Q4 2023 Standard BioTools Inc Earnings Call

Participants

David Holmes; IR; Standard BioTools Inc

Michael Egholm; Director; Standard BioTools Inc

Jeffrey Black; Chief Financial Officer, Senior Vice President; Standard BioTools Inc

Adam Taich; Chief Strategy Officer; Standard BioTools Inc

Presentation

Operator

Good day, everyone, and welcome to Standard BioTools, Inc. fourth-quarter and full-year 2023 financial results conference call. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, David Holmes, from Investor Relations.
David, please go ahead.

David Holmes

Thank you, operator, and good afternoon, everyone. Welcome to Standard BioTools's fourth-quarter and full-year 2023 earnings conference call. Leading the call today is Michael Egholm, President and Chief Executive Officer; Jeff Black, Chief Financial Officer; and Adam Taich, Chief Strategy Officer.
At the close of market today, February 28, 2024, Standard BioTools released its financial results for the quarter and fiscal year ended December 31, 2023. During this call, we will review our results and provide commentary on our financial and operational performance, 2024 outlook, market trends, and strategic initiatives.
During the call, we will make forward-looking statements about events and circumstances that have not yet occurred, including plans and projections for our business, our outlook for 2024 and future financial results, market trends and opportunities, and our expectations related to the combined operations with SomaLogic, including potential synergies and our business outlook for the combined company.
These statements are subject to substantial risks and uncertainties that may cause actual events or results to differ materially from current expectations. The forward-looking statements in this call are based on information currently available to us, and we disclaim any obligation to update these statements, except as may be required by law.
During the call, we will also present some financial information on a non-GAAP basis. We believe these non-GAAP financial measures are useful in evaluating our core performance, and as a baseline for assessing the future earnings potential of the company. We use these non-GAAP measures in our own evaluation of continuing operating performance. We encourage you to carefully consider our results on a GAAP and non-GAAP basis.
The reconciliation between non-GAAP measures and their GAAP equivalents are provided in the tables accompanying today's press release and as an appendix to today's presentation slides.
Please note that management will be referring to a slide presentation, including updated supplemental financial information within the webcast today and will not host a Q&A session following their remarks. Today's slide presentation, along with a replay of the webcast, will be available on the Investors section of our website.
So we'd like to now turn the call over to Michael Egholm, President and CEO of Standard BioTools.

Michael Egholm

Thank you, David. We greatly appreciate everyone joining us on today's call. 2023 was our first full year of operations as Standard BioTools, and I could not be more proud of our team and its accomplishments. In one of the more challenging times for the life science companies in recent memory, our disciplined team of operators significantly reduced cost and cash burn, expanded gross margins, and return the declining business to growth.
At today's navigating successful closing of the merger with SomaLogic, I can say that excitements Standard BioTools has now fully activated the business thesis to build scale in a highly fragmented space, while maintaining operational focus and recognizing the all-important Maxim, no margin, no mission.
With the recent completion of the SomaLogic merger on January 5, the pro-forma combined business generated $192 million in revenue in '23 and positions the combined company, not only as a front runner in spatial biology, but as a business with three highly differentiated technologies under one roof representing certainly the broadest next generation of solutions serving the proteomics customer and market in the beyond genomics era. Factor in the $565 million in combined pro forma cash on the balance sheet at the end of 2023, and I can certainly say today we are full speed ahead.
While it's still early days, but so much more to be done, I look back at 2023 as a year of foundation building and validation of our ambition to become a diversified leader in life science tools and empower our customers to do a better world-changing research.
During today's call, I will review our strategic objectives and provide a summary of our 2023 performance against those objectives, briefly review our product portfolio and thoughts on our enhanced competitive position, and finally highlight critical near-term initiatives we expect will position the combined business for success.
Following my comments, I'll turn the call over to Jeff Black who will provide a more detailed analysis of our fourth-quarter and full-year 2023 financial performance. At the conclusion of Jeff's section, Adam Taich will talk on the integration process as we advance the combined business forward in 2024.
To begin, let me restate our top three objectives, which are equally important and fueling data, highlighting our progress in 2023. These are the objectives that guide our strategy and execution, and what we and you should measure our progress against.
[Appear to one,] standardize, and is still, operating discipline in a culture of uncompromising focus with our lean operating approach known as the Standard BioTools Business Systems, or SBS, at its core. From this operational platform, we drive the organization to enhance business efficiency and drive profitability. To this end, we delivered meaningful progress in 2023, including 900 basis points of non-GAAP gross margin expansion, a $20 million and 17% reduction in non-GAAP operating expenses, and over $47 million and 53% improvement in operating cash use.
Objective two, create a scaled platform that profitably can deliver breakthrough enabling life science technologies and services for our customers. As I stated before, without margin, there's no mission and bringing together important solutions under one roof is crucial in the heavily fragmented and unprofitable life science tools space. We are amassing a broad portfolio of highly differentiated platforms, expanding our reach across a diverse set of customers and end markets and building a distributed business model that promises 60%-plus gross margin across a mix of instruments of recurring services and consumables revenue. The model of being better together is really the only proven business model to date in our space.
And the recent merger with SomaLogic has activated that plan fully with the operational team laser-focused on successful integration with SomaLogic, the business development team continues to identify new potential acquisitions in this broad landscape. This includes emerging and compelling technologies, proven platforms, underappreciated businesses with Stella, but only burden teams. Our goal is to approach these opportunities as partners and bring these products businesses and people into the standard bio family. We are careful, but confident that when executed well, this strategy will not only diversify collective revenue and empower our customers with truly differentiated technologies, but will also fuel growth and gross margin at scale.
This leads me to our third and critical objective. Fuel more growth against a challenging macroeconomic environment. I'm pleased to report that we returned our core business to growth in 2023 with total revenue of 106 million, representing 9% growth over 2022, with instrument revenue up more than 40% year-over-year, led by placements of our new IPNXTI. imaging system. We see growth in instrument revenue as a leading indicator to drive future recurring consumables and services revenue across an expanding installed customer base. In addition, the SomaLogic team delivered solid revenue growth in 2023 with $86 million in total revenue and over 20% core revenue growth when excluding certain nonrecurring royalty revenues in 2022, SomaLogic also expanded its authorized site footprint from eight So 17 in 2023, setting us up for growth in the distributed kits business. On a pro forma basis, our businesses delivered revenue of EUR192 million, 2023, activating a major step to achieve an operating scale for the combined business.
And this objective, I'll add one comment given the industry has just emerged from that growth at all cost period, while expanding market share and customer segment was pursuing at the expense of business fundamentals. While it may have made sense in a market flush with cash when capital dries up as it usually does the underfunded and or does without a secure path to profitability, experienced existential risk and deeply discounted values. We extend about to recognize the need for growth, but also appreciate that it must be and will always be pursued with an eye to profitability and long-term shareholder value. We work for our shareholders and commit to you to build sustaining value while we enable our customers to conduct distinct research, review the standard power tools business and distinct product categories, including instruments, consumables, field-based instrument service and now also most cancers. This offering serves our customers largely in academic research and biopharma across two scientific disciplines. Proteomics and genomics consumables are some of the most attractive products in life sciences with a target gross margin profile north of 70%. Today, consumables represented over 39% of our 2023 revenue. Instruments are a large capital expense product. But once installed, have long life cycles and serve as fuel for future consumable pull through our instrument business has a target gross margin north of 60% and today represents about 35% of our current revenue and grew 46% in 2023. We believe this is the leading indicator as new instrument sales generally lead to future growth of recurring sales of consumables and field-based services with attractive margins. And in 2020 for the legacy SomaLogic becomes part of our revenue mix. Most of this revenue today is driven by our Soma scan services businesses, our lead customer relationships with over 190 customers, including many of the top 20 biopharmaceutical companies today. This revenue carries a gross margin profile in the 50% range, and it's concentrated predominantly in large biopharma accounts, running large scale with discovery programs and now also has traction in the clinical trial pipeline, given this business is highly project based and concentrated revenue can be lumpy from quarter to quarter, we'll continue to progress that Adam and his team made to diversify and expand the customer base and enhance revenue, consistency and predictability, and we will apply our lean SBS principles to improve the gross margin profile of this business. We'll also continue to execute on our authorization program was expanded to 17 sites in 2023. This should continue to drive broader customer mix and higher margin consumable revenue. We're excited about the opportunity to leverage than about two legacy academic research relationship. As a way to further evolve the somatrogon customer base. We see great opportunity over time to broaden our commercial reach for this best in class technology through our service offering. Our certified sites model and our commercial relationship with Illumina genomics opened our eyes to the blueprint of human function, but the proteome is the business end of that blueprint and an exciting and fast-growing field of research. But in proteomics, we believe we are the only company with three next-gen technologies in the portfolio. First, our Hyperion XTI. imager has the highest throughput and data quality in the spatial proteomic space. Second data is the only immune cell profiling technology that can distinguish more than 50 intracellular and extracellular markers at the same time, third, starting in 24 hours. So much can plasma proteomics offer the highest coverage of the proteome and lowest CD. in 2023, we returned our legacy stand about portfolio mix business to growth, an increase of over 20% year over year with the launch of our Hyperion XTI. imaging system as a major contributor to that growth. The systems market leading data quality and throughput continued to be very well received by existing and prospective customers as a solution in the emerging field of spatial proteomics for translational research. We plan to launch a new workflow model the first half of 2024 that will improve customer workflow and by extension in time consumable pull through flow by CytomX is the only technology that can do a high number of both extracellular markers and intracellular markers, enabling our customers to gain biological insights that would otherwise go unnoticed using competing technologies. This is an important point of differentiation and should help support growth in 2024 with the addition of the Soma scan platform and expansion of key customer accounts. We have an important differentiated solution for biopharma, enabling the broadest coverage of the fully-owned for discovery of important biomarkers and compelling new drug targets.
Furthermore, with the authorized sites expansion. We expect growth in the academic market where legacy standard bio traditionally plays to in 2023. SomaLogic coal revenue grew over 20% in 2023, while the genomics revenue was down 7% in total and 4% excluding impact of discontinued products, the genomic business achieved a net positive contribution margin and a small loss of 100,000 compared to a loss of more than EUR25 million in 2022. This is the type of business discipline you can expect from us Genomics has been the backbone of Life Science discovery innovation for the last 40 years and with the advent of next-generation fast and cheap sequencing has without hyperbole fueled the golden age of biology, while our genomics business remains a strategic asset because it's also a highly competitive market with increasing price competition and sensitivity of next-gen sequencing costs are greatly reduced over the past several years. To that end, we are managing this business prudently and we'll incrementally invest in its continued growth only if we expect that to drive near term incremental contribution margin post the strategic repositioning. We delivered solid progress in 2023 and how consolidate our portfolio from five instruments to one, the Biomark x nine from this platform, we focus on being an OEM provider and strategic enabler to a core set of customers with a significantly reduced genomics spend and focus on commercial approach. We have expanded our installed base with our major OEM partner while targeting additional OM.s and high volume key accounts to help return to sequential growth and enhance the genomics segment's contribution margin. In fact, earlier this week, we announced a long-term OEM agreement with next-gen diagnostic as our second major OEM agreement. This partnership with NGT in the field of pathogen sample preparation reflects the advancement of our growth strategy bringing the main focus and expertise that will broaden the impact of our microfluidic platform across vital sectors of life science, as I mentioned earlier, with operational execution and the successful close of our merger with SomaLogic. We have established a strong foundation for a leadership position in the life science tool space, but we're not naive to the work that lies ahead we're just getting started. As we look to the remainder of 2024 and beyond, we have a clear roadmap for key drivers of value and staying committed to delivering over the next months and quarters ahead is what you can expect from us.
First, continued progress on merger integration and prioritization of strategic initiatives. We're pleased to report that our merger integration activities are well underway with clear line of sight on several strategic tactical and operating decisions and more work to do. And as we look forward to our Q1 earnings call in May when we expect to provide an update on our initial 90 days strategic plan and priorities. In the meantime, we remain focused on running the business with the same level of operating discipline we have shown over the past seven quarters since we assumed leadership at standard bio tools taken delivery on our cost synergies commitments. To reiterate, we expect the merger will deliver approximately 80 million in annual cost synergies by 2026 compared to our current combined operating expense run rate for the first half of 2023. This is a shared operating focus across the organization with several German workstreams already in place. While it will take a quarter to begin to see these efforts show up at the operating result, we expect to see meaningful reductions in our non-GAAP operating expenses in the second half of 2020. For particularly in G&A, we expect to have more than 50% of 40 million of our annualized target synergies implemented and operationalized by the end of the fourth quarter.
Third, continued traction on revenue growth. Today, we provided revenue guidance for 2024 and a range of 200 million to 200 million, implying combined revenue growth of 4% to 7%. This is against the backdrop of both internal merger integration priorities and continued uncertainties from macroeconomic headwinds that we see continuing to play across the industry. Still, we remain confident in our growing pipeline of opportunities, providing a good set up for an expanded growth profile into 2025 and beyond. This will all take patience, focus and time, but we are confident in our ability to deliver and we look forward to providing you with progress updates along the way.
I'll now turn the call over to Jeff for more detailed commentary on our fourth quarter and full year 2023 financial results.
Yes.

Jeffrey Black

Thank you, Michael. And thank you all for joining our call today. As a reminder, unless otherwise noted, the 2023 financial results we reported today reflect only the standard Bitauto's legacy business and exclude the results of SomaLogic, which will be included for the first time with our first quarter results. As Michael noted, we're pleased with our results for both the fourth quarter and the full year 2023, starting with revenue in 2023, we delivered revenue ahead of guidance and returned to declining business to growth all while navigating a challenging macroeconomic environment. Total revenue for the fourth quarter was 28.2 million and grew about 4% over 2022. Instrument revenue grew 44% in the quarter and was offset by a 22% reduction in consumable revenue related primarily to the timing of customer orders. We call that 2022 benefited from our OEM partners, additional consumables purchases. So we expect consumables revenue to expand as they burn off that inventory and increase their installed base. Service and other revenue in the quarter grew 12%, while looking at the full year, which is less variable and more reflective of the progress we've made over the last several quarters.
Total revenue of $106.3 million expanded by nearly 9%. Growth was driven by a 46% increase in instrument revenue and offset by an 11% decline in consumables. Excluding the aforementioned impact of our OEM partnership in genomics, consumables revenue actually grew 8% in our proteomics business over last year. Service and other revenue grew 6% in 2023. I think it's important to reiterate that we believe growth in instrument placements is the leading indicator and metric. While we expect continued variability in quarter-to-quarter instrument placements, a growing installed base expands future consumables and field service pull through, which are drivers of both revenue and margin growth. Recurring sources of consumables and service revenue were about 64% of total revenue in 2023 Now turning to revenue contribution by segment, our total proteomics revenue was up 21% in the fourth quarter and 22% for the full year, led by continued traction of Hyperion XTI., which we launched in the second quarter. Total genomics revenue was down 13% in the fourth quarter and 7% for the full year. As we mentioned, our consumables growth in genomics was impacted by larger consumables orders in 2022 associated with the launch of our first OEM partnership. In fact, genomic instrument placements were up in 2023 with related growth over 30%. And as Michael mentioned, we recently signed a second OEM partner, NGD., which should pave the way for a return to growth in this segment. And most importantly, we've managed this business to a near contribution margin positive, posting a small $100,000 loss in 2023 versus negative contribution over of over 25 million in 2022 to ensure in 2023, we returned a declining proteomics business to growth, and we set up our genomics business for future profitable growth.
Moving on to our operating performance. Our non-GAAP gross margin for the fourth quarter expanded by 630 basis points to over 59% and for the full year, our non-GAAP gross margin improved by about 900 basis points to just over 60%. And recall that non-GAAP gross margin primarily excludes noncash amortization of intangibles we continue to face residual headwinds related to legacy service and warranty related costs, product mix and capacity utilization. We're aggressively managing these service and warranty costs often on a customer-specific basis and this could create continued pressure throughout 2024. But we do remain confident in our ability to drive growth gross margins for our standard bout with legacy business over time.
In the mid 60% range, especially as we move past these transitory headwinds. At the same time, our gross margins should continue to benefit from our SBS lean approach and price realization. Keep in mind that gross margins are different across instruments, consumables and services, and that revenue mix quarter-to-quarter impacts our ability for the time being be overly specific on our margin expansion roadmap.
Moving to our operating expenses, total non-GAAP OpEx of just over $24 million or about 86% of revenue in the fourth quarter, down from about 94% of revenue in the fourth quarter of 2022. Non-gaap operating expenses for the full year were just under 99,000,093% of revenue in 2023, down from about 119,000,121% of revenue last year. For the full year in 2023, we reduced non-GAAP operating expenses by more than 20 million or 17%. And this is reflective primarily of the cost rationalization programs we've executed over the past year, a testament to strong execution of our SBS operating discipline and lean transformation. This is also indicative of the discipline we engaged since the close of our merger with SomaLogic to reduce OpEx across our combined organizations on our path to realizing our 80 million cost synergies commitments by 2026. It's early days, but we're well on our way. In fact, SomaLogic team provided a healthy head start delivering a second half 2023 reduction in non-GAAP OpEx of roughly 10 million as compared to the first half of 23. We remain enthusiastic about the value we expect to generate with the combined cost structure while leveraging the scale and reach of our diversified portfolio. At the same time, we continue to maintain focused investments in our commercial organization and our R&D pipeline to support sustained long-term revenue growth, abbreviated cash flow and the balance sheet. On a stand-alone basis, we ended 2023 with over 115 million in cash, cash equivalents, restricted cash and short-term investments. For the full year, we reduced operating cash used by $47 million or about 53%. We have been and will continue to be disciplined stewards of cash on a pro forma combined basis after giving effect to the merger with SomaLogic, our cash, cash equivalents, restricted cash and short-term investments at the end of 2023 were approximately 5.65 million. While we expect our cash burn over the next few quarters to be elevated due to transaction integration and restructuring activities. We're well positioned to both fund these nonrecurring activities and support the combined business to cash flow breakeven.
As we look to future M&A, you can be assured that the SomaLogic merger integration remains priority number one, and we'll be thoughtful about additional strategic M&A when such opportunities arise. As Michael mentioned, we're careful but confident that when executed well, this strategy will diversify revenues and fuel growth in gross margins.
Okay. Before I turn the call back over just a few comments on our 2024 outlook and our longer-term financial profile. Today, we issued total combined revenue guidance for fiscal 2024 in the range of 202 hundred 5 million, implying annual growth in the 4% to 7% range, as Michael mentioned, in 2024 as a year of focused execution of our strategic priorities while also maintaining a laser focus on realizing long-term cost synergies secure path of profitable growth. And at the same time, we're navigating continued macroeconomic headwinds facing our entire industry. While our revenue growth will not be linear, we remain committed to our longer term growth targets as we hit key commercial inflection points. We continue to believe by the end of 2026, our combined business will deliver approximately 300 million of revenue with non-GAAP gross margins in the mid 60s, positive adjusted EBITDA margin and a cash position capable of supporting our continued growth.
And one final update on our cap structure of the Board recently approved a new share repurchase program of up to $50 million through March of 2026. This buyback program will be effective as of March first, 2024. With our enhanced balance sheet and operating cash flow improving. This will enable us to repurchase opportunistically and offset future dilution from possible equity issuances arising from convertible debt and other instruments in our existing cap structure. We see this has nothing more than responsible housekeeping to provide additional flexibility in preserving our long-term shareholder value.
And with that, I'll turn the call over to Adam case, former CEO of SomaLogic and our current Chief Strategy Officer for some additional perspective on 2023 and combination of our two companies.

Adam Taich

Thank you Jeff. We are extremely excited about the progress we have made and the value we have collectively generated in 2023, culminating with the groundbreaking merger of our two companies. Speaking on behalf of the entire SomaLogic team, we are thrilled to now be part of the standard bio tools family and are driven to tackle our next chapter of growth together as we have highlighted previously, SomaLogic has carefully cultivated strong customer relationships and invested in broadening our commercial reach, which today services many of the top 20 biopharma companies and have more than doubled our footprint of global authorized sites in the past 12 months. We are also extremely excited about our partnership with Illumina, which will dramatically expand the ways in which customers can utilize the Soma scan technology. Ongoing improvements and menu expansion have enabled multiple enhancements while preserving a commitment to accuracy and reproducibility that is now synonymous with the Soma scan name. The most recent menu expansion announced late last year provides researchers with the broadest coverage tool available to make meaningful advancements in biomarker discovery and drug targeting. When we first started discussions on the merger. The complementary nature of our platforms and technologies was one of the most compelling aspects of the combined business. Now as we sit together on this conference call, our two companies have come together to create a leading multi-omics platform to drive improved returns for all of our stakeholders. We are pleased that the integration process is well underway and we are advancing towards growing our combined business with vast upside potential in attractive markets.
I also want to take this opportunity to once again thank our world-class team of dedicated professionals that have worked so diligently to bring us to this point today.
With that, I will turn the call back over to Michael for closing remarks.

Michael Egholm

Thank you, Adam. I'll conclude by thanking our team for their solid execution in 2023 and our investors for their continued support of our mission. And I once again, welcome our summer logging team members to the standard BOTOX family, including key additions to our executive leadership team to join us from an organization of highly talented individuals with a true passion for the legacy SomaLogic technology I couldn't be more excited about the impact our combined businesses will have on empowering research and chance in life. We are ever mindful of the work still to be done and challenges ahead, but I am more convinced now than ever that the standard power tools and SomaLogic are better together. Stay tuned for future updates. We look forward to connecting with many of you at the up coming to the Cowen Healthcare Conference on March sixth in Boston and the KeyBanc virtual Life Sciences and MedTech forum on March 19th.
I'll now turn the call over to the operator for concluding remarks.

David Holmes

Yes, ladies and gentlemen, with that, we'll conclude today's presentation. We do thank you for joining. We may now disconnect your lines.