Cytek Biosciences Q3 2024 Earnings Call Transcript

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November 5, 2024

There are 12 speakers on the call.

Operator

Thank you for standing by. At this time, I'd like to welcome everyone to the Citec Biosciences Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer I will now turn the conference over to Paul Goodson, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Earlier today, Citec Biosciences released financial results for the quarter ended September 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 investorscitecbio.com. Joining me today from Citec are Wenbin Zhang's CEO and CFO, Bill McComb. 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 Citec's business plans, strategies, opportunities and financial projections.

Speaker 1

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 this press release, Cytec issued today and in Cytec's filings with the SEC. This call will 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, Cytec disclaims any duty to update any forward looking statements, whether because of new information, future events or changes in its expectation.

Speaker 1

This conference call contains time sensitive information and is accurate only as of the live broadcast November 5, 2024. Finally, I would like to announce that Plytech is hosting a full day user group meeting on December 5. The meeting will feature presentations by users of our technology and Citec scientists to share their research experience and ideas for how best to use Citec's products. We have a limited amount of space for analysts and investors, so please let me know as soon as possible if you would like to attend. With that, I would like to turn the call over to Wen Bin.

Speaker 2

Thanks, Paul. Welcome, everyone, and thank you for your interest in Citec. On today's call, I will provide an overview of our performance in the Q3 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 financials before we open it up for Q and A. Starting with our Q3 results, we delivered solid growth with 7% year over year growth and the total revenue reaching $51,500,000 Our growth this quarter was driven primarily by strong double digit year over year total revenue growth across EMEA and APAC and from our service revenue globally.

Speaker 2

We were pleased to see continued growth despite the ongoing soft market conditions. Fundamentally, this is because we are a technology leader in a core instrument category that many last consider essential as compared to more discretionary technologies. We believe our instruments offer higher multipurposeing data quality, sensitivity and ease of use. These capabilities serve the basis for our strong reputation and loyal customer base. Geographically, we continued to see positive momentum in EMEA and APAC and a return towards more normal spending patterns in the U.

Speaker 2

S. While market conditions for instruments in the U. S. Continued to be softer than last year, we were encouraged to see sequential quarterly improvement for Spisense products across our customers, in particular with the biopharma sector. We experienced strong demand from our global pharma and the CRO customers, who are increasingly focused on harmonizing their instruments across different regions for translational discovery work, which our technology is uniquely capable of delivering.

Speaker 2

Additionally, we posted another quarter of positive adjusted EBITDA, a cornerstone of our path to deliver sustainable profitability. This was driven by our disciplined focus on expense management combined with our revenue growth. Overall, we are seeing the durability of our diversified portfolio clearly demonstrated as we effectively navigate macro headwinds. We believe our SciTech cell analysis portfolio is becoming a core technology in lab discovery and comprehensively serving our customers' needs in cell analysis. Importantly, the high degree of geographic and the customer diversification in our business provides us with confidence in delivering on our expectations and our long term objective of sustainable profitable growth.

Speaker 2

We are working hard to solidify Citec's next chapter as a market leader in cell analysis. To that end, our team is focused on driving forward 4 key pillars, each of which is integral to our long term growth instruments, applications, bioinformatics and clinical. In the Q3, we expanded our global footprint with 164 instruments sold, reaching a total installed base of 2821 units, including 328 AMNED and GUAVA instruments shipped since the acquisition of the Luminess business. Within these totals, the Cytec Aurora and the Northern Lights systems are showing good growth both in the Q3 and the year to date compared to 2023, while the sales order is showing consistent demand. We believe the growing installed base of our instruments will continue to serve as a strong foundation to drive adoption of our product and service offerings going forward.

Speaker 2

Turning to bioinformatics. Our primary objective is to enable our customers to streamline their experiment workflow through our software tools, which drives adoption and the utilization of our cell analysis solutions. We continue to empower the scientific community with better tools to advance their research, most recently with the special panel tool and enhancement of our panel builder tool within Citec Cloud. We are receiving great feedback from our customers who are benefiting from this expanded capability that automates and removes a labor intensive menu process and allows scientists to jump start their panel design work and have seen strong initial adoption among our growing user base. As a result, a number of our customers have already integrated use of the Spectro panel tool into their workflow, leveraging its advanced capabilities to optimize panel design and streamline their research.

Speaker 2

As part of this adoption, we have already begun receiving duration orders generated from the Cytec Cloud. With special panel launch only in late July this year, we are quite pleased with its performance to date. Notably and more broadly, we expanded our CySEC cloud user base, which now has over 13,600 users, more than doubling our user base at the start of the year. This represents an average of more than 5 users per installed Scitech SSP instrument. Turning now to clinical.

Speaker 2

We continue to believe the clinical market represents an attractive business opportunity for CITEC. As Alimanda, several of our products are approved for clinical use in both China and the EU. In the Q3, SITE had success stage to showcase our complete cell analysis solution at a number of industry conferences. One event I'd like to highlight is the ICCS Annual Meeting and Course in Seattle, where Doctor. David Ng, Director of Flow Cytometry and Applied AI at ABLAST Laboratories, gave a premier presentation about Cytec FSC technology.

Speaker 2

Doctor. Ng remarked that the integration of special flow cytometry into their workflows has been a game changer for their resource limited and space constrained laboratories. He further noted how our technology solutions have dramatically streamlined their processes, allowing their scientists to focus their time and expertise on high value and high skill analysis, which translates to faster and more useful results. In turn, we believe SiTech is uniquely positioned to serve an attractive cell analysis market with the combination of our industry leading end to end technology portfolio, global diversification and the clear long term growth drivers. We are actively focused on portfolio enhancements that will accelerate our business strategy.

Speaker 2

This buildable foundation provides us with confidence as we seek to deliver high growth and profitability and strong cash generation. With that, I will now turn the call over to Bill for more details about our financials.

Speaker 3

Thanks, Wenbin. Total revenue for the Q3 was $51,500,000 an increase of 10% versus the 2nd quarter and 7% versus Q3 of last year. This revenue result reflected a significant recovery in product revenue versus Q2 and robust growth in international markets and service revenue versus Q3 of last year. Product revenue, which is primarily instruments, increased 14% versus Q2 and 3% versus Q3 of last year. The increase versus Q2 was driven by a recovery in the U.

Speaker 3

S. Market, particularly in the biopharma sector and continued growth in international markets. The increase versus Q3 of last year was driven primarily by growth in international markets. Service revenue grew 25% versus Q3 of last year. This service revenue growth reflects continued expansion of the installed base of our instruments and active usage of our tools across a broad range of disciplines.

Speaker 3

Turning to geographic market performance. Total U. S. Revenue increased 9% versus Q2, but declined 9% from a strong Q3 of last year. International markets grew strongly with EMEA up 25% versus Q2 and 33% versus prior year.

Speaker 3

Asia Pacific was flat versus Q2, but up 32% versus prior year. This growth in international markets reflects the fact that CITEX Technology is a market leading full spectral flow cytometry technology of choice for research institutions and biopharma companies worldwide. GAAP gross profit was $29,000,000 for the 3rd quarter, an increase of 14% versus the 2nd quarter and an increase of 7% versus Q3 of last year. GAAP gross profit margin improved slightly to 56% in the quarter, up from 55% in Q2 due to improved overhead productivity on higher revenues. Compared to a year ago, GAAP gross profit margin was down 1% from 57% due to higher product material costs.

Speaker 3

Adjusted gross profit margin, which excludes stock based compensation expense and amortization of acquisition related intangibles, was 60% in the quarter, slightly up from 58% in Q2 and 59% in the prior year quarter. Operating expenses were $33,300,000 for the 3rd quarter, down 2% from Q2, driven by lower G and A expense. Total operating expenses were down 1% from Q3 of last year. Research and development expenses were $9,900,000 for the 3rd quarter, in line with Q2 and down from $11,200,000 in the prior year period. The decrease was primarily due to lower headcount and engineering expense.

Speaker 3

Sales and marketing expenses were $12,400,000 for the 3rd quarter, in line with Q2 at $12,300,000 $12,100,000 for the prior year period. General and administrative expenses were $10,900,000 for the 3rd quarter, down from $11,700,000 in Q2 and up from $10,400,000 in the prior year period. The decrease versus Q2 was primarily driven by lower outside services expense. The increase versus prior year of $600,000 was primarily driven by higher stock based compensation expense. Loss from operations was $4,200,000 for the Q3, an improvement compared to a loss from operations of $6,400,000 for the Q3 of 2023.

Speaker 3

This was driven by higher gross profit and lower operating expenses. I'm pleased to report that we generated positive GAAP net income of $900,000 in the 3rd quarter compared to a net loss of $6,500,000 in the prior year. This was primarily due to a lower loss from operations, higher net other income driven by a foreign exchange gain of $1,100,000 versus a loss of $600,000 in the prior year and a tax benefit of $800,000 versus a tax expense of $2,300,000 in the prior year. Adjusted EBITDA, which excludes stock based compensation and foreign currency impacts, increased to $7,600,000 for the 3rd quarter compared to $2,900,000 in Q2 $3,700,000 in the Q3 of last year. This was due to higher revenue and gross profit versus both Q2 and the prior year quarter and lower operating expenses versus the year ago quarter.

Speaker 3

We remain committed to improving profitability going forward by driving revenue growth and controlling costs. Total cash and marketable securities increased by $600,000 versus Q2 to 277,800,000 dollars despite outspending $12,100,000 to repurchase shares in Q3. This demonstrates the strong cash generating capability of the company. With healthy cash reserves, no meaningful debt and strong operational cash flow, we continue to operate from a position of strength and can fully support our global growth initiatives. As I mentioned, during the quarter, we repurchased 2,200,000 shares of Citec stock for approximately $12,100,000 at a weighted average price of $5.41 per share.

Speaker 3

Shares repurchased under these programs are canceled, leaving us with 128 800,000 shares outstanding as of October 31, 2024. We plan to continue to repurchase shares in Q4 and expect to more than offset the dilutive effect of shares issued under our stock based compensation program in the Q4, which will result in a net reduction of our shares outstanding. Now turning to our outlook for the full year 2024, which when being discussed at a high level earlier. While we are continuing to see a relatively soft market in North America, we did see a recovery toward more normal levels of activity in Q3. At the same time, we see good momentum in Europe and Asia Pacific.

Speaker 3

We also expect to see solid growth in our service business. Based on these factors, we reaffirm our full year revenue outlook in a range of $203,000,000 to $210,000,000 representing overall growth of 5% to 9% over full year 2023, assuming no change in currency exchange rates. In addition, we continue to expect Citec'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. Citec also expects to generate positive cash flow from operations in 2024.

Speaker 3

With that, I will turn it back over to Wenbin.

Speaker 2

Thanks, Bill. Our financial strength and our shared belief in our mission positions Citec well to successfully navigate through today's macro environment, while strengthening our foundation for the future. We have a clear roadmap ahead to deliver long term sustainable growth and profitability, and I'm proud of our team's achievements this quarter. It is their dedication and commitment that drives our progress forward. I want to thank everyone for joining today's call, and we will now open it up for questions.

Speaker 2

Operator?

Operator

Thank you. We will now begin the question and answer session. And your first question comes from the line of Pajat Sivanth with Morgan Stanley. Your line is open.

Speaker 4

Good evening and thanks for the time here. Wendell, maybe just to kick things off, I think you called out a more normalized demand environment in the U. S. And maybe even a little bit of sequential improvement in pharma. And I think you also made a comment in your prepared remarks about how the flow cytometry from market is more sort of essential versus discretionary spend for your customers.

Speaker 4

Can you just elaborate on that a little bit? Why is what you're seeing quite different from what some of the other life science instrument vendors are seeing at the moment, including folks in sequencing, spatial biology, etcetera? And in the U. S, any comment on academic and government? I think that end market was a little bit soft in the Q2 for you.

Speaker 4

Has that gotten better as well?

Speaker 5

Yes, indeed. We have seen some improvement on the academic side as well in Q3 versus Q2. Overall, in the North America, the strength come from the biopharma as what we have indicated. Now, while we are different from others as we have indicated, flow cytometry is a basic life science tool used in almost all biology labs, life science labs and so supporting their daily needs and which is different from many other technologies, which is discretionary. And we feel this probably has played some role with regarding to differentiating Citec from some of our peers.

Speaker 4

Got it. Fair enough. And then one for you, Bill. I mean, obviously, the guide has a $13,000,000 or so sequential step up in the 4th quarter at the midpoint. So a lot of your life science peers have actually pulled out any budget flush benefit, just given the softer than expected environment and so on.

Speaker 4

Can you just help us think through your underlying assumptions there around the budget flush? Or is it sort of what Benben just alluded to in terms of essential versus discretionary spend that sort of underpins your confidence that the step up will come through here in the Q4?

Speaker 3

Look, customarily hi, Tejas. Customarily, we see a step up in the 4th quarter. And if you look at the 4th quarter as a percent of total revenue in prior years, it's about 30%. So we are assuming a normal seasonal pattern here. And I think partly underlying that is the theme that when been discussed that our instruments are viewed as more of an essential instrument by many of our customers as opposed to discretionary.

Speaker 3

So we feel that a normal seasonal pattern is appropriate.

Speaker 4

Got it. Okay. And then last one for me here. Any guardrails on 25 you'd be willing to share? I think the Street has you doing about mid teens growth while also expanding your EBITDA margins versus this year's level.

Speaker 4

Is that a fair framework to use? Or would you rather folks think of high single digit growth perhaps like 10% or so? Just in light of the moving pieces here, including at what point does China recover, whether the pharma sort of end market continues to improve quarter over quarter, etcetera, there's a bunch of moving pieces here. So just curious as to any preliminary color you guys would be willing to share on 2025?

Speaker 3

Do you want me to take that, Wanda? Yes. Yes, go ahead. Look, we don't want to give revenue guidance for 2025 at this point, would be premature. We'll do that on our next call.

Speaker 3

With respect to profitability, the only thing I would note is that if you look at year to date EBITDA, we're up significantly versus last year. We're at about just $9,900,000 year to date EBITDA versus, I think, dollars 2,700,000 last year. That's on an adjusted basis. So our business model is to grow the top line to control to maintain gross margins and to control operating expenses and have them grow more slowly than the top line. So the implication of that is that we would expect to grow EBITDA as we go forward.

Speaker 3

So that's about as much as I can say with respect to 2025.

Speaker 4

Understood. Thanks for the time guys. Appreciate it.

Operator

Next question comes from the line of Brandon Smith with TD Cowen. Your line is open.

Speaker 6

Hi guys. Thanks so much for taking the questions. Congrats on the quarter. Maybe looking ahead a little bit to this December event and honestly into 2025, I'm just wondering maybe what we might expect at that event in terms of pipeline or financial updates, really kind of the overview of you're going to have there. And then maybe heading into 2025, if there's any important new products or product updates on the horizon that you guys think would be especially relevant, just the top line growth moving forward?

Speaker 6

Thanks very much.

Speaker 3

Let me just comment on the first part of the question. We'll at the Q4 earnings call, our Q1 of each year is when we customarily provide our guidance for the year. And we would expect to do same thing next year, give guidance on similar items. So nothing I don't have an expectation at this point that we'd be doing anything significantly different than our normal patent. And with respect to new products, I'll ask Gwen Bin to say what we can about that.

Speaker 5

Yes. And as you can see, we invest substantially in R and D naturally and just like what we have launched this year. And you will continue to see new products being launched over the course of the year. And so that will reflect how we invest and serve for our shareholders.

Speaker 6

All right, great. Thank you.

Operator

Next question comes from the line of Mason Carrico with Stephens. Your line is

Speaker 7

open. Hey, guys. Thanks for the question here. You called out strength in APAC. I wanted to dig in a little bit there and ask you willing to provide any incremental detail on what countries are really driving the strength there?

Speaker 7

Are you seeing demand trends in China improve? Any additional color there would just be appreciated.

Speaker 5

Our APAC business include revenues from Australia, New Zealand, Japan, Southeast Asia, India and as well as China. So this the strength reflects the total effect in that area in that continent. So with regarding to China, and I think you have seen a lot of report from other companies. And indeed, we have seen similar impact, of course, not as severe as what the other companies have been reporting. But overall, clearly and we have seen some impact and but we also expect they may return to normal sometime next year and we look forward to that.

Speaker 7

Got it. And then as we do think about the Q4 here, how much of that sequential increase is really being driven by assumptions around quarter over quarter growth in the U. S? Just really any incremental detail you can give on the assumptions for the Q4 ramp sequentially from a geographic standpoint would be great.

Speaker 3

I think we have strong momentum, as Wendell mentioned, in EMEA and in Asia Pacific, particularly in the Asia Pacific countries other than China, so Australia, New Zealand and so on. With respect to the Q4, we would continue to expect good momentum in Asia Pac and in Europe. We expect some recovery in the U. S, although the U. S.

Speaker 3

Market is softer and therefore, that will probably be the lowest growth of any of the 3 major regions. The service business, we would expect that to continue to grow driven by the growth in the installed base. So that's about as much color as we could give.

Speaker 7

Got it. Thank you.

Operator

Next question comes from the line of David Bostromwich, Piper Stevens. Your line is open.

Speaker 8

Hi. Thank you for taking the questions. This is John on for Dave. I was wondering if you could just give any color on what you're thinking about the longer term growth rate for your business are going to be looking like because they have been this year a bit below that sort of 20% to 30% growth rates that we saw historically. So if you could give any thoughts on what could bring you back potentially up to those levels in the future?

Speaker 8

What might be some puts and takes on those? That'd be appreciated. Thank you.

Speaker 5

Overall, we know life science industry has been challenged. And in some area, you can see the negative growth. What we are driving for is to continue to maintain our growth above the market.

Speaker 8

Okay, great. Thank you. And can you just give any thoughts on how you're tracking CapEx spending and what you would be looking for that would give you additional optimism about that going forward?

Speaker 5

And if you look at our business today and probably about yes, right now it's about 30% in the current, including service and reagents and 70% on capital instrument. Long term, and we are going to continue to invest on reagents on applications to continue to grow our recurring revenue based on our solid installed base. So we feel good about our long term growth.

Speaker 2

Okay. Thank you.

Operator

Next question comes from the line of Andrew Cooper with Raymond James. Your line is open.

Speaker 9

Hey, everybody. Thanks for the questions. Maybe just first, thinking about some of the commentary around China seemingly not as big of a headwind for you as some of the others. Should we expect that you get a similarly sized tailwind from some of the stimulus program in that regions or overall maybe a little bit smoother, so not as low of a low and not as high of a high? Just would love kind of how you think about the trajectory there as some of those funds start to kick out to potential customers?

Speaker 5

I think we're going to benefit clearly. And when China starts to invest buying new instrument, advanced technology clearly is on top of their mind and Scitech technology has been very well established right now in China. And we feel strongly and as the program kicks off and funding start to go to our user base and we will see the great benefits from those new funds available to them.

Speaker 9

Okay. That's helpful. And then just kind of one more crack at the 4Q step up. Can you give us a sense for the visibility you have as you sit today and look at kind of what's already been delivered, what the order book looks like relative to hitting, say, the midpoint of the guide? What do you need to go close through the last 2 months of the quarter versus what's already sort of in hand or at least in a booking?

Speaker 5

We are a 3rd month company. So most of our order come in during the last few weeks. And therefore, even though we are now at the early November, we expect actually with regarding to the full quarter and we continue to rely upon pretty much the last few weeks, last 6, 7 weeks. And so it's too early for us to comment on this.

Speaker 9

Okay. I'll just sneak one more in if I can, but would love a little bit more granular of an update on sort of the clinical pathway in the U. S, what progress you've made in terms of that process and maybe what are the biggest gating factors to getting into that clinical market here in the States?

Speaker 5

I think there are 2 parts with regarding to clinical. 1 is the 510 process, which is one of the parts we are working on. The second part is the LDT and applications, which we have been working with quite a few reputable labs in the U. S. And we feel good about the progress we are making right now.

Speaker 9

Great. Appreciate the time.

Operator

And we have another question comes from the line of Matt Stice with Goldman Sachs. Your line is open.

Speaker 10

Hi, this is Yvie on for Matt. Thanks for taking my questions. So within services, you had solid growth there. How are attachment rates trending? And then can you talk through some of the low hanging fruit to get that attachment rate even higher?

Speaker 10

So you're mostly going after current instrument users that don't have service contracts or you're going after more like new customers buying instruments?

Speaker 5

Service revenue is related to the installed base, right? And also relates to how frequently the instruments are being used. And so on that regards, of course, and that also is related to how many users will buy service contracts. Basically, it's like an insurance, right? So and I think over the last few years, you can see clearly, we our service revenue has been growing quite nicely and that reflects 1st year's how actually the rapid increase of our installed base.

Speaker 5

2nd part is how frequently our instruments are being used with regarding to those customers. And so of course long term and you cannot continue to expect to see 30%, 40% kind of growth rate we have enjoyed. But overall, that's going to continue to track the growth of our installed base.

Speaker 10

Okay, great. Thank you. And then in terms of thinking about how customers have delayed replacements due to CapEx constraints in the weaker funding environment, how do you think about the age of instruments and how that's trended within both your current installed base and then those of competitors whose instruments you might be replacing? And just trying to get a sense for when you think the replacement cycle might start to kick in.

Speaker 5

Yes. This is a little bit complicated question. The reason is, it's under current market, it's very relatively speaking, it's more difficult for customers to get funding to buy new instruments. So they clearly have seen they would like to extend the life of the instruments they have. But on the other hand, we do see new programs kicking.

Speaker 5

They really would like to drive to the advanced research and working with advanced technology. This is where we excel and we have benefited from our customers moving toward new technology toward high parameter cell analysis. Also another advantage we have seen is more and more customers pharma biotech they are trying to harmonize their instrument technology across many of their labs globally. And this is where we excel. Our technology clearly has been there to serve for the needs of our customers on standardization and harmonization.

Speaker 10

Super helpful. Thank you.

Operator

There are no further questions at this time. And this does conclude the meeting. Thank you all for your participation. You may now disconnect.

Speaker 11

Please wait. The conference will begin shortly.

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