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

All right. Good afternoon, everyone. I'm Matt Sykes, the life science tools and diagnostics analyst at Goldman Sachs. And today, I have the pleasure of welcoming Cytek Biosciences here with me today. We have Wenbin Jiang, the CEO; and Bill McCombe, the CFO. Wenbin, Bill, thanks for joining me.

Thank you, Matt.

Nice to be here.

Maybe if we just kick things off and you can kind of set the stage, talk us through the sort of most recent Q1 results. What are sort of the key takeaways that you want investors to come away with when thinking about the rest of 2025?

Sure. So Q1 is typically our weakest quarter. And so we saw that this year. I think the strong points of the business -- or the strong points of quarter are that if you look at the service and Reagent business and the Asia Pac and rest of world instrument business, that's about half the and that half the business grew at 26% in the quarter and that half of the business has grown between 20% and 25% for each of the last 5 quarters. So we're seeing great momentum in those businesses. In the service business because of growth in the installed base and in Asia Pac and Rest of World because those markets are strong. There's a lot of activity, there's good funding and our technology leads. Now those growing -- that growing half of the business was masked by declines in U.S. and EMEA instruments due to funding issues in the U.S., and particularly the academic and government market and in Europe in academic and government as well, where funding -- major funding was delayed because of budget pressures that European governments are under but that's those -- that funding has been put in place now. So -- the declines in those sectors mask the growth in the rest of the business. And we think the growth drivers for service and Asia Pac are enduring and strong long-term growth drivers. And we think hopefully soon, we're going to hit the bottom of the cycle in U.S. and EMEA. When that happens, you'll see growth in the overall portfolio.

Got it. And maybe if you want to take a bit of a step back and Wenbin, maybe have us -- have you give us sort of a high-level overview of the company in terms of how you're differentiated with your FSP technology. And I mean, look, you guys represented innovation in a market that hadn't really seen a lot of innovation in the past. And maybe talk a little bit about why your technology was so differentiated at that time and what you're doing to maintain that sort of technology leadership as you move forward?

Sure. Yes. As we know, flow cytometry is an industry that has been there for many years, 40 years. And during that time and the evolvement and the technology development was kind of slow until around mid-2010, that time frame. And then due to the advancement of the immunology and oncology, really demand for high dimensional cell analysis, look at the phenotyping of the immune cells, the technology at that time hit a bottleneck. That's how we came along and looking at what's available the technology from other industry, looking at what's available for the telecom industry at that time because flow cytometry fundamentally is a photonics technology, which actually has been driving the growth of the telecom industry tremendously at that time. So when we look at that, we feel and if we move some of the technology, integrate some of the technology from the telecom industry with the life science technology together, we will be able to drive the advancement. And so that's how we started Cytek and developed the technology, which we call the full spectral flow cytometry technology. That technology clearly has been very well advanced and reached a stage that really driving the needs of and fulfill the unmet demands of the industry. And because of Cytek, we pretty much have changed the whole industry of the flow cytometry. And now today, if you look at everyone -- every player in the space, nobody is investing in any conventional flow cytometry technology anymore. Everyone was jumping on to where Cytek pioneered. We have pretty much changed the whole $5 billion market. And so we are a leader in that space and total globally about 50,000 installed base and right now, about 3,000 are full spectral flow cytometry technology and based instrument. These are for supporting high end of the applications, which we are a leader, 80% of that by Cytek. This space is going to continue to grow going forward based on all the players' investment, R&D dollar investment in our space, as you can see. And so this is how we have been doing and driving basically the whole industry and change the direction of the whole industry. Now we continue to invest as we can see due to Cytek and we have been in that space and delivering product for 8 years and working with customers and understand more and more of the customer needs. And we recently launched a new product, which we call Evo, which have incorporated all the needs of the customers over the time and really driving the advancement of this technology and continue going forward. Clearly, today, Cytek has been a leader in the high end of the flow cytometry space with what we have developed. And we are moving more and more toward entry mid-level with the same technology that can really help our customers with regarding to the ease of use as well as the flexibility, stability, reliability for that application. In the meantime, due to what we have done and due to the installed base we have built up that enable us to penetrate actually more and more into the consumable space. And clearly, we all know since we work with our customers on a daily basis, and they are our customers, they would always prefer the consumable division coming from the instrument suppliers that gives us a great opportunity to drive the growth in that space. In fact, this is one of the highest growth area for Cytek, even though we start with a low base. And lastly, and we feel the opportunity is on the clinical side. Now -- and due to what we have developed, not only our instrument technology will be able to support the conventional type of flow cytometry applications like TBNK, but more importantly, due to the number of parameters we support that help us really to drive the high-dimensional panel for application like leukemia, MRD. And in fact, we have been working with many of our partners to drive towards that type of application, especially in APAC and Europe, where we have our instruments cleared for the clinical applications.

Super helpful overview. Bill, I want to go back to you for a second. Just and more of them is philosophical when it comes to guidance. This is such an uncertain time, and it's really hard to figure out, particularly in academic and government, sort of what sort of the year might portend. But as you think about your guide and what you did in Q1, what are sort of the guardrails around upside, downside? You kind of talked about sort of half of the business is actually doing very well. The other half is dragging that down. But as you think about sort of the conservatism you've baked into the rest of the year, what are sort of the upside and downside cases in your mind, whether it's an end market, whether it's a particular instrument or something like that, that kind of help us kind of put into context the guide?

So half the business is service and the Asia Pac and Rest of World portion of the instrument business. And with the service business, we've seen a relatively predictable relationship between the growth in the installed base and the growth of service revenues. And the reason for that is that our service contracts is that our instruments get high utilization. So it's important to the core labs that the instrument be up and running because they operate as a business themselves. So when we look at that, we have reasonable confidence of continued growth in that portion of the business at a rate consistent with the growth in the installed base. The reagent business has been pretty steady. And actually, we had improved growth in the first quarter. So we feel relatively -- we've been making changes there that show -- that have been improving our execution and our delivery times. And so we're pretty confident about that. And then you come to the Instrument business. And as I talked about, the Asia Pac and Rest of World are markets where there's good funding and we've been seeing good growth. So really, the variability comes with -- when we gave the guidance, that was in early May, there was a lot of uncertainty about academic funding in the U.S. There is pressure on government budgets, which are the primary providers of funding to the universities in Europe. So we'd see pressure there. And really, that portion of the business constitutes the most of the range of outcomes. And it's a function of how much does the uncertainty delay purchasing decisions. And we looked at a range of scenarios there and bracketed our guidance at the minus 2% to plus 5%. Look, the midpoint is still for growth. And we think that whatever are the pressures on U.S. academic funding that they're cyclical in nature that over time, we expect that market to write itself. But for this year, you have to be a little cautious. And so that represents the outcome represents or its range. As I said in my answer to the first question, we think that the down cycle in U.S. and EMEA that the percentage declines relative to the prior quarter will start to get smaller because we're coming up against easier comps, number one. And as we get further into the year, the universities will just be better at figuring out what the situation is and what they can spend. And look, we've all the while continuing to sell instruments to universities in the U.S. And last comment I'll make is that university funding is quite situational. There are some universities where they're under more pressure than others. And some of those other universities are in pretty good shape. Others are more difficult situations.

Got it. You've historically outgrown the flow cytometry market, and it's obviously a core part of sort of your long-term growth assumptions. Maybe just kind of give us a mark-to-market on where you think the flow cytometry market growth is today and your expectation for the future to the extent you have one?

I think the last number we saw for the first quarter was it was down 2%, if I'm not mistaken.

Actually, [indiscernible] a report Q1 overall. In the cell analysis space, the overall growth was negative, I think, 2 to 3%. And -- but the indication says this negative growth is mostly due to the downturn of the flow cytometry in the space. So that just means flow cytometry could be even worse than that 2% to 3% in Q1.

But look, we're growing faster than that because our installed base is growing at around 20%, right? So that has driven growth at around that level in our service business. And then our Asia Pacific and Rest of World business is growing much faster than the U.S. and EMEA. So that's why we're able to outperform. The other point in that regard is that we're in the full spectrum profiling portion of the overall flow cytometry market, and that segment is expanding. So it's growing faster than the overall market. So for all those reasons, and I think also because of our product innovation and the new Evo being a great example, that's another reason that we would expect to continue to outgrow the market. There are solid factors behind our continued outperformance.

Understood. And in the first quarter, you noted some weakness across the pharma CRO cohort. You actually had a decent Q4 out of that same cohort. So maybe just talk a little bit about what changed in the quarter. You're expecting weakness from that cohort to linger across '25, like...

That cohort or segment is sort of lumpy in its purchasing behavior. The industry has been under some pressure from some of the drug pricing initiatives in the U.S. that have been talked about by the government, approaching patent cliffs but that pressure on funding in the industry isn't very different than where it was in Q4 of last year. So I think that's just an episodic thing. Our technology continues to enjoy an advantage with pharma customers in that it's uniquely capable of being harmonized across different sites. So we don't think that, that's a -that there's a different directional trend beginning in pharma. We see it more as a blip than anything else.

Yes, the quarter-to-quarter variation, right, the best indication probably is the trailing 12-month comparison versus just looking at a particular quarter.

Yes. I mean you're not alone in lumpiness from that segment. It's been -- they've had their own challenges.

Right. And they have plenty of money, plenty of funding. The portion of our business that comes from the small biotech companies that are reliant on external funding is very small. It's in the low single digits. Most of our pharma and CRO business comes from the large pharma companies and large CRO companies.

Got it. You've already highlighted how services was a really bright spot in Q1, and you've done a phenomenal job growing that business. You've mentioned, as I think many of us know that it's attached to the installed base growth as well. But at some point, there's also going to be some level of replacement or maybe even extension of some of the service contracts as people might not have the funding. In terms of like your long-term aspirations for services, either as a percentage of the business or sort of a long-term growth algorithm, how should investors think about that business? Because it's coming up now on radar screen. It's becoming a material part of your growth in your business. So maybe helping us frame what that opportunity set is would be helpful.

Yes. Sure. So that will be just the fact that it's -- that the installed base is growing at a faster percentage rate than the instrument sales business will cause the service business that faster growth will mean it will become an increasingly bigger proportion of the overall portfolio. So you could see that business becoming into the -- I think we said in the first quarter that our recurring revenue, which includes the reagent business and reagents is about 5% or 6% was 31% on a trailing 12 basis. Over time, you can see that get into the 40s, I would say. And just because high utilization continues to be a feature of our installed base. Our instruments get used 24/7 in the labs or we hear that a lot. So it means it's important for those labs to have service contracts because a core lab operates as a business. It charges out its services to other parts of the university. So uptime and high utilization is important. So that's why we're optimistic about continued future growth. Now as the deliveries in each year, as the installed base gets larger, the percentage that the deliveries in each year represent of the total installed base will get smaller. So that 20% over the next few years is going to come down into the teens, but it will still be very healthy growth.

Yes. I think from a modeling perspective, this is what we see, right? And eventually, the total installed base is going to grow based on the organic market growth eventually when it stabilizes this business. So there are 2 parts of the growth. One is the organic installed base growth based on market growth eventually. And second part is basically to track the inflation, right? Because service -- you service your own instrument, you don't really have a competition from that perspective. So that's become your own guaranteed business and then it's going to track the inflation plus the organic growth.

Yes. And look, the instruments need service. Every once in a few years, the lasers need replacement. So if you've got a service contract, you get the laser replaced for free. So it continues to be a good incentive for the customer to have a service contract.

And then higher level, if I look at your -- combining your reagents and services, so let's call it your recurring revenue, I believe it was about 31% of total revenue on a trailing 12-month basis. I mean that's an attractive part of the tools business model, right, having this recurring revenue. Ideally, like what is your sort of mix that you would like to see? Because your instruments -- unlike some of your peers, your instruments are actually accretive to margins, too. They're really good margins on the instruments as well. But it's more transactional in nature. It's a little bit lumpier. So as you think about how to properly have that balance between recurring and nonrecurring, how do you think about that?

So look, we would like to have recurring revenue be as high as possible. And we continue to invest in growing the service business but it grows with the installed base. And then the reagent business is small. It's 5% to 6% of revenue but we're growing it in the big markets at close to double-digit rates. So we'll grow those 2 parts of the portfolio as much as we can. As I mentioned before, I think realistically, getting them into the 40% range 5 years from now is doable.

Yes. The other part is if you really want to do the long-term modeling and when stabilizes, a reasonable ratio between instrument, reagent and consumable altogether more like the 45%, 55% range. 45% Instrument 55% recurring, which includes service and reagents.

That reagents? Okay.

Yes.

Got it. China has been a pretty good source of consistency and growth for you guys, unlike some of your peers that have called out some weakness in the region. Maybe walk through what you're seeing here in China and any color on how Cytek is benefiting from China equipment renewal stimulus packages?

We have been -- we started with China later than the U.S. and European market, right? And the early days, pretty much we were trying to establish ourselves with the name recognition. And because that market previously was dominated by a few players like BD, Beckman and Thermo Fisher, those kind of companies. But over the time, and clearly, Cytek now is becoming a well-known name in China, especially as the full special technology has become established in this industry, Cytek now is regarded as a premier company. So that we benefited from that. Then the next is due to the stimulus program and encourage many of the customers' users over to buy new instruments. And so coupling both, so we actually -- that's a reason for Cytek's rapid growth right now in that market from a very small portion to today. In fact, we are now the #3 in China. And based on 2024 tender won by all the potential suppliers over there. And the top 2, of course, we know who they are, and we are #3 overall. But on the other hand, China is large and territory but dependent, in fact, in some important territory like Shanghai, Cytek is already #2 now. So we are doing very well there.

Got it. Maybe talk a little bit about tariffs. I mean, talk about a moving target. There's some news last night or today as well. However, maybe just refresh for investors sort of what your tariff exposure is? What is sort of your manufacturing footprint in China in terms of both Instruments and reagents? And how should we think about mitigation?

Sure. So we have established a -- we have 3 major manufacturing facilities. So let me talk about instruments first and reagents. And so Wuxi, China; Fremont, California; and Singapore. And so we're able to manufacture product for the Asian and European markets in either Singapore or Wuxi, and there's no tariff issue there. The vast majority of the components for our systems are sourced in Asia somewhere. And then for the U.S. product, we're either manufacturing in Fremont or trying as much as possible to bring it in from Singapore. So it's a region-for-region manufacturing strategy. Obviously, there are some components for U.S. product that have to come in from Singapore or other places. So there's some tariff impact but we are adding tariff surcharges to our invoices to recapture that. So net-net, we've talked about an impact of 1% to 3% to gross margin but I expect it to be very much towards the lower end of that range. So it's not a huge deal for us.

Okay. And then, Bill, just how should we be thinking about sort of your fixed versus variable cost base, particularly what level of sustained revenue do you need in order to generate a consistent positive adjusted EBITDA going forward? I mean you have it now but just kind of think about -- give people some context around sort of the fixed versus variable and what sort of maybe a potential EBITDA margin expansion could look like?

Yes. So the short answer to that is that we -- about 75% to 80% of $0.80 on every incremental dollar of revenue drops through to the EBITDA line. So our gross margins around about 50% on last year, I think we're 55%, heading towards 60%. And so of that cost of goods, it's about 40%, about half of that is fixed and half of it is variable. So you should get a drop-through of about 20% of that or [indiscernible]. And then at the operating expense line, we expect fairly limited growth. It's sort of around inflation levels because we have the infrastructure in place already to support substantially higher. So we did have -- we had positive EBITDA last year with $200 million of revenue. We had -- so $22 million, including investment income and $14 million, excluding investment income. And so we're predicting revenue in a similar range this year, and I don't think our cost structure is going to change too much. So as we grow revenue, we should be able to drop through at least 70% of that, 75% to 80% from the cost of goods at the gross margin line and then 1%, 2% or 3% total growth in operating expenses. So you can see $10 million of incremental revenue, we could easily see $7 million of incremental EBITDA from that.

Got it.

Maybe $7 million to $8 million, I would say.

Okay. It's pretty healthy.

Yes. So I think you make a good point, Matt, is that we're really at an inflection point where our EBITDA margin ex investment income was about 7% last year. That could easily double or triple in the next few years.

Yes. Wenbin, I want to talk a little bit about the Cytek Cloud, which has been interesting. You've got -- I think you reported in Q1, 18,000 users. Maybe just kind of give us a little brief overview of the platform but also, I think importantly, how this provides sort of a stickiness with your customer base? And how do you offset the advantage of the stickiness with maybe some absorption of costs that you're doing? I mean there's a lot of data they're producing. It can kind of get out of control at a certain point. So how do you kind of strike that balance?

Yes. No, absolutely. Before Cytek Cloud, when customers use Cytek Instrument and to design, develop panel, they have on trial basis in the lab and putting those reagents onto the instrument and it's not doing well and they change. Typically takes 3 to 6 months to optimize a panel. Now what Cytek Cloud has done is it enables users to design and optimize panel virtually on Cytek system and actually the cloud. Afterwards, the system will allow users to purchase reagents through Cytek Cloud because it's linked to our reagent purchase platform or they can, of course, buy elsewhere. And then they can just take that panel to the lab and do the experiment. That clearly expedited their development of panel very quickly, right, a week or so and everything is done. And so that makes it very, very efficient. And so many users like this platform, a reason when we -- why and when we launched 2 years ago, immediately received all the attention of our user base by now 18,000 and clearly more than 18,000 by now and because we have grown so fast. That also has reflected the number of users, how many people are using Cytek instrument and -- which also reflected on the service revenue growth. Now this is just one part of the features of Cytek Cloud. Second part, actually Cytek Cloud, we are continuing to improve this is to provide data analysis afterwards, the experiment through cloud. And then for data management as well. Today, special instruments, so much data and typical in the old days, you have a desktop type of storage system and quickly gets full. And now we will provide those online storage. And then the data management is also then easily for them to access pulling out to compare to look at it, study them. And now going forward, we'll continue to evolve and become a platform for users to exchange information data and present results become a forum for the user base. So through that way, it becomes really a great platform for Cytek customers, and that will enable Cytek customers to stay with our platform, our solutions. So that's the kind of system we are developing.

And am I correct in assuming if you're uploading all this data in the cloud and you're using it and you're recalling that information for data generation and studies and things, if you were to switch off of Cytek to a new instrument, none of that would be relevant or usable. And therefore, it keeps that virtual cycle of people in the ecosystem for Cytek. Is that a correct assumption?

Basically all the data once developed, it will be -- continue to be valid and usable on Cytek instrument, of course, not for others.

Yes. Of course. Okay. We have about a minute left. Maybe just to kind of wrap things up a little bit. What is kind of the message you'd like to leave investors with? And what do you feel is the most underappreciated or things that are underappreciated about the Cytek story?

Sure. I think as I mentioned earlier, the fact that half the business is growing at 20%, that the other half, the EMEA instrument business that I think we're much closer to the bottom than the top of the cycle and that, that will turn relatively soon. And unlike almost every other sub-$1 billion market cap tools company, we are not dependent on going back to the financing markets because we're generating positive EBITDA and positive cash flow. And that we've also just introduced a new version of our core Aurora analyzer, and it's met with very positive reviews from customers, and we are quite optimistic about how that's going to perform and drive sales going forward. So I think there's a lot about our story that there's a lot to like right now.

Great. Well, Wenbin and Bill, thank you very much. Appreciate your time.

Thanks a lot, Matt.

Thank you.