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

Great. Good morning, everyone. My name is Matt Sykes, the Life Science Tools and Diagnostics Analyst at Goldman Sachs. I have the pleasure of welcoming Cytek Biosciences. Here with me this morning, we've got Wenbin Jiang, the CEO; and Bill McCombe, the CFO of Cytek. Wenbin, Bill, thanks so much for joining us today. Really appreciate it.

Maybe just to start things off. Maybe just talk us through sort of your most recent quarterly results and maybe just highlight some key takeaways from the quarter now that there's been some time and been some investor conversations and feedback. Just what are the kind of key takeaways you want people to have post that first quarter as they think about the rest of this year?

Well, I think the most important thing was we saw a strong resumption of organic growth from 1% in Q4 of 2023 to 11% in the first quarter of this year. So that reflected a continuation of rebound in the market or in our particular market that we saw beginning in the Q4 of last year. And we were pleased to see it continue into the -- into this year. It was particularly strong in services as the population of installed base of instruments expanded significantly. But we also did see it on the instrument side as well. So -- we think that the market in flow cytometry is moving towards Full Spectrum Profiling. We've seen a strong endorsement of that at recent conferences. And so we feel that the market momentum is solid.

Got it. And Bill, just taking you for a minute, since joining Cytek back in mid-March, maybe just give us some color on your near and long-term goals for the business.

Our important goal this year is to -- 2 important goals: 5% to 10% revenue growth of last year reflecting a continuation of the organic growth that we talked about and net income profitability, which will come from controlling costs and leveraging that revenue growth. And then another important goal, we haven't quantified it is generating positive cash flow. So we think that we're we think that distinguishes us from many of our peers and that we're a cash-generating company. And we recently demonstrated that by announcing our reinitiation of our $50 million share repurchase program, which we're funding -- we have a very substantial cash balance, but we're also funding that out of organic operational cash flow. So that's proof of our confidence in the momentum of our business and our ability to generate profitability and cash.

Got it. And Wenbin, maybe I think it'd be helpful to kind of take a step back and kind of give a high-level framework for Cytek. Could you maybe give a brief overview of what flow cytometry is, how Cytek fits into the flow cytometry market?

Yes. In a simpler term, flow cytometry basically is a technology -- tool to analyze study and count the cells based on the phenotype, so this is how it has been used for. And over the years, study in the immunology, they start to look at those populations based on varieties of parameters and more -- and more of those parameters are needed. Then conventional flow cytometry technology start to hit a bottleneck. This is where Cytek comes from, and we started -- pioneered the full spectral flow cytometry analysis, through those technology, comparing to the conventional, which actually -- through our data, we captured all the data available to us through the medical algorithm and which enable us to be able to analyze lots of parameters going way beyond 40 parameters. And based on those 40 parameters to analyze the cell population, and that gives researchers, clinicians a lot more information to enable them to do deep understanding of the cells for their studies, especially the new drug development or type of research projects.

Got it. And maybe just give sort of a -- brief sort of last 5 years how the flow cytometry market has evolved and how Cytek specifically has played a role in driving this evolution through the full spectral flow cytometry technology that you have?

Yes. We launched our first product in 2017. That event really is a pivot -- point to convert, drive the whole industry from the conventional tool where Cytek started from. And over the last 5 years, clearly, the whole industry and -- start to realize this is the direction of the flow cytometry. This is the future going forward, all the flow cytometry analysis that is -- will be based on full spectrum. This is also evidenced by many of our peers and starting to invest and in this technology and started to endorse our technology going to all of those top research centers today or big pharma, you can see and -- pretty much all the kind of tools, the technologies I think they are going to go with going forward will be full spectral. Using one of the key opinion leaders, what he said was with Cytek having both spectral analyzer as well as the spectral sorter, by the way, sorter is a technology to enable us to pick individual cell out after the analysis among those millions of cells. And so now with both analyzer and the sorter available from Cytek, why would people still stay with the old conventional technology. So this is -- just shows the future where it's going to be, nobody today is questioning whether full spectral will be the technology of choice, it's just how long it may take to convert from conventional to the full spectral.

Got it. You made an acquisition a little while ago in Luminex. And just curious in terms of the integration, how you plan on utilizing that installed base to leverage services growth?

I think it's very evident. And a year ago before our acquisition, if you take a look at our service gross margin, we actually list our service business separately from the rest of the business, which we call the products, take a look at the gross margin. And before the acquisition, clearly, our service was kind of even negative or flat on the gross margin side over the last 12 months, we made tremendous improvement with our service operation efficiency in our Q1, and we recorded more than -- better than 50% gross margin for our service. This is an evidence that combining the other installed base between the conventional Luminex assets and Cytek installed base, we do have, definitely improved the overall efficiency and how we serve our customers.

Got it. The sort of the challenges in China from a capital equipment standpoint, have been well documented. However, you noted strength in the region on the most recent earnings call for Cytek. Can you talk about the dynamics you're seeing in the region and what isolates Cytek from market-wide headwinds within China?

I think there have been many conversations and reports versus -- with regarding to the slowdown of kind of [indiscernible] environment in China, which slowed down their business. Cytek certainly is kind of somewhat different, and our business overall has been showing the growth. I think part of the reason is linked to, earlier I mentioned, the kind of overall shift unconventional flow cytometry towards the full spectral and China is also moving towards that direction. Flow cytometry is by the way, is basically a life science tool used in many applications. It's too necessary -- so necessary for all kinds of applications. And when customers really decide to buy, the question is, they will go with the conventional or go with the full spectral. This is where Cytek enjoy the kind of benefits. And so due to our leadership positions, clearly, and that has shown up on our record -- on our financials, and we actually have been doing well in China. It's just because of this particular reason. And when customers do decide to buy, they will buy Cytek tools.

And just staying on China. Can you talk a little bit about the local manufacturing footprint you have in the region, specifically around your new facility in Wuxi and how this will expand your local presence throughout the region?

Today, we manufacture in multiple sites. We have a manufacturing site in Fremont, California, in Seattle, also in San Diego where we manufacture all the reagents. China, where we manufacture of our clinical tools, entry-level instruments as well as some of the assemblies used for the final assembly in Fremont and Seattle. Last year, actually, earlier this year, we expanded our facility in China. We moved into a new -- brand-new facility, 50,000 square foot, which actually, by the -- Cytek owned it, instead of lease. So that enabled us to really continue to expand to support our global manufacturing infrastructures. That certainly also help Cytek who support our local market in China as well because overall in China versus the rest of the world, China -- 50% of the buying -- purchase in China is with regarding to the clinical tools. So since our tools are clinically approved in China as well as in Europe, this facility will enable us to support those type of application for that type of clinical market, clinical applications. Also recently, we have our TBNK, the standard clinical panels approved for the China market that -- that facility will enable us to continue to grow to support our clinical applications over there.

Got it. There's been a lot of focus on China stimulus in the program that was announced earlier this year. Could you maybe talk about what the potential demand drivers are for you with the China stimulus program and in terms of what your expectations are for time [indiscernible] purchases and revenues for you.

[indiscernible] we'll talk about potential needs. [indiscernible] but normally, that takes a little bit while to really become a real sales. We foresee if this becomes a real potential, very likely going to be Q4 or early next year.

Got it. Okay. And just staying geographically, in the quarter, you noted strength in Europe, specifically on seeing customers return to normal equipment order patterns. Maybe just talk to the difference in what you're seeing in terms of sales cycles in Europe versus the U.S.?

That really have to come back to the overall situation last year. And Q1, Q2 last year, and we realized a significant slowdown in Europe. And at that time, we mentioned [ these ] are still there, and it's just a decision-making process became longer, and we thought it will [indiscernible] and actually become a little -- started in Q4, we noticed [indiscernible] the purchase started to come back, and that also continued into Q1. So that actually reflected the kind of slowdown in Q1, Q2 last year for Europe. Now overall, U.S. has the kind of decision making and is kind of always takes longer time recently -- even last year and actually continued on and on, that's what we have seen. But again, the same thing is we don't see the business getting lost. It just takes more time to make a decision. We feel this is going to continue for a while, especially for the U.S. market. But on the other hand, we are still very positive regarding to the overall business as evidenced in Q1, as you can see, our organic revenue growth is exceptional and continue through the kind of momentum we saw in Q4. We feel this will continue for the rest of the year.

Got it. We've seen a couple of peers comment on just elongated replacement cycle with customers pushing off replacements given some of the funding constraints. Where in the cycle of Cytek in terms of flow cytometry replacement cycle? I mean you're replacing your first instruments about 7 years ago. I know that a lot of the growth that you've seen over the last couple of years has actually just been new installations [indiscernible] that could start kicking in and maybe just talk [indiscernible].

Yes. Globally, there are about 50,000 instruments installed. Many of them are actually already old and need to be replaced, but of course, due to the macro environment, the kind of replacement is kind of slow. But we do see this coming to Cytek and many of the purchases, we already see since we do offer discounts for those customers coming to swapping the older tools. We do see the kind of replacement coming -- but of course, not as fast as we would like to see, but it is happening.

Got it. Back in the fourth quarter of last year, you cited a later than historical pharma budget release, which is embedded in your second half guide. But now that we have budgets in hand, how has that trended versus your initial expectations in terms of what you were thinking you were going to see from the budgets?

Okay. When we formulated our guidance for the year, we were assuming that those budgets would be in place and customers would be drawing against them. And without adding too much to our guidance, I'll just say we continue to be confident. So things are playing out as expected, I would say.

And then last quarter, you talked about elongated sales cycles in the U.S. and APAC x China. Wenbin you just mentioned that the U.S. sales cycle is kind of do tend to be a little bit longer. Have you seen any improvement now that we're kind of into -- through Q2 almost like -- as that sales cycle shortened at all in the U.S. or in APAC, ex China, where some of those issues existed?

For the U.S., we don't really see any difference, but that's already taken into account in our forecast, our guidance. [ We're seeing ] there's some improvement comparing to Q1, but in the end, we don't know until we have to wait until the end of the quarter.

Okay. Maybe can you give us a brief introduction to Cytek Cloud offering and how your bioinformatics offering can add some additional stickiness to the existing installed customer base?

Actually, Cytek Cloud is a great piece of the business for Cytek, not really from a revenue perspective, but from how it actually serve customers, how it help customers who use Cytek technology. We launched this program [indiscernible] 18 months ago, it has gone quite nicely. And by now, more than 10,000 users are already on our platform. This platform support customers on Cytek's organic technology, full spectral technology. As you can see, we have more than 2,000 instruments with more 10,000 user, that means on averaging more than 5 user per instrument. So this is -- having continue to grow very quickly. And if you talk to customers, they all really like this platform. It helps customers who is on the panel virtually on the cloud, before taking this to the Cytek instrument, really helps customers to improve their R&D research efficiencies, save their money with regarding to trying the panel on the tools. So it's a great piece of tools and -- so we are going to continue to improve this platform, adding more features, which include the data management, data analysis, data storage, also enable users to communicate over the Cytek Cloud among themselves. This will -- a lot of new features will be added, this is going to be an instrument -- actually a tool and some very important part of Cytek business as a full solutions Cytek will offer to our users.

Got it. Maybe could you give us an update on sort of the reagent strategy just for the benefit of the audience, and you guys had started out the business -- its' focused on hardware using third-party reagents. You started developing your own reagents, made a small acquisition to help develop that. Maybe just talk to us where kind of the reagent business is today and what your expectations are for it over this year or the longer term?

And as you can see, and we have 4 business pillars; instruments, applications, bioinformatics, clinical. Among the applications, part of that is to drive customers who come to Cytek for our reagents, on-site instrumentations. But that's not really individual reagents, individual work, but overall panels with applications in mind to support their research. Now reagent is a great piece of business, and it's recurring, just like our service and -- so a few years ago, we made a first acquisition Tonbo to help jump start our overall reagent business and -- but overall, our reagent business is very different from many of the other reagent supplies over there, we are not really trying to turn ourselves into a catalog suppliers, but [indiscernible] individual reagents, which really is important for the applications on Cytek tools, Cytek instruments. We in fact, partner -- work with many of the individual reagent suppliers, partners to drive the overall reagent business we focus internally on certain reagents, which is unique to our full spectral technology. So overall, the reagent business has been growing quite nicely, but the base is still small and comparing to our instrument, reagent also takes more time to grow on revenue versus the instrument simply because per order revenue of reagent is very different from instrument. So -- but overall, the growth rate of our reagent definitely is higher than our overall instrument growth rate. I feel this is a direction and our long-term objective, of course, the overall recurring revenue of Cytek is going to be 50%, if not more. So this is one of the areas we are investing and will continue to invest.

Maybe could you talk a little bit about what percentage of reagents are currently of overall revenues. I know a while back, you had sort of like a mid-single...

Yes, still in the mid-single digits when been said, it's part of the strategy of driving applications and ease of use. So out of that, you have to have reagents and flow cytometry, some of those reagents are specialized. So we've got to have them so that our systems are easy to use and our overall solution drives research productivity. That's the focus of the strategy. So reagents support that rather than become a primary strategy in themselves. We think that driving stickiness and the ease of use and people loving to work with our systems, that's what drives the overall business.

Perfect. Okay. And Bill, just on margins, last quarter, you talked about inventory adjustments related to Luminex acquisition for about 2% of the margin decline.

Right.

How confident are you in this -- this is a onetime in nature and the integration-related headwinds are behind us?

Yes. Look, I'm reasonably confident when you're running a business that has thousands of SKUs, which a reagent business does, there's always the potential for surprises in that area. But last quarter was driven by moving inventory from the sellers system into ours, and therefore, we're applying our inventory rules. So that drove the bulk of that inventory adjustment. There'll be -- look, scrap won't be 0. It will be a small number, but much, much smaller than the 2% of revenue that we -- or $1 million round numbers that we incurred last quarter.

Got it. And you can kind of -- can you remind us sort of the gross margin cadence -- gross margin cadence you're expecting over the course of this year?

Well, our -- if you look at our quarterly revenue cadence, it tends to be in the ZIP code of 45% in the first half and 55% in the second half. the first quarter tends to be significantly lower, more in the 20% range. So given that our costs -- most of our costs are relatively fixed, that drives fluctuation in the gross margins. So we would expect better absorption and better -- therefore, better gross margins in beginning in the second quarter and particularly in the fourth quarter, which is usually our biggest quarter. So that the significant drop-through of that incremental revenue to gross margin. But we don't guide to gross margin on a quarterly basis. But we -- our objective is to get gross margins back to where they have been historically. That's about what we can say.

Okay. Last quarter, you know the expectation to be net income positive for the full year '24, which assumes a relatively steep ramp up for Q1. Could you maybe talk through the expected cadence through the year to get to sort of that net income positive for the full year?

Yes. I guess a significant portion of that would be in the fourth quarter because the fourth quarter is -- it's in the ZIP code. Last year, I guess, it was about 30% of revenue. And the reason is that customers know that when they're buying from a public company they have greater leverage towards the end of each quarter and in the fourth quarter, and that's just the way customers are. So we'll see most of that -- a significant portion of that net income come in the fourth quarter and perhaps the third but mostly in the fourth quarter. And look, we'll do better in the second and third quarter than we did in the first because our revenue should be better. But the bulk of that -- that net income will come in the fourth quarter.

Okay. And Wenbin -- just on the competitive dynamics. You guys have taken a significant amount of shares since you launched, just given the performance and the value proposition of the instrument, so maybe talk about what some of the competitors have done in reaction to your success and how you're kind of dealing with that?

The first is because of our technology, we have really driven the application towards high parameter analysis. In fact, in that space, we are not really taking market share. We are in the market, we created in that market. From there, we gradually moved downward to support the convention of the so-called high end of the applications, which to us is really the kind of mid-level type of applications. Seeing the success and clearly after since we first launched 2017 by now 7 years, right? And they started to move into our direction and started -- the whole industry is endorsing the overall the technology site pioneered earlier I mentioned, eventually flow cytometry will be full spectral technology based on what Cytek has pioneered. And also, this is a large market size, right? We talked about more than 50,000 instruments already in the field. And looking at Cytek overall deployment 2000, there's still a very small fraction of that. That just means the market is large enough to accommodate a few more players. And we feel it's healthy and some other players coming in is going to continue. It's a strong endorsement of Cytek technology. In fact, it will make customers easier to come to Cytek when they actually make a decision to buy, this evidenced by the overall growth, Cytek has enjoyed since Q4, and we know actually flow cytometry sale and analysis by itself actually was a down market last year. Also Q1 recently, we saw a report on [indiscernible], which is an industrial organization from by many of our peers. Based on that report, the overall cell analysis market was a down market in Q1 and also the whole year last year. Look, Cytek is actually growing. So this just means, in fact, when other competitor players coming into Cytek direction. It's a strong endorsement of what we are doing, and we feel very confident. And with those endorsements, we can continue to grow and continue to gain more and more market share in the mid- to entry level. High end of the market in the Cytek market. We continue to keep our leadership position. We continue to invest to make sure we stay being a leader.

Got it. You've mentioned in the past that Cytek is seeing some early success in converting existing Guava customers, the Northern Lights platform. How is this dynamic trended recently?

Overall, we do see -- and now when we go to the conventional Guava customers, we do offer them both solutions and we have Guava, Northern Lights earlier when we first acquired the business. Initially, our decision was to discontinue Guava -- just because Guava some unique features, the Guava customers love to see and a little while, we slowed down, we decided to keep the Guava technology for a while and -- in the meantime, today, when we go through those conventional customers, we offer both solutions, some continue to select Guava, some actually move towards our Northern Lights system. But in order for Northern Lights to capture the complete customer base of Guava, some things -- certain features need to be included on Northern Lights, which is something we are doing, and we are working on it will take some while for us to complete.

Got it. And with the Luminex acquisition, it came with a pretty significant commercial team along with it. How has that integration gone? And have you seen leverage from those -- from that commercial team start to kind of resonate in the business over the past 6 months or so?

If you look at the -- it was mostly heavily concentrated in Europe. And if you take a look at our market share in Europe, in fact, it is growing quite nicely since last year. That's a reflection of the merge. Clearly, it's making contributions overall for our business through that sales organizations. Now the integration has already all completed. And I think we are in kind of a better position today and with regarding to our commercial organizations.

Got it. Bill, just turning to capital deployment. You talked about the recently announced share buyback. You've done some acquisitions in the past, how are you thinking kind of broadly about capital allocation as you kind of move forward? I know a large focus of yours is free cash flow, increasing profitability. But just -- how are you thinking about all the different balances that you've got there?

M&A opportunities are episodic. You were not going to stretch to do a deal just because we have the cash available. We're only going to do deals if we think that they're synergistic and that they're well priced and that we can integrate them well. So given that we're generating positive cash and that we think our stock is very attractively valued, the Board decided to reinitiate the program. And so we'll keep plenty of dry powder for M&A opportunities, but given that we're generating excess cash flow, we thought that our stock was compelling opportunity to put some of that to work. So we'll continue to do share repurchase as we see the opportunity to do that at good prices, we're fortunate that we have the opportunity to do both M&A and share repurchase from time to time. So we'll manage it on a case-by-case basis as we see opportunities. And as we look at where our stock is trading, there's no sort of mechanical formula beyond that. We'll just be opportunistic.

Got it. Just in a minute we have left, what are some of the key takeaways you guys would like to have investors think about as they think about Cytek and do more work on the company?

Okay. Look, I think we're -- we have a technology that is very substantially advantaged over the competitors in a key area of growth for life science tools, flow cytometry and developing very detailed information at the cellular level is very important for some of the major directions of pharmaceutical and biotech research. And so we sit squarely in the middle of that opportunity. Compared to many of our peers, we're highly profitable, we're cash generative and we're going to be net income positive. And we think that combination of sitting on top of a great market opportunity and having a platform that generates profits and cash is a unique investment proposition for potential shareholders.

Great. Wenbin, Bill, thank you so much for joining me today. I really appreciate it. Thank you.