Standard BioTools Inc (LAB) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Fluidigm third-quarter 2016 financial results conference call. (Operator Instructions). As a reminder, this conference call is being recorded. I would like now to turn the conference over to Miss Anna Petrovic, Director of Corporate Development and Investor Relations.

Thank you. Good afternoon, everyone. Welcome to the Fluidigm third-quarter 2016 earnings conference call. At the close of the market today, Fluidigm released financial results for the third quarter ended September 30, 2016. 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 from Fluidigm today will be Chris Linthwaite, our President and Chief Executive Officer, and Vikram Jog, our Chief Financial Officer. The call is being recorded and the audio portion will be archived in the Investors section of our website.

During the call and subsequent Q&A session we will make forward-looking statements about events and circumstances that have not yet occurred including plans and projections for our business, future financial results and market trends and opportunities.

Examples of these forward-looking statements include: expected changes to our commercial and organizational structure and business strategies and the anticipated impact of such changes; expected timing for releases of new products; changes in competitive dynamics; potential applications and growth drivers for our products and business; cash management and other financial plans.

These statements are based on management's current expectations and are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from currently anticipated events or results.

Information about these risks and uncertainties and other information affecting our business and operating results are contained in our annual report on Form 10-K for the year ended December 31, 2015, our quarterly report on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016 and our other filings with the SEC.

Additional information will also be set forth in our quarterly report on Form 10-Q for the quarter ended September 30, 2016 to be filed with the SEC. We advise investors to review these risk factors carefully.

The forward-looking statements in this call are based on information available to us as of today's date, November 3, 2016. 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. This non-GAAP financial information discussed during the call excludes the impact of, among other items, various non-cash and one time charges.

Fluidigm has chosen to provide this information because it believes it enhances an understanding of our ongoing economic performance and because it permits investors to perform comparisons of operating results in a manner similar to Fluidigm's internal operating analysis. Certain reconciliations between GAAP and non-GAAP results are presented in a table accompanying our earnings release which can be found in the Investors section of our website.

Our estimates of forward-looking non-GAAP operating expenses exclude estimates for stock-based compensation expense, depreciation and amortization; loss on disposal of property and equipment; future changes relating to developed and acquired technologies; other intangible assets and income taxes, among other items, certain of which are presented in the table accompanying our earnings release.

The time and amount of certain material items needed to estimate non-GAAP financial measures are inherently unpredictable or outside of our controls to predict. Accordingly we cannot provide a quantitative reconciliation of our non-GAAP margins without a reasonable effort. Material changes to any of these items could have a significant effect on guidance and future GAAP results. I will now turn the call over to Chris.

Thank you, Ana. Good afternoon, everyone. As you may be aware, last month we announced Gajus Worthington's departure from Fluidigm. On behalf of the Board, management and everyone at Fluidigm, I thank Gajus for his tremendous contributions over the last 17 years. He was a visionary for the Company; I'm both honored and humbled to walk in Gajus' footsteps and wish him well in his future endeavors. He will continue to support us in an advisory capacity.

Before commenting on our third-quarter performance, on a personal note I am thrilled and energized by the opportunity to lead Fluidigm into the next chapter of its story. Since joining in August I have made some preliminary assessments and begun moving swiftly to enact a number of needed changes. More details will follow on this front.

As an industry participant, I had the opportunity to study Fluidigm for a number of years, particularly as it pioneered the single cell genomics market. I was impressed by its audacity to invest and develop new markets, pioneering and punching above its weight class in many respects.

I also saw things that I thought could be improved, namely capital deployment, discipline and follow through on early product successes and the commercial organization. This will change under my leadership.

One of the first changes I implemented was the reintegration of the commercial organization as well as a realignment of marketing and sales. As a reminder, last year we reorganized and added to our commercial organization, building out an applied markets team and a research team.

While having two or more commercial teams as a common structure in large companies, I believe Fluidigm is not ready for this split. We currently lack the organizational scale, financial resources and customized value propositions, critical to maximum success.

In addition, we believe the reorganization contributed to disruption across the entire commercial organization, exacerbating deficiencies in our execution. We may revisit this structure in the future. Heading into 2017, we will go to market with an integrated selling team aligned by geography.

Similarly, another priority for us is addressing open territories in our selling organization. We believe the lack of account coverage and some significant sales force turnover, particularly in Europe and in APAC excluding China, contributed to our financial underperformance in the quarter.

Moving to portfolio management, we need a more disciplined and measured approach here. Recently, we began a bottoms up review of our innovation pipeline. At the end of this process, we intend to rebalance our investments based on growth profile, cost improvement, potential and technology risk.

With regard to our product launch strategy, we will release products in a more metered manner to ensure that we have the support infrastructure in place to maximize customer success. To this end, we expect to release the imaging mask cytometry system on a limited basis this quarter. Our goal is to ensure full support of our first customers, as they integrate this important technology into their research studies and project work. Meanwhile, we continue to build backlog for the IMC.

In addition, we are revising the release dates for the small cell HT IFC and updated medium cell HT IFC. We now expect to release both in December. Previously we projected release in September and Q4, respectively. Going forward, we will generally not comment on product release dates until they are ready for launch.

A key question for investors may be cash management. While we have sufficient cash on hand to manage our business, we must re-examine our cost structure. I witnessed firsthand the power of disciplined capital deployment without sacrificing growth. We will adopt these practices at Fluidigm.

Finally, shifting to the single cell biology market, as a market leader in the single cell genomics and high perimeter cytometry markets, we see evidence of increasing competitive intensity. We see this as validating our read on the long-term potential of these early markets.

With regard to the single cell genomic end market, to date we believe competitors are placing units predominantly with our existing customers. While many of these customers are clearly interested in expanding their single cell work in the dimension of throughput, we believe the C1, with its breadth of applications, remains a vital component of an overall single cell workflow.

In addition, while the market is expanding in terms of the number of cells and samples processed, we see somewhat more modest growth in new customers. However we believe programs such as cell atlasing could provide the next growth accelerator for the market. The recently announced Chan Zuckerberg initiative and the inaugural meeting for the International Human Cell Atlas Initiative held last month in London are just two examples of burgeoning interest in this field.

In another of our key markets, mass cytometry continues to be an exciting new category. Our early adopters were principally focused on methods development of a new technology and subsequently, we have witnessed a steady increase in academic and scientific publications using these tools with approximately 305 publications to date.

As we move into translational research and applied markets with this technology, our applications menu and support model must adapt to these new customer needs. In response to this need, we plan on introducing new applications as well as new content for our mass cytometry systems.

Now in summary, I am fully committed, along with the entire leadership team, to take the necessary actions to reshape this business and establish greater discipline across all the functions of our business. Currently, we are in the process of developing a new strategic framework to clearly define our priorities, direct execution and to lay the foundation for sustainable growth.

Now turning to the quarterly results. We are disappointed with our third-quarter performance. All three drivers of growth, single cell biology, applied market consumables and new products, outlined early in this year were all down in the third quarter compared to the year ago period.

Total revenue for the third quarter of $22 million was down 23% compared to the year ago period, driven primarily by broad-based softness in instrument sales, particularly genomics instruments. However, the shortfall relative to expectations was driven predominantly by lower than expected revenue from Helios systems across both applied and research markets. Our quarterly result was further exacerbated by lower than expected revenue from genomics, analytical IFC.

I will now spend some time to add context around the key drivers of the miss in the quarter relative to expectations. As I mentioned, the primary driver behind the miss in the quarter was due to lower than anticipated revenue from Helios systems. Several of the orders we anticipated to close in Q3 were tied up in the procurement process and were not booked until Q4.

In addition, we faced some additional challenges from competitive dynamics as well as longer sales cycles, particularly in the applied markets. We fell short of our expectations for consumables in the third quarter due to a broad-based decline, driven primarily by underperformance within the genomic consumables segment. Key factors driving this decline were the timing of orders, competing technologies and dormancy of some of our instrument systems.

Now on a positive note, there were a few bright spots on our business worthy of acknowledgment in an otherwise disappointing quarter. First, consumables related to the mass cytometry business grew 30% in the third quarter and 42% in the first nine months of 2016. Second, overall services revenue grew 19% in the third quarter and 23% for the first nine months of 2016 as our installed base continues to grow and we actively manage renewals. Finally, on a geographic basis, our strong year in China continues with growth of 41% in the third quarter and 105% through the first nine months of 2016.

Turning to the topic of Q4 guidance, on the balance, given the recent volatility in our business, we have decided not to provide specific 2016 financial guidance, pending completion of a business review and implementation of a granular action plan in line with my approach to business management.

In closing, while a number of challenges affected our financial results this year; we are excited and energized about the possibilities that lay ahead. Our culture of innovation, our broad single cell biology portfolio all hold tremendous potential and we are committed to forging an independent path to growth.

Entering this new chapter is humbling, but it is also an exciting opportunity to both re-imagine and recommit to how we will deliver on our promises to our customers, employees and stockholders. I will turn the call over to Vikram.

Thanks, Chris, and good afternoon, everyone. For the third quarter of 2016 total revenue of $22.2 million was down 23% year-over-year. For the first nine months of 2016, total revenue was $79.4 million, a decrease of 6% year-over-year. Instrument revenue of $9.2 million decreased 39% or $5.9 million year-over-year in the third quarter due to softness in sales across most platforms, driven primarily by lower revenue from genomics instruments.

For the first nine months of 2016, total instrument revenue of $36.2 million decreased 15% or $6.6 million compared to the year ago period. Consumables revenue of $8.8 million, which includes IFCs, assays, reagents and antibodies, decreased by 12% or $1.2 million year-over-year in the third quarter, driven primarily by lower revenue from genomics IFCs, partially offset by increased sales from proteomics reagents. For the first nine months of 2016 total consumables revenue of $31.9 million was flat compared to the year ago period.

For the third quarter, our genomics analytical IFC pull through tracked moderately below its historical range of $25,000 to $35,000 per system per year. Our genomics regulatory IFC pull through tracked substantially below its historical range of $15,000 to $25,000 per system per year. And our proteomics consumables pull through tracked slightly below its historical range of $50,000 to $70,000 per system per year.

Total service revenue of $4.2 million increased by 19% or approximately $665,000 year-over-year in the third quarter. For the first nine months of 2016 service revenue of $11.1 million increased by 23% or approximately $2 million compared to the year ago period.

Product revenue of $18 million by customer, which excludes service revenue, for the third quarter of 2016 was as follows. Product revenue from research customers was $11.9 million, down approximately 23% or $3.6 million year-over-year, mainly due to broad weakness in instrument sales, particularly C1 systems. And product revenue from applied customers was $6.1 million, down approximately 36% or $3.5 million year-over-year, driven primarily by lower sales of Helios and BioMark system as well as lower sales of IFCs.

Our total instrument installed base was approximately 1,813 instruments at the end of the third quarter and approximately 930 units of the installed base were analytical systems with the balance comprising preparatory systems.

Geographic revenues as a percentage of total revenue for the third quarter 2016 were as follows: United States 56%; Europe 24%; Asia-Pacific 16%; and 4% other. Geographically the year-over-year total revenue growth rates for the third quarter 2016 were as follows: Asia-Pacific was up 3%; United States was down 8%; Europe down 48%; and other was down 40%.

Europe was down 48% year-over-year driven mainly by lower revenue from genomic instruments. Sales in Europe were pressured by C1 competitive headwinds and lack of adequate sales coverage in some territories. As we mentioned earlier, we are working on the productivity of our sales force and this is a top priority for us.

In Japan, we continue to experience weakness and have reorganized the sales team. Excluding China, sales in Asia-Pacific were impacted by inadequate sales coverage. But importantly, we have already implemented the changes to improve performance in the region.

GAAP net loss for the third quarter of 2016 was $19.8 million compared with a net loss of $9.3 million for the same period last year which benefited from a gain on escrow settlement of $4 million. Non-GAAP net loss for the third quarter was $10.9 million compared with the $4.4 million non-GAAP net loss for the year ago period.

GAAP product margin was 49.6% for the third quarter of 2016 versus 54.6% in Q2 of 2016 and 58.3% for the year ago period. The year-over-year and sequential declines in GAAP product margin were mainly due to fixed amortization costs and lower revenue. Non-GAAP product margin was 70.2% for the third quarter of 2016 versus 69.5% in Q2 of 2016 and 72.1% for the year ago period. The year-over-year decline in non-GAAP product margin was mainly due to unfavorable product mix, higher production costs and lower instrument average selling prices.

Turning now to OpEx. GAAP research and development expenses were $9.3 million in the third quarter of 2016 compared with $10 million for Q2 2016 and $9.4 million for the year ago period. The sequential decrease in GAAP research and development expenses was driven primarily by lower material costs and compensation expense.

GAAP SG&A expenses were $21.1 million for the third quarter of 2016 compared with $23.8 million for Q2 2016 and $19.6 million for the year ago period. The sequential decline in SG&A expenses was mainly due to lower legal fees and outside service costs. The year-over-year increase in SG&A expenses was mainly due to higher headcount.

Now moving on to the balance sheet. Total cash, cash equivalents and investments were $71.2 million at the end of the third quarter of 2016 compared with $86.4 million at the end of Q2 2016, a sequential decline of $15.2 million. Please note our cash burn benefited from an unusually low DSO in Q3. Going forward, we expect our DSO to be more in line with our historical pattern.

Accounts receivable were $12.8 million compared to $18.9 million at the end of the second quarter of 2016. DSO at the end of Q3 2016 was 52 days compared to 60 days at the end of Q2 2016 due to an increase in collection activity.

Turning to cash flow, net cash used in operating activities was $13.2 million for the third quarter of 2016 versus $7.4 million in the second quarter. The sequential increase in net cash used in operating activities for the third quarter was due to a half yearly interest payment on our outstanding convertible debt, timing of vendor payments and inventory build.

Now moving on to guidance. As we mentioned earlier, given the recent volatility in our business we have decided not to provide specific 2016 financial guidance until we complete a business review and implement our action plan.

And with that I will now turn the call over to the operator to open it up for questions.

(Operator Instructions). Sung Ji Nam, Avondale.

Thanks for taking the questions. First off, if I could ask a clarification. Did you say that the high throughput IFCs will be available in December of this year -- both the small cell as well as the medium cell?

This is Chris. Yes, I did say that, yes.

Okay. And then in terms of -- for the mass spectrometry for Helios, you talked about some competitive dynamics there. This is the first time we are hearing direct competition for that particular product. I was wondering what kind of technologies are some of the competitive products to that particular platform.

So let me just make sure I clarify. Could you just repeat which area in particular?

For Helios in general. Are there different competitors for applied markets versus life sciences or --?

No, I wouldn't look at it that way. I think, as you know, this is really developing a new category in the high perimeter space. And so what you see is in the academic markets a willingness to adopt the technology, to explore and build out its capabilities and test and build methods around it.

For the applied markets it is more about -- there are substitution alternatives and they're using conventional methods for doing more limited analyte-based or single or handfuls of analytic -- or analyte-based detections. And so there is a higher burden I think of evidence you have to prove to get folks to make that commitment in an applied market setting.

So, I don't think it is a new competitive dynamic per se. It is just more of a sophisticated understanding of what it takes to be successful over the long period of time in the applied markets with a new emerging technology.

Brian Brokmeier, Cantor Fitzgerald.

Good afternoon. You indicated that all three growth drivers, the new product supply market, consumable revenue and single cell, were all down. Where was the biggest shortfall? And as you look at your pipeline or other information, which area are you the most confident will stabilize or improve in the near-term and which may be a little bit more challenging to reaccelerate?

Brian, this is Vikram. As we had indicated, the biggest shortfall was on the Helios side and we have talked about the dynamics that affected Helios during the quarter. We talked about the several systems that were stuck in the procurement process and some lengthening sales cycles, particularly as they apply to the applied business just based on different customer characteristics and expectations.

And lastly, we talked about the beginnings of some kind of competitive headwind in that area as well. The other dynamic we talked about was in the genomic analysis, chip business during the year -- I'm sorry, during the quarter. And we believe that was mostly due to timing of large customer orders.

Okay. And which one can you reaccelerate? Are you confident you can reaccelerate in the near-term?

Well, let me answer the question a little differently. In terms of the trend line on the genomic analysis side, we believe based on our assessment in Q3 that that should go back to pre-Q3 trend lines.

Okay, and can you provide some color around the delayed 800 small cell high throughput shift to December? And are you able to provide an update on the 10,000 cell shift which is planned for early 2017?

This is Chris. Maybe I will take a little bit of a crack at that. So first, on the 10-K chip -- I will take it backwards. So going forward we are not going to provide any forward-looking statements related to new product development until the product is ready for launch. So at this stage unfortunately I'm not going to be able to comment in a meaningful way about the 10-K chip.

On the HD chips I think I would characterize the situation, there were some very modest -- they were going to come out in the market sequentially. So we had new insights as we were going through the final stages of validation of that technology and preparing it for market release.

So when we got to be advanced scale up phase we realized some new insights. We fixed those insights, we are really excited about the potential of the chip going out and just pushed out the two chips sequentially based upon the first chip being in series, not in parallel.

Bill Quirk, Piper Jaffray.

Great, good afternoon, everyone. This is actually Alex Nowak filling in for Bill today. So Chris, just a couple high level questions for you. The first one is when do you think you will complete the planning for the action plan of the business and then share those results with the investor community? And along with that, when do you plan to reinstate either 2016 guidance or issue 2017 guidance?

I will tell you this is so important frankly that we need to take however much time is required to make sure we get it right. So at this stage I'm not going to give a forward-looking statement, if you will, about when we will come back out with that prepared plan. Clearly I need to work on this at a very swift pace; we already are working on it at a very swift pace.

We know there are a lot of implications behind it, so there is no advantages to being slow in this process. So we will come out as soon as we are ready. With regards to 2016, I would just be speculating about when the date would be to come back with any more information about 2016. And I know 2017 is also something we're working on in parallel and we will come out when we are ready.

That is helpful. And then another high level and then another follow-up question. How is the morale with employees over at Fluidigm based on the recent results? Are you having any trouble retaining personnel or recruiting employees? And this goes along with the previous question, but do you plan to have a global meeting with the Fluidigm employees to unveil your plan once it is complete?

I would tell you right now as a new member of the Fluidigm team, I know there is a number of new members, I think I am just excited, even more excited now that I have been inside the organization and seen the potential. I have always characterized and I believe still today its full potential has not been realized.

And so I think from a perspective of tracking talent I don't see a problem from that perspective once we come out with a very clear roadmap on what we are going to be doing next. I think there will be many people that will be very excited about the potential of this technology and realizing how we are going to unlock all of these dimensions of our business going forward.

From a turnover perspective there has not been a meaningful change in the trend lines related to our quarterly turnover. We do track that information; we look at both the voluntary and involuntary turnover. And so far we have not seen any particular changes in those trend lines.

But in all seriousness this is an organization that wants to win, that wants to be associated with success. No one here is satisfied with the performance of the prior quarter. No one is satisfied with the trend line that we have established for this year and for the last few quarters.

So I would characterize the organization as really I think there is a thirst for making sure that we are all aligned, rallied around and very clear and what we are going to work on first, second and third. I think it's the management team's obligation to get that information out as quickly as possible.

It's quite likely there will be a series of meetings. I have already held town hall meetings at each one of our operations. I've had a chance to meet with all of our colleagues around the world. And I have seen -- as I've look them in the eyes I have seen nothing but positive energy and excitement about the future. But we owe them the specifics and we will come back to that soon.

Doug Schenkel, Cowen and Company.

This is Adam on for Doug. Thanks for taking my questions. In your prepared remarks you provided some color on the European and Asian geographies, but I was wondering if you could do the same for the US which decreased by 8% year-over-year. Were there any notable dynamics in this region that you noticed in Q3? Thanks.

This is Vikram. So the dynamics in the US I think were not as acute as the ones we talked about for Europe. But in the US we had the same dynamics from a sales force issue in the applied research split that we spoke about in our prepared remarks. But I would say that the effect in other geographies was a lot more pronounced.

Okay, thank you. And you also mentioned in your remarks the several large initiatives that are appearing in the news lately that can use single cell approaches such as the Human Cell Atlas. Can you provide any color on what role you believe Fluidigm will have in these large initiatives or is it just too early to tell? Thank you.

Maybe I will take a crack at that one. Thanks for the question, Adam. With regards to the various initiatives, we have had really I think -- I won't call it a privileged position but we have had a special position with the KOLs in the market, the key opinion leaders, developing and leading these initiatives.

I think whereas if you were participating in the CZI, the Chan Zuckerberg Initiative launch unveiling you would have actually seen a picture of one of our chips held as an example of the promise of the technology and what the initiative was all about. They did that without us having a position, that picture was done.

But clearly we're involved in the steering committees, the commissions and the teams that are organizing the workgroups around how this work is going to be done. So with the [pining] in the space we will and should continue to be a major market participant in this initiative.

And so we are super excited about it. We have got a group of people who are working on how to make our tools available and modifying any value propositions that are important to those groups as the work stages evolve and how the work is going to be delineated or shared around the world.

I am showing no further questions at this time. I would like to now turn the conference back to Ana Petrovic, Director of Corporate Development and Investor Relations.

We would like to thank everyone for attending our call. A replay of this call will be available on the Investors section of our website. This concludes our call and we look forward to the next update following the close of the fourth quarter 2016. Good afternoon, everyone.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.