Standard BioTools Inc. (NASDAQ:LAB) Q3 2023 Earnings Call Transcript November 7, 2023
Operator: Hello, and welcome to the Standard BioTools’ Third Quarter 2023 Financial Results Conference Call. As a reminder this conference is being recorded. It is now my pleasure to introduce your host Peter DeNardo, Investor Relations. Thank you. Mr. DeNardo, you may begin.
Peter DeNardo: Thank you, Rachel. Good afternoon, everyone. Welcome to Standard BioTools’ third quarter 2023 earnings conference call. At the close of the market today, Standard BioTools released its financial results for the quarter ended September 30, 2023. During this call, we will review our results and provide commentary on our financial and operational performance, market trends and strategic initiatives. Presenting from Standard BioTools today will be Michael Egholm, Chief Executive Officer and President; and Jeff Black, Chief Financial Officer. During the call, we may make forward-looking statements about events and circumstances that have not yet occurred, including plans and projections for our business, our outlook for 2023 and future financial results, market trends and opportunities, and our expectations related to a planned merger of SomaLogic, including potential synergies in 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. The forward-looking statements on this call are based on information currently available to us, and we disclaim any obligation to update these statements, except as may be required by law. During the call, we will also present some financial information on a non-GAAP basis. We believe that these non-GAAP financial measures are useful in evaluating our core performance as a baseline 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 table of accompanying today’s press release and as 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 website. I would 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 Egholm, our Chief Executive Officer and President. Michael?
Michael Egholm: Thank you, Peter, and good afternoon, everyone. We appreciate you joining us on the call today. During the call today, I’ll provide a summary of our year-to-date performance and the drivers of that performance. I’ll then turn 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 objectives. Our first objective is to fuel growth by harnessing the differentiated life science tools in our portfolio. Achieving growth in this macroeconomic environment is no small task. And in light of that, we are pleased that the third quarter revenue was in line with our expectation, enabling us to deliver 10% revenue growth year-to-date.
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Q&A Session
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Excluding the impact of a previous strategic – of the previous strategic decision to discontinue certain product lines in our genomics business, we achieved 13% growth year-to-date. Our second objective is to standardize or apply operating discipline that permeates our organization in order to enhance the profitability of the business. Our uncompromising focus on the continuous improvement and lean operating principles at the heart of Standard BioTools business systems or SBS, have delivered meaningful progress year-to-date, including over 1,000 basis point on non-GAAP gross margin expansion, a 21% improvement in non-GAAP operating expenses and a 58% improvement in operating cash used. Our third objective is to leverage our platform to create scale, which is crucial in the life science tools space.
Our recently announced plan to merge with SomaLogic activates that plan. There is significant potential in our fragmented sector and a deep pipeline of opportunities. For now, we intend to be laser-focused on the transaction at hand. We are a team of seasoned operators that have deep experience in integration of companies and know what it takes to achieve a successful close and integration. Thereafter, 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 existing portfolio, which offers three product categories: instruments, consumables and service and serves customers in the proteomics and genomics end markets. Instrument revenue is about 34% of revenue and has grown 47% year-to-date.
We believe this is an important leading indicator of future growth. We see growth in instrument sales generally leading to future growth of recurrent sales of consumables and services with attractive margins. On a year-to-date basis, we are pleased to have returned the proteomics business to growth. We have also successfully navigated a planned temporary revenue decline in genomics, which resulted from the discontinuation of certain product lines, in that business. I’ll touch on each of these more in a moment. Consumables were about 40% of revenue year-to-date while services were about 25%. Those recurring sources of revenue are 65% of the mix year-to-date, which enhances our top line visibility going forward. I would like to provide more detail on our proteomics business, which includes spatial biology and serves a lucrative end market in terms of both size and growth.
We have executed well in returning the proteomics business to growth, driving 22% revenue growth year-to-date. The growth is attributable to disciplined commercial execution and the launch of the Hyperion XTi 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 suggests that, it is the strongest contender in 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 CyTOF XT, is the only technology that can do a high number of both extracellular markers and intracellular markers. The ability to do both at the same time, allow our customers to gain biological insights that would otherwise go unnoticed using competing technologies.
Turning to genomics. We instituted a hard pivot beginning last year to minimize its drag on our business and instead position it to become accretive. For the first three quarters of 2023, the genomics business generated a modest positive contribution margin, compared to a loss of $24 million during the same period last year. The strategic reposition has involved managing a planned revenue decline as we work to consolidate the portfolio to a single instrument, the Biomark X9, which is poised to win in the niche markets we serve. Debt repositioning and emphasis on a more strategic customer set has begun to deliver progress with 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, focused on expanding installed base with our major OEM partner while targeting additional OEMs and high-volume key accounts.
We note that the new – we 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 over to Jeff for a more detailed review of our financial results. Jeff?
Jeff Black: 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 macroeconomic headwinds. We delivered meaningful operating progress, including margin expansion, a significant decrease in OpEx and sustained improvement in operating cash flows. Total revenue for the third quarter was $25.4 million, instrument growth was 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 purchases in genomics. So, we expect consumables revenue 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 nonstrategic product lines, we achieved 13% total revenue growth year-to-date. Growth was driven by instrument revenue expansion of 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 a 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 we will expect to see continued variability in quarter-to-quarter instrument 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. 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. It was up 22% year-to-date, led by continued traction of Hyperion XTi, which we launched past this past April. In the third quarter, total genomics revenue grew 3% and 5% when excluding discontinued products.
And year-to-date, genomics was down 4%, but up 1% when excluding discounted 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 the 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 managed the genomics business, to a positive contribution margin, against a $24 million loss in the first nine months of last year. With sustainable positive contribution margin in mind, we’re balancing the trade-off between OEM – interim margins and the higher-margin consumables and services that they will ultimately generate. Moving on to our operating performance.
