Here we go. Thank you for everyone for joining us. I'm here with Cytek CEO, CFO, so we'll just go right into it here. What is full spectral flow cytometry and who participates in this market? Who are your competitors?
Full Spectrum Profiling technology is pretty much basically a kind of technology where we capture the fluorescence spectrum completely and, instead of as opposed to conventional, which use an optical filter to remove all the side band and capture the intensity of the center wavelength of the fluorescence markers. So that basically with Full Spectrum, it provides us more information and that will enable us to put many fluorescence markers all together, still being able to distinguish the different markers. So that it has been used to enable our technology to support high-dimensional cell analysis. Today, with our technology, we can demonstrate a panel of more than 40 colors, actually 45-50 colors even, and versus conventional technology, which is limited to below 30 biomarkers from a single tube of samples.
Flow Cytometer has been there for many years, more than 40 years, and the players include like BD, Danaher, Thermo Fisher, and many other players. However, what we have done with our full spectral is we have changed the landscape of the flow cytometry applications today, and the whole industry is moving toward the full spectral technology we have pioneered. So this is the kind of situation right now and for the whole market.
Gotcha, and can you talk about your cell sorter? How does that fit with the overall portfolio?
Cell sorter basically is, when you have analyzed the cells, and in many cases, you would like to pick certain cells out for further downstream analysis. This is where the cell sorter comes to play. With Cytek's cell sorter, nice thing about it is our cell sorter and the cell analyzers are fully compatible to each other. That means all the panels used and developed on our cell analyzer can be ported over to our sorter, and they will just function without any problem. Oh, also, the data coming out from our cell analyzer is completely identical to that coming from our cell sorter, which is very different from the conventional sense with other alternative technology. Analyzer and the cell sorter, they are very different.
You talk to customers and, you know, they will actually say, you know, full spectral flow cytometry technology is, you know, significantly better. What, why have competitors not been able to build a better flow cytometer?
I think that goes back to the conventional technology and previously. First is in the conventional sense, and as earlier I mentioned, the conventional technology relies upon optical filters to remove the sideband, capture only the center wavelength. That's one part. So lots of information gets lost on the data side. The second part is, the conventional technology also relies upon photomultiplier tube, PMT. PMT is a kind of vacuum tube-based technology, and they actually no two PMT detectors perform the same and always provide you with a very kind of variability, making it very difficult to build a flow cytometer with the same performance. With our Full Spectrum Profiling technology, we have removed, eliminated the PMT and replaced with APD, which is a kind of technology built upon semiconductor wafer level manufacturing process. That enables all of our detectors perform identically.
So because of this, the flow cytometers built with Cytek technology, they all perform very close to each other and basically enable us to standardize our instrumentations. The data coming from Cytek's flow cytometers, they all perform very close to each other. This is very important for many applications, for example, like clinical labs and diagnostic applications, as well as for clinical trials, where you always these days require the experiment or the trial being done across multiple labs, even multiple countries. But you would like to make sure the data coming out from different labs basically perform the same and give you the same results. Here, this is where what we call harmonization of flow cytometer becomes important.
Cytek technology, due to the, actually the detectors we have been used, we enable all those instruments perform in a way that enable the kind of standardization and harmonization.
Gotcha. So, back to some of the business development activity. You acquired the Luminex business from DiaSorin. What came in that acquisition and how is it complementary to flow? And are you seeing any cross-selling opportunities so far? And what would incentivize some of that cross-selling?
When we acquired Luminex, at that time, we cited three primary reasons. One is for its imaging technology. Second is for its entry-level product, Guava product line that enable us to leveraging its customer base to drive our Northern Lights technology to serve for those customer base. Third is to expand the installed base to help us improve the operation efficiency for instrument maintenance service business. Now a year from—actually more than a year—since then, when we go back to take a look at what we did and imaging, in fact, if some of you may have gone to the CYTO meeting, you can clearly see these days, last two years at CYTO, there are two themes across the two both conferences. There are two things. One is full spectral technology, which we pioneered.
Second part is the imaging flow cytometry. Imaging has become more and more attractive and from application perspective. Now the imaging technology we acquired from Luminex in fact continues to be the best technology out there with regard to resolution. It provides the best data performance. We feel actually since then, and clearly we have seen the technology we have acquired has been very well received by our customer base. Second part is with regard to the entry-level application, as we can see last two years, and we do see our Northern Lights instrumentation starting to become more and more popular. Actually, the growth in our Northern Lights is kind of quite impressive. The last part is with regard to our service operation.
When we acquired Luminex at that time, if you went back to take a look at our report, and at that time, our service operation gross margin was close to zero, right? Today, if you look at our recent earnings report, our service operation gross margin is approaching 60%. Clearly we can see the benefits from that aspect with regard to expanded field installed base to help improve our service operation efficiency. We have achieved all three objectives which we cited when we acquired the Luminex business.
Yeah. Mainly it's a great segue, Will. We'll get you involved here. Can you talk about the margin gross margin profile you have with instruments? Now, generally speaking, people don't think about life science tools. Instrumentation is having good gross margins. So you kind of flipped the script here. So I don't know, maybe if you wanna talk about that.
Sure. Well, we offer best-in-class technology at a competitive price, and we challenge our manufacturing operations folks to continually drive down cost, so a combination of those two things drives the margin. The margin profile this year has improved significantly since Q1. It's gone from 51% in Q1 to 54 or 55% in Q2 to 56% in the most recent quarter, so we've continued to make progress. We did have some one-timers that impacted Q1, but you know, we've continued to make progress in Q2 and Q3, as we grow revenue and we leverage the fixed costs that are in our manufacturing operation, and you know, we'll continue to try to do that going forward.
Gotcha. Now, I guess this could be for either Wenbin or Will. Just in terms of, not you, you do have consumables, but not really, I mean, you do not, not really as big of a focus. And, you know, you talk about your instrument has a lot of compatibility with competitor reagents. So can you talk about that advantage in the marketplace and, you know, combining it with, you know, also a revenue consumable revenue opportunity?
Clearly, on one hand, you can see we now have close to 3,000 instruments in the field. That provides a large potential market for our reagents. That's part of the reason why we have been driving our reagent adoptions, as well as the applications on our instrumentations, to drive the recurring revenue opportunities. But on the other hand, depending on applications, right, if many of the flow cytometry applications are with core labs, with high-end research applications. In that market, the reagent business mostly is more like Amazon type of business. Each order is very small, but there are lots. So that means it's a kind of logistics type of business. And from Cytek perspective, we started with instrumentations. More 70% of our revenue today continues to be instruments. And our infrastructure today is optimized for supporting instrument business.
As we move toward reagents, and it requires us to invest to develop the infrastructure, logistics to support those different type of business, which we have been doing. But it's gonna take some time for us to fulfill. That includes not only the typical physical transaction logistics, also the IT part, ordering system. All of those things require us to improve, to update. One of the key processes we have done is the Cytek Cloud. Cytek Cloud is a system we have developed to support our customers for flow cytometry panel design and data analysis, data optimization. And actually, we have been leveraging that platform. And now what we have implemented is to enable our customers to place reagent orders for reagents after the panels are optimized. In this way, that will enable us to drive the recurring revenue opportunities, reagent sales.
That's one side. Second part is, we understand where it takes time for us to really implement the infrastructure really to be compatible with many of our other partners, reagent partners, out there. So what we have done is we focus on application kits, panels. With those application panels, we actually enable us to support those recurring customer business with those big pharma, biotech, those type of applications. We have made good progress right now. Take a look at the kits we have developed, including our 18-color, 25-color, and 14-color kit. All of those things have been very well received by our customer base. This is an area we will continue to invest and to develop. We hope through those two initiatives, one is on the kits development, other is to continue to improve our logistics and Cytek Cloud to drive the reagent business, recurring opportunities for us.
Gotcha. Can you just maybe talk about the mix you anticipate in the future? I don't know what kind of time frame you'd wanna give with consumable mix. And it does sound like there's some investments that would be made. So, I mean, how are you thinking about the P&L with investments in getting into some of those reagents?
Yeah, yeah. Unlike instrument and reagent, it does, as I said, takes time. But we have already made a good progress so far. Overall, we started from nothing a few years ago to today. Our reagent is about mid-single digit of our overall business. We are continuing to invest, and we hope eventually, overall, the reagent business will be about, we feel, and the recurring for this way. It's not just reagent. Recurring revenue versus our capital expenditure-based business will be like 50/50. Recurring, including also our service business. In fact, our service business, the gross margin, as earlier mentioned, already approaching 60%. Which won't be that much different from reagents. If you take a look at the overall flow cytometry reagent business, the margin, gross margin, is roughly around 60%-70%.
So we are about over there. So we feel eventually we will have a kind of good balance between instrument, reagent, service, recurring basically the gross margin all around the same in the forties and around there.
Gotcha. A recurring theme here has been just capital cycle, equipment cycle. No one seems to be immune from it. Just in terms of a go-forward basis, what are your best guesses as to when this one proves? What metrics do you think, as investors, we should follow? Is it interest rates? Is there any other, you know, biotech IPOs? I mean, how do we think about that?
Yeah. Look, our goal is to deliver consistent earnings growth in the current environment. You know, we're not betting on any improvement. So we wanna deliver solid top-line growth, and better and more rapid EBITDA growth, by leveraging our high margin, high gross margins and keeping operating expense under control. You know, what metrics should investors look for? It's, you know, it's hard to say. We haven't had an event like the pandemic ever before. Many observers say that this is a hangover from the pandemic. So it's a cycle that we haven't seen before. So we're not gonna predict when it turns.
You know, as far as biotech capital raising is concerned, you know, small biotech companies that are dependent on raising equity to spend on our instruments are a very small proportion of our overall customer base. Now, our biopharma customer base is largely huge pharma companies and big biotech companies that have plenty of cash. So, just it's very difficult to point to specific markers. The only thing I can say is that when interest rates went up, in 2022, I believe it was, the market started to come down. So by inference, lower interest rates should be better for us. But it's very difficult to say by how much.
Gotcha. Well, just maybe if you can talk about the customer mix here, 'cause you have shifted a lot more towards biotech. So.
Mm-hmm.
What's kind of driving that shift? And can you talk about some of the global instrument standardization that you've seen, other dynamics?
So yeah, our mix has shifted towards the biopharma sector. But that's been driven by large global pharma and biotech companies adopting our technology across multiple sites. So we've had a number of instances of large multi-unit orders, driven by the fact that our technology is uniquely capable of being standardized. And what I mean by that is that if you run the same experiment on two different machines, you get in different locations you get the same result. So if you're a global pharmaceutical or biotech company, that's very important to you because you don't want one lab in your R&D program producing a different result than another lab just because their instruments are different.
You wanna make sure that you have the standardization of instruments is therefore very valuable to global multi-site pharmaceutical and biotech companies. So that's been a big driver, once again, because our technology, because of how it, you know, what it's based on, is uniquely capable of being standardized. So it's that's a big, big driver for us. And you can see that in our public numbers. Our biopharma we report our biopharma segment versus academic and government. And I, from memory, think we're up 14% in Q3 versus Q2.
Mm-hmm.
You know, up I think about 9% year on year in the biopharma segment. That's evidence of the value of this trend or the strength of the trend and the value of the customer benefit from that.
Gotcha. So what is the overall flow cytometry market growing at, if you had to best guess to that? And basically, what do you think your spread is between that and the between your growth rate and the market growth rate, you know, thinking about how you have, you know, a superior product to pretty much all the options out there?
Director, if you wanna take that.
ALDA, which is an industry association for all the life science companies, actually had a report a week ago showing the cell analysis market during the first three quarters this year. Flow cytometer is part; an instrument is part of the cell analysis space. It shows overall during the first three quarters the market is down by about 3%. But if you look at Cytek during the first three quarters we actually grew by 6%. So looking at that one the spread is about 9%. Similarly last year ALDA had a report showing about negative 7% growth. And while Cytek managed to removing the acquisition-related business organic side was flat. So that's about 7%. So this is roughly the kind of gap or spread you can see.
Cytek continues to manage to outgrow the market, basically.
I mean, the goal for you to be, you know, say five to nine then? Five to seven?
Yeah, using that.
Yeah. We don't, you know, specifically set out guidance based on a. We don't have an explicit assumption about market growth. But, you know, I think we generally feel like we can outperform by multiple percentage points.
Gotcha. You are unique in this industry. I mean, I think you're one of the only companies at this early and kind of the, you know, still in a market growth or still in a growth phase, to be operating margin positive, so can you grow from here? What type of growth rates do you need for margin expansion from here? And how are you thinking about buybacks? 'Cause you do have cash and you are generating cash.
Yeah. We can. We have high gross margins. So, as I mentioned, 56%, and that's been increasing. And so that means that if we control our operating expense, and our operating expense this year has been flat. And you know, it's hard to stay flat on a multi-year basis. But assuming that we can control operating expense to low single-digit growth, you know, we should be able to expand our EBITDA margins even with the growth in the range that we've achieved this year. So you know, we think that that's a particular benefit of our model, of the high gross margins that we enjoy. And then in terms of share buyback, the answer to your question is across a pretty broad range of revenue growth, we can still expand margin.
With respect to share buyback, you know, what we've done this year is basically targeted to spending our excess cash flow on share buyback and keeping our cash balance around the same level. So, you know, that's, it's a way of deploying excess cash when we don't have a particular M&A opportunity. M&A opportunities come along, you know, in, I'd say, an episodic fashion. You can never predict when they're gonna show up. And so in the meantime, we're deploying excess cash to buyback stock.
Gotcha. Wenbin , Will, thank you very much.
Yep. Thanks a lot.
Thank you.
Pleasure.