Standard BioTools Inc

NASDAQ:LAB

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and welcome to the Standard BioTools Inc. Second Quarter 2023 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Scott Greenstone, Vice President, Investor Relations and Business Development. Thank you. Mr. Greenstone, you may now begin.

[Scott Greenstone, executive]

Thank you, operator, and good afternoon, everyone. Welcome to the Standard BioTools' Second Quarter 2023 Earnings Conference Call.

At the close of market today, Standard BioTools released its financial results for the quarter ended June 30, 2023. During this call, we will review our results and provide commentary on our financial and operating performance, market trends and strategic initiatives.

Presenting for Standard BioTools today will be Michael Egholm, Chief Executive Officer and President; and Jeff Black, Chief Financial Officer.

During the call, we may make forward-looking statements about events and circumstances that have not yet occurred, including plans and projections for our business, our outlook for 2023 and future financial results and market trends and opportunities. These statements are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from current expectations. The forward-looking statements in this call are based on information currently available to us, and we disclaim any obligation to update these statements, except as may be required by law.

During the call, we will also present some financial information on a non-GAAP basis. We believe that these non-GAAP financial measures are useful in evaluating our core performance and as a baseline for assessing our future earnings potential of the company. We use these non-GAAP measures in our own evaluation of continuing operating performance. We encourage you to carefully consider our results under GAAP as well as our supplemental non-GAAP information and the reconciliation between these presentations, which are disclosed in the table accompanying our earnings release.

Please note that management will be referring to a slide presentation, including updated supplemental financial information within the webcast today, and this presentation is also posted on our website. I would also like to note that the company will not be hosting a Q&A session following prepared remarks during today's conference call.

I will now turn the call over to Michael Egholm, our Chief Executive Officer and President. Michael?

[Michael Egholm, executive]

Thank you, Scott, and good afternoon, everyone. We appreciate you joining us on the call today. First off, I would like to welcome Jeff Black, our Chief Financial Officer, to the Standard BioTools team, and thank Vikram Jog for his 15 years of service and dedication to this company and wish him the best in his next endeavor.

Jeff brings years of relevant operational and capital markets experience, having most recently played pivotal leadership roles in 2 successful med tech turnarounds. We are already seeing his impact after 2 short months, and he will be an integral member of our leadership team as we execute on our vision to create the next diversified life science tools player.

During the call today, I'll provide a summary of our performance and discuss where the business is heading. My comments today will focus primarily on our first half 2023 progress as this year-to-date perspective is more representative of the progress we're making in our corporate transformation versus what any single quarter might suggest. I will then turn the call over to Jeff to offer a more detailed look at Q2 and our first half financial performance.

Today, I'm more encouraged by the business and our progress than I've been since joining 5 quarters ago, while remaining humble about the work still ahead. I'm pleased to report that in the first half of 2023, we delivered 17% revenue growth, with 47% growth in the most recent quarter compared to 2022. In addition, through the first half of 2023, we saw over 1,000 basis point improvement in non-GAAP gross margins and nearly $18 million and more than 25% reduction in non-GAAP operating expenses and a $28 million and more than 60% reduction in operating cash burn compared to 2022. We remain early in our corporate transformation and remain mindful of the macro environment in which we currently operate.

The strategy, as previously articulated, is focused on 3 priorities: stabilizing the core business with a focus on bringing it back to growth; improving operating discipline, which includes expanding gross margins and reducing operating expenses to achieve positive cash flow and profitability; and finally, using M&A to drive scale, profitability and growth. We're making progress against 2 of these objectives with our LEAN operating system and remain focused on executing on the third.

We view our business across 3 product categories: instruments, consumables and services. Each drive the other to feed the corporate P&L but naturally, with different economic and growth dynamics. Today, we serve 2 end-user markets in related but distinct scientific fields: proteomics and genomics. We expect this to expand over time as we expand the reach and diversity of our offerings. Internal R&D and inorganic efforts are focused on filling these segments and markets with the best and most attractive products and solutions.

Turning to our first strategic objective, a return to stable growth. We are seeing encouraging signs in our business driven largely by new instrument sales. Total revenues for the first half of the year grew 17% over the same period in the prior year, with total instrument revenue growing over 70% in that period. Growth was led by our Proteomics business, which was up nearly 40% against an expected 8% decline in Genomics sales, which we are explicitly managing for profitability, not growth, today.

The growth in Proteomics reverses the business' decline from a year ago, which we ascribe to new products and a disciplined commercial execution, improved customer service and a ruthless focus on quality. In April, we launched a new imaging product, our first in 6 years, named the Hyperion XTi. This new solution has by far the highest data quality and throughput for high-parameter protein analysis and a rapidly growing spatial biology marketplace, positioning us as a real contender for translational researches. We are encouraged by early traction and delivery of our first revenue units in May, and we're working hard to build our funnel.

In our traditional flow cytometry business, our customer-focused approach has highlighted that our mass cytometry solution has real fundamental, technical and workflow advantages over competitors' products. Today, the CyTOF XT is the only platform that can multiplex a high number of extracellular markers and intracellular markers at the same time. This capability enables biological insights missed by legacy technologies and a growing area of interest noted by multiple publication at this year's CyTOF meeting. This simple but important insight allowed the team to do a much better job positioning our advantages to prospective customers, which drove unit sales in the quarter and still, the sales funnel for future quarters.

Our second end-user market, genomics, continues to undergo a multiyear transition to high throughput applications on NGS. I've been in this field since its earliest days, and when the wind is blowing, it's best to have it at your back, not your front.

With that knowledge, over the last year, we made a hard pivot in the business with 3 key actions. First, we consolidated the product portfolio down to a single instrument, the X9, eliminating several legacy systems, including lower-priced options, understanding this would lead to temporary headwinds for instrument sales. Second, we significantly reduced spend in sales, marketing and R&D and, finally, initiated a new go-to-market approach focused on gaining additional OEM partners and high-volume key accounts. This strategic shift allowed us to execute a managed decline of 8% in our Genomics business for the first half of the year while delivering a near-breakeven contribution margin versus a loss of over $15 million in the first half of 2022.

We believe this is a sustainable trend as our new go-to-market strategy gains traction in our OEM partner process business. The trade-off on this type of OEM relationship is that margins are lower than for the instruments we sell directly but expand over time as revenue shifts to higher-margin consumable sales and, importantly, with lower SG&A associated with these OEM sales. We are working on additional potential OEM partnerships but caution that new relationships take time to develop, validate and mature, and we're still early in that process.

All of the above improvements are the result of our commitment to the SBS way of operating and the people we recruited into the organization to drive that system. I'm proud to say that SBS is now firmly rooted across all functions in the company and will help drive further progress in quarters to come, resulting in continued revenue growth, gross margin expansion and operating expense rationalization.

Focus on quality and serving our customers is enhanced in our LEAN-based SBS approach and reliability is crucial to customer satisfaction. While there's more work to do here, we have worked hard at improving quality and manufacturing as well as being highly responsive to our customers. This has the virtuous cycle benefit of higher instrument sales and higher-margin consumable pull-through over time. Services in this area also help customers gain comfort and become, over time, instrument purchases and consumable users.

In addition to the commercial execution, our operating discipline is manifesting itself in higher gross margin and reduced operating expenses, allowing for a materially lower operating cash burn. This leads us to our third priority, consolidation or adding to our instrument reagents and services through inorganic growth. This is a critical core focus for Standard BioTools but also nonlinear. The industry is ripe for consolidation, and we are well positioned to lead the charge.

Incremental additions can leverage our infrastructure and SBS approach, feed our balance sheet, accelerate scale, drive growth and add, importantly, to profitability. Each opportunity fits into our detailed internal metrics. And with a world full of innovative products, but few able to alone support a single company or even fewer companies with experienced and capable teams to scale and build a profitable business, we now see Standard BioTools as well positioned with a uniquely attractive chassis for us to consolidate. Such consolidation is central to our strategy and our value proposition resonates with partners that are excited about potentially joining our company where they can have a meaningful impact.

I will now turn it over to Jeff overview of our financial results. Jeff?

[Jeffrey Black, executive]

Thanks, Michael, and good afternoon, everybody. It's a privilege to be here today and a part of the Standard BioTools team.

As Michael noted, we're pleased with our results for the second quarter and the first half of '23, delivering year-over-year top line growth, gross margin expansion, significant decrease in OpEx and sustained improvement in operating cash flows.

As Scott mentioned earlier, let me remind you all that I will refer to non-GAAP numbers in today's discussion. Non-GAAP measures exclude certain nonoperating and noncash items, and a reconciliation of GAAP and non-GAAP measures are provided at the end of our earnings press release that was issued earlier today and in our earnings call presentation.

With that, let me begin with a review of revenue. So note that over the past several quarters, we've reported on core product and service revenue, which excludes revenue from discontinued products and other revenue. With the product portfolio refocus behind us today and going forward, we will discuss total revenues. And keep in mind that our second quarter and first half of 2022 reported revenue includes a revenue offset from a onetime $1.6 million reserve related to our discontinued LCM product line in our Genomics business. And this is the last of our legacy issues impacting year-over-year revenue comparability.

Total revenue grew 47% year-over-year to $27.7 million for the second quarter and 17% to $52.8 million for the first half of '23. This growth has been led by increased instrument placements, primarily in our Proteomics end-user markets.

Looking at our revenue mix. Instrument revenue grew over 300% in the second quarter and over 70% year-to-date, while growth in our combined consumables and services revenue has been flat to moderate. Note that the uptick in instrument revenue should set us up well for increased consumables and services pull-through based upon an expanding installed base, particularly in our proteomics markets. Instruments, while typically the lowest margin of 3 categories, will drive higher margin consumables and services revenue once instruments are in use in subsequent quarters. Recurring consumable and service revenue comprised about 65% of our revenue year-to-date in 2023.

Our total Proteomics revenue grew 74% in the second quarter and 38% in the first half of 2023. Our growth in Proteomics is reflective of continued traction across instruments, consumables and services. We're seeing early wins from recent product launches across geographies. And as Michael mentioned, our continued investment in this segment is already beginning to bear fruit.

At the same time, we're seeing headwinds in the Genomics segment play out as we anticipated, a primary driver of our decision to reorganize, simplify and reposition the business over the past year. Total Genomics grew 15% in the second quarter and was down 8% in the first half of 2023. And just a reminder, that this includes a revenue offset from a onetime $1.6 million related to our discontinued LCM product line. We're managing related investments in Genomics prudently. We're currently running it at near contribution margin breakeven. We continue to push on our strategy to accept the trade-off between lower OEM instrument margins for our focus on higher-margin consumables, a lower operating cost base and sustainable positive contribution margin.

Our non-GAAP gross margin for the second quarter expanded to just under 61% and by about 2,100 basis points compared to the second quarter of 2022. And on a year-to-date basis, our non-GAAP gross margin improved to just under 62% and about 1,100 basis points compared to the first half of '22. Note that non-GAAP gross margin primarily excludes our noncash amortization of developed technology, which will be fully amortized by the end of the first quarter of 2024.

Gross margins will continue to benefit from our business improvement programs and price realization. But keep in mind that margin profiles are different across instruments, consumables and services, so our gross margin expansion road map will be impacted by quarter-to-quarter variations in revenue mix. We continue to see some residual headwinds related to product mix, legacy service and warranty-related costs and capacity utilization, but we remain confident in our ability to drive gross margins over time into the mid-60% range.

Moving to our expenses. In total, our non-GAAP operating expenses of $25.2 million were just over 90% of revenue in our most recent quarter, down from $33.8 million or about 180% of revenues in the prior year. In the first half of '23, we reduced our non-GAAP operating expenses by just under $18 million or 26% as compared to the first half of '22. And this is reflective primarily of the cost rationalization programs we've executed over the past 12 months. At the same time, we continue to make focused investments in our commercial organization to drive continued near-term revenue growth and R&D investments to expand our product pipeline.

We continue to be thoughtful stewards of our resources and remain well positioned to support our growth initiatives, which brings me to cash flow and the balance sheet. We ended the second quarter with over $143 million in cash and restricted cash. Our operating cash use decreased in the second quarter versus 2022 by more than $20 million or 70%. And on a year-to-date basis, we've reduced operating cash used by $28 million or more than 60% over 2022. We continue to deliver on improvements in operating efficiencies with a multiyear runway and a line of sight to positive cash flow in our core operating business.

Before I turn the call back over to Michael for concluding remarks, just a few comments on our outlook for the remainder of 2023. We're encouraged by progress in the first half of the year, revenue growth ahead of expectations, gross margin expansion underway and significant reductions in operating expenses. But we're also still in the early days of our transition, cognizant of an uncertain macroeconomic environment and imperfect visibility at the quarter-to-quarter variations in our business. So based on these factors, we're not updating financial guidance today, but we'll look to provide updates when appropriate as the macro environment becomes more clear and our business transition efforts continue to play out.

And with that, I'll turn the call back over to Michael for concluding remarks.

[Michael Egholm, executive]

Thanks, Jeff. Good to have you onboard. While it's still early days, I'm encouraged by our progress to date. In our first few quarters, we focused on operational improvements and continue to see those impacts. This quarter, we saw the business return to a healthier revenue growth. And while we see some variability on a quarter-to-quarter basis, we are on a much stronger footing now and well on our path to achieving profitability. We also firmly believe we have established a great foundation underpinned by SBS to spearhead much-needed consolidation in our industry. We will approach these opportunities with thoughtful rigor.

I conclude by thanking the team for their execution and investors for their patience. And while we need to celebrate revenue growth, gross margin expansion and operating expense production in just 5 quarters, we remain humble and see all the work still left to do in a market environment existing in peak uncertainty.

We look forward to providing you further updates and seeing many of you at our upcoming investor conferences, including Canaccord's 43rd Annual Growth Conference in Boston later this week, and the UBS MedTech, Tools and Genomics Summit in Dana Point next week.

Operator?

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a good day.