Standard BioTools Inc (LAB) 2014 Q2 法說會逐字稿

Presentation

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Fluidigm Second Quarter 2014 Financial Results Conference. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to our host, Ms. Un Kwon-Casado. Ma'am, you may begin.

Thank you. Good afternoon, everyone, and welcome to the Fluidigm Second Quarter 2014 Earnings Conference Call. At the close of market today, Fluidigm released financial results for the second quarter ended June 30, 2014. During this call we will review our results and provide commentary on recent commercial activity and market trends. Following these comments we will host a Q&A session.

Presenting for Fluidigm today will be Gajus Worthington, our President and CEO, and Vikram Jog, Chief Financial Officer. The call is being recorded and the audio portion will be archived in the investor section of our website.

During the call and subsequent Q&A session we will be discussing plans and projections for our business, future financial results and market trends and opportunities, including, among others, statements regarding expectations for the single-cell biology in production genomics market, including future market conditions and our prospects and growth opportunities in such markets, our future product launches and other business strategies, expectations regarding future sales, revenue, opportunities, objectives, and financial performance of our proteomics product line, and current estimates of 2014 revenue growth, GAAP and non-GAAP operating expenses, stock-based compensation expense, interest expense, and capital spending.

These statements are forward-looking and are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from currently anticipated events or results such as risks relating to the integration of our recently acquired proteomics product line with our business and operations, the execution of marketing and sales strategies for genomics and proteomics product line, intellectual property rights, the launch of new products, and the manufacturing or supply of our products.

Information on these and additional risks, uncertainties, and other information affecting our business and operating results are contained in our quarterly report on Form 10Q for the year ended March 31, 2014 and our other filings with the SEC.

Additional information will also be set forth in our quarterly report on Form 10Q for the quarter ended June 30, 2014 to be filed with the SEC. We advise investors to review these risk factors carefully. Fluidigm disclaims any obligation to update these forward-looking statements except as may be required by law.

During the call, we will also present certain financial information on a non-GAAP basis. Reconciliation between GAAP and non-GAAP results are presented in a table accompanying our earnings release, which can be found in the Investor section of our website.

With that, I will now turn the call over to Gajus.

Thanks, Un. Good afternoon, everyone. Thank you for joining us today. Our second quarter results demonstrate another period of solid financial performance within our core genomics products lines with top line organic growth of 32% driven by robust demand of the C1 Single-Cell AutoPrep System and increased consumables utilization by high volume production genomics customers.

We also achieved record non-GAAP margins of 77%, up 300 basis points year over year. Finally, we made significant strides in bolstering the commercial infrastructure and improving the sales and support process of our recently acquired single-cell proteomics product line from DVS Sciences. We now project total 2014 revenue guidance of $112 million to $118 million, an increase from our previous range of $111 million to $116 million. We are increasing our total organic revenue guidance to $94 million to $96 million which represents year over year growth of 32% to 35% up from our previous guidance range of $91 million to $94 million. For the acquired single-cell proteomics product line from DVS Sciences, we are widening the range of our full year revenue guidance to $18 million to $22 million versus our previously communicated guidance of $20 million to $22 million. We are comfortable with our bookings outlook but the timing of revenue recognition of CyTOF?2 systems is impacted regionally and by site readiness of the customer. We are lowering the bottom end of the revenue range to account for this variability.

We believe our progress in 2Q in strengthening the commercial infrastructure and improving the sales and support process positions as well for sequential booking growth in the back half of the year for the single-cell proteomics product line. The single-cell market continues to evolve in line with our expectations that biological experimentation across many subfields will ultimately need to be conducted at the individual cell level. We see many positive indications that single-cell biology will be pervasive.

Most important of all is the increased pace of great discoveries. In the quarter there were two high profile publications in Nature and Science, both based upon research using Fluidigm single-cell products which revealed significant cellular heterogeneity in immunology and cancer, both with profound biological implications. They highlight the power of single-cell analysis. These discoveries would not have been possible if analyzed by conventional bulk sample approaches.

At the end of the second quarter the total number of single-cell publications citing Fluidigm technology now stands at 199 with approximately 59 publications utilizing mass cytometry technology and 10 C1 publications. In addition, our own results speak to the growth in momentum of the single-cell market.

Single-cell genomics revenue grew approximately 70% in the first half of 2014 versus the first half of 2013. Our C1 unit sales volume in Q2 tied the record unit sales in Q1 and we continued to see very healthy demand in our C1 pipeline for the remaining half of the year. At the end of the second quarter we had a total install base of C1 and BioMark systems for single-cell research of over 400 units and are tracking well to our goal of 700 Fluidigm systems for single-cell genomics by the end of 2015.

During the quarter we launched the C1 Open App program enabling researchers to develop and share new single-cell applications on the C1. Opening the C1 to custom scripts allows our users to quickly expand the platform into new areas of research such as epigenetics and protein detection as well as implement alternate whole transcriptome techniques. Finally, we are on track to launch our single-cell whole exome and single-cell whole genome sequencing protocols in the second half of the year.

While we've built a strong leadership position in the single-cell genomics market, our acquisition of DVS sciences catapulted us to a new level. We are now able to address the needs of single-cell biology which we believe will require both genomics and protein based analysis. During the quarter we saw substantial validation of this thesis.

As an example, one of our customers in Q2 created the first single-cell biology core that includes the full suite a Fluidigm products including the C1, BioMark, and the CyTOF 2. In addition, we became aware of multiple publications in the pipeline that utilize both the C1 and the CyTOF. There are now single-cell funding programs available in the UK and Japan that we believe will benefit our entire single-cell portfolio as these programs seek proposals not only in genomics but also in proteomics.

More specifically, we have visibility into several large grant applications that include the C1, BioMark, and the CyTOF 2. Ultimately, we believe single-cell researchers will need access to both genomics and proteomics methodologies and we aim to provide the best solutions for both.

Single-cell biology is evolving rapidly and as discoveries are made, new questions surface. And this in turn translates into needs for new solutions. As researchers have begun to understand the role of cell to cell heterogeneity in all manner of healthy and diseased tissue, they are now realizing that cell to cell communication and the effects of the local niche have a profound influence on the behavior of individual cells.

Thus the next major evolution in our overall single-cell biology strategy will be to address in situ single-cell analysis, enabled by imaging mass cytometry. That is to assess single-cell protein expression directly from tissue and thus to capture the effects cells have upon each other and the influence of their native environment.

This exciting extension of our mass cytometry technology which was published in Nature Methods earlier this year is a combination of a sample handling module with a CyTOF 2 platform. This enables high parameter single-cell or even sub cellular tissue imaging analysis of over 30 markers simultaneously. This capability was a key component in our strategic interest to acquire DVS Sciences and its mass cytometry technology.

Current workflows for single-cell genomics and proteomics disassociates samples into individual cells in suspension and thus lose cellular context information. For tissue based samples it will be important to validate and understand the spatial relationship of single-cells relative to other cell types. The incumbent immunofluorescence imaging techniques are limited in the number of different protein markers that can be stained and visualized at a time, half a dozen at most.

We are in development of this platform and expect to commercialize and introduce the imaging mass cytometry capability sometimes within the next calendar year depending on feedback received from our early access customers. Today, we announced the early access program which provides a limited number of researchers access to this technology in order to help drive the new science and establish the impact of this breakthrough technique.

In the near-term as we highlighted at the beginning of the call, we are focused on improving the commercial support and sales execution for the single-cell proteomics product line. The sales and support management of this product line is now directly managed by our established channel and we have begun filling key sales marketing and support positions to position us well for growth into the next year.

Over the last three months we began implementation of a number of initiatives to ensure our customers' experience with the CyTOF technology is delightful. This includes enhanced post-sales field application support, expansion of the number of antibody based assays and panels, and improved training and pre-install customer support.

Our production genomics business also continues to be a key driver of our top line growth and diversification of our overall revenue mix in terms of customer and product type. In the quarter our high volume production genomics accounts increased consumables utilization which helped to drive our organic consumables revenue growth of 51% in the quarter. Consumables revenue driven by production genomics applications represented approximately 45% of our total consumables revenue in the quarter and was approximately 65% year over year.

An underlying driver to our growth has been our success in penetrating and scaling with the growth of clinical laboratory accounts. In the quarter, approximately 20% of our overall revenue was driven by clinical rapid laboratory accounts. In addition, approximately half of our new production genomics instrument sales were driven by repeat purchases by existing customers pointing to the scalability of our solutions as our customers grow their enterprises.

We have recently augmented our North American sales organization with sales managers solely focused on identifying and securing new production genomics accounts given the fundamentally distinct sales process versus our research oriented single-cell biology target customers.

In closing, we believe our first half results demonstrate the strong underlying demand for our products as well as the durable nature of our diversified business model. Second, we are energized by the progress achieved in our single-cell proteomics product line in the quarter and are committed to executing on our strategy and delivering on our goals for the second half of the year. Finally, we are confident our pillars in proteomics and genomics will provide the foundation to reach across the continuum of single-cell biology and position us well for market leadership and long-term growth.

I will now hand the call over to Vikram for a more detailed review of our financial results.

Thanks, Gajus. Good afternoon, everyone. I will now walk you through our second quarter 2014 operating results and highlights.

In the second quarter of 2014 total revenue of $27.6 million was up 58% year over year with organic revenue up 32%. Instruments and consumables both delivered solid growth in the quarter. Instrument revenue grew 51% year over year to $15.4 million. Excluding contribution from the recently acquired CyTOF 2 system instrument revenue grew 20% year over year on an organic basis. Single-cell genomics continues to be a strong growth drive for the Company and for instrument revenue in particular. Approximately 70% of the BioMark systems sold during Q2 were motivated by single-cell research and approximately 20% of C1 system sales were bundled with a BioMark system consistent with our historical pattern.

Our total consumables revenue, both IFCs and assays which include antibodies, was $12.1 million during the second quarter, up 71% year over year and 51% organically driven by production genomics applications.

Our genomics analytical pull through in the second quarter tracked within our historical range of $40,000 to $50,000 versus the prior year and was slightly higher than our range of $15,000 to $25,000 versus the prior year for our genomics preparatory systems.

Proteomics analytics pull through tracked slightly above its pre-acquisition historical range of $50,000 to $70,000 versus prior year. Total single-cell proteomics revenue in the quarter was $4.6 million on a pro forma basis including $3.8 million recognized before the close of the acquisition. Total single-cell proteomics revenue was $11.2 million in the first half of 2014.

Our total instrument install base increased to 1,147 instruments at the end of the second quarter of 2014 with 666 analytical systems including 81 proteomics systems and 481 preparatory systems including C1 systems.

Geographic revenues as a percentage of total product revenues for the second quarter were as follows. United States, 52%. Europe, 27%. Japan, 1%. Asia-Pacific, 17%, and 3% other. Geographically we saw strength across all our markets excluding Japan in the second quarter. While Japan revenue was weak in the quarter we believe this is more reflective of seasonality and customer buying patterns and a uniquely favorable funding environment in Q1. notably, Japan's sales grew 150% in the first half of the year compared with the same period in 2013. The percentage of product revenue from Japan was 9% in the first half of 2014 which is consistent with the historical annual trend of 7% and 10% for 2013 and 2012 respectively. We believe the single-cell biology market in Japan is healthy given the growing interest from the scientific community and recent government sponsored initiatives dedicated to single-cell proteomics analysis.

Net loss for the quarter was $12.7 million compared to a net loss of $4 million in the prior year second quarter. Adjusting for stock-based compensation, depreciation, and amortization, interest expense and other acquisition related non-cash charges and benefits, non-GAAP net loss for the second quarter of 2014 was $1.7 million compared to the same number in the second quarter of 2013. please refer to the reconciliation of GAAP to non-GAAP information attached to the second quarter of 2014 earnings release for details.

GAAP product margin was 64% in the second quarter of 2014 versus 72% in the year ago period. After adjusting for acquisition related non-cash charges, including amortization of developed technology and inventory revaluation, stock-based compensation and depreciation and amortization, non-GAAP product margin was 77% versus 74% in the year ago period. The increase is in part due to lower IFC costs resulting from higher production volumes related to higher sales, increased instrument margins mainly due to a higher mix of C1 instruments which have a higher margin than other instruments and favorable sales volumes and average unit sales prices for assays and reagents. In addition, there was a product mix shift from instruments to consumables versus the year ago period which have higher margins.

Turning now to OpEx, research and development expenses were $11.4 million in the second quarter of 2014 comparing to $5 million in the second quarter of 2013 and $7.6 million in Q1 2014. The year over year increase in research and development expenses was primarily driven by the acquisition of the single-cell proteomics product line, headcount additions, and materials used in R&D products.

SG&A expenses were $18.7 million in the second quarter of 2014 compared to $11.6 million in the year ago period. And $15.3 million in Q1 2014. The addition of the single-cell proteomics product line contributed approximately 35% of the year over year increase. Integration expenses of approximately $1.1 million, increased headcount, trade shows, promotions, and professional fees drove the remainder of the increase. Stock-based compensation expense was $5.9 million in the second quarter of 2014 compared to $1.7 million in the second quarter of 2013 and $3.4 million in Q1 2014.

Moving on to the balance sheet, total cash, cash equivalents and investments were $157 million at the end of the second quarter compared to $158.3 million at the end of Q1 2014 and $83.5 million at the end of Q1 2014. Net cash used in operating activities excluding cash outflows related to the acquisition was $3.8 million in the first half of 2014 versus $3.5 million in the first half of 2013. Accounts receivable were $13.3 million compared to $18.8 million at the end of the first quarter of 2014. DSO at the end of the second quarter of 2014 was 43 days compared to 66 days in Q1 2014. Inventory was $16.4 million, up from $13.4 million at the end of the first quarter of 2014. The sequential increase was mainly due to higher instrument inventory.

Moving on to our financial guidance for 2014 we are increasing our 2014 total revenue guidance to be between $112 million to $118 million, up from our previous range of $111 million to $116 million. Operating expenses on a GAAP basis are projected to be between $134 million and $136 million in line with the guidance provided on our last earnings call. Non-GAAP operating expenses excluding approximately $11 million of estimated acquisition related expenses, $19 million of estimated stock-based compensation expense, and $4 million of estimated depreciation and amortization expense are projected to be between $100 million and $102 million.

Stock-based compensation expense is projected to be between $21 million and $22 million including $9 million related to assume share-based awards from the DVS acquisition. Substantially all of our stock-based compensation expense is reflected in operating expenses. Interest expense is projected to be $5.3 million. And finally, capital spending is projected to be between $11 million and $13 million. 2014 CapEx projections include expenditures related to the move and expansion of our Singapore manufacturing facility and expenditures related to the newly acquired proteomics product line.

With that, I will now turn the call over to the Operator to open it up for questions.

(Operator Instructions) Dan Leonard, Leerink.

Guys, I was hoping you could elaborate on lowering the bottom end of your DVS guidance? Presumably you're more than familiar with revenue recognition dynamics and instrument business then when you gave the guide. So, I'm wondering if there's something more to it than that.

Sure. Yes, Dan. So, it has to do with regional factors and customer readiness. So, when you get this close to the end of the year and with a $600,000 instrument you're counting individual opportunities really. And depending on where you get the orders from, if they come from Asia, they come from China, they can take six months before you can even get the system into the territory.

So, as you get closer here, we have better visibility into where the orders are actually going to come from. There's certainly the potential that a number of these will come from territories where we won't be able to get the instruments into them, into those customers during the quarter. In addition, we've been advised by some customers -- and this is new information -- that some of them don't want delivery until early 2015.

So, there is some more information there from three months ago, both in terms of the geographic, the potential geographic complexion of our order -- where our orders will come from as well as individual updates from individual customers.

That said, the book -- our orders outlook is certainly consistent with the revenue guidance that we provided and it will just depend on where those orders come from.

For my follow up, is there a bill you could communication to us to give us a bit more comfort on the trend you're seeing internally on CyTOF demand?

Dan, we generally don't provide book to bill. That may be something that we could do in the future but it's not something we're prepared to do right now.

Okay. Thank you.

Bill Quirk, Piper Jaffray.

Great. Thanks. Good afternoon, everybody.

Hi, Bill.

I guess first off, guys, can you elaborate on the systems side of the business. I guess when I dropped the numbers in, it does look to me like some of these segments were coming in much better than they had previously come in or slightly above. I guess maybe my math was wrong here. Can you elaborate?

For analytical systems we were within our historical range of $40,000 to $50,000 per system per year. For preparative systems we were above our range of $15,000 to $25,000 per system per year. Now on a -- as you look at by market segment as I mentioned earlier we did have a strong demand out of our production genomics customers and they tend to be very high through put and we have more and more of these customers that are using preparative products for their high through put sequencing in particular. And that would be the access array. So, Bill, I wouldn't say that there was something that was dramatically different than our historical ranges. But the performance was certainly good.

Got it. And then can you speak to the sustainability, Gajus? We've had a couple of quarters now in a row where the production side of the business has really ramped up. So, I get it. Two quarters is not necessarily a trend. But we're certainly driving in the right direction.

As you probably know, Bill, we've been talking about production genomics for certainly more than two quarters as we've pointed to that as one of the growth drivers. So, it's been a growth driver consistently for quite some time, certainly more than the past couple of quarters. I think the last couple of quarters we've seen it do particularly well. But to get to your question, we have penetrated a very small portion of the overall market that we believe that we can with our products. We go after very specific segments. There are clinical segments that we go after. There's an ag-bio segment that we go after. There's a sample ID segment that we go after. And within those segments we have a very low penetration. These are existing markets where we are up ending established incumbent technology so you can size the genotyping portion of available market in the range of, say, $280 million to $300 million. Call it $285 million. That's a number we've provided previously. So, that doesn't count obviously next-generation sequencing. Nor does it count gene expression which we also have production customers for. So, we're very low penetration at this point and we continue to see strong demand for our products. So, we believe that this is sustainable. And we're investing in it. We're investing not only in the channel, but we're also investing in terms of product development.

Very good. Thank you, guys.

Peter Lawson, Mizuho Securities.

Hi, guys. Just on the DVS guidance, just wonder if you could talk through that again? What gives you the confidence about maintaining the top end of the DVS guidance range?

Hi, Peter. It really just has to do with where our orders can come in. As I said earlier, it depends on their complexion as well, geographically, and from which individual customers. We have confidence in where our orders are going to come from, confidence in our order outlook generally. What we don't know is exactly where those are going to come from on a geographic basis and as I said earlier in some cases there will be individual customers that we're likely to receive orders from that we won't be able to ship to in this year.

Then just on the CyTOF, did you place more in this quarter than in Q1?

I don't think we have broken out instrument installation. Revenues for Q2 were $4.7 million which was lower than the pro forma revenue in Q1, our recognized portion of revenues in Q1 was if memory serves about $3.8 million during the quarter.

Post-acquisition?

Post-acquisition.

$2.8 million.

Yes. Sorry. $2.8 million. So, Q4 -- pardon me, Q2 revenues for the CyTOF line are actually down from Q1 and that's no surprise to us. That's what we were certainly telegraphing when we lowered guidance during the last call. We expected the first half to be the most challenged part of the year with respect to landing new orders.

And then on the number we have, CyTOF placements? How many have both instruments?

How many of our CyTOF customers have both the CyTOF and the C1? Is that the question?

Yes. Exactly.

A very low number, probably at this point literally I would -- a little. A handful. Certainly less than ten.

Thank you.

Sung Ji Nam, Cantor.

Thank you. I was wondering, in the past you talked about the CyTOF near-term opportunity being the roughly $300 million high end flow cytometry market. And I was wondering with the addition of the new imaging mass cytometry, does that change that potential market -- near-term market size as well?

It does. It opens up a whole new market, Sung Ji. This is an opportunity that would allow the measurement of protein expression in tissue. So, it opens up a whole new research market. It also potentially could open up new clinical applications as well. It's completely different from flow cytometry. We haven't provided an estimate for the size of that market, as you probably can imagine we've looked at it internally but as we get closer to product launch then we'll be providing that information. But it definitely expands the applicability of the mass cytometry technology meaningfully.

Great. And then my follow up is I was wondering before the CyTOF orders that you were looking at for the second half of the year, are they mostly coming from your current customer base? Or was wondering if these are new customers that you're acquiring?

It's a blend. More than -- certainly a majority of new customers but there are repeat buys in there as well or rather potential buys in there as well.

Thank you.

Doug Schenkel, Cowen & Company.

Hi. Good afternoon. So, the APAC revenue number was pretty huge relative to historical norms. Could you just provide some color on the drivers and also the sustainability of that type of growth and strength?

The same applications that have driven demand in other territories are driving demand in APAC including production genomics which historically has been a lesser factor in that territory. There are still a lot of territory in APAC that we go through distribution and in some cases that extremely effective. In other cases it's not as effective as a direct channel. In general distribution is not as effective as a direct channel. So, just by investing in that territory with direct sales footprint, we believe that we have the means to continue to grow in APAC. Now, we're quite bullish about our prospects there. And as it was mentioned, and this is Japan now, but Japan following the UK, we think that other countries will follow suit subsequent to Japan. Japan as you probably remember from our last call has announced funding single-cell research that includes both proteomics and genomics. We believe that there will be other announcement of other countries, perhaps in parts of APAC as well that will increase funding availability there. So, we feel very good about our prospects in APAC.

Okay. And the sequential instrument growth was I guess a bit less than the norm. Sequential instrument revenue growth was a lot less than the norm and clearly this was more than offset by a really strong consumables revenue number. In fact I think consumables revenue as a percentage of sales was the highest it's been since back in 2012. So, I'm wondering if you want to talk a little bit about how you're thinking about product mix over the balance of the year in the context of full year guidance?

We're not thinking about it. We don't provide guidance on an instrument or consumable basis. But I do want to note, Doug, that you may remember that one of the things that we experienced in Q1 that was unusual, two things were unusual for us that would cause it to look a little different than previous Q1 to Q2 comparisons. The first was that we had a really strong quarter in Japan. The second was that we had strength, an unusual amount of strength throughout all territories which was an important part that led us to sequential growth in Q1 over Q4, something that Company had never experienced in its history. So, that's part of the comparison here. We just had a super-strong Q1.

Okay. And the flow cytometry market, as we've talked about it in the past, you're arguably going after a broader market and one with more entrenched and larger competitors than you've faced in single-cell genomics thus far. Given this assertion and the observation that it seems like you've probably placed about five instruments per quarter plus or minus some kind of CyTOF since the acquisition which is below the quarterly average pre-deal rate. Could you just talk about how you're talking about augmenting and/or changing your sales approach and with the new imaging product, how do you think about the need to at some point expand your commercial reach?

Our acquisition of DVS, one of the things that we've implemented from the beginning is a change in the commercial practices and this is across the board, the techniques that we use in our genomics commercial channel, whether that be in sales, marketing, technical support, what have you, we've honed over a number of years now and those same techniques we are now starting to apply to the proteomics lines and we think that's going to be very effective whether we're competing for funding that might go to a flow cytometer versus a CyTOF or whether we're competing for something that's brand new, we're no stranger to that circumstance. As you probably remember, we launched the BioMark system and grew that product line. There was always some latent competition for either 7900s or the occasional BioTrove or other platforms, be it Expresses, what have you. So, we're no stranger to that. This is not really that different. And what's also not different for the CyTOF versus say flow cytometry as BioMark was for conventional real-time PCR equipment is that it's substantially broader in its ability to survey important biological information. That's really the key. It has a fundamentally enabling attribute.

So, all that said, Doug, one of the areas for growth for us and this was an important part of our thesis for the acquisition was that our genomics customers were going to need access to this information. And as I noted during the prepared remarks, that we're seeing evidence of this, we see some very strong data that's been collected, really important data that's been collected by multiple customers now and submitted for publication that validates our premise that there will be demand from our genomics customers for this platform.

So, there is the conventional, I'd say the legacy positioning that was perhaps more directly positioned versus flow cytometry and certainly some of that will persist. We also see a really important new opportunity in single-cell biology that is a mix of customers that would've bought conventional flow cytometry equipment but then also have been our genomics customers.

Operator?

Bryan Brokmeier, Maxim Group. (Operator Instructions) Mr. Bryan Brokmeier, your line is open. It seems that Mr. Brokmeier has disconnected. There are no further questions at this time. I'd like to turn it back to Un Kwon-Casado for closing remarks.

Thank you. We'd like to thank everyone for attending our call this afternoon. A replay of this call will be available on the investors section of our website. This concludes the call and we look forward to the next update following the close of the third quarter of 2014. Good evening, everyone.

Ladies and gentlemen, this concludes today's conference. Thank you for your attendance and you may now disconnect. Everyone have a great day.