Q3 2023 Standard BioTools Inc Earnings Call

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Hello, and welcome to the standard buyer chose third quarter 'twenty 'twenty financial results Conference call.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host pages in our Investor Relations. Thank you Mr. Bernardo you may begin.

Thank you Rachel good afternoon, everyone welcome to standard bias towards third quarter 2023 earnings conference call at the close of the market today standard buyout tools released its financial results for the quarter ended September 30th 2023.

During this call we will review our results and provide commentary on our financial and operational performance market trends and strategy T. Chek initiatives does that incur a standard biofuels today will be Michael I called 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 putting plans and projections for our business our outlook for 'twenty, 'twenty, three and future financial results market trends and opportunities and our expectations related to a planned merger with Soma logic, what are your potential synergies and our business outlook for the combined company.

Post close these statements are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from current expectations are forward looking statements. On this call are based on information currently available to us and we just claim any obligation to update these statements except as maybe required by law.

During the call we will offer that some financial information on a non-GAAP basis. We believe that these non-GAAP financial measures are useful in evaluating our core performance as a base point for assessing the future earnings potential of the company. We use these non-GAAP measures in our own evaluation of continuing operating performance.

We encourage you to carefully consider our results on a GAAP and non-GAAP basis, a reconciliation between non-GAAP measures and their GAAP equivalents are provided in the tables accompanying today's press release, and there's an appendix to today's presentation deck.

Please note that management will be referring to a slide presentation, including updated supplemental financial information with the webcast today and this presentation is also posted on our website a replay of the webcast will be available on the investors section of our web site.

I'd also like to note that the company will 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.

Thank you Peter and good afternoon, everyone.

We appreciate you joining us on the call today during our call today I'll provide a summary of our year to date performance and the drivers of that performance.

And the call over to Jeff, who will provide a more detailed analysis of our financial performance.

I'll start with a review of the progress made against our top three exits. Our first objective is to fuel well by harnessing the differentiated life science tools adult portfolio achieving wrote in this macroeconomic environment is no small task and in light of that we are pleased that the third quarter revenue was.

Aligned with our expectation, enabling us to deliver 10% revenue growth year to date.

Excluding the impact of a previous strategic diskette.

Our previous strategic decision to discontinue certain product lines in our genomics business, we achieved 13% year to date.

Our second objective is to standardize all apply operating disciplines that permeates the organization in order to enhance the profitability of the business.

Uncompromising focus under continuous improvement and lean operating principles of harvest and the Biofuels business system or Sps have delivered meaningful progress year to date, including over 1000 basis points non-GAAP gross margin expansion.

21% improvement in non-GAAP operating expenses and 58% improvement in operating cash use our third objective is to leverage our platform to create scale.

Is crucial in the life science tools space, our recently announced plans to merge the sumo logic activates that plan, there's significant potential in a fragmented sector and a deep pipeline of opportunities for now we intend to be laser focused on the transaction at hand.

A team of seasoned operators that had deep experience integration of companies and know what it takes to achieve a successful close and integration yeah. After we look forward to capitalizing on the continued potential for consolidation in our sector.

I'll turn next to the progress being made with our system portfolio, which all of us.

Sweet product categories instruments, consumables and service and serves customers in the proteomics and genomics market instrument revenue is about 34% of revenue and has grown 47% year to date. We believe this is an important leading in.

Takeda future growth, we see growth in instrument sales generally leading to future growth of our current sales of consumables and services with attractive market margins.

On a year to date basis, we are pleased to have returned to proteomics business to growth.

We've also successfully navigated a planned temporary revenue.

Nomex, which resulted from the discontinuation of certain product lines in that business.

Touching on each of these more in a moment.

Consumables were about 40% of revenue year to date, while services were about 25%.

Those with current sources of revenue are 65% of the mix year to date, which enhances topline visibility going forward.

Yeah.

I would like to provide more detail on our proteomics business, which includes spatial biology, and so there's no question and Mark in terms of both size and growth.

<unk> executed well in returning to pre owned business to quote driving 22% revenue growth year to date.

Growth is attributable to disciplined commercial execution and the launch of the Hyperion.

Imaging system in the second quarter, the systems market, leading data quality and throughput.

Continue to be very well received and we believe early customer feedback suggest that it is the strongest consent and the emerging field of spatial biology for translational research.

We have also begun to more clearly distinguish the technological and workflow advantages of our flow cytometry solution. The sites of X T is the only technology that can do a high number of both extracellular and.

And intracellular Marcus.

<unk> to do both at the same time allow customers to gain biological insights that would otherwise go unnoticed using competing technologies.

Turning to genomics, we instituted a hard pivot.

Last year to minimize its drag on our business and instead precision it should become accretive, but it's supposed to tweak quotas from 'twenty to 'twenty. Three if you know what business generated a modest positive contribution margin compared to a loss of 24 million during the same period last year.

The strategic repositioning has involved managing San revenue decline as we work to consolidate the portfolio to a single instrument. The biomarker <unk> nine which is poised to win in the niche markets, we said that we'd positioning and emphasis on the more strategic customer set has begun to deliver progress, but genomics revenue up.

Slightly by 1% year to date, excluding impact of discontinued products.

We have significantly reduced genomic spend in sales marketing and R&D and we have upgraded our commercial approach focus on expanding installed base with a major OEM partner like targeting additional Oems and high volume key accounts, we note that the new <unk>.

Note that new OEM relationships take time to develop validate and then mature and we're still early in the process I will now turn the call out work suggests a more detailed review of our financial results Jeff.

Thanks, Michael and good afternoon, everybody as Michael noted, we're pleased with our results for the third quarter revenue was in line with expectations in spite of challenging macro macroeconomic headwinds, we delivered meaningful operating progress including margin expansion a significant decrease in opex and sustained improvement in operating cash.

Rose.

Total revenue for the third quarter was $25 4 million instrument growth of 14% in the quarter was offset by about a 15% reduction in consumable revenue related primarily to the timing of customer orders recall that 2022 benefited from our OEM partners initial consumables purchase.

Purchases in genomics. So we expect consumables are there to expand as they burn off that inventory and increase their installed base.

Service and other revenue in the quarter increased by 5%.

On a year to date basis, which is less variable and more reflective of the progress we've made over the last few quarters.

Total revenue of $78 $2 million has expanded by 10% excluding the impact of the exit of non strategic product lines, we achieved 13% total revenue growth year to date.

Growth was driven by instrument revenue expansion, 47% and slightly offset by a 6% decline in consumables related to the aforementioned impact of our OEM partnership.

In fact consumables grew across all other product lines on both the quarter and year to date basis.

Service and other revenue has grown 5% year to date and as a reminder, we believe growth in instrument placements is a leading indicator and.

And we will expect to see continued variability in quarter to quarter instrument places placements the growing installed base expands future consumables and service pull through which are significant drivers of both revenue and margin growth.

Recurring sources of consumables and service revenue were about 65% of total revenue year to date.

Yeah.

Turning to revenue contribution by segment keep in mind that variability from quarter to quarter is significantly impacted by the timing of customer orders.

Total proteomics revenue was down 4% in the third quarter was up 22% year to date led by continued traction of Hyperion Sci, which we launched pass this past April in the third quarter totaled genomics revenue grew 3% and 5% when excluding discontinued products in year two.

Genomics was down 4% and up 1% when excluding discontinued products and this is as we continue to manage our portfolio of consolidation.

And as we mentioned our consumables growth in genomics was also impacted by larger consumables orders last year associated with the launch of our OEM partnership.

We also think it's important to highlight again that through this transition we've manage the genomics business to a positive contribution margin against the $24 million loss in the first nine months of last year.

This sustainable positive positive contribution margin in mind, we're balancing the trade off between OEM industry instrument margins and the higher margin consumables and services that they will ultimately generate.

Moving on to our operating performance our non-GAAP gross margin for the third quarter expanded to 57% by 830 basis points compared to the third quarter of 22 and this includes about 400 basis points of pressure related to one time warranty related reserves in the current quarter.

On a year to date basis, our non-GAAP gross margin improved to 60% by about 1000 basis points.

non-GAAP gross margin, primarily excludes noncash amortization of developed technology, which will be fully amortized by the end of Q1 2024.

We continue to face residual residual headwinds related to legacy service related costs product mix and capacity utilization, but.

But we remain confident in our ability to drive gross margins over time into the mid 60% range.

Gross margins will continue to benefit from our S. P. S mean approach as well as price realization, but they're different across instruments consumables and services.

Revenue mix quarter to quarter will impact our ability to be overly specific when it comes to our margin expansion roadmap.

Yeah.

Moving on to Opex on a non-GAAP basis, our total non-GAAP operating expenses of just under $25 million were about 97% of revenue in the third quarter down from about $30 million and 116% of revenue in 2022 year over year, we reduced non-GAAP operating expenses by 17%.

Third quarter, 21% year to date and this is reflective primarily of the cost rationalization programs. We've executed over the past 12 months. This is a testament to strong execution of our S. P S operating discipline and lean transformation.

While driving that strong operating performance, we're making focused investments in commercial organization, our R&D pipeline to support sustained long term revenue growth and this is the playbook that we plan to replicate with our planned merger with some logic. We're excited about the value we expect to create by rationalizing our combined cost structure.

While prioritizing growth investments.

Overall, we continue to be thoughtful stewards of our resources and we remain well positioned to support our growth initiatives.

And that brings me to the cash flow and the balance sheet. We ended the third quarter with over $130 million in cash.

Cash and short term investments.

Operating cash use decreased year over year in the third quarter by $14 million or 54% and on a year to date basis, we've reduced operating cash use by $47 million or about 58%.

As we've stated before we have a multiyear cash runway to execute our core business. We continue to deliver on improvements in operating efficiencies and have a clear line of sight to positive cash flow in our core operating business.

Moving to our outlook as a reminder, on October 4th we updated our full year 2023 of your revenue guidance to a range of 100 million to $105 million. We also today updating our non-GAAP gross margin outlook for the full year to about 60% Rep.

Representing a 900 basis point increase over 2022.

We remain very encouraged by our continued progress and performance during a Europe continued transition legacy headwinds and a challenging macro environment.

And with that I'll turn the call back to Michael to provide some additional commentary on our pending merger with XOMA logic before opening the call up for questions.

Thank you Jess it's been unexciting months since we announced the transaction we have been under road and we are very pleased with the reception. We're receiving we are confident that investors of both companies will see the compelling long term value proposition. This transaction brings with the expectation of near and long term financial benefits and <unk>.

Sequential growth through the combination of our two companies, we're making important progress as we work towards close which is on track for the first quarter of 'twenty 'twenty four we expect to file a preliminary proxy statement in the coming days and we're looking forward to continued conversations with all shareholders with the.

Third quarter now behind US we are increasingly confident in the strategic rationale for the combination and the long term financial and synergy targets. We have provided with Spi stronghold in academic research settings, and some biologic stronghold and biopharmaceutical research our customer basis.

Well that minimally this page to pet to look at new and expanded relationships for both of US and an improved go forward picture.

Both companies judge holders dose benefit with fewer than expected double digit revenue growth profiles or what at least the next three years.

We're working closely.

But the Cellulosic team.

Further and organize the synergy opportunities, which we plan to share as we get closer to closing we expect that through the elimination of redundant public company NGA cost.

And the company wide continued application of lean conversion and S. P. S. Operating principles the merger will deliver approximately $80 million in annual cost synergies by 2026 compared to our current combined operating expense run rate for the first half of 2023.

And assuming a Q1 close.

Bind entity is expected to have over $500 million in cash to self fund continued organic and inorganic growth.

We look forward to building on all that both companies have accomplish creating a larger more diversified company and a true leader in our space, we remain more committed than ever to become a diversified leader in the life science tool space, our pending merger with summer logic is the mix that choice the activation of that.

Of that nation.

And with that I'll turn it over to Rachel to open the line for questions.

Thank you well went up again the question answer session.

Ask a question you May press Star then one on your telephone keypad.

It does using a speakerphone please pick up your handset before pressing the case.

If at any time. Your question has been addressed and you like to withdraw your question. Please press Star then two.

At this time, we'll pause momentarily for any questions to into the key.

Okay.

Once again, if you'd like to ask a question. Please press Star then one.

There are no questions at this time I would now like to turn back the conference to Michael Collins for closing remarks.

Hey, Thank you Rachel I'd like to conclude by thanking our team for their execution and our investors for their continued support of our mission. While we are pleased with our results to date, we remain mindful of the work still to be done.

And of the highly uncertain market environment, which we are currently navigating we look forward to providing you further updates and seeing many of you at the Jefferies Healthcare Conference in London next week actually Uhm.

Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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