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

Good afternoon, everyone. My name is Matt Sykes. I'm the life science tools and diagnostics analyst at Goldman Sachs, and I have the pleasure of introducing the senior management team from Cytek Biosciences. CEO, Wenbin Jiang, to my right; and Patrik Jeanmonod, the CFO. Patrik, Wenbin, thank you very much for joining us today.

Thank you.

Maybe if you could just sort of start with 2 things. One, maybe for those in the room, introduce who Cytek Biosciences is, just a brief overview of the company and sort of the markets you are involved with; and then two, reflect on Q1 results and sort of what your expectations are as we go into the second half of this year.

I will first talk about what Cytek is, and Patrik is going to follow with the numbers. Cytek is a company specialized in cell analysis, and we provide advanced flow cytometry instrumentation and solutions to support many life science labs, pharmaceutical companies, university core labs for advanced research as well as translational and clinical research applications.

So maybe briefly, I'll talk about Cytek last year. We closed 2022 with a 28% growth rate over the prior year and landed about $164 million in revenue. So we're very pleased with our numbers last year. Q1, slightly different story. We had a 6% growth rate over last year coming out of an extraordinary [ ADA ] in Q1 of last year. In Q1, we also added the newly acquired Luminex business for 1 month. So we closed the acquisition of our business in end of February and we added 1 month of Luminex activity. So the company is now transitioning to organic, nonorganic information, and we'll provide that in the next quarters through the end of the year. The year was -- the quarter was -- the reflection on the first quarter is mostly a little bit of a headwind in the U.S. market. What we've seen is the -- eventually the banking crisis has created some tension and we've seen elongated sales cycle on closing the deals with some of the customers. But at the same time, we also see continued demand for instrument. We've seen this elongated sales cycle in Q1. Overall, I think we're fairly pleased. I mean we still have a fairly solid gross profit margin. It landed at 59%, but we expect that gross profit margin to stay in that line or grow over the next couple of quarters, again, back in the 60s-plus.

Great. And maybe let's talk a little bit about the technology in flow cytometry. I mean you have a full spectrum of flow cytometry instrumentation, and when we were doing work on this sector, we noted that there was a real lack of innovation in flow cytometry for quite some time. And then Cytek comes along and really has a differentiated instrument with the new technology. I'd love to kind of hear your view as how you feel Cytek is differentiated from the competitors.

I think, yes, flow cytometry by itself started 30, 40 years ago, and over that time, gradually evolved into basic life science tools. So today, you can find varieties of flow cytometries in almost every life science lab or supporting from research to clinical applications. Over time, as the research, drug discoveries and immuno-oncology continue to evolve, with the new drug development, new research coming along, they require more and more deeper understanding of the cells. And then the conventional flow cytometries start to hit a technology limit. And so this is one, and there's a market demand and there's a need, but original technology is already unable to meet those needs. So Cytek comes along. What we have developed is a technology, we call it a Full Spectrum Profiling technology. In essence, that provides a lot of more information. Basically, we provide a technologies that can capture all the information without throwing away anything, any details. With that, what we have done is we provide a deeper understanding and analysis on the cells from new system perspective and a deeper understanding. Second part is the technology enabled a lot sensitive studies actually provide a lot of details and make it a lot more sensitive than the conventional technology. And then one of the important subject is conventional flow cytometry. I find it always difficult to be standardized across labs, across tools. But standardization is, in fact, important for many of the clinical trials. Cytek technology does provide those type of features to enable customers, users to standardize, especially for CRO to standardize across instruments, across labs, across different geometric locations for their tools. And finally, it's always important on a cost perspective, and you always would like to have the best results at the lowest possible cost. That's what our technology comes along.

Got it. And maybe for -- move on to the acquisition of Luminex, which I think was a pretty important milestone for Cytek. When we kind of first saw that news, we felt it from an infrastructure standpoint, it was a really solid deal. You're inheriting a global commercial team and then selling the Aurora Northern Lights platform, presumably into that Luminex installed base, maybe could you talk about what progress you've made in terms of going after this installed base and where the training of that commercial team kind of stands at this point?

Yes. Maybe I can start and then maybe Wenbin can augment. So looking at the integration, we will look at it from 3 angles: people, process and clients. So when looking at the people side, we've fully integrated all the people here in the U.S. We have a final step in -- outside of U.S. and Europe, but outside of that, the people side is fully integrated. We have trainings in March for the customer-facing group in the U.S. We have training in Europe for the customer-facing group in April in Europe and in China. So we feel like we've made absolutely great progress integrating that group. On the process side, we've fully integrated the manufacturing for the Amnis in Seattle, Amnis, that's fully integrated in our systems. That's completed. The Guava coming out of the Austin manufacturer, that still belongs to DiaSorin. That piece will be moved out of DiaSorin in the next couple of months and will be moved to China. So we're making good progress on that, too. And then finally, on the client side, you see that deal has opened up a new avenue for us. And -- I mean, so far, we've been able to strengthen the relationship with most of these clients. At the same time, we believe that there's continued opportunity for us to cross-sell, to upsell and we are just at the beginning of this journey.

Maybe digging a little bit deeper in that on the on the Guava's cost structure. You were trying to align that closer to the Northern Lights platform in addition to the transition of 3 laser Guava users to the Northern Lights. Where does sort of that stand today in terms of that integration of Guava into your product platform?

Yes. So the Guava product line, obviously, has a much lower gross profit margin, which is another very attractive to Cytek and also a slightly lower gross profit margin and eventually a lower gross profit margin to expect in the short term. But we are very aggressive at looking at recasting. Obviously moving the Guava business line to China will help, but also in the redesigning some of the platform will also help. I'm not expecting the gross profit margin to go up substantially this year just because of the Guava profitability profit margin, I should say.

And then just on Amnis, I mean I think it gave you some really good imaging technology. Can you talk about what you found attractive with Amnis? And you've talked a little bit about how that integration is completed, but maybe from a technology standpoint, what you gained from the Amnis platform?

Yes. I think if you -- some of you, if you may have attended the annual cycle meeting in Montreal last month, actually, you will realize there are 2 major themes in that show. And one is the full spectrum technology pioneered by Cytek and now really -- now today becomes a trend and a movement and the whole industry is moving towards the field that Cytek has created under the [indiscernible]. Then the second thing is actually the imaging flow cytometry. We all know Amnis imaging flow cytometry is a leader in that space, and now Cytek owns both of those technologies today, really the future, also the direction the whole industry is moving towards. I think regarding to the Amnis technology, one aspect is the precise and the clear high-resolution imaging at a very fast speed to enable users to actually capture on a cell level, cell by cell, and for them to understand or analyze not only between the cells as well as inside the cells, that kind of information. Second is the AI technology for the data analysis. That actually helps enables the rapid fast detection and analysis based on imaging provided by the tool. So those are the things that really fascinated and attracted Cytek, and we feel not only the Amnis flow cytometry imaging by itself, from an analysis perspective, has great potential to penetrate into Cytek's customer base, support Cytek's customer needs. In addition, that technology -- by integrating that technology with Cytek full spectrum will provide a new level of tools or technologies based on the imaging as well as to enable customers to imaging-based sorting. So those are the type of direction and the technology we are studying, we are moving toward, going forward.

That's a really helpful explanation. And Patrik, we've talked in the past about the reagents business. I mean when you first started out, you were a hardware business and your customers were using third-party agents. But over time, you've built up your own reagent capability. Could you maybe give us a sense of kind of where you stand with that and what progress you've made and what the customer feedback has been to the Cytek reagents?

Yes. A great question. So before I go into the reagent, so maybe I want to remind the group here that we have -- our long-term strategy is investing in 4 pillars. And these 4 pillars are the instruments which we've just closed on our Luminex acquisition. That's number one pillar, then application, I'll come back. Bioinformatics, and finally, clinical. So long-term strategy, we have fairly defined projects. On the reagent side, so last year, we communicated that we would be mid-single digit as a percent of revenue for reagent, and we have seen that revenue component of ours increase substantially, and it's one of the fastest-growing line item embedded in the product. So it's not booking out. But at the same time, I can say it's growing. This year, we still expect to continue to grow, and we believe we're going to be closer to the high single digit, the total revenue. Why only single digit? It's just because we added revenue from Luminex, and that dilutes our reagent business a little bit. But overall, customers have come back and buying these kits, and I'm fairly pleased to see where we are with this reagent. And it's not just in the U.S., but it's also in Europe. So very pleased with that.

Yes. Actually, I want to add a little bit on top. With regarding to Cytek Cloud, it is a informatics system we have developed. One of the features of Cytek Cloud is to help customers to design application panel, optimize panel as well as to provide a data analysis capability. Through that process, to enable also customers to find the right reagents, to purchase the right reagents. So this platform is eventually going to help Cytek also to grow our consumable reagent business. And actually, that platform has been very successful so far, and we accumulated thousands of users already in a very short period of time.

And just a follow-up on that, because I think it's a really interesting point. What do you think does Cytek -- [ is in the ] cloud actually adds to the stickiness of the customer base? Because you're creating a bit of a captive audience there with that cloud. And maybe talk a little bit about what bioinformatics can add to sort of customer loyalty and stickiness of those customers.

Absolutely. And as you know, what we have is really advanced tools out there and support very complex panels and applications. And from a user perspective, they definitely appreciate if the company can help with regarding to the application panel designs. Cytek Cloud makes it a lot easier for them. We can start from what we have provided. We have a base panel templates, and we have the right reagents optimized for Cytek's instrumentations. And all of those enable customers just to put all those panels together, and they can start to do the online virtual experiment before moving on to a real instrument they have in their labs that quickly reduce their cost of experiment, reduce their development cycle time, and in the end, help with also on the reagent side. They don't really have to try that many different versions, and we have this right there to help them. The reason why -- it has been very popular right now among many of Cytek's users.

Got it. And then, Patrik, you mentioned at the outset talking about the lengthening sales cycles, and I think one of the things that's been discussed at length during this week has been sort of both emerging biotech and also large pharma softening in demand. Could you talk a little bit about -- you spoke last quarter about the delayed orders from caution from customers. Have you realized some of those delayed orders? And how has the dynamic changed? Has it gotten better? Has it gotten worse? Stayed the same?

Yes. It's a tough question, but the way I would answer that is, so earlier this year, economists defined the macro environment as potential recession. Then in the last couple of weeks now, we're talking about a mild recession. So I think we moved from recession to mild recession and may eventually improving over time. What we've seen with our customer base, obviously, the reaction considering that we have instrument as a primary element for sale is CapEx driven, and CapEx driven is maybe one area that you can act quickly as a CFO if you want to protect your cash. And I think we've seen some of that. Now to answer your question about what have we seen since, so we've seen a level of rebound in April, but 1 month does not give you a trend. So -- but we're pleased with what we've seen. I think we continue to see strong demand for our instruments. We see strong demand for the cell sorter. We crossed the 100 instrument line just a few weeks back. And if I make an analogy to what we -- when we launched the analyzer, so the analyzer, the oral analyzer, was launched in 2017. And in December of 2018, we had 100 instruments. So it's a fairly similar pattern, and I think we are pleased to see how it follows this pattern. What we're also seeing is that customers now not only buy the oral but also the cell sorter combined. So we've seen a positive behavior from customers, and we see that as positive going forward.

Yes. I wanted to touch on the cell sorter because as you said, you recently announced the 100th cell sorter sale. That's one of the higher ticket items that you do sell, and so it's interesting to see that the momentum continues there. Is it because of that combined sale that's driving that? Or is the level of differentiation in terms of your cell sorter really allowing it to kind of disconnect a bit from sort of that softening end market demand.

So I can start with the -- my view on that is, obviously, the fact that the cell sorter combines so nicely with the Aurora platform, it makes it fairly easy to sell together as our bundled sales. I think because we have such a large customer base that are already using the Aurora, pairing with a cell sorter makes a lot of sense. So overall, I think the technology is superior. I think it's a lot easier to use from a customer side. So that's the -- I mean, overall, I think the cell sorter will continue to see demand and very strong demand for it.

Yes. I would like to add on top of that. As you know, over the time, we have developed, accumulated, a large installed base for our Aurora tools analyzers. And along with that, and a lot of panels and the applications are developed on our tools. Many of those customers says, okay, they use our tools and discover many new things in cells, and they would really like to go further deeper onto that and says, okay, can I grab those cells, certain population out, sort those out so as to enable me to do further analysis? Under that assumption, then what they really need is a tool that can use the same panel already being used on the analyzer. This is where Cytek Aurora cell sorter comes along. Because no other cell sorter is going to be able to leverage, use the same panel already being used on our analyzer, and Cytek cell sorter will, therefore, be a natural choice out there to enable customers to use the same panel. And they actually -- the Cytek cell sorter and Cytek analyzers are pretty much, from an analysis perspective, they are identical. So the panels, you can move back and forth. And so that really gives us an advantage and also secured our customer base for our cell sorters.

Got it. And then just talking about sort of the CapEx decisions. You have the Aurora, the Northern Lights on the analytics side, and then Northern Lights is a lower price point than Aurora. Could you talk about maybe are customers choosing the Northern Lights just given the budget constraints they have? Or are you seeing, in terms of a mix of Aurora and Northern Lights, a similar mix that you've seen previously?

Yes. So we -- since middle of last year, we've had a concerted effort to push the Northern Lights business line. I mean, we've seen -- I mean, Aurora instrument came out in 2017, later on the Northern Lights. So we've seen amazing growth in Aurora. But we also believe that there's opportunity in that mid-market element, and we've pushed on the Northern Lights. So we see demand for the Northern Lights and increased demand as well. So overall, I think a positive trend with all the same customers in the end. It's a biotech and pharmaceutical.

And you're achieving similar margins with both of those instruments?

Yes, very much, yes.

In terms of China, you had a very strong quarter last quarter, overall international, but China as well. I know you've been making a bigger push into the clinical market in China, but maybe could you talk a little bit about the strength that you're seeing in China and whether you feel like that's sustainable over the course of this year?

Overall, yes, we have been very successful. And on the clinical application side in the China market, this is also partially contributed to China as a different -- from a regulatory perspective, China clear the instruments separately from reagents from solutions. In the U.S., 510(k), they do this all together as a full solution. China does this separately. That enabled us to, in the early days, to have our instruments cleared for our Northern Lights-CLC. And right afterwards -- and we have developed the solutions on the Northern Lights-CLC side to enable many of the high-complexity leukemia diagnostic applications. This is something conventional instruments are challenged. By doing so, we have a big panel and really making such work a lot easier for our customers. We penetrated into many of those leukemia labs in China using our Northern Lights-CLC. That's partially the kind of success we have over there. Of course, clinical is different from territory to territory, and the success in China not necessarily means for the U.S. U.S., we have a separate clinical activities ongoing. We are closely engaged with FDA on the U.S. clinical clearance. But in the meantime, we have launched this MRD leukemia panels, and we're leveraging this leukemia panel. We work with many labs in the U.S. as well to develop LDT solutions to support -- to enable our partners to get the leukemia solution cleared so they can support their version of the MRD diagnostics over there. So this is one of the direction of the company, not only in the U.S. as well as Europe, Asia.

You started to answer my next question, which is sort of the applicability of the local clinical markets. I think maybe expanding on what you just said, talk about the U.S. clinical market. It's a very large market, so there's a significant opportunity there, but there are some challenges to getting into it. But maybe talk about how you feel like in terms of penetration, what you can do with LDT versus what do you think it opens up post FDA clearance as you continue to work with them.

From clinical, U.S. clinical perspective, there are 2 part of the clinical reimbursement. One is 510(k)-cleared. Company provides the full solution instrument along with the reagent panels. And the second part is the LDT. Now when we look at Cytek technology, what we really excel is those large panels to reduce the tube size, number of tubes. And we can provide high dimension parameters with a single tube. Through that process, we can really help to reduce the overall cost of doing the analysis and as well as to shorten the time and reduce the number of tubes and improve, increase the sensitivity, as you don't really have to split your precious samples into multiple tubes. And then with all that, pressure cells into a single tube that can help you to find the right cells of interest. This is what we feel are the benefits, advantages, of the tools of the technology we have provided. The reason why we are, from an LDT perspective, focusing on that aspect in the U.S. market for now.

Got it. And then, Patrik, going back to the first quarter, you revised the '23 organic revenue outlook lower. You increased Luminex revenue contributions, though. Can you maybe walk us through some of the puts and takes of that lower guide? I mean I think some of it likely has to do with sort of the lengthening sales cycle that you've already kind of walked through, but maybe talk to us a little bit about looking at just the organic kind of base business growth. What were some of the puts and takes in that guidance lowering?

Yes. So one expectation that we had with the acquisition of Luminex was to be able to convert some of the Guava customers into Northern Lights. What we discovered is that the Guava instrument has some technical capabilities that the Northern Lights system does not have today. One of them is the Guava platform actually has a very simple menu process that's, I would say, less sophisticated than the Northern Lights. And for the customer base, let's say, it is an element that is driving that. So as a result, we've lowered our Northern Lights revenue a little bit and increased the Luminex revenue. That's a little bit the puts and takes.

Got it. And maybe talk a little bit about -- on the margin side. You mentioned the 59%, and you expected to kind of hold that line. On the operating margin side, I think it gets lost, just given the sort of dynamic of companies that were coming public when you did. You were one of the few that actually was profitable at the time and you continue to be, but maybe talk a little bit about OpEx operating margin expectations over the course of this year.

Yes, thanks for the question. So I mean we have that gross profit margin of about 60%, and obviously, that's going to support some of the SG&A. So we're going to continue to invest in SG&A, and we have last year, so we're going to continue to invest in sales and marketing and R&D, but also G&A as a publicly traded organization. What we will do at the same time is manage our income segment so that we remain friendly to our P&L. And what I mean by that is we will -- one key area of spend is obviously headcount, and with the addition of about 140 people from Luminex, we will manage our total headcount to remain within what we believe is getting us to a profitable stage on an annual basis. So we as an organization, we committed to remain profitable on an annual basis even at a net income level.

And then maybe talk a little bit about the -- what came with the Luminex acquisition was a significant commercial presence, and therefore, how does that factor into SG&A spend? Because a lot of -- without Luminex you probably would have been building up the commercial team. With Luminex, you might actually have to do that. So how should we think about SG&A spend over the course of the year?

Yes. So I think we'll see a little bit of a transition phase in the next 1, 2, maybe 3 quarters, where we're going to integrate obviously the team. We're going to push the top line on the Luminex on organic side. And as we integrate the staff into the sales group and marketing and field service engineer groups, the expectation is for us to improve the gross profit margin just because of scale and also to continue to see our operating margin improve over time. So the expectation is that we should see some of that already happening, maybe not in Q2, but in the latter part of this year.

Just to add on top of that, now with our organic growth and we -- our budget plan, we already have a plan, a need, to add additional commercial people. The Luminex acquisition actually helps us to have those people right out there. Of course, in some areas, there might be some redundancy, but most of those areas, if you take a look at most of the people we have on Luminex side, the Europe, APAC, this is an area and we had a plan to grow substantially. And Luminex has been helping us to shorten the time to hire. And also all of those are very experienced experts in the flow cytometry space, which are actually kind of difficult, it takes a long time to add if we have to hire organically. And so this is another advantage, another benefits of having this Luminex acquisition in place.

And then Patrik, just Cytek has historically followed a seasonal pattern for revenue skewed towards the back half, and you cited this year will be -- there'll be some -- maybe a little additional seasonality concentrated in the back half of the year. Could you maybe talk about how we should think about this dynamic going forward? It's fairly typical of the industry, so it's not a Cytek necessarily specific comment, but maybe talk about sort of how you deal with the seasonality? And then is the additional sort of back half weighted? Is there some expectation of recovery also baked in there? Or is this just the normal seasonality that you typically see?

Yes. So on the seasonality, you're right. Cytek have seen -- if I look back the last 3, 4 years, I mean, we've always seen a second half that's a little bit softer than the second half of 43%, 50-plus percent. So this is not going to be different. With -- in addition, a little bit of a headwind, considering the macro environment that we've seen. So the expectation for us is to do -- to have a second half that's going to be a little stronger just because we're also adding that customer-facing group from Luminex that's going to be fully trained, that needs to be fully integrated in our system. And I think we are making great progress towards that. And I think the company has executed, if I look at the last 4, 5 years, quite well along all these lines, and I believe that we are in a similar situation.

Got it. And then just in the time we have left, you obviously did a larger -- for you, a larger acquisition in Luminex. But how are you thinking about sort of capital deployment and M&A in this landscape in terms of where valuations are and where gaps are in your portfolio?

So I mean we'll continue to look at the M&As. I mean we're going to remain opportunistic. I mean we have $300-plus million in cash. We've put a little bit of money aside for the buyback, which we announced a couple of weeks ago. We announced a $50 million buyback. So that will happen, and we've reserved some of that. We look at -- we never stopped really looking at acquisitions, so I think we'll continue to look into those. As we finalize the integration of Luminex, I believe that we would be ready for the next acquisition. It might later this year or beginning of next year. There are key areas going back to the 4 pillars. I think we've invested now in the instrument side. I think that still key areas that we can further invest into for maybe at a different time, we can talk about it.

Okay. Good, we'll leave for another time. We are running out of time, but thank you very much, Wenbin, Patrik. I really appreciate it.

Thank you.

Thank you.