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

Everyone, good morning, and welcome to day-3 of the Morgan Stanley Healthcare Conference. I'm Tejas Savant, I cover the Life Sciences here at Morgan Stanley. It's my pleasure to host Cytek today. And speaking on behalf of the company, I have CEO, Wenbin Jiang; and CFO, Bill McCombe. So welcome, guys. Great to have you here. Before we begin, just some important disclosures. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales rep.

So with that, Wenbin, maybe to set the stage, can you talk to us about how '24 has played out so far relative to your expectations at the start of the year? And what are the key accomplishments you'd like to highlight over the last 12 months or so?

I think first is, overall, the first 6 months and comparing to the same period last year, we achieved a 5% growth, which is within the guideline, actually the forecast we provided to the community. And so, of course, we would like to do better, and we hope the next 6 months is going to have -- we can perform better than what we are expecting right now. And I think overall during the last 12 months, especially the second half of last year, actually, was doing quite nicely. And the whole space, even though overall, the macro environment, our economy continues to be stretched or challenged, but in that environment, we have outperformed the market. So overall growth continued to go above the market growth. That's what we have been seeing right now, and we expect it will continue to be that way over the next 12 months.

Got it. Fair enough. Maybe just starting at the portfolio level then, how do you think about the flow cytometry TAM? And within it, the share for full spectrum, high parameter flow today, I think you had highlighted $8 billion opportunity a couple of years ago. Has that evolved at all?

I think there are 2 aspects of the overall market size. One is what flow cytometry technology by itself can do and which we have cited $8 billion or more. That basically -- it's not just to compete against the same -- the vendors in the same industry that are providing the spectral as well as other flow cytometry technology, as well as actually other technology that perform the same functions or providing the same information on the sales. Then if we just look at the flow cytometry by itself, which overall, the total revenue going together, we believe it is about $4 billion to $5 billion today. So that's basically -- that means there's another $3 billion potentially can be captured by the flow cytometry technology.

Got it. Fair enough. And as you think about steady-state growth in the market, how much faster is the growth for the 4 to 5 laser high-parameter category that you guys operate in?

Actually, if you take a look at the whole flow cytometry space, about 50% of the applications in the research market, which actually primarily is based on the 4 to 5 laser system.

Got it. And of those -- I think in the past, you've talked about, about 50,000 units out there. Help us think through how much of the demand that you see in any given year is driven by the replacement cycle versus new customers buying instruments for the first time?

In this space, the overall market growth on average is about 8% -- 7% or 8% range. But last couple of years, it is a difficult market. And in fact, overall market was down. But long term, we continue to believe it's going to come back, maintain this type of trajectory. And we think the replacement market in this space -- overall, in the last couple of years, frankly speaking, due to the challenge regarding to the capital expenditure. In fact, people have been trying to extend the usage life of the tools as long as they can. So in that case, that's clearly far less than they used to be. And so in terms of the actual percentage, it is very, very difficult to say because that's reflected by the overall economy, right? So we feel, and in fact, there are probably more -- within the growth, probably will be more from the new applications.

Got it. So your current portfolio, you have Aurora, the cell sorter and then you also have the Northern Lights and the Amnis, can you talk about how your offering is differentiated relative to competition in this space, the high end of the Aurora and cell sorter? And then on the more -- the lower and the Northern Lights and the FCI instruments as well? And more importantly, do you ever run into the sequencing-based single cell players or some of the spatial biology players? In a sense, it's a different user base, but has that sort of overlap come up in the funnel at all?

First is, when we go to customers and when customer makes some buying decisions, it's always based on performance and ease of use and whether that address their needs in that scenario, and this is where Cytek has been outperformed comparing to other vendors' instrument. Regarding tool Spatial as a similar type of other tools, we feel they're complementary. And we've never seen a case when customers decided to buy Cytek or compared Cytek to a spatial device or to a sequencer. It's just something they feel -- this just provides additional information. And also flow cytometry is a basic life science tool. Today, you can find it in almost every biological labs. And so it provides different insights, also very easy to use and very quickly can get to the results comparing to other technologies. So it's just different. There'll be a quick way of -- the first site of understanding.

Got it. Your installed base, it's around 2,600 units or so, about 300 of those being Amnis and Guava now. I guess, you started including Amnis and Guava in that base now. Just excluding the Amnis and Guava platforms, what do you think Cytek's market share is within that flow cytometry installed base today?

Total overall, we believe there's about, as earlier mentioned, 50,000 instrument. And within that 50,000 instrument, we have between 2,000 to 2,500. So that's roughly about 5%.

Got it. 5% or so. Fair enough. You acquired FCI from Luminex in early '23 to expand the offering that brought in Amnis and Guava. How is that acquisition played out so far relative to your expectations? And has the deal sort of lived up to the strategic rationale that you laid out when you bought those assets?

First, come back to the original rationale. We mentioned 3 reasons for the acquisition, one is the imaging technology with [indiscernible]. Second part is the Guava installed base that provides an entry point to drive our Northern Lights sales. The third reason was to have an expanded pool of integral for service that will help improve the operational efficiency of our service business. Coming back now and look at those 3 areas where we have made the progress. First is, in fact, image cytometry, as we all know, has been very, very well appreciated by the community. These days everybody is talking about imaging. And clearly, Cytek is a leader right now due to the acquisition of this technology. Our images team continue to provide the best resolution for this type of application. It's claimed being recognized as basically the high single-cell microscope, that kind of resolution and no other technology has been able to achieve. So we feel very good about what we have got. The second part is regarding the entry and to drive our Northern Lights business actually in Q2, even though our instrument revenue admittedly was down. In fact, our Northern Lights sales has gone up, and that just shows the potential of that part of the business and actually, clearly, the Guava acquisition has been helping. Second -- third part was regarding the operational efficiency of our service business. And in fact, comparing to a year ago, today, our operation gross margin has achieved 55%. Actually, that was the number in Q2. And that's a great achievement concurrent to a year ago was kind of 0, right? So that shows -- and all of those have played out very well and meet our expectations.

Got it. On Enhanced Small Particle Detection, that's something you just launched recently on the Aurora and Northern Lights. How does this feature enhance the value proposition for those 2 platforms? And what's the early customer feedback been like?

There's a lot of interest in the space, in the community regarding to study the microparticle and nanoparticle type of applications, especially for the virus, cell to cell interactions. And this is where our tool is designed for and that really provides additional information on our capability. There are 2 parts, one is to enable existing size customer tool upgrade if that's what they are looking for. Second part is if they want to just -- like to acquire instrument with the capability we can provide.

Got it. Switching to reagents. I mean, it's small for you today. I think it's about 5%-ish of sales. But over time, I think you've talked about that number getting a lot higher. So walk us through what does the penetration rate look like in terms of your user base? How many of them are using your reagents versus third-party reagents? What does the reorder rate look like? And where does that number in terms of percentage contribution to revenue go over the next, let's say, 3 years?

First, unlike when the flow cytometry agent providers, we are not a catalog company. That's not what we are driving to. So that's why our focus on the reagents has been, what we call, full spectrum enhanced reagents. That means, those reagents that really can help expand the application capability of our technology. So that's the first part. Second part is, we focus on panels because once we get to high-dimensional applications, which are enabled by our technology. In fact, a panel construction can be challenging for many users. This is where we have been focusing on to provide the ease-of-use for customers to start with a panel already optimized. So that means here, we are -- the focus is not really to drive immediate rapid growth of revenue, but meaningful revenue which is part of our overall solution for our customers. With that regard, we have been very successful. And actually, we have provided called the [indiscernible], which has been growing quite nicely. Overall reagent today, I think since we don't split the reagent with the instrument, but overall together, right now, 25% of our business service in product is about 75%. But put another way, in fact, overall, our recurring revenue is about 30%. So the reagent is about single digit. But that track our overall growth. But as you know, our instrument growth is much lower and reagent growth is higher than our instrument.

Got it. Fair enough. I want to switch to clinical, Wenbin. Again, it's an interesting opportunity over the medium term for you. You made good progress in China there. I think you've talked about this -- that 10 laser, 6 -- rather, 1 laser 6 color capability translating into a competitive advantage. Walk us through that situation. And then I think you also have a Northern Lights 510(k) submission in the work. So just any update on that?

Overall, we feel one of the benefits or advantage of full spatial technology is to enable higher dimension with less number of lasers as the conventional technology has always been if you want to expand the number of parameters, you add another laser. Looking at the whole structure of the flow cytometry, which one failed the most? Actually, the laser. Second part, which one is the most component among cytometry, that's the laser, right? The reason why with our technology, with less number of lasers that can provide more functionality, higher demand, higher parameters. That's where the nature and benefits of a full spatial technology we have provided. So with that regard, we have been very successful so far, and we continue to drive the adoption and application based on our technology. And on the clinical side, we continue to make progress. And as you know, earlier, this year, we mentioned about our successful Class III registration for our TBNK, which includes single-laser 6-color as well as the convention with 2-laser 6-color panels. We are driving that application. In fact, single laser 6-color TBNK is also cleared in Europe for the clinical applications there. We are making great progress right now for the clinical adoption for our technology. U.S. and the clearance of the U.S. is different from China and the Europe. It's a solution clearance. But our focus right now actually has always been on the LDT. Of course, there are lots of complication regarding to how FDA will regulate the LDT, and we are working through those kind of subjects right now.

And a couple of years ago, Wenbin, you sort of teased about a next-gen clinical flow cytometer being in development. Just any updates on that sort of process and where things stand?

We will continue to work on this. Of course, when you talk about the new innovative technology, it's not just one day you can get this done, right? There are many subjects, many regulatory hurdles we have to overcome. This -- we are making progress on that aspect.

Got it. Cytek Cloud, you've been highlighting it more and more off-late. I think you talked about 11,000 users. What percent of the customer base is on the cloud at the moment? And what sort of helped -- I guess, what features of the cloud drive that stickiness in your user community and, I guess, workflow advantages that they're working on the cloud?

Right. In Cytek Cloud, there are 2 aspects. One is the general usage applications. Today, we have basically, on average, 5 users per instrument regarding to the user sign-up on our Cytek Cloud. That's a great achievement and very rapid achievement, frankly speaking, and that was launched in November of '22. So by now, 5 users per instrument, more than that. So that's one aspect that provides the user an opportunity to basically analyze the data, store the data and exchange information, all those aspects. Recently, we launched, what we call, SpectroPanel, which is actually one level beyond that actually enable users to design panel automatically. And what happens is as earlier mentioned, we'll get to the high dimensional. Many users actually found it challenging to really optimize those big panels. So in that regard, our system and all you need to do is to import the biomarkers they would like to study and the system will automatically match the relevant [indiscernible] and the combination of [indiscernible]. Then provide them virtual optimize panel for them to work on. Then afterwards, they can, in fact, place -- get a quotation from our system automatically and place orders if they have to pull out their own credit cards or they can go through the PO process to buy the reagents from our system. And then they can move over to the instrument they have. Now that feature of today is only enabled for those users who have Cytek instrument. It's not for other players, yes.

Got it. Switching to more recent trends. You've seen your share of the weakness, but it's been quite distinct from what most other sort of players are seeing in terms of just where you're seeing it, right? So you actually called out a strong double-digit growth in both EMEA and APAC. And the U.S. was where the weakness was sort of concentrated for you. What was that driven -- is there a difference in product or end market mix across those geographies for you?

Cytek being a global company and having products into more than 70 countries, when some territory become weak, other territory can be strong. And so that's exactly what has happened right now in Europe and APAC. In fact, a year ago, Europe due to the war in Ukraine, what kind of slow. U.S. did very well actually. APAC just came out of the pandemic, relatively speaking, was weak. Of course, APAC we combine China and the rest of Asia. So it's overall, right? And then, of course, coming into this year, and we see the opposite in the U.S. relatively weak, and then Europe, APAC are strong. And this kind of global presence really has provided us a kind of buffer, like crushing out any up and down turmoil, and that's great for us.

Got it. I think you also spoke about the order slowdown driven by elongated sales cycles as it relates to, I think you called out sales team turnover, funding pressures and some excess capacity in the U.S. market. Were they all sort of equally responsible for the shortfall that you saw this year?

Regarding to the U.S. weakness.

Just the sales team, the excess capacity dynamic and then, of course, the funding pressures, which everybody else is seeing as well.

For the U.S.

Yes, we saw the academic and government market in the U.S. be the weakest of the 2 major sectors. And I think all of those pressures impacted that market. And we just -- what we experienced was that the decision-making process just took a little longer than we expected. As Wenbin said, we grew strong double digits in instruments, in Asia Pac and Europe. Similar customer mix, maybe even somewhat unexpectedly or paradoxically that the government and academic sector is stronger. So it's a bigger percentage of the total revenue mix outside the U.S., but government academic in Asia Pac and Europe was much stronger than in the U.S. So it's a quarter-to-quarter variation that we see and we expect long-term secular growth trends over a multiyear time horizon and not any different.

Got it. And Bill, are the sales turnover issues now sort of behind you in terms of...

Yes. We had a salesperson who retired that was covering a key sector. We brought in a new person who didn't get the same traction. We actually have that retired person come back now and she's doing great. So it was a relatively isolated issue. And it was one of the factors that drove the somewhat slower performance in Q2. There were other issues as well.

Got it. And how long do you expect the excess capacity sort of headwind to impact the top line?

Yes. Look, what we were referring to there was that it seemed that spending growth was very rapid during the COVID era on both the academic side and on the biopharma side. And we were hypothesizing that, that rapid spend in '21, '22 and parts of '23 had caused a bit of an overhang that we were seeing this year. It's really difficult to prognosticate about that. We -- as I said, we did see market softness in the U.S. We hypothesized that, that might be one of the factors because we've heard about it from lots of people. But there's really no -- there's no precedent for the pandemic, obviously, and there's no cyclical precedent that one can look at. So hard to say.

Got it. Wenbin, back to you on the pricing environment in flow cytometry. This is a question that keeps coming up. You're dealing with some larger peers here, BD, Bio-Rad, Sony, et cetera. Are you seeing sort of elevated pricing pressures at the moment? Several companies in the life sciences have reported using reagent rental leasing programs, just anything that they can do to help reduce that upfront capital requirement for instrument purchases?

Yes. Actually, like many other medical device applications, reagent rental has been very popular in the space. That's primarily in the clinical space. For research application, that doesn't happen very often. So that's why it's not a primary part of our business right now since majority of our sales are still for [indiscernible]. Now regarding to price pressure, in fact, we probably have the lowest cost structure on our operations right now and enjoyed, you can see, the clear gross margin and for our capital expenditure type of business. And we feel we will be very, very strong, and we can face any challenges in our space if actually it happens. We haven't really seen much yet, but we are prepared, if it happens.

Got it.

Yes, the reagent rental, #1, we don't do much of it, but we would -- from the market research we've done and discussions, we would not expect that to be any lower margin than our core business. That's just a different way of paying for the instrument that customers in the clinical space use. But in terms of overall gross margins, we wouldn't expect it to have any negative impact. And as Wenbin said, we've not been seeing significant across the board price pressure. Look, there've be a few more requests for financing than we've seen in the past, which we put down to cash flow pressure, but nothing significant on the pricing front.

Got it. Just switching to the end markets. I think biopharma is about 60% of your total revenue. Clearly, the end market has been pressured this year. But maybe to just set the stage a little bit. What's your split between pharma versus biotech versus CRO customers? And what is -- has there been any difference in headwinds across those 3 customer constituencies?

Between biotech, pharma and CRO?

Yes.

Yes, we don't split that out. Sorry, I don't have that information ready at hand, not really seeing any -- anecdotally, I've not seen any significant changes there between those 3. As we talked about before, we've seen different growth patterns between the collective pharma, biotech and CRO versus academia and government.

Fair enough. And on that note, Bill, I mean, as you think about the sequential trends in that end market, I think you actually saw biopharma revenue improve a little bit sequentially in the second quarter versus the first?

Yes, what we said is that we saw some improvement in -- firstly, our service business across the board grew very strongly, 30%. And then our products business in Asia Pac and EMEA grew very strongly, on a combined basis, about 30%. Within the U.S., we saw academia and government down, but we saw biopharma up sequentially from Q1 to Q2. So that was encouraging.

Got it. And do you see that sort of sustaining here? I mean, more recently, there's been some chatter from the preclinical CROs, especially around renewed pharma, reprioritizations and budget cuts, particularly on the discovery side, largely driven by IRA and patent cliffs and so on?

Yes. I mean, we haven't. Obviously, we're not going to talk about -- we don't have the numbers for the third quarter yet, and we wouldn't talk about it even if we did. But -- and I'm not updating our commentary here, but we haven't seen any changes in trends. Our business tends to be -- we see more revenue from the larger pharma companies, larger CROs. And they're interested in the quality of our technology and we're established with them as the premier technology. They're interested in harmonization, which is something that we can provide. This is particularly useful to them. So we think that the spending plans and spending trends of those larger companies tend to be stable over a multiyear period and less up and down based on what happened in the last quarter in the financing markets. Most of our business are bigger companies with more stable budgets, stable funding and longer-term plans.

Got it.

Yes. There's a buying decision -- actually behavior is different between academic and pharma. For the academic industry, normally, they always go to the best, latest. And -- but pharma actually they start with assessing their technology and gradually, slowly, they are kind of conservative. Once they have identified a technology, it may not necessarily be today's technology, it maybe yesterday. But however, they spend so much time to assess. And once the decision is made, they want to move the technology across all of their institutions. As you know, all those big pharmas are global, right? They have labs across the world. And this is the reason why it's important for them to harmonize the tools, the technology across all of their labs and Cytek tools fits right there. And in fact, the first or maybe the only instrument today on the flow cytometry space that will enable them to harmonize across different institutions across. That's the kind of general trend we are seeing with those customers.

Yes. We see repeat orders from big pharma companies, maybe not every quarter, but every second quarter at least as they populate those global labs with the technology they want.

Got it. Switching to China, Wenbin. That's been a nice growth driver for you this year. A lot of other life science companies have faced challenges in the region. What's letting you sort of buck the broader trend and then, of course, the obligatory question on the stimulus and what are you hearing on the ground in terms of reversal of the funds to the province level, and are you starting to see that show up in your funnel activity?

I don't think Cytek is very much different from many other companies talking about the challenges in China. Frankly speaking, we face the same challenge. One of the difference between Cytek technology and many quite others is probably due to the advanced nature of our tools which I don't really see much local competition. So that means when they do decide to buy and we truly outperform and some others, they may see some local competition. Indeed, actually, in the entry level, we do see lots of local competition faced by many of our peers because those are the areas of focus for their technology, their tools. We have been focusing on high end of the research applications in China. And I think on a stimulation subject, I think there have been lots of discussions. And it's out there. But typically, this is a kind of value process, a very slow process. And normally, it takes quite a long time, 6 months or it may sometimes even longer to figure out the requirement and start to work on tender and even after you have won the tender, it may still take quite a long time, 3 months or even more to have the money funded. That's the time they will place order and then you will see the benefit. That's why we don't see the stimulation package to impact our business this year.

Got it. But would the back half of '25 be fair? Or do you think it actually would be late '25, just given the time lines you laid out?

It's more like a mid to later part of '25.

Mid to later part of '25. Okay. Just a couple of quick ones on the financials and the guide before we let you go. How are you thinking about the phasing of revenue between 3Q and 4Q this year, Bill? And then importantly for next year, right, what are some of the puts and takes to keep in mind that could drive growth either above or below that 20%-ish range, let's say, you have an easy comp? But clearly, the end markets aren't going to step function get better on Jan 1.

Yes. On the first question, we don't guide to the quarter specifically, but what I would do is, point you to the pattern of the last couple of years where we have about 25-ish percent of our revenue in Q3 and 30% in Q4. So I don't have a reason to expect that our customer -- and that's driven entirely by customer behavior. They just have a preference to get more active as it gets to the end of the year. I don't have a reason to expect that, that would be any different, but it's customer dependent. And as it relates to next year, puts and takes, we we're seeing nice strong overall growth in service in EMEA or in Asia Pac. We would expect that the U.S. would return to growth because the secular drivers are there. We're working on new products as we've talked about and so I think it's -- those would be the puts, if you will. But the takes nothing really comes to mind in that area. So we'll have some new products. We'll have market -- continued market growth in Europe and Asia Pac, and we would hope that the U.S. stabilizes back to a more -- particularly the U.S. academic market stabilizes. And we think that for the reasons we've talked about that U.S. biotech pharma should continue to grow. And look, we're not taking into account any exogenous events, wars, recessions and so on and so forth. The one macro factor that could help us is we're all expecting interest rate cuts this month, hopefully, at the end of the year as well. when interest rates went up, we saw that will have a negative effect on the business. So by implication, that may provide a tailwind. That's about as much as I can say.

Got it. Fair enough. Thanks so much for spending the time with me this morning, guys. We appreciate it.

Thank you.

Thank you. It's great to be here.