Leukemia, MRD. In fact, we have been working with many of our partners to drive toward that type of application, especially in APEC and Europe where we have our instrument cleared for the clinical applications.
Thank you. Super helpful overview. Bill, I want to go back to you for a second, just more almost philosophical when it comes to guidance. This is such an uncertain time and it's really hard to figure out, particularly academic and government, you know, sort of what the year might portend. As you think about your guide and what you did in Q1, what are the guardrails around upside, downside? You kind of talked about, you know, half the business actually doing very well, the other half is dragging that down.
As you think about sort of the conservatism you've baked into the rest of the year, what are sort of the upside and downside cases in your mind, whether it's an end market, whether it's a particular instrument or something like that, that kind of help us kind of put into context the guide.
Half the business is service and the Asia Pacific and rest of world portion of the instrument business. With the service business, we've seen a relatively predictable relationship between the growth in the installed base and the growth of service revenues. The reason for that is that our service contracts, as our instruments get high utilization. It's important to the core labs that the instrument be up and running because, you know, they operate as a business themselves. You know, when we look at that, we have reasonable confidence of continued growth in that portion of the business at a rate consistent with the growth in the installed base. The reagent business has been pretty steady and actually we had improved growth in the first quarter.
We feel relatively we've been making changes there that show that have been improving our execution and our delivery times. We're pretty confident about that. You come to the instrument business and as I talked about, the Asia Pacific and rest of the world are markets where there's good funding and where we've been seeing good growth. Really the variability comes with when we gave the guidance that was in early May, you know, there was a lot of uncertainty about academic funding in the U.S. Pressure on government budgets, which are the primary providers of funding to the universities in Europe. We've seen pressure there and really that portion of the business constitutes the most of the range of outcomes. It's a function of, you know, how much does the uncertainty delay purchasing decisions.
You know, we looked at a range of scenarios there and bracketed our guidance at the minus 2% to plus 5%. You know, the midpoint is still for growth and you know, we think that whatever the pressures on US academic funding, you know, they're cyclical in nature, that you know, over time we expect that market to right itself. You know, for this year you have to be a little cautious. That represents the outcome, represents the range. As I said in my answer to the first question, we think that the down cycle in US and EMEA, that the percentage declines relative to the prior quarter will start to get smaller because you know, we're coming up against easier comps, number one.
You know, as we get further into the year the universities will just be better at figuring out what the situation is and what they can spend. Look, we've, you know, all the while we're continuing to sell instruments to universities in the U.S. Last comment I'll make is that university funding is quite situational. There are some universities where they're under more pressure than others and, you know, some of those other universities are in pretty good shape, others are more difficult situations.
Got it. You've historically outgrown the flow cytometry market and it's obviously a core part of sort of your long term growth assumptions. Maybe just kind of give us a mark to market on where you think the flow cytometry market growth is today and your expectation for the future to the extent you have one.
I think the last number we saw for the first quarter was it was down 2% if I'm not mistaken.
Actually, Aldo has a report, Q1 overload in the cell analysis space. The overall growth was negative, I think 2% or 3%. The indication says this negative growth is mostly due to the downturn of the flow cytometry in that space. That just means flow cytometry could be even worse than that total in Q1.
Look, we're growing faster than that because our install base is growing at around 20%. Right? So that has driven growth at around that level in our service business. Then our Asia Pacific and rest of world business is growing much faster than the U.S. and EMEA. That is why we're able to outperform. The other point in that regard is that we're in the full spectrum process profiling portion of the overall flow cytometry market and that segment is expanding, so it's growing faster than the overall market. For all those reasons, and I think also because of our product innovation, the new EVO being a great example, that's another reason that we would expect to continue to outgrow the market. You know, there are solid factors behind our continued outperformance.
Understood.
In the first quarter you noticed some weakness across the pharma CRO cohort. You actually had a decent Q4 out of that same cohort. Maybe just talk a little bit about what changed in the quarter. Are you expecting weakness from that cohort to linger across 2025?
You know, that cohort segment is sort of lumpy in its purchasing behavior. The industry has been under some pressure from, you know, some of the drug pricing initiatives in the U.S. that have been talked about by the government, you know, approaching patent cliffs. That pressure on funding in the industry isn't very different than, you know, where it was in Q4 of last year. I think that's just an episodic thing. Our technology continues to enjoy an advantage with pharma customers in that it's uniquely capable of being harmonized across different sites. You know, we don't think that there's a different directional trend beginning in pharma. We see it more as a blip than anything else.
Yeah. Due to the quarter-to-quarter variation, the best indication probably is the trailing 12 months comparison versus just looking at a particular quarter.
Yeah. I mean you're not alone in lumpiness from that segment. They've had their own challenges.
Right. They have plenty of money, plenty of funding. The portion of our business that comes from the small biotech companies that are reliant on external funding is very small. It's in the low single digits. Most of our pharma and CRO business comes from the large pharma companies and large CRO companies.
Got it. You've already highlighted how services was a really bright spot in Q1 and you've done a phenomenal job growing that business. You've mentioned as I think many of us know that it's attached to the installed base growth as well. At some point there's also going to be some level of replacement or maybe even extension of some of the service contracts as people might not have the funding. In terms of like your long term aspirations for services, either as a percentage of the business or sort of a long term growth algorithm, how should investors think about that business? Because it's coming up now on radar screen. It's becoming a material part of your growth in your business. Maybe helping us frame what that opportunity set is would be helpful.
That will be, you know, just the fact that it's that the installed base is growing at a faster percentage rate than the instrument sales business will cause the service business. That faster growth will mean it will become an increasingly bigger proportion of the overall portfolio. You could see, you know, that business becoming into the, I think we said in the first quarter that our recurring revenue, which includes the reagent business, and reagents about 5% or 6%, was 31% on a trailing 12 basis. You know, over time you can see that get into the 40s, I would say.
Okay.
Just because high utilization continues to be a feature of our installed base, you know, our instruments get used 24/7 in the labs or we hear that a lot. It means it's important for those labs to have service contracts because a core lab operates as a business, it charges out its services to other parts of the university. Uptime and high utilization is important. That's why we're, you know, we're optimistic about continued future growth. Now, as the deliveries in each year, as the installed base gets larger, the percentage that the deliveries in each year represent of the total installed base will get smaller. That 20% over the next few years is going to come down into teens, but it'll still be very healthy growth.
Yeah, I think from modeling perspective this is what we see. Eventually the total installed base is going to grow based on the organic market growth. Eventually when stabilizes this business. There are two parts of the growth. One is organic installed base growth based on market growth eventually. The second part is basically to track the inflation. Because service, you service your own instrument, you don't really have a competition from that perspective. That becomes your own guaranteed business. It is going to track the inflation plus the organic growth.
Yeah. Look, the instruments need service every once in a while, years the lasers need replacement. If you've got a service contract, you know, you get the laser replaced for free. It continues to be a good incentive for the customer to have a service contract.
If I look at your combining your reagents and services, let's call it your recurring revenue. Yep, I believe it was about 31% of total revenue on a trailing 12 month basis. I mean that's an attractive part of the tools business model, right? Is having this recurring revenue ideally. What is your sort of mix that you would like to see? Because your instruments, unlike some of your peers, your instruments are actually accretive to margins too. There are really good margins on the instruments as well, but it's more transactional in nature. It's a little bit lumpier. As you think about how to properly have that balance between recurring and non-recurring, how do you think about that?
Sure. Look, we would like to have recurring revenue be as high as possible and we continue to invest in growing the service business but it grows with the installed base and then the reagent business is small, it's 5% or 6% of revenue but we're growing it in the big markets at close to double-digit rates. So we'll grow those two parts of the portfolio as much as we can. As I mentioned before, I think realistically getting them into the 40% range five years from now is doable.
Yeah. Another part is if you really want to do the long term modeling and when stabilizes a reasonable ratio between instrument, reagent, and consumable altogether, more like a 45-55 range. 45% instrument, 55% recurring, which include the service and reagents.
Okay, yeah, got it. China has been a pretty, you know, good source of consistency and growth for you guys. Unlike some of your peers that have called out some weakness in the region. Maybe walk through what you're seeing here in China and any color on how Cytek is benefiting from China equipment renewal stimulus packages.
You know we haven't, we started with China later than the US and European market. In the early days, pretty much we were trying to establish ourselves with the name recognition, and because that market previously was dominated by a few players like BD, Beckman, and superficial, those kind of companies. Over the time, and clearly Cytek technology is becoming a well known name in China, especially as the full spectrum technology become established in this industry. Cytek now is regarded as a premium company, so that we benefited from that. The next is due to the stimulus program and encourage many of the customers, users, over to buy new instruments, and so coupling both. We actually, that's a reason for Cytek's rapid growth right now in that market from a very small portion to today.
In fact we are now the number three in China and based on 2024 tender won by all the potential suppliers over there and the top two, of course we know who they are, and we are number three overall. On the other hand, China is large and territory dependent. In fact, in some important territory like Shanghai, Cytek is number two now. We are doing very well.
Got it. Maybe talk a little bit about tariffs. I mean, talk about a moving target. There's some news last night or today as well. However, maybe just refresh for investors. Sort of what your tariff exposure is, what is sort of your manufacturing footprint in China in terms of both instruments and reagents. How should we think about mitigation?
Sure. We have established three major manufacturing facilities. Let me talk about instruments first and reagents. Wuxi, China, Fremont, California, and Singapore. We are able to manufacture product for the Asian and European markets in either Singapore or Wuxi. There is no tariff issue there. The vast majority of the components for our systems are sourced in Asia somewhere. For the US product, you know, we are either manufacturing in Fremont or trying as much as possible to bring it in from Singapore. It is a region for region manufacturing strategy. Obviously there are some components for US product that have to come in from Singapore or other places. There is some tariff impact. We are adding tariff surcharges to our invoices to recapture that.
Net net, you know, we've talked, we've just talked about an impact of 1%-3% to gross margin, but I expect it to be very much towards the lower end of that range. It's not, it's not a huge deal for us.
Okay. Bill, just how should we be thinking about sort of your fixed versus variable cost base? Particularly what level of sustained revenue do you need in order to generate a consistent positive adjusted EBITDA going forward? You have it now, but just kind of think about, give people some context around sort of the fixed versus variable and what sort of maybe a potential EBITDA margin expansion could look like.
Yeah, so the short answer to that is that we, about 75-80% of 80 cents on every incremental dollar revenue drops through to the EBITDA line. So our gross margins, you know, roundabout 50 on last year I think were 50, 50, 55%, you know, heading towards 60. And so of that cost of goods, it's about 40%. About half of that is fixed and half of it's variable. So, you know, you should get a drop through of about, you know, about 20, 20% of that or 80. At the operating expense line, you know, we expect fairly limited growth. You know, it's sort of around inflation levels because we have the infrastructure in place already to support substantially higher. We did have, we had positive EBITDA last year with $200 million of revenue.
We had, so $22 million including investment income and $14 million excluding investment income. We are predicting revenue in a similar range this year. I do not think our cost structure is going to change too much. As we grow revenue, you know, we should be able to drop through, you know, at least 70% of that, you know, 75-80% from the cost of goods at the gross margin line and then, you know, 1, 2 or 3% total growth in operating expenses. Okay. You can see, you know, $10 million of incremental revenue. You know, we could easily see $7 million of incremental EBITDA from that.
Got it.
Maybe $7 million to $8 million, I would say.
Okay. It's pretty healthy.
Yeah, yeah. I think you make a good point, Matt, is that we're really at an entire inflection point where our EBITDA margin ex investment income was about 7% last year. That could easily double or triple in next few years.
Yep. Wenbin, I want to talk a little bit about the Cytek Cloud, which has been interesting. You've got, I think you reported in Q1, 18,000 users. Maybe just kind of give us a little brief overview of the platform. But also I think importantly how this provides sort of a stickiness with your customer base and how do you offset the advantage of the stickiness with maybe some absorption of cost that you're doing. There's a lot of data they're producing. It can kind of get out of control at a certain point. How do you kind of strike that balance?
Yeah, no, absolutely. You know, before Cytek Cloud, when customers used Cytek instrument to design, develop panel, they have to on trial basis in the lab and putting those reagents onto the instrument and if not doing well and they change typically takes three to six months to optimize a panel. Now what Cytek Cloud has done is it enabled users to design and optimize panel virtually on Cytek system, actually the cloud. Afterwards, the system will allow users to purchase reagents through Cytek Cloud because it's linked to our reagent purchase platform or they can of course buy elsewhere and then they can just take that panel and to the lab and do the experiment. That clearly expedited their development of panel very quickly, a week or so when everything is done. That makes it very, very efficient. Many users like this platform.
A reason why when we launched two years ago immediately received all the attention of our user base by now 18,000 and clearly more than 18,000 by now. Because we have grown so fast, that also has reflected the number of users how many people are using Cytek instrument, which also reflected on the service revenue growth. Now this is just one part of the features of Cytek Cloud. Second part actually Cytek Cloud we are continuing to improve this is to provide data analysis afterwards the experiment through cloud and then for data management as well. Today special instruments, so much data and typical in the old days you have a desktop type of storage system and quickly gets full.
We will provide those online storage and then the data management is also then easily for them to access the old, pulling out to compare, to look at it, study them. Going forward, we'll continue to evolve and become a platform for users to exchange information, data and present results, become a forum for the user base. Through that way, it becomes really a great platform for Cytek customers and that will enable Cytek customers to stay with our platform, our solutions. That's the kind of system we are developing.
Am I correct in assuming if you're uploading all this data in the cloud and you're using it and you're recalling that information for data generation and studies and things, if you were to switch off of Cytek to a new instrument, none of that would be relevant or usable and therefore it keeps that virtual cycle people in the ecosystem for Cytek. Is that a correct assumption?
Basically all the data once developed, it will continue to be valid, usable, on-site instrument. Of course, not for others.
Yes, of course. Okay, we have about a minute left, maybe just to kind of wrap things up a little bit. What is kind of the message you'd like to leave investors with? What do you feel is the most underappreciated or, you know, things that are underappreciated by the Cytek story?
Sure. I think as I mentioned earlier, the fact that half the business is growing at 20% that the other half, the EMEA instrument business, that I think we're much closer to the bottom than the top of the cycle and that, you know, that will turn relatively soon and that unlike almost every other sub billion dollar market cap tools company, we are not dependent on going back to the financing markets because we're generating positive EBITDA and positive cash flow and that we've also just introduced a new version of our core Aurora analyzer and it's met with very positive reviews from customers and we are quite optimistic about how that's going to perform and drive sales going forward. I think that's a lot about our story. There's a lot to like right now.
Great. Wenbin, Bill, thank you very much, appreciate your time.