Q3 2022 NanoString Technologies Inc Earnings Call
Yes.
Excuse me, ladies and gentlemen, thank you for your patience the call will begin momentarily again. Thank you for your patience the call will begin momentarily.
[music].
Good afternoon. Thank you for attending today's NATO shrink third quarter 2022 operating results Conference call. My name is Megan and I'll be your 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 will.
To ask a question. Please press star one on your telephone keypad.
I'd now like to pass the conference over to our host Doug Farrell with Ministry Doug. Please go ahead.
Thank you operator, and good afternoon, everyone. Joining me on the call today is Brad Gray, our president and CEO as well as Tom Bailey, our CFO earlier today, we released our financial results for the third quarter of 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 cash flows current and future orders.
Prospects for expanding and penetrating our addressable markets.
Strategic focus and objectives.
Orphan status and anticipated success of recent and planned product launches as well as the impact of macroeconomic factors.
Looking forward.
These statements are subject to risks and uncertainties, including those described in our SEC filings. Our results may differ materially from those projected we undertake no obligation to update those.
Later in the call Tom I'll be discussing our financial results in 2022 guidance. We are prepared as a supplement to GAAP financial measures selected non-GAAP adjusted measures calculation of which are described in detail in our press release.
The call all financial measures will be GAAP, unless otherwise noted.
You can also find a reconciliation of GAAP to non-GAAP measures as well as the description limitations and rationale for using these in this afternoons press release.
Analysts and investors in building their models, we have posted exhibits under the financial information tab of our Investor Relations homepage and include the presentation of non-GAAP or adjusted measures rather selected financial data.
Now I'd like to remind everyone that next week, we'll be participating in the Stifel Healthcare conference in New York as well as the Jefferies Healthcare conference in London, We look forward to having a chance to speak with many of you then now I'd like to turn the call over to Brad.
Good afternoon, and thank you for joining us spatial biology that dynamic.
Building powerful scientific insights, while expansion will last a decade or more.
The next few years will determine the mix of technologies, which key discoveries will be made.
While there are other emerging spatial biology providers, we believe that our early mover advantage.
Technology ecosystem et cetera.
Egypt partners position us to lead for this reason our top priority is to maximize the number of our spatial biology instruments placed in leading research labs worldwide.
During the third quarter, we made great progress on this top priority generating orders from approximately 60 spatial biology and trends.
Increase of approximately 70% compared to the same quarter a year ago.
Now with more than 100, cosmic spatial molecule inhibitors and accumulate on a revenue backlog valued at approximately $23 million.
This backlog to increase in Q4 and have set us up for robust growth for 2023.
During Q3, we also advanced our scientific leaders images generated by our customers using the genomics digital spatial profiler were featured on the cover of not one but two of the world's leading scientific journals as seminal description of cosmetics was published in another leading journal and we.
Strengthened our informatics ecosystem through our partnership with <unk>, whose mission is to transform pathology through AI based image analysis and workflow standardization.
The degree to which customer interest in spatial biology is trending towards platforms that provide spatial Stephen Jay at single cell resolution has been EBIT radar previously expected.
<unk> customer focus on single cell imaging resulted in fewer orders for the genomics instrument and in Q3, we captured 20 genomics orders compared to the 25 to 30 of orders we had expected for the quarter. Fortunately our cosmic space will look like your imager is the leading product in a single cell inventory category.
And we are capturing demand at a significant pace, we generated approximately 40 confidence orders during Q3 substantially exceeding the 25% to 30 Cognex orders, we had guided for the quarter as a result, while we recognize less revenue than previously expected.
Our guidance for overall spatial midstream orders.
Our spatial biology instrument orders were strong Q3 was a challenging quarter for consumable sales, which were the largest contributor to the shortfall in our Q3 revenue relative to guidance, we experienced a decline in annual consumable pull through per system for both encountered NGL mix, which we believe was due to us.
Combination of lumpy ordering patterns customer life cycles, and macroeconomic factors for encounter ultra dropped across virtually all geographies and customer segments and seem to be driven by a decrease in demand from the older systems in our installed base.
<unk> weakness seem to be primarily a product of lumpy ordering patterns and the impact of a relatively large number of newly placed systems still ramping with our full consumer will run rate.
Both cases weakness was exacerbated by broader market conditions.
Continued clinical trial delays among large pharma customers reduce spending the cash strapped small biotechs and COVID-19, Lockdowns in China.
While we were clearly disappointed by this shortfall I remain confident that we are set up for a strong 23 and beyond.
Importantly, we have recently reevaluated, our key priorities to ensure that we invest in the most promising aspects of spatial biology, while streamlining our cost structure.
The result of this review, we are eliminating approximately 95 positions and reducing spend in other non personnel areas.
While these decisions are difficult, especially if we consider the impact on our people. These actions will ensure that a more substantial portion of expected 2023 revenue growth all to our bottom line and that we are positioned to deliver on our commitment to achieve breakeven without the need for additional financing.
Tom will provide more details on our financial outlook. During his prepared remarks before I hand, the call over to him I'd like to provide an overview of our progress towards our strategic objectives for the year.
Given the tremendous customer interest I will start with an update on our objective to launch Kosmos is the industry, leading molecular imaging platform.
Our interest in Cognex has exceeded our expectations throughout the year as we prepare to ship our first commercial systems in the weeks ahead, we are more confident than ever that cosmic <unk> is the best performance specs and the ecosystem to be a platform of choice.
Cosmic leaves with best in class performance metrics, including highest flex RNA assays.
We believe the image proteins and robust data quality, all done and challenging <unk> tissue.
This is helping us reach new customers and show strong synergy with the whole transcriptome capabilities of genomics boding well for our long term leadership in spatial biology.
In Q3, two thirds of Cognex instrument orders came from <unk> customers.
Our cost basis is extending our customer base into discovery research one third of these new customers chose to adopt cognex <unk> at the same time.
Time by purchasing a bundle.
Meanwhile, one third of all Q3 complex instrument orders came from labs, who previously adopted genomics primarily between translational research to date Cognex has penetrated only 20% of the genomics installed base adjusting many more opportunities for cross selling going forward.
In the near term, we expect our facial instrument order mix to remain complex heavy cognex represents about 60% of opportunities added to our spatial instrument funnel in Q3, and we expect capex to continue to account for about two thirds of spatial instrument orders.
Our beta program is progressing well with cognex instruments installed in integrating with electronics as three beta customer sites.
Customer feedback has been overwhelmingly positive and through these interactions we have identified several training software updates that we are incorporating into the final commercial rollouts.
We're completing the validation of cognex and the Comex and the integrated solution and are preparing our first commercial systems for shipment in the weeks ahead, we expect.
To shift between five and 10 cosmic systems before the end of the year and we can't wait to see the great Science. These systems will generate.
Our second objective is to drive genomics DSP further into mainstream research broadening adoption across multiple areas of research.
From a scientific perspective, our cosmic <unk> customers had a wildly successful.
Papers and images generated using genomics graced the cover of two prestigious scientific journals nature genetics.
Cancer research in total our customers published more than 30, new papers, bringing our total to more than 160 peer reviewed publications as of September 30.
This productivity underscores the utility of genomics, particularly in translational research for human oncology and immunology.
Demand for genomics instruments from translational researchers remained strong even at discovery researchers for single cell resolution of conflicts and translational researchers drove the vast majority of the approximately 20 genomics instruments quarter during the third quarter.
We remain focused on ramping the consumable pull through of our growing installed base of <unk> systems. We have observed that customers take time to build our pipeline of additional projects, reaching steady state utilization 12, or 18 months after instrument purchase order.
<unk> consumable revenue has grown the large number of instruments sold in the second half of 2021 and activated in the first half of 2022.
Have weighed on the consumable pull through per system.
We are bolstering our support for customer ramps and consumable pull through going forward by refocusing, our Phd field application specialists, primarily on spatial biology experiment design, helping customers accelerate the pipeline of projects on our platforms. We expect this will benefit both.
Genomics and conflicts pull through in the long term.
Meanwhile, we continue to invest in partnerships that enhance the genomics workflow.
Using video bonds, AI, driven digital pathology software Oncotype ex discovery, researchers will be able to analyze more colorful rapid images generated on genomics and combine these images with those using traditional haa statements to better understand the number entitled cells present within regions event.
We expect the combination of these technologies will accelerate biomarker discovery and validation for both whole transcriptome RNA and high Plex protein analysis.
We're committed to delivering informatic solutions that enhance research productivity, bringing us to our third strategic objective, which is launching our atomic spatial informatics platform.
Facial experiments require unprecedented bioinformatics capabilities to support image analysis data visualization and global collaboration.
We believe that the highly scalable compute and storage capacity of our cloud based <unk> platform is essential to drive broader adoption of spatial biology and that comment is an underappreciated competitive differentiator.
We expect to achieve our goal of launching a comex in the weeks ahead at atomic becomes available to the first customers receiving their commercial complex systems.
We expect to roll autonomous out to our Geo mix users during the first half of 2023.
So Thomas employees of flexible data structure, so it's ready to be leveraged using artificial intelligence and machine learning from day one.
Other NATO spring a good deal farm are exploring opportunities for further integration by connecting our atomics. The Vizio farm software set of researchers to leverage artificial intelligence and machine learning to provide spatial biology for both of our spatial biology platforms.
Our fourth objective for 2022 is to sustain our encounter franchise Q3 was a challenging quarter for income as new instrument placements and consumable pull through both fell short of expectations.
Instrument placements slowed among academic researchers, especially in Europe and were hindered by a year on year decrease in the number of genomics plus encountered bundles that are being sold.
Consumable pull through was challenged by an increase in aged or it's our installed base, which first commercially launched back in 2009.
This stage in the in kind of lifecycle, we believe that some older systems are becoming inactive as researchers who originally purchased them transition to new roles or take their research in new directions.
While the annualized consumable pull through on each dividend camera system has remained relatively stable over the last 24 months.
And the number of active and camera systems has flattened as the number of new encounters being placed approximately equals the number of older and counter systems being it activates.
While we do not view encounter as a future growth driver. It remains an important foundational business that continues to generate great science and provide substantial cash flow to support our global commercial channel and innovation.
I'd now like to turn the call over to Tom to review the details of our financial results and outlook for the balance of the year.
Thanks, Brad and thanks, all for joining us today.
Revenue for the third quarter was $29 $5 million, reflecting a cosmic heavy special instrument mix lower genomics and cut our consumable sales that are forecast syndicated and about a $1 million negative foreign currency.
For cosmetics, we generated orders were about 40, new systems in Q3.
Adding approximately $9 million revenue backlog to be recognized in future periods.
As of September 32022, our accumulative Cosmic orders stated over 100 systems translating to a total revenue backlog about $23 million.
Q3 genomics revenue was $9 3 billion.
Genomics instrument revenue was $4 7 million, reflecting approximately 20, new system shipments and consumables revenue was $4 6 billion.
Q3 annualized julie's consumables pull through was about $58000 per installed system.
At the end of Q3, our genomics installed base was approximately 330 instruments with about 15, new instruments installed during the quarter.
For our encoder business, which includes all service Q3 revenue was $20 2 million.
And kind of instrument revenue was $3 3 billion consumables revenue was $12 million in Q3 annualized encounter consumable pull through was approximately $44000 per installed system.
At the end of Q3, our <unk> installed base was approximately 1105 instruments with about 20, new instruments installed during the quarter.
Turning to margins with expenses I will 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 Web page for detailed information on how our non-GAAP or adjusted measures are prepared.
Q3, adjusted gross margin was 57% an improvement of 100 basis points as compared to Q3 of last June of last year ended improvement sequentially.
Reflecting management manufacturing personnel and other expenses to align with current product sales volumes and efficiency improvements.
These impacts were partially offset by investments, we are making manufacturing capacity primarily to support commencement of cosmetics instrument shipments in consumables.
Adjusted R&D expense was $14 5 million a decrease of 12% year over year, primarily due to the capitalization of approximately $3 5 billion of software related product development costs that will be expense in future periods.
Inclusive of capitalized amounts are Q3, R&D spend reflects continued investment in our spatial biology platforms, including hardware consumables and software development for Cognex and the products in advance of the expected shipment of our first commercial cosmic <unk> instruments in Q4.
Adjusted SG&A expense was $28 4 billion, an increase of 20% year over year, driven primarily by investments made in spatial biology related to commercial initiatives.
Q3, adjusted EBITDA loss was $26 $1 billion, and our cash and cash equivalents at September 30 were $235 million.
We also announced today that we have taken steps to streamline our cost structure by eliminating selected positions that activities, while maintaining key investments and spatial biology.
As our business mix has evolved we decided to take these steps to prioritize our portfolio of technologies operational and commercial initiatives.
These steps will allow us to better leverage our operating expenses, while investing in our special biology business and will support our objective of reaching cash flow breakeven with our current balance sheet resources.
We expect to record a charge of approximately $3 5 million in the upcoming fourth quarter related to these changes.
Turning to guidance, our Q4 outlook reflects a revised mix of expected spatial biology system orders and consumables pull through rates for genomics and encounter based on our Q3 experience with the upper end of our guidance ranges, assuming modest Q4, driven seasonal improvements.
For the fourth quarter, we expect to receive orders for over 60 spatial biology systems with an approximately 66% 33% mix between cognex in genomics, implying a cumulative total of over 200 spatial systems sold in 2022.
Spatial biology revenue of 12% to $13 million, which we expect will derive from the sales of genomic systems. The shipment of our first <unk> systems and broke consumables.
We would expect approximately $7 million to come from.
Instrument sales and approximately $5 million to $6 million to come from consumable sales.
We expect Q4 and counter revenue of 21% to $22 billion total Q4 revenue of $33 million to $35 million.
We have also updated our 2022 full year outlook, which is detailed in todays press release to reflect our year to date actual results and our Q4 outlook our.
Our updated full year outlook also incorporates approximately one month's impact of our announced cost reduction initiatives.
Looking ahead to 2023, the cosmic systems orders, we've already secured in 2021 and 2020 to provide the foundation for expected revenue growth of 40% to 50% in 2023.
We also expect improvement in our EBITDA loss next year, reflecting expected revenue growth combined with a full years impact of our cost reduction initiatives and anticipate ending 2023 with approximately $140 million to $150 million of cash.
We look forward to operating more details when we provide our 2023 annual guidance per our usual process in February .
I will turn the call back over to Brad FERC closing comments.
Thanks, Tom we are focused on the dual objectives of spatial biology market leadership, and achieving cash flow breakeven on our planet's resources. We believe our leadership in spatial biology is best measured pace of new instrument orders by that measure we are having a solid year.
Our successful launch of prospects since the stage for strong revenue growth in 2023.
We're addressing trends in our encounter in genomics business with decisive action.
And are streamlining our cost structure to maintain balance.
With our unique spatial biology portfolio and strong balance sheet. We believe we are poised to deliver both market leadership and future profitability.
With that we'll now open the line for questions.
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Our first question comes from the line of Carl Mixon with Canaccord Genuity. Your line is now open.
Hey, Thanks for the questions I guess.
I guess, Brad just starting with the quarter could you just product right.
Some more detail on like why consumables for genomics.
It was lumpy by ordering less lumpy like how do you can prevent prevent that going forward and you didn't mention the realign commercial pretty much I mean with any of the shortfall here due to that realignment earlier in 2002.
Yes. Thanks for the question Kyle I'll start with the second one first we do not believe that the shortfall in Q3 was related to our sales force realignment in the first quarter, we're really past the issues that that realignment created.
Many of the differences we saw between territories that had and hadn't been realigned or now a race.
Junior consumable reps have caught up to the senior consumable reps in terms of performance et cetera.
Now that we have those execution issues behind us we're more focused on.
<unk> and market trends and issues that are very specific to our installed base in terms of the lifecycle of the customer. So looking at the Q3 genomics consumable pull through I'd say it is impacted by three different factors, which are sort of tricky to parse apart. The first is lumpy ordering patterns and we've come to appreciate their debt.
<unk> new sites for Geo mix very often build inventory early on and then burn it off slowly over time.
No that we saw some stocking orders in the third quarter of 2021 that did not repeat in the third quarter of this year.
And as a result, that's part of the explanation for the year on year drop.
The best evidence for Lumpiness as the very strong Q4 seasonality that we have seen in both the 2020 in 2021, where our pull through reached over 100 10-K.
Wasn't really pull through on a run rate basis in terms of actual experimentation, but rather they're stocking behavior.
The second issue is is macro.
And when we look at where our year on year pull through dropped the most we can see that it dropped the most amongst biopharma companies and within China, and we know that these groups have been under some macroeconomic pressure.
The last point and then the Turkey is one.
For us to model today is the lifecycle impact of new sites. So it takes a lot for our genome excited to reach its full ramp of consumables, sometimes there's logistical issues that needs to overcome such as the purchase of ancillary equipment for slide trap, where data storage and analysis solutions.
Sometimes they are learning to plan, new projects and taking on new concepts of spatial biology and between eventual selection and sometimes core lab simply need to promote their new spatial biology capabilities to their to their local customers to build a book of business and overall when we look back a new site tends to do about 60% of.
What its long term run rate for principles will be during its first year, and then ramp up to 80% in the second year and 100% thereafter.
Because we had a very large number of government systems sold in the second half of last year and installed and activated in the first half of this year.
We are experiencing a wave of relatively.
Both pull through systems that are still ramping up to the full run rate.
So it's very tricky to assign.
<unk>.
To allocate the pull through drop across these three different factors, but it's something we're continuing to study and that we will provide updates on in future periods and when we guide for next year.
Okay that was great and then maybe just thinking about Jim specifically, just staying on that going forward I guess mix of orders one third being genomics sounded like that was the expectation.
Maybe just talk about your confidence in the health of that franchise on the kind of the visibility heading into 'twenty, three and beyond and I was also curious if <unk> read out and WTO ta as much as it because that much of a headwind.
We're not sure that thought that might have been.
Last year earlier thanks.
Yes.
Yes, I'll take the second question.
First again, Kyle Wpa in NGF readout now represent the vast majority of the usage of the genomic system, 85% of our new systems are placed in front of the sequences.
And the whole transcriptome Atlas assay count for something like 75% of our consumable revenue. So that's been really a successful story.
Also long term optimistic about the value of the genomics franchise.
The science speaks for itself, it's no small thing to be on the cover of two different journals within just a few months time.
We now have 160, <unk> papers 30, a quarter being published this for translational researchers who are doing immunology oncology. This is a very productive and powerful instrument.
I do think the idea of single cell imaging is sucking a lot of the oxygen out of the room right now with respect to people who are building their own special capabilities, but in the long term, we still believe deal mix has an important place in it.
The best evidence we have to date for that is the strong synergy between cosmetics NGL mix. When it comes to who is purchasing the cosmic systems very large fraction of those who are buying cosmetics are either doing so with a genomics and a bundle or our labs, we've already purchased the genomics.
I want to tap complementary capabilities.
Alright, perfect and then just one more before I hop off just on the 'twenty three outlook, I guess and I know youre not going provide much detail until will be on the <unk> call.
But.
Brad just a lot of this hinges upon genomics next year and including pull through I mean, how should we sort of think about that as we kind of model.
Going ahead here.
Yes.
Yes, I think that.
Yes the.
First answer is obviously, we will provide more detail in February but setting that aside what we built our growth rate ranges you didnt make heroic assumptions around Geo mix I think that you can get to our numbers, but assuming genomics repeats what it does what it did this year for instruments and that pulled through repeats what it did this year as well and you can get to those growth rate regime.
Assumptions will comment more in February .
Okay got it and just to repeat the the range was 40% to 50% growth in I think it was the backlog for cosmic a $20 million is that correct.
The $23 million currently and we expect that to be about 30 by the end of the year.
In dollar terms perfect Okay alright.
Alright, guys I'll leave it there. Thanks, so much for the questions I appreciate it.
Thank you Kyle.
Yeah.
Thank you.
Our next question comes from the line of Dan Brennan with Cowen. Your line is now open.
Great. Thank you and thanks for taking the question guys, maybe just starting off with the updated guidance for the year fourth quarter arguably still looks a little steep just walk us through the visibility, particularly our genomics and when we're getting to like $12 million to $13 million.
And revenues versus $9 million, a little over 9 million. This quarter, just give us a sense. It looks like price mix are expected to double sequentially is that about right.
On what's implied for genomics in fourth quarter and kind of what your visibility there.
Yes.
Fourth quarter, Dan that 12% to $13 million range also is inclusive of the 5% to 10 cosmic systems that we expect to ship that Brett mentioned in his script you have to consider that when looking at that range and I think when you do that you'll see that the range that we've established for genomics is a conservative range that assumes that the bottom end of the range that pull through.
It's about the same as we saw in Q3 and at the top end is that what you would characterize as a typical sequential improvement which for genomics is about a 15% sequential improvement in pull through so that would be the top end of our range, which is still lower than the old range that we had before so I think that the new guide that we've set up incorporates those factors that we see.
Feel confident the placement we glad about for Q4.
Got it.
You guys talked about China and emerging Biopharma.
In the remarks.
I understood how to trying to do in the quarter and how big is that emerging biopharma business for you since you're kind of citing that as a weak point.
Yes, so China underperformed its plan during the quarter Tom.
Tom May have the exact year on year numbers, China represents about 5% of our overall revenue for the company.
<unk>.
Small biopharma represents about 15% of our overall revenue for the company. Although we also decided that large biopharma at least on the consumable side has also underperformance and that makes up about another 10%.
<unk> of our business so I think.
This was not the only factor that impacted our performance, but we do have.
When you add those together, 25% to 30% of our business exposed to some end markets.
Sure.
Taking their own unique challenges.
Got it and then.
And then when you think about cosmetics going into 'twenty, three obviously really strong order book a lot of momentum there.
Like how do you see I guess maybe.
Throughout the $40 to 50% how much does that assume additional cosmic <unk> orders in the first half of the year. They can install just wondering you got a lot of momentum right now, which is great and hopefully that is sustained but obviously theres a lot of premiums coming out and you've got a vision. That's on the market and you have others that are coming just wondering kind of what you baked in for kind of additional order conversion as we look ahead.
The 2020.
Yes, I'll repeat that will guide in February , but I think that we built that 40% to 50% range to and not as a service <unk> assumption on what we would expect orders to be for <unk> next year. So you do not have to make a heroic growth assumptions on <unk> orders to get to the revenue range appropriate range that we have.
Articulated at 40% to 50%.
Got it and then maybe final one just if you think about you guys had the investor day, not that long ago.
Those longer when you look out say the next three to five years I mean, we've got near zero Mccrickard Wobbling right now, but you guys still feel good longer term, it's got a real strong place.
And Cognex, obviously you guys are excited how do you think about the collective business say growing not over 23.
When you look at say the next three to five years, 20% topline growth rates in the topical with any any range of outcomes that you would talk to you about what the overall company should be able to do.
Yes, Dan This is Brad I don't think we're going to establish long term.
Growth rates here on this call.
And then I think we believe we're going to be a market leading company.
Market expansion biology market, which is just getting started and we will grow in a very meaningful way for a decade ahead.
We obviously have some transient impacts this year with the inability to recognize revenue on cosmetics.
And we're still learning the consumable pull through dynamics of genomics.
But the secular trend.
Heavy growth in spatial biology industry should should drive meaningful.
Meaningful top line growth for the years ahead.
Alright, guys. Thank you.
Thank you.
Next question comes from the line of Dan <unk> with Stifel. Your line is now open.
Afternoon, guys. Thanks for the questions Brad why do you think Biopharma spending has retracted historically speaking the consistency there.
Ben well above average in the R&D setting.
Well, we've been talking about for ever since the recovery from the pandemic about a slowdown in clinical trial approval that occurred during the COVID-19, pandemic and because the translational biology, that's done on our systems is downstream of that accrual typically starting once all of the clinical trial.
Samples have been collected.
We have seen a slower recovery and pull through in Biopharma, and we had amongst academics and the time.
Since the 2020 pandemic that has not improved it has remained suppressed relative to pre pandemic levels.
Okay, but if you were you were I remember you were talking about that earlier in the year.
It didn't seem like that was impacting NGL mix pull through at the time is that is this sort of like a follow on effect or something that you.
Youre, realizing later I'm trying to understand the progression of the issue over the quarters.
Well, it's I mean, it's an issue that has been impacting both encounter in geography bulk group.
Ever since the <unk>.
Pandemic period.
You talked about at most in the context of encounter because.
The overall magnitude in absolute dollar terms for encounter is bigger than it is for geography at this stage of their life cycles.
But.
This is not a.
Our new issue, it's probably more than we would have guessed with a recovered by now we have not seen the recovery.
And biopharma pull through that we would have expected as those trials completed enrollment and translational biology of the game.
Okay.
Okay, and then you mentioned this quarter than last quarter as well that pull through was suffering from some of the newcomers that are just slow to ramp what about the existing users.
You know those labs that bottom instrument in 2019 2020 early 2021, I think there are about 200 devices or so that were installed by June of 'twenty. One. So just curious how pull through is trending amongst that crowd and how it compares to the new cards, you're referencing here.
Yes, when we look over a long period like the trailing 12 months from the third quarter of 2022 back versus the previous trailing 12 months from the third quarter of 2021 back there very similar that being said if you just look at Q3 it.
It was our pull through was down sequentially from Q2 to Q3 across all vintages of our genomics installed base.
So this particular quarter, even the more mature systems that have been out there a while.
Lower ordering and we attribute that to some of the other factors I mentioned in terms of Lumpiness.
And the macro effects.
Okay.
Okay last one for me just Tom on cosmetics as orders continue to build here and I'm. Just curious what would you think about as far as a placement backs for 2023.
I know talking about 24, it seems a little crazy right now, but just wondering what we need to sort of in our minds pencil in for backlog towards the end of the year there.
Yes, I think that in the guidance range that we had for <unk>.
Seems that orders are similar to this year for conflicts that would deliver about half of our backlog. So that would suggest that you would go into 2024 with about with about.
About 60.
We would take it.
And backlog.
And then to the.
That's based on the 40% to 50% range that we talked about obviously, we'll get more explicit commentary at February that could be yes.
Perhaps a move that around that split that 40%, 50% would infer.
But that number Dan.
Okay. Thank you guys.
Okay.
Thank you.
Our next question comes from the line of <unk> Chen with Jpmorgan Chase. Your line is now open.
Hello, Thank you for taking my question.
Sure.
So regarding the audit.
Gentlemen.
Could you provide more color.
In terms of customer preferences.
Okay.
Chuck perhaps by customer type.
More or less.
And then how does that trend line.
Awesome.
I think you are.
Total hearing your question.
First part I know was talking about.
Our preference for cognex in Geos to different customer types. So I think what we've observed so far this year we did.
Well sure.
Going back to 2021, we sold quite a few <unk> systems to both discovery customers and translational customers. So discovery customers remember when we.
Are those who are doing very basic scientific research not necessarily focused on curing disease of translational researchers are those who are doing work on human tissue samples for drug development or diagnostic development. So our <unk> sales last year were pretty nicely balanced against those two.
Customer segments. This year those discovery customers have shown a very strong preference for single cell imaging and in fact.
<unk> is predominantly going to discovery customers now.
Interest NGL mix remained strong from translational customers, but given the mix, we had last year, which was balanced across two we've seen.
Meaningful year on year drop in the total number of genomic systems workplace.
That is helpful.
All along.
Second question is no.
My phone number.
Comes from Michael.
That's correct.
Got it.
Obviously, you have a head start with Kaufman.
Yes.
And a quick one from the lines.
Alright.
Good morning, gentlemen.
Okay.
Yes.
Oh I'm sorry.
Yes.
The question that time.
So we feel really great about the position of cosmetics and the durable advantage as it has I mean I think that.
First we've picked the RNA plex.
Key specification, where we are currently market, leading and we expect to remain market, leading so we do a 1000 different R&D once most of the other competing imagers do about half of that.
Area, we distinguish ourselves is on protein imaging, where we will launch with a 60 flex offering and we've demonstrated already in ability to over 100 plex.
That is a feature that most of the other imagers are not able to offer their customers. So we feel very good about the competitive profile of cosmetics.
I think so far we have a very good win rate in those instances where customers are evaluating our offering against others.
Okay.
Thank you the question our next question comes.
Good.
No go ahead operator.
You broke up a little bit there.
Sorry about that.
The next question comes from the line of Catherine Schulte with Baird.
Your line is now open.
Yes.
Hey, guys. Thanks for the question.
I think you said than that.
Yes can you hear me.
Yes, we cant Catherine.
Perfect.
I think you said the number of active encountering remaining about flat as new systems are being offset by older systems that are being retired.
Any sense for why these systems are being retired as there are a placement cycle dynamic within accounts or users stopping and time based research.
Well the two major reasons that we see.
Yes.
No no longer use their encounters are one the individuals and purchase that encana and who was responsible for experimentation on it moves from one job to another.
And to the science moves in a different direction, perhaps away from bulk gene expression too.
Some other area of science.
When you look back across our installed base and we look at where those systems are inactive it's highly correlated with the age of the system because as you can imagine with every cumulative year after an instrument in place.
Cumulative profitability.
Employees bottom, leaving goes up and accumulate profitability the science going on in different direction goes up. So there is a lifecycle. These systems that's totally independent of their usable life and then we have active systems that are around there from 2012 sale running assays, but every year.
Possibility that.
The researchers move in a different direction increases.
Got it and then on pull through with rates of your peers talk about weakness on the consumable side as well just given maybe more pronounced seasonality in <unk>. So can you just talk through how activity levels trended throughout the quarter and maybe how.
October look just to get a better sense for which of those were transitory and let you guys go.
Sorry, Michael.
Well, we don't have perfect visibility into activity levels. Our systems are not connected with the telemetry that allows us to monitor their use remote laid out some of our competitors are so I can't really speak to that question Kathryn.
Our early October trends are consistent with the guidance that Tom gave which is to say we are not expecting a substantial transitory recovery in the fourth quarter.
We have not built that or guidance.
Got it thank you.
Thank you.
Our next question comes from the line of Tejas Savant with Morgan Stanley . Your line is now open.
Hi, guys. This is edmund advantageous thanks for taking the questions.
The first question from me is whats embedded for your what's embedded for you encounter franchise in your updated guidance and given some of the dynamics that you observed in the quarter.
We'd be.
Thinking about encountering next year as flat year over year would be the right way to think about it.
Yes, I think I've reported before thanks had been in the fourth quarter.
As mentioned in the prep remarks with another cost so we built the guidance.
At the bottom end of the range for consumables at what the Q3 pull through was.
The top end of the range you can assume about a 10% sequential improvement in pull through which is typically what we would see on a seasonal basis in a normal year. So consistent with the comment that Brad just made about us not assuming any improvement in the macro factors thats what that reflects.
So that's the overall guidance was built for Q4, and we'll give more commentary on next year as well.
Get into the February timeframe, but the growth rate ranges that we assumed.
For the 40% to 50% range assumes the typical flat instruments a year over year that we typically assume that our encounter guidance and pull through that was consistent with what we observed this year sort of improvements next year. So that's still would suggest there would be some growth but not.
Any any growth in the pull through ranges that we experienced this year that were built into those preliminary assumptions.
Got it and I'm understanding you want to hold 23 guidance until later, but.
How are you thinking about academic budgets heading into next year in light of the upcoming mid terms in the Iraqi government priorities. Since you entered the energy subsidies in the EU.
Okay.
We have not in our commentary about next year's growth rate factored any major changes that ensue.
Academic research funding in one direction or the other.
I'll keep an eye on it but spatial biology as a relatively new deal that I would hope would be.
Funded pretty well.
You can see I think that through some major recent initiatives.
Huge new brain mapping effort, that's underway, that's being run out of the Allen Institute up here in Seattle that represents a major application of spatial biology technology. That's just got I think have a $1 billion in research funding over multiple years ahead. So my hope is regardless of what the budget does overall the application of new technologies.
<unk> spatial.
We'll be at the top of the priority list.
Got it appreciate that and one final question for me.
Adding the fact that China is only about 5% of your total business. You've also talked about the fact that you want to expand your exposure in the region. So I was wondering if you think back about all of the headwinds that you saw during COVID-19 and ongoing headwinds in the region has your international expansion plan in China.
Approaches changed in any way and do you plan on further expanding from that 10, plus direct sales in the region in the next 12 months.
Yes, our international expansion plans have not changed unfortunately, the investment we've made him a great team. We have built in China haven't really had a chance to prove what they can do because of the rolling lockdowns that we've experienced over there, but I still have you.
High degree of confidence that they will succeed when we.
We provided.
Cool down with the virus.
We don't have any any plans to reduce our pace of investment there.
Great. Thank you very much for the time.
Thank you.
Thank you.
There are currently no further questions registered so as a reminder, its star one on your telephone keypad.
Yes.
No questions waiting at this time.
Very good thank you to everyone for joining us today.
Full transcript shall be available as well as a replay in the next couple of hours you can access that by dialing 866, 813 94 or three.
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Thank you again this concludes our call.
That concludes my name is Julian Bott quarter 2020 operating results conference call. Thank you for your participation you may now disconnect your lines.