Q1 2022 NanoString Technologies Inc Corporate Sales Call
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Better understand the risks and uncertainties, we refer you to the documents we file 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 million to $38 million for Q1 revenue we.
We have scheduled this call promptly to update you on the trends we're seeing in our early indications of their route calls.
The primary driver of the Q1 shortfall with genomics instrument revenue, which was approximately $5 million genomics consumable revenue came in at approximately $5 million, representing an increase of about 80% over the prior year.
Encounter revenue of approximately $21 million included $4 million of instruments $13 million of consumables and $4 million in service.
A highlight of the quarter with a strong demand for our new cognex based on 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 genomics instrument orders. During Q4. It also cleared the most mature instrument sales.
Opportunities out of our funnel, while numerous opportunities remains in our 2022 sales funnel they were less mature, resulting in larger than typical drops and 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 and spatial biology and to prepare for the launch of our Cognex SME.
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 enrolls to take full advantage of this larger sales team. We promoted some sales team members to new leadership roles and in many case.
<unk> backfill them with individuals who are 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 transfer between sales territories. One data point that supports this is that there was a close rate for genomic systems in territories that.
Were realigned that was substantially lower than the rate that we saw for territories that we're not modified.
We believe that the potential genomics 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 genomics 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 or interest in spatial biology.
While we are 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 genomics funnel remains robust and our lead generation continues at a healthy pace.
In addition, we're excited by the momentum of the conflicts SME.
We are 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.
<unk> focus on capturing the growth opportunity in spatial biology, and delivering a 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 one on your telecom keypad. If for any reason you would like to turn that question. Please press star.
Again to ask a question Thats Star one.
As a reminder.
Speaker phone, please remember to pick up your handset before asking your question. We will talk to you briefly ask questions are registered.
The first question comes from Dan Arias with Stifel. 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 Thats 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.
Its 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.
Two things give us confidence that that is not the primary reason behind the stall.
First is on a pure win loss analysis, Theres 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.
And those instruments that we did close during the first quarter. We have no reason to believe that the sales cycle was in any way extending.
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 and our geographic channel that correlated with specific organizational changes that we made.
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 genomics pull through the 76000 annualized is a pretty significant drop there. So what do you think is going on on the on the consumable side.
Yes, 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 filling them with more junior consumable reps and we saw some.
Vic drops and pull through from those customers, who were passed off from the senior reps to the junior reps.
We also believe.
<unk>.
This will recover as our new junior consumable reps, who are managing these accounts in specific territories are able to form customer relationships and.
And get more deeply engaged and they happened 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 rep selling genomics in cosmic systems going forward.
Each cell both will there'll be some folks that are dedicated to one in and what do you think the key is to optimizing the sales and incentive process for the two systems.
The strategy that Australia, and spatial biology is to sell a portfolio of products. So with our new structure. We have an account manager who's sort of works as the quarter back 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 poelten specialists as needed to help.
Cell specific products in the case of spatial biology instruments, our technical sales specialists, the same ones, who launched genomics continue to support both genomics and the cognex launch and by having a technical sales specialists that covers both we can enter a conversation with a customer that's really not geared towards selling.
Specific instrument, but is geared towards building a capability for spatial biology, delivering the entire portfolio that nano streak.
Stirring can uniquely provide and then we let the customer steer us down the path towards either a genomics or cosmetics or a bundle of the two depending on what their specific scientific questions are and the speed with which they want to build their spatial profiling core.
Okay. Thanks, a bunch.
Thank you Dan. The next question comes from Julia Cohen with J P. Morgan.
You May now proceed.
Hi, good afternoon, guys. Thanks for color.
First of all you have to factor into this.
Is there any sense, what's the relative magnitude of how much was pulled forward into <unk> and how much was the sales force disruption.
I see.
Think it's fair to say that the sales Rep sales force 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.
Anil maturity in the funnel size was sufficient to deliver our guidance provided that the close rates on things like instrument sales for genomics were consistent with historical performance.
It was it was the sales force reorganization.
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.
I know you are in the process of reassessing.
Our guidance so.
The southwest.
Alignment impact is temporary what do you think will be a factor that you would factor in.
When when kind.
Kind of in a vehicle.
Our outlook right now how long do you think.
Well productivity.
Linda will pay for itself.
<unk>.
Sure.
Yes, I think starting with the last question Giulia, 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 many teen concept.
That we've introduced and by the way the mid teen concept is not new either to <unk> 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.
Couple of things that we're investing in one is some very specific training for our sales reps in new roles we have.
Have reps, who are stepped up into leadership positions. So we're 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.
The second thing we're doing it 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 the salesforce dot 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.
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 April from March into April as well.
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 youre really without.
Any slowdown in terms of end market demand.
Any.
Competitive takeout.
But how are you thinking about the possibility that your customer interest might be shifting from genomics to cognex.
Yes, that's something we're obviously watching carefully I think.
The imager category, which is what we call the high resolution platforms, which cost mix is one are certainly getting a lot of noise from commercial organizations today and I'm sure our customers are being bombarded with with.
Both.
The advertisement and promotion for cosmetics and other imagers at this time.
But yes genomics has a very important place in the.
And some unique attributes that make it a perfect companion to cosmetics. So genomics provides the whole transcriptome, whereas the imager category does not genomics provides high throughput.
The image of category.
We will not.
And genomics provides the ability to focus all the power of the platform on regions of interest that are defined that the users will according 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 are 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 genomics and cosmetics growing and which brings more and more customers into the nanosphere spatial ecosystem.
Got it thanks Bill.
Thank you Julia the next question comes from Paul <unk> with Cowen. Please proceed.
Yes.
Great Hey, this is Dan Brennan bold columns here.
Kind of on and off the prepared remarks, so I missed some of it.
Maybe first question would be just on geometry placement Beggared, Brad you say, how the sales force that was realigned.
<unk> consumable salespeople into different roles did you also say that you moved.
Sales people 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, primarily focus on consumables and that made them responsible for the entirety of our book of business and a certain.
Territory, and it gave them sort of direct.
Management over the specialists, whether they be consumable specialist 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 consumable 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.
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 yes.
Yes, I think represents a natural evolution and those individuals' capabilities to sell their book of business and I believe that with some training and a relatively modest amount of time, we will have a fully effective mini team approach.
Got it could you discuss genomics orders in the quarter Brett.
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 of system and I think that put orders slowed down here.
At.
Let's see.
And about 2000 units.
So that was 20 slate and recognize that that's 20 orders because I mean, yes.
We were thought it's about the same.
Dan were offered Youre 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.
Yes.
Got it and you would suggest given all the commentary around the realignment and the pressure and the expectation that the funnel there that 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.
Yes.
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 pre.
Primarily too.
Reduced effectiveness based on the sales force realignment.
Got it.
Obviously March 1st I know you discussed earlier that one of the funnel started box below where it was at a point in March.
The close rate.
I guess have you guys discussed the wholesale force realignment and kind of the Tweeners you made I know there was commentary regarding the expansion of the sales force that you guys have made but like the realignment it sounds like it was.
Somewhat new so I'm just wondering like how.
How that decision was made.
Really nice job the last couple of years, it kind of maintaining the funnel and execution. So just wondering how that.
Now this whole new things came about how it.
At least right now.
That's a good question Dan.
This sales force realignment had been in the planning for over nine months, so as we hired.
Most of 100, new commercial professionals throughout 2021, we needed to understand.
How do we incorporate them most effectively into our into our organization.
One of the one of the issues that we came across in 2021.
As we were planning how to incorporate these new sales reps.
With our larger sales force.
Some individual customers.
Interacting with a large number of different nano spring routes. They added consumable wrap they had an instrument rep. They had a technical sales specialists. 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 consumables. So.
In order to simplify the way our customers interact with us and in order to support our growing portfolio of multiple platforms.
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.
<unk>, new roles and shifted some opportunities in the funnel from one sales rep to the other.
And one of the things we observe that corroborate. 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 and January had the lowest close rates of any portion of our funnel.
A real.
Reduction in the effectiveness of our ability to close business and accounts.
That shifted from one responsible account manager to another in January and I think that that really points to.
As a as a.
This underperformance in Q1 substantially.
Connected to a realignment.
And could you.
Ill provide some characterization of like the close rate itself like are you talking.
30% close rate versus typically 70 or 10 versus 15.
Any.
I think look I think the easiest way back calculated 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 we fell well short of what we had guided but we had the funnel there with historical close rates.
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 anything they are probably addressed but supply chain or on the com or China. Some of the hot buttons coming into the quarter for tools and broadly for the market was there any drag or yes.
And it's hard to know if there is no impact that might overstate the case Im sure that <unk> was to some degree.
<unk> in the first couple months of the year and as Youll recall, we had seen some slowness in the first couple of months.
But but I think the.
Those types of macro issues R. R.
Our.
They pale in comparison to the two major issues. We've identified here in other words I don't expect.
Let 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.
I wish we had done better in preparing for this change management at our transition.
But I'm confident that the same sales team, who delivered 50 plus orders in the fourth quarter and the new structure. Once they settle then we'll be back.
Two 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.
Your footprint.
And from what I heard in the earlier answer Youre 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 is it just kind of.
That 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.
We'll address that in the May timeframe.
Okay, Alright, thanks, Brian .
Thank you Kyle the next question comes from Catherine Schulte with Baird. Please proceed.
Hey, guys. Thanks for the question.
Maybe first.
What percentage of your territory 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 thats really just trying to be addressed.
Yes. Thanks for the question Kathryn virtually 100% of our direct territories were impacted by the rule changes and some degree of territory realignment.
So that's the answer the first question look we're only.
We can have into April and I will say, we have we have captured good order flow in the.
First few.
First few weeks here.
That's encouraging but.
I think we want to see a few more weeks before we update.
Our overall.
The outlooks.
Okay.
Can you talk about that as a closure and territories that were realigned substantially lower than those that were not be aligned.
Yes, virtually 100% like how are you comparing those two brands, yes, let me I'm, sorry, I may have used confusing language there Kathryn.
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 hand.
Handing one account from 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 in those specific accounts that we saw the most precipitous drop and close rate compared to historical and that tells me that.
No.
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 said the account.
Not at the territory basis does that makes sense Katherine.
That does thank you and I wanted to go through.
That you made earlier.
Q&A.
Jim.
Were you promoted senior.
Instrument reps into the management role.
Doing better on the instrument side.
Why is that can you talk to some of those dynamics and feels like those would be the ones that saw disruption you were then back filling them with Martin Europe .
Just be curious, Denmark color there yes.
Thank you.
Remember the new the new role of these account managers is to sort of played the leadership role in their territory prioritizing where effort goes.
Who 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 spins more energy on instruments, and therefore that team spends more energy on instruments and therefore, they performed relatively better on instruments.
When you perform when you promote somebody who was it more of a consumer oriented person.
They tend to gravitate towards more consumable sales and the overall effort that that team places.
More bias towards that and the performance is better.
But we're looking for obviously balance right. So we want we want our new account managers to be just as comfortable directing the tier two instruments into consumables to be facile at both.
And that's going to take some training and some getting used to the new rules.
Alright, thank you.
Thank you Catherine.
The next question comes from Paul Medicine Canaccord. Please proceed.
Great. Thanks for the questions I know that you just reported in early March It was March 1st.
And I appreciate that the close rate with an issue during the last four weeks of the quarter, but I mean were you.
Banking on most deals closing at the end of the quarter and do you recapture like prior revenue.
From previous quarters during the end of the quarter as well just it just seems a little counterintuitive. So 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.
And that third month has a tremendous impact and what the overall instrument revenue performance is so that helps it maybe explain.
We could have.
<unk> been so off from our guidance that was issue 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.
And the third month of a quarter and I would say the answer is no not typically if we received an order in.
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.
Helpful. Thanks for that and just constants orders 15 is a pretty good number.
Compared to previous quarters do.
Do you expect that those orders are going to step up going forward and are you still seeing the same portion of cognex orders being represented by genomics.
Genomics 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 cost mix orders came from existing genomics users.
Almost every other order came from someone who I would describe as a single cell researchers someone who has embraced that modality.
So it was about 50 50, we saw many fewer bundles of genomics plus cost mix 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 till our may call to give any kind of forward looking guidance on the trajectory of genomics orders, but as you said, it's off to a really great start and one that's arguably stronger even than the genomics launch was.
At the same time and its trajectory.
Okay. Thanks for that and then just going to encounter so pull through was below the kind of the guidance or the expectations, which seems conservative.
Just to start off can you talk about what's happening there on the encounter consumable side.
Yes.
Any counter consumables were just this subject to this these reorganization of dynamic ads.
The genomics 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 this junior reps as well yet and so that wasn't.
And impact that hit us both across encounter and genomics.
Okay.
So I'll leave it there thanks for the questions.
Thank you.
Thank you thank you Kyle.
The next question comes from Tejas Savant with Morgan Stanley . Please proceed.
Hey, guys.
And then on potatoes.
Right.
So lorena.
I guess just.
Can you guys hear me.
I can hear you fine yes.
Yes, Hi, Greg.
Given the early stage of the special ramp why would genomics consumables, it's such a big sales push Shouldnt people, who just bought their box recently.
Regarding our projects, even absent a tenured sales rep.
Yes genomics.
It's a very new technology for our customers to use we find that through the first four quarters of utilization they need a tremendous amount of handholding to learn how to design and execute spatial biology experiment. So 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.
These these consumables don't just sell themselves are 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 cosmic ramp here.
In the first quarter, how are you going to navigate prioritizing revitalizing Sheila as you focus on the <unk> rollout.
Well <unk> 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 Theyre doing leads could end up in a genomic sale. If that's the right system for them. It could end up in a complex sale.
If that's the right system for them and in some cases it will end up in a bundle where laboratories are eagerly building 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 into 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 Adnan.
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 didn't miss any portion of the call today there'll be a replay available.
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With that we'll conclude our call and thank you for joining us.
That concludes Fernando strong Q1 results conference call. Thank you for your participation you may now disconnect your lines.
Goodbye.