NanoString Technologies, Inc.

Thank you for attending today's NanoString fourth quarter and fiscal year 22 operating results call. My name is Forum, and I will be your moderator for today's call. All lines will remain 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 telethon keypad. It is now my pleasure to pass the conference over to our host, Doug Farrell, Investor Relations at NanoString. Mr. Farrell, please proceed.

Thank you, operator, and thanks for joining us today. On the call with me today is Brad Gray, our president and CEO, as well as our CFO, Tom Bailey. Earlier today, we released our financial results for the fourth quarter and fiscal year ended December 31st, 2022. During this call, we may make statements that are forward-looking, including statements about financial and operating projections, future business growth, trends, and related factors, expectations regarding future operating results, future cash flows, current and future instrument orders, prospects for expanding and penetrating our addressable markets, and our strategic focus and objectives, as well as the development status and anticipated success of recent product offerings and the impact of macroeconomic factors. 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 form of statement. Later in the call, Tom will be discussing our financial results and guidance for 2023. Be prepared as a supplement to GAAP financial measures, selected non-GAAP adjusted measures, the calculation of which are described in detail in our press release. Throughout this call, all financial measures will be GAAP unless otherwise noted. You can also find reconciliations of GAAP to non-GAAP measures, as well as the description limitation and rationale for using each such measure in this afternoon's press release. To aid analysts and investors in building their models, we have posted exhibits under the financial information tab of our investor relations home page that include a presentation of our non-GAAP or adjusted measures and selected other financial data. I'd like to remind everyone that we'll be participating in the Cal and Healthcare Conference in Boston next week. In addition to our fireside corporate discussion, Brad will also be participating in a panel focused on AI-based genomics and drug discovery on Tuesday afternoon. It will include participants from NVIDIA and generative medicine. We look forward to having the opportunity to speak with many of you then, and I'd like to turn the call over to Brad. Thanks, Doug.

Good afternoon, and thank you for joining us today. We are thrilled with the momentum that's building in the spatial biology market. NanoString currently offers researchers the most compelling portfolio of spatial biology solutions, and we believe that ongoing innovations will continue to extend our lead. As we begin 2023, we enjoy both growing demand and a substantial backlog and believe that we are poised for strong revenue growth. I'll begin by recapping some highlights from our quarter and fiscal year 2022 before outlining our priorities for 2023. 2022 was a year of transition for spatial biology as the arrival of single-cell imagers both expanded demand and shifted mix within the market. With our best-in-class Cosmic Spatial Molecular Imager, we were able to capitalize on this trend and grew our total spatial biology instrument orders by 50% year-on-year to approximately 250 systems across Cosmix and our Geomix digital spatial profilers. In the process, we broadened our customer base beyond the core oncology researchers who we've served in the past, reaching discovery researchers who've embraced single-cell biology. This has allowed us to generate about 70% of our Cognizant's orders from customers who are new to Nanostream. Our finish to the year was particularly strong. During Q4, we generated orders for more than 105 spatial SIP instruments. and began delivering the first Cosmix commercial shipments. At the year end, we had captured orders for around 180 Cosmix instruments and built a revenue backlog valued at approximately $40 million. We also saw tremendous scientific momentum as we surpassed 7,000 peer-reviewed papers enabled by our technologies, including approximately 200 using our spatial biology platforms. COSMICS was featured in the December 2022 issue of Nature Biotechnology, with a high-resolution single-cell image of RNA and protein from COSMICS gracing the journal's cover. COSMICS was also recognized as one of the top 10 innovations by the Scientist Magazine in their annual survey highlighting products that are poised to revolutionize research and advance our scientific understanding. Our spatial biology platforms also reached more mainstream media, as in the January issue of National Geographic, which contained an article on aging, which highlighted Alzheimer's research from Wake Forest University Medical Center, using both geomics and cosmics to perform high-resolution mapping of brain tissue. As we begin 2023, we're convinced that our early mover advantage, the scalability of our technologies, and our product innovation engine put us in a leading position in the spatial biology market. Now I'd like to provide an outline of our strategic objectives for the year ahead. Our first objective for 2023 is to rapidly penetrate the spatial biology market. Spatial biology was nature's method of the year just two years ago, and the field is still in its infancy. We estimate that the addressable market in spatial biology research alone is valued at $6 billion across 7,000 labs. only 5% of which have been penetrated to date. Our focus is on winning share as this market develops by capturing instrument orders and making our customers successful. We kicked off 2023 by providing important updates on our spatial biology product portfolio and roadmap at the Advances in Genome Biology and Technology Conference, or AGBT. Spatial biology featured prominently at AGPT this year, representing about 25% of the total presentations and posters. For the second year in a row, NanoStrand had the most spatial biology studies of any technology provider, almost double the number of spatial abstracts of our nearest competitor. AGPT provides a perfect venue in which to build our brand with basic discovery researchers who are still getting to know NanoStrand. We capitalized on the opportunity to be the gold sponsor for this year's meeting, and I could not be more pleased with our showing. Following the conclusion of the meeting, consulting firm DesiBio published a survey of attendees that rated spatial biology as the most exciting space, with NanoString the most mentioned company. During the meeting, we achieved three key objectives. First, we publicly demonstrated our Atomics spatial informatics platform. Atomics is a flexible, open-source, cloud-based informatics platform that provides secure, scalable storage and analysis for spatial biology researchers. Think of it as the iCloud of nanostring spatial biology ecosystems. Customer interest in Atomics is extremely high, and we have conducted dozens of Atomics demos during the meeting. Feedback from the customers was extremely positive. Those who have already ordered a COSMICS system cannot wait to get their hands on the total solution provided by COSMICS plus Atomics. Researchers appreciate that Atomics allows them to focus on the science and avoid the headaches of building and maintaining their own compute and storage infrastructure. Atomics also provides this highly scalable storage and compute power for a fraction of the upfront cost of on-site capabilities making the decision to move data to the cloud an easy one. Second, we used AGBT to unveil our COSMICS assay roadmap, which will continue to set the standard for PLEX. PLEX is the term used to describe the number of unique genes or proteins that a platform can analyze. We believe PLEX is the most critical differentiator in the spatial imager class, as it directly determines the amount of information generated from precious samples. Our belief that Plex is the number one attribute is grounded in our real-world experience. As when we have offered customers using our Cosmix Technology Access Program the choice between our 1,000 Plex assay or our cheaper and faster turnaround time 100 Plex assay, every single customer opted for the higher Plex assay. The Plex provided by Cosmix already stands head and shoulders above the competition. with our currently available 1,000 Plex assays offering twice the amount of data per sample as images from other manufacturers. As we showed at AGVT, we're pushing Plex further and faster than anyone expected. We revealed our 6,000 Plex human RNA assay, which provides 12 times the data per sample of that provided by competing platforms. To be clear, These data were not from some small-scale proof-of-concept experiment. We have worked with multiple research customers to use this assay to generate real insights. Then two of those customers were on hand at AGVT presenting and discussing their 6,000-flex data. Our 6,000-flex offering is already in full product development, and we plan to make it available through our technology access program in the fourth quarter and to begin shipping it to customers early next year. Finally, we used the AGBT meeting to highlight an exciting new collaboration with Dr. Chris Mason and others at the Weill Cornell School of Medicine, called the Spatial Atlas of Human Anatomy, or SAHA. The abstract described SAHA was selected for a plenary talk during the opening night of AGBT. As Dr. Mason described, researchers at Cornell will use the geomics or transcriptome assay to analyze tissues from 30 different organs provided by a healthy and genetically diverse population of adults. The researchers plan to make the Atlas available to researchers around the world through periodic releases, and we believe that SAHA will become an important reference database of normal tissue, which may be crucial for enabling precision medicine therapeutic approaches. Coming out of AGBT, it is clear to us that COSMICS has the performance attributes to remain the platform of choice for single-cell imaging. Our confidence and our ability to rapidly penetrate the spatial biology market has never been higher. Our second objective is to deliver more predictable revenue growth over the course of 2023. In 2022, we struggled to predict the mix of spatial biology instrument demand between our cosmics and geomic systems, resulting in inconsistent revenues. We believe that 2023 is set up to be a very different year. First, we're shipping and recognizing revenue on both spatial biology instruments, so the overall revenue will be less sensitive to mix. Second, we expect our primary revenue growth driver to be COSMICS instrument orders that we've already captured and which are currently in backlog. We plan to execute a meter rollout of COSMICS instrument shipments designed to provide excellent customer experience as we scale up manufacturing, installs, and training. We will start with a manageable number of installations during Q1, increasing the pace in Q2 and then remaining at a relatively steady pace over the balance of the year. This gives us a high degree of confidence in the predictability of our revenue growth in 2023. Our third strategic objective is to demonstrate continued progress towards cash break-even. This is a prime directive for the company, and everyone on our team knows it. During Q4, we made hard choices to optimize our cost structure heading into 2023. We reduced our headcount from about 800 employees to about 700 employees. For 2023, we're guiding revenue growth in the range of 34% to 41%, which we are expecting to deliver while modestly lowering our operating expense. driving a substantial improvement in our adjusted net loss for the year and an improving financial profile quarter by quarter throughout the year. We exited 2022 with more than $195 million of cash and equivalents and believe that with these resources in hand, we are well positioned to sustain our operations to break even and profitable growth. I'd now like to turn the call over to Tom to review the details of our financial results and to provide our financial outlook for the year. Thanks, Brad, and thanks all for joining us today. For the fourth quarter of 2022, revenue was $34.4 million in the middle of our guidance range. Q4 spatial biology revenue was $14.8 million above the upper end of our spatial revenue guidance range. Our cumulative COSMICS SMI order book as of December 31st was approximately 180 systems, including about 80 new orders received in Q4. We shipped the first 13 COSMIC systems to customers in Q4, generating revenue of approximately $3 million, leaving us a backlog of over 165 systems we expect to ship in 2023, with a revenue value of approximately $40 million. Q4 Geomics revenue was $11.4 million, a 23% sequential improvement. Geomics Instrument revenue is $5.4 million, reflecting over 25 new systems shipped. Suburbals revenue was $6 million, Q4 annualized geomics pull-through was about $73,000 per system. At the end of Q4, our geomics installed base was approximately 350 instruments with about 20 instruments installed during the quarter. Q4 end-counter revenue, which includes all of service, was $19.6 million. End-counter instrument revenue was $2.5 million. Consumables revenue was $12.1 million, and Q4 annualized end-counter pull-through was approximately $44,000 per system. At the end of Q4, our end counter installed base was approximately 1,120 instruments, with about 15 instruments installed during the quarter. Turning to margins and expenses, commentary reflects non-GAAP or adjusted results, which for Q4 exclude the impact of stock-based compensation, depreciation, litigation, and certain non-recurring restructuring and severance expenses. Please refer to our press release as well as the how our non-GAAP or adjusted measures are prepared. Q4 adjusted gross margin was 43%. Our Q4 adjusted gross margin was impacted by manufacturing variances held on our balance sheet, due mainly to underabsorbed labor we expensed in Q4, together with the reduction in our workforce. Inclusion of these additional charges in Q4, cost of goods sold, impacted our Q4 adjusted gross margin by about 8 percentage points. Q4 adjusted R&D expense was $15 million, a decrease of 4% year-over-year, and adjusted SG&A expense was $27.5 million, an increase of 4% year-over-year. Q4 adjusted operating expense trends reflect the initial impact of expense reductions we implemented in Q4, balanced by investments we continue to make in our spatial biology manufacturing capacity and efficiencies, and in our spatial biology product development field support commercial initiatives. Our Q4 adjusted EBITDA loss was $27.7 million. We exited the quarter with approximately $196.5 million of cash, cash equivalents, and short-term investments. Transitioning to our 2023 outlook, we expect 2023 revenue of $170 to $180 million, representing annual growth of 34% to 41%. Our range includes spatial biology revenue, 2022. End counter revenue, which includes all service and other revenue, is expected to be in the range of $75 to $80 million, a 6% decline at the midpoint of the range as this more mature part of our business moved into cash cow boat. We expect about 40% of total revenue to be recorded in the first half of 2023 and about 60% in the second half. Seasonality will be strongly influenced by the pace of cosmic shipments, which will steadily increase over the course of the year as we increase our capacity to manufacture and install COSMICS instruments. We expect to clear a current order backlog of over 165 units by the fourth quarter. We expect 2023 adjusted EBITDA loss to range from 65 to 75 million, a significant improvement compared to 2022. More substantively, in the second half of the year, as our spatial biology revenue grows on a reduced operating expense base, we expect adjusted gross margins will be beyond as these systems begin to pull through to higher margin consumables. For the first quarter of 2023, we expect revenue will be in the range of $32 to $34 million, reflecting typical sequential and seasonal patterns in our measured pacing of cosmic shipments. Our Q1 range includes $15 to $16 million of spatial biology revenue and $17 to $18 million of encounter and service revenue. Now I'll turn the call back over to Brad for our closing comments. Thanks, Tom. In closing, we feel great about our setup for 2023. Momentum in our spatial business is building, and we've established COSMICS as a market-leading spatial imager. At year end, we had a backlog of COSMICS orders valued at approximately $40 million, giving us excellent visibility to our revenue trajectory for the year. For 2023, We expect to generate healthy revenue growth while reducing operating expenses, which will allow us to work in a disciplined fashion towards achieving cash flow break even.