NanoString Technologies, Inc.

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

Thank you, operator. Welcome, everyone. Joining me on the call today is Brad Gray, our president and CEO. And Tom Bailey, our CFO, earlier today we released our financial results for the first quarter ended March 31st, 2023. 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, cash flows, current and future instrument orders, and our manufacturing capacity, as well as prospects for expanding and penetrating our addressable markets. 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 uptake any forward-looking statements. Later in the call, Tom will be discussing our Q1 financial results and guidance for 2023. We have 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 the call, all financial measures will be GAAP unless otherwise noted. You can find the reconciliation of GAAP to non-GAAP measures as well as the description, limitations, and the rationale for using each 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 homepage. that include a presentation of our non-GAAP or adjusted measures and selected other financial data. I'd like to remind everybody that we will be attending the Jefferies Conference in New York City next month. We look forward to having the opportunity to meet with many of you then. I'd now like to turn the call over to Brad.

Good afternoon, and thank you for joining us today. I am excited to report that 2023 is off to a strong start. We drove continued momentum in the business with revenue from both spatial biology and encounter exceeding the guidance we provided on our year-end call. With strong spatial biology demand and the successful scale-up of our COSMICS manufacturing and installation capacity, we are raising our revenue outlook for the year. Before Tom provides details on these financial results and improved outlook later in the call, provide updates on our progress to our strategic objectives for the year. Our first objective for 2023 is to increase our penetration of the spatial biology market. During the first quarter, the spatial biology demand was healthy across both instruments and consumables. Our overall spatial biology revenue increased by more than 75% over Q1 of last year. We ended the first quarter with an installed base of 385 spatial systems, an increase of about 31% over the prior year. Our COSMIC spatial molecular imager remains the primary growth driver of the business as we further penetrate the rapidly growing market for single-cell spatial biology. Our rollout of COSMIC is tracking ahead of plan. We are ramping our manufacturing capacity and refining the processes that our field service engineers, and application scientists used to install COSMIC systems and train users. We believe these efforts will accelerate uptake of COSMIC's consumables, which are the growth engine of the company over the long term. Even with our increased pace of COSMIC shipments, strong demand led COSMIC's instrument orders to exceed shipments in Q1, growing our backlog. About 75% of our COSMICS orders came from new customers, and biopharma customers increased to about 25% of system orders. Oncology applications drove about 70% of the orders, followed by immunology and neuroscience. In February, we unveiled our consumable roadmap for COSMICS. We've demonstrated our ability to scale the number of biological targets imaged by COSMICS, which is referred to as its PLEX, up to 6,000 RNAs and 120 proteins. More than 10 times the content that any competing platform currently offers. Our substantial advantage in Plex has resonated with our customers as an important factor in why we believe Cosmix will remain a market-leading spatial imager. In parallel to ramping up Cosmix shipments, we've been connecting customers to our Atomics spatial informatics platforms. Atomics provides seamless and 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. Customers value the investment we've made to ensure that informatics does not become a bottleneck in spatial biology research and are excited to leverage the cloud to collaboratively analyze the massive datasets that spatial biology experiments generate. While instrument demand remained COSMICS heavy in Q1, geomics placements continued, and our expanded geomics install base drove a meaningful increase in consumable revenue. The speed with which new geomic sites became active consumable customers improved from Q4, and we expect to see that trend continue over the balance of the year. In parallel, we're releasing software updates that improve the capabilities and workflow of geomics. including a recent update that enables customers to measure RNA and protein simultaneously on the same slide, an appealing capability that helps scientists increase the insights that they extract from each sample. Translational researchers remain the primary users of genomics, as illustrated by the latest paper to grace the cover of the journal Cancer Research. team of researchers at the University of Glasgow published a study that used geomics to evaluate and subgroup colorectal cancer patients whose cancer has metastasized to their liver. The study demonstrated the ability of geomics to characterize tumor heterogeneity and identify novel biomarkers associated with clinically relevant subtypes of colorectal cancer. We recently caught up with the authors of this paper at the American Association of Cancer Research, or AACR, annual meeting, where spatial biology featured prominently in the scientific agenda. Our customers had strong showings, with nearly 60 abstracts for geomics and cosmics, an increase of more than 40% over the prior year. Our booth was buzzing with activity and customer interest throughout the meeting, and lead generation at this year's AACR more than doubled over the prior year. Customer interactions like these are expanding our instrument funnel and providing visibility to our growth outlook and continued leadership in this dynamic field. Our second objective is to deliver predictable revenue growth. We clearly achieved this goal during Q1, as revenue for both spatial biology and encounter exceeded our guidance for the quarter. In addition, our revenue visibility is continuing to improve. which bodes well for our ability to deliver predictable revenue to the balance of 2023 and beyond. The recurring consumable revenue streams generated by our installed base of more than 1,500 instruments grew both sequentially and year on year, with consumable pull-through in line with expectations. This helped our encounter business, which has a revenue mix that is now more than 90% consumables, deliver results above the high end of our guidance even as instrument placement slowed. We also grew COSMIC's instrument order backlog while scaling up our manufacturing and install capacity. Since COSMIC's instrument revenue is the primary growth driver of 2023, these results drive incremental revenue visibility. With COSMIC's demand strong and scale up on track, we expect the quarterly cadence of shipments and installs to increase as the year progresses. and we are in a position to raise our guidance for the year. Given the strong demand, we expect many of the COSMICS instrument orders we receive in the coming quarters will remain in backlog as we exit the year, maintaining our high revenue visibility as we enter 2024. Our third strategic objective is to demonstrate progress towards cash flow breakeven. The team remains laser focused on accelerating our path to profitability. During Q1, our adjusted operating expenses were down $2 million year-on-year. This OPEX reduction offset lower gross margins and kept our EBITDA approximately flat year-on-year during the first quarter. We expect our bottom line to improve each quarter through the balance of the year, as our revenue growth accelerates with cosmic shipments. We exited Q1 with approximately $155 million in cash, cash equivalents, and short-term investments on hand, and believe that we are well-positioned to manage our business to profitable growth with our current resources. Now I'd like to turn the call over to Tom to review the details of our financial results and provide an update on our financial outlook for the year. Thanks, Brad, and thanks all for joining us today. For the first quarter of 2023, total revenue was $35.8 million, $1.8 million above the upper end of our Q1 guidance range and about $3 million above Q1 consensus estimates. For our spatial biology business, Q1 revenue was $17.1 million, approximately 77% year-over-year growth, $1.1 million above the upper end of our guidance range and about $2 million above consensus estimates. Spatial instrument revenue was $10.1 million, approximately 110% year-over-year growth, reflecting acceleration of cosmic shift Q1 ASP reflects a heavier mix of international geomic shipments and also the deferral of a portion of COSMICS revenue that will be recognized in future periods as service revenue as customers use initial amounts of ATOMIX compute and data storage included with each COSMICS sale. We installed about 35 spatial instruments during Q1, growing our spatial instrument installed base to approximately 385 instruments. Facial biology consumables revenue was $7 million, approximately 44% year-over-year growth, and reflecting in-line genomics consumable sales over our growing installed base and continued initial shipments of COSMICS consumables. Q1 encounter revenue, which includes all service, was $18.7 million, about $1 million above the upper end of our Q1 guidance range and consensus estimates. Encounter instrument revenue was $1.2 million, consumables revenue At the end of Q1, our end counter installed base was approximately 1,130 instruments with about 10 instruments installed during the quarter. 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, amortization, and certain one-time items. or adjusted measures are prepared q1 adjusted gross margin was 43 percent impacted by revenue mix more heavily weighted to cosmetics instruments which are currently selling at lower gross margins due to higher unit production costs that are expected to be incurred in future periods as we scale cosmetics production we also continued in q1 to make investments to expand our service and manufacturing capacity and we incurred increased cloud compute costs associated with our Atomics platform. Lastly, in accordance with internal policies, we recorded a larger than usual Q1 inventory reserve of just over one million that impacted Q1 gross margins by about three percentage points. This reserve is primarily related to our spatial biology consumable sales mix shifting away from our more targeted consumable panels and toward our geomics whole transcriptome assay and other newer spatial biology consumable products. year-over-year, and primarily driven by lower personnel and product development costs related to cosmetics and anatomics. Adjusted SG&A expense was $29.8 million, an increase of 1% year-over-year, reflecting lower personnel costs offset by Q1 trade show and other marketing-related expenses that are higher in the first quarter as compared to subsequent quarters throughout the year. Our adjusted EBITDA loss was $27.2 million, and our cash, cash of March 31st, 2023. As noted on our last call, we expect cash burn and EBITDA loss to be heaviest in the first half of the year as we make investments in working capital to support the significant ramp in cosmic shipments, and given other cash expenses such as audit fees, trade show expenses, and corporate bonuses that are incurred in the first quarter. Turning to guidance, for the second quarter, we expect revenue to be in the range of $40 to $42 million, This range includes $23 to $24 million of spatial biology revenue, representing a more than doubling of spatial revenue year over year, and $17 to $18 million of encounter and service revenue. For the full year, we are raising our revenue guidance range, reflecting our Q1 results and the expected ramp of cosmic shipments in Q2. We now expect our full year total revenue to be in the range of $175 to $185 million, compared to the previous range of 170 to 180 million our updated range includes spatial biology revenue of 100 to 105 million as compared to the previous range of 95 to 100 million and encounter revenues which includes all of service and other revenue of 75 to 80 million unchanged as compared to the previous range we continue to expect adjusted evit da loss to range from $65 to $75 million, unchanged from our previous guidance, with even DA loss and cash flow improvements still expected to be more substantive in the second half of the year as our spatial biology revenue grows on a reduced operating expense base. We also continue to expect adjusted gross margins will be temporarily lower in 2023 in the 45% to 50% range as our revenue mix shifts towards COSMICS instruments for improving in 2024 and beyond, as these systems begin to pull through higher margin consumables. Now I'll turn the call back over to Brad for our closing comments. Thanks, Tom. In closing, we feel great about our strong start to 2023. Momentum in our spatial business is building as demand for COSMICS is being driven by its market leading capabilities. Our revenue visibility is increasing on stable consumable pull through and increasing COSMICS backlog. We're well positioned to generate strong 2023 revenue growth while reducing operating expenses, allowing us to make continued progress towards profitability. With that, I'll open the line for your questions.