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

Good afternoon, everyone. Welcome to day 3 of our Morgan Stanley Global Healthcare Conference. My name is Edmund Tu. I work on the life science tools team here at MS. Before we begin, I want to remind everyone important disclosures can be found at morganstanley.com/researchdisclosures. And it's my pleasure to be hosting Cytek Biosciences today. And on-stage representing the company, I have Wenbin Jiang, CEO; and Patrik Jeanmonod, CFO. Thank you guys for coming and welcome.

Thank you.

Thank you.

I guess to start, Wenbin. Can you talk about what you think is Cytek's key accomplishments over the past 12 months? What were some things that you could have done differently? And what are you most excited about going into '24?

During the last 12 months, a few things we have accomplished. First, on the instrument side, we have really grown our sales order business. And as you can see, we had a press release and achieved that 100 sales order milestones in Q2. And on the Revision side, we launched a few new kits, including our leukemia panel as well as the MDSC new kit, new panels to support our user base, the applications for our technology. And then we acquired Luminex assets, including Amnis imaging for cytometer as well as Guava that enabled us to own the great technology on the imaging side, the imaging flow cytometry as well as entry-level [ milled easy side ] technology to support the general user base for the -- for cytometry.

Great. And I guess just looking across the competitive landscape, how has it evolved over the years? And where do you find yourself if you do missing out on opportunities to install instruments? And how has the pricing or specs evolved more recently?

I think from cytometry perspective, over the time, and you can see the gradual involvement and early days and based on the conventional technology, we realize, notice, it actually hits the [indiscernible] the bottom to support today's immunology and immuno-oncology applications. That's the reason why we developed this full special technologies enable us really to break the barriers of the fluorescence space that full cytometry can support and get us to 40 parameter and beyond. Now by doing this, we are not really increasing the cost. In fact, we have reduced the overall cost structure of the flow cytometry and while make it a lot easier for our user base and support their needs, we feel very -- really accomplished. And so what we have done, we have changed the whole landscape of the flow cytometer industries, and you can see full spectra technology site that has pioneered becomes the churn and the future of the flow cytometry industry.

Got it. And then on -- I guess in terms of competitors' capabilities and pricing, are you actually seeing it coming closer to you? Or are you still seeing pretty big delta?

I think here, what we really need to look at is the one is the actual price of the flow cytometer. Another part you need to look at is the dollar per parameter and compared to -- so look at those things. Overall, and I think flow cytometry itself in the high end, this is where we excel greatly, not really much change on the pricing side. But on the other hand, we have tremendously reduced the dollar per parameter cost structures really help to enable our user base on that aspect.

Got it. And we've been getting some questions on your TAM, and I think you guys have previously stated a $12 billion TAM. And that includes the increased applications addressable by your FSP technology and the fact that you guys mentioned the Power of And. So I was wondering if you can kind of talk to us more about the Power of And. How you see yourself as complementary to other technologies and how you're framing this TAM?

Right. And the first year, flow cytometry by itself is really an established business market. And with great potential today, flow cytometer is a basic life science tool in almost every labs out there supporting from research to translation to clinical. Now as earlier I mentioned, the conventional technology has a limit. And as the research continue around and more and more needs in the immuno-oncology side of the studies and the big demand for a new technology and tools. And this is where we come from. What we have developed, not only our tool is backward compatible supporting all the existing needs and supporting all the existing markets. We actually opened up a new application, new opportunities, which conventional technology is not able to support. That actually helps us to expand the market, expand the total TAM. This is where we come from. We feel great -- good with regarding to how our technology can continue to push the boundary of the scientific studies and for the translational studies, for the clinical trial and eventually get to the clinical side. We have built this 4 business pillars from instrument to applications to bioinformatics to clinical. And we continue to invest across all of those pillars and to support our expansion of our business. We feel good about the future of Cytek.

Got it. And then I guess, if we were to try to triangulate your market share, I think you guys have previously said that there's a global installed base of about 50,000 flow cytometers. The Amnis plus Guavas, about 7,000 installed base. If you were to factor in your FSP installed base with a mid-teens, high-teens percentage market share be reasonable?

Yes, indeed, the overall Guava plus Amnis together more than 7,000 installed base, but that's the cumulative installed base. Like Guava, Amnis has a much longer history than Cytek. Not necessarily every one of those are still in service. But overall, they still have a significant amount out there serving for our customers. The customer base by those in-store instruments is going to -- we feel will greater benefit Cytek for driving not only our current full spectrum technology as well as the Amnis imaging technology. Also, through this process, we -- it enable us to continue to improve the user interface of our Northern Lights full spectrum technology too much that provided by the Guava tools to serve for the biologists who are happy with -- really appreciate the benefits of those Guava instruments, from both cost user-friendly perspective.

Got it. And then I guess switching gears a bit and looking at your end markets. Within your biopharma end market, I think earlier in 1Q, you saw some pressures in the U.S. market, but that kind of recovered in the second quarter, But at the same time, you started to seeing some incremental pressures in EU. Can you kind of just recap what you saw in the first half of 2013 in your biopharma end market? And I think you noted that you expect the EU market to see a recovery in the second half. Has that played out as you expected? What are some of the trends you're seeing across your 3 geos?

Yes, I can take that. So you're right. So looking at Q2, right, for example, we landed about $50 million total revenue, and it was mostly driven by the U.S. market, followed by APAC and then Europe. While Q1, it was driven by the 2 regions like Europe and APAC followed by the U.S. So being a global organization, the expectation is that all these markets will somehow help each other. When we look at the second half of this year and where we've come historically, we've seen that typically we have a second half that's stronger than the first half. And this is the result of companies closing on the CapEx budget and so on. So the expectation in there is that the European market will be stronger, so will also be the expectation of the U.S. market as well. So overall, I think the expectation for us is that the second half is going to be stronger than the first half.

Got it. And then, I guess, Patrik, looking at China specifically and APAC. What are your assumptions in terms of another government for the region? And should it come in this year, would it be a '23 impact or a '24 impact?

It;s too early to say, but I would say it'll probably be a 2024 impact, but I'll give a chance to Wenbin to comment on that.

Right. And clearly, Q1, Q2, we did very well for our China market, as you have just mentioned. We benefited from the incentive program later last year. And we probably will continue to see some benefit through Q3 because it normally takes some while to close the deal eventually. And -- but on the other hand, as the incentive program goes away and then pretty much you will go to business as usual, and that kind of change has already been figured into our guidance, and we feel it's going to basically perform as we have predicted over the next few quarters.

Got it. And then looking at your academic end market, the end market seems to have held up pretty well. Can you provide some color on what you're seeing in the end market? And specifically looking at next year, if there's going to be low single-digit to mid-single-digit decline in NIH funding, how meaningful of an impact would that be to you guys?

Patrik?

Yes. So currently, the mix between academia versus pharma and biotech is about 50-50. Looking at our numbers, this year, academia has actually been fairly strong for us. While we look into next year's funding, I think it's a little early to really comment about next year, but we continue to see strong demand from academia. And we expect overall pharma and biotech to remain fairly present on closing on the budget, on CapEx budget. So the expectation is that, that mix will remain about the same going forward.

Got it. And then switching gears to your products and your instruments. Wenbin, you mentioned you placed your 100th sales order in 2Q. Can you speak to the demand and the traction that you're seeing there? And with the sales order being one of your bigger ticket items, talk to some of the drivers for its, I guess, resilience and current macro conditions.

Yes. We all know macro economy environmentally challenged these days with pharma, biotech and Patrik mentioned academia, we're still doing fine. And now regarding [ solar ], I think one of traction for Cytek solar is it is actually compatible with our sales analysis. And one of the merits for our user base when they start to get into the sorting side, they really would like to be able to leverage the investment they have already spent on the analyzer and they don't want to redevelop something out there. In that case, our sales order is 100% compatible with our analyzers. Customers, users can move the panels back and forth. This is really great for them from a user perspective and a reason why we feel, and this is really a benefit for customers to come to Cytek instead of some other sorting technology. Pretty much all our sales analyze customer base has already prepared us for our sales orders.

Got it. And then in terms of your current self-order placements to existing users and new users, what is that mix looking like today? Maybe, Patrik, you can take this. And then on a higher level, what are some of the barriers to, I guess, getting more new users to come on? Is it just educating them about FSP technology or...

Yes. So we don't really break out instrument details by the news users or old users. But what I can say is we are seeing increased demand for the paired instrument, the analyzer and the sorter which are a great combo. So overall, I think the -- I mean, obviously, we've sold more analyzers, but we are seeing increased demand for sorters.

Got it. And I guess, how have your current order funnel activity trended in the recent months? Are you seeing negative changes in velocity for the speed at which orders turn into [ fills ]?

Yes. So our funnel has remained elevated. We have a strong funnel throughout all the regions. At the same time, we've seen a slowdown in turning these orders into -- the funnel numbers into orders. And I think this is probably more the result of a macro environment that's pushing some customers to be more cautious about their cash. Again, we're expecting the second half to provide increased demand for this because they have to close on the CapEx budget.

Got it. And then I guess turning to your reagents and kits. This is one of the fastest-growing areas for your business and you guys have put in a lot of development efforts. So where are you guys currently standing in terms of your development efforts? And what are some metrics you can share with us to help us understand or quantify your progress?

So the reagents obviously -- the reagents business is a critical revenue line for us. We're very pleased with the results that we've seen. To your point, it's a very high growth area. We've added a number of new kits that have come out. The revenue or the total revenue as a percent of total -- the reagent revenue as a post kind of total revenue still in like single digit going up to the -- mid-single digit going to high single digit. So very pleased. It's a small business for us, but growing very fast. And we are very pleased with where we're seeing customer traction and demand.

Could that possibly reach low teens in '24?

Yes.

Got it. Absolutely. Wenbin, Cytek Cloud is one of your recent efforts that you're trying to push. Can you share some more details on your Cytek Cloud? And what are some of the features that's available on it today? And what are some upcoming features?

Cytek Cloud is a platform as part of our bioinformatics program to drive support, help our user base and that program and that cloud provides for like a panel construction, panel optimization, reagent purchase and a data analysis, data storage and also data management. We feel what we are trying to build. And some of those functions are already in place, some are continuing to be optimized and expanded. We feel this is a platform really will help to drive our customers towards Cytek solution and to leverage our full spectrum instrument reagents and the clinical platform. Actually, since its first launch in November last year, just in less than a year by now. And actually, it has done very well. And our user base has grown tremendously. And already -- the total number already exceeded the number of instruments we have deployed.

Would it be reasonable to assume that all of your instrument users would ultimately be on Cytek Cloud as is the most logical option?

We don't have a static number with regarding to whether every instrument will have already [ sat ] down, but we do know and our instrument anomaly, there are several users for instrument. Some -- actually most tens of users sometimes. So -- but absolutely. And our user base is more than double of our number of instruments. So that's a great potential. And we continue to grow rapidly.

Got it. And then turning to your recent FCI acquisition that you mentioned earlier, Wenbin. I think you guys reached some important integration milestones recently. If you could kind of talk about that a little bit. And what remains, stays on here?

From the Luminex integration perspective, and a few things from operations side, we have almost completed all the integration and there are 2 platforms, one is Amnis, 100% completed. And the Guava originally was embedded in the Luminex manufacturing facility. Now we have pretty much very close to the end of the transfer process in the -- there are 2 products. One is Guava, 100% completed. Guava, right in the final qualification stage. And then on the commercial side, we have already completed all the cross training of our sales and application. We have merged, combined both sales team together under the same single management system. Then the service side, and we are still in the process of cross training. We expect all the process integration completed towards the end of the year.

Got it. And then in terms of the new commercial organization. I think you guys have recently made changes and split that into 2, with one part being the enhanced sales organization and the other part being the new platform organization. Can you kind of talk about the reasoning and logic behind that?

Cytek historically has been a technology-driven company. We started with full spectrum technology, developed our analyzer and sorter. Then we build our sales team to push our technology and products to the customer base. With the Luminex acquisition, now we have more products to offer and also -- and we'll combine the resources. Now we fund and it becomes more and more important to hear more from the customer base to get feedback from customers to enable us to target the real needs of the customer to develop next-generation products, future products in that case. And we feel our current original commercial organization being -- pushing our technology to the customer and we need basically feedback, basically the dual way process. That's the reason we decided we feel it's better for us to split our commercial organization into 2 functions: one, as sales function and to push our technology, our products. The other one actually to build a dual way feedback loop to engage the customer, hear from customers. And so with that, we installed an appointed [ Philip ] to manage our sales organization. Philip has been a very experienced sales executive. And many years ago, was the VP of flow cytometry sales with big flow cytometry companies and also build, single-handedly build the global salesforce for flow cytometry for one of the flow cytometry companies. And we feel that he is very suitable and very experienced and qualified to help to run our sales organization. In the meantime, we have also appointed a senior executive through our Luminex acquisition to lead our platform organization functions. And as you know, Luminex used to be focused on the clinical side. We feel clinical as one of the platforms we are trying to build and definitely the kind of expertise coming around to lead our platform organization will help to accelerate our clinical activities. So we feel very good about this structuring, and we feel it's going to really help to accelerate the company's growth going forward.

That's a good segue to my next question. On your clinical efforts, you guys have an approved instrument and reagents in both China and EU. Is there any way you can share what percent of your revenue is being driven by clinical applications in China and EU? And I guess on the China topic, we see anticorruption initiatives. Could that potentially be a headwind for you as some of the hospitals are seeing more scrutiny around spending?

We started the clinical application in China, got our tools cleared for that market and followed by the European clinical clearance. I think through last year, and we evolved and developed very well for that market with our instruments. In the meantime, in China, we also started to get our reagents created to support the clinical application in that market. Overall, I think the reason actually we're aware of the anticorruption movement drive in China, from a Cytek perspective is long term, if actually the problem can surely resolve is actually is good for us, for Cytek to grow our business. Definitely as an international companies, and we feel our technology and the functionality actually really excel and -- so without all those other interference, definitely, we can accelerate our technology, our growth into the China market.

Got it. And then in the U.S., you have a dual problem strategy where you're seeking for instrument invasion approvals and at the same time, looking to do LDT tests. With FDA recently trying to more strictly regulate LDTs, do you think that could potentially be a headwind for your efforts in the U.S.?

I think from that perspective, and we are actually engaging very closely with the FDA to have our instrument players to serve for the clinical market. In the meantime, we have many partnerships, collaborations ongoing with the clear labs across the U.S. And I think together with the U.S. FDA clearance activity as well as the partnership to support the application on our tools, we feel good long term and to drive our clinical initiatives for the U.S. market in addition to the international opportunities in China and Europe.

Got it. And then, Patrik, just turning to your guidance real quick. You guys talked about some of the headwinds that you're seeing and some of the considerations. But just help us recap, how should we be thinking about the cadence of revenue in 3Q and 4Q? And what are some upside/downside drivers to your guidance range for this year?

Yes. So I mean we remain behind -- we are behind our guidance for the year, which was $205 million to $220 million. So I think we're behind that number. Again, we believe that the second half will be stronger than the first half. Some of the key drivers, obviously, the service revenue will continue to grow as we've seen it in Q2. We also expect the reagent business to continue to grow along with [ self order ] and we talked about it and analyzes Northern Light and the -- so key drivers for us. The expectation here is that the economy remains where it is now and doesn't worsen. But at this point, we believe that we have a good opportunity to close the year in that range.

Got it. And then with the midpoint of your guidance this year pointing to about 30% year-over-year growth, do you think a 30% year-over-year growth in '24 would be reasonable? Or could it be higher or lower than that?

Yes. So we're not quite ready to talk about the long-term range or guidance. We have an analyst meeting coming up sometime in November, and we'll provide more data at that point.

Got it. And then in terms of gross margins. The product mix driving down gross margins offset by higher gross margins on the service side. How are you treating gross margins in '23? And what should we expect in '24?

Yes. So the gross profit margin we had in second quarter were lower than our overall expected gross profit margin. So the second half, we should expect to see some level of improvement coming from, first of all, the Guava product family will be moved out entirely in Q4, has started already in Q3. So we should expect better margin increase for that. We should expect to increase margins because of scale. I think the company has delivered about $50 million in Q2. The expectation is going to be at least much higher for the third and the fourth quarter. So overall, I think as we continue to execute on our global strategy to improve gross profit margin, but also OpEx, I think we feel pretty good at where we are at this point.

Got it. And then, I guess, turning to your capital deployment strategy. With your recent FCI acquisition and your $50 million repurchasing plan that was announced earlier, could you remind us of your capital deployment priorities? And what is your current appetite for another deal?

Yes. So we are actively looking at other opportunities. I think we -- as long as they fall into this criteria that we've defined as a high growth, nice gross profit margin and accretive to our own business, I think we'll have the appetite. We still have a lot of cash and also the opportunity to raise money, it may be through debt or other options. But overall, yes, we'll probably do another -- we'll do some level of activity going forward.

Got it. One of the beauties of being the last session of the day is we can go over a little bit. But with the remaining time left, Wenbin, what do you think are some of the most important takeaways from the talks today? And what are some key facts that investors are overlooking that you would like to highlight?

I think, overall, as you can see, Cytek actually probably one of the only companies in the lifestyle tool space, rather profitable. And I think from that perspective, and you don't really see that many opportunities here. And what we continue to maintain, to drive is what we call the profitable growth, which we feel is really important for anyone and any investors to look into our business. And also important for Cytek to generate value for our shareholders. This is what we will continue to focus on and making sure we will maintain profitability and funding our operations.

Got it. With that, thank you guys for coming today.

Sure.

Thank you.