Cytek Biosciences, Inc. Q4 FY2021 Earnings Call

Thank you for standing by. And welcome to the Cytek Biosciences Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. As a reminder, today’s program may be recorded. I would now like to introduce your host for today’s program, Alex Khan, Investor Relations. Please go ahead, sir.

Thank you. Earlier today Cytek Biosciences released financial results for the quarter and year ended December 31, 2021. If you haven’t received this news release or if you’d like to be added to the company’s distribution list, please send an email to investors at cytekbio.com. Joining me today from Cytek are Wenbin Jiang, CEO; and Patrik Jeanmonod, Chief Financial Officer. Before we begin, I’d like to remind you that management will make statements during this call that are forward-looking statements within the meanings of the federal securities laws, including statements regarding Cytek’s business plans, strategies, opportunities, and financial projections. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled Forward-Looking Statements in the press release Cytek issued today and in Cytek’s filings with the SEC. This call will also include a discussion of certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles. Reconciliations to the most directly comparable GAAP financial measures may be found in today’s earnings release submitted to the SEC. Except as required by law, Cytek disclaims any intention or obligation to update or revise any forward-looking statements whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast, February 23, 2022. With that, I would like to turn the call over to Wenbin.

Thanks, Alex, and welcome everyone joining the call today. I want to start by thanking the incredible Cytek team for their dedication and execution as we close out 2021. On today’s call, I will begin with a brief overview of our company. Next, I will discuss our exciting progress for the quarter and the year. And finally, I will turn the call over to Patrik for a more detailed look at our financials. For those of you new to the Cytek story, we are a leading sales analysis solutions company advancing the next generation of cell analysis tools by leveraging a novel technical approach to create our Full Spectrum Profiling or FSP platform. Our FSP platform includes instruments, reagents, software, and application services and utilizes the full spectrum of fluorescent signatures to deliver higher resolution, high content, and high sensitivity cell analysis. Our technology and solutions address some of the key limitations of conventional methods, while our flow cytometry is a widely used tool for single-cell analysis. Conventional flow cytometry and early approaches to spectral flow cytometry have been challenged as they are only able to detect a few markers in a single tube. Their limited dimensionality, sub-optimal resolution, low throughput, high cost for performance, and the significant technical expertise required to operate their systems have really limited the advanced cell analysis field. By contrast, our patented FSP technology optimizes sensitivity and accuracy through its novel optical and electronic designs that utilize an innovative method of live detection and distribution. This novel technological application allows us to address the inherent limitations of other technologies by providing a higher density of information with greater sensitivity, more flexibility, and increased efficiency, all at a lower cost for performance. Our innovative technology has been validated by 385 peer-reviewed publications to date, over 1,100 instrument placements at the end of the year, and a growing number of applications. At Cytek, we provide our customers with an end-to-end solution consisting of instruments, reagents, software, and application services. We launched our initial flagship instrument, the Aurora, in 2017. A year later, we launched the Northern Lights instruments, an entry-level product. Both instruments are cell analyzers offering high throughput, ultra-sensitive analysis, and intuitive workflows that work to address the unmet needs of our customers. These instruments are efficient and compact, making them well-suited for clinical research. In October of 2020, we launched our reagents to capitalize upon the recurring revenue opportunities derived from the installed base we have generated. Our 14-color cFluor immunoprofiling kit and the 40-color Optimized Multicolor Immunofluorescence Panel provide users with ready-to-use protocols and antibodies, simplifying the workflow from sample preparation to data analysis. In October of 2021, we launched our new 25-color immunoprofiling assay and shortly after acquired the reagents business of Tonbo Biosciences. Both editions further strengthen our position as a full solution provider to our customers. Our 25-color immunoprofiling assay includes reagents and tools optimized for use with our Aurora full spectrum flow cytometry. We are creating a new normal for flow cytometry by making such a high-dimensional panel available as a standardized kit. This past year, we also began shipping our cell sorters, which enable additional downstream genomics and proteomics analysis. Importantly, our sorters allow researchers to isolate living cell populations from higher complexity panels beyond 40 biomarkers. While our cell analyzers have been strong drivers of our revenue growth to date, we expect that reagents and cell sorters will play an important role in driving our revenue growth over the next three to five years. As we highlighted previously, once an instrument has been placed, our intuitive workflow allows customers to quickly get up to speed on the technology and begin generating results. Additionally, we routinely work with KOLs, engaging with these industry leaders to address their particular scientific questions by optimizing reagents and the protocols on our instrumentation. This often creates blueprints for other customers to build upon. By collaborating with customers to create these novel reagent panels or kits, we are continually opening new applications and markets for our FSP platform. I’m proud to say that our installed base of instruments continued to achieve robust growth. This quarter, we placed 140 instruments, bringing our total installed base to 1,110 instruments as of the end of the year. We continue to execute on our core strategy and achieved solid adoption with high-dimensional cell analysis users, while also bringing Full Spectrum Profiling to entry-level users as well. During the fourth quarter of 2021, we achieved the exciting milestone of shipping our 1,000 cell analysis system. Since first being introduced in 2017, our cell analysis systems have gained widespread adoption across the globe with us in more than 40 countries. Additionally, we continue to make progress in regulated clinical markets, including in China and the EU. In China, we have made progress towards China National Medical Product Administration or NMPA IVD Class III Certification for the TBNK assay to run on our previously certified Northern Lights CLC instruments. Data collection has been completed at three hospitals comprising 700 patients, and the data analysis and NMPA submission packet preparation has been initiated. In the EU, we have received IVDD Certification for our automated sample loader or ASL, which is an accessory to our previously IVDD certified Northern Lights CLC instrument. We also closed on our acquisition of Tonbo Biosciences' reagent business, which along with the launch of our additional cFluor reagent and reagent kits, meaningfully enhanced our reagents portfolio offering. The integration of Tonbo Biosciences' business within Cytek is largely complete, as we are now preparing to expand these offerings further. We welcome the talented Tonbo team into Cytek and are excited to grow our presence in San Diego. We are very pleased with the performance of these important new offerings and the value they bring to our platform. Last month, we announced the expansion of our Fremont headquarters with the opening of a new facility, tripling our previous manufacturing capacity in order to meet growing global demand for cell analysis solutions. In addition to the new Fremont facility, we have also opened new offices in Seattle, Washington, which are dedicated to key R&D initiatives and customer application support. This new facility supports our commitment to develop tools that will advance the next generation of cell analysis and become the partner of choice for players throughout the life sciences field. As I mentioned earlier, our technology has been validated by 385 peer-reviewed publications to date. These publications cover a wide array of topics, with the top five subjects being infectious disease, human knowledge, immunotherapy, immune-oncology, and oncology. In the fourth quarter, Cytek had 55 publications in peer-reviewed scientific journals. Eleven of these publications were about COVID-19, including a Nature paper elucidating which type of cells give rise to human immune system memory and the mechanism for that protection. HIV continues to be another area of investigation for our customers. In Nature Medicine, authors including Dr. Anthony Fauci published an article detailing how the human immune system reacts when HIV treatment is interrupted. I’m excited by the progress our team has made this quarter and throughout the course of the year, as we continue to establish ourselves as a leading cell analysis solutions company. As we push forward a cadence of new products and applications, we are deeply focused on providing a complete cell analysis solution to our customers. We look forward to continuing to provide our novel FSP platform to these customers as they push the bounds of scientific discovery. With that, I will now turn the call over to Patrik for more details around our financials.

Thanks, Wenbin. Total revenue for the fourth quarter of 2021 was $38.9 million, a 27% increase over the fourth quarter of 2020. This increase was driven by instrument sales during the quarter and supported our full-year revenue growth of 38% in 2021. We also saw an increase in contract service sales during this year, which we expect to continue as more instruments shift from warranty coverage to service contracts. Gross profit was $23.6 million for the fourth quarter of 2021, an increase of 22%, compared to a gross profit of $19.4 million in the fourth quarter of 2020. Gross profit margin was 61% in the fourth quarter of 2021, compared to 64% in the fourth quarter of 2020. Non-GAAP gross profit margin in the fourth quarter of 2021 was 63%, compared to 64% in the fourth quarter of 2020, after adjusting for stock-based compensation expense and amortization of acquisition-related intangibles. Operating expenses were $22.3 million for the fourth quarter of 2021, a 92% increase from $11.6 million in the fourth quarter of 2020. This increase was primarily due to expenses to support continued growth of the business, including costs related to operating as a public company. Research and development expenses were $7.1 million for the fourth quarter of 2021, compared to $4.4 million for the fourth quarter of 2020. Sales and marketing expenses were $8.3 million for the fourth quarter of 2021, compared to $4.6 million for the fourth quarter of 2020. General and administrative expenses were $6.9 million for the fourth quarter of 2021, an increase from $2.6 million in the fourth quarter of 2020. Income from operations in the fourth quarter of 2021 was $1.3 million, compared to $7.9 million in the fourth quarter of 2020. Net income in the fourth quarter of 2021 was $0.3 million, compared to $5.6 million in the fourth quarter of 2020. Non-GAAP net income in the fourth quarter of 2021 was $3.9 million, compared to $5.9 million in the fourth quarter of 2020, after adjusting for stock-based compensation expense, acquisition-related amortization, and other non-recurring expenses. This result reflects our focus on additional investments in our operations to support our anticipated revenue growth in 2022 and beyond. Now, turning to our guidance, we expect full-year 2022 revenue to be in the range of $160 million to $168 million, with a quarterly cadence expected to be in line with the historical seasonality of our business. Before I conclude, I would like to touch on some assumptions embedded in our 2022 guidance. As Wenbin said, we are entering 2022 in a strong position. Further, our guidance does not currently anticipate another COVID wave. Yet we will remain ready from an operational standpoint to handle any customer or installation challenges should they arise. Finally, in line with our objectives, we are planning to increase our capital and operating investment in sales, marketing, and research and development this year by 55% to 60% in the aggregate to support our continued growth initiatives. We remain well positioned to maintain our profitability and achieve our long-term growth targets and objectives. We are also pleased with our strong balance sheet, including a solid cash position and no debt underpinning our healthy organization. We will continue to invest in our core business as it relates to new projects and innovation, while remaining opportunistic in the M&A environment and focusing on goals in all key areas. With that, I will turn it back over to Wenbin.

Thanks, Patrik. Cytek has continually demonstrated our commitment to developing tools to advance the next generation of cell analysis. I would like to express my deep gratitude for the team we have here at Cytek. Their excellence and the shared belief in this important mission drive our progress. Over the past year, we have successfully executed on our strategy of growing the business, while remaining profitable and investing in our enterprise. While we continue to grow through product launches, expansions of our offerings, along with strategic investments in R&D and the Tonbo acquisition, we have positioned our portfolio for continued future growth. Our robust established installed instrument base, complemented by a growing contribution of recurring revenue and supported by our solid financial position will drive our success in 2022 and beyond. Going forward, our team will continue on our path to become the full cell analysis solutions partner of choice for players throughout the life sciences field as we leverage our novel technology to continue to drive innovation, transform the cell analysis market, and enable researchers to make significant scientific advances in key areas of medical discovery. With that, we will now open the call up for questions. Operator?

Certainly. Our first question comes from Tejas Savant from Morgan Stanley. Please go ahead with your question.

Hi, guys. Good evening and thanks for the time here this evening. So, perhaps, one to kick things off for Wenbin, and Allen feel free to chime in as well. So I am curious about, in light of some of these pandemic headwinds and the macro environment, some of your instrument-focused peers, particularly those with a presence in academic labs have talked about sort of a little hesitancy in CapEx purchases and delays in the purchasing process. Have you seen any sort of impact at all in terms of the elongation of your flow cytometer replacement cycles on an industry-wide basis? And if not, why do you think that’s the case, especially for Cytek?

That's a good question. It really depends on the region we are discussing. Overall, we haven't noticed much impact in the U.S. and Europe, but we are experiencing some delays, particularly with installation and service in the APAC region. I believe part of the reason we don't see significant impact is that many of the applications related to COVID actually require our tools.

Got it. That’s helpful. And then, Wenbin, can you provide a little bit color on just attraction for cell sorters, if you can give us some commentary around just the demand you’re seeing for bundled instruments and what you are seeing in terms of the mix of new versus existing Cytek customers, as well as perhaps multi-unit placements here? That would be helpful.

The current deployment of our cell analyzers has been geared toward the need for our cell sorters. Many customers, when they start using our tools and conducting their studies, often want to delve deeper into the cells we have analyzed in their specific contexts. They prefer to use the same sorter since our sorter supports compatibility with the panels used, allowing them to easily transfer the panel between analyzers and cell sorters. This indicates a strong demand for Cytek sorter technology. Regarding our customer base, we have both existing customers and new ones. Some of our current analyzer customers are looking to buy additional tools, and there are also new customers interested in purchasing them in pairs.

Got it. That’s helpful. And then, as we look at your guide here of $160 million to $168 million, perhaps this is best addressed by Patrik here. Just wanted to get a sense of what’s embedded at the low versus the high end of the range. Is it just sort of incremental supply chain pressures and sort of COVID creating site access issues and installation delays at the low end, or is that something else that you’re factoring in as you think about that range?

The way we look at the guidance is that the low and upper end come from multiple sources. We have a number of specific instruments that we plan to move this year. It’s also reagents and service revenue. So it’s a combination of these three components that gives us the lower end and higher end. We feel very good with the lower end, and we also see some positives on the upper end.

Got it. Very helpful. Thank you, guys.

Thank you. Our next question comes from the line of Matt Sykes from Goldman Sachs. Your question, please.

Hey, guys. This is Dave on for Matt. Congrats on the quarter. Following up on the outlook for the year, any additional color you can provide on the instrument versus consumable mix and within instruments what you’re expecting?

The expectation here is that we see the large majority will be instrument, yet, with a growing base of reagent and also expecting the service revenues to be slightly stronger than last year. So it’s really still driven by instruments: the analyzer, the cell sorter, followed by the reagent and then the other service revenue.

Got it. And could you tell us more about the puts and takes affecting operating margin? I appreciate the color on R&D, any additional color on the leverage point in SG&A?

When looking at this year, we are continuing to invest in all the key areas: sales, marketing, and R&D to help us for the future, and that’s also going to help us in better managing our overall business in the years beyond 2022.

Thanks.

Thank you. Our next question comes from the line of David Westenberg from Piper Sandler. Your question, please.

Yes. I do. Thank you so much. So congrats on the quarter. So I want to first maybe talk about some of the reagents and some of the highest flex users. Can you talk about their adoption cycle? What kind of or how fast they get ramped on the bigger and bigger panels in terms of the reagents? And can we extrapolate some of that behavior to maybe some of the future customers, as you’re getting more and more mix shifts into reagents?

In fact, as you can see, reagents are a new business for us, and our early customers pretty much leveraged whatever was available on the open market. Now, I think, from Cytek perspective, we are now getting to this space and start to work with our customers to optimize their panels, leveraging the cFluor reagent, as well as the reagents from our Tonbo acquisition. And this may take some time, but we do see great potential out there, especially the kits we have developed, including our 14-color and 25-color immunoprofiling kits, which really help customers alleviate their research workload and enable them to work on sophisticated complicated panels.

Appreciate the color there. And this question has come up a lot from investors in terms of a competitor's launch into a new cell sorter, and I believe this competitor is the number one company in terms of placements of flow cytometers just generally. Do you anticipate any impact from that new flow cell sorter in terms of your instrument placements this year, or do you still feel you really do have such a competitive advantage in terms of your technology that customers won’t hesitate to continue to buy your products?

Yeah. We have noticed the preannouncement of the tools they are going to launch. But until we have seen that on the market on the customer side, it’s very difficult for us to assess the kind of impact, but we are paying attention to it.

Got you. Okay. And then, on the last question in terms of your TAM expansion, I think you have given us some color in the past: you had an $8 billion TAM. This could expand over the years to, I think it was $23 billion. Can you give us some of the proof markets that might be near-term, TAM expanding markets that you’re seeing with customers maybe today and over the next couple of years, and I’ll stop there. Thank you.

I think we just talked about the five areas of publications, which summarize the types of applications our tools currently support. While these are certainly our main focus areas, there are additional ones as well.

Thank you. Our next question comes from the line of Max Masucci from Cowen. Your question, please.

Hi. This is Stephanie on for Max. Thanks for taking the question and congrats on a great quarter. So I just wanted to follow up on some of the questions on the reagents business. It’s been just over four months since you launched your 25-color immunoprofiling assay. How has the demand for this assay been ramping, and are you seeing most of your customers order the 18-color kit on a standalone basis or are most ordering the assay along with the seven reagents provided by BioLegend?

Yeah. I think mostly for both instead of A plus B products.

Okay. Great. Thanks for that. And then as a follow-up, so if you compare some of your earlier customer wins between 2017 and 2022 versus customers you’ve won over the past year, are you seeing any difference in their willingness to adopt your internally developed reagents and reagent kits versus sticking with their original third-party reagent provider?

Yeah. In fact, we do see a lot of interest in the kits we have developed, and our team has been very busy and operating, trying to deliver those goods to meet our customer demand.

Okay. Great. Thank you. And then if I could sneak in one more. So I’m just curious whether your relationship with BioLegend helped to accelerate your pace of new customer wins or expanded your customer reach and whether your relationship with BioLegend improved your ability to access any new customers.

BioLegend is one of the reagent partners we have been working with throughout the lifecycle of our products since its launch. And we in fact have been working very closely with quite a number of other reagent partners as well. As you can clearly see, because the technology we have enables the use of lots of various reagents, it definitely helps both ends for us, as well as our reagent partners.

Okay. Got it. Thanks for taking my questions.

Thank you. This does conclude the question-and-answer session, as well as today’s program. Thank you everyone for your participation. You may now disconnect. Good day.