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

Good morning, everyone. Thank you for joining us on Day 3 of our Global Healthcare Conference. My name is Edmund Tu. I work on the Life Science Tools team here at MS. And it's my pleasure to be hosting Cytek Biosciences today. Speaking on behalf of the company, we have CEO, Wenbin Jiang; and CFO, Bill McCombe. Thank you, guys. Before we get started, I would like to remind everyone, we have important disclosure information that can be found on our disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your sales representative.

So with that out of the way, can you help us set the stage and talk about how '25 has played out versus your initial expectations at the start of the year? And what are your key accomplishments in the past 12 months?

As you know, we have a new administration for the year. And when we initially presented our forecast, that was not in part of the considerations. And clearly, starting from January, and there was an export control from the prior administration right a week before his departure. And that was certainly caught us some surprise. And thereafter, we know there was tariff situations and the funding reduction of the subjects. Nevertheless, and all those things, although expected, and we have managed through and clearly due to our earlier preparation will be regarding to region for region manufacturing, which was part of our projection and potentially, it may happen. And overall, we have managed this very well. And even though there was some impact, but it's very minimal. So far, we have done well overall.

I mean, in a market where instrument sales have been challenging, last quarter, your core FSP instruments placed a 3% year-over-year growth, unit growth. So wondering what's driving the strength here? And maybe taking a step back, can you help remind the audience, what's different about your FSP platform versus conventional flow cytometers out there today?

Yes. First, we know flow cytometry is a basic life science tool and used widely and being widely adopted in almost every life science labs. And so they have been used on a daily basis. Now as the technology progresses and the application become more versatile, and they need more and more advanced technology on the flow cytometry side to support their research. And that means the conventional instrument and set limitations. This is when we started to develop our technology, which is called the full spectrum profiling technology. The way it works is it capture all the information from those biomarkers on the fluorescent side that enable us to distinguish lots of markers with special signature very close to each other. So because of this, what we have done and that really drive us to break the conventional barrier and get us to far more parameters, and we started with our initial 40 color panel, which now becomes the standard in our industry. Now we certainly have already broken that barrier as well, we go way beyond 50 colors. With our technology, pretty much we have changed the whole landscape of the flow cytometry. Now full spectrum becomes a standard in the industry. And of course, every of our competitors are moving towards that direction. They realize and the future of the flow cytometry technology is based on what Cytek has pioneered and has promoted, and now we become a standard of the industry. That actually brings down to Cytek is previously, we compete against the conventional tools. We need to convince our customers why they have to go to spectrum today is no longer the case. And when customers start to make a decision what to buy, clearly, full spectrum is in their mind, that becomes a default position. And among the industry and who is the leader, clearly, Cytek is the first name they can recognize. And so we have enjoyed the benefit of that the reason why even in today's very tight capital expenditure environment, we continue to enjoy the growth and our core technology tool continues to grow. And last quarter, we reported a 3% increase over the prior year.

Got it. That's helpful. And then if we were thinking about the flow cytometry TAM, flow cytometry applications today address about a $7.5 billion initial TAM for cellular analysis and has the potential to advance into a $8.5 billion TAM for a total $16 billion opportunity. So if we were to take a step back, what's the difference between the initial TAM and the adjacent TAM? And where are we today in terms of penetrating this $8.5 billion?

I think the first is when we talk about $5 billion, is what flow cytometry today is overall business revenues and $7 billion is the potential flow cytometry is able to support if every application starts to adopt what we have presented to the user base. I think first is, today, clearly, and we know in today's environment and actually, coming back to the overall general growth and the projection and also based on past history is always about 7% to 8% year-over-year annual growth. Of course, the last couple of years, we actually see a contraction in the space due to a few reasons. And one is the over investment during the pandemic space. Many companies purchased the capital instrument based on, at that time, what's available to them, the investment. Second part is -- second reason is due to the funding trend, especially. And as you know, early start-ups and less and less funding getting invested into those industry new business, you don't see that as many. And clearly, that has impacted the purchase. And then, of course, recently, you see all those new situations facing us. And -- but long term, and we believe and it will continue to grow in that space, especially flow cytometry, earlier I mentioned about that's a very old technology has been there and widely adopted, but many of the instruments around 50,000 instruments in the field, many of those are up for renewals, they need to be updated. And so we feel -- and although the current capital expenditure investment has impacted the timing and -- but eventually, it's going to come back, and they need to be replaced. And in fact, we have already seen that. And we do offer, for example, like kind of incentive for those switch, and we see a lot of those kind of situations these days and people coming back for Cytek to offer them the new technology, new tool and to replace their old instrument in the lab and this is getting more and more now. That's what we have been seeing recently. And this is going to continue on this kind of process, we feel. And we are definitely going to benefit.

Got it. And Wen, you mentioned about a 50,000 installed base of flow cytometers today, what do you think your guess for the rough mix between conventional flow versus FSP as we stand today?

I think FSP started from about 2015 time frame. And overall, we believe today in the field about 3,000 ish and based on full special technology. And clearly, this is going up rapidly. That's what we see and more and more cutting. So great opportunity for us is because the overall percentage is still very small and less than 10%. And as you can see going forward, and flow cytometry, typically 7 to 10 years will be the place. And you can see the kind of opportunity for us as most of those become full special going forward within the next 5 to 10 years.

Got it. And then maybe diving into your end markets a little bit. On the academic end market. I think the funding pressures and the softness in the U.S. academic government end market is pretty well known. And while instruments directly funded by the NIH on the account for less than 5% of your total revenues, what are you seeing in your U.S. academic and government and market customers? And how is the sentiment sounding like today?

I think it's -- from that purchase, sometimes it's not just a derived funding situation. It's kind of thinking mentality and the kind of fair and that really has slowed down their purchase decisions even though when they actually need them, and they are going to push back their decision-making. But that's the reason why we see some challenges. We have seen some challenges during the last few quarters. Nevertheless, I think gradually and people have started to realize, and it's not as bad, and what people have been thinking about, even NIH funding reduction probably is not going to be as much worse as what we expected. So I think overall, we have already seen and I think the U.S. market has become stabilized and so as you can see, last quarter, our overall results in the U.S. is already almost flat compared to a year ago versus early Q1 and which was a reduction. And so I think this trend is going to continue. That's what we feel and for the U.S. market. Europe is a different subject and because of the overall challenges with regard to funding or defense moving from less than 2% to above getting close to 5%. Clearly, they are struggling with moving around the funding to support that, and that clearly is going to continue to impact high expenditure support on the research space. But again, the needs are there, and it's just we regarding to where they are going to cut more and where is less. We feel flow cytometry eventually is going to come back because of the needs for almost every of the research needs in the lab and many of the tools are becoming old. They need to be replaced.

Got it. And then I guess in terms of your customers in the academic government end market in EMEA, are you seeing regional differences? Or is it broadly the same? Any trends to call out?

We saw amongst the pharma customers, the biopharma customers, some preference for swinging investment back in the U.S. in the second quarter. In terms of the academic and government, we actually had a good quarter in EMEA, but it came principally from countries that were not in NATO. The NATO countries appear to be most affected by the budgetary constraints. And in Asia Pac, the funding situation of both biopharma and we're seeing increasingly stronger contribution from the academic and government sector in Asia Pacific. Now much of the sales, particularly in China, go through distributors, so they end up in our, as we classify them in our biopharma sector, but much of that strength actually comes from -- is driven by government spending. So that's sort of a -- that's a snapshot.

Got it. And then I guess in terms of your biopharma customers and your FSP platform, can you kind of tell us how these customers in this end market use your instruments? Is it more in the upstream discovery work? Or are you seeing some of this being used in 2 QC applications? And how does it differ between pharma, biopharma and CRO customers?

Firstly, in the first question in the pharma side, the application is split between drug discovery and translational and that's related to the kind of clinical trial and then production side, the QC type of applications. Cytek tool today are mostly focused on towards drug discovery. And I believe almost every large pharma today have Cytek instrument already to support their usage and continue. We see the continued increase of our penetration to support those type of applications. And then follow through is on the translation side. And that's where they start to work very closely with CRO. And we clearly see CRO started to adopt Cytek tool technology more and more and started from, of course, early days IQVIA. And one of the reasons they have cited with regarding to going to Cytek for supporting the clinical trial in the CRO is not because of the high parameter itself because during the clinical trial, they don't really want big panel, it's expensive. They only want to shrink the size of the panel. Nevertheless, the reason why CRO would like to adopt Cytek technology, which support large panel is the flexibility, okay? Because CRO needs to serve all kinds of clients, pharma based with many different type of biomarkers. And normally, without Cytek tool previously, they have to deal with all those small panel one by one, and they have to prepare lots of different type of reagents and a big catalog and large inventories. As you know, and many of those probably eventually would have to be down to wasted. Now after they have transitioned into Cytek technology with those large panels, they can reduce the whole offering catalog down from a whole box to a couple of pages to support their customers. That significantly reduced the kind of inventory they need to prepare to support their customers that save them tremendously, also the kind of flexibility they have -- we have to offer for them. That's the whole reason why CRO is getting more and more into Cytek to Cytek technology. We have more than 10 CRO today based on Cytek to Cytek technology and more and more we are seeing our penetration into that space to support them. QC, we do have a tool that can support QC, but QC side is a different sales channel. As you know, Cytek started from high end of the research, gradually getting into the translational clinical trial. And with regard to QC is a different sales activities. We are learning, and we feel that's an opportunity for Cytek. We have the tool, we have the products. We have the technology can support them, and we see that as a future opportunity for Cytek.

Got it. And then before we move away from the regions, maybe just zooming in on China a little bit. It seems like you guys have done pretty well in the first half. And looking at some of the publicly available tender information, Cytek always comes in a solid team with some months, you guys coming in, in the second place. So maybe can you guys talk about what you're seeing in the region there, how customers are reacting and maybe some of your stimulus wins or benefits in retail in China?

And in China, after that many years of work with our customers, clearly, Cytek has established ourselves as one of the top premier supplier, especially as the new decision come down, what to purchase when full spectrum technology become a default position, Cytek now start to benefit. And so even though some of our competitors still have the name recognition, but with regarding -- getting down the technology selection, clearly, we benefit. And that's the reason why we -- our market share in China start to grow during the last few quarters, we see this trend is continuing, and we clearly going to benefit. And so that's the reason why, and we see -- overall, our business in China is doing well right now. .

Got it. And then maybe switching over to your portfolio. I think the exciting news coming out of Cytek 2025 this year was your Aurora EVO debut. Tell us more about this new instrument, what's new here? And how has the early reception been since it started shipping, I think it was in June?

You see, Aurora, we first launched in 2017, right? And as we engage with customers, as we into the pharma side, we have been hearing a lot from the pharma with regarding to what they would like to see certain features being carried on our tool. Build upon those inputs, we started to develop a new technology, new tool and all of those features start to get into the new EVO system we launched in Cytek this year. That's including, for example, the highest throughput, pharma would like to see and that's going to help them to improve the efficiency timing and with regarding to drug discovery. And then the automation side is because all flow cytometry require turn on, turn off and with certain time delay and this kind of automate the process that allow customers to remotely turn on, turn off and those systems that can also speed up the process operation. And then we see the small particle more and more on the drug discovery side require those kind of features. Now we did have the small particle option previously for early in human. Now it has become a standard across all EVO that support those nanoparticle kind of research. Finally, is harmonization also become a standard across EVO. All of those features are actually desired by the pharma. So EVO is really a system for the pharmaceutical company.

Got it. It sounds like it packs a lot of great new features. So I guess maybe one for you, Bill, how should we be thinking about the ASP of this new instrument? Would it be fair to think of something higher than the Aurora, but maybe lower than the sales order? How should we be thinking about this?

Yes, we don't talk so much about ASPs of individual products. It's something that fills out a premium to the Aurora because it has features that add productivity and value. Relative to the sales order things occurred maybe depending on the configuration, it could be a little higher, a little lower.

Got it. That's a helpful color. And then, I guess, speaking of sales order and other instrument in your high-end portfolio, how has that been performing a way? Is it seeing some pressure given its higher ASP or maybe some distraction from customer interest in the EVO?

You mean the sorter?

Yes, the sorter.

I'd say it's, we had a very strong first quarter. And strength in the Q4 of last year, and it's continued with what I call solid performance in Q2. Bear in mind that we're in a market -- an overall market that have negative growth. So solid performance is actually pretty good.

Got it. And I know Cytek has been a leader in the high-end flow cytometry space, but you guys have also indicated your interest in further penetrating the entry and mid-level flow cytometry market. So if you guys could provide some color on how these efforts have been progressing? And maybe some color on how Northern Lights has been performing of late and customer interest in your new Muse Micro?

Yes, Muse Micro has done really very well. And it's a low ASP product. So it's not a big contributor to overall revenue. Northern Lights continues to be a solid performer. We're growing at least as fast as probably doing a little better than the market in that product as well. But the big products continue to be the Aurora and the sorter. They account for the majority of revenue. Aurora plus Aurora EVO and sorter continue to be the big account for the majority of the portfolio.

Got it. And then you guys are seeing a lot of momentum in your recurring revenues and it was a service and reagents with Brightspot and [indiscernible] both growing 18% year-over-year. So maybe parsing the 2 apart, on services, Bill. You've mentioned that there's a very predictable relationship between installed base growth and service revenue with a 1-year lag on average. But as your installed base starts to mature, how do you think about this relationship evolving?

Well, I think it's our attach rate, if you will, it's been very stable. So it will continue to grow with the growth in the installed base. But as the denominator gets larger, the percentage increase will gradually get a little slower, but that will be a gradual effect on growth over a multiyear period. We're not -- we're not going to see dramatic changes there at least. That's our current view. Look, our systems are very actively used that we've got in our cloud, Cytek Cloud, we've got or maybe 6, 7 users per machine. So it's important for the customers that the machine is up and running and ready for use. So I think that has supported our service business.

Got it. And then on reagents. I know this is a relatively new and smaller business for you guys. But one of the interesting things you guys talked about on the last call is your installed base post about $150 million worth of the agents annually, but you're only capturing less than 10% of that. So I was wondering what are some specific strategies or initiatives that you guys are implementing to accelerate the adoption of Cytek reagents on the instruments?

Sure. So the most important one is reducing our delivery times, time between when a customer orders and when the reagent shares up at their facility. So we've brought that down very substantially since the end of last year. And I think that's really helped. We've continued to invest. So that's probably the most important driver of growth. The other things that we've done include continuing to invest in new reagents. So we spend a lot of relative to the size of business, a lot of money on new reagents and new dyes. And once you've developed a new dye in particular, that's an asset that keeps producing revenues over a long term, over the long term. So that's the second thing. And the third thing is we have put together a number of partnerships that enable people -- the customers to buy other companies reagents through our platform. And so that has substantially expanded our product range. So we, through a combination of our own reagents and those that we source through from other players, we now have a very full catalog. And I guess lastly is Cytek cloud. We've worked on making it easier for customers to buy reagents through Cytek cloud, aloha at this stage is a pretty small contributor, but it's a contributor. So that -- and look, the combination of all those things has really improved the growth rate pretty close to flat to 20-ish percent in the last quarter, 18%, I think.

Got it. And then speaking of Cytek Cloud Lending, I think on the last call, you mentioned your vision of tying the Cytek Cloud into a platform for users to exchange their information and to present data and inform for, I guess, the community to better relying. What are your thoughts on the time lines to implementing this strategy? And how do you envision this creating additional stickiness for your customers?

Actually, Cytek cloud clearly, a platform and widely adopted by our user base and also growing very fast and reaching beyond 20,000 users because the tool really is helping and streamline the panel design for our users. Previously, that process takes weeks months, now a couple of hours. And so that's really helpful and useful, given some of our competitors coming to Cytek cloud and that can somehow help their user bases with regarding to the user panel. Now I think Cytek cloud system and earlier, I mentioned about the platform, we want to continue to expand, including supporting the user bases for them to exchange information. Today, we do have all those process. We routinely offer workshop user group meetings and for them to exchange. And many of those activities can be adopted over Cytek cloud. But right now, our primary focus today is trying to support on the reagent side and the lot of automations are being implemented from panel design to reagent quote to reagent orders thereafter. And of course, we are able to expand and to include all those other activities. But in order to support that, certainly, there are certain costs involved, and we hope the whole platform will be able to sustain by self sustainable. And we feel through certain activities like reagent support and those kind of things, eventually, we will be able to enable our Cytek cloud to provide more and more capabilities, and that's going to continue. We do have invested quite a bit on making this platform more and more user friendly for our user base.

Got it. And then the clinical market is an important part of your growth strategy and your focus. Could you provide us with a quick update on how the clinical market is doing in China and where do you guys think in terms of seeking clinical regulatory approval in the U.S.?

Yes. Clinical clearly, we have to go through market by market, and we are regulated by each country and where we sell to China was the first one we received the clinical clearance today, and we in fact, Northernized CRC platform and has been going relatively well compared to other markets. And because of the clinical certification we received over there, we also have the class clinical clearance for the reagents panels like TBK. We are also trying to expand the application panels beyond what we have today and over there for the market in China specifically. Europe is the second part, we have the Northernized CLC, IBD, we have also built a relationship with Sysmex. And as we know Systemax premier clinical tool providers in Europe, and we have built a partnership over there and together to drive the Northern light COC for that market. In Europe, we also build a dedicated we start to build a dedicated clinical team to drive the adoption in Europe as well. Here in the U.S., FDA and we continue to drive clearance and my understanding based on FDA regulatory requirements, I can't talk too much for those things still in the process.

Got it. That makes sense. And I guess there's been some moves in the flow cytometry market of late, and I have to ask an obligatory question on the competitive landscape. So can you provide us with your current view on the flow cytometry competitive landscape today? And are you beginning to see a narrowing of either capabilities or pricing?

And as I mentioned, a full spectrum becomes a primary technology and tool products for this industry. Clearly, our competition is clearly and the primary previously for the conventional now moving into our space. And we do have seen more and more players here into our space. But we don't really see them as a threat. We see them as an endorsement. Cytek is a leader. Now previously, earlier I mentioned, we have convinced customers why they have to select a full spectrum and instead of staying with the conventional. Now, no such a need since everybody is on to spectrum and a great endorsement for Cytek cloud. Now Cytek has been shipping this product for that many years. And we have gone through all the ups and downs and all the problems being addressed, and versus all of the newcomers. And here and now, certainly, we have a broader, larger base for us to drive our products into. And from our perspective, from a performance perspective, from a data side, we continue to outperform across all the spaces and comparing to those newcomers. And now the point is about pricing, right? And Cytek, in fact, has always been cost efficient in our space. And in fact, we don't worry about overall competition with regarding to pricing, and that's what we are good at and because of our operational efficiencies and certainly. And we will continue to drive products represented by the EVO we launched to make sure and we reduced the price erosion effect in our space and because we provide value to our customers. In fact, in this industry, pricing is not really the primary driver for customers to sell up to each product. It's about performance. And of course, as we move into the QC space production side, it may be a different thing, but this is an area we are still trying to learn, trying to adopt, but we feel we are positioned to support that market to be competitive in that market as well.

Got it. And then, Bill, maybe a few financial questions for you. On the last call, you guys were at the top end of your guidance, and you're now expecting down 2% to plus 2% growth for the year. What are your underlying assumptions for your end markets across your regions here? And how much visibility do you have into the second half? What gives you confidence in the revised range?

When we break the business down into 4 pieces actually. So the service business where growth is driven by the growth in the installed base with a 1-year lag. So we already know how the installed base grew in 2024. So that gives us a good visibility on what to expect in 2025. But we expect continued growth there, consistent with the last few quarters. The reagent business for the reasons I talked about, we've seen a real uptick in growth there, and we expect that to continue because those drivers are in place. They're going to continue to drive growth there. And then as the Asia Pac instrument business, the Asia Pac portion of the instrument business. So those 3 represent about half of the business. And the Asia Pac instrument business, we don't report instruments by itself, but we report Asia Pac in total and that the majority of which is instruments and that grew at about 9% in the first half. The funding situation for instruments in those markets continues to be quite strong, good support in China from the government. And academic and biopharma institutions in the other Asian countries are pretty well supported. So we expect growth to continue there consistent with historical rates. And then you come to the other half of the business, which is U.S. and EMEA instruments, more of a challenge there. The U.S. was a little better in the second quarter than the first. So we're hopeful continues. And the new year has been weak, we -- it's obviously under pressure because of government funding. And so that's a bit of a question mark. But the guidance assumes that the half of the business that's growing strongly provides enough of a lift to overcome whatever headwinds we encounter in the other half of business.

Got it. I know we're out of time here, but I just want to give you guys an opportunity to give us some closing remarks. What are some of the key points that you want to highlight to investors today? And maybe how should we be thinking about your long-term growth and what's driving that?

Sure. I think key point is that in flow cytometry market that's down 3% in Q2 and similar number in Q1, we grew our volumes for FSP instruments by 3%. So the franchise is very strong. And this downdraft that we've seen in the flow cytometry business we're confident at some point will come to an end, and we will emerge very strongly from that. I talked about the service reagent and Asia Pac instrument businesses, which are growing strongly. So as soon as EMEA and U.S. instruments stop declining, you'll see growth in the overall portfolio. And then the other thing to remember is that the incremental margins on our instrument business as revenue grows, are very high. We're in the 75%, 80% region. So when we're able to reestablish top line growth, you're going to see a lot of that drop through to EBITDA line. And with low EBITDA margins, our EBITDA margins excluding investment income are in 7% area, you could see substantial EBITDA growth as we come out of this downturn in the industry. I think that's going to change investor perception on the company when they realize just how profitable we can be in an industry environment where the headwinds have abated then the top line is growing.

Great. Thank you guys for the time today. Thank you.