Welcome to Cytek's Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the call over to Paul Goodson, Investor Relations. Please go ahead.

Thank you, operator. Earlier today, Cytek Biosciences released financial results for the quarter ended September 30, 2022. If you have not received this news release or if you'd like to be added to the company's distribution list, please send an e-mail to [email protected]. 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 the call that are forward-looking statements within the meaning of the federal securities laws, including statements regarding Cytek's business plans, strategies, opportunities and financial projections. These statements are based on the company's current expectations and inherently involve significant risks and uncertainties that could cause actual results or events to differ materially 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. Reconciliation to the most directly comparable GAAP financial measure may be found in today's earnings release submitted to the SEC. Except as required by law, Cytek disclaims any duty to update any forward-looking statements, whether because of new information, future events or changes in its expectations. This conference call contains time-sensitive information and is accurate only as of the live broadcast, November 9, 2022. With that, I would like to turn the call over to Wenbin.

Thanks, Paul, and welcome, everyone, joining the call today. I want to start by again thanking our team at Cytek for their dedication and execution as we close out the third quarter of 2022. On today's call, I will begin with a recap of our progress this year and discuss how Cytek continues to advance toward our mission and vision. And then I will turn the call over to Patrik for a more detailed look at our financial results and outlook. Our results this quarter demonstrate the success of our efforts to operate our business efficiently and effectively in a challenging macro environment. We achieved continued improvement across gross margins, net income and adjusted EBITDA, all while further growing our sales across the globe, diversifying our revenue base and executing on our broader strategy. Although macro factors continue to impact the broader industry, I'm proud of our team's achievements and demonstrated the ability to adapt to the evolving environment, and I'm confident for the remainder of 2022 and beyond. As we look at the industry landscape, Cytek continues to stand apart in the field as we provide our customers with an end-to-end solution consisting of instruments, reagents, software and application services. Our unique portfolio of comprehensive solutions positions us as a leader in the sector, and we are proud of the demonstrated value we provide to our customers. This year, we have consistently highlighted our comprehensive suite of products and services, which has led to a further diversification of our revenue stream beyond the sale of instruments. As we have said previously, beyond our original suite of instruments, which continue to see solid demand, we expect our reagents and sales orders to contribute considerably to our future enterprise revenue growth. I'm pleased to say that our installed base of instruments continues to achieve robust growth in the field. During the third quarter, we placed 142 instruments, bringing our total installed base to 1,501 instruments as of the end of Q3. Furthermore, these placements reflect our core strategy to achieve growth across the range of users from high-sensitivity cell analysis users to entry-level users. Since first being introduced in 2017, our cell analysis systems have gained widespread adoption across the globe with use in more than 40 countries. Along those lines, I want to take a moment to speak to how our strategy of expanding our global penetration has demonstrated results for our company. In last year's third quarter, sales within the U.S. accounted for 70% of our company's revenue, while the EMEA and the APAC regions were only 18% and 8%, respectively. Now in line with our expansion efforts, in this past quarter, our EMEA sales grew to account for 25% of our overall revenue. Furthermore, our APAC region sales as a percent of total grew by 10 points, now representing 18% of Cytek's overall sales. Clearly, our strategy is yielding results, and I look forward to this continued progress to expand our presence globally. In addition to continuing to grow our instrument base and overall revenue, I want to again acknowledge our team's successful efforts this quarter and throughout the whole of 2022 in operating in the face of challenging macro conditions and achieving strong results. This quarter, our gross margins were over 66% and adjusted gross margin over 68%, both expanding over the prior year. We reported net income of $1.6 million, and our adjusted EBITDA grew significantly from last year's third quarter. Importantly, as we continue to see increased scale in our reagent business as well as other high-margin offerings, I'm confident in our ability to continue to consistently achieve strong and stable margins. I want to reiterate, these achievements are the result of the diligent efforts of our entire team throughout Cytek, not by accident. It is this focus on efficient and effective operations that I believe sets us apart in the field and positions us for further success as we move ahead. For example, as we have discussed previously, our team is able to withstand macro pressures by leveraging our global workforce in order to manage through inflationary and supply chain pressures. Furthermore, our intentional strategy to maintain a past inventory buffer provides a further mitigation of potential supply chain disruption to insulate our operations from concerns. In all, we continue to be focused on execution, and I remain confident in the Cytek team's demonstrated ability to manage through this environment and continue to succeed despite the ongoing challenges. At the end of April, we announced the appointment of Todd Garland as our Chief Commercial Officer and, now only six months into the role, Todd has been instrumental in our company's recent success. Among his many areas of focus, Todd has developed an execution plan for our European sales strategy. We've demonstrated results already, and more to come. More recently, just last week, we announced the appointment of Chris Williams as our Chief Operating Officer to lead and execute Cytek's global operations strategy to scale up our capability to support our mission as a full solution provider to our customers. Prior to joining Cytek, Chris was the VP of Engineering, Technology, Operations and Innovations for Thermo Fisher’s Pharma Services Group. Before that, he was VP and the General Manager for single-use technologies and the VP and General Manager for bioprocess equipment and automation, both at Thermo Fisher Scientific. I want to take a moment to welcome Chris to our team at Cytek. He joins us at an important time for our company as we are on a growth trajectory that requires the ability to scale. Our focus is on ensuring that this growth is conducted efficiently as we target markets with large scale, and automation and the process improvements are critical components of this. We are confident that Chris is the right person to help lead us forward and make the most of our growth opportunities, and we are excited for what comes next for our organization. As we continue to grow our offerings and the base of instruments, reagents and services, our technology has now been validated by 881 peer-reviewed publications as of the end of the quarter. This quarter alone, there were 112 peer-reviewed publications mentioning Cytek. I'm very proud of this accomplishment, which speaks to the momentum of our platform and validates the use of our offerings in the scientific community. Of note, one paper on HIV published in Nature by researchers at Scripps Research Institute showed how a slower immunization process holds promise for difficult vaccine targets. In a second major paper, researchers from NYU Medical School showed how gut bacteria direct the T cells to adopt distinct functions in the adaptive immune system. Microbiome research is rapidly growing, and we are pleased that our FSP platform provides insights into this promising area. As you can see, these papers and many others demonstrate the proven, real-world applications of our technology and services to the scientific community. In all, once again, I'm pleased with the progress our team has made this quarter and throughout 2022. As we continue to push forward a cadence of new products and applications, we remain 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 and clinical progress. With that, I will now turn the call over to Patrik for more details around our financials.

Thanks, Wenbin. Total revenue for the third quarter of 2022 was $40.5 million, an 18% increase over the third quarter of 2021. During the third quarter, total revenue was adversely affected by the timing of certain sales as well as foreign currency headwinds given the continued strengthening of the U.S. dollar. As a greater portion of our sales have shifted toward commercial customers, which are calendar year-based, we expect the timing of some sales to transition from the third quarter to the fourth quarter of this year. Gross profit was $26.9 million for the third quarter of 2022, an increase of 26% compared to a gross profit of $21.3 million in the third quarter of 2021. Gross profit margin was 66.4% in the third quarter of 2022, representing a 450-basis point expansion compared to the 61.9% in the third quarter of 2021. Adjusted gross profit margin in the third quarter of 2022 was 68.4% compared to 63.5% in the third quarter of 2021 after adjusting for stock-based compensation expense and amortization of acquisition-related intangibles. Operating expenses were $25.5 million for the third quarter of 2022, a 39% increase from $18.4 million in the third quarter of 2021. The increase was primarily due to expenses to support continued growth of the business including further investments in sales and marketing, R&D and costs related to operating as a public company. Research and development expenses were $8.7 million for the third quarter of 2022 compared to $6.1 million in the third quarter of 2021. Sales and marketing expenses were $8.8 million for the third quarter of 2022 compared to $6.6 million in the third quarter of 2021. General and administrative expenses were $8 million for the third quarter of 2022, an increase from $5.7 million for the third quarter of 2021. Despite our revenue coming in slightly below our expectations as a result of the timing dynamics and FX impact I mentioned, we achieved net income of $1.6 million this quarter compared to $1.4 million for the third quarter of 2021. Additionally, adjusted EBITDA in the third quarter of 2022 was $7.3 million compared to the $5.5 million in the third quarter of 2021 after adjusting for stock-based compensation expense and foreign currency impact. As we indicated, our third quarter revenue was adversely impacted by the timing of certain sales as well as foreign currency exchange rates given the strengthening of the U.S. dollar. Despite these headwinds, we continue to expect full year 2022 revenue to be closer to the high end of the range of $160 million to $168 million, ending the year strong. Cytek continues to be in a strong position financially, continues to see solid demand and is committed to remaining profitable on an annual EBITDA and net income basis as well as achieving our long-term growth targets and objectives. In addition, our strong balance sheet, including a solid cash position and no debt underpin the strength of our healthy organization. We will continue to invest in our core business as it relates to new projects and innovations while remaining opportunistic in the M&A environment and focusing on growth in all key areas. With that, I will turn it back over to Wenbin.

Thanks, Patrik. I'm proud once again of Cytek's achievement this quarter and throughout the duration of 2022, punctuated by our strong gross profit margin, net income and adjusted EBITDA results. We operate our business according to four key pillars, each of which is integral to our enterprise's mission and the forward vision. These pillars, which are instruments, applications, bioinformatics, and clinical, lay out our road map for operating our business now and in the future with intentional and purposeful execution. As we continue to build out our team at the leadership and operations level, I'm ever more confident that our daily work aligned with these four pillars adheres to and executes on our overall strategy. I would like to express my appreciation for our team around the world. It is their excellent hard work and a shared belief in our important mission that drives our progress. Thank you, everyone, and we will now open the call up for questions.

Our first question comes from the line of Tejas Savant of Morgan Stanley.

Maybe Patrik or Wenbin, I'll just start with trying to get a sense of how much of the softness you saw in the quarter was FX versus instrument slippage? And then I have a couple of follow-ups.

Yes. So Tejas, thanks for the question. So the majority is more slippage into the next quarter. Obviously, we've also seen the FX impact. So I would say that was 60% maybe delays and the remaining is FX.

Got it. That's very helpful. Now in terms of just your sense of whether this is a one-time thing? Or given the SKU shifting a little bit towards commercial customers here, do you think there's risk of further slippage here into 2023 for some units that you had hoped to shift in the fourth quarter? And then the context for the question, guys, is basically some of your tools peers have talked about large biopharma customers perhaps freezing CapEx budgets for the rest of the year. So any color you can share there would be helpful.

Yes. So at this point, we're not expecting further slippage into next year. We reiterated our guidance for the year, as I mentioned. So at this point, we are not expecting further slippage.

Got it. And then one for you, Wenbin, as you think about your instrument backlog heading into next year, I know you've reiterated expectations for, I think, it was 30% growth year-over-year. Is that something you still feel good about? And at least at a qualitative level, can you share some color on how much of the instrument shipments that you're looking at in '23 are essentially covered by the backlog that you will have exiting this year?

We are actually right now working on our budget for next year, and we don't really have a very concrete number to share with you. But as time goes by, we will let you know. But in the meantime, I think, as Patrik earlier just mentioned, we are very confident regarding what we see today in achieving our overall year revenue guidance for the year.

Got it. So that 30% growth is that still on the table? Or is that under review as you work on your next year's plan, Wenbin?

It continues to be on the table, yes.

Our next question comes from the line of Matt Sykes of Goldman Sachs.

Maybe my first question, Patrik, you talked about the greater portion of sales in the commercial customers causing the shift from maybe Q3 to Q4. Could you talk about maybe what that level was in terms of commercial customers, in terms of percentage and what it's become? And should we be thinking in terms of going forward, more seasonality in the business on a regular basis for kind of annual revenues?

Yes. So Matt, thanks for the question. As you know, we are heavily linked to seasonality as a business. When I look at our business in the last two years, what we've typically seen is the second half to be stronger with the fourth quarter to be substantially stronger as well, which we expect to translate this year as well, looking at our funnel and some of the activity we have in the works. The commercial aspect is we've seen an increase in the commercial activity of biotech and pharma. So the expectation is that this will also continue in Q4.

Just to add on top of that, if you look at our overall distribution between academic and industrial customers, in fact, this year, comparing to last year, the shares of industrial customers have increased quite a lot, and that certainly also contributes to the timing of the orders for this year.

Got it. And then as you look at the expansion you've made in Europe and APAC this quarter, and I know, Wenbin, you made a statement about when the CCO made a plan about expanding into Europe was one of the first plans that they made. Could you maybe talk about the customer segments where you're having early success driving that higher level of penetration in those markets? Is it the biopharma biotech? Or are there other customer segments that are driving that growth in Europe and APAC specifically?

Both Europe and our international sales have significantly increased this quarter compared to previous quarters, mainly due to industrial customers. Our overall customer base is shifting more towards this segment. Additionally, in China, we are also seeing a substantial portion of sales moving into the clinical area.

Got it. And just my last question. Just can you give us any sense in terms of the cell counter and how that progress is going? I know you've called it out in previous quarters, but the launch went very well and the momentum is really good. Any additional color you can provide on the cell counter specifically?

You mean the cell sorter?

Sorry, cell sorter, yes.

Yes, it continues to increase, although we don't really separate the sorter number from the analyzers, but the share of sorters is increasing, yes.

Yes. And maybe I can just add to that, that sequentially, actually, the number of sorters that we sold have also increased quarter-over-quarter. So we are seeing continued demand and strong demand for the cell sorter.

Our next question comes from David Westenberg of Piper Sandler.

So I'm going to ask something similar to what Tejas asked and maybe a little bit different way. Just in terms of the slippage from Q3 to Q4, I think you usually talk about backlog or instrument order lead time being three months. So are you fairly comfortable with the fact that almost all of those Q3 expectations are into Q4? I just want to start with just that.

Yes. So the way I would answer is we have seen actually a higher funnel level at this point. So that's the reason why we feel we're confident about our Q4 activity.

Okay. Perfect. That is helpful. And we're not the best models on Wall Street. So it could be our mistake here. But the instrument placement number did beat us, but the service revenue or product revenue missed us. So is there something going on with mix you want to maybe note? Or is it maybe something on ASPs? Or am I just a terrible modeler? And the last one is acceptable.

I won't say that. But the service revenue has come out very strong as a result of just some more instruments coming out of warranty. On the product side, your model may be off a little bit, but it could be a combination of both the ASP number of instruments you have in your model. So I'm not exactly sure how to answer that question.

Could you provide insights on the markets outside the U.S. where you have made investments? Specifically, how many markets do you believe you are not currently reaching in relation to the total addressable market outside the U.S.? Additionally, could you clarify what percentage of those markets you feel is still untapped due to sales limitations? Lastly, could you discuss the needed investments in those regions? I’ll stop after this.

I think first is, in the U.S., definitely, there’s a large chunk of clinical market we are not in, and we are working on this. Internationally, we have just started the clinical penetration into the European market. Probably it's going to take us a few quarters to see some meaningful results. In China, we have done very well, in fact, across our research and clinical side. And then it's the clinical reagents, which is another area we think there's great potential opportunities for Cytek in both China and Europe. Of course, the U.S. is linked to our overall clinical strategy.

And our final question comes from the line of Max Masucci of Cowen.

This is Joe on for Max. Our gross margins came in ahead of our model in the quarter and saw a really nice growth both year-over-year and sequentially. It'd be great to just get some detail on what led them to beat here.

Yes. I think it's continued management of our supply chain, it's continued management of what we call the excellence manufacturing process, taking good advantage of the global footprint. So a number of vectors here that we're working on that are helping us. Overall, thanks for pointing that out, but we are very pleased with the gross profit margin as well there.

Got it. And then during the Analyst Day, I believe you mentioned that reagent sales as a percent of total revenue could end up in the mid- to high single-digit range in 2022. Was wondering how that's shaping up against expectations and if there's any additional color you could offer for demand in your reagent business in the quarter.

Yes. We're on track towards that, yes.

Got it. And then lastly, in the Q2 call, there was mention of inventory levels that were at an all-time high around $45 million. Curious how that trended in the quarter. And will it keep building or kind of wind down in Q4?

Yes. So the expectation is, in Q4, it should be flattish over Q3.

And thank you. That does conclude the Q&A session and our conference for today. Thank you for participating. You may now disconnect.