Cytek Biosciences Q2 2023 Earnings Call Transcript

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August 8, 2023

There are 10 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Citec Biosciences Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paul Goodson with Investor Relations.

Speaker 1

Thank you, operator. Earlier today, Citec Biosciences released financial results for the quarter ended June 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 investorscitecbio.com. Joining me today from Citec are Wenbin Zhang, CEO and Patrick Jameneau, Chief Financial Officer. 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 ZYTECH'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 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, Cytec disclaims any duty to update any forward looking statements whether because of new information, This conference call contains time sensitive information and is accurate only as of the live broadcast, August 8, 2023.

Speaker 1

Before I finish, I want to mention that we are planning an Investor Day in late November in New York, where we will look forward to sharing more about our business. We will update you with details as we get closer to the event. With that, I would like to turn the call over to Wen Bib.

Speaker 2

Thanks, Paul, and welcome everyone Joining our Q2 earnings conference call. On the call today, I will discuss our results For the Q2 as well as our progress across our 4 key strategic pillars to drive growth. Then I will turn the call over to Patrick for a more detailed look at our financials and an update on our outlook for 2023 before we open it up for Q and A. Starting with our Q2 results, we achieved $49,700,000 of total revenue, representing growth of 24% year over year. This included approximately $8,200,000 of revenue from the product lines acquired from Luminess.

Speaker 2

Excluding acquisition related revenue, our organic revenue was 41,500,000 Our results were driven by improvement across the U. S, particularly with our pharma and the biotech customers, where orders that were delayed at the end of the first quarter began to come in. Yet, We continued to see impact from our biopharma customers in Europe during the Q2. Overall, while the macro environment continued to be somewhat challenging, these results are a testimony to our dedicated efforts to operate our business efficiently and effectively, all while further growing our sales across the globe, diversifying our revenue base and executing on our product strategy. Patrick will provide more detail Our financial results momentarily.

Speaker 2

Seita continues to stand apart in the field As we provide our customers with an end to end solution consisting of instruments, reagents, Software and Application Services. We are focused on driving growth and diversifying revenue streams. In addition, we expect our recent acquisition of the flow cytometry and the imaging business from Luminess We'll open new markets and applications. As we complete the integration of We acquired the business over the course of this year. We are taking proactive measures to optimize our business operations and advance our overall strategy.

Speaker 2

I will share more details on our progress with the integration shortly. As I have mentioned before, we operate our business according to 4 key pillars, each of which is integral to our long term growth. These pillars, which are instruments, Applications, bioinformatics and the clinical help execute our overall strategy and we believe will drive excellent growth over the longer term. Starting with instruments, During the Q2, we placed 112 instruments from our organic seismic portfolio. Altogether, this installed base has now reached 1878 instruments.

Speaker 2

This does not include the installed instruments of OmniNet Imaging and the Guava Microcaprolid product lines acquired by Luminess, which also continued to grow during the quarter. Collectively, these organic and acquired instrument placements We present growth across diverse applications spanning entry level to high dimensional cell analysis. We cater to a broader spectrum of customers and provide tailored applications to meet their specific needs. Looking ahead, we look forward to driving instrument adoption across our product portfolio. This growing installed base We'll also create a receptive market for new instruments that we plan to launch in the coming years, Leveraging Citic's advanced technologies alongside the powerful technologies acquired from Luminex.

Speaker 2

During the quarter, we proudly shipped our 100th Citec Aurora Fill Solar System. Launched in June 2021, the site of Aurora cell solder builds upon the remarkable SP capabilities of our Aurora cell analysis system, delivering unparalleled high sensitivity performance at the single cell level. It empowers researchers to effortlessly and seamlessly resolve and solve Even the most challenging cell population, preparing discoveries and optimizing efficiency in cell analysis workflow. It is exciting to see how full special profiling analysis is taking hold and redefining the new normal in the field. This further motivates us to forge ahead with unwavering dedication shaping the future of cell analysis.

Speaker 2

Turning next to applications, which includes our reagents and TIP. Revenue from the regions and tips continues to be a fast growing product area, highlighting the increasing demand for our offerings, which are focused on making the user job easier, faster and more accurate. We continue to actively collaborate with our partners to expand our reagent portfolio and develop application specific kits. In June, we launched the C4 Myelogerrived Suppressor Cells or mDSC kit optimized on our FSP platform, significantly broadening the application menu for our customers by offering them enhanced capabilities and flexibility in their research and analysis. With this launch, we are addressing a wide range of research needs across various applications, Particularly in cancer research and the therapy development, where myeloid derived suppressor cells play a crucial role.

Speaker 2

Broadening our menu of application is a critical part of our strategy that helps us both meet the needs of our existing customers and helps us attract new customers seeking comprehensive solutions. The breadth of our applications can be seen across the wide range of peer reviewed publications That includes our technology. During the Q2, there were 139 New peer reviewed publications mentioning SciTech, bringing the all time number of publications to over 1300. With the growing number of peer reviewed publications featuring our products, researchers are embracing Scitech's As an example of how significant some of these research efforts are, 2 Recent papers highlight the power of our technology in immuno oncology applications. The first paper published by Biotechnology Companies, Neur Looking and AI4Bao in cancer immunology research, Elucidate the signaling mechanisms of melanoma tumors that are resistant to immune checkpoint inhibitors.

Speaker 2

They also showed how their therapeutic candidate developed using synthetic biology techniques The The second paper published in Nature by clinicians at the Cedars Sinai Medical Center describes how bladder cancer cells Adapt to survive and identify biomarkers for improving cancer immunotherapy. Bioinformatics is our 3rd strategic area. A key part of our bioinformatics strategy is enabling our customers to streamline their experiment workflow. To that end, we are excited to share that the user engagement and demand for the Cytec Cloud Launched late last year has been doing exceptionally well. CytecCloud's digital ecosystem offers a comprehensive suite of spectral panel design tools seamlessly integrated into a centralized platform.

Speaker 2

This cutting edge solution empowers researchers to prepare and optimize their experiments remotely, streamlining the process from panel design to data acquisition. The accelerated time to insight is invaluable across a broad range of applications from immunology to oncology, infectious diseases and inflammatory diseases. The success of Cytec Cloud not only benefits our extensive existing user base, but also paves the way for future users as we continuously enhance its capabilities Incorporating data management, sharing and analysis features. With SightCloud at To the forefront, we are poised to revolutionize single cell analysis to drive groundbreaking discoveries and to propel scientific research to new heights. One topic we have not discussed previously is Citec's use of artificial intelligence and machine learning to enhance The value of our instruments.

Speaker 2

Cytec cell solders use machine learning to optimize sorting as well as to analyze droplet shape, Automatically making flow rate adjustments and performing as a function. The unmix AI software is based on deep machine learning and is a modified version of an AI platform that won the ImageNet challenge. Turning to our clinical opportunity. Several of our products are approved for clinical use in both China and the European Union, where our most common sale for clinical applications is the Dawson Light CLC system, accompanied by our growing C4 resin product portfolio. In both China and the European Union, The clinical market is an attractive long term business opportunity for Citec.

Speaker 2

As a reminder, We are preparing to submit our product for FDA clearance in the U. S. Where we believe our powerful FSP platform If cleared, we'll bring enhanced diagnostic power and the visibility to the benefits of patients by providing doctors a clearer and a more detailed view of each patient's condition. Part of our clinical strategy is to collaborate or partner with other organizations for development of clinical applications. These partnerships underscore our commitment to providing customers With comprehensive solutions and driving innovation with cutting edge technology, we are actively engaged with partners for opportunities across product development and the clinical risk advancements.

Speaker 2

To that end, we are excited to share about our initiative with the Swiss Protometry School and the Geneva University Hospital focusing on minimal residual disease or MRD detection in leukemia and then lymphoma. We are working diligently with the Geneva University Hospital to harness the potential of MRD analysis using our advanced technologies and the tailored solutions. As we continue to collaborate with key partners and institutions, We remain dedicated to expanding our clinical related offering and furthering our full solution provider mission. Now I would like to spend a moment to discuss our progress with the integration of Luminex Flow cytometry and Imaging Business. As we have shared, this acquisition provides important contribution to our technological abilities, product range, customer base and the commercial reach.

Speaker 2

After approximately 5 months into integration, we have completed several important milestones and still have some key steps ahead of us. Our AMLX operations in Seattle are now fully integrated and functioning. We are pleased with the smooth transfer of operations. Additionally, we have made a remarkable progress In independently manufacturing the VAVA product line, the transfer of VAVA manufacturing to Citec facility is nearing a successful completion. This strategic move enables us to consolidate our manufacturing operations, which in turn is expected to yield substantial cost saving advantages for the company.

Speaker 2

Driving improvement in gross margin for VAVA Instruments. We are confident The final stage of this transfer will be executed seamlessly. From a commercial perspective, we have cross trained our commercial personnel on the new technologies That is Amnes and Guava products to Cytec employees and the Cytec products for our new team members from Omnice and VAVA. In addition to cross training, we launched a cross selling plan targeted at Fitech With our integrated commercial team, we are enhancing our ability We continue to be excited by the value of the Luminess acquisition in both the near and the long term. The near term value of this acquisition consists of the significant cross selling opportunities and The service operational efficiency improvements with the fully integrated sales and the customer service team In the longer term, there are a number of new products we plan to introduce by combining FSP imaging and the micro Citek's acquisition and integration of The Amlex and the Guava product lines has provided a great opportunity for Stitech to transition from a technology oriented company to a market driven business.

Speaker 2

Historically, our operations have been guided by the technology we have developed With the foresight to recognize major market opportunities for our full spectral technology in disease research, Drug development, translational medicine and clinical applications. While these opportunities are abundant and growing, We now have a larger addressable market and the new product opportunities through ARMLEX and VARBA. To better address these markets, we have combined the original Citec sales team with the Omnice and Ava sales team, which will significantly to increase our global reach. With that, I will now turn the call over to Patrick for more details around our financials.

Speaker 3

Thanks, Wenbin. Total revenue for the Q2 of 2023 was 49 point $8,200,000 of revenue from the products and services acquired from the Luminex transaction, which closed on February 28. This was our 1st full quarter of recognizing revenue from these product lines. Organic revenue, excluding the acquired products and services, was $41,500,000 an increase of 3% compared to the same period of 2022. While the macro environment was still somewhat Challenging during the Q2, we did see improvements across the U.

Speaker 3

S, particularly with our pharma and biotech customers as orders that were delayed at the end of the Q1 began to materialize. On a non GAAP constant currency basis for the quarter, revenue was 50,000,000 Gross profit was $28,200,000 for the Q2 of 2023, an increase of 15% compared to a gross profit of $24,600,000 in the Q2 of 2022. Gross profit margin was 57% in the Q2 of 2023 compared to 61% in the Q2 of 20 22. Adjusted gross profit margin in the Q2 of 2023 was percent compared to 64% in the Q2 of 2022 after adjusting for stock based compensation expense and amortization of acquisition related intangibles. Operating expenses were $37,300,000 for the 2nd quarter of 2023, a 47% increase from $25,500,000 in the Q2 of 2022.

Speaker 3

The increases in OpEx were primarily due to expenses related to increased headcount from the Luminex acquisition and personnel related expense across R and D, sales and marketing and G and A. Over time, as revenue increases, we expect these expenses to become a smaller portion of our overall revenue. Research and development expenses were $12,100,000 for the Q2 of 2023 as compared to $8,400,000 for the prior year period. Sales and marketing expenses were 14 point $4,000,000 for the Q2 of 2023 as compared to $8,400,000 for the prior year period. General and administrative expenses were $10,800,000 for the Q2 of 2023 as compared to $8,600,000 for the prior year period.

Speaker 3

Loss from operations was $9,100,000 for the 2nd quarter compared to a loss from operations of $900,000 for the Q2 of 2022. Net loss in the Q2 of 2023 was $4,400,000 compared to net loss of $700,000 in the Q2 of 2022. Additionally, adjusted EBITDA in the Q2 of 2023 was positive $1,500,000 compared to positive $4,800,000 in the Q2 of 2022 after adjusting for stock based compensation expense. Cash, cash equivalents and short term investment were 298 $8,000,000 as of June 30, 2023. Now turning to our guidance for 2023.

Speaker 3

We continue to expect our full year revenue to be in the range of $205,000,000 to 220,000,000 representing overall growth of 25% to 34% over full year 2022. This is comprised of revenue from our existing organic business to be in the range of $180,000,000 to 190,000,000 and a total of $25,000,000 to $30,000,000 of revenue contribution from the business acquired from Luminex. This assumes no change in the rate of foreign exchange as well as some continued impact from elongated sales cycle from our Biotech and Pharma customers. With that, I will turn it back over to Wenbin.

Speaker 2

Thanks, Patrick. Scitech has continued to demonstrate our commitment to developing tools, reagents and the software to advance the next generation of sale analysis. I would like to express my deep gratitude for the team we have here at Citec. It is their excellence, hard work and share the belief in our important mission that drives strong progress. We believe Scitech is particularly well positioned to address multiple opportunities given the power of our advanced technologies, The strength of our capital base, the growing awareness of our extended product portfolio and the extraordinary talent of our employees.

Speaker 2

I'm confident that our daily work around under our 4 pillars adheres to and executes our overall strategy. I want to thank everyone for joining today's call, and we will now open it up for questions. Operator?

Operator

Thank you. We will now conduct the question and answer session. Please standby while we compile the Q and A roster. Our first question comes from Andrew Cooper with Raymond James. Andrew, go ahead with your question.

Speaker 4

Hey, everyone. This is Noah standing in for Andrew. Thanks for taking my question. My first question is that given all the noise with the I'm just curious to see what you're seeing on that front with your second quarter results coming in pretty healthy as well as a contrary tone relative to others in

Speaker 2

the space. So what are

Speaker 4

you seeing on that front?

Speaker 3

Yes. So what we've seen is and Nolan, by the way, that's Patrick. Thanks for the question. So What we've seen is that the overall, especially here in the U. S, we've seen increased demand And we've been able to turn those into sales.

Speaker 3

So but we have also seen bigger pharma coming in. So overall, I think the I wouldn't say the funding is back, but we've seen a quarter that was more in line with what we would expect compared to our Q1 numbers.

Speaker 2

Awesome. Thank you.

Speaker 4

And if I can get one more in, are you like is there any disparity And what is working in the current macro environment in terms of, let's say, higher end versus lower end? Because it seems like FCI did pretty well in the core of SciTech as well. But does anything jump out on that side

Speaker 2

in terms

Speaker 4

of higher versus lower end products performing a certain way?

Speaker 3

I would say that and I'll also let Wenbin chime in. But overall, I think we had a spread of all the instrument and obviously we are seeing now Increase of demand for the sales order, which is a high end product.

Speaker 5

Yes, absolutely. And the sales order definitely is an area that we have enjoyed some healthy growth here.

Speaker 2

Awesome. Thank you so much.

Operator

Our next question comes from Matthew Sykes with Goldman Sachs. Matthew, go ahead with your question.

Speaker 6

Hi. This is Evie Kozlowski on for Matt. Thanks for taking my questions. So what gives you confidence in your guide given the pickup of growth implied for versus the first half of the year? And what kind of visibility do you have for the remainder of the year?

Speaker 3

Well, that's a great question. Yes. So obviously, the looking at the 1st of all, looking at the macro environment and with the Probability of a recession going down, I think we feel more upbeat about the second half. Having more boots on the ground with the combined sales team and being fully trained that gives us increased confidence. But we also expect To see accelerated growth in the instrument sales, again, on continued demand of Analysis, but also accelerate demand for the cell sorter, which has been very well received.

Speaker 3

Remember, we crossed that 100 InsterenLocked just a few months ago. So we see continued demand for that. Finally, also I think continued growth on some of the recurring business that we have, the service business have been very strong for us. So a number of items that will drive the growth in the second half.

Speaker 6

Okay, great. That's helpful. Thank you. And then China, I know last quarter you noted particular strength in that market. Has that continued and has there been any changes to the competitive environment there?

Speaker 6

And also, does your additional investment in facilities there help your positioning versus local

Speaker 5

Actually Q2 overall, our China business continues to enjoy The healthy growth comparing to the same period last year. And indeed, there are local competitors coming, but We are mostly in the entry level and lower end, which we don't really overlap that much.

Speaker 6

Okay, that's helpful. Thank you.

Operator

Stand by for our next caller. Our next question comes from Stephen Ma with TD Cowen. Stephen, go ahead with your question.

Speaker 7

Great. Thanks for taking the questions. A follow-up question on the U. S. Pharma and Biotech strength that you saw.

Speaker 7

Could you give us a sense, was it broad based amongst your customers or was it weighted to a certain profile of the customers such as like emerging biotech versus Larger companies that were catching

Speaker 5

up? Actually, as you recall, we had some Delay in order during the last month of Q1 and quite a lot of those actually Came back in Q2 that actually helps us with regarding to our overall pharma business during the Q2. On the other hand, we will continue to see elongated sales cycle from pharma biotech. Nevertheless, the business remains over there. It just takes longer time to close.

Speaker 7

Okay. And so just to dig in on what you said, so you're still seeing elongated sales cycles then?

Speaker 5

Relatively speaking, yes. Yes, correct. Relatively speaking, and it takes longer time and for us To a close deal, but they are not gone. They are still there. The demand is still there.

Speaker 7

Okay, So you're not so is it still the case that you're still seeing demand, you're not necessarily losing business, it's just that the sales cycle is being elongated that It's still what you guys are saying?

Speaker 3

Yes, correct.

Speaker 7

Okay, got it. And then if I could sneak in one more question. You talked about specifically some European weakness.

Speaker 2

Could you give us a little bit

Speaker 7

more color about market dynamics ex U. S? I know you already talked about China, But more specifically, some of the European weakness that you mentioned? Thank you.

Speaker 3

Yes. So it's The European business has been a little bit is lagging behind the U. S. And APAC at this point, yet Typically, the European market is much stronger on the second half. So we expect that market to pick up in the next 6 months.

Speaker 8

Okay. Thank you.

Operator

Please standby for our next question. Our next question comes from Tejas Sivan of Morgan Stanley. Tejas, go ahead with your question.

Speaker 8

Hey guys, this is Edmund on for Tasiast. Thank you for taking my question. Appreciate all the color here on China so far, but I just wanted to It sounds like it's been performing very well for you guys, but your tools peers are noting deteriorating conditions in China. So I'm just wondering what's Causing this difference in views or what you guys are seeing. Are you guys being insulated to a certain degree by innovation versus Other products?

Speaker 5

I think, yes, even in the tool space, you may see the difference between the current reagents revenue versus 2. Clearly, we continue to enjoy the incentive plan happened starting from Q3, Q4 last year. And now Coming back to see how it's going to perform during the second half of the year, this is still something we are assessing. And Indeed. I think there are lots of difficulties that we have been hearing about in China, but how it might impact us In the second half is still something to be seen.

Speaker 3

Yes. And I would just add to that, Edmund. Flow is not a new technology. So we are also enjoying demand for replacement. We are enjoying also demand because of The spectrum that we have.

Speaker 3

So overall, I think we should expect to see continued demand

Speaker 9

And on the last call,

Speaker 8

you guys noted There were certain features of the Guava that need to be implemented into the Northern White before you guys can accelerate the conversion of the user base. Can you provide some more And I was just wondering how are you guys balancing between incorporating these features into the Northern Light to drive that user base's adoption Versus focusing on the next generation platform that you're going to develop with the Agnes Imaging capabilities? I I

Speaker 5

think these are 2 different products. 1 is the high end of the market focusing more for customers in the discovery or core labs. And comparing to the Northern Lights ORBA features, So we do have teams actually working on these 2 subjects in parallel. We have different teams on different project.

Speaker 9

Got it. And then one

Speaker 8

thing, you alluded to potentially larger addressable market now that you These Luminex products in the portfolio. Could you clarify on that a bit?

Speaker 5

As you can see clearly, previously, our organic products focus more toward pharma biotech and those discovery and translation, while Guava more toward industrial QC, those type of entry level customers. Now combining these 2, now we Product portfolio that can meet the needs across varieties of user base applications.

Speaker 8

So has your overall TAM changed since your prior views?

Speaker 5

Not really overall, Time has changed. It's just we have more targeted products to focus on different user base.

Speaker 8

Got it. Thank you.

Operator

Standby for our next question. Our next question comes from David Westenberg with Piper Sandler. David, go ahead with your question. Hi.

Speaker 9

Thank you, guys. So sorry, I'm not go ahead. It seems familiar topic on China. I don't know if you can quantify it, but the remaining assumptions in the Guide on China, I don't know if you want to give us a number or say it's steady state from what you had, but just to really help us understand like maybe No, if there is further slowdowns or further commentary, how much of that guide would be at risk in that? Thank you.

Speaker 3

So, David, we don't really break out the guide this way, but we've read our guide as we do all the time and We still feel good about where we are with the guide for the year, considering the funnel and we look at the funnel Looking at all the regions. So I will maybe leave it with that.

Speaker 9

Okay, Great. And continuing on with the guidance and I realize there's some integration between the Luminex flow cytometry products And the legacy products, but I think you called it out as $8,200,000 of the Lumex revenue in Q2. I think your guidance for 25% to 30%, if I kind of take that same run rate, like I would assume a little bit of growth or acceleration for what you had in Is that the right way to think about it? Was I getting them was I reading the press release correctly when I looking at that?

Speaker 5

It doesn't work that way. Typically, you know and you know the business, right? Typically, we are a 3rd month company and most of the orders come in during the 3rd month. But on the other hand, from Luminess perspective, right, we only have about 10 months for the year. And so if you work that Numbers pretty much that will get to what we have projected for the whole year.

Speaker 9

Okay. Okay. Great. Can you talk about if there's been any surprises positive or negative from the portfolio now that you've had it since February? And then kind of continuation of that question, how is the integration going with the sales team?

Speaker 9

Is there any synergies that you're getting there that maybe you didn't call out at first? And is there any opportunities to rationalize the sales force or reorganize the sales force from here?

Speaker 5

Not really a surprise, but we do have learned a lot through this integration, right? And especially with regarding to The technology embedded in the Luminess product portfolio, more we see the value of this acquisition. And we do feel and it's going to help us not just for this year, but actually for the years to come.

Speaker 9

Got it. And since I think I am the last of 5, I'll squeeze in one more because I can do that. So on the reagents, you used the word fast growing in the prepared remarks. So Can we assume when using that kind of commentary, this is growing faster than instruments here? Is that the assumption now?

Speaker 6

And thank you.

Speaker 2

That's my last question.

Speaker 3

Yes. David, it's going faster than the our Total revenue? Yes.

Speaker 9

Thank you, guys.

Operator

I am showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.

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