Q2 2023 Standard BioTools Inc Earnings Call

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Hello, and welcome to the standup Vial tools, Inc. Second quarter 2023 financial results conference call.

As a reminder, this conference is being recorded it is now my pleasure to introduce your host Scott Queenstown, Vice President Investor Relations and business stuff.

Thank you.

Mr. Greenstone you may now begin.

Yeah.

Thank you operator, and good afternoon, everyone and welcome to the standard <unk> second quarter 2023 earnings Conference call.

At the close of market today <unk> released its financial results for the quarter ended June 32023.

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 Biofuels today will be Michael Holmes, 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 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 <unk>.

Consider our results under GAAP as well as our supplemental non-GAAP information.

The reconciliation between these presentations, which are disclosed in a 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. In 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 <unk>, Our Chief Executive Officer, and President Michael.

Today I'm more encouraged by the business and our progress than had been since joining five 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 'twenty to 'twenty, three we saw or 1000 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 costs.

But.

Paths for 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 three priorities stabilizing the core business with a focus on bringing it back growth.

Improving operating discipline.

Fluids, expanding gross margins and reducing operating expenses to achieve.

Cost of cash flow and profitability and finally, using M&A to drive scale profitability and growth we are making progress against two of these objectives with lean operating system and we remain focused on executing on the third.

We view our business across three product categories instruments consumables and services each drive the order to fit the corporate P&L, but naturally with different economic and growth dynamics. Today, we serve two end user markets and 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 and total R&D and inorganic efforts are focused on filling the segments and markets with the best and most attractive products and solutions.

Turning to our first strategic objective.

To stable growth, we are seeing encouraging signs in our business driven largely by new instrument sales.

Revenues for the first half of the year grew 17% over same period in the prior year with total instrument revenue rolling over 70% in that period.

It was led by our proteomics business, which was up nearly 40% against an expected 8% decline in genomic sales, which we are explicitly managing for profitability and not growth today.

The growth in proteomics with versus the businesses declined from a year ago, which we ascribe to new products and disciplined commercial execution improved customer service and a rootless focus on quality.

In April we launched our new imaging product our first six years named the Hyperion STI. This new solution has by far the highest data quality and throughput for high parameter protein analysis in the 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 on workflow advantages over competitors products today at the site of <unk> is the only platform that can multiplex a high number of extracellular markers and intra cellular markets at the same time this.

Capability enables biological insights mis by legacy technologies, and a growing air interest noted by multiple publications at this year's <unk> meeting this simple, but important insight allowed us team to do much better job positioning our advantages to prospective customers, which drove unit.

Sales in the quarter and fill the sales funnel for future quarters.

Our second end user market genomics continues to undergo a multi year transition to high throughput applications on MTS I've been in this field since its earliest days and when the Windows flooring, it's best to have it at your back Nacho upfront with that knowledge over the last year, we made a.

Hard pivot in the business with three key actions.

First we consolidated the product portfolio down to a single instrument, TX nine eliminating several legacy systems, including lower priced options understanding this would lead to temporary headwinds for instrument sales.

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% and our genomics business for the first half of the year while daily.

During 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 and our OEM partner approach this 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 or.

Partnerships precaution that new relationships take time to develop validate and mature and we are still early in that process.

All of the above improvements out of assault on all of our commitment to the Sps way of operating and the people we recruited into the organization to drive that system I'm proud to say that Sps is now firmly rooted across all functions in the company.

It helped drive further progress in quarters to come resulting in continued revenue growth.

Margin expansion and operating expense rationalization.

Focus on quality and serving our customers is in hand, and our lead 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 deep.

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 approved commercial execution, our operating discipline is manifesting itself in higher gross margin and reduced operating expenses, allowing for materially lower operating cash burn.

This lead us to our third priority consolidation, adding to our instrument reagents and services through inorganic growth. This is a critical core focus for us for standup power tools, but also non linear the industry is ripe for consolidation and we are well positioned to lead the charge.

Incremental additions can leverage our infrastructure and Sps approach feed off balance sheet accelerate scale drive growth.

And importantly to profitability each opportunity that fits into our detailed in term matrix and with a world full of innovative products.

But few able to alone support a single company, even fewer companies with experienced and capable teams to scale and build a profitable business.

We now see standup power tools is well positioned with a.

Uniquely attractive chassis for us to consolidate such consolidation is central to our strategy and our value proposition resonates with founders that are excited about potentially joining a company where they can have a meaningful impact.

I will now turn it over to Jeff for a review of our financial results Jeff.

Thanks, Michael and good afternoon, everybody, it's a privilege to be here today and a part of the standard about tools team.

As Michael noted, we're pleased with our results for the second quarter and the first half of 'twenty three 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 non operating and non cash items and a reconciliation of GAAP and non-GAAP measures are provided at the end of our earnings press release. It 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 one time $1 6 million reserve related to our discontinued LCM product line and 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 'twenty three this.

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.

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 three categories will drive higher margin consumable 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.

As Michael mentioned, our continued investment in this segment is already beginning to bear fruit.

At the same time, we are 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 one time $1 6 million reserve related to our discontinued LCM product line.

We're managing related investment 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, lower operating cost base and sustainable path.

Contribution margin.

Our non-GAAP gross margin for the second quarter expanded to just under 61% and by about 2100 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 1100 basis points compared to the first half of 'twenty two.

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. The margin profiles are different across instruments consumables and services. So our gross margin expansion roadmap will be impacted by quarter to quarter variations in revenue mix we.

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 operating expenses in total our non-GAAP operating expenses of $25 2 million. We're 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 'twenty, three we reduced our non-GAAP operating expenses by just under $18 million or 26% as compared to the first half of 'twenty two.

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 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 use by $28 million or more than 60% over 2022.

We continued to deliver on improvements in operating efficiencies with a multi year runway and a line of sight deposit of cash flow in our core operating business.

Before I turn the call back over to my goal 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.

We're also still in the early days of our transition cognizant of an uncertain macroeconomic environment.

And in perfect visibility into quarter to quarter variations in our business.

So based on these factors, we're not updating financial guidance today, but we will 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 will turn the call back over to Michael for concluding remarks.

Thanks, Jeff good to have you onboard while it's still early days I'm encouraged by our progress to date.

Our first few quarters, we focus on operational improvements and we continue to see those impacts this quarter, we sold a business will turn to a healthy revenue growth and while we see some variability on a quarter to quarter basis. We are in 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 Sps to spearhead much need of consolidation in our industry will approach these opportunities with thoughtful railcar.

I conclude by thanking the team for their execution and investments for that patient and while we need to celebrate revenue growth gross margin expansion and operating expense production in just five 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 43rd annual growth Conference in Boston later, this week and UBS Med Tech Toolset genomics summit in data next week.

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.

Okay.

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