NanoString Technologies, Inc. (NASDAQ:NSTG) Q3 2022 Earnings Call Transcript

NanoString Technologies, Inc. (NASDAQ:NSTG) Q3 2022 Earnings Call Transcript November 7, 2022

NanoString Technologies, Inc. misses on earnings expectations. Reported EPS is $-0.79 EPS, expectations were $-0.51.

Operator: Good afternoon. Thank you for attending today’s NanoString Third Quarter 2022 Operating Results Conference Call. My name is , and I’ll be your moderator for today’s call. I would now like to pass the conference over to our host, Doug Farrell, with NanoString. Doug, please go ahead.

Doug Farrell: Thank you operator and good afternoon everyone. Joining me on the call today is Brad Gray, our President and CEO; as well as Tom Bailey, our CFO. Earlier today, we released our financial results for the third quarter of 2022. During this call, we may make statements that are forward-looking, including statements about financial and operating projections, future business growth, trends and related factors, expectations regarding future operating results, cash flows, current and future orders, prospects for expanding and penetrating our addressable markets, our strategic focus and objectives, and the development status and anticipated success of recently planned product launches, as well as the impact of macroeconomic factors.

Looking forward these statements are subject to risks and uncertainties, including those described in our SEC filings. Our results may differ materially from those projected, and we undertake no obligation to update those. Later in the call, Tom will be discussing our financial results and 2022 guidance. We have prepared as a supplement the GAAP financial measures, selected non-GAAP adjusted measures. The calculation of which are described in detail in our press release. Throughout the call, all financial measures will be GAAP unless otherwise noted. You can also find reconciliations of GAAP to non-GAAP measures, as well as the description, limitations, and rationale for using each measure in this afternoons press release. To aid analysts and investors in building their models, we have posted exhibits under the financial information tab of our investor relations home page that include a presentation of non-GAAP or adjusted measures or rather collective financial data.

I’d like to remind everyone that next week we’ll be participating in the Stifel Healthcare Conference in New York, as well as the Jefferies Healthcare Conference in London. We look forward to having a chance to speak with many of you then. Now, I would like to turn the call over to Brad.

Brad Gray: Good afternoon and thank you for joining us. Spatial biology is a dynamic field, yielding powerful scientific insights. While expansion will last a decade or more, the next few years will determine a mix of technologies in which key discoveries will be made. While there are other emerging spatial biology providers, we believe that our early mover advantage, best-in-class technology, ecosystem and synergistic platforms and Blue Chip partners position us to lead. For this reason, our top priority is to maximize the number of our spatial biology instruments placed in leading research labs worldwide. During the third quarter, we made great progress on this top priority, generating orders for approximately 60 spatial biology instruments, an increase of approximately 70%, compared with the same quarter a year ago.

We have now sold more than 100 cosmic Spatial Molecular Imagers and accumulated a revenue backlog valued at approximately $23 million. We expect this backlog to increase in Q4 and have set us up for robust growth for 2023. During Q3, we also advanced our scientific leadership. Images generated by our customers using the GeoMx digital spatial profiler was featured on the cover of not one, but two of the world’s leading scientific journals. A similar description of CosMx was published in another leading journal and we strengthened our informatics ecosystem through a partnership with Visiopharm, whose mission is to transform pathology through AI-based image analysis and workflow standardization. The degree to which customer interest in spatial biology is trending towards platforms that provide spatial imaging at single-cell resolution has been even greater than we previously expected.

The intense customer focus on single-cell imaging resulted in fewer orders for the GeoMx instrument. And in Q3, we captured 20 GeoMx orders compared to the 25 to 30 orders we had expected for the quarter. Fortunately, our CosMx spatial molecular imager is a leading product in the single-cell imager category and we are capturing demand at a significant pace. We generated approximately 40 CosMx orders during Q3, substantially exceeding the 25 to 30 CosMx orders we had guided for the quarter. As a result, while we recognized less GeoMx revenues than previously expected, we exceeded our guidance for overall spatial instrument orders. While spatial biology instrument orders were strong, Q3 was a challenging quarter for consumable sales, which were the largest contributor to the shortfall in our Q3 revenue relative to guidance.

We experienced a decline in annual consumable pull-through per system for both nCounter and GeoMx, which we believe was due to a combination of lumpy ordering patterns, customer life cycles, and macroeconomic factors. For nCounter, the pull-through dropped across virtually all geographies and customer segments and seemed to be driven by decrease in demand from the older systems in our installed base. For GeoMx, the weakness seemed to be primarily a product of lumpy ordering patterns and the impact of a relatively large number of newly placed systems still ramping to their full consumable run rate. In both cases, weakness was exacerbated by broader market conditions, including continued clinical trial delays among large pharma customers, reduced spending small biotechs, and COVID-19 lockdowns in China.

While we are clearly disappointed by the shortfall, I remain confident that we are set-up for a strong 2023 and beyond. Importantly, we have recently reevaluated our key priorities to ensure that we invest in the most promising aspects of spatial biology, while streamlining our cost structure. As a result of this review, we are eliminating approximately 95 positions and reducing spend in other non-personnel areas. While these decisions are difficult, especially if we consider the impact on our people, these actions will ensure that a more substantial portion of expected 2023 revenue growth falls to our bottom line and that we are positioned to deliver on our commitment to achieve breakeven without the need for additional financing. Tom will provide more details on our financial outlook during his prepared remarks.

Before I hand the call over to him, I’d like to provide an overview of our progress towards our strategic objectives for the year. Given the tremendous customer interest, I will start with an update on our objective to launch CosMx as the industry leading molecular imaging platform. Customer interest in CosMx has exceeded our expectations throughout the year. As we prepare to ship our first commercial systems in the weeks ahead, we are more confident than ever that CosMx SMI has the best performance specs and the ecosystem to be a platform of choice. CosMx leads with best-in-class performance metrics, including highest flex RNA assays, the capability to image proteins, and robust data quality, all done and challenging FFPE tissue. CosMx is helping us reach new customers and showed strong synergy with the whole transcriptome capabilities of GeoMx boding well for a long-term leadership in spatial biology.

In Q3, two-thirds of CosMx instrument orders came from new to NanoString customers. is expanding our customer base into discovery research. One-third of these new customers chose to adopt both CosMx and GeoMx at the same time by purchasing a bundle. Meanwhile, one-third of all Q3 CosMx instrument orders came from labs who had previously adopted GeoMx, primarily within translational research. To date, CosMx has penetrated only 20% of the GeoMx install base suggesting many more opportunities for cross-selling going forward. In the near-term, we expect our spatial instrument order mix to remain CosMx heavy. CosMx represents about 60% of opportunities added to our spatial instrument phone in Q3 and we expect CosMx to continue to account for about two-thirds of spatial instrument orders.

Our beta program is progressing well with CosMx instruments installed and integrating with AtoMx at three beta customer sites. Customer feedback has been overwhelmingly positive. And through these interactions, we’ve identified several training and software updates that we are incorporating into the final commercial rollouts. We’re concluding the validation of CosMx and AtoMx as an integrated solution and are preparing our first commercial systems for shipments in the weeks ahead. We expect to ship between 5 and 10 CosMx systems before the end of the year and we can’t wait to see the these systems will generate. Our second objective is to drive GeoMx DSP further into mainstream research, broadening adoption across multiple areas of research.

From a scientific perspective, our CosMx customers had a wildly successful third quarter. Papers and images generated using GeoMx raised the covers of two prestigious Scientific journals, Nature Genetics and Clinical Cancer Research. In total, our customers published more than 30 new papers, bringing our total loan to more than 160 peer-reviewed publications as of September 30. This productivity underscores the utility of GeoMx, particularly in translational research for human oncology and immunology. Demand for GeoMx instruments from translational researchers remains strong, even as discovery researchers opt for single-cell resolution of CosMx. And translational researchers drove the vast majority of the approximately 20 GeoMx instruments during the third quarter.

We remain focused on ramping the consumable pull-through of our growing installed base of GeoMx systems. We’ve observed that customers take time to build their pipeline of spatial projects, reaching steady state utilization 12 or 18 months after instrument purchase. While GeoMx consumable revenue has grown, the large number of instruments sold in the second half of 2021 and activated in the first half of 2022 have weighed on the consumable pulp group per system. We are bolstering our support for customer ramp and consumable pull-through going forward by refocusing our PHD field application specialists, primarily on spatial biology experiment full design, helping customers accelerate their pipeline of projects on our platforms. We expect this will benefit both GeoMx and CosMx pull-through in the long-term.

Meanwhile, we continue to invest in partnerships that enhance the GeoMx workflow. Using Visiopharm’s AI driven digital pathology software, Oncotopix Discovery, researchers will be able to analyze four-color fluorescent images generated on GeoMx, and combine these images with those using traditional H&E staining, to better understand the number and type of cells that are present within regions of interest. We expect a combination of these technologies will accelerate biomarker discovery and validation for both whole transcriptome RNA and high-plex protein analysis. We’re committed to delivering informatics solutions that enhance research productivity, bringing us to our third strategic objective, which is launching our AtoMx Spatial Informatics platform.

Spatial experiments require unprecedented bioinformatics capabilities to support image analysis, data visualization, and global collaboration. We believe that the highly scalable compute and storage capacity of our cloud-based AtoMx platform is essential to drive broader adoption of spatial biology and that AtoMx is an underappreciated competitive differentiator. We expect to achieve our goal of launching AtoMx in the weeks ahead and AtoMx becomes available to the first customers receiving their commercial CosMx systems. We expect to roll AtoMx out to our GeoMx users during the first half of 2023. AtoMx employs a flexible data structure, so it’s ready to be leveraged using artificial intelligence and machine loading from day one. Together, NanoString and Visiopharm are exploring opportunities for further integration by connecting our AtoMx Visiopharm software so that researchers can leverage artificial intelligence and machine learning to provide spatial biology for both of our spatial biology platforms.

Our fourth objective for 2022 is to sustain our nCounter franchise. Q3 was a challenging quarter for nCounter as new instrument placements and consumable pull-through both fell short of expectations. Instrument placements flowed among academic researchers, especially in Europe and were hindered by a year-on-year decrease and the number of GeoMx plus nCounter bundles that were being sold. Consumable pull through was challenged by an increasing age of our nCounter installed base. which first commercially launched back in 2009. At this stage in the nCounter lifecycle, we believe that some older systems are becoming inactive as researchers who originally purchased them transition to new roles or take their research in new directions. While the annualized consumable pull-through on each active nCounter system has remained relatively stable over the last 24 months.

Growth in the number of active in camera systems is flat as the number of new encounters being placed approximately equals the number of older nCounter systems being inactivated. While we do not view nCounter as a future growth driver, it remains an important foundational business that continues to generate great science and provide substantial cash flow to support our global commercial channel and innovation. I’d now like to turn the call over to Tom to review the details of our financial results and outlook for the balance of the year.

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Tom Bailey: Thanks Brad and thanks all for joining us today. Revenue for the third quarter was $29.5 million, reflecting a CosMx heavy spatial instrument mix, lower GeoMx and kind of consumable sales of our forecast indicated, and about $1 million negative foreign currency impact. For CosMx, we generated orders for about 40 new systems in Q3, adding approximately $9 million of revenue backlog to be recognized in future periods. As of September 30, 2022, our cumulative CosMx orders stand at over 100 systems, translating to a total revenue backlog about 23 million. Q3 GeoMx revenue was 9.3 million. GeoMx instrument revenue was 4.7 million, reflecting approximately 20 new system shipments and consumables revenue was 4.6 million.

Q3 annualized GeoMx consumables pull-through was about 58,000 per installed system. At the end of Q3, our GeoMx installed base was approximately 330 instruments with about 15 new instruments installed during the quarter. For our nCounter business, which includes all service, Q3 revenue was 20.2 million. nCounter instrument revenue was 3.3 million, consumables revenue was 12 million, and Q3 annualized nCounter consumables pull-through was approximately $44,000 per installed system. At the end of Q3, our nCounter installed base was approximately 1,105 instruments with about 20 new instruments installed during the quarter. Turning to margins and expenses, I’ll provide results on a non-GAAP or adjusted basis, which removes the impact of stock-based compensation, depreciation, and certain other items.

Please refer to our press release, as well as the exhibits we have posted to our Investor Relations webpage for detailed information on how our non-GAAP or adjusted measures are prepared. Q3 adjusted gross margin was 57%, an improvement of 100 basis points as compared to Q3 of last year and an improvement sequentially reflecting management of manufacturing personnel and other expenses to align with current product sales volumes and efficiency improvements. These impacts were partially offset by investments we are making, manufacturing capacity, primarily to support commencement of CosMx instrument shipments and consumables. Adjusted R&D expense was 14.5 million, a decrease of 12% year-over-year, primarily due to the capitalization of approximately 3.5 million of software related product development costs that will be expensed in future periods.

Inclusive of capitalized amounts, our Q3 R&D spend reflects continued investment in our spatial biology platforms, including the hardware consumables, and software development for CosMx and AtoMx in advance of the expected shipment of our first commercial CosMx instruments in Q4. Adjusted SG&A expense was 28.4 million, an increase of 20% year-over-year and driven primarily by investments made in spatial biology related commercial initiatives. Q3 adjusted EBITDA loss was 26.1 million, and our cash and cash equivalents at September 30 were 230.5 million. We also announced today that we have taken steps to streamline our cost structure by eliminating selected positions and activities, while maintaining key investments in spatial biology. As our business mix has evolved, we decided to take these steps to prioritize our portfolio of technology’s operational and commercial initiatives.

These steps will allow us to better leverage our operating expenses, while investing in our spatial biology business and will support our objective of reaching cash flow breakeven with our current balance sheet resources. We expect to report a charge of approximately 3.5 million in the upcoming fourth quarter related to these changes. Turning to guidance. Our Q4 outlook reflects a revised mix of expected spatial biology system orders and consumables pull-through rates for GeoMx and nCounter based on our Q3 experience with the upper-end of our guidance ranges assuming modest Q4 driven seasonal improvements. For the fourth quarter, we expect to receive orders for over 60 spatial biology systems with an approximately 66%, 33% mix between CosMx and GeoMx, implying a cumulative total of over 200 spatial systems sold in 2022.

Spatial biology revenue of $12 million to $13 million we expect will derive from sales of GeoMx systems, the shipment of our first CosMx systems and from consumables. We would expect approximately $7 million to come from instrument sales and approximately 5 million to 6 million to come from consumable sales. We expect Q4 nCounter revenue of 21 million to 22 million and total Q4 revenue of 33 million to 35 million. We have also updated our 2022 full-year outlook, which is detailed in today’s press release to reflect our year to date actual results and our Q4 outlook. Our updated full-year outlook also incorporates approximately one month’s impact of our announced cost reduction initiatives. Looking ahead to 2023, the CosMx systems orders we’ve already secured in 2021 and 2022 provides the foundation for expected revenue growth of 40% to 50% in 2023.

We also expect improvement in our EBITDA loss next year, reflecting expected revenue growth combined with a full-year’s impact of our cost reduction initiatives and anticipate ending 2023 with approximately $140 million to $150 million of cash. We look forward to offering more details when we provide our 2023 annual guidance for a usual process in February. Now, I’ll turn the call back over to Brad for closing comments.

Brad Gray: Thanks, Tom. We are focused on the dual objectives of spatial biology in market leadership and achieving cash flow breakeven on our current resources. We believe our leadership in spatial biology is best measured to the pace of new instrument orders, and by that measure, we are having a solid year. Our successful launch of CosMx sets the stage for strong revenue growth in 2023. We’re addressing trends in our nCounter and GeoMx business with decisive action and are streamlining our cost structure to maintain balance. With our unique spatial biology portfolio and strong balance sheet, we believe we’re poised to deliver both market leadership and future profitability. With that, we’ll now open the line for questions.

Q&A Session

Operator: Thank you. Our first question comes from the line of Kyle Mikson with Canaccord Genuity. Your line is now open.

Kyle Mikson: Hey, thanks for the questions. I guess, Brad, just starting with the quarter, could you just provide some more detail on like why consumables for GeoMx was lumpy by ordering was lumpy, like how do you, kind of prevent that going forward? And you didn’t mention the realign commercial team much, I mean, was any of the shortfall here due to that realignment earlier in 2022?

Brad Gray: Thanks for that question, Kyle. I’ll start with the second one first. We do not believe that the shortfall in Q3 was related to our sales force realignment in the first quarter. We really passed the issues that that realigned and created. Many of the differences we saw between territories that hadn’t been realigned are now €“ raised the junior consumable reps have caught up to the senior consumable reps in terms of performance, etcetera. We think now that we have those execution issues behind us, we’re more focused on macro and market trends and issues that are very specific to our installed base in terms of the lifecycle of the customer. So, looking at the Q3 GeoMx consumable pull-through, I’d say it’s impacted by three different factors, which are sort of tricky to parse apart.

The first is lumpy ordering patterns and we’ve come to appreciate there that new sites for GeoMx very often build inventory early on and then burn it off slowly over time. We know that we saw some stocking orders in the third quarter of 2021 that did not repeat in the third quarter of this year, and as a result, that’s part of the explanation for the year-on-year drop. The best evidence for lumpiness is the very strong Q4 seasonality that we have seen in both 2020 and 2021 where our pull-through reached over 110,000, that wasn’t really pull-through on a run rate basis in terms of actual experimentation they’re stocking behavior. The second issue is macro. And when we look at where our year-on-year pull-through dropped the most, we can see that it dropped the most amongst biopharma companies and within China.

And we know that these groups have been under some macroeconomic pressure. The last one and the trickiest one for us to model today is the lifecycle impact of new sites. So, it takes a lot for a GeoMx site to reach its whole ramp of consumables. Sometimes there’s logistical issues that needs to overcome such as the purchase of ancillary equipment for slide prep or data storage analysis solutions, sometimes they’re learning to plan new projects and taking on new concepts of spatial biology and selection, and sometimes core labs simply need to promote their new spatial biology capability to their local customers to build a book of business. And overall, when we look back, a new site tends to do about 60% of what its long-term run rate for consumables will be during its first year and then ramped up to 80% in the second year, and 100% thereafter.

Because we have a very large number of GeoMx systems sold in the second half of last year and installed and activated in the first half of this year, we are experiencing a wave of relatively low pull-through systems that are still ramping up to their full run rate. So, it’s very tricky to assign to allocate the pull-through drop across these three different factors, but it’s something we’re continuing to study and that we will provide updates on in future periods and when we guide for next year.