Cytek Biosciences, Inc.

Thank you for standing by. At this time, I'd like to welcome everyone to the SciTech Biosciences third quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After this speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to re-draw your question, Again, press the star 1. I will now turn the conference over to Paul Goodson, Investor Relations. Please go ahead.

Thank you, Operator. Earlier today, SciTech Biosciences released financial results for the quarter ended September 30, 2024. If you haven't received this news release or if you'd like to be added to the company's distribution list, please send an email to investors at scitechbio.com. Joining me today from Scitech are Wenbin Zhang, CEO, and CFO Bill McComb. Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of the federal securities laws, including statements regarding sitex business plans, strategies, opportunities, and financial projections. These statements are based on the company's current expectations and inherently involve significant risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled, Forward-looking statements in this press release, CITAC issued today, and in CITAC's filings with the SEC. This call will include a discussion of certain financial measures that are not calculated in accordance with generally accepted accounting principles. Reconciliation to the most directly comparable gap financial measure may be found in today's earnings release submitted to the SEC. Except as required by law, SciTech disclaims any duty to update any forward-looking statements, whether because of new information, future events, or changes in its expectations. This conference call contains time-sensitive information and is accurate only as of the live broadcast, November 5, 2024. Finally, I would like to announce that SciTech is hosting a full-day user group meeting in Boston on December 5th. The meeting will feature presentations by users of our technology and SciTech scientists to share their research experience and ideas for how best to use SciTech products. We have a limited amount of space for analysts and investors, so please let me know as soon as possible if you would like to attend. With that, I would like to turn the call over to Wenbin.

Thanks, Paul. Welcome, everyone, and thank you for your interest in SciTech. On today's call, I will provide an overview of our performance in the third quarter and the progress achieved on our strategic initiative to drive sustainable growth and profitability. Then I will turn the call over to Bill for a more detailed look at our financials before we open it up for Q&A. Starting with our third quarter results, we delivered solid growth with 7% year-over-year growth and the total revenue reaching $51.5 million. Our growth this quarter was driven primarily by strong double-digit year-over-year total revenue growth across EMEA and APAC, and from our service revenue globally. We were pleased to see continued growth despite the ongoing stock market conditions. Fundamentally, This is because we are a technology leader in a core instrument category that many labs consider essential as compared to more discretionary technologies. We believe our instruments offer higher multiplexing data quality, sensitivity, and ease of use. These capabilities serve the basis for our strong reputation and loyal customer base. Geographically, we continued to see positive momentum in EMEA and APEC, and a return toward more normal spending patterns in the U.S. While market conditions for instruments in the U.S. continued to be softer than last year, we were encouraged to see sequential quarterly improvement for site-based products across our customers, in particular with the biopharma sector. We experienced strong demand from our global farmer and CRO customers who are increasingly focused on harmonizing their instruments across different regions for translational discovery work, which our technology is uniquely capable of delivering. Additionally, we posted another quarter of positive adjusted EBITDA, a cornerstone of our path to deliver sustainable profitability. This was driven by our disciplined focus on expense management combined with our revenue growth. Overall, we are seeing the durability of our diversified portfolio clearly demonstrated as we effectively navigate macro headwinds. We believe our site Excel analysis portfolio is becoming a core technology in lab discovery and comprehensively serving our customers' needs in their analysis. Importantly, the high degree of geographic and customer diversification in our business provides us with confidence in delivering on our expectations and our long-term objectives of sustainable profitable growth. We are working hard to solidify SciTech's next chapter as a market leader in sales analysis. To that end, Our team is focused on driving forward four key pillars, each of which is integral to our long-term growth, instruments, applications, bioinformatics, and clinical. In the third quarter, we expanded our global footprint with 164 instruments sold, reaching a total installed base of 2,821 units. including 328 Amnet and Guava instruments shipped since the acquisition of the Luminous business. Within these totals, the Sighted Aurora and the Northern Light systems are showing good growth both in the third quarter and the year-to-date compared to 2023, while the Stealth Folder is showing consistent demand. We believe the growing install base of our instruments will continue to serve as a strong foundation to drive adoption of our product and service offerings going forward. Turning to bioinformatics, our primary objective is to enable our customers to streamline their experiment workflow through our software tools, which drive adoption and the utilization of our cell analysis solutions. We continue to empower the scientific community with better tools to advance their research, most recently with the special panel tool and enhancement of our panel builder tool within SciTech Cloud. We are receiving great feedback from our customers who are benefiting from this expanded capability that automates and removes a labor-intensive manual process and allows scientists to jumpstart their panel design work and has been strong initial adoption among our growing user base. As a result, a number of our customers have already integrated use of the Spectral Panel tool into their workflow, leveraging its advanced capabilities to optimize panel design and streamline their research. As part of this adoption, we have already begun receiving relation orders generated from the CITR Cloud. With special panel launch only in late July this year, we are quite pleased with its performance today. Notably, and more broadly, we expanded our CITR Cloud user base, which now has over 13,600 users. More than doubling our user base, at the start of the year. This represents an average of more than five users per installed SciTech FFP instrument. Turning now to clinical, we continue to believe the clinical market represents an attractive business opportunity for SciTech. As a reminder, several of our products are approved for clinical use in both China and the EU. in the third quarter, site at the center stage, to showcase our complete scale analysis solution at a number of industry conferences. One event I'd like to highlight is the ICCS annual meeting and the course in Seattle, where Dr. David Ng, director of flow cytometry and applied AI at Baylor Laboratories, with a premier presentation about site technology. Dr. Ng remarked that the integration of special flow cytometry into their workflows has been a game changer for their resource limited and the space constrained laboratory. He further noted how our technology solutions have dramatically streamlined their processes, allowing their scientists to focus their time and expertise on high-value and high-skill analysis, which translates to faster and more useful results. In sum, we believe Scitec is uniquely positioned to serve an attractive sales analysis market with the combination of our industry-leading end-to-end technology portfolio, global diversification, and clear long-term growth drivers. We are acutely focused on portfolio enhancements that will accelerate our business strategy. This durable foundation provides us with confidence as we seek to deliver high growth and profitability and strong cash generation. With that, I will now turn the call over to Bill for more details about our financials.

Thanks, Wenbin. Total revenue for the third quarter was $51.5 million, an increase of 10 percent versus the second quarter and 7 percent versus Q3 of last year. This revenue result reflected a significant recovery in product revenue versus Q2 and robust growth in international markets and in service revenue versus Q3 of last year. Product revenue, which is primarily instruments, increased 14 percent versus Q2 and 3% versus Q3 of last year. The increase versus Q2 was driven by a recovery in the U.S. market, particularly in the biopharma sector and continued growth in international markets. The increase versus Q3 of last year was driven primarily by growth in international markets. Service revenue grew 25% versus Q3 of last year. This service revenue growth reflects continued expansion of the install base of our instruments and active usage of our tools across a broad range of disciplines. Turning to geographic market performance, total U.S. revenue increased 9% versus Q2, but declined 9% from a strong Q3 of last year. International markets grew strongly with EMEA up 25% versus Q2 and 33% versus prior year. Asia Pacific was flat versus Q2, but up 32% versus prior year. This growth in international markets reflects the fact that SciTech technology is the market-leading full-spectral flow cytometry technology of choice for research institutions and biopharma companies worldwide. GAAP gross profit was $29 million for the third quarter, an increase of 14% versus the second quarter, and an increase of 7% versus Q3 of last year. Gap gross profit margin improved slightly to 56% in the quarter, up from 55% in Q2 due to improved overhead productivity on higher revenues. Compared to a year ago, gap gross profit margin was down 1% from 57% due to higher product material costs. Adjusted gross profit margin, which excludes stock-based compensation expense and amortization of acquisition-related intangibles, was 60% in the quarter, slightly up from 58% in Q2 and 59% in the prior year quarter. Operating expenses were $33.3 million for the third quarter, down 2% from Q2, driven by lower G&A expense. Total operating expenses were down 1% from Q3 of last year. Research and development expenses were $9.9 million for the third quarter, in line with Q2 and down from $11.2 million in the prior year period. The decrease was primarily due to lower headcount and engineering expense. Sales and marketing expenses were $12.4 million for the third quarter, in line with Q2 at $12.3 million and $12.1 million for the prior year period. General and administrative expenses were $10.9 million for the third quarter, down from $11.7 million in Q2 and up from $10.4 million in the prior year period. The decrease versus Q2 was primarily driven by lower outside services expense. The increase versus prior year of $0.6 million was primarily driven by higher stock-based compensation expense. Loss from operations was 4.2 million for the third quarter, an improvement compared to a loss from operations of 6.4 million for the third quarter of 2023. This was driven by higher gross profit and lower operating expenses. I'm pleased to report that we generated positive gap net income of 0.9 million in the third quarter, compared to a net loss of 6.5 million in the prior year. This was primarily due to a lower loss from operations, higher net other income driven by a foreign exchange gain of 1.1 million versus a loss of 0.6 million in the prior year, and a tax benefit of 0.8 million versus a tax expense of 2.3 million in the prior year. Adjusted EBITDA, which excludes stock-based compensation and foreign currency impacts, increased to $7.6 million for the third quarter compared to $2.9 million in Q2 and $3.7 million in the third quarter of last year. This was due to higher revenue and gross profit versus both Q2 and the prior year quarter and lower operating expenses versus the year-ago quarter. We remain committed to improving profitability going forward by driving revenue growth and controlling costs. Total cash in marketable securities increased by 0.6 million versus Q2 to 277.8 million, despite our spending 12.1 million to repurchase shares in Q3. This demonstrates the strong cash generating capability of the company. With healthy cash reserves, no meaningful debt, and strong operational cash flow, we continue to operate from a position of strength and can fully support our global growth initiatives. As I mentioned, during the quarter, we repurchased 2.2 million shares of Scitech stock for approximately 12.1 million at a weighted average price of $5.41 per share. Shares repurchased under these programs are canceled, leaving us with 128.8 million shares outstanding as of October 31, 2024. We plan to continue to repurchase shares in Q4 and expect to more than offset the dilutive effect of shares issued under our stock-based compensation program in the fourth quarter, which will result in a net reduction of our shares outstanding. Now turning to our outlook for the full year 2024, which has been discussed at a high level earlier. While we are continuing to see a relatively soft market in North America, we did see a recovery toward more normal levels of activity in Q3. At the same time, we see good momentum in Europe and Asia Pacific. We also expect to see solid growth in our service business. Based on these factors, we reaffirm our four-year revenue outlook in a range of $203 to $210 million, representing overall growth of 5% to 9%. over full year 2023, assuming no change in currency exchange rates. In addition, we continue to expect Scitec's gap net loss to be in the single-digit millions range for the full year 2024. It remains our objective to deliver positive net income going forward. Scitec also expects to generate positive cash flow from operations in 2024. With that, I will turn it back over to Wenbin.

Thanks, Bill. Our financial strength and our shared belief in our mission position SciTech well to successfully navigate through today's macro environment while strengthening our foundation for the future. We have a clear roadmap ahead to deliver long-term sustainable growth and profitability. And I'm proud of our team's achievements this quarter. It is their dedication and commitment that drives our progress forward. I want to thank everyone for joining today's call, and we will now open it up for questions. Operator.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. And your first question comes from the line of Peja Savant with Morgan Stanley. Your line is open.

Good evening and thanks for the time here. Wenbin, maybe just to kick things off, I think you called out a more normalized demand environment in the U.S. and maybe even a little bit of sequential improvement in pharma. And I think you also made a comment in your prepared remarks about how the flow cytometry from market is more sort of essential versus discretionary spend for your customers. Can you just elaborate on that a little bit? Why is what you're seeing quite different from what some of the other life science instrument vendors are seeing at the moment, including, you know, folks in sequencing, spatial biology, etc.? And in the U.S., any comment on academic and government? I think that end market was a little bit soft in the second quarter for you. Has that gotten better as well?

Yes, indeed, we have seen some improvement on the academic side as well in Q3 versus Q2. Overall, in North America, the strength comes from the biopharma, as what we have indicated. Now, while we are different from others, as we have indicated, flow cytometry is a basic life science tool used in almost all biology labs, life science labs, and so supporting their daily needs. and which is different from many other technologies, which is discretionary. And we feel this probably has played some role with regarding to differentiating SciTech from some of our peers.

Got it. Fair enough. And then one for you, Bill. I mean, obviously the guide has a 13 million or so sequential step up in the fourth quarter at the midpoint. So, you know, a lot of your life science peers have actually pulled out any budget flush benefit, just given the softer than expected environment and so on. Can you just help us think through, you know, your underlying assumptions there around the budget flush? Or is it sort of what Benben just alluded to in terms of, you know, essential versus discretionary spend that sort of underpins your confidence that the step up will come through here in the fourth quarter?

Look, customarily we see a step up in the fourth quarter, and if you look at the fourth quarter as a percent of total revenue in prior years, it's about 30%. So we are assuming a normal seasonal pattern here, and I think partly underlying that is the the theme that when being discussed that our instruments are viewed as more of an essential instrument by many of our customers as opposed to discretionary. So, you know, we feel that a normal seasonal pattern is appropriate. Got it.

Okay. And then last one for me here. Any guardrails on 25 you'd be willing to share? I think the street has you doing about mid-teens growth while also expanding your EBITDA margins versus this year's level. Is that a fair framework to use, or would you rather folks think of high single-digit growth, perhaps like 10% or so, Just in light of the moving pieces here, including at what point does China recover, whether the pharma sort of end market continues to improve quarter over quarter, et cetera, there's a bunch of moving pieces here. So I'm just curious as to any preliminary color you guys would be willing to share on 25.

Do you want me to take that, Wimber? Yeah, go ahead. Look, we don't want to give revenue guidance for 2025 at this point. It would be premature. We'll do that on our next call. With respect to profitability, the only thing I would note is that if you look at year-to-date EBITDA, we're up significantly versus last year. We're at about... just 9.9 million year-to-date EBITDA versus, I think, 2.7 last year. That's on an adjusted basis. So our business model is to grow the top line, to maintain gross margins, and to control operating expenses and have them grow more slowly than the top line. So the The implication of that is that we would expect to grow a bit as we go forward. So that's about as much as I can say with respect to 2025.

Understood. Thanks for the time, guys. Appreciate it.

Next question comes from the line of Brandon Smith with TV Cowan. Your line is open.

Hi, guys. Thanks so much for taking the questions. Congrats on the quarter. Maybe looking ahead a little bit to this December event and honestly into 2025, I'm just wondering maybe what we might expect at that event in terms of pipeline or financial updates, really kind of the overview of what you're going to have there. And then maybe heading into 2025, if there's any important new products or product updates on the horizon that you guys think would be especially relevant just to top-line growth moving forward. Thanks very much.

Let me just comment on the first part of the question. At the fourth quarter earnings call, our first quarter of each year is when we customarily provide our guidance for the year. And we would expect to do the same thing next year. give guidance on similar items. So nothing, you know, I don't have an expectation at this point that we'd be doing anything significantly different than our normal pattern. And with respect to new products, I'll ask Wenbin to say what we can about that.

Yeah, and as you can see, we invest substantially in R&D and and just like what we have launched this year, and you will continue to see new products being launched over the course of the year, and so that will reflect how we invest and serve for our shareholders.

All right, great. Thank you.

Next question comes from the line of Mason Carrico with defense. Your line is open.

Hey, guys. Thanks for the question here. You called out strength and APAC. I wanted to dig in a little bit there and ask if you're willing to provide any incremental detail on what countries are really driving the strength there. Are you seeing demand trends in China improve? Any additional color there would just be appreciated.

Our APEC business includes revenues from Australia, New Zealand, Japan, Southeast Asia, India, and as well as China. So the strength reflects the total effect in that area, in that continent. So with regard to China, and I think you have seen a lot of reports, from other companies, and indeed we have seen similar impact. Of course, not as severe as what the other companies have been reporting. But overall, clearly we have seen some impact, but we also expect they may return to normal sometime next year, and we look forward to that.

Got it. And then as we do think about the fourth quarter here, how much of that sequential increase is really being driven by assumptions around quarter-over-quarter growth in the U.S.? Just really any incremental detail you can give on the assumptions for the Q4 ramp sequentially from a geographic standpoint would be great.

I think we – We have strong momentum, as Wenbin mentioned, in EMEA and in Asia-Pacific, particularly in the Asia-Pacific countries other than China, so Australia, New Zealand, and so on. With respect to the fourth quarter, we would continue to expect good momentum in Asia-Pac, And in Europe, we expect some recovery in the U.S., although the U.S. market is softer, and therefore, you know, that would probably be the lowest growth of any of the three major regions. The service business, we would expect that to continue to grow driven by the growth in the installed base. So that's about as much color as we could give.

Got it. Thank you.

Next question comes from David .

Hi. Thank you for taking the questions. This is John for Dave. I was wondering if you could just give any color on what you're thinking about the longer-term growth rates for your business are going to be looking like because they have been this year a bit below the sort of 20% to 30% growth rates that we saw historically. So if you could give any thoughts on what could bring you back potentially up to those levels in the future, what might be – some takes on those would be appreciated.

Thank you. Overall, we know life science industry has been challenged and in some areas you can see the negative growth. What we are striving for is to continue to maintain our growth above the market.

Okay, great. Thank you. And can you just give any thoughts on how you're tracking CapEx spending and what you would be looking for that would give you additional optimism about that going forward?

And if you look at our business today, and probably about, yeah, right now it's about 30% in the current, including service and reagents, and 70% on capital instrument long-term and we are going to continue to invest on reagents, on applications to continue to grow our recurring revenue based on our solid installed base. So we feel good about our long-term growth. Okay, thank you.

Next question comes from the line of Andrew Cooper with Raymond James. Your line is open.

Hey, everybody. Thanks for the questions. Maybe just first, you know, thinking about some of the commentary around China, seemingly not as big of a headwind for you as some of the others, you know, should we expect that you get a similarly sized tailwind from some of the stimulus program in that regions or overall maybe a little bit smoother, so not as low of a low and not as high of a high? Just would love kind of how you think about the trajectory there as some of those funds start to kick out to potential customers?

I think we are going to benefit. Clearly, when China starts to invest in buying new instruments, advanced technology clearly is on top of their mind, and sci-tech technology has been very well established right now in China, and we feel strongly, and as the program kicks off, and funding start to go to our user base and we will see the great benefits from those new funds available to them.

Okay, that's helpful. And then just kind of one more crack at the 4Q step up. Can you give us a sense for the visibility you have as you sit today and look at kind of what's already been delivered, what the order book looks like? relative to hitting, say, you know, the midpoint of the guide, what do you need to go close through the last two months of the quarter versus what's already sort of in hand or at least in a booking?

You know, we are a third-month company. So most of our orders are coming during the last few weeks. And therefore, even though we are now in early November and we've Actually, with regard to the full quarter, we continue to rely upon pretty much the last few weeks, last six, seven weeks, and so it's too early for us to comment on this.

Okay. I'll just sneak one more in if I can, but would love a little bit more granular of an update for the clinical pathway in the U.S., you know, what progress you've made in terms of that process and maybe what are the biggest gating factors to getting into that clinical market here in the States?

I think there are two parts regarding clinical. One is the 510 process, which is One of the parts we are working on. The second part is the LDT and applications, which we have been working with quite a few reputable labs in the U.S., and we feel good about the progress we are making right now.

Great. Appreciate the time.

Again, if you would like to ask a question, press star 1 on your telephone keypad. And we have another question comes from the line of Matt Stice with Goldman Sachs. Your line is open.

Hi, this is Evian for Matt. Thanks for taking my questions. So within services, you had solid growth there. How are attachment rates trending? And then can you talk through some of the low-hanging fruit to get that attachment rate even higher? So you're mostly going after current instrument users that don't have service contracts, or you're going after more like new customers buying instruments?

Service revenue is related to the installed base and also relates to how frequently the instruments are being used. So in that regard, of course, and that also is related to how many users will buy service contracts. Basically, it's an insurance. And I think over the last few years, you can see clearly, our service revenue has been growing quite nicely. And that reflects first is how actually the rapid increase of our installed base. Second part is how frequently our instruments are being used regarding to those customers. And so, of course, long-term, and you cannot continue to expect to see 30%, 40% kind of growth rate we have enjoyed. But overall, that's going to continue to track the growth of our installed base.

Okay, great. Thank you. And then in terms of thinking about how customers have delayed replacements due to CapEx constraints in the weaker funding environment, how do you think about the age of instruments and how that's trended? within both your current install base and then those of competitors whose instruments you might be replacing and just trying to get a sense for when you think the replacement cycle might start to kick in.

This is a little bit complicated question. The reason is under current market, it's relatively speaking more difficult for customers to get funding to buy new instruments. So clearly, we have seen they would like to extend the life of the instruments they have. But on the other hand, we do see new programs kicking in. They really would like to drive to the advanced research and working with advanced technology. This is where we excel, and we have benefited from our customers moving toward new technology, toward high parameter cell analysis. Also, another advantage we have seen is more and more customers, pharma, biotech, they are trying to harmonize their instrument technology across many of their labs globally. And this is where we excel. Our technology clearly has been there to serve for the needs of our customers on standardization and harmonization.

Super helpful. Thank you.

There are no further questions at this time, and this does conclude the meeting. Thank you all for your participation. You may now disconnect.

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