Cytek Biosciences, Inc. Q1 FY2024 Earnings Call

Thank you for standing by. My name is Liz, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Cytek Biosciences First Quarter 2024 Earnings Conference Call. I would now like to turn 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 March 31, 2024. 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 newly appointed CFO, Bill McCombe. 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 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, May 8th, 2024. Before Wenbin speaks, I would like to mention that Cytek will be participating in a variety of industry and academic conferences, meetings and seminars throughout 2024. While these are primarily geared to the scientific community, they may offer an opportunity to interact with users of our technologies to learn why Cytek instruments are so highly valued by our customers. There is a cost to attend most events, and we have a limited number of spaces to accommodate members of the financial community. So if you are interested in attending, please contact me. With that, I would like to turn the call over to Wenbin.

Thanks, Paul. Welcome, everyone, and thank you for your interest in Cytek. On the call today, I will discuss our performance for the first quarter of 2024 and the progress achieved on our strategic objectives to drive sustainable growth and profitability. Then I will turn the call over to Bill for a more detailed look at our financial results and our outlook for 2024 before we open it up for Q&A. Our strategic priorities in 2024 are centered on strengthening our competitive position with an eye toward improving operational leverage. We are focused on driving revenue growth, margin expansion, and capital efficiencies. These objectives are part of our balanced business strategy to deliver sustainable profitability and maximize free cash flow. Turning to specifics. In our first quarter revenue results, we achieved $44.9 million, representing growth of 21% year-over-year. Organic revenue grew 11%, excluding acquisition-related revenue of $7.6 million in the first quarter of 2024. We began to see improvement in organic revenue growth in the fourth quarter of 2023, which we were pleased to see continue into the first quarter. Total organic revenue grew 11% in the first quarter, driven by strong growth in our services revenue from our increasing installed base. Organic revenue growth was also driven by continued growth in our products revenue. Longer term, we expect our recurring services and related revenue will be strong growth drivers for Cytek. In the first quarter, we expanded our global footprint with 99 organic Cytek instruments sold, reaching a total installed base of 2,247 instruments. This number does not include the thousands of installed Amnis and Guava instruments. Ordering trends in the first quarter for both organic and inorganic products were largely within our expectations, but we submitted activity levels by region. Specifically, we experienced increased strength across Europe and China where Cytek FSP products are also becoming well established as a market leader in flow cytometry. We are seeing customers gradually returning to their previous level of buying patterns in these regions. However, in the U.S. and APAC, excluding China, we continued to see some elongated sales cycles. In the first quarter, we continued to make strategic investments to increase the efficiency and performance of our operations. In March, we announced that we opened a new 50,000 square foot facility in Wuxi, China to meet the rising global demand for our cutting-edge cell analysis solutions. With this facility, we are able to increase our manufacturing capacity and foster unique vendor relationships to drive operational efficiencies and to further our competitive advantage over industry peers. Turning to bioinformatics, our primary goal is to enable our customers to streamline their experiment workflow through our software tools, which drive adoption and utilization of our cell analysis solutions. One way we track our success in bioinformatics is through user engagement and demand for our core bioinformatics offerings, the Cytek Cloud. I'm pleased to report that we now have over 8,500 users, representing an average of more than 3 Cytek Cloud users per installed Cytek FSP instrument. As a reminder, Cytek Cloud's digital ecosystem offers a comprehensive suite of special panel design tools seamlessly integrated into a centralized platform, forming a unified ecosystem. Our cutting-edge solution empowers researchers to prepare and optimize their experiments remotely, streamlining the process from panel design to data acquisition. We are also pleased to share that just this week at the CYTO conference, the primary flow cytometry conference worldwide, we launched our special panel software package through an early access program. Special panel is an intelligent design algorithm that automatically designs high-quality panels for optimal mark resolution and is optimized specifically to use onsite at FSP instruments. We expect the special panel tool to make the use of instruments even easier and will save researchers time and money by allowing a broader range of reagents to be selected automatically for their design panels to achieve biological objectives with optimized data quality. We recently preannounced this solution on our social media channels, and we encourage you to follow the discussion there for more information. On the clinical front, we have previously reported our success at obtaining the IVDR compliance for our single-laser, 6-color TBNK panel in the EU market. I'm pleased to report that just last week, our application for the 6-color TBNK panel on our single-laser NL-CLC instrument was approved in China. This approval is unique to Cytek and is an important development as previous regulatory approvals for TBNK analysis have been based on using two-laser instruments. Using Cytek's one-laser system will provide important advantages to our users in the form of lower cost, more reliable operations, and more consistent results to support laboratory standardization. Overall, the start to 2024 was encouraging with a resumption of organic growth and improved customer purchasing patterns, trends that we began seeing in the fourth quarter that continued through the balance of the first quarter. It is a testimony to our position as an industry leader in comprehensive cell analysis solutions and the clear underlying demand for our products. We are purpose-filled to advance next-generation cell analysis with our end-to-end platform, addressing the direct needs of our customers to advance their research, and we believe this continues to be a significant and important differentiator for Cytek. With that, I will now turn the call over to Bill for more details around our financials.

Thanks, Wenbin. Before reviewing more details around our financials, I wanted to express my gratitude for the opportunity to join this innovative company and play a meaningful role in charting the next chapter of Cytek's continued success. I believe there is tremendous growth potential at Cytek, and I look forward to working alongside this team to drive sustainable growth and long-term value creation. Total revenue for the first quarter of 2024 was $44.9 million, a 21% increase over the first quarter of 2023. The first quarter of 2024 included $7.6 million of revenue acquired in the Luminex transaction, which closed on February 28, 2023, and contributed $3.5 million of revenue to that quarter. Organic revenue, which excludes revenue from the acquired Luminex business, was $37.3 million in the first quarter of 2024, an increase of 11% compared to the first quarter of 2023. Beginning in the second quarter and going forward, the acquired Luminex business will have been owned for the full prior year quarter, so we will no longer break out this revenue separately. Gross profit was $23 million for the first quarter of 2024, an increase of 9% compared to a gross profit of $21 million in the first quarter of 2023. GAAP gross profit margin was 51% in the first quarter of 2024 compared to 57% in the prior year quarter. Inventory adjustments of a one-time nature arising from the integration of the Luminex inventories into the Cytek system contributed to 2% of the margin deterioration. Higher overhead expenses, which were lower than the fourth quarter of 2023 but higher relative to revenue in the first quarter, drove the remainder of the margin decline. We expect overhead expenses will remain fairly constant over the balance of the year and will gradually decline as a percentage of revenue. Adjusted gross profit margin, which excludes stock-based compensation expense and amortization of acquisition-related intangibles, was 55% in the first quarter of 2024 compared to 59% in the prior year quarter. Operating expenses were $33.7 million for the first quarter of 2024, increasing 1.6% from $33.2 million in the first quarter of 2023, driven primarily by an increase in headcount and personnel-related expenses. Notably, operating expenses increased at a substantially lower rate than our revenue growth in the same period, demonstrating our focus on operating leverage. Research and development expenses were relatively flat at $9.8 million for the first quarter of 2024 as compared to $10 million for the prior year period. Sales and marketing expenses were $12.5 million for the first quarter of 2024 as compared to $11.1 million for the prior year period. The increase of $1.4 million was primarily due to increased headcount and related expenses. General and administrative expenses were $11.4 million for the first quarter of 2024 as compared to $12.1 million for the prior year period. The decrease of $0.7 million was driven by acquisition-related legal expenses in the prior year period not reoccurring, offset by higher consulting expenses. Loss from operations was $10.7 million for the first quarter compared to a loss from operations of $12.2 million for the first quarter of 2023. Net loss in the first quarter of 2024 was $6.2 million as compared to $6.8 million in the prior year. This was primarily due to a lower loss from operations, offset by lower other income, which was due to unrealized foreign exchange losses. Adjusted EBITDA, which excludes stock-based compensation expense and foreign currency impacts, for the first quarter of 2024 was a reduced loss of $0.7 million compared to a loss of $2.5 million in the first quarter of 2023. This was due to higher revenue and gross profit. We are committed to continuing to improve our profitability going forward by driving revenue growth and controlling costs. Cash from operations for the first quarter of 2024 was a positive $4 million, and total cash and marketable securities increased by $7.7 million in the quarter to $270.4 million. With healthy cash reserves, no meaningful debt, and positive operational cash flow, we continue to operate from a position of strength and can fully support our global growth initiatives. Now turning to our outlook for the full year 2024. Today, we are reiterating our 2024 revenue guidance, which we expect to be in the range of $203 million to $213 million, representing 5% to 10% growth over our 2023 total revenue, and this assumes no change in currency exchange rates. We started the year with the first quarter results showing a continuation of improvements in ordering trends which support our full year outlook. As we look ahead, we continue to expect modest growth across all our product and service lines, with most of that growth being weighted towards the second half of the year, consistent with historical spending patterns of our customer base. We expect that our 2024 revenue growth, combined with our ongoing cost control efforts, will position us to report positive GAAP net income for the full year 2024. With that, I will turn it back over to Wenbin.

Thanks, Bill. I want to express my gratitude to our exceptional Cytek team for their dedication to driving our mission forward. It is their unwavering belief in our mission, coupled with the effective execution of our business strategy, that positions Cytek as a frontrunner in advancing the next generation of cell analysis. The increasing application of cell analysis in fields across health care, including immuno-oncology, infectious diseases, and immunology, has led to rising need for advanced cell analysis solutions. We are uniquely positioned to serve these attractive end markets as an industry leader in next-generation cell analysis solutions, underpinned by long-term recurring growth drivers in services and reagents. I'm excited for our roadmap ahead to address this demand as we build competitive solutions and empower scientists directly with the tools and support they need to advance their research. I want to thank everyone for joining today's call, and we will now open it up for questions.

Your first question comes from Tejas Savant at Morgan Stanley.

Wenbin, looks like a decent start to the year on both products and service revenue and placements as well. I wanted to ask you on your comments on China and Europe to start with. Could you just elaborate on what you're seeing there across your academic and pharma customer base, especially in China? And then in light of that recent stimulus program that's about to be rolled out over the next 3 years or so, is that starting to show up in your early customer conversations in the funnel just yet? And any anecdotal color you can share on potential benefit, perhaps not in 2024 but into 2025 and beyond would be great.

Actually, in China, currently, our primary growth is from the academic space, mostly in universities and research institutions. Regarding your question on the incentive program, it's coming, but we haven't seen the benefit yet. We expect it will probably help in the second half of the year.

Got it. That's helpful. And then I want to ask you about reagent rentals during the quarter. In terms of just the order book, what fraction of the orders this quarter were reagent rentals versus upfront purchases? Any color on that?

Reagent rental represents a very small part of our overall business. As we continue to support our clinical business, we may observe revenue impacts from polymers, particularly on the reagent side, but currently, it is still in the early stages.

Perfect. And last one for me on just the competitive dynamics here. Are you seeing any heavier sort of price discounting from your next-gen flow peers, Sony, BD, etc., as the industry grapples with instrument purchasing headwinds and elongated purchasing cycles, as you called out, at least in North America and APAC ex-China?

We do start to see new players in this space. This is a reflection of our success in driving the flow cytometry industry towards full spectrum technology, which we pioneered 7 years ago. Previously, we were probably more focused on converting conventional to special. Now the whole industry is truly convinced this is the direction and the future. Cytek is clearly a leader in this space and this technology. This is also reflected in the recent CYTO meeting in Edinburgh. It's very exciting, and we are very encouraged by what we have seen there.

And your next question comes from the line of Matthew Sykes from Goldman Sachs.

This is Jake on for Matt. So you saw a sequential step down in organic revenue. Can we attribute that to seasonality in the quarter? And then can you also talk about how you're thinking about the pacing of growth throughout the rest of the year?

I think I will let Bill handle that question.

I'm not sure I understood it, but our organic revenue actually increased substantially in this quarter compared to Q4 sequentially. It went up from around 1% to 11%. So we saw a meaningful improvement in organic revenue growth. Did I understand your question correctly?

Yes. Yes, you did.

Okay. So that's the answer, meaningful uptick in organic revenue growth. As far as revenue staging is concerned, look, I think we are still comfortable with the revenue guidance that we gave for the year. Obviously, that implies some quarterly revenue growth during the balance of the year. We would expect that to follow a similar pattern to recent years. I think we're ready for the next question, operator.

Yes. And your next question comes from the line of David Westenberg from Piper Sandler.

So welcome, William. And I'll just go ahead and pick on you since this is your first earnings call. So the margins missed the Street by a little bit. This is probably a lot to do with services and mix. And is some of this potentially also just the way customers are buying the instrument on more services contracts? And then with all that in mind, how should we think about gross margins the rest of the year just in terms of pacing? Could we be seeing, as we go into 2025/2026, maybe this reset to this level of gross margins?

Thank you for the welcome and for your question. The decrease in gross margin was attributed to two specific factors. There was no change in customer purchasing behavior or product mix influencing this decline. One factor was an unusual inventory adjustment caused by the integration of Luminex inventories into the Cytek system. After the acquisition, a significant portion of the inventories was stored in a third-party warehouse and managed by a separate ERP system. When these inventories were integrated into our system, it involved a manual process with thousands of SKUs, leading to a few errors. This is an unusual scenario that we do not expect to happen again, accounting for about 2% of the margin decline. The remainder of the decline was due to overhead absorption. Although overhead expenses were somewhat lower than in Q4, they were still relatively comparable, while revenue was lower than in Q4. This resulted in less overhead absorption, negatively affecting the margin. We anticipate that this will improve over the year as quarterly revenue increases. We believe the inventory issue was a one-time incident, and we expect the overhead impact to improve throughout the year.

Got it. So the real way to think about the rest of the year is that 55% kind of number and maybe take it off from there or march from there?

I don't want to give specific margin guidance as we haven't established that yet. I can say, however, that our goal is to return to our historical gross margins.

Perfect. All right. Lots of great detail there. So just Wenbin, I think you said Asia and in Europe, you're seeing some of the return of capital cycle purchases. I just want to make sure I heard that correctly. And I think you were saying maybe this could be an analog to the U.S. and what might be happening in the U.S. or North America. I just want to confirm I heard that correctly. And can you elaborate a little bit on what you're seeing there and why you're optimistic in terms of that?

What I'm saying is particularly in Europe and China, we are seeing purchasing return to the normal previous way. This actually started in Q4 and continued into Q1, which is very encouraging. On the other hand, we do see continued elongated purchasing cycles in the U.S. and in APAC, excluding China. However, those orders will return. It's not a loss that can't be recovered. They will come back and close. We expect them to close.

Got it. Just on my last one, just in terms of customers using larger or the full potential of full spectrum flow cytometry. Are you seeing an increase in that usage? And when you are seeing an increase of that, are you seeing them order Cytek specific reagents? And just even a little bit more color on how you're seeing adoption in terms of reagents there. That would be my last one.

We are definitely seeing positive trends across the industry, particularly in pharmaceuticals. They are beginning to validate our instruments and standardize their usage within their organizations. They continue to return to increase the number of instruments they have. We are talking about institutions where there aren't just a few users—there are even hundreds of users using Cytek instruments currently. So in some organizations, this is very encouraging.

And your next question comes from the line of Andrew Cooper from Raymond James.

This is Noah on for Andrew. So my first question is, you talked about instrument sales coming in at expected levels. Were you seeing any particular strength across particular instruments? Would that be the cell sorter and the higher-end products? Or is that mostly from other places within the portfolio?

Our strengths continue to be our flagship product, which is Aurora, which continues to grow. Of course, in the meantime, we are going to focus more and more on entry to the mid-level to drive adoption across our product portfolio.

Awesome. And one more question. You guys launched the Orion reagent mixer in 4Q of 2023. I understand that the dollars are going to be minimal. But have you seen any new doors open for the rest of the business because now you've had a full quarter selling and possibly seeing any reagent pull-through on that end?

With a new instrument you've launched, the first thing is to come out, work with customers to validate the instruments before we begin full production on the customer side. We have seen very encouraging trends and interest from our customer base.

And your next question comes from the line of Mason Carrico from Stephens.

Given the current funding environment and budget limitations, for customers interested in purchasing your higher-end instruments, are most of those who are delaying their purchases just putting off the decision? Or is there a trend where they might be opting for mid-tier instruments instead?

I mentioned, we continue to see greater interest in our flagship product, which is Aurora and the Aurora CS. In that regard, we don't really see much change related to how budgets will impact buying behavior. But the elongated buying cycle is particularly related to the U.S. and the APAC region, which has been that way for quite some time. It will all come. It just takes a longer time for them to make decisions. That's what we are seeing.

Got it. Okay. And maybe a different question here. Last quarter, you mentioned having early success in transitioning existing Guava customers to your Northern Lights platform. Has that trend persisted? Additionally, in terms of your Northern Lights sales, what percentage of those sales are attributed to existing Guava customers compared to non-Guava customers?

In the previous session, we did mention that Guava customers do have their specialized needs, which today are not really being satisfied by the Northern Lights. This is because Guava, in particular, has some platforms that are value-driven while Northern Lights is more designed for individual users with flexibility. This is something we are working on the software side to address those needs from the Guava customers. We expect to eventually address this and convert more users.

And your next question comes from the line of Jacqueline Kisa from TD Cowen.

This is Jacqueline Kisa on for Steven Mah. Congrats on the approvals and the facility opening. Looking forward to your clinical progress, are there any specific clinical milestones you can expect to see on the horizon now that you've gained approval for your TBNK panel and reagents?

Yes, absolutely. We expect to see continued growth in our reagent business. In the meantime, we hope that will also help us grow our Northern Lights CLC instrumentation. Earlier, there was a question regarding reagent rental, which will also be helpful because approved TBNK will enable users to come back for our instruments to support that type of business model.

Great. And has the opening of the new facility driven any demand or customer conversations? Will the facility focus more on supporting clinical applications or just provide support across the board?

The facility is to support product manufacturing across the board, mostly instrument manufacturing.

Great. If I could just sneak one more in. Late last year, you launched a software improvement on Northern Lights. Have you received any feedback from that from customers? Is there any room for similar product improvements on the rest of the portfolio?

Well, actually, we have received encouraging feedback from customers regarding the new software, which enables those conventional instrumentations to manage the special features. In the meantime, it reduces the barriers to move from one platform to another, and we feel it's a great success.

There are no further questions at this time. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.