Cytek Biosciences, Inc. Q2 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the Cytek Biosciences Second Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paul Goodson with Investor Relations.

Thank you, operator. Earlier today, Cytek Biosciences released financial results for the quarter ended June 30, 2023. 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@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 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 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. Reconciliation of 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, August 8, 2023. Before I finish, I want to mention that we are planning an Investor Day in late November in New York, where we will look forward to sharing more about our business. We will update you with details as we get closer to the event. With that, I would like to turn the call over to Wenbin.

Thanks, Paul, and welcome, everyone, joining our second quarter earnings conference call. On the call today, I will discuss our results for the second quarter as well as our progress across our four key strategic pillars to drive growth. Then I will turn the call over to Patrik for a more detailed look at our financials and an update on our outlook for 2023 before we open it up for Q&A. Starting with our second quarter results. We achieved $49.7 million of total revenue, representing growth of 24% year-over-year. This included approximately $8.2 million of revenue from the product lines acquired from Luminex. Excluding acquisition-related revenue, our organic revenue was $41.5 million. Our results were driven by improvements across the U.S., particularly with our pharma and biotech customers, where orders that were delayed at the end of the first quarter began to come in. Yet, we continued to see impact from our biopharma customers in Europe during the second quarter. Overall, while the macroenvironment continued to be somewhat challenging, these results are a testimony to our dedicated efforts to operate our business efficiently and effectively, all while further growing our sales across the globe, diversifying our revenue base and executing on our product strategy. Patrick will provide more detail on our financial results momentarily. 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. We are focused on driving growth and diversifying revenue streams. In addition, we expect our recent acquisition of the flow cytometry and imaging business from Luminex to open new markets and applications. As we complete the integration of the acquired business over the course of this year, we are taking proactive measures to optimize our business operations and advance our overall strategy. I will share more details on our progress with the integration shortly. As I have mentioned before, we operate our business according to four key pillars, each of which is integral to our long-term growth. These pillars, which are: instruments; applications; bioinformatics; and the clinical, help execute our overall strategy and we believe will drive excellent growth over the longer term. Starting with instruments. During the second quarter, we placed 112 instruments from our organic-sized portfolio. Altogether, this installed base has now reached 1,878 instruments. This does not include the in-store instruments of Amnis imaging and Guava macrocapitalist product line acquired from Luminex, which also continued to grow during the quarter. Collectively, these organic and acquired instrument placements present growth across diverse applications spanning entry-level to high-dimensional cell analysis. We cater to a broad spectrum of customers and provide tailored applications to meet their specific needs. Looking ahead, we look forward to driving instrument adoption across our product portfolio. This growing installed base will also create a receptive market for new instruments that we plan to launch in the coming years, leveraging Cytek's advanced technologies alongside the powerful technology acquired from Luminex. During the quarter, we proudly shipped our 100th Cytek Aurora Cell Sorter system launched in June 2021. The Cytek Aurora sales order builds upon the remarkable FSP capabilities of our Aurora cell analysis system, delivering unparalleled high sensitivity performance at the single-cell level. It empowers researchers to effortlessly and seamlessly resolve and solve even the most challenging cell operations, propelling discoveries and optimizing efficiency in cell analysis workflows. It is exciting to see how full special profiling analysis is taking hold and redefining the new normal in the field. This further motivates us to forge ahead with unwavering dedication, shaping the future of cell analysis. Turning next to applications, which include our reagents. Revenue from reagent sales continues to be a fast-growing product area, highlighting the increasing demand for our offerings, which are focused on making the user's job easier, faster, and more accurate. We continue to actively collaborate with our partners to expand our reagent portfolio and develop application-specific kits. In June, we launched the cFluor myeloid-derived suppressor cells or MDSC Kit optimized on our FSP platform, significantly broadening the application manual for our customers by offering them enhanced capabilities and flexibility in their research and analysis. With this launch, we are addressing a wide range of research needs across various applications, particularly in cancer research and therapy development where myeloid-derived suppressor cells play a crucial role. Broadening our manual of applications is a critical part of our strategy that helps us both meet the needs of our existing customers and helps us attract new customers seeking comprehensive solutions. The breadth of our applications can be seen across the wide range of peer-reviewed publications that include our technology. During the second quarter, there were 139 new peer-reviewed publications mentioning Cytek, bringing the all-time number of publications to over 1,300. With the growing number of peer-reviewed publications featuring our products, researchers are inviting Cytek's innovative solutions to drive advancements in scientific research. As an example of how significant some of these research efforts are, two recent papers highlight the power of our technology in immuno-oncology applications. The first paper published by biotechnology companies elucidates the signaling mechanism of melanoma tumors that are resistant to immune checkpoint inhibitors. They also showed how their therapeutic candidate developed using synthetic biology techniques improved on the natural therapeutic process of innate cytokine. The second paper published in Nature by clinicians at the Cedars-Sinai Medical Center describes how bladder cancer cells adapt to survive and identify biomarkers for improving cancer immunotherapy. Our informatics is our third strategic area. A key part of our bioinformatics strategy is enabling our customers to streamline their experiment workflow. To that end, we are excited to share that the user engagement and demand for the Cytek Cloud launched late last year has been performing exceptionally well. Cytek Cloud's digital ecosystem offers a comprehensive suite of special panel design tools seamlessly integrated into a centralized platform. This cutting-edge solution empowers researchers to prepare and optimize their experiments remotely, streamlining the process from panel design to data acquisition. The accelerated time to insight is invaluable across a broad range of applications from immunology to oncology, infectious diseases, and inflammatory diseases. The success of Cytek Cloud not only benefits our extensive existing user base but also paves the way for future users as we continuously enhance its capabilities, incorporating data management, sharing, and analysis features. With Cytek Cloud at the forefront, we aim to revolutionize single-cell analysis to drive groundbreaking discoveries and propel scientific research to new heights. One topic we have not discussed previously is scientists' use of artificial intelligence and machine learning to enhance the value of our instruments. Cytek cell sorters use machine learning to optimize sorting as well as to analyze droplet shape, automatically making flow rate adjustments and performing functions. The Amnis AI software is based on deep machine learning and is a modified version of an AI platform that won the ImageNet challenge. Turning to our clinical opportunities. Several of our products are approved for clinical use in both China and the European Union, where our most common sales for clinical applications is the Northern Lights CLC system accompanied by our growing cFluor reagent product portfolio. In both China and the European Union, the clinical market is an attractive long-term business opportunity for Cytek. As a reminder, we are preparing to submit our products for FDA clearance in the U.S., where we believe our powerful FSP platform cleared will bring enhanced diagnostic power and visibility to the benefit of patients by providing doctors with a clearer and more detailed view of each patient's condition. Part of our clinical strategy is to collaborate or partner with other organizations for the development of clinical applications. These partnerships underscore our commitment to providing customers with comprehensive solutions and driving innovation with cutting-edge technology. We are actively engaged with partners for opportunities across product development and clinical treatment advancement. To that end, we are excited to share our initiative with the Swiss Flow Cytometry School and the Geneva University Hospital focusing on minimal residual disease or MRD detection in leukemia and lymphoma. We are working diligently with the Geneva University Hospital to harness the potential of MRD analysis using our advanced technologies and tailored solutions. As we continue to collaborate with key partners and institutions, we remain dedicated to expanding our clinical reagents offering and furthering our full solution provider mission. Now I would like to spend a moment to discuss our progress with the integration of Luminex Flow Cytometry and Imaging business. As we have shared, this acquisition provides an important contribution to our technological ability, product range, customer base, and commercial reach. After approximately five months into integration, we have completed several important milestones and still have some key steps ahead of us. Our Amnis operations in Seattle are now fully integrated and functioning. We are pleased with the smooth transfer of operations. Additionally, we have made remarkable progress in independently manufacturing the Guava product line. The transfer of Guava manufacturing to Cytek's facility is nearing a successful completion. This strategic move enables us to consolidate our manufacturing operations, which, in turn, is expected to yield substantial cost-saving advantages for the company, driving improvements in gross margin for Guava instruments. We are confident that the final stage of this transfer will be executed seamlessly. From a commercial perspective, we have cross-trained our commercial personnel on the new technologies, including Amnis and Guava products, for our new team members from Amnis and Guava. In addition to cross-training, we launched cross-selling plans targeted at Cytek FSP, Amnis, and Guava products. With our integrated commercial team, we are enhancing our ability to offer comprehensive solutions through our value to customers. We continue to be excited about the value of the Luminex acquisition in both the near and the long term. The near-term value of this acquisition consists of the significant cross-selling opportunities and the service operation efficiency improvements with the fully integrated sales and customer service teams. In the longer term, there are a number of new products we plan to introduce by combining FSP imaging and microcapillary technologies. Cytek's acquisition and the integration of the Amnis and Guava product lines have provided a great opportunity for Cytek to transition from a technology-oriented company to a market-driven business. Historically, our operations have been guided by the technology we have developed with the foresight to recognize major market opportunities for our full special technology in disease research, drug development, translational medicine, and clinical applications. While these opportunities are abundant and growing, we now have a large addressable market and new product opportunities through Amnis and Guava. To better address these markets, we have combined the original Cytek sales team with the Amnis and Guava sales team, which will significantly increase our global reach. With that, I will now turn the call over to Patrik for more details around our financials.

Thanks, Wenbin. Total revenue for the second quarter of 2023 was $49.7 million, a 24% increase over the second quarter of 2022. This included approximately $8.2 million of revenue from the products and services acquired from the Luminex transaction, which closed on February 28. This was our first full quarter of recognizing revenue from these product lines. Organic revenue, excluding the acquired products and services was $41.5 million, an increase of 3% compared to the same period of 2022. While the macroenvironment was still somewhat challenging during the second quarter, we did see improvements across the U.S., particularly with our pharma and biotech customers, as orders that were delayed at the end of the first quarter began to materialize. On a non-GAAP constant currency basis for the quarter, revenue was $50 million. Gross profit was $28.2 million for the second quarter of 2023, an increase of 15% compared to a gross profit of $24.6 million in the second quarter of 2022. Gross profit margin was 57% in the second quarter of 2023 compared to 61% in the second quarter of 2022. Adjusted gross profit margin in the second quarter of 2023 was 60% compared to 64% in the second quarter of 2022 after adjusting for stock-based compensation expense and amortization of acquisition-related intangibles. Operating expenses were $37.3 million for the second quarter of 2023, a 47% increase from $25.5 million in the second quarter of 2022. The increases in OpEx were primarily due to expenses related to increased headcount from the Luminex acquisition and personnel-related expenses across R&D, sales and marketing, and G&A. Over time, as revenue increases, we expect these expenses to become a smaller portion of our overall revenue. Research and development expenses were $12.1 million for the second quarter of 2023 compared to $8.4 million for the prior year period. Sales and marketing expenses were $14.4 million for the second quarter of 2023 compared to $8.4 million for the prior year period. General and administrative expenses were $10.8 million for the second quarter of 2023 compared to $8.6 million for the prior year period. Loss from operations was $9.1 million for the second quarter compared to a loss from operations of $0.9 million for the second quarter of 2022. Net loss in the second quarter of 2023 was $4.4 million compared to a net loss of $0.7 million in the second quarter of 2022. Additionally, adjusted EBITDA in the second quarter of 2023 was positive $1.5 million compared to positive $4.8 million in the second quarter of 2022 after adjusting for stock-based compensation expense. Cash, cash equivalents and short-term investments were $298.8 million as of June 30, 2023. Now turning to our guidance for 2023. We continue to expect our full year revenue to be in the range of $205 million to $220 million, representing overall growth of 25% to 34% over full year 2022. This is comprised of revenue from our existing organic business to be in the range of $180 million to $190 million and a total of $25 million to $30 million of revenue contribution from the business acquired from Luminex. This assumes no change in the rate of foreign exchange as well as some continued impact from an elongated sales cycle from our biotech and pharma customers. With that, I will turn it back over to Wenbin.

Thanks, Patrik. Cytek has continued to demonstrate our commitment to developing tools, reagents, and software to advance the next generation of cell analysis. I would like to express my deep gratitude for the team we have here at Cytek. It is their excellence, hard work, and shared belief in our important mission that drives strong progress. We believe Cytek is particularly well positioned to address multiple opportunities, given the power of our advanced technologies, the strength of our capital base, the growing awareness of our extended product portfolio, and the extraordinary talent of our employees. I'm confident that our daily work around under our four pillars, adheres to and executes our overall strategy. I want to thank everyone for joining today's call, and we will now open it up for questions.

Our first question comes from Andrew Cooper with Raymond James.

This is Noah standing in for Andrew. My first question is that given all the noise with the funding environment, I'm just curious to see what you're seeing on that front with your second quarter results coming in pretty healthy as well as a contrary tone relative to others in the space? So what are you seeing on that front?

Yes. In the U.S., we've noticed increased demand, and we've successfully converted that into sales. However, larger pharmaceutical companies are entering the market as well. Overall, while I wouldn't say funding has fully returned, this quarter has been more aligned with our expectations compared to our Q1 results.

If I could ask one more question, is there any difference in performance between higher-end and lower-end products in the current macroenvironment? It seems like FCI and the core Cytek have done well, but do you notice anything specific regarding how higher versus lower-end products are performing?

I think we had a variety of products, and we're noticing an increase in demand for the sales order, which is a high-end product. I'll also let Wenbin share his thoughts.

Yes, absolutely. And the cell sorters definitely is an area that we have enjoyed some healthy growth here.

Our next question comes from Matthew Sykes with Goldman Sachs.

This is Eve Kozlowski on for Matt. So what gives you confidence in your guide given the pickup of growth implied for the back half versus the first half of the year? And what kind of visibility do you have for the remainder of the year?

That's a great question. Looking at the macroenvironment, with the decreasing probability of a recession, we feel more optimistic about the second half of the year. Having a fully trained sales team on the ground enhances our confidence. We anticipate accelerated growth in instrument sales, driven by ongoing demand for our analysis and increased interest in the Cell Sorter, which has received positive feedback. We recently surpassed the 100-instrument milestone, indicating sustained demand. Additionally, we expect ongoing growth in our recurring business, particularly in our strong service segment. Several factors will contribute to our growth in the second half.

And then China, I know last quarter, you noted particular strength in that market. Has that continued, and has there been any changes to the competitive environment there? And also, does your additional investment in facilities help your positioning versus local competitors?

Actually, Q2 overall, our China business continued to enjoy healthy growth compared to the same period last year. And indeed, there are local competitors coming, but they are mostly in the entry level and the lower end, which we don't really overlap that much.

Our next question comes from Steven Mah with TD Cowen.

A follow-up question on the U.S. pharma and biotech strength that you saw. Could you give us a sense, was it broad-based amongst your customers? Or was it weighted to a certain profile of the customer, such as larger companies that were catching up?

Actually, as you recall, we had some delay in orders during the last month of Q1. And quite a lot of those actually came back in Q2. That helps us with our overall pharma business during Q2. On the other hand, we will continue to see an elongated sales cycle from pharma and biotech. Nevertheless, the business remains over there. It just takes a longer time to close.

And just to dig in on what you said. So you're still seeing elongated sales cycles then?

Yes, that's correct. It does take longer to close the deal, but the demand is still there. They are not gone.

So is it still the case that you're seeing demand? You're not losing business; it's just that the sales cycle is taking longer. That's still what you are saying?

Yes, correct.

And then if I could sneak in one more question. You talked about specifically some European weakness. Could you give us a little bit more color about market dynamics ex U.S.? I know you already talked about China, but more specifically, some of the European weakness that you mentioned?

Yes. So it's true that the European business has been lagging behind the U.S. and APAC at this point. Yet, typically, the European market is much stronger in the second half. So we expect that market to pick up in the next six months.

Our next question comes from Tejas Savant of Morgan Stanley.

This is Edmond on for Tejas. I appreciate all the color here on China so far. But I just wanted to dig into this a little bit more. It sounds like it's been performing very well for you guys, but your peers are noting deteriorating conditions in China. So I'm just wondering what's causing this difference in views or what you guys are seeing? Are you guys being insulated to a certain degree by innovation versus other products?

I think even in the tool space, you may see the difference between the current reagents revenue versus tool. And clearly, we continue to enjoy the incentive plan happening, starting from Q3, Q4 last year. And now coming back to see how it's going to perform during the second half of the year, this is still something we are assessing. And indeed, I think there are a lot of difficulties that we have been hearing about in China, but how it might impact us in the second half is still something to be seen.

Yes. I would like to add that flow is not a new technology, and we are experiencing demand for replacements as a result. Overall, I believe we should anticipate continued demand in comparison to some other tool companies.

And on the last call, you guys noted that there were certain features of the Guava that need to be implemented into the Northern Light before you guys can accelerate the conversion of the user base. Can you provide some more details on that? And I was just wondering, how are you guys balancing between incorporating these features into the Northern Light to drive that user base's adoption versus focusing on the next-generation platform that you're going to develop with the Amnis imaging capabilities?

I think these are two different products, like one year the high end of the market, focusing more on these customers in the discovery or collabs and compared to the Northern Lights or Guava features. So we do have teams actually working on these two subjects in parallel. We have different teams on different projects.

And then, Wenbin, you alluded to potentially larger addressable market now that you have these Luminex products in your portfolio. Could you clarify on that a bit?

As you can see, clearly, previously, our organic products focused more towards pharma, biotech, and those discovery and translation, while Guava more towards industry QC, those types of entry-level customers. Now, combining these two, we have a product portfolio that can meet the needs across a variety of user base applications.

So has your overall TAM changed since your prior views?

Not really. Our TAM has not changed. It's just we have more targeted products to focus on different user bases.

Our next question comes from David Westenberg with Piper Sandler.

I apologize, but I’d like to ask a question regarding China. Can you provide some clarity on the remaining assumptions in your guidance for China? If possible, please share a number or indicate if it remains consistent with what you previously had. It would be helpful to understand any potential slowdowns or additional comments and how that might impact your guidance.

Yes. So David, we don't really break out the guide this way. But we've revised our guide as we do all the time, and we still feel good about where we are with the guide for the year, considering the funnel, and we look at the funnel, looking at all the regions. So I will maybe leave it with that.

Continuing with the guidance, I understand there’s some overlap between the Luminex flow cytometry products and the legacy products. You mentioned $8.2 million in Luminex revenue for Q2. Based on your guidance of $25 million to $30 million, if I project that same run rate, I would assume some growth or acceleration from this quarter. Is that the correct way to interpret it? Did I understand the press release accurately?

It doesn't work that way. Typically, and you know the business, right? Typically, we are a third-month company, and most of the orders come in during the third month. But on the other hand, from Luminex's perspective, we only have about 10 months for the year. So if you work those numbers, pretty much that will get to what we have projected for the whole year.

Can you talk about, if there's been any surprises, positive or negative, from the portfolio now that you've had it since February? And then kind of continuation of that question, how is the integration going with the sales team? Is there any synergies that you're getting there that maybe you didn't call out at first? And is there any opportunities to rationalize the sales force or reorganize the sales force from here?

I'm not really surprised, but we do have learned a lot through this integration. Especially regarding the technology embedded in the Luminex product portfolio, we see the value of this acquisition. We do feel it’s going to help us not just for this year, but actually for the years to come.

And since I think I am the last of 5, I'll squeeze in one more because I can do that. So on the reagent, you used the word fast-growing in the prepared remarks. So can we assume, when you're using that kind of commentary, this is growing faster than instruments here? Is that the assumption now?

Yes, David, it's growing faster than our total revenue. Yes.

I am showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.