NanoString Technologies, Inc. (NSTG) on Q4 2022 Results - Earnings Call Transcript
Operator: Good afternoon. Thank you for attending today's NanoString Fourth Quarter and Fiscal Year 2022 Operating Results Call. My name is Porum and I’ll be your moderator for today’s call. All lines will remain muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] It is now pleasure to pass the conference over to our host Doug Farrell, Investor Relations of NanoString. Mr. Farrell, please go ahead.
Doug Farrell: Thank you, operator, and thanks for joining us today. On the call with me today is Brad Gray, our President and CEO; as well as CFO, Tom Bailey. Earlier today, we released our financial results for the fourth quarter and fiscal year ended December 31, 2022. During this call, we may make statements that are forward-looking, including statements about financial and operating projections, future business growth, trends and related factors, expectations regarding future operating results, future cash flows, current and future instrument orders, prospects for expanding and penetrating our addressable markets, and our strategic focus and objectives, as well as the development status and anticipated success of recently product offerings and the impact of macroeconomic factors. Forward-looking statements are subject to risks and uncertainties, including those described in our SEC filings. Our results may differ materially from those projected, and we undertake no obligation to update any forward-looking statements. Later in the call, Tom will be discussing our financial results and guidance for 2023. We have prepared as a supplement the GAAP financial measures, selected non-GAAP adjusted measures, the calculation of which are described in detail on press release. Throughout this call, all financial measures will be GAAP unless otherwise noted. You can also find reconciliations of GAAP to non-GAAP measures, as well as the description, limitations, and rationale for using each such measure in this afternoon's press release. To aid the analysts and investors in building their models, we have posted exhibits under the financial information tab of our Investor Relations home page that include a presentation of our non-GAAP or adjusted measures and selected other financial data. I'd like to remind everyone that we'll be participating in the Cowen Healthcare Conference in March next week in addition to our fireside corporate discussion Brad will also be participating in a panel focused on AI based genomics and drug discovery on Tuesday afternoon that will include participants from NVIDIA and Generative Medicine. We look forward to having the opportunity to speak with many of you then. And I would like to turn the call over to Brad.
Brad Gray: Thanks, Doug. Good afternoon and thank you for joining us today. We are thrilled with the momentum that's building in the spatial biology market. NanoString currently offers researchers the most compelling portfolio of spatial biology solutions, and we believe that ongoing innovations will continue to extend our lead. As we begin 2023, we enjoyed both growing demand and a substantial backlog and believe that we are poised for strong revenue growth. I'll begin by recapping some highlights from our fourth quarter and fiscal year 2022 before outlining our priorities for 2023. 2022 was a year of transition for spatial biology as the arrival of single cell imagers both expanded demand and shift in mix within the market. With our best-in-class CosMx Spatial Molecular Imagers, we were able to capitalize on this trend and grew our total spatial biology instrument orders by 50% year-on-year to approximately 250 systems across CosMx and our GeoMx Digital Spatial Profiler. In the process, we broadened our customer base beyond the core oncology researchers, who we've served in the past, reaching discovery researchers who've embraced single cell biology. This has allowed us to generate about 70% of our CosMx orders from customers who are new to NanoString. Our finish to the year was particularly strong. During Q4, we generated orders for more than 105 spatial SIP instruments and began delivering the first CosMx ship – commercial shipments. At the year-end, we had captured orders for around 180 CosMx instruments and build a revenue backlog valued at approximately $40 million. We also saw tremendous scientific momentum as we surpassed 7,000 peer-reviewed papers enabled by our technologies including approximately 200 using our spatial biology platforms. CosMx was featured in the December 2022 issue of Nature Biotechnology with a high resolution single cell image of RNA and protein from CosMx gracing that journal's cover. CosMx was also recognized as one of the top 10 innovations by The Scientist Magazine in their annual survey highlighting products that are poised to revolutionize research and advance our scientific understanding. Our spatial biology platforms also reached more mainstream media, as in the January issue of National Geographic, which contained an article on aging, which highlighted Alzheimer's research from Wake Forest University Medical Center using both GeoMx and CosMx to perform high revolution mapping of brain tissue. As we began 2023, we're convinced that our early mover advantage, the scalability of our technologies and our product innovation engine, put us in a leading position in the spatial biology markets. Now I'd like to provide an outline of our strategic objectives for the year ahead. Our first objective for 2023 is to rapidly penetrate the spatial biology market. Spatial biology was nature's method of the year just two years ago, and the field is still in its infancy. We estimate that the addressable market in spatial biology research alone has valued at $6 billion across 7,000 labs, only 5% of which have been penetrated to date. Our focus is on winning share as this market develops, but capturing instrument orders and making our customers successful. We kicked off 2023 by providing important updates on our spatial biology product portfolio in roadmap at the Advances in Genome Biology and Technology Congress, or AGBT. Spatial biology featured prominently at AGBT this year representing about 25% of the total presentations and posters. For the second year in a row NanoString had the most spatial biology studies of any technology provider, almost doubled the number of spatial abstracts of our nearest competitor. AGBT provides a perfect venue in which to build our brand with basic discovery researchers, who are still getting to know NanoString. We capitalized on the opportunity to be the gold sponsor for this year's meeting, and I could not be more pleased with our showing. Following the conclusion of the meeting, consulting firm DeciBio published a survey of attendees that rated spatial biology at the most exciting space with NanoString the most mentioned company. During the meeting, we achieved three key objectives. First, we publicly demonstrated our AtoMx Spatial Informatics Platform. AtoMx is a flexible, open source cloud-based informatics platform that provides secure scalable storage and analysis for spatial biology researchers. Think of the iCloud of NanoString's spatial biology ecosystem. Customer interest in AtoMx is extremely high, and we have conducted dozens of AtoMx demos during the meeting. Feedback from the customers was extremely positive. Those who have already ordered a CosMx system cannot wait to get their hands on the total solution provided by CosMx plus AtoMx. Researchers appreciate that AtoMx allows them to focus on the science and avoid the headaches of building and maintaining their own compute and storage infrastructure. AtoMx also provides this highly scalable storage and compute power for a fraction of the upfront cost of onsite capabilities making the decision to move data to the cloud an easy one. Second, we used AGBT to unveil our CosMx assay roadmap, which will continue to set the standard for plex. Plex is the term used to describe the number of unique genes or proteins that a platform can analyze. We believe plex is the most critical differentiator in the spatial imager class as it directly determines the amount of information generated from precious samples. Our belief that Plex is the number one attribute is grounded in our real world experience as when we have offered customers using our CosMx technology access program, the choice between our 1000 plex assay or our cheaper and faster turnaround time 100 plex assay, every single customer opted for the higher plexed assay. The plex provided by CosMx already stands head and shoulders above the competition with our currently available 1000 plex assays offering twice the amount of data per sample as imagers from other manufacturers. As we showed an AGBT, we're pushing plex further and faster than anyone expected. We revealed our 6,000 plex human RNA assay, which provides 12x the data per sample of that provided by competing platforms. To be clear, these data were not from some small scaled proof-of-concept experiment. We have worked with multiple research customers to use this assay to generate real insights. Then two of those customers will hand at AGBT presenting and discussing their 6,000-plex data. Our 6,000-plex offering is already in full product development and we plan to make it available through our technology access program in the fourth quarter and to begin shipping it to customers early next year. Finally, we used the AGBT meeting to highlight an exciting new collaboration with Dr. Chris Mason and others at the Weill Cornell School of Medicine called the Spatial Atlas of Human Anatomy or SAHA. The abstract described SAHA was selected for [indiscernible] during the opening night of AGBT. As Dr. Mason described, researchers at Cornell will use the GeoMx whole transcriptome assay to analyze tissues from 30 different organs provided by a healthy and genetically diverse population of adults. The researchers plan to make the Atlas available to researchers around the world through periodic releases, and we believe that SAHA will become an important reference database of normal tissue that which may be crucial from enabling precision medicine therapeutic approaches. Coming out of AGBT is clear to us that CosMx has the performance attributes to remain the platform of choice for single cell imaging. Our confidence in our ability to rapidly penetrate the spatial biology market has never been higher. Our second objective is to deliver more predictable revenue growth over the course of 2023. In 2022, we struggle to predict the mix of spatial biology instrument demand between our CosMx and GeoMx systems resulting in inconsistent revenue. We believe that 2023 is set up to be a very different year. First, we're shipping and recognizing revenue on both spatial biology instruments. So the overall revenue will be less sensitive to mix. Second, we expect our primary revenue growth driver to be CosMx instrument orders that we've already captured and which are currently in backlog. We plan to execute a meter rollout of CosMx instrument shipments designed to provide excellent customer experience as we scale up manufacturing and installs and training. We'll start with a manageable number of installations during Q1, increasing the pace in Q2, and then remaining at a relatively steady pace over the balance of the year. This gives us a high degree of confidence in the predictability of our revenue growth in 2023. Our third strategic objective is to demonstrate continued progress towards cash break even. This is a prime directive for the company and everyone on our team knows it. During Q4, we made hard choices to optimize our cost structure heading into 2023. We reduced our headcount from about 800 employees to about 700 employees. For 2023, we're guiding revenue growth in the range of 34% to 41%, which we are expecting to deliver while modestly lowering our operating expenses, driving a substantial improvement in our adjusted net loss for the year, and an improving financial profile quarter-by-quarter throughout the year. We exit 2022 with more than $195 million of cash and equivalents. And believe that with these resources in hand, we are well positioned to sustain our operations to break even and profitable growth. I'd now like to turn the call over to Tom to review the details of our financial results and to provide our financial outlook for the year.
Tom Bailey: Thanks, Brad. And thanks all for joining us today. For the fourth quarter of 2022, revenue was $34.4 million in the middle of our guidance range. Q4 spatial biology revenue was $14.8 million above the upper end of our spatial revenue guidance range. Our cumulative CosMx SMI order book as of December 31 was approximately 180 systems, including about 80 new orders received in Q4. We shipped the first 13 CosMx systems to customers in Q4 generating revenue of approximately $3 million, leaving us a backlog of over 165 systems we expect to ship in 2023 with a revenue value approximately $40 million. Q4 GeoMx revenue was $11.4 million, a 23% sequential improvement. GeoMx instrument revenue was $5.4 million, reflecting over 25 new systems shipped. Consumables revenue was $6 million and Q4 annualized GeoMx pull-through was about $73,000 per system. At the end of Q4, our GeoMx installed base was approximately 350 instruments with about 20 instruments installed during the quarter. Q4 nCounter revenue, which includes all of service was $19.6 million. nCounter instrument revenue was $2.5 million, consumables revenue was $12.1 million and Q4 annualized end nCounter pull-through was approximately $44,000 per system. At the end of Q4, our nCounter installed base was approximately 1,120 instruments with about 15 instruments installed during the quarter. Turning to margins and expenses. Commentary reflects non-GAAP or adjusted results, which for Q4 exclude the impact of stock-based compensation, depreciation, litigation, and certain non-recurring restructuring and severance expenses. Please refer to our press release as well as the exhibits we have posted to our investor relations webpage for detailed information on how our non-GAAP or adjusted measures are prepared. Q4 adjusted gross margin was 43%. Our Q4 adjusted gross margin was impacted by manufacturing variance [ph] was held on our balance sheet due mainly to under absorb labor we expensed the Q4 together with the reduction in our workforce. Inclusion of these additional charges in Q4, cost of goods sold impacted our Q4 adjusted gross margin by about eight percentage points. Q4 adjusted R&D expense was $15 million, a decrease of 4% year-over-year and adjusted SG&A expense was $27.5 million, an increase of 4% year-over-year. Q4 adjusted operating expense trends reflect the initial impact of expense reductions we implemented in Q4, balanced by investments we continue to make in our spatial biology manufacturing capacity and efficiencies and in our spatial biology product development field support commercial initiatives. Our Q4 adjusted EBITDA loss was $27.7 million and we exited the quarter with approximately $196.5 million of cash, cash equivalents and short-term investments. Transitioning to our 2023 outlook, we expect 2023 revenue of $170 million to $180 million, representing annual growth of 34% to 41%. Our range includes spatial biology revenue of $95 million to $100 million, a more than doubling of our spatial revenue as compared to 2022. nCounter revenue, which includes all service and other revenue is expected to be in the range of $75 million to $80 million, a 6% decline at the midpoint of the range. As this more mature part of our business moved into cash cow [indiscernible]. We expect about 40% of total revenue to be recorded in the first half of 2023 and about 60% in the second half. Seasonality will be strongly influenced by the pace of CosMx shipments, which will steadily increase over the course of the year as we increase our capacity to manufacture and install CosMx instruments. We expect to clear a current order backlog of over 165 units by the fourth quarter. We expect 2023 adjusted EBITDA loss to range from $65 million to $75 million, a significant improvement compared to 2022 more substantively in the second half of the year as our spatial biology revenue grows on a reduced operating expense base. We expect adjusted gross margins will be temporarily lower in 2023 as our revenue mix shifts towards CosMx instruments before improving in 2024 and beyond as these systems begin to pull through higher margin consumables. For the first quarter of 2023, we expect revenue will be in the range of $32 million to $34 million, reflecting typical sequential and seasonal patterns and our measured pacing of CosMx shipments. Our Q1 range includes $15 million to $16 million of spatial biology revenue and $17 million to $18 million of nCounter and service revenue. Now I’ll turn the call back over to Brad for our closing comments.
Brad Gray: Thanks, Tom. In closing, we feel great about our setup for 2023. Momentum in our spatial business is building and we’ve established CosMx as a market leading spatial limiter [ph]. At year end, we had a backlog of CosMx order valued approximately $40 million, giving us excellent visibility to our revenue trajectory for the year. For 2023, we expect to generate healthy revenue growth while reducing operating expenses, which will allow us to work in a disciplined fashion towards achieving cash flow breakeven. With that, I love to now open the line for your questions.
Operator: [Operator Instructions] Our first question comes from the line of Dan Brennan with Cowen. Dan, your line is now open.
Operator: Our next question comes from the line of Dan Arias with Stifel. Dan, your line is now open.
Operator: Our next question comes from the line of Kyle Mikson with Canaccord. Kyle, your line is now open.
Operator: Our next question comes from the line of Martha [indiscernible] from JPMorgan. Martha, your line is now open.
Operator: Our next question comes from the line of John Sourbeer with UBS. John, your line is now open.
Operator: Our next question comes from the line of Tejas Savant with Morgan Stanley. Tejas, your line is now open.
Operator: This concludes our question-and-answer session for today’s call. I will now pass back to Doug for any final remarks. Thank you.
Doug Farrell: Thanks everybody for joining us today. If you did miss any portion of the call, a replay should be posted in the next couple of hours. Toll free access to that is 866-813-9403. For international callers, please use 929-458-6194. The conference ID is 176735. So with that, this concludes our call. Thank you.
Operator: Good-bye. This concludes today’s call. Thank you for your participation. You may now disconnect your line.
