Good day, and thank you for standing by. Welcome to Harvard Bioscience 1st quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dave Sirois , director of SEC. Please go ahead.
Thank you, Amy. Good morning, everyone. Thank you for joining the Harvard Bioscience 1st quarter 2023 earnings conference call. Before we begin, I would like to suggest that you take a moment and download a copy of our presentation that will be referred to during this call. The file is entitled Q1 2023 HBIO Quarterly Earnings Presentation and is located in the Investor Overview Events and Presentation section of our website. Leading the call today will be Jim Green, Chairman of the Board, President and Chief Executive Officer, Jennifer Cote, Interim Chief Financial Officer. Before I turn the call over to Jim, I will read our safe harbor statement. In our discussion today, we may make statements that constitute forward-looking statements.
Our actual results and performance may differ materially from what we have projected due to risks and uncertainties, including those described in our annual report on Form 10-K for the period ended December 31st, 2022, our subsequently subsequent quarterly reports on Form 10-Q, and our other public filings. Any forward-looking statements, including those related to the company's future results and activities, represent our estimates as of today and should not be relied upon as representing our estimates as of any subsequent day. Much of today's call will focus on our non-GAAP quarterly results, which we believe better represents the ongoing economics of the business, reflects how we set and measure our incentive compensation plans, and how we manage the business internally. The differences between our GAAP and non-GAAP results are outlined in the earnings release and today's presentation.
These two documents, as well as a replay of this call, can be found on our website under Investor Overview, Events and Presentations. Additionally, any material, financial or other statistical information presented on the call, which is not included in our press release and presentation, will be archived and available in the Investor Relations section of our website. I will now turn the call over to Jim. Jim, please go ahead.
Thank you, Dave. Hello, everybody. Let me start by saying how pleased I am to have the last two years in the turnaround phase behind us and to now focus on delivering the profitable growth platform we envisioned. Let's go to slide three of the presentation to take a look at the highlights for the quarter. Reported revenue for the quarter was $30 million, up 4% on an as-reported basis. When I think about a half million dollars of negative impact from currency and consider the $1.1 million of discontinued products, I see underlying core growth of around 10% over Q1 last year. Gross margin improved to $18.3 million or 61% of revenue. That's five percentage points above last year. Adjusted operating profit improved to $4.4 million or 15% of revenue, up seven percentage points.
Adjusted EBITDA measured $4.8 million or 16% of revenue, also up seven percentage points from last year. GAAP earnings per share improved to a positive $0.01 from negative $0.17 last year. Adjusted EPS measured $0.06 per share, up $0.02 from last year. Cash flow from operations was $1.8 million versus a negative $2 million last year. In the appendix, you'll find the bridge from non-GAAP measurements to GAAP. Move to slide four, take a look at the revenue in the quarter by product family. This slide shows Q1 2023 revenue adjusted to reflect Q1 2022's exchange rates. Starting with the first row of the table, our cellular and molecular technology revenue was roughly flat when adjusted for currency and includes an impact from the discontinued products.
We had solid growth in Asia-Pacific, which was offset somewhat by slowness in the Americas and Europe. BTX electroporation growth was driven by our new focus in bioproduction. Cell-based testing products were up strong. We continue to rotate out of low-margin products primarily sold through distribution. Discontinued product sales decreased by approximately $1.1 million versus prior year. Our preclinical product revenue was up 10.3% as reported and up 11.6% on a constant currency basis. Asia had strong growth in Ponemah Enterprise software, telemetry, and respiratory systems. America saw strong growth in respiratory systems. The U.S. dollar compared to the euro and British pound caused a currency impact of a half million dollars.
All said, we grew 4% as reported, and this includes a half million negative impact of currency and further negative impact of discontinued products of $1.1 million compared to last year. Let's move to slide five, so I can tell you a little bit about some of the exciting new product introductions. Before I start, let me explain a little bit about this slide. Over the last three years, we've optimized our product offerings to critical areas of the drug and therapy continuum. Our product strategy is to continue to introduce new technologies and applications in academic research and at the same time, apply these technologies to further penetrate larger industrial applications with our customers in pharma, CROs, and biotech. A key benefit to this approach is to offer higher value products with higher ASPs and recurring revenue streams.
We do this by capitalizing on our strong call points with preclinical customers. I'd like to highlight three of the new products that we've introduced so far this year. Starting from the left, our new SmartUSSING Epithelial System, which builds on our Ussing technology from metabolism and permeability studies, which has already been proven in academic research labs. This new system has been designed for ease of use, making it attractive for higher volume needs of CROs and pharma customers. I'm pleased to report that the first SmartUSSING system has been installed and is in use at a large pharma lab in Europe. In the middle is our new STG5 stimulation generator.
Building on our leadership in stimulation, this new product follows the theme of simplicity, modularity, and ease of use, which opens access to our technology in higher value industrial labs, where automation and ease of use enables lab techs as opposed to highly trained PhDs to operate. We're excited to announce that after the quarter end, we received the first order for our new high-capacity behavior monitoring system from a large CRO customer. This system combines our high-precision activity tracking with our GLP compliant Ponemah Enterprise software, which is heavily used by CROs and pharma today for safety and efficacy, data collection, and regulatory reporting. Scalable and with substantially higher technology content, we expect the industrial level systems to provide higher ASPs and additional recurring revenue streams compared to academic research-focused products.
This new offering is the basis of our expanded industrial level product line, with substantially higher ASPs ranging well into the hundreds of thousands of dollars. As an example, this first order is in excess of $800,000. Now I'll turn the call over to Jennifer Cote, our Interim CFO, for a look at key financials. Jen.
Thank you, Jim. I'm excited to be able to share our Q1 financial results in greater detail. If you can please refer to slide seven. As a reminder, my discussion will focus on adjusted results for P&L performance, which aligns with measurements we use to internally manage the business, and a reconciliation between our adjusted results and the corresponding GAAP financial measures is included in the slide deck. Jim's already taken you through our revenue performance, and I'll take you through some additional details on our expenses, balance sheet, and cash flows. Q1 gross margin was 61% compared to 56% in Q1 of FY 2022. This is also a strong consecutive improvement over Q4 FY 2022 margin of 56%. In general, our gross margin will fluctuate from period to period based on revenue mix and volume, inflation, impacts of supply chain, and other factors.
We had a higher mix of our preclinical products during Q1, which has stronger average margins, and we are also realizing the impact of pricing improvements and the impact of lower mix of discontinued products. We also entered Q1 2023 with lower labor and overhead costs, as the headcount reductions related to our portfolio rationalization are now complete. The implementation of these improvements, together with our pricing increases, are demonstrated in our margin improvement in Q1. Moving to our adjusted EBITDA. As discussed in Q4, we are now reporting on adjusted EBITDA. The primary difference to adjusted operating margin is depreciation on our fixed assets. We believe this change aligns more closely with our focus on cash flow improvements and is consistent with the presentation of other comparable companies.
Our Q1 adjusted EBITDA was $4.8 million, or 16% compared to $2.7 million or 9% in Q1 2022. The improvement was primarily driven by our increased growth margin. We also see favorable impact of our cost reduction activities in our Q1 results. These are partially offset in Q1 by accruals for our employee annual incentive plan. As mentioned last quarter, we do expect an increase in capital expenditures in 2023 as we invest in the consolidation of certain business tools and also invest in tooling and capital equipment related to new products. Turning my attention to cash flow. Our cash flow provided by operations was $1.8 million in Q1 FY 2023 and represents our third consecutive quarter of positive cash flow from our operations. This is a result of our strong EBITDA together with our continued focus on working capital management.
We continue to keep our improved DSO steady and continue to implement activities that will start to shift our inventory downwards. We are also excited to share that we reduced our net debt by $2.2 million during Q1. The combination of strong gross margins, strong adjusted EBITDA, and solid operating cash flows and our reduction in net debt results in a great start to FY 2023. I'll now hand this back to Jim to cover our 2023 guidance.
Thank you, Jen. Moving to our summary on slide nine and a look to see what we see for the year 2023. With growth from new products, a stronger portfolio, and expanding recurring revenues all running through our improved cost structure, we see 2023 as the year we deliver the profitable growth platform that we've envisioned. We now expect reported revenue growth in the mid-single digit range, and that's inclusive of approximately four percentage points of discontinued product revenue compared to 2022. We expect gross margins to remain strong at the 60% level. We expect adjusted EBITDA margin in the 16%-17% range. With expanded EBITDA, combined with improving working capital driving strong cash flows, we plan to significantly pay down our debt.
Finally, this quarter, we reduced our debt leverage to 3.2x, and we plan to further reduce our debt leverage to approximately 2x levels by the end of 2023. Thank you. Now I'll turn the call over to the operator to open the line for questions. Thank you.
Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question is from Paul Knight with KeyBanc. Please proceed with your question.
Hey, Jim. Congratulations on what looks like a great quarter. Can you talk, I guess, first of all, the, where are you with, your sales force reorganization, and what do you have now, and where are you with that process?
Thanks, Paul, thanks again for your kind comments about our performance. You know, what we've done is we've established the sales force now where we're able to effectively approach the academic research sites and continue to deliver high-end products and advanced technologies there. At the same time, we've expanded our reach to be able to have our sales force also call on the industrial segments of CROs and pharma companies. There's a bit of a split there, where there is a focus on the academic side for people who are focused on advancing the technology.
We're also, like I said, working to design these products, and you see them now being introduced into the industrial side for where we see substantial growth in, not only the ASPs and revenue growth, but also recurring, generating much more recurring revenues in the process. It's a good mix of the two, and at this point, I'd say we're pretty much in the final shape as far as how that coverage works today.
Every quarter, you're getting a little more granular on new product launches. Can you quantify that? I mean, is 10% or 20% of sales from new products in the last year, or how do you like to talk to, you know, this slide five on new products?
Yeah, that's a great question. You know, to me, when I look at overall growth of the business, I typically expect to see. I split that into three main components. Our biggest driver is new product introductions because those change the inflection of the business. They move more and more toward the addition of recurring revenues that we and you also see that I now report more on our recurring revenue basis, and I reported last quarter that we had indicated that over 35% of our revenue today is recurring revenues. If you look at the big drivers for growth, it's primarily new product introductions. It's also expansion and volume of our existing and improved portfolio. Then along with that, you see pricing improvements.
You know, when I look at what do I expect to see as far as new product development and how that drives growth, typically, I would expect that to. We would shoot to see something like 10% growth with new products. Of course, some of that is gonna be cannibalized. But if I can deliver on my growth targets and have it be predominantly new product introductions and then also expanding our existing portfolio, again, with a much better mix that we have now, it lets me, you know, it lets me underpin the growth targets that I've set for the business. It's also nice to see us rotating out of these lower-end products.
You know, if you think about back when I, when I took over as CEO, since then, we've arguably taken about $10 million out of lower margin, less, not as strategic revenue segments, with. These are mainly products that sold through distribution. That allowed us to get the size of our business, get size right, and you see that in the margin profile dramatically changing. We're more than with the products that we've discontinued, we're more than replacing that with new products and much better. Again, you see that measured very well in our, in the migration of our gross margin into that 60% region.
Okay. The other last question to me, for me at this time would be on supply chain. Are you through that period?
Yeah, I think we are. I mean, we certainly see it. It's, you know, it's really, you know, it's improved dramatically. We can also see that with, you know, now we're starting to see some improvements on purchase price there. Things are starting to come down. We're not seeing so much of situations where things get bought up and are hard to find. You know, we did have some inflation, and we, you know, we, if you think about last year, we had to buy ahead, just wanted to make sure that we could continue to produce and ship. You know, we did have to buy ahead at somewhat higher prices, and that, but that'll flow through our, that'll flow through our numbers here. Certainly overall supply chain is really improving.
We don't see, you know, the kind of disruptions that we saw in the past. The same thing goes for freight. Freight will start to improve here in time too. You know, our focus is making sure that we work down our, you know, we had to take on quite a bit of extra working capital with, you know, building up inventories to make sure we could ship. That's gonna improve this year too. You know, the combination of much improved EBITDA and improvements in working capital, those drive cash flow. That lets us get our debt down. You know, at the end of the day, you know, things have really smoothed out quite a bit.
You never know if something else is gonna happen, but, you know, we're positioning to make sure we've got the headroom if we do see some small impacts, but at this point, everything looks very solid for us.
Okay. One more. On the debt, are you paying down long or short debt?
We'll typically be paying down the higher price debt first, so that would be the shorter. You know, we're working on getting it down overall. We have put a hedge in place, so we're hedged pretty well. The part that's not hedged, that's the piece that we pay off first.
Okay. Thanks.
Thanks, Paul.
Thank you. One moment for our next question. Our next question is from Bruce Jackson with The Benchmark Company. Your line is open.
Hi. Thanks for taking my question. Congratulations on the quarter.
Thanks, Bruce.
Thank you.
Just a general question about the impact of COVID-19 research. Right now in the life science tool space, there's been a kind of a drop-off in activity around that. You do have some respiratory research products. I'm kind of curious to know, have you seen any drop-off in demand for those products, or are there other types of respiratory disease research going on that are helping out that business?
Well, I think, certainly there's no question in 2021 we did see what looked like a little bit of a COVID-19 bump, very specifically around the respiratory type products. You know, some of that demand had slowed down somewhat, you know, we also introduced a new version of it called SmartStudy, which is helping us to stay close to those same levels and not really see a drop-off of it. It is part of what we see, you know, continue to grow in our business as we look forward. We didn't really see...
Most of our products, we really haven't seen, you know, a drop-off per se associated with COVID itself because, you know, as you know, most of our products are used, you know, heavily used for development of any drug and/or any vaccine. If they're using it, if it is a new vaccine coming through, like we saw with COVID, it utilized the same technologies for that. That substituted for what would have been other drugs that were, you know, that were in the pipeline, like in, you know, some of the neurological drugs that were in development and, and the typical situations with cancer and diabetes and such. That's gonna rotate back.
We see that rotating back to, you know, more natural development of the drugs and the drugs that are in the pipeline and less of them maybe on, you know, specific to COVID. I think the main thing is for us, the COVID had a bit of a bump for us in 2021. You know, that's settled out, and we see we're on more of a natural growth path here going forward.
Okay. Great. One quick question on the revenue cadence. Generally you're up in the second quarter sequentially, and then third quarter is kind of like flat to sometimes down, and then fourth quarter is generally pretty big. Is that the same pattern you expect to see in revenue this year?
Yeah.
you know, just give us a little bit of guidance there.
Yeah. I think, you know, when I look, when I look to kind of the morphology for the year, you know, we expected with the rotation out of the low-end products and the fact that we're able to replace most of that, if not all of it and then some with the newer products rolling in here in the year. You know, originally I thought that we'd see, you know, the first half to be somewhat flattish, and then start to really move back toward our nice growth in the second half. You know, what we've seen is some strong growth here up front with the new products.
You know, when I think to the rest of the year, you know, Q2, you know, might be kind of a flattish to Q1 kind of view because, you know, again, we're still seeing some of this rotation out. You know, but again, we are seeing, you know, nice improvement to, you know, overtake that and at least mitigate that. Certainly in the second half, you know, that's when we see, you know, the underlying growth of the new products, you know, really kicking in. I don't know that this is gonna be a real typical year as far as Q2, Q4. Certainly, you know, Q4 has been just because of the purchasing cycle, typically is our strongest quarter and it's likely to be that way again this year too.
I think with, you know, as I get the next quarter, I'll be able to underpin better, you know, on the, on the revenue side. You know, you see we've taken the revenue up from, you know, from what we had talked about last time, you know, looking at overall about mid-single digits, you know, plus or minus. Again, that being net of about four points of headwind. You know, we see this as a very strong year and continuing to develop. You've seen what the bottom line looks like now that we have so much of a better of our cost position. You know, our overall cost organization's come down dramatically. Again, you measure that in the gross margin, you see that in the EBITDA margins.
We are, you know, back on a nice growth path that, you know, is underpinned by these new products too. The combination of new products and an improved product portfolio and altogether, you know, shows this is the platform we were planning to build.
Okay. Great. That's it for me. Thank you for taking my questions.
Thank you, Bruce.
Thank you. As a reminder to ask a question, please press star one one on your phone. One moment, please, for our next question. Our next question is from Christopher Sakai with Singular Research. Your line is open.
Hi, Chris.
Hi, guys. This is Aseem for Chris. I was wondering.
Oh, Aseem?
To an extent. Yeah, Aseem.
Thanks.
I was wondering, if you can quantify to an extent you can, the contribution from the increase in price and volume growth versus the new products, in terms of the overall growth that you have experienced?
In general, I would, I would say that, you know, we are seeing both are driving growth for us, you know, expansion of volume on better priced products on the overall portfolio. If, you know, we tend not to split out and report on those specifically, I would expect that half or maybe a little better than half will be new products and maybe the other half would be, you know, expansion of existing products that includes both volume and price, with the two of them, you know, really kicking in nicely. You've seen the new products that we've introduced, you know, with the new bioproduction product that we introduced at the end of last year. You know, that's now in our revenue stream this year.
That's expected to grow to annualized somewhere around $1 million a year of consumables alone on that one deal. We're working on many others. I talked about the new introduction of the new high-capacity behavioral system. The initial order on that at over $800,000 and that will revenue recognize in the year. As you might expect with that being picked up by a large CRO, we expect that that's gonna have real opportunity to grow with the rest of our CROs and start to move into areas of very large core academic research sites where they're doing large studies and pharma studies. This is a whole new incremental growth area for us.
You know, if you think about, you know, behavioral systems in the past, you might sell them into academic research, you know, maybe they're a, you know, $10,000 system. Well, now we're talking hundreds of thousands of dollars and a real need for this kind of a technology, especially when you combine it with what we have for telemetry and that expansion of what's required for data collection, reduction and regulatory submissions. Again, we're, you know, we're really happy to see that, you know, a lot of our new growth coming with new products, and you know that they're also designed to really focus on bringing through recurring revenues at the same time and services. Also, you know, with our expansion of our current portfolio.
It's a good position to have both vectors moving in the right direction.
Great. Talking of new products, looks like, in terms of telemetry, you are gaining great traction in Asia and EMEA. Maybe, and I'm maybe interpreting it wrong, maybe the momentum here in America is probably not as positive as Asia and EMEA. Is that what's going on? If it is, if you can give us more color how what's happening in Asia and EMEA might translate into Americas.
Well, we're actually seeing across the board, the telemetry is, it's come back very strong in all three areas. It's just that, you know, Asia has really stepped up. You know, a lot of demand developing in Asia, and we see that as a long-term growth driver. You know, EMEA had been operating, you know, pretty poorly for a while, in terms of our telemetry products. That was one of our big drop-offs, mid last year. That's come back nicely. On a relative basis, yeah, we've, you know, certainly, you know, with Asia growing very fast and EMEA recovering, you know, don't discount America. America is the U.S. is also, growing very nicely, and we see that continuing. We don't really see...
It's just that, when all three are performing well, it's hard to differentiate because when you got one of them that's really outperforming the rest, I don't want that to hide the fact that all the regions are doing quite well in this space.
Great. As the new product momentum is building up, and you continue to get new orders and further in the pipeline, there are even more new products. In like midterm, like in next couple of years, how do you see the end customers, the mix of end customers changing, like OEM distributors, government, academics, CRO, pharma? How do you see that mix changing from maybe what it was in 2022?
Yeah, that's a great question. You know, strategically, you know, we still see academic research as a great opportunity for us that we'll continue to grow nicely there with the funding being, you know, very strong with NIH and such. Very much of the new growth that we see is taking those technologies and designing them for applicability into the more industrial spaces. I think what I expect to see is you'll see growth in both academic research and in industrial segments, but you'll see expanded growth on the industrial segments, and that's where you'll see the growth of recurring revenue streams too.
I expect that we'll continue to report a migration of much more and more of our business will be on the commercial side with pharma, CROs and industrial segments. Still not discounting what's happening in academic research. We need to still be at the leading edge there, and to continue to be at the edge with our technologies, especially in areas like electroporation for transfection and the development of new drugs. You know, I think that's. Again, to answer your question, we're gonna see more growth on the industrial side along with this.
Thank you so much, and congrats on a strong start for our 2023.
Thank you. Appreciate it. Thank you. Have a great day.
Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to Jim Green for closing remarks.
Okay. Well, thank you for joining us. This ends today's presentations. We hope you'll join us in the summer for our second quarter results for fiscal 2023. Thank you, this ends the presentation.
This concludes today's conference call. Thank you for participating. You may now disconnect.