Akoya Biosciences, Inc. (NASDAQ:AKYA) Q3 2023 Earnings Call Transcript

Akoya Biosciences, Inc. (NASDAQ:AKYA) Q3 2023 Earnings Call Transcript November 11, 2023

Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Akoya Biosciences Incorporated Third Quarter 2023 Earnings Conference Call. [Operator Instructions] At this time, I’d like to turn the conference over to Mr. Priyam Shah. Mr. Shah, you may begin.

Priyam Shah: Thank you, operator, and thank you to everyone who is joining us today on this call. I’m Priyam Shah, Head of Investor Relations at Akoya Biosciences. On the call today, we have Brian McKelligon, Chief Executive Officer; and Johnny Ek, Chief Financial Officer. Earlier today, Akoya released financial results for the third quarter ended September 30, 2023. A copy of the press release is available on the company’s website. Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of Federal Securities Laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements.

Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. For a list and description of the risks and uncertainties associated with the Akoya’s business, please refer to the risks identified in our filings with the US Securities and Exchange Commission, including in the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2022, filed on March 6, 2023. And subsequent filings with the SEC, including our quarterly report on Form 10-Q for the quarter ended September 30, 2023, filed today, November 8, 2023. We urge you to consider these factors. And you should be aware that these statements are considered estimates only and are not a guarantee of future performance.

This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 8, 2023. Akoya disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. The audio portion of this call will be archived on the Investors section of our website later today under the heading, Events. Akoya plans to participate in several upcoming investor conferences, including the Stephens Investment Conference, the Canaccord Genuity MedTech and Diagnostics Forum, and the Piper Sandler Healthcare Conference. Details can be found under events on the Investors section of our website.

And with that, I will now turn the call over to Brian.

Brian McKelligon: Thank you, Priyam, and good afternoon or evening to everyone. We appreciate you joining us today. During today’s conference call, I will begin by giving you a broad overview of our performance in the third quarter. I will touch upon our business advancements and provide insights into the latest developments in our product offer. Following that, Johnny will delve deeper into our financials and key business trends and provide an outlook for the future of our business. Akoya had a strong third quarter in 2023, marked by several noteworthy achievements, including record-breaking revenue of $25.2 million, representing a strong 34% growth compared to the previous year. Gross profit was $15.3 million in the third quarter, representing a 40% growth over the prior year period.

And gross margin has now grown to 60.6% for the third quarter. All of this was achieved, while also contracting our operating expenses versus the prior year end quarter. Our ongoing efforts to leverage our cost structure to drive the business towards positive cash flow are well underway, as we work to ensure that a more substantial portion of the expected revenue growth continues to fall to our bottom line. The cumulated installed base now stands at 1,132 instruments, the largest in the field, and as a testament to our team’s commitment to scaling spatial biology workflows for our customers and setting the standard in the industry. Akoya’s consistent and sustained growth year-after-year and quarter-after-quarter since our IPO in the spring of 2021 can be attributed to our unwavering dedication delivering a top tier portfolio of products that cover the entire spectrum of the spatial biology market, from biomarker discovery, to translational research, to clinical applications; all backed by a strong intellectual property portfolio.

Our incremental investments moving forward are strategically targeted, allowing us to maintain operating expenses at a constant level, while we continue to rapidly scale our footprint in spatial biology. We are pleased to report the continued expansion in peer-review publications now over 1,070 as of the end of the third quarter, a 55% increase in the prior year period. This volume of accelerating publications is a testament to the great science being done by our customers, and we expect this trend to continue. Recent highlights include a published study in the inaugural issue of GEN Biotechnology last month, detailing the powerful results of a study done by the team at the University of Queensland to comprehensively map the spatial proteome of head and neck squamous cell carcinoma using a panel of over 100 protein markers run on the PhenoCycler-Fusion.

Through this effort, these researchers have identified distinct immune and metabolic signatures to help advance the understanding of the heterogeneity of tumors and the mechanistic basis of variable clinical response. Akoya is now at the forefront of ushering in the next era of spatial biology, or Spatial Biology 2.0, with a focus on delivering faster and more powerful solutions across a more than 1,100 instruments in the field. Our R&D and operational efforts are now dedicated to further scaling our platforms by introducing significant workflow efficiencies, launching expanded panels and ready-to-use content, broadening our application menu, and expanding our range of partner software solutions. This holistic approach to delivering ongoing improvements to our platforms from sample to answer is transformative for our customers, driving further adoption and accelerating the utilization of Akoya’s solutions.

This Spatial Biology 2.0 initiative announced at last week’s Society for Immunotherapy of Cancer meeting, or SITC, in San Diego, is grounded in the following principles. First, spatial phenotyping was whole slide imaging at high throughput is a requirement; whether it’s a discovery, translation, or a diagnostic application. Second, the time from sample to answer needs to be rapid to support a researcher’s ability to expeditiously complete their study. Whether it’s a 50 sample discovery project or a 300 sample translational study, time matters. Sample processing times need to be minutes to hours, not days to weeks. Third, given the significant investment our customers are making, scientists expect a future-proof solution with frequent improvements and upgrades.

Now some specific examples of acquired spatial biology to clinical deliverables include the following. First, the recent rollout of the PhenoCycler-Fusion 2.0 field upgrade represents a significant milestone. Setting a new industry standard on the speed of whole slide spatial phenotype. With this upgrade, customers can now process twice as many samples per week, establishing the PhenoCycler-Fusion as the highest throughput spatial discovery platform available in the market. Second, our PhenoImager HT 2.0 upgrade similarly represents a transformative enhancement, resulting in an astounding five-fold increase in workflow speed. One of the key new features of the HT 2.0 is its ability to perform real-time image analysis directly on the industry.

This not only expedites the sample-to-answer process, but also enhances the overall efficiency of the workflow. These instrument upgrades have been welcomed with great enthusiasm by our customers, and we expect the adoption to continue to accelerate. Coupling the integration of these 2.0 instrument upgrades with Akoya’s ready-to-use PhenoCode discovery and signature panels provides at an accelerated and streamlined solution. Akoya continues to expand its portfolio of PhenoCode Panels, building on our existing content in oncology, immune-oncology, and inflammation, while also expanding into new areas like neurobiology and preclinical animal models. Given the rapid expansion in commercial and open source spatial biology software solutions, Akoya continues to prioritize our resources on delivering rapid and real-time primary analysis to our customers.

And partnering with industry-leading third-party software providers for the downstream analysis. Our proprietary file compression algorithm and rapid image analysis deliver our data in a standardized format called QPTIFF. This standardized data format delivers manageable data files compressed nearly 30-fold to tens of gigabytes. And catalyzes the ability of third-party software providers to easily develop and support analysis of a Akoya’s derived datasets. We have established partnerships with leading software providers, including Enable Medicine, Visiopharm, Indica Labs, PathAI, OracleBio, and open source solutions like QuPath. The result is a comprehensive suite of desktop, cloud based, and open-source software solutions, ensuring that retailers have the flexibility to select the software solution that best aligns with their specific needs and requirements.

At the SITC Conference last week that I already mentioned, Akoya had a strong presence as we highlighted our Spatial Biology 2.0 initiatives. It was also clear that spatial phenotyping in gaining significant traction and is becoming center of early and late-stage clinical biomarker efforts, especially in the field of immuno-oncology. Akoya has played a pioneering role in driving these efforts by offering a clinical platform that meets the stringent requirements of our biopharma partners, Precision Medicine and companion diagnostic groups. Our Advanced Biopharma Solutions CLIA Lab in Marlborough, or ABS, is increasingly focused on latter-stage, high-value projects. And we are confident in our ability to continue to meet the accelerating needs of the spatial biology clinical market.

To expand and strengthen our clinical pipeline, Akoya is actively leveraging the capabilities of our HT 2.0 workflow and cross-pollinating the best practices from our Advanced Biopharma Solutions CLIA Lab directly to our CRO partners. To date, we have extended our rapidly growing qualified service provider network, which now includes 18 in this related CROs. With payer direct promotion of Akoya-based biomarker solutions, our platform is option in more and more clinical studies and is further amplified. On the operational front, our focus is on supply chain simplification, and manufacturing robustness and efficiency to meet the rapidly growing demand for our reagents. In parallel, we have a dedicated effort to drive meaningful margin improvements on these reagents, as they become a larger percentage of our overall revenue year-over-year.

This drives continued increase in our overall gross margin, as we anticipate being above 60% as we exit 2023. In summary, our strategic focus for the remainder of 2023 is centered on three key initiatives. First, enhancing applications and workflow efficiency as we usher in Spatial Biology 2.0, including system improvements and upgrades, expanding our PhenoCode manual [ph] offerings, and driving increased total of reagents on both the PhenoCycler-Fusion and PhenoImager HT. Second, accelerating the clinical adoption with clinically directed workflow improvements, expanding late-stage biomarker programs with our top tier biopharma through our ABS lab, and leveraging our growing network of CRO partners to a qualified service provider network to drive further adoption in the late translation on clinical markets.

And third, driving operational excellence and financial sustainability by focusing on improving efficiencies and cost effectiveness, and executing on targeted investments to support our strategic goals and working towards achieving cash flow positivity in 2025. And with that, I will turn the call over to Johnny to discuss our financial results. Johnny?

Johnny Ek: Thanks, Brian. As Brian highlighted, total revenue for the third quarter of 2023 was $25.2 million, a 34% growth compared to the same period in 2022. Our robust year-over-year growth was achieved globally across our diversified revenue channels and strong portfolio of products and services. Product revenue including instruments, reagents, and software, totaled $18 million for the third quarter, representing 25% growth over the prior year period. Instrument revenue reached $12 million in the third quarter, representing a 27% growth over the prior year period. During the quarter, we sold 69 instruments, of which, 27 were PhenoCyclers; and 42 were from the PhenoImager portfolio. Our total installed base now stands at 1,132 instruments, which includes 327 PhenoCyclers and 805 PhenoImagers.

A total of 209 Fusion instruments have shifts since the full commercial launch at the start of 2022, and we now have a total installed base of 186 for the combined PhenoCycler-Fusion system, sold directly as a combined system or as an upgrade to standalone PhenoCycler instruments that previously utilized third-party microscopes. The majority of the PhenoCyclers are being sold in combination with the Fusion and we expect this combination to drive increased reagent pull-through from an expanding menu of panels and faster workflows because of the ongoing 2.0 field upgrades. We project that approximately half the current installed base of PhenoCycler-Fusion and HTs will be upgraded to the 2.0 versions by year-end. Reagent revenue reached $5.7 million in the third quarter, reflecting a 21% increase from the prior year period.

The annualized third quarter reagent pull-through applicable to both the PhenoCycler and HT, is now in the mid $30,000 range. This is a notable improvement compared to the annualized pull-through per instrument in 2022, which was in the low $30,000 range for both the PhenoCycler and the HT. This growth can be attributed to the increased utilization of PhenoCyclers paired with the Fusion and a growing utility for HTs. As we continue to pair more Fusions with PhenoCyclers, enhance our instruments through the 2.0 field upgrades with expanded workflow capabilities, and refine our operations planning and supply chain, we are strategically positioning reagents to play a more significant role in our revenue mix as our customers increase their usage.

Service and other revenue totaled $7.2 million for the quarter, an increase of 62% over the prior year period. Services have been a substantial growth segment for us, as our install base and warranty revenue rapidly expand. And as our lab services continue to drive additional higher scale spend. Gross profit was $15.3 million in the third quarter, representing a 40% growth over the prior year period. And gross margin was 60.6% for the third quarter. As we optimize our operations and leverage our manufacturing investments, we expect to further drive the expansion of our gross margin, which we project to be above 60% as we exit 2023. Operating expenses for the quarter totaled $26.8 million as compared to $27.6 million in the prior year period, indicative of a flattening or reduced spend pattern as we had previously indicated.

Throughout 2023, we have had consecutive quarterly contraction in our spend while we continue our meaningful top line growth. As Brian highlighted, our efforts to leverage our cost structure to drive the business towards profitability are indeed well underway. We ended the quarter with approximately $78.6 million of cash and cash equivalents, with the ability to draw an additional $11.3 million on our existing debt facility, bringing our total available capital to $89.8 million. Common shares outstanding and fully diluted shares, including the impact of outstanding options and unvested restricted stock awards, are 49.1 million as of September 30, 2023. In summary, we are thrilled to report another exceptional quarter with record-breaking revenue of $25.2 million, marking a strong 34% growth over the prior year period.

Akoya’s installed base has now reached 1,132 instruments, solidifying our position as the industry leader in spatial biology. Our strategic focus remains on the rapid expansion of our installed base, while driving reagent revenue growth and increasing pull through across our systems to realize the scalability of spatial biology. We’ve also implemented important organizational changes to enhance efficiency, drive gross margin improvement, and achieve cost advantages, all while maintaining strong top line growth. As such, we are confident in our ability to sustain strong growth throughout 2023 and beyond, while driving towards the goal of cash flow positivity in 2025. We are pleased to reaffirm our 2023 revenue guidance range of $95 million to $98 million, given the direction of our business and the favorable trends we are observing in a dynamic spatial biology market.

Back to you, Brian.

Brian McKelligon: Well, thank you, Johnny. We are pleased to report a strong quarter, and we look forward to executing on our strategic objectives throughout the remainder of the year, as we drive the business towards positive cash flow. We are thankful for the hard work, our fellow dedicated Akoyan’s as well as for the support of our customers and shareholders. Akoya remains well-positioned for growth and we’re excited about the opportunities that lie ahead, as we deliver new space solutions from the discovery to the clinical markets. At this point, we’ll turn the call over to the operator for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question or comment comes from the line of Tejas Savant from Morgan Stanley. Mr. Savant, your line is open.

Edmund Tu: Good evening, guys. This is Edmond. Thank you for the time.

Brian McKelligon: Hey, Edmund. Thank you.

Edmund Tu: Hey, Brian. Just to start on the 2.0 rollout progress, I think, on the call, you guys mentioned — expect about 50% of both platforms to be upgraded by year end.

Brian McKelligon: Yes.

Edmund Tu: I recall you just previously had noted that it would be a little faster for the PhenoImager, because it’s a software upgrade or something. Has there been any changes or what caused the change in expectation here?

Brian McKelligon: I don’t think there’s any change. I think that’s kind of what we had expected. It certainly could potentially accelerate. So approximately 50% across the board by year end is kind of what our expectations had been. So it’s really in line with what we had planned.

Edmund Tu: Got it. And given the fact that the RNA chemistry isn’t going to be capable until the customers have the 2.0 rollout, is it fair to assume that you won’t be releasing anything that provides RNA contact — context until next year? And if you could, could you provide some color on what this initial panel would look like? Would be it be — I think, Brian, you’ve mentioned you plan on designing panels for more targeted experiments on the scale of 30 to 100 samples. So would it be more of a mid-plex range RNA code deduction capability?

Brian McKelligon: So at a high-level, Edmond, our objective is to look at RNA as an absolutely complementary analyte to our high-plex protein profiling. And then with respect to the details of the RNA rollout, we will be providing some more specific announcements on our RNA strategy in the near future. So we’re going to hold off on a little bit more detail at this point.

Edmund Tu: Got it. And then the final question. On the call, Brian, you mentioned some clinical driven workflow improvements on the HT. Is that something from the 2.0 rollout that’s ongoing right now?

Brian McKelligon: There’s a couple of parts. That’s a good question. Overwhelmingly, the 2.0 rollout really does simplify the primary informatic analysis by doing it in parallel, having your data come off ready for, kind of what you call, tertiary analysis, which is to get the meaning — the meaning of — understand sort of the value of your study. That’s part one. That workflow improvement is certainly meaningful. There’s also some additional workflow improvements and expertise that’s coming out of our partnership with Acrivon that we are going to be able to leverage as part of some of our forthcoming partnerships. And some of those things include kind of reporting additional workflow improvements, reagents, et cetera. So those are — those improvements are, I think, more second order.

But really, clinically relevant and embedded within our conversations with many of our biopharma partners, as we see our pipeline of opportunities and projects move farther and farther downstream.

Edmund Tu: Got it. Thank you for the time.

Brian McKelligon: Thank you, Edmond.

Operator: Thank you. Our next question or comment comes from the line of Lucas Baranowski from UBS. Mr. Baranowski, Your line is now open.

Unidentified Analyst: Actually, [indiscernible] calling in. Thanks for taking the question and congrats on the quarter. So maybe just start off first on the gross margin. It sounds like 60% rate exiting the year. Just any color there on what is some of the puts and takes on the margin improvement? And just thoughts on the path to a positive cash flow?

Brian McKelligon: Yes. Johnny, you want to answer that?

Johnny Ek: Sure. Yes. As you saw, our Q3 results of 60.6% gross margin is really indicative of where we think the business is when we operate the way we’ve been preparing to do. We expect to see those improvements in the next year, as we take advantage of initiatives that we are putting in place now to — bring in-house some of our — some manufacturing capability, improve our supply chain, which drives efficiency because you’ll recall in prior quarters, some of the headwind on gross margin was related to scrap and excess and yields, and things like that. And so we are taking action on many of those items, which will allow our gross margin to improve over the next year or so. Coupled with the fact that, as our revenue mix changes over time more to reagents, which are a higher margin product for us, that will supplement the cost efforts that we are putting in place as it relates to gross margin.

Unidentified Analyst: Thanks. And apologies, I was a little late joining the call. But I think last quarter you talked a little bit about some of the broader market demand, like China, maybe a pullback with some capital purchases. Just any updates there on thoughts in the market and as you look out to the fourth quarter or even next year?

Brian McKelligon: Yes, it’s a really good question. I think as we look across the market segments, obviously, a 34% growth year-over-year and a 31% growth full year-to-date, I think those are solid growth numbers. As we drill in a little bit, it’s really interesting to look at — the largest market for us really is the Americas. And that market, year-over-year, we’ve been able to grow in the mid 40% range year-over-year in the Americas. EMEA is doing pretty strong at the mid 20%. Like others, APAC has been a challenge. That said, we’ve still been able to grow in mid single digits in APAC, certainly well below our hope and expectations coming into the year. But given the strength in the Americas, the continued performance in the EMEA, and the ability of the APAC team to continue to get some growth out of that business, that’s what’s enabled us across the board to continue to grow this quarter at 34% year-over-year.

Unidentified Analyst: Got it. Thanks for taking the question.

Brian McKelligon: Thanks, Louis.

Operator: Thank you. [Operator Instructions] Our next question or comment comes from the line of David Westenberg from Piper Sandler. Mr. Westenberg, your line is now open.

Unidentified Analyst: Hi. Thanks for taking the questions. This is John on for Dave. So given the interest rate environment, do you feel that that’s impacting any capital equipment, like the app type capital equipment? And considering that you have more affordable platform, do you think that’s helping you? Thank you.

Brian McKelligon: Yes. I mean, certainly we are seeing more diligence around capital purchases. So there’s a slight lengthening and visibility around platforms like ours. It hasn’t gotten to a point where it’s impacting our ability to perform. And I do think that certainly the affordability of our platform certainly helps. I think the other way that we look at it is the meaningful throughput of our instruments really allows our customers, as you think about amortizing costs over a number of samples per unit time. It’s really helped our business. And that’s particularly true as you look at groups, whether they’re CROs, or core labs, or research based CROs that want to leverage our platforms as a business opportunity for them across multiple users.

The fact that we can do on 60, 80 samples a day, 300 samples a week on the HT, and 20 to 30 samples on the PhenoCycler-Fusion, that throughput coupled to the affordability and the amortization of samples per unit time has really allowed us to take those platforms and continue to grow in areas where it’s being used as a service offering.

Unidentified Analyst: Got it. Thank you. And I’m aware that you’re not giving any guidance towards 2024 revenues. But are there any other macro factors that we should consider when looking forward to that?

Brian McKelligon: I don’t think anything different than our peer group just in terms of the macroeconomic environment. I think for us, as you look to ’24, generally, thematically, as Johnny alluded to, it’s about really continuing to see solid top line growth, while at the same time, we are really going to be holding our expenditures in 2024 at a level that’s consistent with what you’ll see at the second half. So I think we feel like in terms of our multiyear strategy to really forward invest in ’21 and ’22 to solidify our commercial team and portfolio. And then in the subsequent years, ’23 and ’24, continue that revenue growth while really holding our expenses and investing in gross margin. That really has been our plan. And it’s certainly magnified importance in this environment.

And so we think that strategy will continue into 2024. So as you noted, while we are not guiding specifically, again, still thematically, it’s continued top line growth with real eye towards expenditures equivalent in ’24 to second half to reiterate. Johnny, anything to add to that?

Johnny Ek: No, I think that’s exactly right. It’s a [indiscernible] focus. It’s continuing to grow revenue at a meaningful rate. It’s improving gross margin ratably through the year. And then it’s continue to hold OpEx at an appropriate rate given the forward investment. That’s, to your point, not guiding for ’24 yet. But it’s how we look to the future. Those are critical areas of focus for us.

Unidentified Analyst: Got it. Thanks for your time.

Operator: Thank you. Our next question or comment comes from the line of Rachel Vatnsdal from JPMorgan. Mr. Vatnsdal, your line is now open.

Unidentified Analyst: Hello. This is Martha on for Rachel from JPMorgan. Thank you for taking the question and congrats on the quarter. Just wanted to dig into the assumptions for 4Q. Maybe you can provide a little bit more color on the pull-through and placement assumptions. And just to clarify, in light of the macro, are you assuming some sort of 4Q budget flush for 4Q? Thank you.

Brian McKelligon: So — yes. So right now, I think I heard your questions about 4Q guidance on that and budget flush. And while we explicitly don’t guide on the fourth quarter, like our typical seasonality, we do expect a top line step up in Q4 relative to Q3. Yes, in terms of budget flush, it’s a really good question. I think for us, obviously, it’s not a binary event where it’s either a flush or not. I think for us, we are being fairly muted in our expectations of a meaningful freeing up of CapEx money amongst our customers. And thinking this is going to be sort of more of a typical step up, similar dynamic in 2022 because I think the environment is similar. Johnny, want to add anything?

Johnny Ek: No, I think that’s how we think of it. The only thing I would add is, as we reiterated guidance, you do math on Q4 and you get right into our guidance, which is where we expect for the full year.

Unidentified Analyst: Thank you. And then in terms of pricing this year. Can you discuss how much you were able to raise pricing? What are your expectations for ’24? And then are you seeing any pricing pressure from your competitors this year?

Brian McKelligon: Yes, I’d say, like this fiscal year ’23, it will be a similar scale of price increase in ’24, taking into account, obviously, the economy and interest rates and what we think is a fair price increase. But I think it will be within standard range, nothing that’s an outlier. Johnny, you want to add anything to that?

Johnny Ek: No. I mean, I think with the high inflation environment, what we are seeing, we expect to be able to get price increases that are what we’ve seen in prior years and appropriate. And we are not seeing a meaningful pressure on price. I think that’s part of your question is we are not having that in the field. That’s not a major item we are working anyway.

Unidentified Analyst: Thank you.

Operator: Thank you. Our next question or comment comes from the line of Kyle Mikson from Canaccord Genuity. Mr. Mikson, your line is now open.

Kyle Mikson: Yes. Hey, guys. Thanks for taking the questions. Congrats on the quarter. Brian, can you kind of talk about like — maybe update us on your push into the genomics market. Because as we think, I mean, I remember like asking a year ago or so like when we talk about RNA for the first time, how has that gone so far? And if are you going to really like pull back and really lean more into, I guess, proteomics still? I mean, just how are you thinking about this whole multi-omics strategy as we look ahead in 2024?

Brian McKelligon: Yes, I think longer term, Kyle, it’s still of absolute importance to have a multi-omics solution. I think for us is, as we talked earlier, I think we really look at RNA as an absolute complementary analyte. And just as an example that we alluded to in the opening comments, the recent publication in GEN Biotechnology and a lot of the discoveries that we are able to be realized with 100-plex multi-omics — I mean, 100-plex of spatial proteomic study on the PCF and the immense value that was gotten out of that. It really does highlight how much discovery you can get out of spatial proteomics. And we are seeing, I think, a growing realization of that. So as we look at RNA, it’s absolutely a complementary approach, where it’s used to either look at translational — transcriptional translational concordance or not.

But probably more importantly, leveraging it to look at analytes where protein might not be the most ideal methodology. So still at a high-level, Kyle, looking at it as a highly complementary approach, still committed to it. But as noted earlier, we are going to give a little bit more color on the RNA strategy in the coming months.

Kyle Mikson: Okay. And maybe just clarify what I was asking. A pretty noisy in that market today. Does it make sense just to pull back a bit, I guess, and just focus on your bread and butter?

Brian McKelligon: It’s — the way I would characterize it is our number one priority is to continue to be great at our workflow, to deliver on this — the continued workflow improvement, workflow simplification, throughput, flexing, et cetera. And then layering in RNA as complementary versus having RNA be the number top one priority. It’s amongst the priorities getting towards a multi-omics solution.

Kyle Mikson: Okay. That’s super helpful. Don’t mean to go into too much detail there, but that was great. Maybe, I think you guys mentioned you’re making efforts to achieve meaningful margin improvements for reagents. So that would be the time that we’ve been looking forward to for a while now if you like the pull-through, et cetera. Can you just kind of dive deeper into that and tell us what exactly you meant by that statement? And what do we expect in the next couple of quarters or a year or so that can really meaningfully improve margin as well as just consumables pull-through and kind of what underlying margins for that business as well?

Brian McKelligon: Yes. So the two parts that obviously are compounding and more than additive. Part one is enabling that higher throughput with the 2.0 releases, with the continued rollout of additional PhenoCode Panels, with the maturation and addition of additional software partners. So that time to answer becomes faster and easier. That’s sort of part one. And I think we sort of talked through all of the components of that. In fact, I just did. The second part is in terms of improving reagent gross margins. Some of this includes, rather than relying on external third parties and a chain of custody of third-party suppliers amongst all the reagent components and antibody conjugations and fulfillment, is beginning to take more control of that ourselves.

And so that time from build to customer shelf is shorten, and so is the amount of investment that we have to make both internally and externally to do that. So the overall cost of goods for an individual antibody or panel drops down, while we simplify and streamline that supply chain, that chain of custody. And take on more of that manufacturing internally rather than relying on third parties, which is why we have an ISO 13485 facility and why we have that capabilities.

Kyle Mikson: Awesome. If I could just squeeze another one for [indiscernible]. Maybe you could just talk about, either qualitatively or quantitatively, what percentage or what portion of the PhenoCycler kind of install basis is using standard or legacy microscopes rather than the Fusion today. I’d just be curious to hear that, given the tradition of the past couple of years.

Brian McKelligon: It’s a good question. It’s a little bit over 40% that are still on third-party. So if you look at the 330 so PhenoCyclers that are out there, about 190 of them — I’m rounding up a little bit. About 190 of them have a Fusion attached to it. So that’s about their proportion. And we see, as we go through next year, almost every cycle of it sold is going with the Fusion. So that’s sort of part one. And then part two, we’ll continue to upgrade those existing PhenoCycler third-party scopes throughout next year. So hopefully that gives you your answer.

Kyle Mikson: Yes, that was perfect. Thanks for the time, guys.

Operator: Thank you. Our next question or comment comes from the line of Timothy Chiang from Capital One. Mr. Chiang, your line is open.

Timothy Chiang: Thanks. Hey, Brian, just being at SITC last week, obviously you guys had a pretty big presence there. You had a pretty well attended perception as well. How do you sort of leverage a big rollout of the Fusion 2.0 post the SITC Conference? I mean, did you guys get a lot of positive responses.? Could you talk a little bit about that?

Brian McKelligon: Yes. I mean, there is huge positive response, not only at the booth, but also at some of the events that you might have been too, response to the poster publications. I think, simply the number one thing, Tim, that you get out of it is a high number of qualified leads amongst an audience that really is the most targeted customer base for our current platforms in the field of oncology/immuno-oncology. So the number one thing that you get out of it is high-quality leads. Obviously, the second benefit you get out of that given, not only the massive increase in the size of that conference, but just our large presence, we get a lot more visibility. And with the rollout of both the 2.0 on the PhenoCycler-Fusion and the HT 2.0, that visibility is across multiple market segments.

Because there’s researchers at SITC that are, not only discovery researchers that have an interest in the PhenoCycler-Fusion, but absolutely translational and clinical companion diagnostic leaders in our market that have an absolute interest in the emerging clinical opportunities. So getting that visibility across that entire market continuum, I’d say is the second biggest value.

Timothy Chiang: And maybe just a follow-up question for Johnny. Obviously, your gross margins right at 60% this quarter. And you mentioned some supply chain efficiencies that you’re starting to benefit from. I mean, what — where can you get your gross margins down the road, Johnny?

Johnny Ek: So I think, as I mentioned, it’s sort of comprised of several efforts that will evolve gross margin over time. Our first and sort of quickest improvements to margin are on the cost supply chain, as Brian mentioned, the chain of custody of some of our reagents. Those things we can make moves there and have started making moves that you see this margin are improving. That will drive margin, as I’ve said in the past, a couple of hundred basis points a year is how we see margin moving. But as more and more long-term margin becomes — our revenue becomes more heavily weighted towards reagents, again, I think that margin continues to move north for the next several years, right? I mean, right now, in the near-term, it’s cost initiatives as well as a margins as a revenue shift.

But that becomes even more important as we fully leverage the 1,200 instruments we have in the field, as that annuity or that pull-through increases per box, that drives that margin improvement as well to something clearly north of the 60% that we are talking about now.

Timothy Chiang: Okay, got it. Thanks.

Operator: Thank you. Our next question or comment comes from the line of Mason Carrico from Stephens. Mr. Carrico, your line is now open.

Mason Carrico: Hey, guys, thanks for the question. Sorry, if these have already been asked, but I’ll ask two upfront, if that’s all right.

Brian McKelligon: Sure.

Mason Carrico: First, how are you thinking about the growth outlook for the services business going forward? Growth there has obviously been really strong this year. Is there anything that we should be taking into consideration when we are thinking about how to model that segment of your business next year? Or do you expect the demand momentum that we’ve been seeing to really keep continuing?

Brian McKelligon: Yes. On the services front, obviously, we report that out, but don’t guide at that level of granularity. But I think, I’d say, qualitatively, there’s two growth drivers to that service revenue, obviously, the growing installed base and warranty revenue. But some of the real material drivers, I think, as you’re alluding to, are our current companion diagnostic partnerships and the continued expansion of our Advanced Biopharma Solution service business. So we expect continued incremental growth across the services next year. The other thing, I would say is, as I noted to in the commentary, we are increasingly working with our CRO partners through our qualified service provider network to really begin to leverage them as a partner and an amplifier in the translational and clinical research segments, given that we have a really solidify workflow at this point with the 2.0 and the reagents and some of the software improvement.

So while we expect continued incremental growth in the services across the board from both of those contributors, warranty, and lab services, we are also increasingly focused on taking those opportunities with our biopharma partners. And turning those more into product revenue with our CRO partners, while we have more shots on goal and more clinical trials, giving us higher and higher probability of more CDx opportunities that we will have in-house in 2014 and beyond. And those CDx opportunities, I would say, Mason, really are upsides to the model. So I took some liberties with your question on how it fits in strategically, but that’s how we think about it.

Mason Carrico: No, that’s helpful. And if I could take one more here. How is adoption of the PhenoCode Panels trended? And how are you thinking about the timeline until when some of your higher utilization CRO customers should begin rolling those into regular use?

Brian McKelligon: That’s a really good question. And that — the latter part of your question is really our explicit strategy. And it’s embedded in our desire to build this glorified service provider network, because we want to have that in place because what we’ve talked about with our PhenoCode Panels, whether the signature panels on the HT or the discovery panels on the PhenoCycler, those have sort of a rolling cycle release that were really second half weighted and into ’24. So having that CRO network locked in, ready to grab those signature panels, having the systems upgrades on both of the two Os to leverage those panels to drive higher utilization, all of that does point to as you’re alluding to. 2024, really, as the realized year when we feel like those regions are going to begin to contribute to the top line and continue that reagent revenue growth.

Mason Carrico: Thanks. That’s helpful, Brian. Appreciate it.

Brian McKelligon: Thank you.

Operator: Thank you. I’m showing no additional questions in the queue. At this time, I’d like to turn the conference back over to Mr. McKelligon for any closing remarks.

Brian McKelligon: Yes. Just very simply, I think, to reiterate what both Johnny and I have said, first and foremost, thank everybody for your time, your questions, your intention. And obviously, as we look forward to really reiterate our priorities, there are threefold. Number one is to continue to invest in our portfolio, in that workflow. We continue to upgrade the systems, provide content, and software solutions so that time to answer is both easier and faster. And that will help drive a growth now in that reagent revenue portfolio. While at the same time, point number two, we invest in our own operational excellence to get better margins out of those very reagents themselves and maintain our overall cost basis while we continue to grow the top line, really securing our path to cash flow positivity.

And number three, we really are seeing growing level of excitement in our later-stage translational clinical partnerships, and are growing increasingly confident in this real clinical opportunity. And so, we’ll look at that in the forthcoming years as real upside to our existing financial model. I think that will really prove to the market that this clinical plan is something real in the near-term. Those are really the sort of the three legs of our growth strategy. And with that, I thank everybody for your time and we look forward to seeing you all soon. Bye.

Operator: Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.