NanoString Technologies, Inc.

Good evening and thank you for attending today's NanoString Q1 results conference call. My name is Selena and I will be your moderator. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Doug Farrell with NanoString. Please go ahead.

Thank you, Operator. Good afternoon. Thank you for joining us. During the call today, our CEO, Brad Gray, will review the preliminary financial results that were released at the close of the market today. After our prepared remarks, we'll take questions. We plan to report our full financial results for the first quarter on May the 10th. This call will be recorded, and the audio portion will be archived under the Investors section of our website. During this call, we may make statements that are forward-looking in nature, including statements about preliminary financial results for the first quarter, sales execution and sales funnel, the impact of the realignment of our sales force, expectations for demand for our products and growth in our business, including customer interest in spatial biology, the impact of new products and expansion into new markets, and the growth trajectory for our product lines. Forward-looking statements are subject to risks and uncertainties, many of which are beyond our control. Our results may differ materially from those projected. All forward-looking statements are based upon current information, and management assumes no obligation to update these statements. To better understand the risks and uncertainties, we refer you to the documents that we filed with the SEC, including our most recent Form 10-K. With that, let me turn the call over to Brad.

Thank you, Doug. Good afternoon, and thank you for joining us. This afternoon, we announced preliminary first quarter revenue of approximately $31 million, below our guidance of $34 to $38 million for Q1 revenue. We have scheduled this call promptly to update you on the trends we're seeing and our early indications of their root cause. The primary driver of the Q1 shortfall was geomics instrument revenue, which was approximately $5 million. GEOMIC's consumable revenue came in at approximately $5 million, representing an increase of about 80% over the prior year. In-counter revenue of approximately $21 million included $4 million of instruments, $13 million of consumables, and $4 million in service. A highlight of the quarter was the strong demand for our new COSMIC spatial molecular imager, which generated more than 15 new orders during the quarter. After reviewing the preliminary results, And with the benefit of hindsight, we believe that we have identified two factors that impacted our Q1 results. First, we believe that our first quarter revenue shortfall was driven by an uneven sales execution, resulting in an imbalance between capturing fourth quarter revenue and developing our funnel of Q1 2022 opportunities. While this focus allowed us to capture more than 50 geomics instrument orders during Q4, it also cleared the most mature instrument sales opportunities out of our funnel. While numerous opportunities remained in our 2022 sales funnel, they were less mature, resulting in larger than typical drops in orders from Q4 to Q1. Second, we believe that this was compounded by the impact of changes we made to realign our expanded commercial team early in the year, which temporarily reduced the effectiveness of our sales efforts. During 2021, we made a strategic investment to expand our commercial team to capture the enormous market opportunity in spatial biology and to prepare for the launch of our Cosmix SMI. Since this time last year, we've added about 90 new positions to our commercial team, allowing us to increase the density of our sales coverage in major markets. At the beginning of January, we rebalanced the territories and roles to take full advantage of this larger sales team. We promoted some sales team members to new leadership roles, and in many cases, backfilled them with individuals who were newer to the company. It is taking time for members of our sales team to settle into these new roles and to become fully effective. In addition, the pace of sales transactions may have slowed as customers were transferred between sales territories. One data point that supports this is that there was a close rate for geomic systems in territories that were realigned that was substantially lower than the rate that we saw for territories that were not modified. We believe that the potential geomics purchases from these customers were delayed, not lost. We believe that both the less mature 2022 instrument funnel and the impact of the sales realignment are temporary. We expect our geomics instrument funnel to become more balanced over the course of the year as our sales team becomes more effective in their new roles. Importantly, there is no indication that our Q1 results were impacted by opportunities lost to competition or any slowdown of interest in spatial biology. While we're disappointed with the slower than expected start to the year, this does not diminish our enthusiasm about our future growth prospects or the overall opportunity for spatial biology. Our geomics funnel remains robust and our lead generation continues at a healthy pace. In addition, we're excited by the momentum of the COSMICS SMI. We're currently finalizing our forecast for the second quarter and look forward to providing more details on our upcoming earnings call on May 10th. We'll provide any updates on our 2022 outlook based on the trends that we see through early May. We're focused on capturing the growth opportunity in spatial biology and delivering the level of predictability that our shareholders have come to expect from us, including consistent sales execution, leveraging our larger and realigned commercial channel. Our top priority is continued leadership in spatial biology, and you can have confidence that the entire team is working diligently to achieve this goal. At this point, we'd like to open the call up for questions.

Thank you. If you'd like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question comes from Dan Arias with Stifle. Please proceed.

Afternoon, guys. Thanks. Brad, I hear you on the overall interest in spatial and that seemingly being good, but on competition, that will be a question that's asked just given how many emerging companies are getting going on commercialization this year. What gives you the comfort that there's not just a platform evaluation process that's taking place with these new instruments that are coming to market?

Hey, Dan, thanks for the question. Certainly there is a platform evaluation process that we would expect customers to take place But two things give us confidence that that is not the primary reason behind the stall. First is on a pure win-loss analysis, there's really been no change in our ability to win competitive processes from the third and fourth quarters of last year where we had tremendous momentum. Second, in those instruments that we did close during the first quarter, we have no reason to believe that the sales cycle was in any way extended beyond what we saw in Q3 and Q4 last year. In other words, people are not taking longer to deliberate on their purchase. Finally, numerous analyses that we've conducted correlate where performance was strong versus weak with places in our geographic channel that correlated with specific organizational changes that we made. So we're pretty capable of tying specific word changes to specific slowdowns in our overall trajectory, which, again, would not be consistent with competition.

Okay, and then maybe just on the consumable side, I mean, have you dug in with existing users a little bit on Geomix pull-through? The 76,000 annualized is a pretty significant drop there, so what do you think is going on on the consumable side?

The consumable side of our business was also impacted by our organizational changes. Part of the shift of our overall channel was to promote senior consumable reps into account management positions, back-selling them with more junior consumable reps. And we saw some specific drops in pull-through from those customers who were passed off from the senior reps to the junior reps. We also believe that this will recover as our new junior consumer reps who are managing these accounts and specific territories are able to form customer relationships and get more deeply engaged than they have been in the past.

Okay, maybe just one more for me and then I'll hop off. Can you just remind us what the plan is for sales reps selling geomics and cosmic systems going forward? Will each sell both? Will there be some folks that are dedicated to one and And what do you think the key is to optimizing the sales and incentive process for the two systems?

Thanks. Yeah, the strategy in manufacturing and spatial biology is to sell a portfolio of products. So with our new structure, we have an account manager who sort of works as the quarterback in a given geographic territory, maintaining relationships with the accounts across our entire instrument portfolio as well as our consumables. And then that account manager pulls in specialists as needed to help sell specific products. In the case of spatial biology instruments, our technical sales specialists, the same ones who launched Geomix, continue to support both Geomix and the Cosmix launch. And by having a technical sales specialist that covers both, we can enter a conversation with a customer that's really not geared towards selling a specific instrument, but is geared towards building a capability for spatial biology, delivering the entire portfolio that NanoString can uniquely provide. And then we let the customer steer us down the path towards either a geomics or a cosmics or a bundle of the two, depending on what their specific scientific questions are and the speed with which they wanna build their spatial profiling core.

Okay, thanks a bunch.

Thank you, Dan. The next question comes from Julia Quinn with JP Morgan. You may now proceed.

Hi, good afternoon, guys. Thanks for the call. So first, between the two factors you discussed, is there any sense, you know, what's the relative magnitude, you know, how much was pulled forward into 4Q and how much was the Salesforce disruption?

I think it's fair to say that the Salesforce disruption was the larger contributor. Although our funnel was less mature than we might otherwise hope at the beginning of the quarter, as of the time of our March 1st earnings call, the funnel maturity and the funnel size was sufficient to deliver our guidance, provided that the close rates on things like instrument sales for geomics were consistent with historical performance. It was the sales force reorganization and the reduction in effectiveness that happened during that, that reduced our close rates in the last month of the quarter, and which I believe was the primary driver of the shortfall.

Got it. And then I know you're in the process of reassessing your guidance. If the Salesforce realignment impact is temporary, what do you think will be factors that you would factor in when kind of reassessing your full-year outlook? And right now, how long do you think the Salesforce productivity, how long does it take for Salesforce productivity to stabilize?

Yeah, I think starting with the last question, Julia, we've taken a series of specific actions that we think will help our sales reps settle into their new roles and begin working in this mini team concept that we've introduced. And by the way, the mini team concept is not new either to NanoString or to other sales organizations. It's one that we piloted in 2021 in several regions that were high performing. It worked well. And many other companies have used this approach over time. So a couple things that we're investing in. One is some very specific training for our sales reps and new roles. We have reps who have stepped up into leadership positions who are going to get specific leadership training. We're going to be providing mentoring one-on-one for new district sales managers and account managers. And we think that pretty quickly we can help those individuals learn new tricks that may not have been at the core of what their previous roles required. The second thing we're doing is we've learned some hard lessons about funnel management, especially in the fourth quarter with the failure to properly cultivate future opportunities. And we're taking advantage of our CRM system, which we upgraded to Salesforce.com last year, to use the full power of the CRM system and business intelligence to, on a weekly basis, look for balanced sales efforts across both current and future business in a way that will ensure that our funnel remains not just large but at the proper maturity level at all times. So overall, I would expect us to take a quarter or two to reach full effectiveness. We're evaluating what our ability to recapture some of the instrument opportunities that slipped from March into April is, and we'll continue to look at trends overall before updating guidance on May 10th.

Got it. And one more from me and I'll let others jump in. I know you ruled out that, you know, any slowdown in terms of end market demand and any, you know, competitive kind of, you know, takeout. But how are you thinking about the possibility that your customer interest might be shifting from geomics to cosmics?

Yeah, that's something we're obviously watching carefully. I think the imager category, which is what we call the high-resolution platforms of which Cosmix is one, are certainly getting a lot of noise from commercial organizations today, and I'm sure our customers are being bombarded with both the advertisement and promotion for Cosmix and other imagers at this time. But Geomix has a very important place and some unique attributes that make it a perfect companion to Cosmix. So Geomix provides the whole transcriptome whereas the imager category does not. Geomix provides high throughput where the imager category will not. And Geomix provides the ability to focus all the power of the platform on regions of interest that are defined that the users will according to the scientific questions. And again, imagers will not have that capability So in customer interactions that I've been a part of in the last few weeks, these messages resonate when they're delivered. And I believe that our sales reps will come around to be able to position the entire portfolio in a way that keeps both geomics and cosmics growing and which brings more and more customers into the nanostring spatial ecosystem.

Got it. Thanks, Brett. Thank you, Julia. The next question comes from Kyle Butcher with Cowen. Please proceed.

Great. Hey, this is Dan Brennan. Sorry, I had some phone problems here. So I kind of on and off the prepared remarks. I missed some of it. Maybe first question would be just on general placements. I heard, Brad, you say how the sales force that was realigned, you moved consumable salespeople into different roles. Did you also say that you moved instrument salespeople into different roles?

Yes, I didn't say that, Dan, but we did. So the new account management structure took our most senior and successful reps, regardless of whether they had been primarily focused on instruments or primarily focused on consumables, and it made them responsible for the entirety of our book of business in a certain territory. And it gave them sort of direct management over the specialists whether they be consumable specialists, technical instrument specialists, or lead generation reps who work in that territory, kind of making them the quarterback of the team, calling the plays, and playing a slightly more broad role than they've played in the past. So we did ask our instrument reps to step up. We asked our consumer reps to step up. And one of the patterns we saw actually in the first quarter was that in territories where a former instrument rep is now the account manager instrument performance was better. And in a territory where a former consumable rep is now the account manager, often the consumable performance was stronger. So this, I think, represents a natural evolution in those individuals' capabilities to sell the book of business. And I believe that with some training and a relatively modest amount of time, we'll have a fully effective mini team approach.

Got it. Did you discuss Geomix orders in the quarter, Brad?

I don't believe that I shared the specific sales volumes. Our ASP was similar to what it has been in the past at about $240 a system, and I think that put orders – let me scroll down here – at about 20 units.

So that was 20 placed and recognized, or that's 20 orders?

It's about the same. Dan, you're operating at about a one-to-one book-to-bill. So I think it was 20 revenue recognized, but the order units were not far off that. Got it.

And you would suggest, given all the commentary around the realignment and the pressures and the expectation that the funnel's there, that you've got... feedback reflecting or kind of all the commentary reflecting that that number clearly is understated, I guess, versus what the true demand is and we'll have to wait and see? Or just how would you characterize your confidence in that number kind of moving up?

Yeah, that number represents a substantially lower close rate on the funnel of opportunities that were available at the beginning of March than what we've seen in the past. And we attribute that lower close rate primarily to you know, reduced effectiveness based on the Salesforce realignment.

Got it. And, you know, obviously March 1st, I know you discussed earlier that, you know, while the funnel started off slower, it was at a point in March 1st where it was really just a close rate. I guess, have you guys discussed the whole Salesforce realignment and kind of the changes you made? I know there was a commentary regarding the expansion of the Salesforce that you guys had made, but, like, the realignment sounds like it was – somewhat new. So I'm just wondering, like, you know, how that decision was made. You've done a really nice job the last couple years at kind of, you know, maintaining the funnel and execution. So just wondering how that, you know, how this whole new change came about and, you know, how it's, you know, at least right now.

Yeah, no, that's a good question, Dan. You know, this Salesforce realignment had been in the planning for over nine months. So as we hired, you know, almost 100 new commercial professionals throughout 2021, you We needed to understand how to incorporate them most effectively into our organization. One of the issues that we came across in 2021 as we were planning how to incorporate these new sales reps was that with our larger sales force, some individual customers were interacting with a large number of different nanostring reps. They had a consumable rep. They had an instrument rep. They had a technical sales specialist. They had field application specialists. They had a large number of people that they were interacting with, and they had no single point of contact to sort of make the first call when they wanted to buy a new instrument or order their next consumable. So in order to simplify the way our customers interact with us and in order to support a growing portfolio of multiple platforms, we decided to shift towards an account management model. And at the same time we did that of course, we moved people into these account management roles, and we shifted territory between individuals to get the balance of how large each territory was right. And so that both had sales reps learning new roles, and it shifted some opportunities in the funnel from one sales rep to the other. And one of the things we observed that corroborates the fact that this is a sales execution issue rather than some other macro dynamic is that those specific opportunities that were handed from one rep to the other in January, they had the lowest close rates of any portion of our funnel. There was a real reduction in the effectiveness or ability to close business in accounts that you know, that shifted from one responsible account manager to another in January. And I think that really points to this as a, you know, this underperformance in Q1 as substantially connected to our realignment.

And could you provide some characterization of like the close rate itself? Like are you talking 30% close rate versus typically 70 or 10 versus 50, any, any, any?

Well, I think, look, I think the easiest way to calculate it, Dan, is to look at where our guidance was and where our actuals were, and you can tell what the drop in the close rate was, relatively speaking, not in absolute terms, but, you know, we fell well short of what we had guided, but we had the funnel there with historical close rates to, you know, to make that guidance number if we executed as we have in the past.

And no impact in the quarter? I'm sorry for asking if you can probably address it, but supply chain or Omicron or China, some of the hot buttons coming into the quarter for tools and broadly for the market, was there any drag?

Yeah, I mean, Dan, it's hard to know if there's no impact. That might overstate the case. I'm sure that Omicron was to some degree a reality in the first couple months of the year. And as you'll recall, we had seen some slowness in the first couple months. But I think those types of macro issues, they pale in comparison to the two major issues we've identified here. In other words, I don't expect that my peers will have seen the shortfall that we have based on facing the same macro factors. I think our shortfall is largely self-inflicted, I'm afraid. And, you know, I wish we had done better in preparing for this change management or our transition, but I'm confident that this same sales team who delivered 50-plus orders in the fourth quarter in the new structure once they settled in will be back to the high-performing team they always have been.

And last one, if I may. So it sounds like we'll get an updated view of the year at your full friend's And from what I heard in an earlier answer, you're talking about the sales force taking a quarter or two to get trained and up to speed. So effectively, it's unrealistic to think like this issue could drag on into Q2 and then by Q3, Q4 is where you could be regaining back to where you were or just trying to think.

You know, Dan, I'd really prefer to kind of hold specific commentary until we've seen a few more weeks and we've worked with our sales reps to continue to settle in. And, you know, we'll address that in the May time frame.

Thank you, Kyle. The next question comes from Catherine Schultz with Baird. Please proceed.

Hey, guys. Thanks for the question. Maybe first, how many or what percent of your territories went through that realignment in January, and have you started to see that close rate gap improve as we get into April, or is this something that's really just starting to be addressed?

Yeah, so thanks for the question, Catherine. Virtually 100% of our direct territories were impacted by the role changes and some degree of territory realignment. So that's the answer to the first question. You know, look, we're only a week and a half into April. I mean, I will say we have captured good order flow in the first few weeks. first few weeks here, you know, that's encouraging. But, you know, I think we want to see a few more weeks before we update our overall outlooks.

Okay, got it. Well, when you talk about kind of the closed-rater territories that were realigned was substantially lower than those that were not realigned. I guess it's virtually 100%. How are you comparing those two groups?

Yeah, no, I'm sorry. I may have used confusing language there, Catherine. So the difference in that almost every territory had some degree of realignment. What we looked at to look at the impact of the realignment, meaning handing one account from the rep who used to manage it to the rep who will manage it going forward, we looked at the specific accounts that were reallocated from one sales rep to the other. And it's in those specific accounts that we saw the most precipitous drop in close rate compared to historicals. And that tells me that that transition did not happen as effectively as we wanted. That handoff did not happen as effectively as we would have wanted it to happen from the old rep to the new rep. So that is for the account not at the territory basis. Did that make sense, Catherine?

That does make sense. Thank you. And I wanted to go through a comment that you made earlier in the Q&A. I think you mentioned that where you promoted a senior instrument rep into the management role, you were doing better on the instrument side. What is that? Can you talk to some of those dynamics? I mean, it feels like those would be the ones that saw disruption if you were then backfilling them with more junior reps. So I'd just be curious to get more color there.

Yeah, I think, remember, the new role of these account managers is to sort of play the leadership role in their territory, prioritizing where effort goes, how much energy is spent on consumables, how much energy is spent on instruments. So I think what we observed was when you promote a leader who was more instrument oriented, that territory spends more energy on instruments and therefore, that team spends more energy on instruments and therefore they perform relatively better on instruments. When you promote somebody who was more of a consumer oriented person, they tend to gravitate towards more consumable sales and the overall effort that that team places more biased towards that, and the performance is better. But we're looking for, obviously, balance, right? So we want our new account managers to be just as comfortable directing the team to instruments and to consumables, to be facile at both. And, you know, that's going to take some training and some getting used to the new roles.

Got it. Thank you. Thank you, Catherine. The next question comes from Kyle Mixon of Canaccord. Please proceed.

Great. Thanks for the questions. I know that you just reported an early March. I think it was March 1st. And I appreciate that the close rate was an issue during the last four weeks of the quarter. But were you banking on most deals closing at the end of the quarter? And do you typically capture prior revenue from previous quarters during the end of the quarter as well? It just seems a little counterintuitive. I'm just curious about that.

No, thanks for the question. So like many life science tools companies, the capital equipment or instrument portion of our line, of our revenue line is quite back-end loaded. It would not be unusual for us, it would in fact be typical for us to do half of our instrument business in the last month of any given quarter. And so a reduction in the close rate in that third month has a tremendous impact in what the overall instrument revenue performance is. So that helps it maybe explain how we could have been so off from a guidance that was issued basically at the beginning of the third month. And your second question, I think, asked do we capture revenue that was booked for orders that were booked in the previous quarter in the third month of a quarter? And I'd say the answer is no, not typically. If we received an order in the fourth quarter that was, for some reason, not shipped until the first, we probably would have shipped that in the first two months of the quarter, not the third. Okay.

That's helpful. Thanks for that. And just on COSMICS orders, 15 is a pretty good number compared to previous quarters. Do you expect that those orders are going to step up going forward, and are you still seeing the same portion of COSMICS orders being represented by the geomix customers as well, like being pretty stable? I think it was 50-50 the last time you told us about that.

Yes, so in terms of the mix, yes, about 50% of COSMICS orders came from existing geomix users. Almost every other order came from someone who I would describe as a single-cell researcher, someone who's embraced that modality. So it was about 50-50. We saw many fewer bundles of Geomix plus Cosmix in the first quarter, and we attribute that to the fact that there simply was not the end-of-year money that would allow as many customers to buy two systems at once as there was in the fourth quarter. I think I'll wait until our May call to give any kind of forward-looking guidance on the trajectory of Geomix orders, but as you said, it's off to a really great start and one that's arguably stronger even than the Geomix launch was at the same time in its trajectory.

Okay, thanks for that. And then just going to encounter, so Poulter was below kind of the guidance or the expectations, which seemed conservative just to start off. Can you talk about what's happening there on the encounter consumables side?

Yes, the encounter consumables were just as subject to these reorganizational dynamics as the geomics consumables were. So these junior reps who in many cases stepped up and took over accounts that were previously managed by the senior reps, those accounts that were handed off did not perform as well in the junior rep hands. And that's probably just because they haven't gotten to know those junior reps as well yet. And so that was an impact that hit us both across Encounter and Geomix.

Okay. Makes sense. I'll leave it there. Thanks for the questions. Thank you.

Thank you. Thank you, Kyle. The next question comes from Teja Savant with Morgan Stanley. Please proceed.

Hey guys, this is Edmund on for Tejas. Thanks for the time. Hello Edmund. Hi, can you guys hear me? I can hear you fine, yes. Yes, hey Brad. So given the early stage of the spatial ramp, why would geomics and symbols need such a big sales push? Shouldn't people who just bought their box recently be ramping up projects even absent a tenure sales rep?

Yeah, geomics is a very new technology for our customers to use. We find that for the first four quarters of utilization, they need a tremendous amount of hand-holding to learn how to design and execute spatial biology experiments. These are things they really have never had the opportunity, these are experiments that they've never had the opportunity to perform in the past, and that does require the attention of consumable sales reps, as well as field application specialists. So, you know, these consumables don't just sell themselves. Our customers do need help planning and understanding how to use the system in their first few experiments.

Got it. And then what does this mean in terms of the Cosmix ramp here with the missing first quarter? How are you going to navigate prioritizing revitalizing GeoMix as you focus on the Cosmix rollout?

Well, Cosmic's had a great first quarter, and I don't think anything about the trend in the first quarter changes anything about our prioritization. As I may have mentioned in one of my previous answers, the way our sales reps approach an account now is to approach it as a spatial biology sales call, and where that dynamic conversation with the customer and the type of science that they're doing leads could end up in a geomic sale if that's the right system for them, It could end up in a cosmic sale if that's the right system for them. And in some cases, it'll end up in a bundle where laboratories are eagerly building a spatial biology capability they haven't had in the past. So we don't really think about sales effort going on one or the other. We go in with our portfolio of spatial biology products and do an account with the goal of coming out with an order for one or two systems.

Got it. Thank you very much. Thank you.

Thank you, Edmund. There are no additional questions waiting at this time, and that concludes our Q&A session. I would like to pass the conference back to Doug Farrell for closing remarks.

Thank you, Operator. If anybody did miss any portion of the call today, there will be a replay available beginning shortly and through the 19th of April. U.S. callers, please dial 866-813-9403. We'd ask international callers to use 929-458-6194. The access code for both is the same, 508842. With that, we'll conclude our call, and thank you for joining us.

That concludes the NanoString Q1 results conference call. Thank you for your participation. You may now disconnect your lines.