Q3 2023 Standard BioTools Inc Earnings Call

Participants

Peter DeNardo; IR; Standard BioTools Inc.

Michael Egholm; CEO & President; Standard BioTools Inc.

Jeff Black; CFO; Standard BioTools Inc.

Presentation

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 for Standard BioTools today, we have 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 or projections for our business, our outlook for 2023, and future financial results, market trends and opportunities, and our expectations related to a planned merger with 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 in 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 offer that some financial information on a non-GAAP basis. We believe that these non-GAAP financial measures are useful in evaluating our core performance as a baseline for assessing the future earnings potential of the company. We use these non-GAAP measures on our own evaluation of continuing operating performance.
We encourage you to carefully consider our results on a GAAP and non-GAAP basis. A reconciliation between non-GAAP measures and their GAAP equivalents are provided in the tables accompanying today's press release and as an appendix to today's presentations 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. Excluding the impact 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 continuous improvement and lean operating principles at the heart of Standard BioTools' business systems or SPS have delivered meaningful progress year to date, including over 1,000 basis points of non-GAAP gross margin expansion; a 21% improvement in non-GAAP operating expenses; and a 58% improvement in operating cash use.
Our third objective is to leverage our platform to create scale. This 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. Day after, we look forward to capitalizing on the continued potential for consolidation in our sector.
I'll turn next to the progress being made with our 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 lead into future growth of our current 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%, with current sources of revenue at 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 system's market-leading data quality and throughput continued 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 size of Hyperion XTi 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.
This strategic repositioning 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. That 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 genomics 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 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

Thank you, 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 of 14% in the quarter; it 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 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. It 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 the quarter and year-to-date basis.
Service and other revenue has grown 5% year to date. And as a reminder, we believe growth in instrument placements is a leading indicator, and 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 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 discontinued products. And this is as we continue to manage our portfolio consolidation. And as we mentioned, our consumables growth in genomics was also impacted by larger consumables orders last year associated with the launch of our OEM partnership.
We also think it's important to highlight again that through this transition, we've 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 interim margins and the higher margin consumables and services that they will ultimately generate.
Moving on to our operating performance. Our non-GAAP gross margin for the third quarter expanded to 57% by 830 basis points compared to third quarter of '22. And this includes about 400 basis points of pressure related to one-time receipt of warranty-related reserves in the current quarter.
On a year-to-date basis, our non-GAAP gross margin improved to 60% and by about 1,000 basis points. Non-GAAP gross margin primarily excludes noncash amortization of developed technology, which will be fully amortized by the end of Q1 2024.
We continue to face residual headwinds related to legacy service-related costs, product mix, and capacity utilization. But we remain confident in our ability to drive gross margins over time into the mid-60% range. Gross margins will continue to benefit from our SBS lean approach as well as price realization, but they're different across instruments, consumables, and services. And thus, revenue mix quarter to quarter will impact our ability to be overly specific when it comes to our margin expansion roadmap.
Moving onto OpEx. On a non-GAAP basis, our total non-GAAP operating expenses of just under $25 million were about 97% of revenue in the third quarter, down from about $30 million and 116% of revenue in 2022.
Year over year, we reduced non-GAAP operating expenses by 17% in the third quarter, 21% year to date, and this is reflective primarily of the cost rationalization programs we've executed over the past 12 months. This is a testament of the strongest execution of our SPS operating discipline and lean transformation.
While driving that strong operating performance, we're making focused investments in commercial organization, our R&D pipeline to support sustained long-term revenue growth. And this is the playbook that we plan to replicate with our planned merger with SomaLogic. We're excited about the value we expect to create by rationalizing our combined cost structure while prioritizing growth investments. Overall, we continue to be thoughtful stewards of our resources, and we remain well positioned to support our growth initiatives.
And that brings me to cash flow and the balance sheet. We ended the third quarter with over $130 million in cash, restricted cash and short-term investments. Operating cash use decreased year over year in the third quarter by $14 million or 54%.
And on a year-to-date basis, we've reduced operating cash used by $47 million or about 58%. As we've stated before, we have a multiyear cash runway to execute our core business. We continue to deliver on improvements in operating efficiencies and have a clear line of sight to positive cash flow in our core operating business.
Moving to our outlook. As a reminder, on October 4, we updated our full-year 2023 revenue guidance to a range of $100 million to $105 million. We also today updated our non-GAAP gross margin outlook for the full year to about 60%, representing a 900 basis point increase over 2022.
We remain very encouraged by our continued progress and performance during a year of continued transition, legacy headwinds, and a challenging macro environment.
And with that I'll turn the call back to Michael to provide some additional commentary on our pending merger with SomaLogic before opening the call up for questions.

Michael Egholm

Thank you, Jeff. It's been an exciting month since we announced the transaction. We've been on the road and we're very pleased with the reception we are receiving. We are confident that investors of both companies will see the compelling long-term value proposition this transaction brings with the expectation of near- and long-term financial benefits and sequential growth through the combination of our two companies.
We're making important progress as we work towards close, which was on track for the first quarter of 2024. We expect to file our preliminary proxy statement in the coming days, and we're looking forward to continued conversations with our shareholders.
With the third quarter now behind us, we are increasingly confident in the strategic rationale for the combination and the long-term financial and synergy targets we have provided. With SBI's stronghold in academic research settings and SomaLogic's stronghold in biopharmaceutical research, our customer bases overlap minimally. This paves the path to a lucrative new and expanded relationships for both of us and an improved go-forward flow picture for both companies' shareholders.
This benefit will fuel an expected double-digit revenue growth profile over at least the next three years. We're working closely with the SomaLogic team to drill down further and organize the synergy opportunity, which we plan to share as we get closer to closing.
We expect that through the elimination of redundant public company MGA costs and the company-wide continued application of lean conversion and SBS operating principles, the merger will deliver approximately $80 million in annual cost synergies by 2026, compared to our current combined operating expense run rate for the first half of 2023. And assuming a Q1 close, our combined entity is expected to have over $500 million in cash to self-fund continued organic and inorganic growth.
We look forward to building on all that both companies have accomplished, creating a larger, more diversified company, and a true leader in our space. We remain more committed than ever to become a diversified leader in the life science tools space. Our pending merger with SomaLogic is the next step towards the activation of that mission.
And with that, I'll turn it over to Rachel to open the line for questions.

Question and Answer Session

Operator

(Operator Instructions)
There are no questions at this time. I would now like to turn back the conference to Michael Egholm for closing remarks.

Michael Egholm

Thank you, Rachel. I'd like to conclude by thanking our team for their execution and our investors for their continued support of our mission. While we are pleased with our results to date, we remain mindful of the work still to be done and of the highly uncertain market environment, which we are currently navigating. We look forward to providing you further updates and seeing many of you at the Jefferies Healthcare Conference in London next week. Back to you, Rachel.

Operator

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