Cytek Biosciences, Inc.
Q3 2023 Earnings Call Transcript

Published: 11 Nov 2023

[Operator:]

Good day and thank you for standing by. Welcome to the Cytek Biosciences Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Paul Goodson, Head of Investor Relations. Paul, please go ahead.

[Paul Goodson:]

Thank you, operator. Earlier today, Cytek Biosciences released financial preliminary results for the quarter ended September 30, 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 email to [e-mail]. Joining me today from Cytek are Wenbin Jiang, CEO; and Patrik Jeanmonod, CFO. Before we begin, I'd like to remind you that we 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's SEC filings, including the upcoming Form 10-Q that is expected to be filed with the SEC on Thursday, November 9th, 2023. This call will also 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, 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 the live broadcast, November 7th, 2023. I would like to mention that Cytek will be hosting a number of flow cytometry events over the coming months. While these are primarily geared to our scientific user base, they may be of interest to our analysts and investors alike. These include the Cytek Reveal Roadshow, which is currently underway, several Cytek user group meetings, and a variety of industry conferences where we will have a product booth and will be sponsoring user outreach events. These events offer an opportunity for you to interact with users of our technology and get their comments directly on why they chose Cytek. We have a limited number of spaces to accommodate members of the financial community. So, if you're interested in attending, please contact me. With that, I will turn the call over to Wenbin.

[Wenbin Jiang:]

Thank you, Paul. And welcome, everyone to our third quarter conference call. On the call today, I will discuss our results for the third quarter as well as our progress across our four key strategic pillars to drive growth. Then I will turn the call over to Patrik for a more detailed look at our financials and an update on our outlook for 2023, before we open it up for Q&A. Starting with our third quarter results. Against a difficult macroenvironment, we achieved $48.0 million of total revenue, representing growth of 19% year-over-year. This included approximately $6.8 million of revenue from the product lines acquired from Luminex. Excluding acquisition-related revenue, our organic revenue was $41.2 million, a 2% increase year-over-year. We are pleased with the continued growth we saw in the third quarter from our reagent portfolio and the services, areas that we expect to be leading growth drivers for our business in the future. This positive trend is a testimony to the strong utilization of our instruments and the flywheel effect attached to them. In the third quarter, like many other companies, we were not immune to the increasing headwinds within our industry where we experienced extended sales cycle and the order delays. We expect this pressure to persist into the fourth quarter. As a result of these factors, we expect full year revenue from our organic business to be approximately flat versus the prior year, and $25 million to $30 million of revenue contributions from the business acquired from Luminex. Taken together, we expect full year revenue in the range of $188 million to $192 million, representing growth of 15% to 17% over the prior year. Patrik will provide more detail on our financial results momentarily. Despite this challenging backdrop, I'm pleased with our team's commitment to adapt and navigate this evolving environment. We remain focused on driving our product strategy forward and at delivering commercial growth at profitable levels across our diversified revenue streams. We believe that the underlying interest in our Full Spectrum Profiling, or FSP technology, continue to be high. And we are making good progress with both new and existing customers in our pipeline. We are addressing well-established markets across the scientific community where there is a large need for tools beyond the conventional. We are well positioned to meet this demand as an industry leader offering an expansive product portfolio, purpose-built to advance next-generation cell analysis. To deliver on our long-term objectives, we continue to focus our business on four key pillars

[Patrik Jeanmonod:]

Thanks, Wenbin. Total revenue for the third quarter of 2023 was $48 million, a 19% increase over the third quarter of 2022. This included approximately $6.8 million of revenue from the products and services acquired from the Luminex transaction, which closed on February 28th. Organic revenue, excluding the acquired products and services, was $41.2 million, an increase of 2% compared to the same period of 2022. As Wenbin mentioned, we are continuing to experience extended sales cycles and order delays. While the macroenvironment was challenging during the third quarter, we did experience strength in both in revenue, including reagent and service revenue. Gross profit was $27.2 million for the third quarter of 2023, an increase of 1% compared to a gross profit of $26.9 million in the third quarter of 2022. Gross profit margin was 57% in the third quarter of 2023 compared to 66% in the third quarter of 2022. Adjusted gross profit margin in the third quarter of 2023 was 59% compared to 68% in the third quarter of 2022 after adjusting for stock-based compensation expense and amortization of acquisition-related intangibles. Operating expenses were $33.6 million for the third quarter of 2023, a 32% increase from $25.5 million in the third quarter of 2022. The increases in operating expenses were primarily due to expenses related to increased headcount from the Luminex acquisition and personnel-related expenses across sales and marketing, research and development, and general and administrative. These expenses included an increase in tradeshows and other sales. Research and development expenses were $11.2 million for the third quarter of 2023 as compared to $8.7 million for the prior year period. Sales and marketing expenses were $12.1 million for the third quarter of 2022 as compared to $8.8 million for the prior year period, reflecting the addition of our new team members from Luminex. While sales and marketing as a percentage of revenue is up this quarter, over time we expect that this ratio will decline as our revenue growth trajectory recovers and our sales and marketing investment is spread over a larger revenue base. General and administrative expenses were $10.4 million for the third quarter of 2023 as compared to $8 million for the prior year period. Loss from operations was $6.4 million for the third quarter compared to an income from operation of $1.4 million for the third quarter of 2022. The net loss after tax in the third quarter of 2023 was $6.5 million compared to net income after tax of $1.6 million in the third quarter of 2022. Additionally, adjusted EBITDA in the third quarter of 2023 was positive $3.7 million compared to positive $7.3 million in the third quarter of 2022, after adjusting for stock based compensation expense. Cash, cash equivalents, and short term investment were $288 million as of September 30, 2023. Our strong balance sheet, free from external financial needs, underscores our organization's vitality. With healthy cash reserve and a profitable track record, we continue to operate from a position of strength that enables our global growth efforts. One important use of our cash position has been to repurchase our stock following the $50 million repurchase authorization we announced in May of this year. During the third quarter, we repurchased approximately $8.4 million worth of Cytek stock in open market transactions. Shares repurchased under these programs are canceled, leaving us with approximately 135 million shares outstanding as of September 30, 2023. Now, turning to our guidance for 2023, which Wenbin reported at a high level earlier. We are continuing to see market pressure affecting our revenue expectation, including order delays across North America, economic challenges in China, and elongated sales cycle across geographies. Taking these factors together, we expect our full year revenue to be in the range of representing overall growth of 15% to 17% over full year 2022. We expect this to be composed of approximately flat organic revenue versus the prior year and revenue from the acquired Luminex business to be in the range of $25 million to $30 million. As we look ahead, we are anticipating some softness in our top line to persist into 2024, due in part to the longer sales timelines we are experiencing. While it is too early to provide our specific outlook for next year, we continue to keep a close eye on the dynamic global market conditions. We are also diligently focused on improving operational efficiencies across our business and aligning our overall cost structure to ensure that we remain an agile organization in the best possible position to drive growth and deliver profitability. With that, I will turn it back over to Wenbin.

[Wenbin Jiang:]

Thanks, Patrik. I want to close by thanking our Cytek team for their unwavering dedication to delivering cutting-edge tools, reagents, and a software to advance the next generation of cell analysis. While we are facing near-term headwinds, our financial strength and organizational commitment positions us to successfully weather through these times. We continue to be excited by the significant opportunities ahead to drive adoption of our expansive and growing product portfolio. I'm confident that we are fundamentally well positioned to drive our mission forward with continued execution across our key strategic pillars and focus on delivering profitable growth. I want to thank everyone for joining today's call, and we will now open it up for questions. Operator.

[Operator:]

[Operator Instructions] The first question comes from the line of David Westenberg of Piper Sandler. David, please go ahead.

[David Westenberg:]

Hi. Thank you for taking the question. So I just wanted to give a little bit of sense for the competitive environment, whether or not you're seeing anything out there, whether it be maybe cheaper traditional flow cytometers or maybe full spectrum flow cytometers, just anything on the competitive landscape that tells us the instrument is doing great from that perspective. This really is a lot more than broader market kind of situations.

[Patrik Jeanmonod:]

Yes, Dave, thanks for asking the question. It's Patrik. So we continue to see demand for our instruments, and I don't know if this environment, as you defined it, cheaper is a right definition, considering that we see continued demand from biotech, pharma, and academia. While this quarter was a little softer than expected, we still remain very positive about the continued demand for the full spectrum technology that Cytek is selling.

[Wenbin Jiang:]

Yes. One of the indication we have seen here is, based on our pipeline, we are clearly seeing more cases gone cold instead of being lost. Our win-loss ratios remain constant, not really changing over the time. So this just means the impact is mostly due to the macroenvironment.

[David Westenberg:]

Got it. Traditionally is the right way to think about it, you have a flow cytometer, you have a 5 to 7-year replacement CapEx cycle. If we're seeing softness in 2023 to 2024, but really you would be going at the end of the capital equipment cycle. Is that the right way to think about it as we think about the long-term demand for the instrument? Thank you.

[Wenbin Jiang:]

I think, contiguously, of course, we see returning customer, we also see new customers in our space, and the demand certainly is still out there. But on the other hand, as you know, due to the high interest rates, when customers are making a decision when to purchase, this is part of the consideration they have and basically they try to delay their purchase decisions as long as they can. So this is impacting how we perform, obviously, here.

[David Westenberg:]

Okay, got it. Maybe to just ask one more on, again, this product demand side. Do you offer anything on a little bit more reagent or financing options in order to help them with kind of the capital purchase cycle? Any clever ways to think about that thing over the next couple years to help drive demand and given the high interest rate environment? Thank you.

[Wenbin Jiang:]

Great question. In fact, we are indeed looking at these options. As you know, we have a strong cash flow on our balance sheet, and this potentially is a possibility that we can help our customers to make their decisions regarding the purchase.

[Operator:]

The next question comes from the line of Steven Mah of TD Cowen. Steven, please go ahead.

[Steven Mah:]

Great. Thanks for taking the questions. Patrik, looking at the new guide, if I'm doing my math right, it looks like It's going to be maybe a slightly down to flat sequential quarter over quarter, Q3 to Q4. On the last call, you said that the cadence of revenues would be heavily skewed to the back half of the year. Could you give us some color on what happened? Was there some orders that got pushed back? And what do you think of those pushed back orders? Will they come back eventually or are they going to be lost?

[Patrik Jeanmonod:]

Yes. Steve, so the fourth quarter is going to be up from the third quarter. So we expect the fourth quarter to be up from where we landed in Q3, so that's the number 1. What we've seen in Q3 is a little bit of softness in the academia segment, which typically is strong on the third quarter. We've also seen a little bit of softness in the biotech. We had expected a slightly stronger push on that side. While we are not expecting to lose a lot into next year, we expect Q4 to be stronger than Q3.

[Steven Mah:]

Okay, great. Thanks. And then something that Wenbin said, the customer interest is still strong. Can you help us reconcile what that means? Does it mean that the sales cycle really is just being extended and you're not actually losing business, but it's just being delayed? Is that what your sense is? Just want to reconfirm that.

[Wenbin Jiang:]

Yes, this is exactly what we mean. It's not really being lost as what I have indicated earlier. Our win-loss ratio remains constant. So this just means it takes more time for customer to make a decision under today's macroenvironment, especially when we talk about really expensive, high-cost capital expenditure.

[Steven Mah:]

Okay, got it. And if I can sneak 1 last one in. On your stock buyback thinking, how do you balance continuing to buy back stock with your M&A strategy and potentially keeping some dry powder? Thank you.

[Wenbin Jiang:]

Definitely, we are going to continue to be aggressive regarding to the stock buyback. And as you can see, we authorized $50 million. So far we've spent about $10 million, and we still have $40 million being authorized, which we will do this aggressively during the open window.

[Operator:]

The next question comes from the line of Matt Sykes from Goldman Sachs. Matt, please go ahead.

[Matthew Sykes:]

Good afternoon. Thanks for taking my questions. If I could just drill down a little bit on the comments, you made regarding China. It's obviously well known. It's been a weak spot for many of the companies in the sector. Any additional color you can provide on what you're seeing in China, if there's any particular instrument category there that you're finding that weakness? Is it similar to the delays and pushouts and lengthening of sales cycles or is something else going on in China relative to what you're seeing in the rest of the world?

[Wenbin Jiang:]

Yes, as you can see, we did very well in Q1 and Q2 in China, but Q3, I think due to the anticorruption drive over there, many tenders got delayed, and some of those are continue to be delayed. We don't know it's going to come back in Q4 or until later quarter, actually maybe Q1 next year. This is something we are working on, and definitely this is something not being expected when we got into the Q3. It's impacting how we perform over there.

[Matthew Sykes:]

Got it. And just to follow up on that. I'm not aware of any, but just any incremental color you're hearing on value-based procurement and how that might affect flow cytometry. I know you do some clinical work there, and so obviously concentrated on other assays. But any impact to your business that you might see from that dynamic?

[Wenbin Jiang:]

You mean clinical in China?

[Matthew Sykes:]

Yes, just the value-based procurement programs that are rolling out. Just any potential headwind you see from that at all, or is it you feel like you'll be relatively unaffected?

[Wenbin Jiang:]

Yes, that's exactly what I mean with regarding to the delay in tendering process in China is with regarding to the clinical. As you know, we did very well previously with regarding to clinical instrument sales in China, but Q3 definitely is a quarter we got impacted over there.

[Matthew Sykes:]

Got it. And then just last question for me. Just as you look at the different instrument categories you have, I know you stopped reporting installed base in Q1, but just give us any sense for whether it's Aurora, Northern Lights, cell sorter, et cetera, where you're seeing relative positive strength or weaknesses and any differentiation in customers' preference for price point or types of instruments in this weaker macroenvironment.

[Wenbin Jiang:]

Although we don't really split the instrument types, but overall, if we look at the distribution across different platform, we do see a slowdown in high-cost items versus the lower-priced tools. So that's just another indication of the macroenvironment high interest rate that is impacting how customer buying their tools.

[Matthew Sykes:]

Got it. Okay, thank you.

[Operator:]

The next question comes from the line of Andrew Cooper of Raymond James. Andrew, please go ahead.

[Andrew Cooper:]

Hey, thanks for the question. Maybe, first, like you pointed out, calling for a bit of a step up here into the fourth quarter. We certainly have heard from some other tools players a cautious tone on whether there's a budget flush. So just maybe your thoughts around how much budget frees up in 4Q like we typically would see versus maybe anything else going on there to lead to that step up.

[Wenbin Jiang:]

Indeed. Typically, Q4 is the best quarter for Cytek. And if we look at past history, certainly, it's related to those type of budget flush. And we continue to foresee the same thing that will happen, but at what magnitude, this is something wait to see. But Q4 definitely is going to be the best quarter for Cytek that we still have the kind of confidence.

[Andrew Cooper:]

Okay. Thank you. And then maybe just in terms of some of the customer conversations, I think it makes sense, you're seeing the elongated sales cycles, you're seeing that push to maybe a little bit lower-cost instruments. Have you seen many of those conversations that maybe get held up and the end result is you are able to close a sale, but it's the lower end as opposed to the high-end instrument? Has that been something that's occurred or anything that's jumped out from those client conversations and client interactions that maybe mean we get a little bit more of that lower end versus a pure pushout of those higher-end purchases?

[Wenbin Jiang:]

Yes. Looking at the growth rate across low-end and high-end, as I just mentioned about what we have seen, right? And we do see a higher growth for our lower-end instrument, especially the Northern Lights versus the high end of the instrument.

[Andrew Cooper:]

Okay. And maybe I'll just sneak in one more. Is there any additional color you can share on the reagent business and the kit business in terms of quantifying the growth there and where that business sits today?

[Patrik Jeanmonod:]

Yes, I can take that. So the reagent segment is our second-fastest growing segment, still small. We're talking about a mid-to-high single-digit as a percent of total revenue. But the growth rate are compelling, and we will continue to invest in that segment as we expect to continue to grow that segment substantially going into 2024. We like the recurring revenue coming out of it added to the service business, which makes us also unique to the extent that we can continue to build the growth revenue range for the coming years.

[Wenbin Jiang:]

Yes. And to put it in perspective, reagent growth rate is more than double of our average growth rate for the overall revenue.

[Andrew Cooper:]

Great. I’ll pass it on. Thank you.

[Operator:]

The next question comes from the line of Tejas Savant of Morgan Stanley. Tejas, please go ahead.

[Unidentified Analyst:]

Good evening, guys. This is Edmund. Thank you for the time. I just want to start out with your EU trends and what you saw in 3Q. I think it was a bit soft in 2Q for biopharma, and you guys were calling for a stronger second half. Did that play out to your expectations?

[Patrik Jeanmonod:]

Yes, we continue to see softness in that biotech-pharma segment for sure. We obviously have a higher expectation for this segment. So overall, I think it's a little lower than what we would expect. And that's coupled with the academia that's also not growing as much in the third quarter. Typically, you would have expected that to happen.

[Unidentified Analyst:]

Got it. And then with the Guava manufacturing now transferred to Wuxi, I'm not sure if you guys talked about this, but how should we think about the gross margin impacts in 4Q and looking into '24?

[Patrik Jeanmonod:]

Yes, that's a good question. So we completed the transition in Q3. So for those who don't know, the Guava platform was still manufacturing with the DiaSorin organization, and we had to pay a premium for these instruments. So now these instruments are fully being manufactured within the Cytek environment. And the expectation is that the gross profit margin for these instruments will go up gradually as we move forward; first of all, because we have a better manufacturing process for this instrument, but we're also looking at doing a cost down to improve the overall gross profit margin for those.

[Unidentified Analyst:]

Got it. Super helpful. And then I was wondering if you guys could elaborate a little bit more about your recent Cytek Reveal Roadshow, just what kind of people were in the audience, what kind of feedback you got. And it sounds like you guys plan on doing more of these industry conferences and user meetings. How should we be thinking about the impact on OpEx heading into '24?

[Wenbin Jiang:]

Yes. Cytek Reveal is for Cytek customers, existing and also the new customers. And so far it's very well received, and we are continuing with this process. I think Paul earlier mentioned, we welcome all the investment community to join to be part of that. And probably that's a good place or venue for you to see firsthand how Cytek users feel about the technology we have provided.

[Unidentified Analyst:]

Got it. That sounds very interesting. Thank you for the time.

[Operator:]

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