Earnings Call Transcript - CTKB Q2 2024

Operator, Operator

Thank you for your patience. My name is Luella, and I will be your conference operator today. I would like to welcome everyone to Cytek Biosciences' Second Quarter 2024 Earnings Conference Call. I will now hand it over to Paul Goodson, Head of Investor Relations. You may begin.

Paul Goodson, Head of Investor Relations

Thank you, operator. Earlier today, Cytek Biosciences released financial results for the quarter ended June 30, 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 e-mail to investors at cytekbio.com. Joining me today from Cytek are Wenbin Jiang, CEO, and Bill McCombe. Before we begin, I'd like to remind you that management will be making 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 live broadcast, August 6, 2024. Once again, I would like to invite investors and analysts to attend the industry and academic conferences, meetings, and seminars where we will be exhibiting Cytek's products. There are 43 of these events planned throughout the remainder of 2024 in the U.S. and around the world. 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's 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 will turn the call over to Wenbin.

Wenbin Jiang, CEO

Thanks, Paul. Welcome, everyone, and thank you for your interest in Cytek. On the call today, I will discuss our performance for the second quarter of 2024 and the progress achieved on our strategic initiatives 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 updated financial outlook for 2024 before we open it up for Q&A. Revenue in the second quarter was $46.6 million, an increase of 4% compared to the first quarter and a 6% decline compared to the second quarter of 2023, which was especially strong as it captured some delayed orders from the first quarter of 2023. Collectively, revenue for the first half of 2024 grew 5% compared to the first half of 2023. Revenue in the second quarter of 2024 was comprised of a continued strong double-digit growth in EMEA and APAC, offset by weakness in the U.S. market, where we continued to experience a slowdown in orders and elongated sales cycles, particularly concentrated in the academic and the government segment of the U.S. market. Further, while weaker versus the prior year, the biotech, pharma, and CRO segment improved sequentially versus the first quarter. We believe our performance in this organic and the government segment of the U.S. market was impacted by turnover of our sales team in some sales areas, a slow funding environment, and an overhang of excess capacity from pandemic-era spending. We are working aggressively to bolster our sales team in this area. We believe the elongated sales cycle was primarily a result of these market factors and not as a result of a change in competitive dynamics. Importantly, we believe the fundamental drivers of long-term growth remain in place in the U.S. market and expect it to normalize over time. Specifically, we expect the large installed base of conventional technology growth cytometers will be replaced over time with specialized instruments and will be a growth driver for Cytek going forward. As a result of our Q2 results and the slower-than-expected recovery in the U.S. market conditions, we are slightly narrowing our guidance range and now expect full-year revenue in the range of $203 million to $210 million, representing growth of 5% to 9% over the prior year. Bill will provide more details on our financial results momentarily. In the second quarter, we were pleased to achieve 30% growth in service revenue as compared to the same quarter in the prior year, driven by our increasing installed base of instruments. As a reminder, we expect our recurring service revenue will be a strong growth driver for Cytek longer term. Notably, over the last 12 months, we have leveraged the increasing scale of our service operations to boost labor and overhead productivity. Based on these efforts, we substantially increased our service gross margins by 8 percentage points as compared to a year ago. Overall, while ordering activity continues to be weak in the U.S. and the market recovery was not at the pace we would like to see, we believe that the underlying demand for our cutting-edge analysis solutions remains strong, and we are making steady progress with new and existing customers in our pipeline. As we navigate this dynamic environment, we remain focused on driving sustainable growth and productivity. And essential to this objective is strengthening our position as a market leader in flow cytometry. Turning to our growth strategy. As a reminder, our focus is on four key pillars, each of which is integral to our long-term growth: instruments, applications, bioinformatics, and clinical. In the second quarter, we expanded our global footprint with 147 instruments sold, reaching a total installed base of 2,656 units, including 299 Amnis and Guava instruments shipped since the acquisition of the Luminex Flow Cytometry & Imaging business. This total does not include the thousands of installed Amnis and Guava instruments sold prior to our acquisition of the Luminex product line. We believe that this growing installed base will serve as a durable foundation to drive adoption of our current and future product offerings and deliver growth across our diversified revenue base. During the second quarter, we were excited to have announced our enhanced small particle detection module, or ESP, a new product that can be added to new or retrofitted to existing Aurora and Northern Light instruments. This new capability allows our powerful cell analysis systems to provide further sensitivity and resolution improvements for detecting viruses and other subcellular particles, all while maintaining size and well-known high resolution and high parameter capabilities for cell analysis. By bringing improved speed and accuracy to the study of extracellular vesicles, cell-to-cell communication, and cell signaling in many physiological states, we expect to accelerate the pace of discovery, therapy, and diagnostics development and benefit the scientific community as a whole. For Cytek, we believe these new capabilities will further distinguish our cell analysis solutions as the preferred choice among researchers and clinicians. Turning to bioinformatics. Our main 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. Our success in bioinformatics can be measured through user engagement and demand Cytek Cloud, one of our core bioinformatics offerings. We now have over 11,000 users of the Cytek Cloud, representing an average of about 5 users per installed Cytek FSP instrument. We are excited to share that just last week, we officially launched a powerful tool to automate panel design and expand the capabilities of the panel builder tool within Cytek Cloud, which we previewed during our last earnings call. Our spectral panel tool is a proprietary new intelligent algorithm optimized for Cytek FSP technology that automates the assignment of fluorochromes to markets, removing a labor-intensive manual process. This tool will save researchers time and money by jumpstarting their panel design process with a tool that suggests optimized panels in minutes. As a reminder, Cytek Cloud supports flow cytometry research from panel design to experiment setup to data acquisition, enabling researchers to design panels with ease, taking into account antigen density, marker expression, and region availability. It consists of a suite of integrated online software tools that streamline workflows, combining all spectral panel design tools in one place, which enables users to prepare experiments remotely. Cytek Cloud accelerates time to insight for a wide range of applications and is a vital resource in the research community. On the application front, in the second quarter, we were pleased to share that our one laser and two laser 6-color TBNK reagent cocktails received the China National Medical Administration approval for clinical use on Northern Lights systems in hospitals, laboratories, and clinics across China. As a reminder, this is the first one laser-based 6-color assays supported by FSP capability which gives our one laser systems a competitive advantage against more expensive two laser systems. These reagents help in diagnosing and monitoring various immune-related conditions. Obtaining NMPA clearance is a significant milestone achieved through a rigorous process that validates the safety and efficacy of Cytek’s TBNK reagents. This achievement enhances our market presence in China and opens new potential opportunities while strengthening our competitive advantage. As we continue to push forward new products and applications, we remain deeply focused on providing a comprehensive cell analysis portfolio to our customers. A critical component of this mission is to expand and enhance our reach and capabilities. We look forward to continuing to provide our powerful cell analysis solutions to the scientific community to accelerate clinical progress and scientific discovery. With that, I will now turn the call over to Bill for more details around our financials.

William McCombe, CFO

Thanks, Wenbin. Total revenue for the second quarter was $46.6 million, an increase of 4% versus the first quarter and a decrease of 6% from a particularly strong second quarter of 2023. First half revenue, which averages out this effect, grew 5% versus prior year first half. These revenue results reflect continued robust growth in international markets and in service revenue, with the decline versus Q2 '23 being attributable to weakness in the U.S. instrument market. Product revenue, primarily instruments declined 15% in Q2 versus prior year and 4% in the first half, which was driven by weakness in the U.S. market, particularly in the academic and government sector. Service revenue grew 30% in Q2 and 50% in the first half versus a year ago, driven by substantial growth in the installed base of systems meeting service contracts. Service business growth reflects how extensively our tools are being used on a daily basis across all disciplines. Turning to geographic market performance. Total U.S. revenue declined 29% from a strong Q2 2023 and 15% for the first half of 2024, as product revenue weakness offset service growth. International markets grew strongly with EMEA up 52% versus prior year and 51% for the first half and Asia Pacific, up 27% in Q2 and 16% for the first half as Cytek technology continued to gain traction as the full spectral flow cytometry technology of choice for research institutions and biopharma companies worldwide. Gross profit was $25.4 million for the second quarter, an increase of 11% versus the first quarter and a decrease of 10% versus a year ago. GAAP gross profit margin improved to 55% in the quarter, up from 51% in Q1 due to the absence of inventory adjustments and improved labor and overhead productivity in service. Compared to a year ago, GAAP gross profit margin was down 2% from 57% due to higher product labor expenses, offset by a substantially improved service gross margin due to labor and overhead productivity on higher revenue. Adjusted gross profit margin, which excludes stock-based compensation expense and amortization of acquisition-related intangibles was 58% in the quarter, up from 55% in Q1 and down from 60% in the prior year quarter. Operating expenses were $34 million for the second quarter of 2024, essentially flat with Q1 at $33.7 million and decreased 9% from $37.3 million in the second quarter of 2023, driven primarily by lower R&D and sales and marketing expenses. Research and development expenses were $10 million for the second quarter, in line with $9.8 million in Q1 and down from $12.1 million in the prior year period. The decrease of $2.1 million was primarily due to lower headcount and engineering expense. Sales and marketing expenses were $12.3 million for the second quarter, a slight decrease from Q1 at $12.5 million and down from $14.4 million for the prior year period. The decrease of $2.1 million was primarily due to lower headcount. General and administrative expenses were $11.7 million for the second quarter, slightly up from $11.4 million in Q1 and up from $10.8 million for the prior year period. The increase of $0.9 million was primarily driven by higher stock-based compensation expense. Loss from operations was $8.5 million for the second quarter, an improvement compared to a loss from operations of $9.1 million for the second quarter of 2023. This was driven by lower operating expenses in the current quarter, offset by lower gross margin versus the prior year. Net loss in the second quarter was $10.4 million compared to $4.4 million in the prior year. This was primarily due to a non-cash tax expense in the current quarter, driven by a lower effective tax rate and a consequent reversal of a Q1 tax benefit compared to a tax benefit in the prior year quarter, and to a lesser extent, lower net other income due to foreign exchange losses. Adjusted EBITDA, which excludes stock-based compensation expense and foreign currency impacts, increased to $2.9 million for the second quarter compared to a loss of $0.7 million in Q1 and $1.5 million in the second quarter of 2023. This was due to higher revenue and gross profit versus Q1 and lower operating expenses versus the year-ago quarter. We remain committed to improving profitability going forward by driving revenue growth and controlling costs. Total cash and marketable securities increased by $7 million versus Q1 to $277 million due to higher adjusted EBITDA and efficient working capital management and despite spending $3 million to repurchase shares in the quarter. With healthy cash reserves, no meaningful debt, and positive operational cash flow, we continue to operate from a position of strength that can fully support our global growth initiatives. As I mentioned above, one important use of our strong cash flow and cash position has been to repurchase our stock. Accordingly, in June, we announced an authorization to repurchase $50 million of our stock. During the second quarter, we repurchased approximately $2.7 million worth of Cytek stock in open market transactions at a weighted average price of $5.99 per share. Shares repurchased under these programs are canceled, leaving us with 131.5 million shares outstanding as of June 30, 2024. Now turning to our outlook for the full year 2024, which Wenbin reported at a high level earlier. We are continuing to see market pressures impacting our revenue expectations, including order delays across North America. At the same time, we are seeing signs of normal spending patterns returning to Europe and Asia Pacific. Due to these more mixed market conditions, we are narrowing our full-year revenue outlook to a range of $203 million to $210 million, representing overall growth of 5% to 9% over full year 2023 and assuming no change in currency exchange rates. We continue to expect modest growth across our products and service lines and growth rates continue with historical spending patterns at our customer base in the second half of this year. In addition, we do not expect to be GAAP net income positive for the full year due to our outlook for slightly lower gross profit, higher stock-based compensation expense, and lower other income. We expect Cytek's GAAP net loss to be in the single-digit millions range for the full year 2024. It remains our objective to deliver positive net income going forward. Cytek also expects to generate positive cash flow from operations in 2024. With that, I will turn it back over to Wenbin.

Wenbin Jiang, CEO

Thanks, Bill. I want to close by thanking our Cytek team for their continued commitment to delivering cutting-edge tools, reagents, and software to empower the scientific community to advance the next generation of cell analysis. We are serving very attractive end markets across health care, and I'm confident that we are strongly positioned to drive our growth strategy forward with continued execution across our key strategies and a focus on delivering sustainable growth and profitability. I will also thank everyone for joining today's call, and we will now open it up for questions.

Operator, Operator

Thank you. Your first question comes from Tejas Savant with Morgan Stanley. Please go ahead.