Q4 2023 Harvard Bioscience Inc Earnings Call
Participants
David Sirois; Director of Corporate Accounting & SEC Reporting; Harvard Bioscience, Inc.
Jim Green; President, CEO & Chairman; Harvard Bioscience, Inc.
Jennifer Cote; CFO & Treasurer; Harvard Bioscience, Inc.
Paul Knight; Analyst; KeyBanc Capital Markets Inc.
Frank DiLorenzo; Analyst; Singular Research, LLC
Presentation
Operator
Good morning and thank you for standing by, and welcome to Harvard Bioscience, Inc. fourth quarter 2023 earnings conference call. (Operator Instructions) Please note that today's conference is being recorded.
I will now hand the conference over to your speaker host, David Sirois, Director of SEC Reporting. Please go ahead.
David Sirois
Thank you, Olivia, and good morning, everyone. Thank you for joining the Harvard Bioscience fourth quarter 2023 earnings conference call. Before we begin, I would like to suggest that you take a moment to download a copy of a presentation that will be referred to during this call. The file is entitled Q4 2023 HBIO quarterly earnings presentation and is located in the Investor Overview, Events and Presentations section of our website.
Leading the call today will be Jim Green, Chairman of the Board, President and Chief Executive Officer, and Jennifer Cote, 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 31, 2022.
Our subsequent quarter with 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 date. Also, 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.
Jim Green
Thank you, David. And hello, everybody. Let's move to slide 3 of the presentation. Take a look at the highlights for the quarter.
--Let me start with saying I'm pleased to see growth in North America. However, similar to numerous life science tools companies, we were held back by post COVID, lower demand in China. Revenue for the quarter was $28.2 million, down a modest 1% from last year on an as-reported basis.
This revenue includes the net effect of $900,000 of discounted products compared to the prior year period, we did see a net positive currency effect of $400,000. So adjusting for both currency and discontinued products, underlying core revenue was up about 1-percentage-point from the same period last year.
Gross margin improved to $16.3 million or 58% of revenue, up 230 basis points from the same period last year, our GAAP operating profit was $300,000, up from a negative $500,000 last year. Adjusted operating profit measured $3.3 million or 11.6% of revenue, about flat with prior year.
Adjusted EBITDA measured as $3.7 million or 13% of revenue, again about flat to last year. GAAP earnings per share was $0.04 with a $0.04 loss, again, same as last year. And adjusted EPS measured a positive $0.04 a share, again, same as last year.
Cash flow from operations came in at $4.3 million, up from $2.7 million last year. In the appendix, you'll find the bridge from GAAP measurements to adjusted or non-GAAP measurements So let's move onto slide 4 and take a look at revenue in the quarter by product family and by region. Starting in the Americas, revenue was up 4.1% as reported and included a 2.1% net reduction from discontinued products. So our core revenue was up about 6%.
Preclinical had strong growth in core telemetry, emphysema, enterprise software. So overall was held back by lower demand in the respiratory products as a part of the recovery from the post-COVID timeframes. Cellular and molecular products were up and electroporation and bioproduction and up and cell-based testing. And that was impacted by also the discontinued low margin products. By the way, we're about done with discontinued products. I don't expect to be able to talk much about this as we go forward.
Moving to a media. Overall, Media revenue was up 3.1% as reported and included 2.1% net reduction from discontinued products and a positive currency effect of 4.1%. So adjusting for currency and discontinued media was up roughly about two percentage points. Preclinical systems showed modest growth and was helped by the first installation of our new high-capacity Mars behavioral system at a large CRO operation. Cmt was down modestly, mostly on discontinued products.
Now moving to China and Asia Pacific, Q4 reported revenue was down 15%. Adjusting for currency and discontinued products, Asia Pacific was down about 10%. Telemetry emphysema enterprise software held their own similar molecular products saw another tough quarter similar to Q3. And the primary impact again was academic customers where we saw continued weakness due to post-COVID government academic research funding. We see the weakness in China continuing into Q1 2024.
So we're hopeful with recent news out of China, that market conditions are going to start to improve in early to second, going into the second half. And at worst case, we'll at least see things annualizing at a level where we won't see it hopefully won't see so much of back and forth with lumpiness like that.
So let's move on to slide 5. And let me tell you a little bit about some of the exciting new products and how we've positioned our base business to deliver solid growth with expanding margins and that those margins then support investments to commercialize our exciting new high-growth areas like high-capacity behavior systems, advanced cell and organoids and bioproduction electroporation applications.
This year's commercialization focus. It started with new product introductions that showcased at the Society for Neurology Society for Neuroscience, which was in Q4 just this last November. And then we're also going to be showcasing these products again at next week's Society of Toxicology.
Our first focus is to strengthen our base, which is the vast majority of our business. We introduced our new Soho shared housing telemetry family of implantables at the Society for Neuroscience last November. At the same time, we introduced our latest Geneva software that integrates with EMRs, the high-capacity behavioral testing system, but now and now it's onto a single GLP compliant platform, the funding platform, which is used by the leading CROs, biopharma, large academic institutions around the world, IT processes and manages the extremely large data pools acquired during tox and safety testing now for both telemetry and behavior.
By combining these new applications in a single data management platform, the Panorama system opens new opportunities for our customers to use emerging AI and machine language technologies to analyze the study data. And we'll be working with some of our customers to implement these types of these new machine language type of applications, which then turn into what we use for tuning our algorithms.
We're also expanding our field service offerings designed to increase recurring revenues and consumables.
Our second focus is expanding the high volume industrial applications. We introduced Veeva Mars, the high-capacity behavioral system at the November Society for Neuroscience in Q4, and we had the first commercial installation of EMRs in Q4. It was a large CRO customer, and we're showcasing the Mars at next week's Society of Toxicology, where we will be meeting with many of our leading CROs and biopharma customers.
Our third focus is expanding to the bioproduction five to bioproduction with our leading electroporation electric fusion technology. In January, we established a commercial and application science team dedicated to bioproduction and advances in electroporation. And in February, we released our GLP cGMP compliant amino acid analyzer for bioproduction quality control. The system was adapted from our clinical amino acid analyzer in operation today all around the world in leading clinical laboratories.
Finally, we're focusing on commercializing our leadership position in advanced cellular applications. We launched the mesh MEA organized platform at the Society for Neuroscience. We're also showcasing MESH MEA at next week's Society of Toxicology conference. We're excited to see strong interest for applications in research and biopharma discovery, which we expect will then lead to higher volume, compound analysis and testing applications at higher volume.
Now I'll turn the call back over to Jennifer, our CFO, to give us look at key financials.
Thank you, Jen.
Jennifer Cote
Thank you, Jim. And let's jump into our Q4 and full year financial results. In a little bit more detail, you can all Please refer to slide 7 and as a reminder, in addition to our reported GAAP results, we also include discussion of adjusted or non-GAAP financial results. These aligned with information we used to internally manage the business and our slide deck includes a reconciliation between our adjusted results and the corresponding GAAP financial measures on Slide 12.
So if you could please refer to the top and middle of the slide on a reported basis, our Q4 gross margin was 58.0% compared to 55.7% last year, an improvement of 230 basis points. Our gross margin can fluctuate based on mix of products, but the year-over-year improvement in our gross margin primarily reflects the impact of the product portfolio improvement initiatives that we completed in 2022.
If you refer to the top right of the slide, our adjusted EBITDA during Q4 was flat to last year. It did include investments to complete and launch our new Veeva MARS behavioral system and our shared housing Soho platform and to introduce our new mesh MEA system at Society for Neuroscience in November. And with the challenging macro economic environment, we continue to manage our overall operating expenses, ensuring that our spend is tied tightly to our highest priorities.
Let's move to slide 8, where we'll discuss full year results. And also our success this year with improving operating cash flow and liquidity. Our full year gross margin truly demonstrated the impact of the changes we made last year and finished at 58.9% compared to 53.7% last year, an improvement of 520 basis points.
Last year's gross margin did include inventory write-downs related to the discontinued products of $1.5 million, which accounted for 1.3-percentage-points of the improvement. Adjusted EBITDA finished in alignment with our expectations at 13% a strong improvement over last year's 9.6%.
Moving to the bottom left, where we show both reported and adjusted loss earnings per share, the differences between our reported and our adjusted diluted earnings per share are highlighted in the reconciliation tables. Last year, we incurred $5.8 million in restructuring and other costs related to the transformation of our business, which accounted for $0.14 of the diluted loss per share on the bottom left, Charles.
Now switching gears to highlights on cash flow and liquidity, please refer to the graph in the middle of the bottom row. During Q4, we added an additional $4.3 million in cash flow from operations, bringing our full year cash flow from operations to $14 million, a substantial improvement over $1.2 million in 2022.
Our 2022 operating cash flow was reduced by $4 million in conjunction with the settlement of the Cedar litigation we received stock as part of the settlement. As opportunity presents itself, we are unwinding our position to assist with the continued paydown of our debt. And so far in 2024, we've unwound over $300,000. Our debt paydown for 2023 was $10.5 million and exceeded our expectations of $10 million net debt at year end compared to prior year is down $10.4 million.
This is a significant improvement in net leverage, which finished the year at 2.3 times compared to 4 times at the end of last year. Also, February 2024, we received a net cash benefit of $2.6 million for the employee retention credit provided by the CARES Act. This is a credit that allowed to encourage the retention of staff by employers that were impacted by government orders associated with COVID-19. And this credit will also allow us to reduce our debt in 2024. Further details on all of this will be available in our 10-K and the non-GAAP reconciliation tables included in our press release and in the appendix to the presentation. And I'm now happy to hand things back over to Jim, who will cover our 2024 guidance.
Jim Green
Thank you Jen.
So moving to Slide 10 to take a look at what we see for the full year 2024. As we entered the year with continued market headwinds from China. We expect 2024 to be a tale of two halves. Taking everything into account, we expect flat to modest revenue growth for the full year. We expect weakness in the first half versus a strong and very difficult prior year comparison. And this is especially true in our China revenue were in Q1 2023 was up significantly -- from 2022, and we're expecting revenue to be down significantly in Q1 2024 entering this year with these continued headwinds coming in from China.
The good news is we do think it's going to annualize by the going into the second half. And even with the latest news that we've been hearing out of China, it looks like there might be some upside from that. We do, however, expect strong second half growth versus the first half of this year and versus the second half of last year. So the second half is really the key for the business here, and we're preparing for the second half of this year. You see the new products entering production commercialization. This is going to augment what's happening in the market.
So we feel very good about the second half and we'll get through the first half year. We expect meaningful growth from new product commercializations, and we expect China funding to improve going into the second half, we expect gross margins in the 60% range, up from 59%. And we expect adjusted EBITDA margins improving to the mid teens up from 13%.
With that, I'll turn it over to the operator and open the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Paul Knight, KeyBanc.
Paul Knight
I imagine as I look at slide 5, you know the Soho product, the other products on that slide. What portion will they be of your incremental growth in 2024? Or will they be half of it? What what what's the level of their importance?
Jim Green
Good question. Certainly, if I think about those four driving pillars universe, with the products introduced into the into our main clinical base business, the introduced introduction of Soho offer and the ability to now offer shared housing and more longitudinal testing. We think that's going to add a nice that'll fill continue to support our base business.
And my expectation is that keeps us at or above kind of the March market level. And then the incremental new items, which is the ones you see to the right starting with Viva MRs, we had the first sale of that last year, which approached [$1 million]. We see that growing a fairly positive note, starting with a small base. We see that growing very fast so that could easily be doubling as we get into this into 24. And then we know our goal, I would be disappointed if we didn't see a doubling again going into 25 and that kind of a growth sector.
And in time, I see the behavioral product would be the Mars really becomes part of the base business as it really provides that overall ability to do your acquisition and your data reduction and consolidation of not just telemetry data, but now you combine it with all the behavior of behavioral data, the neuro safety data, all of that comes together now in a big, high high volume, our data analytics system, which is really designed for the ability for for forgetting deriving the right kind of information from it.
And that's, again where we plan to start to apply some of the new technologies of machine learning to that electroporation and bioproduction. That's the third area. That's again an area where coming off of a lower base, maybe this last year was, you know, if you put all of it together, it's probably somewhere around 5% of our business, but that should be growing fast. Also the bulk of the bioproduction part, I would expect to see that growing at close to a hundred percent a year, but off a low base. So that alone could be also now adding another couple of points of growth to our to our core business.
And then on the advanced cellular products and the introduction of this of the new ARM advanced organoid platform. This is getting a tremendous amount of interest. And even with the first show at SFN, we had customers coming up and want to buy immediately. So we have to we have a situation here. We have to be careful with how we roll that out.
I will be somewhat limited for at least the 1st year in terms of volume. So what we're pushing there is if customers really want to get you start using measuring internal organized and we know these applications and the customers that we know where this is going, we believe we know where this is going to go on. But what we're doing is having them if they need to qualify themselves by first, the using our current system and the system for MEAs.
I mean, this is a $70,000, $80,000 system. And then with the assumption that if they want to buy it from for mesh. And then we would probably they would transition from standard MEA chips to the mesh organoid chip. But we'll be really we're going to limit the first number to go to certain universities and certain commercial companies for advancing specific applications that we think are going to really drive the future of it. So in that space. Again, our if I look at where we are and MBAs, it's typically again probably in that same region of maybe 5% of our business. That should be growing dramatically by dramatically.
I would I'd be I guess I'd say I'd be disappointed if we didn't see north of a 30% growth vector on that part of the business and then should we be in what low single digit declines in the first half and mid to high flow into the second half on revenue?
I think that it's fair to say that, you know, coming in I mean, certainly given such a tough, a tough comparable to last year, I mean Q1 last year, and that was it was a record I mean, I think it was all-time record and it was primarily driven by China. So imagine that. So China gives us a difficult comparison and then turns around a year later and gives us a low entry into the year, but we do think that's going to correct.
So I think to your point, I would expect Q1 is going to be tough but then I would expect us to be improving throughout the year from there. Certainly the second half should really be a great, great business for us by then because we've at least got the headwinds.
There are no longer they're no longer headwinds. Maybe they're tailwinds, but they're at least no wind, and we'll take that over headwinds anytime. So this is going to be, I'd say it will be weak in the first half and I think very, very strong in the second half, and that's with the new products kicking in to augment that there's no reason to think that that's not going to be driving the trajectory of our growth vector into it from second half and going forward, because this is a this is a sustainable growth structure that we put in place really driven so much by the introduction of these new exciting products.
Paul Knight
Okay. And last question. What's your long-term growth rate target Jim?
Jim Green
I mean to be certain that would I would target to be double digits. I mean, I think a company like this, we have to be somewhere near 10% and depending on how these growth areas, these new growth areas with a bioproduction with organoids and such that will determine just how far above or below 10%. We are.
I mean, I see the base business, my target would be base ought to be in AD or a better, a little bit better than market intermediates of five to seven of these new growth areas, you know, they may be they're adding another four or five early on, but then adding another moving up from there.
So I think in that range and again, it will really depend on how fast we can commercialize in the adoption of these areas. And keep in mind these product technologies, we have very few competitors that can do this. I mean we are the leader in MEAs. We are we will be the leader in what we're going to be the, um, the Intellon side, when it comes to how you measure and use or how you use organized.
So that in bioproduction, when we very few companies do we see as competitors, that gives us a great position, scarcity value, pricing value and now that we're done fixing things, I feel like we're putting our foot on the gas pedal. You're going to see now commercialization of these products today.
Paul Knight
Thanks, Jim.
Jim Green
Thanks Paul.
Operator
(Operator Instructions) Frank DiLorenzo, Singular Research.
Frank DiLorenzo
Good morning. A question about.
Jim Green
Hey Frank.
Frank DiLorenzo
The question about the 2023 sales. Can you give us an idea of what the dollar amount in 2043 for overall revenue was related to discontinued and divested products and pursuing a following along the idea of the long-term growth objective at UBS, is that something we could begin to assume you're getting closer to that 10% beginning in 2025 from, say, 2024 base being that this year it looks relatively flat, mostly guy, China?
Jim Green
Yes, good question. I mean, I think if the number of discontinued this last year on a net basis was a little over $5 million, so [five five on one 13] or something like that, what would that gives you kind of a base underlying some of the core growth and that's prior to prior to what we see as far as you know, with the new introductions and the new growth areas.
So if I'm building on a base like that, then that kind of underpins what I would suggest that that kind of a base business of Pheno five to seven going forward as you look into the out years and then with these new areas, augmenting that by arguably and we'll see how it goes, I mean maybe we add with the other new areas we had 2 points or 3 points, maybe we have 5 points or 6 points. So that will be the swing on it as to how well adoption happens with the with the new areas.
Frank DiLorenzo
Okay. Regarding you've been talking about a lot of new products, et cetera, and the launches, is that back-ended or front end as far as some of the new products getting out there and being purchased by clients? And also, can you maybe give a little more granularity on and your strategy except in China, but aside from China, but what your strategy might be outside of the United States to garner maybe some incremental growth expansion into some countries you're currently in or to other regions?
Jim Green
Well, I guess first, Bill, the question on.
I'm not sure. Could you repeat your first question because I think that was you say, how do you get from --
Frank DiLorenzo
You've been talking a lot about the new product launches, things of that nature. Can you give us an idea of what the ramp might look like as that ramps up here and to be more of a you're going to have a first half event, et cetera?
Jim Green
Yeah, I mean, these the newer products, as you can tell, are there higher content that are higher value. They're higher numbers and they are low and they're more they're a little bit longer more of a consultative sale. So the introduction started in SFN in November, we're reinvigorating it again with a set society with applications that toxicology.
So we see we're at the point now we're in full commercialization. So the time from order to shipment can vary, but typically you'll spend products, I would say on average you might spend a few months getting into a secured the order and then you'd look at it another few months for the first sale that order. So it certainly is a little more back-end loaded. That's why we're seeing the the conversion to shipments and revenue really starting to happen in the second half of this year and then extending from there and expanding from there.
And then your other question about outside the US, we tend to focus really on what works and is needed in the US is a good proxy for what's needed outside the US. So we tend to again, designed mostly for the U.S. to start with yet with the assumption that China is going to want the same thing.
There's a heavy investment there, and we expect that's going to be recurring and are returning again now to really bring up their ability to do the kind of of drug development and discovery and research and then production that's going to be happening. That's going to continue to happen there.
On Europe also, I mean, we see a lot of science work in Europe. So I would think that will in Europe, we'll focus a little bit more on the science side.
And then with the U.S. and China on the actual more higher volume, commercial applications and again, high volume type of operations.
Frank DiLorenzo
Okay, thanks. Just kind of a quick follow on. Have you talked quite a bit about some of the new product launches that have been going on. Is there any potential later in this year into 2025 for some additional new product introductions or line extensions and also somewhat related to that, what does the landscape look like out there from potentially maybe some partnerships or small sort of M&A activity to kind of bolster some of your current future offerings.
Jim Green
That's a good question, and I'll ask what let's talk about the partnership thing is certainly there's no question. There's a lot of companies that would really like to penetrate on some of the things like areas like bioproduction, there's companies that really want to see are interested in some of these technologies that might be used even in clinical applications.
So there are areas there that we could look that we will be looking to potentially license out. And that would be in areas that we're not where we really don't have the capacity or the funding to be able to go after all of it. So to me, the focus is going to be if you look at those core growth areas so that's where as we develop new products and we'll continue to do that.
They will fit primarily into those four focus areas. And I and hopefully, again, like I said, the things that I can't do with as a company our size. But I can do if I leverage some other major players that are really heavily want to be in some of these areas that I can look to license some of what we're doing through them and and again, that amaze will create the value. If I can't get it directly, I'm happy to get it through working with some partners and your and your thoughts about acquisitions.
We now are at the point where I think we have the capital structure in place that will as we start to think about acquisitions, there are areas that are very interesting that could fit nicely into our product portfolio in some of these areas have certainly been a bioproduction provide some areas that we could potentially augment some of our portfolio and then expanding and accelerating what we're doing with the cellular work with organized that could be interesting and a number of our products.
As in the past, there's not a lot of recurring revenue with some of these products. You see the new ones we're doing. They're designed specifically to bring in recurring revenue to have consumables to have services and field services. We're going to continue to explore and ramp those up. And that's an area that we have some interest potentially for acquisition. When you think about some of the consumables and buffers and things that are provide that are needed by our that our products consume in order to provide the function for their customers.
So there's a plethora of items for us to expand here. We do have to get and we're not, but we're not that big. So we have to be selective of where we make that investment. But it's nice to be in a position where you have a wide wide area that you could do. But again, we're going to we're going to focus on the areas they're going to give us that pricing power and keep us in the ability to stay in our niches and expand from there.
Frank DiLorenzo
Okay. Thank you.
Jim Green
Thanks, Frank.
Operator
And there are no further questions in the queue at this time. I will now turn the call back over to Mr. Jim Green for any closing remarks.
Jim Green
Okay. Well, thank you, everybody. Thank you for listening in today on ends today's presentation. I hope that you'll join us in May for our first quarter results for fiscal 2024.
Thank you very much. This ends the presentation.
Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
