Cytek Biosciences Q2 2024 Earnings Call Transcript

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August 6, 2024

There are 9 speakers on the call.

Operator

Thank you for standing by. My name is Louella, and I will be your conference operator today. At this time, I would like to welcome everyone to Citec Biosciences Second 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 Thank you.

Operator

I would now like to turn the conference over to Paul Goodson, Head of Investor Relations. You may begin.

Speaker 1

Thank you, operator. Earlier today, Citec 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 email to investorscitecbio dotcom. 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 be making 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 the press release CITEC issued today and in CITEC'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, Hy Tech disclaims any duty to update any forward looking statements whether because of new information, future events or changes in its expectations.

Speaker 1

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 CITEX products. There are 43 of these events planned throughout the remainder of 2024 in the U. S. And around the world.

Speaker 1

While these are primarily geared to the scientific community, they may offer an opportunity to interact with users of our technologies to learn why Scitech'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 Wen Bin.

Speaker 2

Thanks, Paul. Welcome, everyone, and thank you for your interest in SiTech. On the call today, I will discuss our performance for the Q2 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 and A. Revenue in the second quarter was $46,600,000 an increase of 4% compared to the Q1 and a 6% decline compared to the Q2 of 2023, which was especially strong as it captured some delayed orders from the Q1 of 2023.

Speaker 2

Collectively, revenue for the first half of twenty twenty four grew 5% compared to the first half of 2023. Revenue in the Q2 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.

Speaker 2

Market. Further, while weaker versus the prior year, the biotech, pharma and the CRO segments improved sequentially versus the Q1. We believe our performance in this academic and the government segment of the U. S. Market was impacted by turnover on our sales team in some sales strategies, a slow funding environment and an overhand of excess capacity from pandemic era spending.

Speaker 2

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.

Speaker 2

Specifically, we expect the large installed base of conventional technology from cytometers will be replaced over time with special instruments and will be a growth driver for Cytec 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 $203,000,000 to $210,000,000 representing growth of 5% to 9% over the prior year. Bill will provide more details on our financial results momentarily.

Speaker 2

In the Q2, 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 Zydex longer term. Notably, over the last 12 months, we have leveraged the increasing scale of our service operations to boost the labor and overhead productivity. Based on these efforts, we substantially increased our service gross margins by 8% points as compared to a year ago. Overall, while ordering activity continued to be weak in the U.

Speaker 2

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 central to this objective is strengthening our position as a market leader in flow cytometry.

Speaker 2

Turning to our growth strategy. As a reminder, our focus is on 4 key pillars, each of which is integral to our long term growth: instruments, applications, bioinformatics and clinical. In the Q2, we expanded our global footprint with 147 instruments sold, reaching a total installed base of 2,656 units, including 299 Amnes and the guava instruments shipped since the acquisition of the Luminess Flow Cytometry and Imaging business. This total does not include the thousands of installed Amylix and Guava instruments sold prior to our acquisition of the Luminess product lines. 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.

Speaker 2

During the Q2, we were excited to have announced our enhanced small particle detection module or ESP, a new product that can be added to new or registered to existing Aurora and Northern Lights instruments. This new capability allows our already powerful cell analysis systems to provide further sensitivity and resolution improvements for detecting viruses and other subcellular particles, all while maintaining Cytec's 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 the cell signaling in many physiological states. We expect to accelerate the pace of discovery, therapy and the diagnostic development and benefit the scientific community as a whole. For Scitech, we believe these new capabilities will further distinguish our cell analysis solutions as the preferred choice among researchers and clinicians.

Speaker 2

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 for SiteGround, one of our core bioinformatics offerings. We now have over 11,000 users of the SiTech Cloud, representing an average of about 5 users per installed SiSets FSP instruments. 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 Sysa Cloud, which we previewed during our last earnings call.

Speaker 2

Our Spectral Panel tool is a proprietary new intelligent algorithm optimized for Citec's SSP technology that automates the assignment of fluorocones to markers, removing a labor intensive measure process. This tool will save researchers time and money by jumpstarting their panel design process with a tool that suggests to optimize the panels in minutes. As a reminder, Cytikloud 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 the reagent availability. It consists of a suite of integrated online software tools that streamline workflows, combining all special panel design tools in one place, which enables users to prepare experiments remotely. Geyser Cloud accelerates time to insight for a wide range of applications and is a vital resource in the research community.

Speaker 2

On the application front, in the Q2, we were pleased to share that our 1 laser and 2 laser 6 color TBMK region cocktails received the China National Medical Administration approval for clinical use on Northern Light Systems in hospitals, laboratories and clinics across China. As a reminder, this is the first one data based fixed color assay supported by FSP capability, which gives our 1 laser systems a competitive advantage against the more expensive 2 laser systems. These regions 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 Cytec TB NK agents. This achievement enhances our market presence in China and opens a new potential opportunity, while strengthening our competitive advantage. As we continue to push forward new products and applications, we remain deeply focused on providing a comprehensive sales analysis portfolio to our customers.

Speaker 2

A critical component of this vision 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 the scientific discovery. With that, I will now turn the call over to Bill for more details around our financials.

Speaker 3

Thanks, Wenden. Total revenue for the Q2 was $46,600,000 an increase of 4% versus the Q1 and a decrease of 6% from a particularly strong Q2 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 2023 being attributable to weakness in the U. S.

Speaker 3

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 needing service contracts.

Speaker 3

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 twenty twenty four as product revenue weakness offset service growth.

Speaker 3

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 CITEX technology continued to gain traction as the full spectral flow cytometry technology of choice for research institutions and biopharma companies worldwide. Gross profit was $25,400,000 for the 2nd quarter, an increase of 11% versus the 1st 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 percent in the quarter, up from 55% in Q1 and down from 60% in the prior year quarter.

Speaker 3

Operating expenses were $34,000,000 for the Q2 of 2024, essentially flat with Q1 at $33,700,000 and decreased 9% from $37,300,000 in the Q2 of 2023, driven primarily by lower R and D and sales and marketing expenses. Research and development expenses were $10,000,000 for the 2nd quarter, in line with $9,800,000 in Q1 and down from $12,100,000 in the prior year period. The decrease of $2,100,000 was primarily due to lower headcount and engineering expense. Sales and marketing expenses were $12,300,000 for the 2nd quarter, a slight decrease from Q1 at $12,500,000 and down from $14,400,000 for the prior year period. The decrease of $2,100,000 was primarily due to lower headcount.

Speaker 3

General and administrative expenses were $11,700,000 for the 2nd quarter, slightly up from $11,400,000 in Q1 and up from $10,800,000 for the prior year period. The increase of $900,000 was primarily driven by higher stock based compensation expense. Loss from operations was $8,500,000 for the 2nd quarter, an improvement compared to a loss from operations of $9,100,000 for Q2 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 2nd quarter was $10,400,000 compared to $4,400,000 in the prior year.

Speaker 3

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 $2,900,000 for the 2nd quarter, compared to a loss of $700,000 in Q1 $1,500,000 in the Q2 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.

Speaker 3

Total cash and marketable securities increased by $7,000,000 versus Q1 to $277,000,000 dollars due to higher adjusted EBITDA and efficient working capital management and despite spending $3,000,000 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 and 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 $50,000,000 of our stock. During the Q2, we repurchased approximately $2,700,000 worth of Citec stock in open market transactions at a weighted average price of $5.99 per share.

Speaker 3

Shares repurchased under these programs are canceled, leaving us with 131,500,000 shares outstanding as of June 30, 2024. Now turning to our outlook for the full year 2024, which when been 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 $203,000,000 to 210,000,000 dollars representing overall growth of 5% to 9% over full year 2023 and assuming no change in currency exchange rates.

Speaker 3

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 CITEC's GAAP net loss to be in single digit millions range for the full year 2024. It remains our objective to deliver positive net income going forward. Scitech also expects to generate positive cash flow from operations in 2024.

Speaker 3

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

Speaker 2

Thanks, Bill. I want to close by thanking our flagship 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 strategic pillars and the focus on delivering sustainable growth and profitability. I want to thank everyone for joining today's call, and we will now open it up for questions.

Operator

The floor is now open for questions. Your first question comes from the line of Tejas Savant with Morgan Stanley. Please go ahead.

Speaker 4

Hi, this is Jason on for Tejas. Thank you for taking our questions. So could you talk a little bit about your order book and visibility into the second half? At midpoint, it seems to imply a 55% to 50 6% second half ramp to achieve the guidance. So could you provide some color on what gives you confidence in this ramp?

Speaker 4

So I mean, how are you baking in any benefits from the stimulus in China? Are there any budget flush dynamics in the Q? So any assumptions about your confidence in

Speaker 3

This is Bill. We baked in a broadly a continuation of both current market conditions and a typical quarterly spending pattern. You'll notice if you look at the prior year's second half and in particular Q4 that those represent more than 50% of annual revenue. So we would we don't see any reason why that typical quarterly patent or first half, second half patent would be any different than prior years. And our guidance represents 5% growth over last year at the low end and low double digits at the top end, which is broadly consistent with our overall year to year growth rate.

Speaker 5

Yes. Just add on top of that, the China impact is not baked into this forecast or guidance.

Speaker 4

Got it. Thank you. Appreciate that. Then I guess a follow-up question. Just with the FCI acquisition now seeing its could you provide us with an update on your development roadmap with Guava and Amnis?

Speaker 4

And as a follow-up, where

Speaker 3

do you currently stand on the development

Speaker 4

of imaging FSP?

Speaker 5

On Guava, as you know, was never a primary reason for the acquisition. Although, we have kept guava for the reason that some of the guava customers would like to stay continue on what they have been familiar with. But omniq side and we continue to assess on the customer demand and needs on the imaging side. And this is part of the reason for the acquisition and we are continuing to work on integrating the imaging capability onto the FSP product.

Speaker 4

Understood. Thank you. And if I may ask one more is just so you noted weakness among academic customers in the U. S. Could you talk a bit about the intra quarter trends that you saw play out?

Speaker 4

Did you see the cadence get better or worse than throughout the quarter?

Speaker 5

As you can see and this trend has been continuing even from Q1 through Q2. And of course, this partially also we have indicated due to some of the turnover of our sales representative in some of the territories in the North America. We are addressing this subject and we feel sales is not being lost. It's just not being pushed to close. We will see it to come back.

Speaker 3

Got

Speaker 4

it. Thank you. Appreciate the time guys.

Operator

Your next question comes from the line of Matt Sykes with Goldman Sachs. Please go ahead.

Speaker 6

Hi, this is Yvi on for Matt. Thanks for taking the questions. So my first is, can you give us more color on the delayed orders that were captured in the quarter? What was the growth what would the growth have been excluding those orders? And then is there a risk that elongated sales cycles continue to delay orders in the back half of the

Speaker 5

year? As you can see and we 1st year, we actually experienced a great growth in Europe and EMEA. But we do have seen the kind of elongated sales cycle in North America and this evidently continued in Q2. And at this time, we don't foresee this will improve over the next couple of quarters for the year, but our guidance has already included this factor.

Speaker 6

Great. Thank you. And then can you talk through with potential replacement cycle coming up like where we are in this cycle and given your large installed base, when we could start to see this come through, maybe some detail on like your average instrument age versus historic trends of when those start to be replaced?

Speaker 5

I think this replacement cycle is not just to replace our own instrument deployed quite a few years ago and it's also a replacement of other conventional instruments now already actually far more of those instruments in fact in the field we feel we are going to benefit from replacing those instruments.

Speaker 3

That universe of when we talk about replacement instruments, we primarily the opportunity is primarily constituted by the thousands of conventional flow cytometry instruments that are out there. There's a we think about 50,000 in total. So it's the replacement of those instruments as they reach end of life that constitutes the most replacement opportunity.

Speaker 6

Very helpful. Thank you.

Operator

Your next question comes from the line of David Westenberg with Piper Sandler. Please go ahead.

Speaker 7

Hey guys, thanks for taking the questions. This is John on for Dave. Can you give any commentary on the instrument mix during the quarter? What the stronger performing instruments were? And if you have any commentary on the consumables across the instruments, that'd be appreciated.

Speaker 7

Thank you.

Speaker 3

Yes. Well, I think we show strength across all of our categories of instruments with particular strength this quarter in the Northern Lights instruments. That was that category was probably the best performer. Okay. And then with respect to consumables, I assume you're referring to reagents.

Speaker 3

That continues to be a mid single digits proportion of the overall business. So it doesn't really have a significant impact on growth rate. And as we said in the past, it grows broadly in line with the rest of the portfolio.

Speaker 7

Got it. Thank you. And do you have any thoughts on when capital budget appetite might start to stabilize more or potentially turn more positive in the U. S?

Speaker 5

I think actually looking at the segment, while we see the kind of weakness in long dated sales cycle on the academic and the government side, we do see pharma start to come back and clearly we see improvement in Q2 versus Q1.

Speaker 7

Great. Thank you.

Operator

Your next question comes from the line of Chad Witkowski with TD Cowen. Please go ahead.

Speaker 8

Hey, this is Chad on for Steven Ma. Can you just help contextualize how the bioinformatics improvements and the automated panel design impact instrument consumable demand and sort of break that out among geographic and customer end markets? Is there more or less sensitivity to these improvements in certain segments?

Speaker 5

The bioinformatics is a platform that to really help our users to leverage the instruments and the reagents we have. The special panel we have just launched, in fact, it automates the panel design, especially for those high complex panels and typically takes a lot more time for the users to optimize. Now we have a system tool that will really enable them to speed up their development. Afterwards, it not only enable them to optimize basically the kind of like a virtual experiment on our platform, it also enables them to purchase solutions afterwards. So through this process, we feel that will help our users provide a full set of solutions for our customers to leverage the full special technology Citic has provided.

Speaker 8

That's helpful. And just to pivot sort of to instruments, obviously the new facility this manufacturing facility opened is related to instrument production. So does this create sort of a risk to gross margin just given that fixed cost is already on the books? And could you maybe speak to how you're thinking of the margin cadence sort of in the back half of the year and beyond?

Speaker 3

The new facility costs of that are already included in our fixed costs. So there's no we don't see a specific downside risk to gross margins from that. And then as to gross margin cadence, last quarter, we said that we expected to move back closer to where our gross margins were last year. And so in this quarter, we moved our adjusted gross margin moved up to 58% And that compares to 60% in Q2 of last year and 59% for the balance of the year. So I think we've recovered most of the margin a large portion of the margin gap versus last year.

Speaker 3

And I think while as revenue grows, we would hope for some margin benefit that the benefit should be fairly modest from this point forward.

Speaker 8

That's helpful. Thanks for the time, guys.

Operator

Ladies and gentlemen, that concludes the Q and A session and today's call. Thank you all for joining. You may now disconnect.

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Cytek Biosciences Q2 2024
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