close that first quarter and as they think about the rest of this year?
Well, I think the most important thing was we saw a strong resumption of organic growth from 1% in Q4 of 2023 to 11% in the first quarter of this year. So that reflected a continuation of the rebound in the market or in our particular market that we saw beginning in the Q4 of last year. And you know, we were pleased to see it continue into this year. It was particularly strong in services as the population of installed base of instruments expanded significantly. But we also did see it on the instrument side as well. So, and we think that the market in flow cytometry is moving towards Full Spectrum Profiling.
We've seen a strong endorsement of that at recent conferences, and so, you know, we feel, we feel that the market momentum is solid.
Got it. And Bill, just taking you for a minute. Since joining Cytek back in mid-March, maybe just give us some color on your near and long-term goals for the business.
Our important goal this year is two important goals. 5%-10% revenue growth off last year, reflecting a continuation of the organic growth that we talked about in net income profitability, which will come from controlling costs and leveraging that revenue growth. And then another important goal we haven't quantified is generating positive cash flow. So we think that we're, we think that distinguishes us from many of our peers, and that we're a cash-generating company, and we recently demonstrated that by announcing our reinitiation of our $50 million share repurchase program, which we're funding. We, you know, we have very substantial cash balance, but we're also funding that out of organic operational cash flow.
So that's proof of our confidence in the momentum of our business and our ability to generate profitability and cash.
Got it. Wenbin, maybe, you know, I think it'd be helpful to kind of take a step back and kind of give a high-level framework for Cytek. Could you maybe give a brief overview of what flow cytometry is, how Cytek fits into the flow cytometry market?
Yeah. In a simple term, flow cytometer basically is a technology or a tool to analyze, study and count the cells based on the phenotype. So this is how it has been useful. And over the years, people were study in the immunology, they start to look at those populations based on varieties of parameters, and more and more of those parameters are needed. Then conventional flow cytometer technology start to hit a bottleneck. This is where Cytek comes from, and we started pioneered the full spectral flow cytometry analysis through those technology.
Comparing to the conventional, which actually through our data, we captured all the data available to us through mathematical algorithm, and which enable us to, be able to, analyze, lots of parameters, going way beyond the 40 parameters. And based on those 40 parameters, to analyze the cell population, and that gives, researchers, clinicians, a lot more informations, to enable them to do a deep understanding of the, the cells and for their, studies, for especially the new drug development type of, research projects.
Got it. Maybe just give a sort of brief, sort of last five years, how the flow cytometry market has evolved and how Cytek specifically has played a role in driving this evolution through the full spectrum flow cytometry technology that you have.
Yeah. We launched our first product in 2017. That event really is a pivot point to convert drive the whole industry from the conventional to where Cytek started from. And over the last five years, clearly, the whole industry and start to realize this is the direction of the flow cytometry, this is the future. And going forward, all the flow cytometry analysis studies will be based on full spectrum. This is also evidenced by many of our peers and starting to invest in this technology and started to endorse our technology.
Going to all of those top research centers today or big pharma, you can see, and that's pretty much all the tech, the kind of tools or the technology think they are going to go with going forward, will be full spectrum. Using one of the key opinion leader what he said was, with Cytek having both spectral analyzer as well as the spectral sorter. By the way, sorter is a technology to enable us to pick individual cell out after the analysis among those billions of cells. And so now with both analyzer and the sorter available from Cytek, why would people still stay with the old conventional technology? So this is just shows the future, where it's going to be, and...
Nobody today is questioning whether full spectrum will be the technology of choice. It's just how long it may take to convert from conventional to the full spectrum.
Got it. You made an acquisition a little while ago of Luminex, and, and just curious in terms of the integration, how you plan on utilizing that installed base to leverage services growth?
I think it's very evident, and a year ago, before our acquisition, if you take a look at our service gross margin , we actually list our service business separately from the rest of the business, which we call the products. Take a look at the gross margin and before the acquisition, and clearly our service was kind of either negative or flat on the gross margin side. Over the last 12 months, we made tremendous improvement with our service operation efficiency. And now Q1, and we recorded better than 50% gross margin for our service.
This is an evidence that combining all the installed base between the conventional Luminex assets and Cytek installed base, we do have definitely improved the overall efficiency and how we serve our customers.
Got it. The sort of challenges in China from a capital equipment standpoint have been well documented. However, you noted strength in the region on the most recent earnings call for Cytek. Can you talk about the dynamic you're seeing in the region, and what isolates Cytek from market-wide headwinds within China?
I think there have been many conversations and reports with regard to the slowdown of a kind of poor environment in China, which slowed down their business. Cytek certainly is kind of somewhat different, and our business overall has been showing the growth. I think part of the reason is, as I mentioned earlier, the kind of overall shift from conventional flow cytometer toward the full spectrum, and China is also moving toward that direction. Flow cytometer, by the way, is a basic life science tool used in many applications. It's a tool so necessary for all kinds of applications, and when customer really decide to buy, the question is: Will they go with the conventional or go with the full spectrum?
This is where Cytek enjoy the kind of benefits and, so due to our leadership positions, and clearly, and, that has shown up on our records, on our financial, and we actually have been doing well in China. It's just because of this particular reason, and when customer do decide to buy, they will buy Cytek tools.
Just staying on China, can you talk a little bit about the local manufacturing footprint you have in the region, specifically around your new facility in Wuxi, and how this will expand your local presence throughout the region?
Today, we manufacture in multiple sites. We have manufacturing site in Fremont, California, in Seattle, also in San Diego, where we manufacture all the reagents. China, where we manufacture of our clinical tools, entry-level instruments, as well as the some of the sub-assemblies used for the final assembly in Fremont and Seattle. Last year, actually, early this year, we expanded our facility in China. We moved into a new, brand-new facility, 50,000 sq ft, and which actually, by the way, Cytek owns it instead of lease it. So that enable us really continue to expand to support our global manufacturing infrastructures.
That certainly also helps Cytek to support our local market in China as well, because overall in China versus the rest of the world, China 50% of the buying or purchasing in China is with regarding to the clinical tools. So since our tools are clinically approved in China, as well as in Europe, this facility will enable us to support those type of application better for that type of clinical market, clinical applications. Also, recently, we have our TBNK, the standard clinical panels, approved for the China market. That, with that facility, will enable us to continue to grow, to support our clinical applications over there.
Got it. There's been a lot of focus on China's stimulus and the program that was announced earlier this year. Could you maybe talk about what the potential demand drivers are for you with the China stimulus program in terms of what your expectations are for time, purchases and revenues for you?
We talk about potential needs. Well, but normally, that takes a little bit of while to really become a real sales. We foresee if this becomes a real potential, very likely is going to be Q4 or early next year.
Got it. Okay. And just staying geographically, in the quarter, you noted strength in Europe, specifically on seeing customers return to normal equipment order patterns. Maybe just talk through the difference in what you're seeing in terms of sales cycles in Europe versus the U.S.?
... That really have to come back to the overall situation last year. Q1, Q2 last year, and we realized a significant slowdown in Europe. At that time, we mentioned that things are still there, and it just the decision-making process became longer. We thought it will, and that actually become a real... Started in Q4, we noticed, and the purchase started to come back, and that also continued into Q1. So that actually reflected part the kind of slowdown in Q1, Q2 last year-
Mm-hmm.
For Europe. Now, overall, the U.S. has the kind of decision making, and it kind of always takes longer time recently, as even last year, and it actually continued on and on. That's what we have seen. But again, the same thing is we don't see the business getting lost. It's just taking them more time to make a decision. We feel this is going to continue for a while, especially for the U.S. market. But on the other hand, we are still very positive with regarding to the overall business as evidenced in Q1. As you can see, our organic revenue growth and is exceptional, and we've continued on through the kind of momentum we saw in Q4. We feel this will continue for the rest of the year.
Got it. We've seen a couple of peers comment on just elongated replacement cycle, with customers pushing off replacements, given some of the funding constraints. Where in the cycle is Cytek in terms of flow cytometry replacement cycle? I mean, you're replacing your first instruments about seven years ago. I know that a lot of the growth that you've seen over the last couple of years has actually just been new installations- They could start kicking in and maybe just talk-
Yeah. Globally, there are about 50,000 instruments installed. Many of them are actually already old and need to be replaced. But, of course, due to the macro environment, the kind of replacement kind of slow, but we do see this coming to Cytek. And, many of the purchases we already see since we do offer discount for those customers coming to swap in their older, older tools. We do see the kind of replacement coming, but of course, not as fast as we would like to see. But this is happening.
Got it. Back in the fourth quarter of last year, you cited a later than historical pharma budget release, which is embedded in your second half guide. But now that we have budgets in hand, how has that trended versus your initial expectations in terms of what you were thinking you were going to see from the budgets?
Okay. When we formulated our guidance for the year, we were assuming that, you know, that those budgets would be in place and, our customers would be drawing against them. You know, I, without adding too much to our guidance, I'd just say we, you know, we continue to be confident. So things are playing out, you know, as expected, I would say.
Got it. And then last quarter, you talked about elongated sales cycles in the U.S. and APAC, ex China. Wenbin, you just mentioned that the U.S. sales cycles kind of do tend to be a little bit longer. Have you seen any improvements now that we're kind of into through Q2, almost? Like, have the sales cycles shortened at all, in the U.S. or in APAC, ex China, where some of those issues existed?
For the U.S., we don't really see any difference. But that's already taken into account in our forecast, our guidance. APAC seems there's some improvement compared to Q1, but in the end, we don't know until we have to wait until the end of the quarter.
Okay. Maybe can you give us a brief introduction to Cytek Cloud offering and how your bioinformatics offering can add, you know, some additional stickiness to the existing installed customer base?
Actually, Cytek Cloud is a great piece of the business for Cytek, although not really from the revenue perspective, but from how it actually serve customers, how it help customers to use Cytek technology. We launched this program was 18 months ago, has grown quite nicely, and by now, more than 10,000 users are already on our platform. This platform supports customers on Cytek's organic technology, full spectrum technology. As you can see, we have more than 2,000 instruments with more than 10,000 users. That means on averaging more than five user per instrument. And so this is having continued to grow very quickly, and if you talk to customers, they all really like this platform.
It helps customers to design their panels virtually on the cloud before taking this to the Cytek instrument. Really helps customers to improve their R&D research efficiencies, save their money with regarding to trying the panel on the tools. So it's a great piece of tools, and so we are going to continue to improve this platform, adding more features, which include the data management, data analysis, data storage, also enable users to create over the Cytek Cloud among themselves. This will. Lots of new features will be added. We feel this is going to be an instrument, actually, a tool and a very important part of Cytek business as well as full solutions Cytek will offer to our users.
Got it. Maybe could you give us an update on sort of the reagent strategy, just for the benefit of the audience? You guys had started out the business as, as focused on hardware using third-party reagents. You started developing your own reagents, made a small acquisition to help develop that. Maybe just talk to us where kind of the reagent business is today and, and what your expectations are for it over this year or the longer term.
As you can see, and we have 4 business pillars: instruments, applications, bioinformatics, clinical. Among the applications, part of that is to drive customers who come to Cytek for our reagents on Cytek instrumentations. But that's not really on individual reagents, individual profile, but the overall panels with application in mind to support their research. Now, reagent is a great piece of business, and it's recurring, just like our service. And so a few years ago, we made a first acquisition, Tonbo, and to help jumpstart our overall reagent business. And but overall, our reagent business is very different from many of the other reagent suppliers over there.
We are not really trying to turn ourselves into a catalog suppliers, but focus on individual reagents, which really is important for the applications on Cytek tools, Cytek instruments. We, in fact, partner work with many of the individual reagent suppliers, partners to drive the overall reagent business. We focus internally on certain reagents, which is unique to our full spectral technology. So overall, the reagent business has been growing quite nicely, but the base is still small, comparing to our instrument. Reagent also takes more time to grow on revenue versus the instrument, simply because the per order revenue of reagents is very different from instrument. So, but overall, the growth rate of our reagent definitely is higher than overall our instrument growth rate.
We feel this is direction and our long-term objective, of course, is the overall recurring revenue is... of Cytek is going to be 50%, if not more. So this is one of the areas we are investing and will continue to invest.
Maybe could you talk a little bit about what the, what percentage of reagents are currently of overall revenues? I know a while back you had sort of like a mid-single-
Yeah, it's still in the mid-single digits.
Okay.
You know, as Wenbin said, it's part of the strategy of driving applications and ease of use. So part of that, you have to have reagents and flow cytometry. Some of those reagents are specialized, so we've got to have them so that our systems are easy to use and that our overall solution drives research productivity. You know, that's the focus, the strategy. So reagents support that rather than become a primary strategy in themselves.
Got it.
We think that driving stickiness and ease of use and people loving to work with our systems, that's what drives the overall business.
Perfect. Okay. And Bill, just on margins, last quarter, you talked about inventory adjustments related to the Luminex acquisition, accounting for about 2% of the margin decline.
Right.
How confident are you in this, this is a one-time in nature and the integration-related headwinds are behind us?
Yeah, look, I'm reasonably confident. We - when you're running a business that has thousands of SKUs, which a reagent business does, there's always the potential for surprises in that area. But last quarter was driven by moving inventory from the seller's system into ours, and therefore, we're applying our inventory rules. So that drove the bulk of that inventory adjustment. There'll be... You know, look, scrap won't be zero, it'll be a small number, but, you know, much, much smaller than the 2% of revenue that we or, you know, $1 million round numbers that we incurred last, last quarter.
Got it. Can you remind us of sort of the gross margin cadence, gross margin cadence you're expecting over the course of this year?
Well, if you look at our quarterly revenue cadence, it tends to be, you know, in the zip code of 45% in the first half and 55% in the second half. And the first quarter tends to be significantly lower, you know, more in the 20% range. So, given that our costs, most of our costs are relatively fixed, that drives fluctuation in the gross margins. So we would expect better absorption and better, therefore, better gross margins beginning in the second quarter and particularly in the fourth quarter, which is usually our biggest quarter. So that the significant drop through of that incremental revenue to gross margin.
But we don't guide to gross margin on a quarterly basis, but, you know, our objective is to get gross margins back to where they have been historically. That's about what we can say.
Okay. Last quarter, you know, the expectation be net income positive for the full year 2024, which assumes a relatively steep ramp after Q1. Can you maybe talk through the expected cadence through the year to get to sort of that net income positive for the full year?
Yeah. With, I guess, a significant portion of that would be in the fourth quarter-
Okay.
Because the fourth quarter is, you know, it's in the zip code. Last year, I guess, it was about 30% of revenue. And the reason is that customers know that when they're buying from a public company, they have greater leverage towards the end of each quarter and in the fourth quarter, and you know, that's just the way customers are. So we'll see most of that, a significant portion of that net income come in the fourth quarter and perhaps the third, but mostly in the fourth quarter.
Okay.
You know, look, we'll do better in the second and third quarter than we did in the first, because our revenue, you know, should be better. But the bulk of that net income will come in the fourth quarter.
Okay. And Wen, but just on the competitive dynamics, you guys have taken a significant amount of shares since you launched, just given the performance and the value proposition of the instrument. Can you maybe talk about what some of the competitors have done in reaction to your success, and how you're kind of dealing with that?
The first is because of our technology, we have really driven the technology, the application toward high-parameter cell analysis. In fact, in that space, we are not really taking market share. We are the market. We created that market. From there, we gradually moved downward to support the conventional, the so-called high-end of the applications, which to us is not really the kind of mid-level type of applications. Seeing the success, and clearly, and, after since we first launched in 2017, by now seven years, right? And they started to move into our directions and started. The whole industry is endorsing the overall the technology Cytek pioneered earlier. I mentioned eventually, all flow cytometry will be full spectral technology based on what Cytek has pioneered.
This is a large market size, right? We talk about more than 50,000 instruments already in the field, and looking at Cytek overall deployment, 2,000, there's still a very small fraction of that. That just means the market is large enough to accommodate a few more players, and we feel it's healthy and some other players coming in is going to continue. It's a strong endorsement of Cytek technology. In fact, it will make customers easier to come to Cytek when they actually make a decision to buy. This is evidenced by the overall growth Cytek has enjoyed since Q4. We know actually the flow cytometry cell analysis by itself actually was a down market last year.
Also, Q1, recently we saw a report from ALDA, which is a industry organization formed by many of our peers. Based on that report, the overall cell analysis market was a down market in Q1, and also the whole year last year. But Cytek is actually growing. So this just means, in fact, when other competitive players coming into Cytek's direction, it's a strong endorsement of what we are doing, and we feel very confident. And, with those endorsement, we can continue to grow and continue to gain more and more market share in the mid to entry level. The high-end level market is a Cytek market. We continue to keep our leadership position. We continue to invest to make sure we stay being a leader.
Got it. You've mentioned in the past that Cytek is seeing some early success in converting existing Guava customers, the Northern Lights platform. How has this dynamic trended recently?
Overall, we do see, and now, when we go to the conventional Guava customers, we do offer them both solutions. And we have Guava, we have Northern Lights. Earlier, when we first acquired the business, initially, our decision was to discontinue Guava, but just because Guava has got some unique features, the Guava customer loved to see, and a reason why we slowed down, we decided to keep the Guava technology for a while. And in the meantime, today, when we go to those conventional customers, we offer both solutions. Some continue to select Guava, some actually moved toward our Northern Lights system.
But in order for Northern Lights to capture the complete customer base of Guava, some things, certain features need to be included on the Northern Lights, which is something we are doing and we are working on. It will take some while for that to complete.
... Got it. And with the Luminex acquisition, you, it came with a pretty significant commercial team, along with it. How has that integration gone, and have you seen leverage from those, from that commercial team start to kind of resonate in the business over the past six months or so?
Yeah, if you look at Luminex, because it was mostly heavily concentrated in Europe, and if you take a look at our market share in Europe, in fact, it was growing quite nicely since last year. That's a reflection of the merge. Clearly, it's making contributions for overall for our business through that sales organizations. And now the integration has already all completed, and I think we are in a kind of a better position today and with regarding to our commercial organizations.
Got it. Bill, just turning to capital deployment. You, you talked about the recently announced share buyback. You've done some acquisitions in the past. How are you thinking kind of broadly about capital allocation, as you kind of move forward? I know a large focus of yours is, is free cash flow, increasing profitability, but just how are you thinking about all the different-
Sure
-balances that you've got there?
You know, M&A opportunities are episodic. You know, we're not gonna stretch to do a deal just because we have the cash available. We're only gonna do deals if we think that they're synergistic, and that they're well-priced, and that we can integrate them well. So, given that we're generating positive cash, and that we think our stock is very attractively valued, the board decided to reinitiate the program. And, so, you know, we'll keep plenty of dry powder for M&A opportunities. But, given that we're generating excess cash flow, we thought that our stock was a compelling opportunity to put some of that to work. So, you know, we'll continue to do share repurchases.
We, you know, as we see the opportunity to do that at good prices. You know, we're fortunate that we have the opportunity to do both M&A and share repurchase from time to time. So, you know, we'll manage it on a case-by-case basis, as we see opportunities and, you know, as we look at where our stock is trading. There's no sort of mechanical formula beyond that. We'll just be opportunistic.
Got it. Just in the minute we have left, what are some of the key takeaways you guys would like to have investors think about as they think about Cytek and do more work on the company?
Okay. Look, I think, you know, we have a technology that is very substantially advantaged over the competitors in a key area of growth for life science tools. Flow cytometry and developing very detailed information at the cellular level is very important for some of the major directions of pharmaceutical and biotech research. So we sit squarely in the middle of that opportunity. Compared to many of our peers, we're highly profitable, we're cash generative, and we're gonna be net income positive. And we think that combination of sitting on top of a great market opportunity and having a platform that generates profits and cash is a unique investment proposition for potential shareholders.
Great! Wenbin, Bill, thank you so much for joining me today. Really appreciate it.
Thank you.