Cytek Biosciences, Inc. (CTKB) Earnings Call Transcript & Summary

Hey, everyone, good morning. My name is Tejas Savant, and I'm the life science tools and diagnostics analyst at Morgan Stanley. It's my pleasure this morning to host Cytek. And from the company, we have Wenbin and Patrik. Thanks, guys, for doing this. Wenbin, maybe just to set the stage for folks not as familiar with Cytek. Can you just give us a 2-minute introduction to the company, and what is it that you'd highlight as your key accomplishments since IPO?

Sure. And I think Cytek went public last year, since then the company has continued to execute based on what we presented to the investment community to the public. Over the last 12 months, we grew our revenue consistently quarter-by-quarter. And also, one of the differentiation factor for Cytek is we operate the company based on making sure we continue to maintain the company's profitability while keep the growth momentum. And so this is how Cytek differentiated from many of the peer companies in this space. So Cytek today, on cash-wise, definitely is a profitable company, and our intention is to continue to maintain this type of operation philosophy to make sure a company investor coming in and not see continued cash burning. So this is what we do.

Got it. Before we get into the details on some of the product lines, I want to ask you about the competitive landscape, how has it evolved over the years, when do you find yourself missing out on an installation opportunity, and do you see any narrowing of the delta in terms of either the specs or the pricing, particularly given the recessionary environment we're in?

Cytek actually launched our first product 5 years ago, and with our product, our technology, we have changed the landscape of the flow cytometry industry in the cell analysis space. We continue to lead in the industry on the technology on the products, in addition, and we make sure we continue to focus on our operational excellence, making sure we can deal with any of the market situations can be competitive, can be flexible to deal with -- even under today's macro economy, we can continue to be able to be competitive. So I think based on our operation, our performance, we have been executing well.

Got it. Every once in a while, we get questions around why you see yourself as complementary to some of these emerging approaches, including special biology, single-cell sequencing, et cetera. So walk us through that sort of dynamic and how customers are using you guys versus some of those peers in a complementary manner?

I think flow cytometry has been there for quite a few years, 20, 30 years. It's a long history. It's a well-established market. Many people in the lab, they are familiar with this technology. What Cytek has done is, we realize the needs of the industry moving more and more towards a high-dimensional cell analysis, while the existing technology is not capable of following through to meet the needs. So looking at the landscape and we realize what we can do is to leverage many of the technology already being adopted in the other industry like the telecom space, a mature technology, that really move the technology from the [indiscernible] technology towards the 21st century. So through that process, we developed the current full special flow cytometry, really move the whole industry towards the future. And so that actually has enabled the company to continue to stay ahead to meet all kinds of challenges and the needs of our customers. Now, what we have done and certainly in this space, lots of new innovations and in the other space, we see ourselves as the kind of default technology people are familiar with, people will go immediately and certain leveraging what we have and to combine our technology with the other technologies really to provide more information for our customers, for our clients.

Got it. And just pushing along that stream of thought a little bit. Can you talk to us about the core IP here, why do you think that your competitors cannot get to the same effects in the cost structure and hence that lower price point unless they just decide to sell at a loss?

No, that's a great question. In fact, if you look at what we have, flow cytometry evolving lots of top notch technology we have developed, including like laser technology, detection technology and as well as the whole integration part of the IPs, over that process, we, in fact, have filed many patent applications, IPs, surrounding our technologies to make sure we are very well protected and we can continue for many years to come. And so I think so far, at least, we can see during the last 5 years since we launched our first product, we haven't really seen any competing close to what we have got in terms of both performance and the cost structure.

Got it. Can you help us parse out what percent of your placements are typically replacements of existing instruments versus new [indiscernible] installs?

We actually haven't done any study with regarding to that aspect. But if you look at our applications, we not only support the conventional type of research needs, we are also driving the new high dimensional cell analysis, which conventional technology is not capable of doing. Now from our customer base, there are 2 type of customer. One is the conventional academic research type of customers. Another is the commercial customers like pharma for a new drug discovery by CRO, biotech for sale and the gene therapy side. So our technology is actually designed to support both end of the applications. Early days when we first started, 100% of our customers in the research side academic side. Today, in fact, last quarter, we disclosed 60% of our customers are in pharma biotech, those commercial customers. That shows a great interest in our technology penetrating the most majority of the applications today and also give us a bright future for what we have.

Got it. Remind us about how you think about sizing the market in terms of annual placement opportunities available to you, and the other question is, how does your share of the overall global installed base compared to your share of installs that happened over the last 12 months across the industry?

This is, again, a very, very difficult question because flow cytometry, as we know and already been there for more than 30 years. And over that time period, and a lot of installed base, in fact, if you look at all the market studies, many are talking about more than 50,000 total installed base globally. And every year, we are a lot more than 8,000 instruments being deployed. So Cytek being a new player in the space, we actually had maintained our high growth momentum during the last few years, continue to deploy more and more insurance. However, in terms of actual percentage of the space, we are still small. And I think we reported 1,356 instruments for our installed base that compared to 50,000 is single digit. But that just means a great opportunity and with what we have, clearly, the whole industry has get to the conclusion that Cytek technology, full special flow cytometry technology is the future of the flow cytometry future of the cell analysis. That just means we have a bright future in field and great potential for our growth.

Got it. Switching to the product side of things, can you speak to recent traction on the sales order? And just any sort of like interesting month-over-month trends there?

We launched our sales order last year, and by now it’s already more than 12 months. I think over that period, certainly, we see our product, our [indiscernible] growing just like [indiscernible] new products and going through a whole sequence of process from going like any new product, and it's a kind of projects that you go through the training, go through the manufacturing improvement. In fact, we have gradually sorted out all the kind of [indiscernible] process required to support a new product. We continue to see our order growing quarter-by-quarter, great potential here. We believe [indiscernible] going to be one of the key revenue generators for the next 3 to 5 years.

Got it. And any color on the mix of new customers versus existing Aurora customers? And is that, in your mind, sort of potential for cannibalization of demand year between the analyzer and the Sorter -- given that the sorter can perform analysis of the same plex and target similar customers?

Yes, they are a full type of customer. And the first customer type of customers, they already got our analyzers and using our technology, find many kind of new sales of interest, which we would like to do further studies. Those customers definitely would like to use our Sorter to take those sales out for the downstream analysis. This is the super set of customers. All of our current analyzer customers have become a basis for our Sorter customers. The second category of customers are those who always would like to pursue analyzers and [indiscernible] in a pair. And those customers previously, we won't be able to support now, they come to Cytek [indiscernible] represent the new opportunities for the company. Now since we have both analyzers and a Sorter and definitely is going to provide us new opportunities, which not presented before.

Got it. And turning to the sample loader, any color on traction on the automated loader post IVDD certification in Europe last year?

Actually, it has been tracked very well. And in fact, most of our customers purchase our loaders together with our analyzers. So I think [indiscernible] out there, especially in pharma, for their study, they always need autoloader. And especially our payload has gone very well with those customers. And then clinical customers coming to Cytek for our new loaders, which has a [indiscernible] capability.

Have you ever had the price of the instrument, and how do you think about impact on placements in Europe and increases in pull-through following the launch?

I think [indiscernible] you have a better number there.

Yes. We don't really disclose pricing on these loaders, but we've seen ongoing activity with all the instruments as Wenbin was saying.

Got it. Okay. Turning to reagents, at a high level, what are the advantages to a customer in terms of using your reagents versus third party? And is there a point where as your installed base scales, we could see you perhaps consider a closed-loop system so that you capture all the consumable sales?

That's another great question. And first year internally, we focus our revisions in 2 aspects. 1 year since we have an open system that can work with any of the off-the-shelf regions out there. Second is, in order to take full capability of the parameters that our [indiscernible] support, you need [indiscernible] reagents. They have a lot of gaps, which are not available today. And so Cytek focuses on developing those type of gap revisions. Second part is, once get to the high dimensional cell analysis. In fact, the panel construction is very challenging. And so Cytek focuses on those kits and optimize the kits, and that really enable our customers to get on to our technology, our tools rapidly. And so that helps customers to simplify their research so they can get on to their outcome, what they want to do right away instead of spending many months if not yet, trying to optimize a complicated sophisticated panel. So this is the direction of our reagents. We think from that perspective, in fact, there's even no need for us trying to close our system because we optimize our site [indiscernible] for the convenience, for the ease of use of our customer, definitely bringing value to our customers. So that not necessarily means we don't want to close our system we can, but on the other hand, I think we would like to really to make sure our customers can continue to leverage our technology for their research use objective for that purpose, probably an open system will do better for our customers. That also will come back for more of our technology stay with Cytek.

Got it. And then, Patrik, perhaps you can take a crack at this. How do you see the reagent contribution trending as a percent of sales over the next, let's say, 3 years? And can you just update us on how many C flow reagents you still have in development?

Yes. So if I address the first question about the reagent revenue. So the expectation is the reagent revenue as a total percent of sales should go up. And the expectation should be 30% plus over time. So that's our first indication. Now related to the number of C flow, we have modern C flow floor panel. So it's increasing. I think we rolled out another 3 just earlier this week or last week. So this is going to continue over time as we continue to grow the business.

Got it. On geo trends here, Wenbin, you've previously noted a little bit of an elongation and decision time lines in Europe. Have you taken any actions such as providing perhaps discounts to help customers offset some of these FX headwinds, and do you expect sort of any of these sales that you missed out on earlier to be recovered later in the year?

First is, if you look at the overall growth in terms of number of instruments, we are actually growing across all territories in the world. And the headwind we are seeing mostly in Europe is the FX, foreign exchange. We know the difference is about 20%, 17% to 20% in order to just to break even, you need to make sure your revenue grow by that amount. And so our revenue is still growing in that aspect. But on the other hand, we would really like to make sure we continue to -- in other sense, we will also grow. And we look at the U.S. side. In fact, in the last quarter, we did very well, 50% in APAC, 80%, in fact, expected China, we have done very well over 100%. Now Europe, we do look carefully and try to device strategy to ensure we can outperform the kind of foreign exchange difference as well as a prolonged decision-making process. Here, I think we are designing the strategy to [indiscernible] that.

Got it. Are you seeing any impact from the energy crisis in the region or perhaps government budgets for these projects getting compressed a little bit here as governments focus on subsidies and so on.

Actually associated with the earlier question was regarding to the elongated decision-making process. Our products are capital expenditure mostly because our revision just started to give us more fraction of our overall revenue, capital expenditures on annual budget. So we haven't really seen true impact yet, but we are still assessing how it's going to affect us next year.

On China, you've been very confident and not seen much of an impact from lockdowns in the region. More recently, obviously, Chengdu, Shenzhen, et cetera, have seen lockdowns. What are the current operating conditions like in China, and do you feel you have enough sort of conservatism baked into the guide for any prolonged shutdowns there?

We did encounter some shutdowns in Q2 or towards the early part of the Q3. We have our manufacturing in Wuxi, which is about 50, 7 miles away from Shanghai. And we also know Shanghai had quite a long period of shutdown. But we have our [indiscernible] we do some of the research in Shanghai and many of the software development in Shanghai. That's why even though the office is shut down, our employees can continue on the software side remotely. So there is not much impact with the manufacturing. And we actually have been dealing with the local government. And I think overall, we don't really see much impact. In addition, we do manufacturing on both ends, both U.S. and China. We cover each other, making sure we start enough inventory to cope with any unexpected situation. So up till now, I think we have done very well, and I don't think there's any obvious impact yet. But of course, if China continues to shut on the whole country, then it's hard to say -- but at least so far, we are doing very well. And we have deal with -- in fact, we have considered all kinds of situations and to make sure we can deal with this.

Got it. And on the clinical side of things, Wenbin, obviously, you've got IBD certification in Europe, any color on traction for the single color reagents and the BNK kit? And third, a similar question on China as well. When do you anticipate receiving approval there?

China actually is kind of a different clinical approval process from the U.S. So U.S. 510(k) is a kind of solution process. China actually separates [indiscernible] from the reagents. So we have our [indiscernible] clinically approved S-Class I instrument. And reagents, there are 2 types of reagents, one is Class 1. As an individual reagent, we have many of our reagents clinically approved. Then Class 3 require a clinical trial, and we have already finished the clinical trial. We submitted our application. We expect sometime next year, we will get the clearance. In the meantime, we have been shipping our clinical instruments to many of the clinical labs in China. In fact, it has been done very well. I think almost 50% of our revenue in China is for clinical applications.

Got it. Patrik, one for you on inflation in the supply chain. In the past, you've talked about building up inventory levels and you noted sort of starting to see normalization there. Just given more recent trends, any updates to how you're approaching that, and anything to think about in terms of implications for cash flow?

Right. So no 2 incremental changes to this environment. Obviously, we've seen price increases from vendors, which we've been -- we've worked with our vendors just to make sure we have also products on time. Overall, we are a little long on inventory just to protect us, and we expect this to go into beginning of next year at this point.

Got it. And then, Wenbin one for you, you have a Chief Commercial Officer who's been in the seat for that almost half a year now. Have you guys identified any new initiatives, new approaches or any potential areas that need to be strengthened further?

Absolutely. And we are so glad to have Todd joining us as our Chief Commercial Officer. If you look at the whole industry flow cytometry across the geographic locations, typically U.S., EMEA and APAC should be 1/3 each. Today, Cytek is primarily having our revenue in the U.S., North America, 60%, Europe, 25%, APAC about 15% -- so we see great opportunities, more potential for us internationally during the last few months. Todd has spent a lot of time and they're trying to define our strategy internationally to continue to grow our business to make sure and we are more in line with the whole industry.

Got it. Patrik, back to you on the guide, any updates you're thinking there and particularly around sort of the low versus the high end of the range or perhaps 3Q versus 4Q in terms of seasonality? And then is there anything that we need to be thinking about as we frame 2023 growth that I think the street is around 28% to 30% or so?

Right. So maybe just to frame the discussion here. So we ended 2021 with 128 million, which was about 38% growth year-over-year over 20. We define our guidance earlier this year in February to be between 160 to $168. We had a strong Q1. So we upped our guidance to the close of the higher range. On the second quarter, we reaffirmed that as well with a second very strong quarter. So currently, we are still closer to the closer of our -- the upper end of our guidance. And when I look in the out at least for next year, there is no reason for me to believe at this point that the growth rate would be materially different. We had an amazing CYTO conference early in the year. We continue to see great demand for our instrument, the Aurora, the Northern Light and the Cell Sorter today, while we're also growing our reagent business. So overall, very positive elements.

Got it. And then a follow-up on gross margins. It's basically a 2 part. One, is there a big difference in gross margins across the analyzer, Northern Lights in the Cell Sorter? And then can you remind us of the difference between instruments versus reagents which will obviously be more meaningful as reagents start to scale?

Yes. So I mean expectation on gross profit margin was 65% range and plus and continue to build the gross profit margin on process improvement on innovation and so on. Typically, instrument has a high gross profit margin. And I think in the industry, it's probably one of the highest. The expectation is that the rating should be at the same level or above at this point. So overall, I think these 2 are very complementary for us from a gross profit margin point of view.

Got it. And then how are you thinking about OpEx here, particularly into 2023 as you look to make investments on the commercial side as well as in R&D?

Yes. So Cytek has historically invested in these key areas. So we've invested, obviously, in R&D. This year, we've made a substantial investment also in sales and marketing. So these are key areas for us that will help us for the future growth, and we'll continue to invest while we obviously want to remain profitable as an organization.

Got it. And then last one for me in a minute or 2 here. Wenbin, I just wanted to get your thoughts on the recent shelf registration. I mean, considering your current cash position, can you elaborate on why you decided to put in that S3 filing, was this just an insurance policy for bad weather or could we see you get more active either on organic or inorganic efforts here?

I will first comment on the merger acquisition side. Patrik can cover the rest. And as what you have said, and we are basically following the kind of standard process of the industry and not really like we need the cash. Cytek is profitable, and we are financially we are very strong. In fact, the [indiscernible] is inactive and even though we have filed. But on the other hand, we are looking opportunistically on any potential targets, which may be complementary to our technology that will enable leveraging our technology to grow the company faster and expand the company. So that's one of the reasons we are doing this.

Yes, nothing to add to that, absolutely.

Got it. Fair enough. That's a great place to leave it at. So thank you both for joining me this morning. We appreciate it.

Yes. Thank you.