Earnings Call Transcript - CTKB Q1 2023

Operator, Operator

Good afternoon, and thank you for standing by. Welcome to the Cytek Biosciences First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. As a reminder, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Goodson, Head of Investor Relations. Paul, please go ahead.

Paul Goodson, Head of Investor Relations

Thank you, operator. Earlier today, Cytek Biosciences released financial results for the quarter ended March 31, 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 e-mail to investors@cytekbio.com. Joining me today from Cytek are Wenbin Jiang, CEO; and Patrik Jeanmonod, CFO. 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 filings with the SEC. This call will also include a discussion of certain financial measures that are not calculated in accordance with generally accepted accounting principles. Reconciliations to the most directly comparable GAAP financial 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, May 9, 2023. With that, I would like to turn the call over to Wenbin.

Wenbin Jiang, CEO

Thank you, Paul, and welcome to everyone joining our first quarter earnings conference call. Today, I will outline our progress in the first quarter, including some challenges affecting our top-line results, and detail our advancements in our four main strategic areas for growth. After my remarks, I will hand it over to Patrick for a more in-depth look at our financial results and our outlook for 2023, followed by a Q&A session. Starting with our first quarter results, we reported total revenue of $37.1 million, which is a 6% increase compared to last year. This includes around $3.4 million from the product line acquired from Luminex. After excluding acquisition-related revenue, our organic revenue was CNY 33.7 million. While we experienced strong growth in Europe and APAC, especially in China, we encountered growing pressures from our biotech and pharmaceutical clients in the U.S. during the quarter, particularly towards the end. Factors contributing to the lower demand included a significant slowdown in biotech funding, reduced spending by biotech and pharma companies, a decline in covered demand, and macroeconomic uncertainties leading to longer sales cycles and delayed orders. Patrick will provide more details on our financial results shortly. Given our Q1 performance and the current challenges, we now anticipate full-year revenue in the range of $205 million to $220 million, representing a growth of 25% to 34% compared to last year. Although our growth expectations for this year are slower than we had previously anticipated, we are confident that the underlying demand for our full spectrum profiling platform remains robust. We are committed to driving growth and diversifying our revenue streams to maintain our strong overall performance. This year, we are proactively optimizing our business operations as we integrate the newly acquired Luminex business and continue to pursue our overall strategy. At Cytek, we take pride in our unique position in the industry, offering customers a comprehensive end-to-end solution that encompasses instruments, divisions, software, and application offerings. Our recent acquisitions and partnerships have strengthened our portfolio, allowing us to stand out in the market. Our diverse range of products and services has helped propel the adoption of Cytek's full spectrum profiling platform as the preferred choice for cell analysis. Our primary line of instruments continues to see solid demand due to a significant market for conventional flow cytometers that can be upgraded to our FSP technology, catering to the need for ultra-high sensitivity to identify more complex cell populations as well as ease of use in modern analytical workflows. Cytek's portfolio is well-positioned to meet all cell analysis needs, regardless of assay complexity. Furthermore, our expanding array of optimized panels for our instruments will aid in promoting FSP adoption, and our recent acquisition of Luminex's flow cytometry and imaging business will open doors to new markets and applications. As previously stated, we structure our business around four key pillars—instruments, applications, informatics, and clinical—each crucial for our long-term growth. These pillars dictate our roadmap for present and future business with intentional execution. Despite the challenges faced in the first quarter, I remain confident that our consistent work aligned with these four pillars will drive substantial growth over the longer term. Starting with instruments, we placed 96 Cytek instruments this quarter, bringing our total install base to 1,766 instruments as of Q1 2023. These placements reflect our core strategy to achieve growth across a spectrum of applications, catering to users from entry-level to advanced cell analysis. This figure does not account for the Amnis and Guava products acquired from Luminex, which have over 7,000 instruments installed among more than 1,500 customers across over 70 countries. We believe this expanded base will benefit from future upgrades to our Northern Lights and Aurora platforms, providing a receptive market for our upcoming instrument launches based on Cytek's advanced technologies along with those acquired from Luminex. The applications segment includes our divisions and trade, where we are actively working with our partners to broaden our reagents portfolio and develop application-specific kits. Revenue from these reagents and kits remains our fastest-growing product area, underscoring the increasing demand for solutions that simplify and expedite work for scientists and clinicians. We are strategically investing in growth opportunities, as illustrated by our partnership with Bio-Rad Laboratories, which is enhancing our reagent offerings and high-parameter panels on our cell analysis systems. Our collaboration with Bio-Rad to integrate StarBright Dyes into our FSP platform, announced during the first quarter, greatly benefits researchers conducting multi-parameter experiments, and we are enthusiastic about our ongoing partnership. We also recently introduced two acute myeloid leukemia panels, providing an effective and sensitive flow cytometric method for identifying and characterizing cells, which enhances the evaluation of measurable residual disease in AML samples. This new panel utilizes the power of FSP technology and builds on our extensive experience in full spectrum cytometry, offering a deeper understanding of the human immune system. Multi-parametric flow cytometry assays are commonly used for detecting and monitoring AML in drug discovery, translational research, clinical trials, and diagnostics. Traditionally, on conventional flow cytometers, markers for assessing AML are split into multiple tubes due to channel limitations, necessitating redundant markers and larger sample volumes. Our single-tube clinical AML approach enhances sensitivity while minimizing waste, improving laboratory operational efficiency and preserving valuable samples. By offering comprehensive solutions for specific applications such as MRD, we empower researchers and scientists to accelerate their discoveries and advance life-saving therapies. Our informatics pillar is also crucial, focused on streamlining customers' experimental workflows. Our site cloud product allows quicker panel designs with a suite of full spectrum design tools, enabling users to share panels. Additionally, customers can convert these panels into templates for use on any cited instruments with specialized flow software, bolstering the attractiveness of our sales analysis solutions and fostering user loyalty. Moving to clinical opportunities, several of our products have secured approval for clinical use in both China and the European Union, with the Northern Lights CLC system and accompanying reagents being our most prevalent clinical application sales. We plan to submit our products for FDA clearance in the U.S., where we believe our FSP platform, once approved, will significantly enhance diagnostic capabilities, providing doctors with a clearer, more detailed view of patients' conditions. Just like in China and the EU, we see the U.S. clinical market as an appealing long-term opportunity. Our global approach to the clinical market and laboratory-developed tests is driven by customer recognition of our technology, empowering labs to efficiently conduct high-level multi-parameter immunophenotyping with limited patient samples. This capability enables doctors to gain refined insights into their patients’ conditions. Our strategy for technology adoption in clinical settings reflects our past successes in the research market. Our full spectrum technology is rapidly becoming the gold standard in research, and we aim to make it the leading choice for clinical applications in the future. As awareness of these benefits increases in the clinical community in China and Europe, we expect our platform to see quicker acceptance as the advanced standard against which other diagnostic methods compete. One European clinical customer noted that we are achieving significant progress as we can define normal conditions more accurately by utilizing more markers in a single tube, maintaining full correlation across all markers. Beyond instruments, our reagents are playing an increasingly vital role in clinical applications. The Suncor panel for AML, mentioned earlier, serves as a powerful new tool supporting diagnostic studies, clinical assessments, and patient stratification, in addition to research purposes for drug development, and we anticipate strong acceptance of this product. Everyone at Cytek is excited about our contributions to essential research and medicine. This mission drives us to create high-performing products and develop new technologies that enhance patients’ and doctors’ lives. Regarding peer-reviewed publications featuring our technology, we are pleased to report that this quarter alone saw 145 new publications mentioning Cytek, bringing the total to 1,152. This achievement indicates the momentum of our platform and affirms the importance of our offerings to the scientific community. We remain dedicated to advancing scientific research with our innovative solutions. Notably, one study published in Nature identified therapeutic strategies to halt metastatic cancer relapse, while another paper in the same journal discussed T cell replication conditions relevant for extending human lifespan. Furthermore, an article recently accepted into the clinical section of Cytometry highlighted the importance of our three-laser FSP instrument, demonstrating the growing significance of full spectrum profiling in immunology. Finally, I want to share updates on integrating Luminex's flow cytometry and imaging business. Though we are only two months into the integration process and have key steps ahead of us, we have achieved several important milestones. Commercially, our entire team has undergone cross-training on Amnis and Guava products, including sales, technical application specialists, and service personnel, as well as lessons on marketing, product demonstrations, and customer training. We've also initiated a cross-training plan focused on service teams for Amnis and Guava products, which will take longer due to the technical training involved, aiming for completion by the third quarter. On the operations side, we are progressing well in integrating business systems, transitioning manufacturing, and harmonizing products. Looking ahead, we have established three medium-term milestones regarding the acquisition. The first aims to accelerate Amnis product sales to approach Cytek's average growth rate by integrating Amnis into our existing customer base, targeting half of the 1,000 Aurora customers to purchase at least one Amnis unit over the next three to five years, which could generate around $200 million in additional revenue. The second milestone involves evaluating Guava's cost structure over the next six months to inform future product development strategies. The Guava microcapital technology represents a valuable asset, and integrating it with the Northern Lights platform could provide access to new customer segments. Finally, we aim to convert existing users of three specific products to the Northern Lights platform as part of our strategic integration growth for the second half of the year. We look forward to keeping you informed on our advancements. While we anticipate modest revenue contributions from the acquisition this year, we believe that the real value will be recognized long-term in three key areas. Firstly, we plan to introduce new products that combine the technologies from each platform. Secondly, we will leverage significant cross-selling opportunities with our integrated sales teams. Lastly, we expect notable improvements in the efficiency and gross margin of our service organization, thanks to the addition of new team members from Luminex. Overall, I am pleased with the progress made by our team this quarter despite some macro challenges. We remain focused on delivering a comprehensive cell analysis solution to our customers and look forward to providing our innovative FSP platform alongside Luminex products and technologies as they drive scientific discovery and clinical advancements. Now, I will turn the call over to Patrick for a detailed discussion of our financials.

Patrik Jeanmonod, CFO

Thanks, Wenbin. Total revenue for the first quarter of 2023 was $37.1 million, a 6% increase over the first quarter of 2022. As Wenbin mentioned, this included approximately $3.4 million of revenue from the products and services acquired from Luminex Corporation. As a reminder, the agreement closed on February 28, meaning that we recognized four weeks of revenue from these product lines in the first quarter. Organic revenue, excluding the acquired products and services, was $33.7 million, a decline of 4% compared to the same period of 2022. Keep in mind that our 2022 revenue was particularly strong, posting 44% growth over the prior year and setting a high bar to achieve growth this year. Our organic revenue was impacted by a few key factors. This slowdown was driven by a longer sales cycle and delayed ordering from our biotech and pharma customers, which we believe was due to increased conservatism arising from macro uncertainties in the funding environment, a decline in bioprocessing activity, higher interest rates, and other factors. The slowdown in the U.S. was offset partially by better performance in all of our markets outside the U.S. A number of our ex-U.S. markets grew in the high double digits, with China growing in the triple digits as a percentage of revenue. We are pleased with the significant improvement in the gross margin in our service business, and revenue from our academic customers were in line with our expectations during the quarter. On a constant currency basis for the quarter, revenue was $38.1 million, an increase of 9% over the first quarter of 2022. Gross profit was $21 million for the first quarter of 2023, an increase of 4% compared to a gross profit of $20.2 million in the first quarter of 2022. Gross profit margin was 57% in the first quarter of 2023 compared to 58% in the first quarter of 2022. Adjusted gross profit margin in the first quarter of 2023 was 59% compared to 60% in the first quarter of 2022, after adjusting for stock-based compensation expense and amortization of acquisition-related intangibles. Operating expenses were $33.2 million for the first quarter of 2023, a 47% increase from $22.5 million in the first quarter of 2022. The increase was primarily due to expenses to support continued growth of the business, including further investment in R&D, sales and marketing, and G&A, with increases in headcount and personnel-related expenses, costs related to the acquisition, and infrastructure services to support the growth of our overall operations. Research and development expenses were $10 million for the three months ended March 31, 2023, as compared to $8 million for the three months ended March 31, 2022. Sales and marketing expenses were $11.1 million for the three months ended March 31, 2023, as compared to $7 million for the three months ended March 31, 2022. General and administrative expenses were $12.1 million for the three months ended March 31, 2023, as compared to $7.5 million for the three months ended March 31, 2022. The loss from operations was $12.2 million this quarter compared to a loss from operations of $2.4 million for the first quarter of 2022. The net loss in the first quarter of 2023 was $6.8 million compared to a loss of $2.2 million in the first quarter of 2022. Additionally, adjusted EBITDA in the first quarter of 2023 was negative $2.5 million compared to positive $1.9 million in the first quarter of 2022 after adjusting for stock-based compensation expense. Cash, cash equivalents, and short-term investments were $299 million as of March 31, 2023. Now turning to our guidance for 2023. As we shared, our expectation for the full-year 2023 revenue now falls into a range of $205 million to $220 million, representing overall growth of 25% to 34% over the full year 2022. This is comprised of revenue from our organic business in the range of $180 million to $190 million, representing growth of approximately 10% to 16% over the full year 2022 revenue, and a total of $25 million to $30 million of revenue contribution in 2023 from the business acquired from Luminex. This assumes no changes in the rate of foreign exchange as well as some continued delays in the longer sales cycles from biotech and pharma customers in the U.S., as Wenbin mentioned. While our typical seasonal pattern is for revenue to be skewed towards the back half of the year, in 2023, we are expecting that pattern to be even more strongly apparent due to the effects of integrating Amnis and Guava as well as macro factors affecting the U.S. economy. With that, I will turn it back over to Wenbin.

Wenbin Jiang, CEO

Thanks, Patrick. As always, I want to start by thanking our team at Cytek for their dedication and drive as we execute on our mission to deliver our complete cell analysis solutions to a broad range of customers. It is their excellence, hard work, and shared belief in our important mission that drives our progress. Cytek is positioned well with many opportunities. We are in a strong position financially, continue to see solid demand, and are committed to remaining profitable on an annual EBITDA and a net income basis as well as achieving our long-term growth targets and objectives. In addition, our solid balance sheet underpins the strength of our company and provides important strategic flexibility to take advantage of opportunities as they may arise. We have significant opportunities ahead to convert the large existing base of conventional flow cytometers to full spectrum, to expand our products into clinical use in the U.S., to accelerate the growth of our new sales orders, to create new products from our recent combination with Amnis and Guava, to drive sales through an expanded customer base, and to make our overall company more efficient and profitable as we scale in size and product offerings. We believe Cytek is particularly well-positioned to address these opportunities given the power of our advanced technologies, the strength of our capital base, the growing awareness of Cytek among customers in the marketplace, and the extraordinary talent of our employees. I want to thank everyone for joining today's call, and we will now open it up for questions. Operator?

Operator, Operator

Thank you, Dr. Jiang. Yes, at this time, we'll conduct a question-and-answer session. Our first question comes from David Westenberg with Piper Sandler.

David Westenberg, Analyst

I'm going to squeeze in a few here because I think a lot of people are on a lot of difficult calls anyway. Can I just maybe ask about the placement numbers here? Your placement numbers missed me by more than the implied revenue beat. Are you at least getting traction with the Aurora placements? And can we make any kind of inference in terms of like what the potential for selling more reagents to that customer in 2023 and 2024 and beyond? And I have a few more here.

Patrik Jeanmonod, CFO

So maybe I can take the first question, Dave. Thanks for asking. So looking at the instrument placement, we sold 96 last quarter, it was about 1.16. So we are down in almost all the categories. But at the same time, we've seen, to your point, an increase in reagent revenue. So the increase in revenue coming from the reagents is actually very positive.

David Westenberg, Analyst

Can you discuss the penetration rate of full spectral flow cytometers? While you've mentioned a slowdown in placements, I believe your technology remains the best in its class. Are we entering a more mature market, or is this slowdown more a reflection of current market conditions? I have a few more questions.

Wenbin Jiang, CEO

I think we can take a look at the split of our customer base, which includes academia and pharma biotech, also international. As indicated, our international sales have done very well, especially in China, and actually, the market is leaning more towards our high end Aurora and the sales orders. In the U.S., our academic customers are, as expected, doing okay. I think it meets our expectations for this way. It's the pharma biotech sector that's below our expectations. But it doesn't mean the business is lost. It just takes a longer time for them to come back to place orders. They have become more conservative. And cited because of our business, like they are heavily leaning towards more delayed ordering behavior for each quarter. This quarter particularly fell short of our expectations with those commercial customers in the pharma and biotech sectors as they have become more conservative. So that's basically what's happening right now.

David Westenberg, Analyst

I understand. I’d prefer not to delve too deeply into that because I don’t believe the idea that small biotech is thriving is entirely accurate. Danaher mentioned during their call that they are adjusting their spending. It’s evident that they are struggling to secure the funding they desire given the current closed capital structure and market conditions. It takes a moment to articulate this. However, I think U.S. pharma-based customers represent about a quarter of our clientele. Is there a possibility that some of the other customers could compensate for this shortfall as we progress through the year? Academia, for instance, may not be as susceptible to these cycles in the latter half of the year. Is there potential for them to maintain their spending since biotech still needs to invest in R&D for advanced programs? Any insights here would be appreciated.

Wenbin Jiang, CEO

Exactly as what you indicated. It just takes longer for them to come back with an order, not necessarily meaning they will never come back. Indeed, we have seen this already, and as we get into Q2, so that's basically what I will put over there.

Operator, Operator

And our next question comes from Tejas Savant from Morgan Stanley.