I have. Your web page slide shows mine 152 petahash at the moment, I think it’s at the moment and properly it does not include yet year-on-year equipment. My question is. When do you think what kind of timeframe can you talk with your hash rate?

Jimmy Vaiopoulos

The question was double the hash rate? Or you said — sorry, it was a question of double the hash rate or the question was, when do we think we can actually get these new miners that we ordered installed?

Unidentified Analyst

No, by when do you consider that you have on 2,000 petahash?

Jimmy Vaiopoulos

So, our recent order is going to add 2,000 petahash to our production. And — but in terms of 2 extra hash or to 2,000 petahash, it’s hard to put an actual date on that. There’s multiple factors that depend on, that matter in terms of when we can do that. Ambitions are there and overtime, with more efficient equipment, it’s going to be easier to get to those higher numbers. But this time unfortunately, I can’t put a date to it that I can confidently hold myself to?

Unidentified Analyst

What are the constraints or what enables you to buy new equipment? I think you have some locked out bitcoins. So, are you going to use this? Or are you still acquiring stake in bitcoin? Or will your free this up to buy new mining equipment? Is there a plan for this?

Jimmy Vaiopoulos

Yes, so we have — our strategy is going to give exposure through both bitcoin holdings and mining. In terms of smaller amounts, I can see us especially if bitcoin goes much higher than where it is today. We will definitely use some of that bitcoins that we have. At some level, it would be a discussion because at all times, we want to make sure that we’re giving people exposure through bitcoin.

And we also — it’s tough as well because you want to make sure when bitcoin goes up, the price of mining equipment also goes up. So, we don’t want to be selling bitcoin at a time where equipment is expensive. We want to make sure we’re timing the market so that, we’re taking advantages of times where bitcoin goes up, taking advantage of times where equipment is cheap, and the payback is much faster.

But we do keep all these factors in mind. And so, with a higher bitcoin price that does give us much more flexibility in terms of expansion as well. Again, timing is to be determined. Another constraint is. There is a certain amount of capital that’s out there that wants more exposure to bitcoin mining. So, similar to the way that we did that raise, not that, it’s in our sights, but that is another potential. And then, what’s we’re hosting, that wouldn’t be self mining, but that would also increase our footprint as a bitcoin miner as well.

Unidentified Analyst

Okay.

Jimmy Vaiopoulos

But I mean to answer your question, we want to get there as soon as possible, we want to increase our self-mining capacity.

Unidentified Analyst

Okay. Thank you very much.

Jimmy Vaiopoulos

Okay.

Operator

Thank you. Our next question comes from Deepak Kaushal [ph]. Please go ahead.

Deepak Kaushal

Hi, Jimmy. Sorry. I joined a bit late, so if I ask any repeat questions, I apologize. But I wanted to get your sense of the M&A environment now that we’re well post halving and with kind of COVID environment. What kind of changes are you seeing and how are you guys thinking about M&A these days? Is it in the playbook?

Jimmy Vaiopoulos

Yes. So, we always keep an open mind in terms of all the different ways that we can grow. And so, just speaking at a high level, here’s our view, eight years ago, there was a lot of basement miners and that was the way that people mined bitcoin. And then, big scale is, it was crazy for someone to open up a two megawatt facility and actually go to more of an industrial level. And so, now past this halving, we’re going to see a lot more bigger industrial scale operations, similar to what we have now, where were the 2 megawatts to 5 megawatts going to be very difficult to be profitable at that scale, because it’s very tough to get a good price at that level and get the economies of scale. And so, we’re going to be seeing a lot more companies coming to our size.

And beyond that also, wanting to become a public company. So, the value of our paper has some value to many other companies that want to grow and be part of something bigger and get those economies of scale. And so, there are definitely opportunities out there, people who have latest generation equipment and steady cash flows and some potential for accretive transactions. It’s just a question of, I mean, there’s lots of questions around that, but yes, we always keep an open mind to these types of transactions, and yes, there are opportunities out there.

Deepak Kaushal

Okay. And then just a quick follow-up. When we think of your expansion geographically, are you — you have enough in the vicinity of your, in province of Alberta? Or are you looking further in other regions in Canada or even in the U.S. what’s your sense of that?

Jimmy Vaiopoulos

Yes. So, we’re very happy with the states we have now, but we also always keep a pipeline of potential new sites as there may be good opportunities to expand beyond our current capacity. What I’ll say is, we are definitely focused within North America, that’s where we see a lot of our investors want to see our hash power in jurisdictions that are well understood and safe. And that’s something that’s important to us.

But yes, we definitely are looking for the cheapest power and best sites all around. And if the opportunity were to present itself where we could take advantage of one of those, we would of course always consider it. And so that pipeline is very important to us. We think that there’s a lot of value and making sure that we can think beyond what we’re currently mining.

Unidentified Analyst

Got it. And then just my last question, if I may. So reading your press release last night and your movement of chips, Clarke chips to Medicine Hat. But you’re also doing the hosting facility for Medicine Hat. Can you just walk us through the rationale behind that? I would have assumed if you’re moving your most efficient chips to Medicine Hat where the electricity price is cheaper, more stable. You want to move the hosting facilities to Drumheller where it’s more variable and pass that on to the customer? What’s the rationale there behind that?

Jimmy Vaiopoulos

Yes, we wanted to keep it also compelling for the client as well. And so, with where is a bit of cheaper energy in Medicine Hat we’re able to, you know, that factors into the decision and choosing Hut 8 over other competitors because there are others that that provide hosting and have fixed fees. Drumheller is still competitive. It’s just a question of Medicine Hat is more competitive. And in signing on our first client and we think there’s potential beyond this at Drumheller and beyond, but we want to make this as compelling as we could for both us and the client and we thought Medicine Hat was the best spot for that.

Operator

Thank you. We have a follow-up question from Ivan Garabedian [ph]. Please go ahead.

Unidentified Analyst

Hi, Jimmy, me again. Simple question, do you have any plans to list the Company on either NASDAQ or the New York Stock Exchange?

Jimmy Vaiopoulos

No media plans. I’ve been definitely watching the companies that are on the NASDAQ and what they have done and keep a close eye on what our options are. And so, that is something I have in my mind. No media plans, nothing that, that’s just around the corner. But, as we grow, we do see that. That’s kind of the next organic expansion in our life as a public company. And so with other companies paving the way there — and also just a note, as a TSX company that we are, we do have an expedited path. I think it’s to the NASDAQ. And so, this is an option to us. We just want to make sure it’s at the right time and well thought out.

Unidentified Analyst

Okay and one last question. And one last question. In your playbook with respect to expanding capacity, especially in buying equipment, do you foresee issuing new shares in order to finance that acquisition of equipment? Or are you going to use the incremental value of bitcoin in order to finance that?

Jimmy Vaiopoulos

It depends. So similar to before the raise, I said, we always keep an open mind if we think that we can. If there’s a big appetite and there is capacity that we have. And we could think — and we believe we can provide value in issuing new shares for this. Then we stay open minded to that. But we do want to grow our self-mining. We do believe that our bitcoin holdings are going to be quite valuable over time. This is a strategy that eventually it may, and so — it could be a mix. It could be one or the other. It’s hard to say at this time, but we do stay open minded.

Operator

Thank you. And at this time, we don’t see further questions. Thank you.

Jimmy Vaiopoulos

Thank you everyone for joining the call and the questions, and we look forward to staying in touch.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. We thank you for participating. You may now disconnect.





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Stelco Holdings Inc. (STZHF) CEO Alan Kestenbaum on Q2 2020 Results – Earnings Call Transcript


Stelco Holdings Inc. (OTCPK:STZHF) Q2 2020 Earnings Conference Call August 13, 2020 9:00 AM ET

Corporate Participants

Trevor Harris – Vice President, Corporate Affairs

Alan Kestenbaum – Executive Chairman and Chief Executive Officer

Paul Scherzer – Chief Financial Officer

Conference Call Participants

Operator

Good morning. My name is Veronica, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the conference call regarding Stelco’s Second Quarter Results for 2020. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Mr. Harris, you may begin your conference.

Trevor Harris

Thank you, Operator. Good morning, everyone. And welcome to Stelco’s second quarter 2020 earnings conference call. Speaking on the call today will be Alan Kestenbaum, our Executive Chairman and Chief Executive Officer; and Paul Scherzer our Chief Financial Officer.

Yesterday, after the market closed, we issued a press release overviewing Stelco’s financial results for the second quarter of 2020. This press release along with the company’s financial statements and management’s discussion and analysis have been posted on SEDAR and on our Investor Relations Web site at investors.stelco.com. We have provided a link to the presentation referenced on today’s call on our Web site as well.

I’d like to inform everyone that comments made on today’s call may contain forward-looking statements, which involve assumptions which have inherent risks and uncertainties. Actual results may differ materially from statements made today, so do not place undue reliance upon them. Stelco management disclaims any obligation to update forward-looking statements except as required by law.

With that in mind, I would ask everyone on today’s call to read the legal disclaimers on Page 2 of the accompanying earnings presentation and also to refer to the risks and assumptions outlined in Stelco’s public disclosures, in particular the second quarter Management’s Discussion and Analysis sections, relating to forward-looking information and risks and uncertainties as well as our filings with Securities Commissions in Canada.

The appendix of our presentation and the non-IFRS performance measures and review of non-IFRS measures of our annual MD&A, provide definitions and reconciliations of the non-IFRS measures that we use today. Please also note that all dollar figures referred to in today’s call will be in Canadian dollars unless otherwise noted.

Following today’s prepared remarks, Alan and Paul will be taking questions. To maximize efficiency, we ask that all participants who would like to ask a question limit themselves to one question and one follow-up before re-queuing.

With that, I would now like to turn the call over to Alan.

Alan Kestenbaum

Thank you, Trevor, and good morning, everyone. Thank you, everyone, for taking time today to join the call and discuss Stelco successful second quarter results.

Over the past quarter our business has not been immune from the challenges that have been brought on by the pandemic and the resulting economic downturn. Despite the pandemic and steel prices that are well below the five year average, we were able to generate adjusted EBITDA of $34 million in the second quarter, an increase of 70% over the first quarter and 6% above Q2 2019, when there was no pandemic.

Our company’s ability to deliver these results is largely attributable to our low cost structure and wide ranging product mix combined with our commitment to tactical flexibility. These factors allow us to target high margin opportunities at any point in the market cycle and continue to deliver positive results for our stakeholders.

We started the year with three very ambitious goals. We aim to capitalize on our investment into state-of-the-art galvanizing batch, anneal and tempered capabilities that target higher value added customers, such as auto customers. We wanted to secure a long-term arrangement for our critical raw material supply and we look to execute on the next phase of our strategic capital plan and modernize our most critical asset, with the goal of Stelco becoming the lowest cost flat-rolled steel producer in North America, with a full suite of product capabilities.

Over the first half of 2020, we have taken several steps towards achieving all of these goals. During the first half of the year, we continue to expand our reach into the fully processed cold-rolled market and delivered increased volumes of high quality products to several of our most valued customers, while growing our customer base. Despite softening demand in the second quarter resulting from the global pandemic, we were able to ship 271,000 tons of value added cold-rolled and coated products during the first half, an increase of almost 74% over the first half of 2019. We are excited about the opportunity that this growth represents for our business and look forward to continuing growing market share in these markets.

With respect to our raw material supply, we announced last quarter that during the depths of the pandemic, we were able to secure a long-term agreement with U.S. Steel to acquire high quality iron ore pellets from the Minntac mine at attractive prices for the next eight years. At the same time, we entered into an option to acquire 25% of Minntac at any point over the next seven years, an option that we see is having great value as it allows us to secure a permanent, high quality, cost effective supply of iron ore pellets from what we believe is the largest and lowest cost mine in the United States.

Earlier this quarter, we also announced that we have entered into an agreement with DTE Energy Services to develop, construct and operate a 65-megawatt cogeneration facility at Lake Erie Works. Once commissioned, this facility will consume byproduct fuels from our blast furnace and coke battery, reducing our greenhouse gas footprint and significantly lowering our overall electricity costs.

And on July 17, we commenced our previously announced blast furnace upgrade and reline project, that will deliver key technology improvements at the Lake Erie Works, we believe making it the only real smart blast furnace in North America. Upon completion of this projected 75-day project Stelco will emerge with what we believe to be the most modern and efficient blast furnace in North America.

In the fourth quarter, we anticipate beginning to realize the benefit from an increase in hot metal production capacity of approximately 300,000 tons annually as well as quality improvements and cost reductions resulting from improved efficiency at the furnace. While this project represents a significant commitment of time and capital, it is key to the long-term growth and success of our company.

Collectively leadership achievements will result in Stelco emerging as an even lower cost and higher quality producer than it is today. We believe this will position us to be the lowest cost steelmaking facility in North America and set the stage for the next generation of growth for our business. Almost all of our key end markets recently have rebounded strongly.

Once again, we expect to be sold out this quarter or be at about half of our normal shipping level due to the blast furnace upgrade project. We expect to complete this project by the end of this quarter positioning us for substantial growth in the fourth quarter compared to historical levels.

I should also note that we have achieved all of this to-date without experiencing any significant operational impacts resulting from the COVID-19 pandemic. By working together with experts and with the cooperation of our workforce, we’ve effectively protected the health and safety of our workers, their families and the community at large while maintaining our operations and continuing to service our valued customers. We also signed on to the Black North initiative, which seeks to actively pursue social justice through hiring and business practices. These are things that we are very, very proud of.

Going forward, I’m excited about the opportunities that lie ahead. Upon completion of our blast furnace upgrade project, we will have completed our strategic objectives for 2020 and will have fully prepared to capitalize on market opportunities as economic recovery continues across North America. To-date, since our ownership again in mid-2017 that’s a mere less than three years ago, we have returned over 330 million to shareholders in dividends and buybacks and we have invested over 600 million back into the business to improve our assets significantly.

We have done all of this in a unique fashion to utilizing earned cash flow without incurring any dilutive debt issuances, or equity issuances, which is something we are very proud of. This accomplishment is a clear demonstration of what happens when you invest in a company with a management team that has approximately 20% of the shares outstanding, working tirelessly alongside you, our investors.

Our management team will also remain sharply focused on the core principles that have guided Stelco’s success to-date. We will stay disciplined and keep our balance sheets strong utilizing our tactical flexibility model to focus on maximizing our cash flow and profitability. We will continue to explore opportunities to strategically grow our company in a manner that generates shareholder value. At the same time, we are focusing on reducing costs across our business in a manner that is responsible and sustainable and continue to focus on returning capital and long-term shareholder growth to our shareholders.

Once again, thank you all for taking time to join our call today. I would now like to turn things over to our CFO, Paul Scherzer, to share some information specific to our financial results.

Paul Scherzer

Thank you, Alan, and good morning, everyone.

While, Alan did refer to business remarks, I think it is important to note that the market headwinds we saw in the first quarter of this year certainly continued through the second quarter. Average pricing remained largely in line with the first quarter although we did see a slight drop of about 1% in our averaged realized price during the period. It’s important to note that pricing does remain significantly below over $200 per ton below the peak pricing we saw in 2018.

From a volume perspective, we were impacted by challenges associated with the COVID-19 pandemic. But we were very pleased to be able to work with our loyal and valued customers to navigate these challenges. We shipped 576,000 tons of steel during the second quarter, which was actually up 6% over the second quarter of 2019, which is pretty remarkable given how the world has changed since this time last year. We were very pleased to be able to continue growing our penetration in the value added cold-rolled and coated markets during the quarter, with shipments of those products up 44% to 124,000 net tons versus the comparable period last year.

Our resulting revenue of $411 million is [down] [ph] 4% from last year’s second quarter, primarily due to the 7% drop in price. However, due to stronger shipments and a substantial improvement in our cost of goods sold, we were able to produce operating income of $16 million and adjusted net income of $10 million for the quarter.

Our adjusted EBITDA of $34 million, or $59 per net ton was an improvement over last year’s quarter in absolute terms and consistent on a per ton basis. While these are positive results there means potential room for improvement once our Lake Erie Works blast furnace returns to operation by the end of this quarter following the 75-day upgrade project. The expected increased production capacity, which combined with an anticipated economic recovery should allow us to increase our shipments in Q4 thriving higher revenue margins and EBITDA as we enter the new year.

At the end of the second quarter, our liquidity position remains strong. We ended the period with $168 million of cash on hand and $105 million of availability under our existing asset based credit facility. As was noted at the end of the first quarter, we do anticipate some reduction in our cash holdings as we complete the capital intensive blast furnace upgrade and relined project. We do however, see ample opportunity to replenish our cash holdings upon completion of this project, when we begin to see the benefits from the expected capacity increase that should translate into higher revenue for the company.

As Alan noted, we are entering the final phase of a capital investment strategy and our overall financial position remains strong. We have resumed work on the installation of a pig iron casting facility that had previously been suspended. We are undertaking this project due to what we see as a strong market for iron units and our expectation of additional hot metal capacity through the blast furnace project. We anticipate this new facility will be up and running priority to year end.

Throughout the past three years Stelco has remained disciplined in its fiscal approach and intensely focused on delivering returns for our shareholders. Our management team is confident that our approach will continue to deliver these same strong results as our business moves into the next phase of growth.

Our business is resilient and has been built on a strong foundation to support our future success even in the face of the current pandemic and other global economic pressures. Our low cost structure will only be improved following the completion of our blast furnace project and our management team’s commitment to our tactical flexibility model will forge Stelco an even greater opportunity to succeed at every point in the market cycle.

I share Alan’s enthusiasm for the future of our business. We will continue to be responsible financial stewards and manage our operations to ensure Stelco can generate value and achieve the best possible outcome for our shareholders.

Question-and-Answer Session

Q – Unidentified Analyst

Trevor Harris

Thank you, Paul and Alan. Alan, I will turn it back to you for closing comments.

Alan Kestenbaum

Okay. We thank everyone for joining the call today. And we hope everybody remains safe. And we look forward to speaking to you again next quarter. Have a good day.

Operator

Thank you very much. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and I ask that you please disconnect your lines. Thank you and have a good day.





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AIG appoints David McElroy CEO for general insurance business By Reuters


© Reuters. American International Group Inc. (AIG) headquarters seen in New York

(Reuters) – American International Group Inc (N:) on Thursday promoted David McElroy to the post of chief executive officer of general insurance and executive vice president with immediate effect.

McElroy, who was president and chief executive officer of the North American operations of general insurance at AIG, will also join the AIG executive leadership team and report to Peter Zaffino, the insurer’s president and global chief operating officer. [nBw9G8kn9a]

McElroy takes over the role of CEO, general insurance from Zaffino in a move that gives Zaffino more time to spend on corporate-wide initiatives and puts him in place to eventually take over as CEO from Brian Duperreault, Wells Fargo (NYSE:) analyst Elyse Greenspan said.

Zaffino was named president of AIG, one of the largest U.S. insurers, in December. (https://reut.rs/3fRZhfd)

“Our view has always been that Duperreault would step down and hand the reins over to Zaffino when there was line of sight to consistent improved performance within its General Insurance business,” Greenspan said.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Genmab A/S (GMAB) CEO Jan van de Winkel on Q2 2020 Results – Earnings Call Transcript


Genmab A/S (NASDAQ:GMAB) Q2 2020 Results Conference Call August 12, 2020 12:00 PM ET

Company Participants

Jan van de Winkel – President & CEO

Anthony Pagano – CFO

Judith Klimovsky – CDO

Anthony Mancini – EVP & COO

Conference Call Participants

Peter Verdult – Citi

Wimal Kapadia – Bernstein

Michael Schmidt – Guggenheim

Matthew Harrison – Morgan Stanley

Trung Huynh – Credit Suisse

Kennen MacKay – RBC Capital

James Gordon – JPMorgan

Emily Field – Barclays

Carsten Lonborg – SEB

Laura Sutcliffe – UBS

Graig Suvannavejh – Goldman Sachs

Sachin Jain – Bank of America

Operator

During this telephone conference, you may be presented with forward-looking statements that include words such as believes, anticipates, plans or expects. Actual results may differ materially. For example, as a result of delayed or unsuccessful development projects. Genmab is not under an obligation to update statements regarding the future nor to confirm such statements in relation to actual results unless this is required by law. Please also note that Genmab may hold your personal data as indicated by you as part of our Investor Relation outreach activities in order to update you on Genmab going forward. Please refer to our website for more information on Genmab and our privacy policy.

And now without further delay, I would like to hand the conference over to our speaker today, Jan van de Winkel. Please go ahead, Jan.

Jan van de Winkel

Hello and welcome to the Genmab conference call to discuss the Company’s financial results for the first half of this year. With me today to present these results is our CFO, Anthony Pagano. And we will be joined for the Q&A by our Chief Development Officer, Judith Klimovsky and our Chief Operating Officer, Anthony Mancini.

Let’s move to Slide 2. As already said, we will be making forward-looking statements. So please keep that in mind as we go through this call. Let’s move to Slide 3. I am proud to say that despite the universal challenges posed by the COVID-19 pandemic Genmab not only had a strong second quarter but a transformative one. Two key events have occurred since we presented to you with our first quarter results. We reported very favorable top line results for tisotumab vedotin in cervical cancer and of course we announced a broad foundational oncology collaboration with AbbVie.

Starting with the most recent event. The highly anticipated tisotumab vedotin data in late June, we along with our partner, Seattle Genetics announced that the innovaTV 204 trial of tisotumab vedotin for patients with recurrent or metastatic cervical cancer had met its primary endpoint with a 24% confirmed overall response rate and a median duration of response of 8.3 months. We very much look forward to discussing these results with the FDA and the potential for the first BLA submission for one of our proprietary therapeutic candidates, this would be an important milestone in our Company’s history.

Our landmark AbbVie collaboration was also one of the most anticipated events of the year for Genmab. Genmab and AbbVie will be equal partners working together to jointly make all strategy, clinical development and commercialization decisions for three Genmab bispecific antibody therapies epcoritamab, DuoHexaBody-CD37 and DuoBody-CD3x5T4 as well as potential novel differentiated cancer therapies created under a discovery research collaboration. So this collaboration sets us on a path to accelerate, broaden and maximize the development of some of our promising bispecific antibody therapies, including epcoritamab with the ultimate goal to bring differentiated new potential therapies much faster to cancer patients.

So as you can see on the slide, we have advances to report with two of these potential therapies. As we recently dosed the first patient in an expansion cohort for epcoritamab and initiated a first-in-human trial of DuoBody-CD3x5T4. I would also like to mention that there is now a Phase 3 trial by Janssen for amivantamab as first-line treatment in non-small cell lung cancer listed on clinicaltrials.gov. This represents the first Phase 3 trial for a DuoBody therapy and we very much look forward to this study being initiated.

In addition, you may have seen the very impressive results from the two ASCLEPIOS Phase 3 trials of ofatumumab in relapsing MS that were published on August the 6th in the prestigious New England Journal of Medicine. Of course DARZALEX also remains an important factor in our success.

Another major 2020 milestone was achieved in the second quarter with the subcu formulation of DARZALEX called DARZALEX FASPRO in the U.S., approval in both the U.S. and the Europe. This is the first and only subcu CD38 antibody approved in the world and we look forward to potential approval in Japan as well following Janssen’s submission of an NDA there in April. As a reminder there is also potential for approvals based on Amgen’s CANDOR study of daratumumab in combination with carfilzomib and dexamethasone in relapsed or refractory multiple myeloma and submissions by Janssen to regulatory authorities in the U.S. and Japan in Q1 as well as a submission by Amgen in Europe in the same quarter.

And while daratumumab may already be considered an important therapy for multiple myeloma, we continue to see the potential for further expansion and positive top line data sets. At the end of May, we saw the first Phase 3 results from an indication outside of multiple myeloma with the positive top line data from the ANDROMEDA study of subcu daratumumab in combination with cyclophosphamide, bortezomib and dexamethasone or in short CyBorDex for patients with newly diagnosed AL amyloidosis. This was followed very recently by positive results of the Phase 3 APOLLO study of daratumumab plus pomalidomide and dexamethasone or pom-dex in relapsed or refractory multiple myeloma. This study was designed to confirm the results from the Phase 1 EQUULEUS trial which investigated the IV or intravenous formulation of daratumumab in combination — in the same combination and it was the basis for an approval in the U.S. in 2017.

Finally and very excitingly we reported $1,838 million in net sales by J&J during the first half of the year, an increase of 31% over the first half of 2019, resulting in DKK1,652 million in royalties to Genmab. Given the challenging coronavirus situation we are pleased with DARZALEX’s performance in the first half of 2020 and we look forward to seeing the further impact of the subcu formulation as it continues to be rolled out by Janssen.

I will now turn the call over to Anthony Pagano to present our detailed financial results for the first half of 2020. Anthony, go ahead.

Anthony Pagano

Great. Thanks, Jan. Let’s move to Slide 4. Before I get into the results and the guidance, I’m going to spend a moment reiterating our overarching financial framework because I think we have materially strengthened what was already a strong foundation with our AbbVie collaboration.

First off, let’s look at our revenue profile. On the left, you can see the component parts of our current and future recurring revenue streams. It starts with DARZALEX. And here we are looking forward to continued growth and expansion. And you can also see ofatumumab and TEPEZZA. We’re excited about the potential ofatumumab approval in RMS that is expected in September and TEPEZZA is off to an exceptionally strong start.

Next onto R&D investment shown on the right. And this is one of the areas where a collaboration with AbbVie is going to make a real difference. We’ll continue to be focused and disciplined in our approach. And as we’ve told you before, we’re going to continue to expand and accelerate our potential winners. But clearly the cash from AbbVie and the fact that we’re sharing the investment in the existing clinical programs on a 50-50 basis means we’ll be able to do more and faster.

Stepping back, what continues to stand out for me from this overall framework is that Genmab remains a resilient business with a very high quality product pipeline and great growth prospects. And these prospects have now been further strengthened by our collaboration with AbbVie. We see this collaboration kind of like a turbocharger toward our 2025 Vision.

With that intro, we can turn to Slide 5. If you attended our call on our transformational collaboration with AbbVie then the information on this slide will look familiar to you. As a reminder, here are its key elements. This is one of the largest oncology partnerships in history with a potential total deal value of up to $3.9 billion. This includes the upfront payment of $750 million and $3.15 billion related to the achievement of additional development, regulatory and sales milestones and optimum payments. The collaboration includes three existing clinical programs, and it is important to remember that we’ve got material commercialization rights for these potential products, which will enable us to build and increase our commercial footprint and we’ll do that with an initial focus on the U.S. and Japanese markets.

We’ve also agreed a broad research collaboration combining the R&D capabilities of both companies. This is definitely a situation where the whole is greater than the sum of the parts. And we’ve got the potential to create four additional differentiated next-generation antibody product candidates. Overall, this is a partnership that further strengthens our financial position and supports our evolution into a fully integrated biotech powerhouse, all working toward our 2025 Vision.

Now let’s move to DARZALEX on Slide 6. Here we saw continued strong performance with only a modest COVID impact in the second quarter. You can see that in the chart on the left. As noted by J&J during their first half results call, DARZALEX saw continued strong market growth and share gains in the U.S. and overall DARZALEX worldwide sales grew by 31% year-on-year. That’s net sales of $1.84 billion, which translates to DKK1.65 billion in royalty income for Genmab.

Now calculating the exact impact from COVID-19 is difficult, especially as we have limited insight into sales in countries outside the U.S. But as we highlighted during our first quarter call, we believe this is a short-term delay and not a fundamental disruption and that’s because of the seriousness of the disease and the need for patients to be treated, coupled with DARZALEX’s strong product profile. Additionally, we expect to see continued uptake of the subcu formulation, which was approved in the second quarter. So for the second half of 2020 we anticipate that sales will ramp up and we’re already seeing early signs of that in the U.S. So DARZALEX continues to be on a clear path to market leadership in multiple myeloma and remains a key driver of our revenue as you can see on Slide 7.

Looking at the graph on the left, you can see that there were three significant contributors to the increase in revenue in the first half. First, we recognized nearly 90% of the $750 million upfront payment from AbbVie. Now clearly it’s important to remember that that’s a one-off contribution. And second, DARZALEX royalties grew more than 40% compared to the first half of 2019. Finally, you see other and most of that DKK97 million comes from TEPEZZA and we’ve seen a really strong start here. As you may have seen Horizon has now raised its 2020 sales guidance for TEPEZZA. Of course, it’s early days, but we see this as a very promising launch.

Now, if we take DARZALEX and TEPEZZA together, we’re really pleased to have seen recurring revenues grow by 47% in H1. As well as increasing revenues, we also increased investment in our pipeline, in our team, and in our capabilities, as you can see on the next slide.

On the graph on the left, you can see the major drivers of our increased investment in the first half of the year. In total, operating expenses increased by DKK521 million, which was driven by the accelerated investment in our product portfolio, including the advancement of both epcoritamab and DuoBody-PD-L1x4-1BB. We also spent more on expanding our very talented team. We’ve continued to hire key team members to support our growing product pipeline and we’ve continued to build our commercial capabilities. With the upfront from the AbbVie collaboration, our revenue growth significantly outpaced the higher investment levels, driving DKK4.57 billion of operating income.

Now having looked at the individual parts, let’s look at our first half 2020 financials as a whole on Slide 9. Here you will see a P&L summary. In the first six months of the year, revenue came in at DKK6.34 billion, an increase of nearly DKK5 billion compared to the first half of 2019. The increase was primarily driven by the upfront payment from AbbVie and higher DARZALEX royalties.

Total expenses in the first half of 2020 were DKK1.78 billion with 84% being R&D and 16% G&A. Operating income, as I noted, was DKK4.57 billion compared to DKK111 million in the first half of 2019, driven by higher revenue. And that brings us to our net income of DKK3.6 billion. So an extremely strong first half of 2020, despite the COVID-19 pandemic, which brings me to our guidance on Slide 10.

We are updating certain aspects of our 2020 guidance previously published on June 10th. We now expect our revenue to be in the range of DKK9.1 billion to DKK9.7 billion an increase of DKK200 million to the top end of the previous guidance. This is still driven by the upfront payment from AbbVie and the continued growth of DARZALEX, complemented by a strong start from TEPEZZA.

We continue to anticipate our 2020 opex to be in the range of DKK3.85 billion to DKK3.95 billion. Putting this together, we’re planning for substantial operating income in 2020 in a range of DKK5.2 billion to DKK5.8 billion.

Now I’ll move to my final slide. Clearly COVID-19 continues to affect everyone’s lives. I think in times like this, it’s useful to take a step back and reflect on our business and financial position. We have a very strong foundation even stronger now with our collaboration with AbbVie. Especially important in today’s environment, we’ve got a robust balance sheet, $1.9 billion of cash at the end of the second quarter and no debt. We have great recurring revenues and they’re growing and we’re using those revenues to invest in a really focused and disciplined way. We’re investing in our highly innovative and differentiated product pipeline as well as in the team and capabilities to deliver it, all driving toward our 2025 Vision.

Now, I’ll turn it back over to Jan.

Jan van de Winkel

Thanks Anthony. Let’s move to Slide 12. So looking at this list, we set many ambitious goals for ourselves in 2020. Based on the robust progress we’ve made year-to-date, our strong financial foundation and our world-class expertise and capabilities, I’m confident that we will continue to be successful in the remainder of this year. Not only will our proprietary clinical pipeline continue to advance, the many regulatory milestone terms on this list and some of it’s have already been met, including the spectacular launch for TEPEZZA means that there is potential for many more patients to one day have access to and hopefully benefit from novel therapies created by Genmab.

Let’s move to Slide 13. This ends our presentation of Genmab’s first half 2020 financial results. Before we take your questions, I wanted to point out one of the events we have listed on this slide here, our 2020 Capital Markets Day taking place in November. For the safety of our attendees and speakers, the event will be virtual this year, but will still feature a comprehensive update on our business and presentations from many of our talented and passionate team members. We will be sending a save the dates for this event soon and details on how you can register and listen to the webcast will be available on our website closer to the event.

So now, operator, please open this call for questions.

Question-and-Answer Session

Operator

Thank you, Jan. [Operator Instructions] Our first question is coming from the line of Peter Verdult from Citi. Please ask your question. Your line is now open.

Peter Verdult

Thank you. Peter Verdult, Citi. Jan, just one question on the data that we can expect in 2020 and 2021, particularly thinking about a 4-1BB PD-L1 and epco in terms of incremental dates are in Phase 3 plans. So could you just map out for us what we can expect for those two assets data wise and strategy-wise in 2020 and 2021? Thank you.

Jan van de Winkel

Thanks, Peter, for the question. I will start with that question and then I’ll ask Judith to basically add to that. So for PD-L1x4-1BB DuoBody, we expect data in the coming months, Peter, at a conference and that will be data from the dose escalation and may be limited data also from the expansion cohorts.

For epcoritamab, we expect also data in the coming months at a key conference and that will be at the optimal dose level for epco and different B-cell tumors. That is for 2020. For ’21 I will ask Judith to give you some further perspective on data from these two compounds, Peter, and potentially others like tisotumab vedotin, daratumumab etc. Judith, maybe you can step in here.

Judith Klimovsky

Yes. Thank you, Jan. So for 2020, nothing to add, but we are very well on track for those two major milestones. For 2021 we haven’t mapped yet, but could be the case that we could present some more data toward the second half of 2021 on PD-L1x4-1BB. That’s not yet mapped, so take it with a grain of salt. It’s early for the projections, but we are on track for 2020.

Operator

Thank you. Our next question comes from the line of Wimal Kapadia from Bernstein. Please ask your question. Your line is now open.

Wimal Kapadia

Great. Thanks very much for taking the question. Wimal Kapadia from Bernstein. Just following up with Pete’s question on the PD-L1x4-1BB, Jan, you previously mentioned six patients were treated with the product and you had seen good responses, including in PDX failures and then you had selected a Phase 2 dose. So I just wonder if you had any incremental color to add. And in particular, I appreciate that the molecule looks relatively potent from what we’ve seen so far. So any additional color on tolerability would be — will be greatly appreciated. Thank you.

Jan van de Winkel

Thanks, Wimal, for the question. I think we have to keep very brief here until we present the data. And I can tell you we have actually now treated a pretty nice number of patients and that includes patients who either already treated with other checkpoint blockers, Wimal, or patients with tumors which are normally not responsive to checkpoint blockers. And you will probably have to wait until we present the data, but we are super excited about this compound.

As Anthony already mentioned in the introductory remarks, Wimal, we have stepped up this program considerably. And so we did for the epcoritamab program this year. And we are really a company who want to invest in the potential winners. So we think this is — this one is a potential winner in a very exciting, expanding market where we really need new and differentiated drugs, I think, to help cancer patients better. But I think you have to wait the clinical presentation in the coming months. But we are very excited. That’s probably where I want to keep it that.

Operator

Thank you. Our next question comes now from the line of Michael Schmidt from Guggenheim. Please ask your question. Your line is now open.

Michael Schmidt

Hey, guys. Thanks for taking my questions. I just had a bigger-picture questions on epcoritamab. I was just wondering, Jan, if you could maybe just share your vision for the longer-term development plan for this antibody, just given that in DLBCL, for example, there — it seems like the — it’s getting a little bit more crowded with novel antibody and ADCs entering the market there in addition to CAR-T. And I was just curious how you think about the optimum development strategy longer term for epcoritamab.

Jan van de Winkel

Thanks, Michael for the question. I will start with that answer and then will also ask Judith to complement me on that. I can tell you that we have very big plans for epcoritamab. We are continuously dosing patients. We have started dosing and the expansion cohorts, Michael. And one of the ways we’re seeing is that not only do we think that we have a very competitive molecule in indications like diffuse large B-Cell lymphoma, follicular lymphoma, we are also having a very active molecule as it now looks in other types of B cancers — B-cell cancers these where other compounds are far less active and potent. So we think that we can actually in one way open up new markets, basically with this asset which is given in a subcutaneous formulation, which we think has very distinct advantages, Michael, over the IV delivered antibodies.

And we are going to penetrate all other lines of treatments and different B-cell tumors. We are working with our partner AbbVie now to work on a very comprehensive, very aggressive plan. And that’s probably where I want to keep it at for the time being. But certainly new inside this year. Certainly data, Michael, at key conferences and, yes, we only get more and more excited about this asset. And also the context of the competitive landscape, we have seen other compounds struggling from other companies recently. And so we think there is going to be opportunity here for a game-changing differentiated novel B-cell targeting antibody therapeutics. So we believe that we have one of the potentially best in our hands here. We have a very strong partner AbbVie.

Maybe I can hand over to Judith and see that you can structure without going into too much detail on the development plan, Judith.

Judith Klimovsky

Yes. Thank you, Jan. So division is based on the data and the data so far and the data that you will see and were coming by the end of the year. It speaks to the fact that is epcoritamab can be best-in-class. I mean it’s not only the subcutaneous formulation, but also the efficacy and safety. And based on that leveraging on the partnership with AbbVie we have mapped a very thorough comprehensive plan and you will see more in clinicaltrials.gov and when it becomes public in coming months. So stay tuned. Basically I cannot disclose the clinical development plan because four — you need to understand it’s a competitive space. But again the competition encourages us because we truly believe that we have something in hand that is differentiated and better.

Operator

Thank you. Your next question now from the line of Matthew Harrison from Morgan Stanley. Please, Matt, ask your question.

Matthew Harrison

Great. Good afternoon. Thanks for taking the question. I guess two from me that I just wanted to ask. One, can you just talk a little bit about AXL and what you’re doing internally to decide how you may move that compound forward or not? And then on tiso, now that you have the pivotal data in hand, how are you thinking about potential other indications with solid tumors and when might we hear something about that? Thanks.

Jan van de Winkel

Thanks, Matt, for the questions. I’m going to hand over both to Judith who is having all the development. Judith, maybe you can get to the potential on AXL.

Judith Klimovsky

Yes, yes thank you. So for AXL SM, we made it public like when we presented the data in September. This year we head into the process of optimizing the PK and understanding the biomarkers data to guide us further on potential future steps. And the biomarker piece is with fresh biopsies. So it’s taking a little bit longer in terms of recruitment, given the higher dose that is imposed on patients in the COVID era. But we still are confident that by the end of the year we will have enough data to guide us on future steps. So this is with regard to AXL.

With regard to tisotumab vedotin, I want to first echo Jan on how excited we are about the data in cervical cancer. And — so per se the data is exciting. But in addition, we can take it as a proof of concept for tissue factor as a target for potential other tumors, because as we know tissue factor is broadly expressed in other tumor types, I mean, particularly those with a very bad prognosis.

So this is why we started in partnership with Seattle Genetics the basket study and the ovarian study. And in ovarian we have an interesting signal even in the Phase 1 expansion in the 30 patients there. So we are looking — monitoring very closely with Sea Gen the progress of the basket study where we enrolled like four different tumor types and to understand where we gather enough data of substance to present in the public domain. So it will be in the future at certain point. So stay tuned. I cannot provide a commitment because we are monitoring it closely, but we expect to have data in the future.

Jan van de Winkel

Thanks, Judith. Thanks, Matthew for the question.

Operator

Our following question comes from the line of Trung Huynh from Credit Suisse. Please go ahead.

Trung Huynh

Hi guys. Thanks for taking my questions. I’ve got a couple on dara. Can you just give us a bit more color on the progress of the subcu dara? I know it’s pretty early in the launch, but are you seeing any kind of accelerating use in dara in earlier lines of therapy? And are you seeing you managing to get — capture new patients, new DARZALEX patients with this subcu formulation? And then perhaps can you update us where you are on the penetration we have with dara across all the lines of therapy? Thanks very much.

Jan van de Winkel

Thanks Trung for excellent questions. And I am happy to actually hand them over to Anthony Mancini, our Head of Operations and Anthony will give you a good perspective for both of these questions. Anthony?

Anthony Mancini

Hi. Thanks for the questions. I think we’re, as Anthony Pagano mentioned earlier, we’re really pleased with the strong growth and share gains across dara for the first half of 2020 and the FASPRO launch overall. I think J&J has really done a nice job on the FASPRO launch with early and rapid access in the U.S. with NCCN listing very quickly, as well as all of the details related to access like P&T and pathways lining up really well and the customer feedback on FASPRO has been very positive to date with them replaying the fact that there is a significant benefit both to patients and offices related to reduced chair time and short duration of in-person visit.

So when you have a 3 million to 5 million injections as Jan mentioned versus a several hour infusion, it’s particularly valuable in a COVID-19 environment. So we’re very pleased with the overarching uptake. In fact the launch uptake of FASPRO is tracking at a similar pace to DARZALEX overall and we really look forward to seeing the continued positive impact of the subcu formulation in the second half.

Just to comment a little bit about market shares in terms of your question. Overarching market share and the latest data point was 24%, which is the highest overall patient share that DARZALEX has achieved to date. And it’s really being driven by earlier and earlier lines of usage of DARZALEX. So in the frontline setting compared to last year we’re seeing a three-fold increase in frontline uptake. So 9% in the latest data point and 3% in last year at the same time. But really what’s driving a large part of the gains is the second line patient setting where DARZALEX achieved 42% overall share and that compares to about 34% last year.

So overall I think really strong uptake of the FASPRO, not just in the U.S. but actually around the world and we’re looking forward to much more of that in the back half of the year in order to reaffirm our guidance that Anthony referred to earlier of $3.9 billion to $4.2 billion. And maybe Anthony Pagano, you can comment further on that — on the guidance.

Anthony Pagano

Yes. Thanks, Anthony. Overall, as you’ve heard from us today and I guess taking a step back, right, it does start with that very, very strong product profile for DARZALEX. I think those of you who have heard me said it before, it really is the complete package. I think looking at the seven approved indications, now the SubQ, the approval in 85 countries, reimbursement in 40 countries, now more than 130,000 patients treated. So I think overall, sort of, we’re very happy with the first half of the year. Obviously we saw a little bit of softness in April, some stabilization in May. But as we exited Q2 and got into Q3 we really like what we’re starting to see here, particularly in the U.S.

Jan van de Winkel

Thanks, Anthony. Thank you, Trung for the questions.

Trung Huynh

Thank you.

Operator

And our following question comes from the line of Ken MacKay from RBC Capital Markets. Please go ahead.

Ken MacKay

Hi. Thanks for taking the question and congrats to the team. I certainly agree with you, Jan, that this has really been a — really a transformational year despite everything going on with COVID-19.

Jan van de Winkel

Thanks, Kennen.

Ken MacKay

So my question is also on the 4-1BB PD-1 DuoBody. You’re enrolling a number of different cancers with really varying degrees of immunologic temperature, as we say, lung cancer to triple-negative breast cancer, which is basically the extreme of hot versus not. So from the emerging trial data or biomarker data, really any other distinguishing features of differentiation which tumors are you so far most excited about for the 4-1BB DuoBody?

Jan van de Winkel

Thanks, Kennen, for the question.

Judith Klimovsky

Hi. Can I take first?

Jan van de Winkel

Yes, yes, please do, Judith. Yes.

Judith Klimovsky

Yes. Thank you. So as you alluded to, by design, the Phase 1 component of this study is not restricted and then we have expansions. And because of the mechanism of action, which is totally different, because it’s not just the blockage of the PD-1/PD-L1 axis, but the conditional activation of 4-1BB. We see the opportunity broader and the potential to impact tumors that are traditionally sensitive to PD-1s or checkpoint inhibitors like PD-1/PD-L1 and those which are like difficult or non-sensitive. So you — and part of these data will be presented at a future meeting and you would see more by yourself.

So we will present actual data and based on that the cohorts that were selected for expansion are to be set out biologically what are different tumors that we can go. And there you have some cohorts that focus on these sensitive tumors where they can relapse or didn’t respond to or which would be like the post checkpoint scenario or tumors that today cannot be tackled by PD-1 and PD-L1s. So these cohorts will give us these data and benchmark with current PD-1/PD-L1s inhibitors. So by the end of the year we will have these again down the dose escalation that will give you more color and the basis for the expansions.

Jan van de Winkel

Thanks, Judith.

Ken MacKay

Judith, maybe just a follow-up on that. When these data are presented, I’m just trying to understand, it will have sufficient data to really sort of make a call on efficacy here. Is this going to just sort of be PK/PD or will we also see response rates and even duration of response or will it just be?

Judith Klimovsky

Okay. Yes, yes. It’s a little bit — so it’s a Phase 1 dose escalation. So the objective of this study is to returning the recommended Phase 2 dose and safety. But we also collective activity. So some activity will be presented. For sure the dose escalation won’t give you — it’s not designed per se for efficacy but for safety. But you will see some preliminary activity on the dose escalation. These data will be presented as any additional, if any, other Phase 1.

Jan van de Winkel

Thanks, Judith. Thanks, Kennen.

Operator

Thank you. Our next question comes now from the line of James Gordon from J.P. Morgan. Please ask your question. James your line is now open.

James Gordon

Hello. Thanks for taking the question. James Gordon from J.P. Morgan. My question was about CD3xCD20. So Roche’s mosunetuzumab they recently got breakthrough designation in FL. Just curious, does that change your view about how far you are in terms of time to market behind them? Are you also seeing an expedited route, did everyone get better or just whoever gets there first? That was the question.

If I can also just squeeze in a quick clarification as well. So 4-1BB given the timing of the CMD on November 13th, is it possible that you actually present the data at SITC, so, November 9 to 14 so you’re actually going to have the data at the CMD and it already been a conference?

Jan van de Winkel

I think I will — thanks James for joining. Thank you for the questions. I think both questions will go to Judith and maybe you can start with epco, Judith.

Judith Klimovsky

Yes, so epco, we for sure, I mean we are aware of the data from every other asset in CD3 and CD20. It makes us even more excited that what we have done in two years from first-in-human to recommended Phase 2 dose and expansions and makes us even working harder with our partner AbbVie to try to take any other step to safely accelerate and this is what we are doing. So we know that this space is competitive, but we know the value that it could potentially bring to patients. So it doesn’t change the plan but rather encourages us to work harder and better and with more excellence.

And with regard to PD-L1x4-1BB, could you repeat the question?

James Gordon

Sure. The question is in terms of when exactly we see the data. So I know you’re having a Capital Markets Day I believe on the 13th of November and I believe the SITC virtual conference.

Judith Klimovsky

Yes, you will see the date in the medical conference.

James Gordon

Got you. And so that could be in time for the CMD as well to be discussed?

Judith Klimovsky

Yes.

James Gordon

Okay. Thank you.

Jan van de Winkel

Thank, Judith. Thanks, James. Very sharp question.

Operator

Our following question comes from the line of Emily Field from Barclays. Please go ahead.

Emily Field

Hi. Thanks. I was just going to try to get a little bit more precise on the last question just because I know in prior communications this year, you’ve talked about closing the gap with Roche. So I know —

Jan van de Winkel

Are you still there, Emily? I don’t think we hear you. Operator, is she still there?

Operator

I think her line dropped.

Jan van de Winkel

I think the line dropped. But I think the question was closing the gap between epcoritamab and then Roche’s mosunetuzumab. Maybe Judith you can a bit more on how do you think we can actually progress epco.

Judith Klimovsky

Thank you. Since this is what I said, we are actively working hand on hand with AbbVie to try to safely accelerate and close that gap as much as possible. We cannot quantify in months, but the fact that we started expansion cohorts tells you that we have caught up substantially vis-a-vis other CD3 and CD20, and we will continue in that taking this momentum to continue accelerating.

Jan van de Winkel

Thanks, Judith. And Emily when you hear the recording, we will definitely follow up with you and see whether you have any other additional questions.

Judith Klimovsky

Yes. And just only one thing, I mean we never said like close the gap, but our goal is to minimize the gap and to shrink the gap as much as possible, in a realistic marker.

Jan van de Winkel

Thanks, Judith.

Judith Klimovsky

Yes.

Jan van de Winkel

Thanks. All right, operator, I think we can take the next question.

Operator

Our following question comes from the line of Carsten Lonborg from SEB. Please go ahead.

Carsten Lonborg

Thank you very much. Carsten Lonborg from SEB. Another question on your CMD. I was wondering whether you see the CMDs strictly as a science event or there will also be some financial outlook? Maybe what I’m trying to understand is whether you would maybe consider updating your 2025 Vision with maybe some financial targets now that you’re a more mature company? Would that be something that you could discuss at the CMD?Thanks.

Jan van de Winkel

Hey, Carsten. Thanks for the question. What we’re thinking about is of course the bulk will be on the science and on the products. We have some very exciting things cooking. Now the gem of the pipeline has never had the quality it has now and we want to give you further insight on that.

And then some use of the novel technology platforms, but we will of course also speak about some financial aspects, how we see the future and also about the next phase and basically investing wisely and selectively in the potential winners. But the bulk will be on the scientific and the development angle.

Carsten Lonborg

Great. And then just a follow-up to that because now we’re talking about the financials. Could you also — maybe Anthony or Jan, detail the increase in the G&A costs for the quarter? How much of this was the commercial costs related to tisotumab?

Jan van de Winkel

Oh, that’s — I hand that question over to Anthony Pagano, Carsten. He can handle that for sure.

Carsten Lonborg

Thanks.

Jan van de Winkel

Anthony?

Anthony Pagano

Yes. So great. So Carsten, yes, I mean looking about sort of the higher G&A costs, I think there are a couple of moving parts here, right. In terms of R&D versus G&A split, for Q1 this year we were at 87%-13% and for Q2 we are at 81% versus 19%. If I put those two quarters together for the first half of the year, we’re at 84%-16%, right. And maybe now sort of talk you through these actual moving parts with that framework. So for the H1 2020, we have higher cost compared to last year and a lot of this is down to some incremental costs following our U.S. IPO in July of 2019.

Separately apart from those sort of ongoing recurring costs, separately for Q2 2020 we do have some one-off costs that we incurred in conjunction with the AbbVie collaboration. If we were to exclude these one-off costs, R&D and G&A cost split for Q2 would be more similar to what we saw in Q1. So there are some moving parts here, Carsten, but there certainly is one-off element that I just described which is impacting the numbers.

Carsten Lonborg

Okay, it makes sense. Thanks.

Jan van de Winkel

Thanks, Anthony. Thanks, Carsten for the questions.

Operator

And our following question comes from the line of Emily Field from Barclays. Please go ahead.

Emily Field

Hi. Can you hear me now? Can you hear me now?

Jan van de Winkel

Yes. Yes, please go ahead.

Emily Field

Oh, great. Sorry. I don’t know what happened. Thanks for answering my other question. I just had another follow-up. I believe in one of the prior answers you mentioned up current about having a place kind of across all lines of therapy. I just wanted to dig into that in terms of what maybe you see as the ideal place for the drug in terms of the treatment paradigm in DLBCL, whether relapse, refractory second line, if you could just give some more thoughts on that.

Jan van de Winkel

Thanks, Emily. I will pass the question over to Judith.

Judith Klimovsky

Yes, thank you for the questions. I think it’s premature. I think that there are still unmet medical needs in every line of therapy and this is what I like most excited about, because this is where the impact on patients will be more evident and remarkable. But still I think that we are looking at opportunities to improve the whole continuum of treatment given the differential aspects and potential transformative nature of CD3, CD20. So I will stop there.

Jan van de Winkel

Thanks, Judith.

Emily Field

Thank you.

Jan van de Winkel

Thanks, Emily.

Operator

Our following question comes from the line of Laura Sutcliffe from UBS. Please go ahead.

Laura Sutcliffe

Hello. Thank you. Just a quick one on DARZALEX please. Could you give us any thoughts on how you’re looking at the potential in the amyloidosis market and in particular, any thoughts around duration would we welcome. Thanks.

Jan van de Winkel

Thanks, Laura for the question. I think I will first hand it over to Judith and then probably Anthony Mancini. Judith?

Judith Klimovsky

Yes, so — yes, thank you, Jan. So for amyloidosis. I mean I am, personally as an hematologist, super excited to have these results because as you know, there are no drugs approved in amyloidosis. So it’s really rewarding as an hematologist like to see something that provides such a benefit in terms of organ damage, because as you know, many tried, but nothing succeeded. So again I mean talking about a full package of DARZALEX.

In terms of market, it is hard to predict because the prevalence, like in the U.S., for example, we say that it’s 12,000 patients dealing with amyloidosis. But as you know when there are no good treatment, diseases are not in the radar screen of physicians and therefore no diagnose, under diagnose or diagnose late.

So part of the — I mean it’s very hard to predict I mean what is underneath the work, let’s say, that the patient population that had amyloidosis that they don’t get the Congo Red test to be diagnosed because there is no awareness, if there is not a good treatment. So, part of the understanding the commercial opportunity is working on really an awareness campaign, not only because this is not a disease that came through hematologists, it comes through cardiologists, through nephrologists, through clinicians because this is the pretty firm symptoms of the disease. So this is from a medical background. Now, Anthony M, if you want to elaborate, a little more on — yes.

Jan van de Winkel

Thanks, Judith.

Anthony Mancini

Thanks, Judith. I don’t know that I can add much more except to say that, really this is great news for patients as you mentioned. It’s an area of huge unmet medical need and yet another positive data set to add to the many positive DARZALEX datasets. I think once filed and approved J&J is probably in the best position to provide more color on incremental impact and duration. But it’s a great question, Laura. Thank you.

Laura Sutcliffe

Thanks.

Jan van de Winkel

Thank you, Laura. Thanks, Anthony.

Operator

Our following question comes from the line of Graig Suvannavejh from Goldman Sachs. Please go ahead.

Jan van de Winkel

Graig?

Graig Suvannavejh

Thank you for taking my questions. Congrats. Hey. Can you hear me? Hello.

Jan van de Winkel

Yes, we can hear you now. Yes.

Graig Suvannavejh

Okay. So, sorry about that. First of all, thanks for taking my question and congrats on all the progress and in your achievements year-to-date. I had just one question. On capital allocation you’ve got almost — you’ve got a very nice cash balance right now. And I’m just wondering, as you think about your business where are you prioritizing investments? Is it in the internal pipeline? Is it around commercialization? Are you thinking strategically around BD opportunities? Any color around how you’re thinking about that would be appreciated. Thank you.

Jan van de Winkel

Thanks, Graig for the question. I will first hand it over to Anthony Pagano and then see whether Anthony Mancini wants to add anything on the commercialization, which is a very important part of the Company now going forward. Anthony Pagano?

Anthony Pagano

Yes. So, Graig, nice to hear your voice and chat with you today. Yes. So look, I think, first of all just thinking about our balance sheet, your rightly pointing out. We do have a strong balance sheet. I think this has sort of been very useful for us here over the most recent period, right. I think more recently when we sort of think about being able to look through any issues as it relates to COVID-19 from that position of strength that the strong balance sheet also met when we were negotiating and what ultimately resulted in the wonderful collaboration with AbbVie that we were also negotiating from a position of strength for that collaboration. And I think moving forward, the strong balance sheet is going to continue to be super important as we execute toward our 2025 Vision.

And now with the T-cell data, there’s potentially a clear path to market there. We will have to wait and see and work our way through the FDA interactions, but we’re super excited about that. But also looking at our pipeline and how that’s maturing, having that rock solid balance sheet means that we can absolutely execute against moving those programs forward and our 2025 Vision with sort of the absolute confidence and the power of the balance sheet behind us.

Sort of thinking a bit about our maybe opex levels moving forward, we I think continue to be focused and disciplined as we invest in our business and the growth opportunities that are in front of us. I think, as we think about being focused and disciplined there are really two sides to the coin, right. On the one hand, we think about discipline. We can think about derisking investments when we can and making tough decisions along the way. That’s really around discipline. And on the other hand, thinking about focus, it starts with our focused strategy that we’ve alluded to that we’ve been executing against since 2013 and that’s our 2025 Vision, right. So we’re really laser sharp focused on delivering against that.

And as it relates to — final point, Graig — as it relates to kind of external opportunities, I think we’ll continue to be focused there. Right? And the theme I talked about more recently is really where we can be natural owners, right, or we can be good evaluators of what we’re bringing in and then ultimately good owners of it once we have it in-house. So I think at least for the shorter term, more of the same in terms of the deals we’ve done more recently.

Maybe Anthony Mancini want to add some stuff on the commercial side.

Anthony Mancini

Yes, look, I would reiterate what Anthony Pagano mentioned in terms of how the AbbVie collaboration is a critical step toward our 2025 Vision and part of investing behind that thoughtful step is really being thoughtful about our priorities from a commercialization standpoint and we’ve taken steps now to start to build our commercial organization in the U.S. and Japan recently, making key strategic appointments there and we’ll continue to do that. And looking externally we will continue to look for, as Anthony Pagano talked about, opportunities to complement what we have, opportunities to deepen what we have and accelerate our quest to achieve that vision and beyond. So I think I’ll leave it there Jan and pass it back to you. But thanks Graig for the question.

Jan van de Winkel

Thanks Anthony and Anthony. I think, Graig, I’ll leave it with this here.

Graig Suvannavejh

Okay, thank you.

Operator

Our last question comes from the line of Sachin Jain from Bank of America. Please go ahead.

Sachin Jain

Hi, there. Thanks for letting me onto the call. Just a couple of pipeline questions to wrap up. On epcoritamab for the CMD in November, will you be able to outline the full Phase 3 program at that point? And by then do you expect to have visibility on how you’ve closed the timeline versus competition on the fast-to-market strategy to be able to give us further color there?

Second question is on HexaBody-CD38. Do we still expect some initial data from that through ’21? And then the final question, obviously there’s a lot of exciting dates coming to year-end, but wonder if you could just flag some earlier stage assets, which will be giving initial data next year that we can perhaps begin to focus on now. Thank you.

Jan van de Winkel

Thanks Sachin. Let me start with question two. I will allocate the first one Judith so that she can think about what will be known at the time of the Capital Markets Day and can’t communicate it publicly given the competitive landscape on epcoritamab. So for HexaBody-CD38, we still plan to move it into the clinic this year. So it’s fully on schedule, Sachin.

And I think at the very earliest end of next year we could see some data, but more likely in ’22. And then in the new year, probably some early data from some of the programs, which are now in the clinic. We now have several new programs in the clinic which could be to do HexaBody-CD37 program, but that could be in the second half of ’21, I would say, and therefore the DuoBody-CD3x5T4 probably second half of next year, at the very earliest or in ’22 more realistically.

Maybe Judith you can give some further color to Sachin on the full Phase 3 program for epcoritamab as we are working on and planning with AbbVie.

Judith Klimovsky

Yes, so we at the Capital Market Day, I mean we won’t disclose on our plans because it won’t be smart and — from our part. But by November there will be — as you know the clinical developments like a map. So you will have two or three points on that map to guide you on the whole journey. But we will never ever discuss at the Capital Market Day, the whole clinical development plan because this could be not wise to do that.

Sachin Jain

Very clear. Thank you.

Jan van de Winkel

Thanks, Judith.

Judith Klimovsky

Yes.

Jan van de Winkel

Thanks, Sachin.

Operator

And there are no further questions at this time, please go ahead.

Jan van de Winkel

All right. So thank you all for calling in today to discuss Genmab financial results for the first quarter of 2020. If you were not able to give your question or you were unable to get to us with the question, please reach out to the Investor Relations team.

We hope that you all stay safe, remain healthy, keep optimistic, very much look forward to speaking with that you again soon, and this concludes the call.

Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.





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