Hey, everyone. Good morning, and welcome to day three of the Morgan Stanley Healthcare Conference. I'm Tejas Savant. I cover the life sciences here at Morgan Stanley. It's my pleasure to host Cytek today, and speaking on behalf of the company, I have CEO Wenbin Jiang and CFO Bill McCombe. So welcome, guys. Great to have you here. Before we begin, just some important disclosures. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales rep. So with that, Wenbin, maybe to set the stage, can you talk to us about how 2024 has played out so far relative to your expectations at the start of the year, and what are the key accomplishments you'd like to highlight over the last twelve months or so?
I think first is overall the first six months and comparing to the same period last year, we achieved 5% growth, which is within the guideline, actually the forecast we provided to the Cytek community. So of course, we would like to do better, and we hope the next six months is going to have... We can perform better than what we are expecting right now. I think overall, during the last 12 months and especially the second half of last year, actually was doing quite nicely.
Mm-hmm.
And, the whole space, even though overall the macro environment or economy continues to be stretched or challenged, but in that environment, we have outperformed the market. So, overall growth and continued to go above the market growth, that's what we have been seeing right now, and we expect will continue to be that way.
Got it
... over the next 12 months.
Got it. Fair enough. Maybe just starting at the portfolio level, Wenbin, how do you think about the flow cytometry TAM, and within it, the share for full spectrum, high parameter flow today? I think you'd highlighted an $8 billion opportunity a couple of years ago. Has that evolved at all?
I think there are two aspects of the overall market size. One is what flow cytometry technology by itself can do, and which we have cited $8 billion or more. That basically said it's not just to compete against the same the vendors in the same industry that are providing the spectral or as well as other flow cytometry technology, as well as actually other technology perform the same functions or providing the same information on the cells.
Mm-hmm.
If we just look at the flow cytometer by itself, which overall the total revenue going together, we would believe it is about $4 billion-$5 billion today.
Mm-hmm.
Yeah. That's basically that means there's another $3 billion potentially can be captured by flow cytometry.
Mm-hmm
... technology.
Got it. Fair enough, and as you think about steady state growth in the market, how much faster is the growth for the four to five laser high parameter category that you guys operate in?
Actually, if you take a look at the whole flow cytometry space, about 50% of the applications are in the research market, RUO, which actually primarily is based on the four to five laser systems.
Mm-hmm. Got it. And of those, you know, I think in the past you've talked about about 50,000 units out there. Help us think through how much of the demand that you see in any given year is driven by the replacement cycle versus, you know, new customers buying instruments for the first time.
In this space, the overall market growth on average is about 8%, 7% or 8% range.
Mm-hmm, mm-hmm.
But last couple of years is a difficult market, and in fact, overall market was down.
Mm-hmm.
Long term, we continue to believe it's going to come back, maintain this type of trajectory. We think the replacement market in that space, overall. In the last couple of years, frankly speaking, we feel due to the challenge with regard to the capital expenditure, in fact, people have been trying to extend the usage life of the tools as long as they can.
Mm-hmm.
So in that case, that clearly is far less than it used to be. And so, in terms of the actual percentage, is very, very difficult to say, because that's reflected by the overall economy, right?
Mm-hmm.
We feel, and in fact, there are probably more within the growth, probably will be more from the new applications.
Got it. So, you know, your current portfolio, you have Aurora, the Cell Sorter, and then you also have the Northern Lights and the Amnis. Can you talk about how your offering is differentiated relative to competition in the space? You know, the high end, you know, for the Aurora and Cell Sorter, and then, on the more, the lower end, the Northern Lights and the FCI instruments as well. And more importantly, do you ever run into, you know, the sequencing-based single cell, you know, players or some of the spatial biology players? In a sense, it's a different user base-
Mm-hmm
... but, has that sort of overlap come up in the funnel at all?
First is, and when we go to customers, and when customer makes a buying decision, it's always based on performance and ease of use... and whether that address their needs. In that scenarios, and this is where Cytek has been for, outperform, and comparing to other vendors' instrument. With regarding to spatial, or as a similar type of other tools, we feel it's-- they're complementary.
Mm-hmm.
We never seen a case when customer decide to buy Cytek and compare Cytek to a spatial device.
Mm-hmm, mm-hmm.
or to a sequencer.
Mm-hmm, mm-hmm.
It's just something we feel this is just provide additional information. And also, flow cytometry is a basic life science tool. Today, you can find it in almost every biological lab, and so it provides different insight.
Mm-hmm.
Also, very easy to use and very quickly can get to the results, so that compared to other technology. So it's, it's just different, give you a quick way of have the first sight of understanding.
Got it. You know, your installed base, it's around 2,600 units or so, about 300 of those being, you know, Amnis and Guava now. I guess, you know, you started including Amnis and Guava-
Mm-hmm
in that, in that base now. Just excluding the Amnis and Guava platforms, what do you think Cytek's market share is within that flow cytometry installed base today?
Total overall, we believe there's about, as earlier mentioned, like 50,000 instrument.
Mm-hmm.
Now within that 50,000 instrument, we have between 2,000 - 2,500. So that's roughly about 5%.
Got it, 5% or so. Fair enough. You know, you acquired FCI from Luminex in early 2023 to expand the offering. That brought in Amnis and Guava. How has that acquisition played out so far, relative to your expectations? And has it, has the deal sort of lived up to the strategic rationale that you laid out, when you, when you bought those assets?
First, it'll come back to the original rationale. We mentioned the three reasons for the acquisition. One is the imaging technology with ImageStream. Second part is the Guava installed base that provides an entry point to drive our Northern Lights cells. The third reason was to have an expanded pool of instrument for service that will help improve the operation efficiency of our service business. Coming back now, going, let's look at those three areas and where we have made progress, and first is, in fact, imaging cytometry, as we all know, has been very, very well appreciated by the community. These days, everybody is talking about imaging-
Mm-hmm.
And, clearly, Cytek is a leader right now, due to the acquisition of this technology. Our ImageStream continues to provide the best resolution, and for this type of application, it's claimed of being recognized as basically the high-speed single cell microscope, that kind of resolution, and no other technology has been able to achieve. So we feel very good about what we have got. The second part is, with regard to the entry and to drive our Northern Lights business. Actually, Q2, even though our instrument revenue, admittedly, was down, in fact, our Northern Lights sales has grown, and that just shows the potential of that part of the business. Actually, clearly, the Guava acquisition has been helping.
Second part, third part was regarding to the operation efficiency of our service business, and in fact, comparing to a year ago, today, our operation growth margin has achieved a 55%. Actually, that was the number in Q2.
Mm-hmm.
And that's a great achievement. Comparing to a year ago was all kind of zero, right? And so that shows... And all of those have played out very well and meet our expectations.
Got it. On enhanced small particle detection, that's something you just launched recently on the Aurora and Northern Lights. How does this feature enhance the value proposition for those two platforms, and what's the early customer feedback been like?
You know, there's a lot of interest in the space, in the community with regard to studying the microparticle, nanoparticle type of applications, especially for the virus-
Mm-hmm
... cell -to- cell interactions. This is where our tool is designed for, and that really provides additional information or capability. There are two part. One is to enable existing Cytek customer to upgrade, if that's what they are looking for. Second part is to, if they want to just outright to acquire an instrument with the capability we can provide.
Got it. Switching to reagents, I mean, it's small for you today.
Mm-hmm.
I think it's about 5%-ish of sales, but over time, I think you've talked about that number, you know, getting a lot higher. So walk us through what does the penetration rate look like in terms of your user base? How many of them are using your reagents versus third-party reagents? What does the reorder rate look like? And where does that, you know, number in terms of percentage contribution to revenue go over the next, let's say, three years?
...first year, you know, unlike many other flow cytometry reagent providers, we are not a catalog company. That's not what we are driving to. So that's why our focus on the reagent has been what we called for full spectrum enhanced reagents. That means those reagents that really can help expand the application capability of our technology.
Mm-hmm.
That's the first part. Second part is we focus on panels, because once get to a high dimensional applications, which are enabled by our technology. In fact, panel construction can be challenging for many users. This is where we have been focusing on to provide the ease of use for customers to start with a panel already optimized. That means the focus is not really to drive immediate rapid growth of revenue, but meaningful revenue, which is part of our overall solution for our customers. With that regard, we have been very successful, and actually, the reagent we have provided called cFluor, which has been growing quite nicely.
Mm-hmm.
Overall, reagent today, I think since we don't split reagent with the instrument, but overall together, right now, 25% of our business, services and product is about 75%. But put another way, in fact, overall, our recurring revenue is about 30%, so the reagent is about single digit. But that tracks our overall growth, but as you know, our instrument growth is much lower-
Mm-hmm
... and reagent growth is higher than our instrument.
Mm-hmm. Got it. Fair enough. I wanna switch to clinical, Wenbin. Again, it's an interesting opportunity over the medium term for you. You made good progress in China there. I think you, you've talked about, you know, this, that, that, ten laser, six, or rather the 1- laser, 6-color capability translating into a competitive advantage. Walk us through that situation, and then I think you also have a Northern Lights 510(k) submission in the works. So, just any update on that?
No, overall, and we feel one of the benefits advantage of full spectral technology is to enable higher dimensional with less number of lasers. As you know, the conventional technology has always been if you want to expand the number of parameter, you add another laser. Looking at the whole structure of the flow cytometry, which one fail the most? Actually, the laser. Second part, which one is the most expensive component among flow cytometry? That's the laser, right? The reason why, you know, with our technology, with less number of laser, that can provide a more functionalities, higher dimensional, higher parameters. That's where the nature and benefits of a full spectral technology we have provided.
So, with that regard, we have been very successful so far, and we continue to drive the adoption and application based on our technology. And on the clinical side, we continue to make progress, and, as you know, earlier this year, we mentioned about our successful Class III registration.
Mm-hmm
... and for our TBNK, which include a single laser, 6- color, as well as the conventional 2- laser, 6-color panels. We are driving that application. In fact, single laser, 6-color TBNK is also cleared in Europe for the clinical application there. We are making great progress right now for the clinical adoption for our technology. U.S. and the clearance of U.S. is different from China and-
Mm-hmm
... Europe. It's a solution clearance, but our focus right now has actually always been on the LDT. Of course, there are lots of complication with regarding to how FDA will regulate the LDT, and we are working through those kind of subjects right now.
A couple of years ago, Wenbin, you sort of teased about a next-gen clinical flow cytometer being in development. Just any updates on that sort of process and where things stand?
No, we are continuing to work on this. Of course, when you talk about the new innovative technologies, it's not just one day you can get this done, right? And there are many subjects and many regulatory hurdles.
Mm-hmm
... we have to overcome. This, we are making progress on that aspect.
Got it. Cytek Cloud, you've been highlighting it more and more off late. I think you talked about, you know, about 11,000 users. What percentage of the customer base is on the cloud at the moment? And what sort of helps. I guess, what features of the cloud drive that stickiness in your user community and, I guess, workflow advantages if they're working on the cloud?
Right. On Cytek Cloud, there are two aspects. One is the general usage applications, and today we have basically on average five users per instrument with regarding to the user sign up on our Cytek Cloud. That's a great achievement, and very rapid achievement, frankly speaking, and that was launched November of 2022.
Mm-hmm.
By now, five users per instrument, more than that. So that's one aspect that provide the user an opportunity to basically analyze the data, store the data, and exchange information, all those aspects. Recently, we launched what we called Spectral Panel, which is actually one level beyond that actually enable user to design panel automatically. What happens is, one, earlier I mentioned, get to the high dimensional, many users actually find it challenging to really optimize those big panel.
And, so in that regard, our system and all the user need to do is to input the biomarkers they would like to study, then the system will automatically match the relevant dyes and a combination of dyes, then provide them a virtual optimized panel for them to work on. Then afterwards, they can in fact get a quotation from our system automatically and place order if they have to pull out their own credit cards, or they can go through the PO process to buy the reagents from our system. And then they can write to move over to the instrument they have. Now, that feature today is only enabled for those users who have Cytek instrument. It's not for other players. Yeah.
Got it. Switching to, you know, more recent trends, you've seen your share of the weakness, but it's been quite distinct from what most other sort of players are seeing in terms of just where you're seeing it, right? So you actually called out, I think, it was strong double-digit growth in both EMEA and APAC. And the U.S. was where the weakness was sort of concentrated for you. What was that driven by? Is there a difference in product or end market mix across those geographies for you?
You know, the nice thing being a global company and having products into more than seventy countries is, you know, when some territories become weak, other territory can be strong. And so that's exactly what has happened right now in Europe and APAC. In fact, a year ago, Europe, due to the war in Ukraine, was kind of slow. Europe. U.S. did very well, actually. APAC, just coming out of the pandemic, relatively speaking, was weak. Of course, APAC, we combine the China and the rest of Asia. So it's overall, right. And then, of course, coming into this year and we see the opposite, and the U.S. relatively weak, and then, Europe, APAC are strong.
Mm-hmm.
This kind of global presence really has provided us a kind of buffer, right, cushioning out any turn up and down turmoil, and that's great for us. So,
Got it. I think you also spoke about, you know, the order slowdown driven by elongated sales cycles, you know, as it relates to, you know, I think you called out sales team turnover, funding pressures, and some excess capacity in the U.S. market. Were they all sort of equally responsible for the shortfall that you saw this year?
Maybe. Sorry, you can answer with regard to the U.S. weakness.
Just the sales team, the excess capacity dynamic, and then, of course, the funding pressures, which, you know, everybody else is seeing as well.
For the U.S.
Yeah, we saw the academic and government market in the U.S. be the weakest of-
Mm-hmm
... of the two major sectors. You know, I think all of those pressures impacted that market. You know, we just-- what we experienced was that, the decision-making process just took a little longer than we expected. As Wenbin said, we grew strong double digits in instruments in Asia-Pac and Europe.
Mm-hmm.
Similar customer mix, maybe even, you know, somewhat unexpectedly or paradoxically, that the government and academic sector is stronger out, is a bigger percentage of the total revenue mix outside the U.S.
Mm-hmm.
But government and academic in Asia-Pac and Europe was much stronger than in the U.S. So you know, it's a quarter-to-quarter variation that you know we see. And you know, we expect that long-term secular growth trends over a multi-year time horizon are not you know not any different.
Got it. And Bill, are the sales turnover issues now sort of behind you in terms of?
Yeah, we-
You know, backfilling those roles?
... you know, we had a salesperson who retired that was covering a key sector. We brought in a new person, you know, who didn't get the same traction. We actually have that retired person come back now.
Got it.
And she's doing great. So it was a, you know, relatively isolated issue.
Mm-hmm
... and it was one of the factors that drove the somewhat slower performance in Q2. It was, you know, there were other issues as well.
Got it. And how long do you expect the excess capacity sort of headwind to impact the top line?
Yeah, look, what we were referring to there was that, it seemed that spending growth, you know, was very rapid during the COVID era on both the academic side and on the biopharma side. And, you know, we were hypothesizing that that rapid spend in, you know, 2021, 2022 and parts of 2023 had caused, you know, a bit of an overhang that we were seeing this year. It's, you know, difficult to prognosticate about that. You know, we, as I said, we did see market softness in the U.S. We hypothesized that that might be one of the factors.
Mm-hmm.
And 'cause, you know, we'd heard about it from lots of people. But there's really no, you know, there's no precedent for the pandemic, obviously, and there's no cyclical precedent that one can look at, so hard to say, you know?
Got it. Wenbin, back to you on the pricing environment in flow cytometry. This is a question that keeps coming up. You know, you're dealing with some larger peers here, you know, BD, Bio-Rad, Sony, et cetera. Are you seeing sort of elevated pricing pressures at the moment? You know, several companies in the life sciences have reported using, you know, reagent rental, leasing programs, just anything that they can do to help reduce that upfront capital requirement for instrument purchases.
Yeah, actually, like many other medical device applications, reagent rental has been very popular in that space. That's primarily in the clinical space. For research application, that doesn't happen very often.
Mm-hmm.
So, that's why it's not a primary part of our business right now, since a majority of our sales are still for RUO.
Mm-hmm.
Now, with regard to price pressure, in fact, we probably have the lowest cost structure on our operation right now and enjoy, as you can see, the clear great gross margin and for our capital expenditure type of business. We feel we will be very, very strong.
Mm-hmm
... and we can face any challenges in our space if actually it happens. We haven't really seen much yet, but we are prepared if it happens.
Got it.
Yeah. Yeah, the reagent rental. Number one, we don't do much of it, but we would. From the market research we've done and discussions, we would not expect that to be any lower margin than our core business. That's just a different way of paying for the instrument that customers in the clinical space use.
Mm-hmm.
But, you know, in terms of overall gross margins, we wouldn't expect it to have any negative impact. And as Wenbin said, we've not been seeing, you know, significant across-the-board price pressure. There have been a few more requests for financing.
Mm-hmm
... than we've seen in the past, which we, you know, we put down to cash flow pressure, but nothing significant on the pricing front.
Got it. Just switching to the end markets, I think biopharma is about 60% of your, you know, total revenue. Clearly, the end market has been pressured this year, but maybe to just set the stage a little bit, what's your split between, you know, pharma versus biotech versus CRO, you know, customers? And what is... Has there been any difference in headwinds across those three customer constituencies?
Between biotech, pharma, and CRO?
Yeah.
Yeah, we don't, we don't split that out. So I, you know, I don't have that information ready to hand. Not really seeing any... You know, anecdotally, I've not seen any significant changes there between-
Mm-hmm
… those three.
Okay.
As we talked about before, we've seen different growth patterns between the collective, pharma, biotech, and CRO-
Sure
... versus academia and government.
Fair enough, and on that note, Bill, I mean, as you think about, you know, the sequential trends in that end market, I think you actually saw biopharma revenue improve a little bit sequentially in the second quarter versus the first?
Yeah. What we said is that we saw some improvement in, firstly, our service business across the board grew very strongly-
Mm-hmm
... 30%.
Mm-hmm. Mm-hmm.
And then, our products business in Asia-Pac and EMEA grew very strongly, you know, as a combined, on a combined basis, about 30%. Within the U.S., we saw academia and government down, but we saw biopharma up sequentially from Q1 to Q2.
To Q2, right.
So that was encouraging.
Got it.
We-
Do you see that sort of sustaining here? I mean, more recently, there's been some chatter, you know, from the preclinical CROs, especially around renewed, you know, pharma reprioritizations and budget cuts, particularly on the discovery side, you know, largely driven by IRA and patent cliffs and so on.
Yeah, I mean, we haven't. Obviously, we're not gonna talk about. We don't have the numbers for the third quarter yet, and we wouldn't talk about them even if we did. But you know, I'm not updating our commentary here, but we haven't seen any changes in trends.
Mm-hmm.
You know, our business tends to be. We see more revenue from the larger pharma companies-
Mm-hmm
... the larger CROs. You know, they're interested in the quality of our technology, and we're established with them as the premier technology. You know, they're interested in harmonization, which is something that we can provide, which is particularly useful to them, so we think that the spending plans and spending trends of those larger companies tend to be stable over a multi-year period, and less, you know, up and down, based on what happened in, you know, the last quarter or in the financing markets. You know, most of our business are bigger companies with more stable budgets, stable funding, and, you know, longer term plans.
Got it.
Yeah, there's a buying decision. Actually, the behavior is different between academic and pharma. For the academic industry, normally, they always go to the best latest, right? And but pharma actually, they always they start with assessing your technology, then gradually, slowly, they are kind of conservative. Once they have identified a technology, it may not necessarily be the today's technology, it may be yesterday's. But however, they spend so much time to assess, and once decision is made, they want to move the technology across all of their institutions. As you know, all those big pharmas are global, right? They have labs across the world. And this a reason why it's important for them to harmonize the tools, the technology, across all of their labs. And Cytek tool fits right there.
In fact, the first or maybe the only instrument in that today on the flow cytometry space, that will enable them to harmonize across different institutions. That's the kind of general trend we are seeing.
Mm-hmm
... with those customers.
Yeah, we see repeat orders from big pharma companies, you know, maybe not every quarter, but every second quarter at least, as they populate those, you know, those global labs with the technology they want.
Got it. Switching to China, Wenbin, that's been, you know, a nice growth driver for you this year. A lot of other life science companies have faced challenges in the region. What's letting you sort of buck the broader trend? And then, of course, the obligatory question on the stimulus, and what are you hearing on the ground in terms of disbursement of the funds to the province level? And are you starting to see that show up in your funnel activity?
I don't think Cytek is very much different from many other companies, talking about the challenges, in China. Frankly speaking, we face the same challenge. One of the difference between Cytek technology and many quite others, probably due to the advanced nature, of our tools and which I don't really see much local competitions.
Mm-hmm.
So that means, when they do decide to buy, and we truly outperform. And some others, they may see some local competition. Indeed, actually, in the entry level, we do see lots of local competitions.
Mm-hmm
... And faced by many of our peers, because those are the areas of focus for their technology, their tools. We have been focusing on high end of the research applications in China. And I think on the stimulation subject, I think there have been lots of discussions, and it, it's all there. But typically, this is a kind of a very slow process, and normally it takes quite a long time, six months, or may sometime even longer, to figure out the requirement-
Mm-hmm
... then start to work on tender.
Mm.
Even after you have won the tender, it may still take quite a long time, three months or even more, to have-
Mm
... the money funded. That's the time they will place order, and then you will see the benefits. That's why we don't see the stimulus package to impact our business this year.
Got it. But would the back half of 2025 be fair, or do you think it actually would be late 2025, just given the timelines you laid out?
More like a mid to later part of 2025.
Okay. Just a couple of quick ones on the financials and the guide, guys, before we let you go. How are you thinking about the phasing of revenue between 3Q and 4Q this year, Bill? And then, importantly for next year, right, what are some of the puts and takes to keep in mind that could drive growth, you know, either above or below that, you know, 20% range? Let's say, you know, you have an easy comp, but-
Sure
... clearly the end markets aren't going to step function, get better on January first.
Yeah, on the first question, you know, we don't guide to the quarter specifically, but what I would do is point you to the pattern of the last couple of years, where we have about 25%-ish of our revenue in Q3 and 30% in Q4.
Mm-hmm.
I don't have a reason to expect that our customer... And that's driven entirely by customer behavior. They just have a preference to get more active in as it gets to the end of the year. And I don't have a reason to expect that that would be any different. But, you know, it's customer dependent. And as it relates to next year, puts and takes, you know, we're seeing, you know, nice strong overall growth in services and in Asia, EMEA and Asia-Pac.
Mm-hmm.
You know, we would expect that the U.S. would return to growth because the secular drivers are there. You know, we're working on new products, as we've talked about. So I think, you know, it's those would be the puts, if you will. The takes, nothing really comes to mind in that area. So, you know, we'll have some new products. We'll have continued market growth in Europe and Asia-Pac, and, you know, we would hope that the U.S. stabilizes back to a more... Or that, particularly the U.S. academic-
Mm-hmm
... market stabilizes, and we think that, for the reasons we've talked about, that U.S. biotech pharma should, you know, continue to grow, and look, that we're not taking into account any exogenous events, you know, wars, recessions, and so on and so forth. The one macro factor that could help us is, you know, we're all expecting interest rate cuts this month...
Mm-hmm
... and hopefully, at the end of the year as well. When interest rates went up, we saw that have a negative effect on the business, so by implication, that may provide a tailwind. You know, that's about as much as I can say.
Got it. Fair enough. Thanks so much for spending the time with me this morning, guys. We appreciate it.
Yeah.
Thank you. It's great to be here.