NanoString Technologies, Inc.

Hello and welcome to the NanoString second quarter operating results. My name is Katie and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star one on your telephone keypad. I'll now hand over to your host, Doug Farrell, Vice President of Investor Relations to begin. Doug, please go ahead.

Thank you very much. On the call with me today is Brad Gray, our President and CEO, as well as Tom Bailey, our CFO. Earlier today, we released our financial results for the second quarter of 2022. During this call, we may make statements that are forward-looking, including statements about financial and operating projections, the impact of the COVID-19 pandemic and other macroeconomic factors, future growth trends and related factors, expectations regarding current and future instrument orders, prospects for expanding and penetrating our addressable markets, as well as our strategic focus and objectives, and the development status anticipated success of recent and planned product offerings. Forward-looking statements are subject to risks and uncertainties, including those described in our SEC filings. Our results may differ materially from those projected, and we undertake no obligation to update any forward-looking statements. Later in the call, Tom will be discussing our financial results and 2022 guidance. We have prepared as a supplement to GAAP financial measures, selected non-GAAP adjusted measures, calculation of which are described in detail in our press release. Throughout the call, all financial measures will be GAAP unless otherwise noted. Besides that, conciliations of GAAP and non-GAAP measures, as well as the descriptions, limitations, and rationale for using each measure in this afternoon's press release. To aid analysts and investors with their models, we've posted exhibits under the financial information tab of our investor relations homepage that include a presentation of non-GAAP or adjusted measures and other selected financial data. I'd like to remind everyone that next week we'll be participating in both the Canaccord and UBS healthcare conferences. We look forward to having the opportunity to speak with many of you there. Now I'll turn the call over to Brad.

Thanks, Doug. Good afternoon and thank you for joining us. I'm pleased to report strong results from our second quarter during which we rapidly expanded our spatial biology customer base while improving our commercial execution. We booked orders for approximately 50 spatial biology instruments, an increase of about 65% year-on-year and 40% sequentially. We achieved a midpoint of our Q2 revenue guidance, even as our order mix shifted towards cosmic spatial molecular imagers, which were currently building our backlog rather than generating current period revenue. These solid Q2 results and strong demand for our novel platforms We underscore our continued leadership in spatial biology and have set up NanoString for a strong revenue growth in 2023 and beyond. During the call today, I'll provide an update on our commercial execution and the dynamics that we're seeing in the spatial market. I'll then provide an overview of our progress towards our strategic objectives before handing the call over to Tom to review the details of our financial results and our outlook for the balance of the year. Our team has rallied behind the rigorous steps we are taking to sharpen our commercial execution. Members of the sales team are settling into their new roles and are more effectively managing both short and long-term instrument opportunities. We're pleased with the progress and the expected commercial execution across to continue to improve during the third and fourth quarters of the year. During June, we had a successful showing of the annual AGVT meeting Spatial biology was a key focus and accounted for about 25% of all presentations and posters. NanoStream and our customers led the field in terms of scientific content, showcasing 20 scientific abstracts, including 15 for Cosmix. We also hosted our fourth annual spatial summit, which drew a standing room only crowd of more than 300 attendees in Orlando and another 300 plus researchers who participated virtually. The AGBT conference also highlighted the degree to which the research community is being rapidly educated regarding spatial biology. No fewer than eight companies are marketing new spatial platforms, primarily single cell imagers in the same product category as our Cosmix SMI. Against this backdrop, several new market dynamics have come into focus. First, we're competing in a spatial biology land graph as researchers commit to platforms and companies that will power their future research. The simplest way to measure progress during this phase of market development is the pace of orders for new spatial biology instruments. As a result, total spatial biology instrument orders will begin to feature prominently in our guidance and reporting for the balance of 2022. Second, the combined energy of so many vendors marketing single-cell imagers is rapidly increasing customer interest in this product category. The result for NanoString is that we're currently finding the volume of orders for our Cosmix SMI to be equal to or even greater than the orders for our well-established Geomix DSP. Rather than fight this market trend, we embrace it. We are equally pleased to place a Cosmix or a Geomix system as either one represents an expansion in the research community's commitment to our platform and an equally valuable revenue opportunity for NanoString. Third, and most importantly, we believe that NanoString is well-positioned to win the spatial biology land grab. We provide a complete portfolio of spatial biology solutions that includes a whole transcriptome profiler and a HyPlex imager integrated with a cloud-based informatics suite, all supported by blue chip partners, including Illumina, Leica, Avcan, and Biotechnology. This portfolio provides researchers with a compelling ecosystem that can offer a solution for virtually any spatial biology experiment a scientist might design. Now I'd like to provide an update on our strategic objectives for the year, which are tied to the individual products in our portfolio. Our first objective is to drive geomic CSP further into the mainstream, broadening adoption across multiple areas of bio, discovery, and translational research. During the second quarter, Geomics instrument revenue grew about 10% sequentially. NGS readout for whole transcriptome assays continued to be the most popular application, driving about 85% of new geomics placements. Two-thirds of systems were sold to translational researchers who represent our historical customer base, while one-third went to discovery researchers who represent a new target market for us. Instrument bundles increased in popularity and accounted for a record 35% of Geomix instrument orders, demonstrating that many new customers are jumping into our spatial biology ecosystem with both feet. Most of these bundles included both a Geomix and a Cosmix system, and several included all three of our platforms, Geomix, Cosmix, and Encounter. Consumable pull-through for Geomix was $77,000, per system on an annualized basis and consistent with our seasonal expectations. About 80% of the cost of geomix consumables were for RNA analysis as our whole transcriptome panels expand to reach beyond the cancer researchers who were our primary early adopters. In May, NanoString and Illumina launched a seamless cloud-based workflow that employed the spatial, improved the spatial data analysis experience of customers using Illumina's NextSeq platform to process samples prepared on geomics. This system includes an integrated push-button run planning tool, as well as automated downstream processing using the Dragon BioIT platform. We believe that this simple, fast, end-to-end solution will improve customers' productivity and experience. Our geomics customers have already been tremendously productive. As of the end of Q2, they had published approximately 130 peer-reviewed publications using GeoMix, and in July, they added another 14 more. We continue to see positive leading indicators for GeoMix adoption as well. Orders for new GeoMix test drives through our technology access program increased 20% sequentially from Q1 to Q2. GeoMix has driven about half the opportunities entering our spatial biology instrument funnel year-to-date, Based on our funnel and improving commercial execution, we expect the pace of geomics instrument sales to increase in the second half of the year, even as new orders are split about evenly between geomics and cosmics. Our second objective for 2022 is to launch cosmics as the leading molecular imaging platform. The excitement around cosmics continues to exceed our expectations. We took orders from more than 25 Cosmic Systems in Q2, about double the pace that Geomix was generating at the same point in its launch. The synergy between our spatial biology platforms and the appeal of our ecosystem is undeniable, as evidenced by the fact that two-thirds of our cumulative Cosmix orders have come from customers who have also adopted Geomix. We are also seeing tremendous interest from customers who are engaging with NanoStrength for the first time. During the second quarter, more than 80% of Cosmex orders came from new customers. Half of these orders came from researchers working outside of oncology in areas such as immunology, neurology, and a host of other applications. These trends demonstrate that Cosmex is helping win the spatial biology land grab. While researchers can now choose among several molecular imagers, COSMIC leads with best-in-class performance metrics, including highest plex RNA, the capability to image proteins, robust data quality, all done in challenging FFPE tissue. Although emerging companies are seeking to promote their offerings, these entrants cannot match our specifications, product portfolio, commercial channel, brand reputation, partnership ecosystems, or financial resources. We remain on track to begin shipping commercial Cosmets instruments during Q4. Earlier this week, we shipped our first beta system to a customer and are planning to ship two more to other customers this month. Meanwhile, we're allowing customers to test drive Cosmets via our technology access program. About 40% of these test drives have already generated an order for a Cosmets instrument. while many others have provided data for grant applications that may support future Cosmic Explorers. Our third strategic objective for the year is to launch our Atomics Spatial Informatics Platform. Atomics is an easy-to-use, cloud-based solution that enables image analysis, data visualization, global collaboration, and highly scalable compute and storage capacity for both Cosmics and Geomics. In addition, Atomics uses a flexible data structure ready to be examined using artificial intelligence and machine learning approaches. We showcased Atomics during the AGBT meeting, and customer feedback was outstanding. Researchers appreciated that we anticipated and addressed the challenge of managing large spatial biology datasets. And we believe that Atomics provides an important differentiator between NanoString's portfolio and the more limited offerings of our competitors. We plan to launch Atomics during this fall. Our fourth objective for 2022 is to sustain growth for our Encounter franchise. Encounter is a foundational business that supports both our global channel and continued innovation. In April, we introduced our new Encounter Pro, which incorporates a comprehensive cybersecurity solution and can be easily paired with Roslyn, a collaborative data analysis platform. These enhancements have been well received, especially by our biopharma customers. We continue to introduce new panels to drive adoption and markets outside of cancer. This quarter, we launched a cardiovascular disease panel, which is now the subject of a collaboration across five thought-leading institutions. We'll also expand our cell and gene therapy portfolio for encounter, and we'll be integrating this application into our spatial platforms. These applications are considered some of the most promising for developing the next generation of therapies across many disease areas. Now I'd like to turn the call over to Tom to review the details of our financial results and outlook. Thanks, Brad, and thanks all for joining us today. The second quarter of 2022 product and service revenue was $32 million. We sold about 50 spatial biology systems during Q2. Orders were comprised of more than 20 geomic systems and more than 25 cosmic systems. Q2 spatial biology revenue was $10.9 million, including geomics instrument revenue of $5.2 million and geomics consumables revenue of $5.7 million. Q2 annualized geomics consumables pull-through was $77,000 per installed system. At the end of Q2, our geomics installed base was approximately 315 instruments. For Cosmics, our over 25 new system orders in Q2 added approximately $6 million in revenue backlog, bringing our cumulative Cosmics total to over 60 orders and our cumulative Cosmics revenue backlog to about $14 million. We expect to begin recognizing material revenue from our growing Cosmics order book at the start of 2023. For our encounter business, which includes all service, Q2 revenue was $21.1 million. Instrument revenue was $4.3 million, consumables revenue was $12.2 million, and Q2 annualized encounter consumables pull-through was approximately $45,000 for installed system. Service revenue, inclusive of all service contract revenue for all platforms and spatial biology tap revenue, was about $4.6 million. At the end of Q2, our encounter installed base was approximately $1,085,000. Turning to margins and expenses, I'll provide results on a non-GAAP or adjusted basis, which removes the impact of stock-based compensation, depreciation, and certain other items. Please refer to our press release as well as the exhibits we have posted to our investor relations webpage for detailed information on how our non-GAAP or adjusted measures are prepared. Q2 adjusted gross margin was 54%, a decrease of 200 basis points as compared to Q2 of last year. The year-over-year change in gross margins was mainly driven by investments we're making in our manufacturing capacity in advance of the commercial launch of COSMICS. Adjusted R&D expense was $14.5 million flat year-over-year, and adjusted SG&A expense was $30.2 million, an increase of 39% year-over-year. The increase in SG&A year-over-year was driven primarily by the full run rate impact of investments made in our spatial biology-related commercial initiatives including the expansion of our Salesforce service and customer support groups. Our adjusted EBITDA loss was $27.5 million and our cash and cash equivalents were $272.3 million as of June 30th. Turning to guidance, we are updating our full year 2022 outlook to reflect an updated expected mix of spatial biology system orders and our current expectation of the pace of improvement of sales execution. For 2022, we now expect to receive orders for about 200 spatial biology systems, consistent with previous guidances updated in May. While our expectation for the total number of spatial biology system orders is unchanged, our view of the geomics-cosmics order mix has. We now expect our order mix this year to be comprised of approximately 100 geomic system orders and approximately 100 cosmic system orders. As compared to our last update, and about 60 COSMICS orders. We have not included any material COSMICS revenue recognition in our 2022 guidance. As a result, we're adjusting our expected 2022 full-year spatial biology revenue to $50 to $55 million to reflect our updated expected system order mix. Our full-year estimated pull-through guidance for geomics is unchanged from our previous range of $90 to $95,000. We also expect We continue to expect full-year end-counter revenue of $90 to $95 million, an estimated pull-through of $50,000 to $55,000, all unchanged from our previous guidance. For total revenue, we now expect to record about $140 to $150 million in 2022, reflecting the updated expected mix of spatial biology system orders. Turning to margins and expenses, we are reiterating our previous full-year guidance for adjusted gross margin, which we expect will be in the range of 56 to 58% and operating expenses. We are therefore updating our expected 2022 adjusted EBITDA loss to a range of 75 to 85 million from the previous range of 65 to 75 million. For the third quarter, we expect to book orders for about 55 spatial biology systems, representing about 60% year-over-year growth with an approximate 50-50 mix of geomics and cosmics. spatial biology revenue of $12 to $13 million, which in Q3 will only include revenue recognized from geomic instruments and consumables, encounter revenue of $22 to $24 million, and total revenue of $34 to $37 million. Finally, I'd like to comment on our setup for 2023. The 100 COSMICS orders expected in 2022 combined with the 20 orders we received in 2021 would bring cumulative COSMICS orders entering 2023 to about 120 total, representing about $30 million in revenue backlog. During 2023, we expect to recognize substantially all of this COSMICS instrument backlog while continuing to accumulate additional orders. This provides line of sight for 2023 revenue growth of more than 40%. Our balance sheet remains strong, and we continue to be confident we have the resources to achieve cash flow break-even while sustaining our key investments and growing our spatial biology market share and leadership position. Now I'll turn the call over to Brad for our closing comments. Thanks, Tom. Nanostring is rapidly winning the most valuable properties in the ongoing spatial biology land graph. We believe our market position will continue to grow stronger in the future based on our broad portfolio, unique ecosystem, and strong financial position. Because COSMICS is not yet shipping, our progress is best reflected in the current growth of our spatial biology instrument orders and our outstanding setup of revenue growth for 2023.