Earnings Call Transcript - QSI Q3 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the 2024 Third Quarter Quantum-Si Earnings Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Doug Farrell, Vice President of Investor Relations. Please go ahead.

Doug Farrell, Vice President of Investor Relations

Good morning, everyone, and thank you for joining us. Earlier today, Quantum-Si released financial results for the third quarter ended September 30, 2024. A copy of the press release is available on the company's website. Joining me today are Jeff Hawkins, our President and Chief Executive Officer; as well as Jeff Keyes, our Chief Financial Officer. Before we begin, I would like to remind you that management will be making certain forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to differ materially from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled forward-looking statements of our press release. For a more complete list and description of risk factors, please see the company's filings made with the Securities and Exchange Commission. This conference call contains time-sensitive information that is accurate only as of the live broadcast date today, November 12, 2024. Except as required by law, the company disclaims any intention or obligation to update or revise any forward-looking statements. During this call, we will be referring to certain financial measures that are not prepared in accordance with U.S. generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included in the press release filed earlier today. Additionally, I'd like to remind everyone that we'll be hosting an Investor Day in New York City next Wednesday, November 20th. You can find a link to register for the event on the Investor Relations section of our website. We'll also be participating in the Canaccord Conference in New York City on November 21. We look forward to having the opportunity to meet with investors at both of these events. With that, let me turn the call over to Jeff Hawkins.

Jeff Hawkins, President and CEO

Good morning, and thank you for joining us. On today's call, we will provide a business update, review our operating results for the third quarter of 2024 and provide our guidance for the balance of the year. After that, we will open the call for questions. I will begin with an update on our three corporate priorities for 2024: to accelerate commercial adoption, to deliver on our innovation road map, and to preserve our financial strength. Our first corporate priority is to accelerate commercial adoption. During the third quarter of 2024, we made continued progress in the commercial ramp-up of Platinum. We believe that we are well positioned to be an industry-leading company in the rapidly growing proteomics market. Our confidence comes from our best-in-class technology, first-mover advantage and robust intellectual property portfolio. We believe that our technology has the potential to create large, new market opportunities that can drive our growth over the coming years. Consistent with the commentary from many of our peers, we observed some lengthening of the sales cycle in the third quarter. Our third quarter 2024 revenue of $787,000 was below our expectations. While we did not lose any deals, we did see customers that opted to push out their purchase of an instrument to a later date than originally communicated. At this early stage of commercialization, a small number of deals being delayed can be the difference between meeting our expectations or not. As we look to the fourth quarter, there are both headwinds and tailwinds to consider. I am pleased to report that we have filled most of the open sales territories I mentioned on our last call. That said, there is a ramp-up period in our industry of around 90 days for any new salesperson to become fully effective. So we expect the full benefit of these new sales professionals to positively impact our results by early next year. Further, in September, we appointed Todd Bennett as our Chief Commercial Officer. Todd brings an outstanding track record with more than 30 years of experience in life sciences and diagnostics and his background includes commercial leadership roles at Luminex, Abbott, Roche and Immucor. Todd has already taken steps to streamline our sales process, bolster our training programs and enable new channel partners to extend our commercial reach. On the positive side, we are observing a rapid improvement in our sales force execution and an overall acceleration of our sales pipeline under Todd's leadership. Additionally, our industry often sees an uptick in capital spending in the fourth quarter as customers look to deploy any remaining budget by year-end. While it is not yet clear how significant this uptick may be, we are well positioned to benefit from any end-of-year capital purchasing given our instrument price point. On balance, it is likely that we will not achieve our full year revenue guidance. That said, we are confident that we will generate a sequential increase in revenue in Q4 of 2024 and expect to surpass $1 million in quarterly revenue for the first time. We are laser-focused on commercial execution with clear strategies in place to try to get as close to our full year guidance as possible. Beyond commercial execution, we have continued to push our scientific affairs initiatives including adding resources to our scientific affairs group to help customers integrate Platinum into their research programs as well as generate new publications that increase the awareness of the unique capabilities of Platinum. These efforts will result in customer data being released at industry conferences and through peer-reviewed publications and are important proof points that help accelerate adoption of our technology in the broader market. Last month, we had a very productive meeting at the Human Proteome Organization World Congress in Germany. This included poster presentations to highlight how Platinum can address protein applications such as detecting variants and post-translational modifications as well as protein barcoding. We also hosted a session in which researchers from Northwestern University presented on integrating our Platinum platform with top-down mass spectrometry to enhance proteoform analysis. Overall, we are making great progress on the commercial front. Given the commercial execution improvements being made under Todd's leadership are relatively recent, the full impact of these changes is still in front of us. My optimism about our ability to expand adoption of our technology across all market segments is as high as it has ever been. Our second priority is to deliver on our innovation road map. Since realigning our R&D programs last fall, we have jump-started an exciting new cycle of innovation. I don't want to preempt our Investor Day next week, but you'll have the opportunity to learn more about exciting initiatives we have taken on to expand our technology capabilities and really shape the long-term future of Quantum-Si. We plan to demonstrate groundbreaking advances in hardware, consumables, chemistry and software that we believe puts us on a clear path to scale our output per sample to billions of reads. We believe these advancements will open large, new market opportunities and will position us to become the clear overall front runner in proteomics. In addition, we will also showcase important new partnerships that will help accelerate the delivery of this cycle of innovation to the market. Next, I am pleased to report that our next version of library preparation kit and our barcoding kit are on track for launch during the fourth quarter. The new library prep kit is expected to reduce the starting sample input amount, expand the range of proteins that are compatible with our system and increase the overall sample success rate. The barcoding kit is expected to provide customers a significant reduction in sample prep time prior to sequencing, while also improving the sensitivity and dynamic range of the application. Our continued innovation has not gone unnoticed. We were recently honored by Frost & Sullivan with their prestigious Technology Innovation Leadership Award. An independent panel of experts selected QSI based on our pioneering technology and contribution to advancing the field of proteomic research. They also recognized our ongoing commitment to innovation and the robust portfolio of intellectual property that is foundational to our long-term success. Additionally, last week, we attended the American Society of Human Genetics Conference where we showcased the collaboration with the University of California, Santa Cruz. Researchers from Dr. Felton's lab demonstrated how they are using Next-Generation Protein Sequencing with Platinum to augment genomic and transcriptomic data and better capture the full complexity of biology. Overall, our innovation pipeline is on track and very exciting. Once we complete our Investor Day on November 20, we will be able to have deeper conversations on the details of our road map and how it is shaping up for the future. Our third priority is to preserve our financial strength. We continue to remain laser-focused on financial discipline that balances maximum output of our innovation road map with preserving financial capital. Jeff will provide more details, but we are pleased with our progress and we remain committed to the sufficient use of our capital. I will now turn the call over to Jeff Keyes to review our financial results.

Jeff Keyes, Chief Financial Officer

Thanks, Jeff. Now I'll review the details of our operating results for the third quarter. Revenue in Q3 2024 was approximately $787,000, which consisted of revenue from our Platinum instrument, consumable kits and related services. Gross profit was $367,000 and gross margin was 47%. As a reminder, our gross margin percentage will be somewhat variable for the near future as we work through our initial stages of commercialization and may be impacted by the timing and mix of instruments versus consumable sales. Our margin may also be impacted in the near term by acquisition costs and any accounting adjustments to underlying inventory that predates the commercial launch of Platinum. Our gross margin for the third quarter of 2024 includes approximately a 4% impact for inventory utilized during the quarter that was carried at low or no value and dates back prior to the initial commercialization. We do expect to see more variances that will flow through our gross margin as we move forward, and I will highlight them if they are material. GAAP total operating expenses for the third quarter of 2024 were $28.5 million compared to $27.3 million in the third quarter of 2023 while adjusted operating expenses were $26 million for the third quarter of 2024 compared to $23.9 million for the third quarter of 2023. Overall, operating expenses increased year-over-year for the quarter based on the continued ramp of our commercial operations. Year-to-date 2024, our total operating expenses were $78.9 million compared to $83.6 million in the prior year, a decrease of about 6%. This includes R&D expenses of $42.7 million as compared to $50.6 million for the same period in 2023, a decrease of about 16%. If you recall, we initiated an R&D realignment in August 2023 that streamlined and focused our R&D efforts on focused product delivery to the market. The year-over-year change reflects the impact of those changes, while at the same time, funding ramping up our commercial operations. Net loss for the third quarter of 2024 was $25.3 million compared to $24.7 million in the third quarter of 2023. And our adjusted EBITDA for the third quarter of 2024 was negative $24.5 million as compared to negative $22.6 million in the third quarter of 2023. Our dividend and interest income in the third quarter of 2024 was approximately $2.7 million compared to $2.6 million in the third quarter of 2023. As of September 30, 2024, we had $196.3 million in cash and cash equivalents and investments in marketable securities. Based on our financial discipline and focused efforts on capital allocation, we expect our existing cash and cash equivalents and marketable securities will provide runway into the second half of 2026. Jeff already commented on full year 2024 revenue, but I'd also like to add some color on adjusted operating expenses and cash guidance. For the full year 2024, we now expect adjusted operating expenses of approximately $100 million versus our original guidance of less than $103 million and net cash usage of about $92 million versus our original guidance of less than $100 million. Now I'll turn the call over to the operator to open the line for questions.

Operator, Operator

Thank you. At this time, we will conduct a question-and-answer session. Our first question comes from the line of Kyle Mikson of Canaccord Genuity. Your line is open.

Kyle Mikson, Analyst

Hey, guys. Thanks for the questions. Jeff, since it's been some time since the kind of initial launch as well as the full commercial launch and then you're still putting up numbers that aren't huge, but it's more measured still, it feels like. Can you talk about why the visibility wasn't quite there in the third quarter, maybe like excluding some of these macro headwinds? And maybe kind of going forward, why you're confident in some of the $1 million revenue quarterly revenue guidance that you put out there? Thanks.

Jeff Hawkins, President and CEO

Thank you for the question, Kyle. I'll begin by saying that, as mentioned in our prepared remarks, our revenue for the quarter was slightly below our expectations. This was primarily due to a few sales that shifted in timing, which can significantly impact our results since the price of the instrument is around $85,000. Moving one or two of these deals can determine whether we meet our expectations. We believed we had a clear understanding of the timing based on consistent customer feedback. However, some deals ended up being delayed by about a month, which significantly affected the outcome. As we look ahead to Q4, we are closely monitoring the forecasts from our commercial team while evaluating various headwinds and tailwinds. We are also looking at the possibility of some budget flush occurring. While we do not anticipate it to be substantial, there are signs that a few deals could come together positively. Overall, we are considering our potential paths and believe there are feasible ways to get back to or very close to our guidance. We are confident that we will exceed $1 million in revenue; the main question is where we will fall within the range from $1 million on the low end to the minimum of our guidance. We have confidence in our plans to achieve this target and will strive diligently to meet our guidance.

Kyle Mikson, Analyst

That was helpful. From an end-user perspective, what are some of the existing bottlenecks given that we are still in the early stages of the sequencing paradigm? What is preventing you from achieving quarters with double-digit placements? What do you still need that is not yet available? Is it evidence, locations, or issues related to consumables such as output range and yield? I don't want to get too detailed since I know you have Investor Day next week, but I'm curious about what still needs improvement in the technology.

Jeff Hawkins, President and CEO

Yeah. I think, Kyle, it's a good question. There's probably a mix of things that impact the rate, which we're bringing on new customers. I would say that there's not sort of like one thing I would say that is the hang-up for customers. Certainly, to your point, more evidence coming out, which I think you've seen more of our customers presenting at conferences, posters in sessions and most recently with the preprint that has been issued from the University of Virginia, I think those things will help. But I don't want to overlook the fact that we also have a very reasonably new number of sales professionals in the U.S., really. We talked about that back in the second quarter earnings call that we were expanding that team. We filled most of those roles during Q3. And those folks are not yet fully ramped, as we discussed in our prepared remarks. They've been onboarded. They've been trained. They're out in the field, really building their pipelines and advancing deals through the funnel. So I don't think we've seen their full capability to sort of contribute to that revenue either at this stage. So I really think it's got a lot to do with just that scale of activity, the number of people that are out there and productive, not some specific limitation in technology or some missing piece of evidence. It really is just about getting those folks out there, getting them trained, working a larger number of opportunities at a time to see that acceleration in the revenue we can deliver every quarter.

Kyle Mikson, Analyst

Got it. That's great. And on that point, have the placements to date for Platinum been primarily driven by direct sales or by distribution partners?

Jeff Hawkins, President and CEO

We've had a mix of both. Obviously, we're direct in the United States and we're direct in some of the key markets in Western Europe. But we're, of course, also expanding our distribution network. So there's been a mix of both. And some of our early distribution partners that we talked about back at the start of the year, some of those distribution partners have also started to place instruments and sell instruments into the end users. So there's a mix of directly placed boxes, our distribution partners directly selling to end users and then some of us selling to our new channel partners as well.

Kyle Mikson, Analyst

Got it. Okay. And maybe I was curious about the version 3 kits and how that was sort of like ramping or any feedback you've gotten so far given that it was launched three months ago or so. Anything you could share on that?

Jeff Hawkins, President and CEO

Yeah. I think on the version 3 kit, similar to what we've seen in past releases, when we bring out a new release like this, given the increase in performance that customers see, we had a very smooth and rapid transition from the prior version to this version. So our customers have moved over to the version 3. I think what we're seeing is showing up in those posters and in that paper and in other presentations, which is that customers are capable of going after each of those new applications they want to pursue. They're seeing better output. They're seeing that consistent sort of reproducibility between the lots that they get. It's just that general lift and overall performance improvement opens up more applications and really makes their research move forward in a very smooth way.

Kyle Mikson, Analyst

Okay. As we look ahead to next week, what are your thoughts or the company's views on the clinical potential of protein sequencing and when that might happen? It seems to overlap with the therapeutic potential, which appears to be gaining traction in the biopharma sector as noted in previous quarters. How do these two areas compare today, and what is the most immediate opportunity for you?

Jeff Hawkins, President and CEO

Yeah, it's a good question, Kyle, and we'll save some of the discussion on that for the Investor Day. I will say that you're correct. We're continuing to see adoption in both smaller biotechs as well as larger pharmas. As we mentioned in our remarks, we had our first contract manufacturer adopt the product that services that space. So we're very pleased with the traction there. We've talked about on prior calls some of those opportunities, they take longer to work through the funnel and materialize. So what we've delivered so far is not the end. We're in many of those processes with other large pharma and biotech opportunities. So we feel good about the potential of our product in that market segment. Exactly when that intersects with a clinical stage program or intersects with a clinical diagnostics, I think that's still out in the future a bit, but we'll get into that in a little more detail at our Investor Day.

Kyle Mikson, Analyst

All right. Great. Look forward to it, Jeff. Thanks a lot.

Jeff Hawkins, President and CEO

Thank you.

Operator, Operator

Thank you. I'm showing no further questions at this time. I will now turn it back to Jeff Hawkins for closing remarks.

Jeff Hawkins, President and CEO

Thank you, everyone for attending today. We look forward to providing you more updates on our innovation pipeline at our November 20 Investor Day and at future conference calls.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.