NanoString Technologies, Inc. (NASDAQ:NSTG) Q1 2023 Earnings Call Transcript

NanoString Technologies, Inc. (NASDAQ:NSTG) Q1 2023 Earnings Call Transcript May 3, 2023

NanoString Technologies, Inc. misses on earnings expectations. Reported EPS is $-0.88 EPS, expectations were $-0.73.

Operator: Good afternoon and thank you for attending today’s NanoString First Quarter Operating Results Call. My name is Jason and I’ll be the moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the call over to our host, Doug Farrell.

Doug Farrell: Thank you, operator. Welcome everyone. Joining me on the call today is Brad Gray, our President and CEO; and Tom Bailey, our CFO. Earlier today, we released our financial results for the first quarter ended March 31, 2023. 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, cash flows, current and future instrument orders, and manufacturing capacity, as well as prospects for expanding and penetrating our addressable markets, 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 Q1 financial results and guidance for 2023. We have prepared as a supplement 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 find the reconciliations of GAAP to non-GAAP measures, as well as the description, limitations, and the 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 everybody that we’ll be attending the Jefferies Conference in New York City next month. We look forward to having the opportunity to meet with many of you then. I’d now like to turn the call over to Brad.

Brad Gray: Good afternoon and thank you for joining us today. I’m excited to report that 2023 is off to a strong start. We drove continued momentum in the business with revenue from both Spatial Biology and nCounter, exceeding the guidance we provided on our year-end call. With strong Spatial Biology demand and the successful scale up of our CosMx manufacturing and installation capacity, we are raising our revenue outlook for the year. Before Tom provides details on these financial results and improved outlook later in the call, I’ll provide updates on our progress to our strategic objectives for the year. Our first objective for 2023 is to increase our penetration of the spatial biology market. During the first quarter, the spatial biology demand was healthy across both instruments and consumables.

Our overall spatial biology revenue increased by more than 75% over Q1 of last year, we ended the first quarter with an installed base of 385 spatial systems, an increase of about 31% over the prior year. Our CosMx Spatial Molecular Imager remains the primary growth driver of the business. As we further penetrate the rapidly growing market for single cells spatial biology, our rollout of CosMx is tracking ahead of plan. We are ramping our manufacturing capacity and refining the processes that our field service engineers and application scientists used to install CosMx systems and train users. We believe these efforts will accelerate uptake of CosMx consumables, which are the growth engine of the company over the long-term. Even with our increased pace of CosMx shipments, strong demand led CosMx instrument orders to exceed shipments in Q1, growing our backlog.

About 75% of our CosMx orders came from new customers and biopharma customers increased to about 25% of system orders. Oncology applications drove about 70% of the orders followed by immunology and neuroscience. In February, we unveiled our consumable roadmap for CosMx. We’ve demonstrated our ability to scale the number of biological targets image by CosMx, which is referred to as plex, up to 6,000 RNAs and 120 proteins, more than 10 times the content that any competing platform currently offers. Our substantial advantage in plex has resonated with our customers as an important factor in why we believe CosMx will remain a market leading spatial imager. In parallel to ramping up CosMx shipments, we’ve been connecting customers to our AtoMx Spatial Informatics Platform.

AtoMx provides seamless and highly scalable storage and compute power for a fraction of the upfront cost of on-site capabilities, making the decision to move data to the cloud, an easy one. Customers value the investment we’ve made to ensure that informatics does not become a bottleneck and spatial biology research and are excited to leverage the cloud to collaboratively analyze the massive data sets that spatial biology experiments generate. While instrument demand remains CosMx heavy in Q1, GeoMx placements continued and our expanded GeoMx installed base drove a meaningful increase in consumable revenue. The speed with which new GeoMx sites became active consumable customers improved from Q4, and we expect to see that trend continue over the balance of the year.

In parallel, we’re releasing software updates that improve the capabilities and workflow of GeoMx, including a recent update that enables customers to measure RNA and proteins simultaneously on the same slide, an appealing capability that helps scientists increase the insights that they extract from each sample. Translational researchers remain the primary users of GeoMx as illustrated by the latest paper to grace the cover of the journal Cancer Research. Team of researchers at the University of Glasgow published a study that use GeoMx to evaluate and subgroup colorectal cancer patients whose cancer has metastasized to their liver. A study demonstrated the ability of GeoMx to characterize tumor heterogeneity and identify novel biomarkers associated with clinically relevant subtypes of colorectal cancer.

We recently caught up with the authors of this paper that the American Association of Cancer Research or AACR annual meeting where spatial biology featured prominently in the scientific agenda. Our customers had strong showings with nearly 60 abstracts for GeoMx and CosMx, an increase of more than 40% over the prior year. Our booth was buzzing with activity and customer interest throughout the meeting and lead generation at this year’s AACR more than doubled over the prior year. Customer interactions like these are expanding our instrument funnel and providing visibility to our growth outlook and continued leadership in this dynamic field. Our second objective is to deliver predictable revenue growth. We clearly achieved this goal during Q1 as revenue for both spatial biology and nCounter exceeded our guidance for the quarter.

In addition, our revenue visibility is continuing to improve, which bodes well for our ability to deliver predictable revenue to the balance of 2023 and beyond. The recurring consumable revenue streams generated by our installed base of more than 1,500 instruments through both sequentially and year-on-year with consumable pull through in line with expectations. This helped our nCounter business, which has a revenue mix that of now more than 90% consumables deliver results above the high end of our guidance even as instrument placements slowed. We also grew CosMx instrument order backlog, while scaling up our manufacturing and install capacity. Since CosMx instrument revenue is the primary growth driver of 2023, these results drives incremental revenue visibility.

With CosMx demand strong and scale up on track, we expect a quarterly cadence of shipments and installs to increase as the year progresses, and we are in a position to raise our guidance for the year. Given the strong demand, we expect many of the CosMx instrument orders we’ve received in the coming quarters will remain in backlog as we exit the year maintaining our high revenue visibility as we enter 2024. Our third strategic objective is to demonstrate progress towards cash flow breakeven. The team remains laser focused on accelerating our path to profitability. During Q1, our adjusted operating expenses were down $2 million year-on-year. This OpEx reduction offset lower gross margins and kept our EBITDA approximately flat year-on-year during the first quarter.

We expect our bottom line to improve each quarter through the balance of the year as our revenue growth accelerates with CosMx shipments. We exited Q1 with approximately $155 million in cash, cash equivalents and short-term investments on hand, and believe that we are well positioned to manage our business to profitable growth with our current resources. Now I’d like to turn the call over to Tom to review the details of our financial results and provide an update on our financial outlook for the year.

Tom Bailey: Thanks, Brad and thanks all for joining us today. For the first quarter of 2023 total revenue was $35.8 million, $1.8 million above the upper end of our Q1 guidance range, and about $3 million above Q1 consensus estimates. For our Spatial Biology business, Q1 revenue was $17.1 million, approximately 77% year-over-year growth, $1.1 million above the upper end of our guidance range and about $2 million above consensus estimates. Spatial instrument revenue was $10.1 million, approximately 110% year-over-year growth reflecting acceleration of CosMx shipments. We shipped 47 spatial instruments to customers in Q1 with an average realized selling price of about $215,000. Q1 ASP reflects a heavier mix of international GeoMx shipments and also the deferral of a portion of CosMx revenue that will be recognized in future periods as service revenue as customers use initial amounts of AtoMx compute and data storage included with each CosMx sale.

We installed about 35 spatial instruments during Q1 growing our spatial instrument installed base to approximately 385 instruments. Spatial biology consumables revenue was $7 million, approximately 44% year-over-year growth that reflecting in line GeoMx consumable sales over our growing installed base and continued initial shipments of CosMx consumables. Q1 nCounter revenue, which includes all service was $18.7 million, about $1 million above the upper end of our Q1 guidance range and consensus estimates. nCounter instrument revenue was $1.2 million. Consumables revenue was $12.8 million, and service revenue was $4.7 million. At the end of Q1, our nCounter installed base was approximately 1,130 instruments with about 10 instruments installed during the quarter.

Turning to margins and expenses, I’ll provide results on a non-GAAP or adjusted basis, which removes the impact of stock-based compensation depreciation, amortization at certain one-time items. 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. Q1 adjusted gross margin was 43% impacted by revenue mix, more heavily weighted to CosMx’s instruments, which are currently selling at lower gross margins due to higher unit production costs that are expected to be incurred in future periods as we scale CosMx’s production. We also continued in Q1 to make investments to expand our service and manufacturing capacity, and we incurred increased cloud compute costs associated with our AtoMx platform.

Lastly, in accordance with internal policies, we recorded a larger than usual Q1 inventory reserve of just over $1 million that impacted Q1 gross margins by about three percentage points. This reserve is primarily related to our spatial biology consumable sales mix shifting away from our more targeted consumable panels and toward our GeoMx whole transcriptome assay and other newer spatial biology consumable products. Adjusted R&D expense was $12.7 million, a decrease of 15% year-over-year, and primarily driven by lower personnel and product development costs related to CosMx and AtoMx. Adjusted SG&A expense was $29.8 million, an increase of 1% year-over-year reflecting lower personnel costs offset by Q1 trade show and other marketing related expenses that are higher in the first quarter as compared to subsequent quarters throughout the year.

Our adjusted EBITDA loss was $27.2 million, and our cash, cash equivalents and short-term investments were $154.6 million as of March 31, 2023. As noted on our last call, we expect cash burn and EBITDA loss to be heaviest in the first half of the year as we make investments in working capital to support the significant ramp in CosMx shipments and given other cash expenses such as audit fees, trade show expenses, and corporate bonuses that are occurred in the first quarter. Turning to guidance, for the second quarter, we expect revenue to be in the range of $40 million to $42 million. This range includes $23 million to $24 million of spatial biology revenue, representing a more than doubling of spatial revenue year-over-year and $17 million to $18 million of nCounter at service revenue.

For the full year, we are raising our revenue guidance range reflecting our Q1 results and the expected ramp of CosMx shipments at Q2. We now expect our full year total revenue to be in the range of $175 million to $185 million as compared to the previous range of $170 million to $180 million. Our updated range includes spatial biology revenue of $100 million to $105 million as compared to the previous range of $95 million to $100 million and nCounter revenue, which includes all of service and other revenue of $75 million to $80 million unchanged as compared to the previous range. We continue to expect adjusted EBITDA loss to range from $65 million to $75 million, unchanged from our previous guidance with EBITDA loss and cash flow improvements still expected to be more substantive in the second half of the year.

As our spatial biology revenue grows on a reduced operating expense base. We also continue to expect adjusted gross margins, but we temporarily lower than 2023 in the 45% to 50% range as our revenue mix shifts towards CosMx instruments for improving in 2024 and beyond as these systems begin to pull through higher margin consumables. 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 strong start to 2023, momentum in our spatial business is building as demand for CosMx is being driven by its market leading capabilities. Our revenue visibility is increasing on stable consumable pull through and increasing CosMx’s backlog. We’re well positioned to generate strong 2023 revenue growth while reducing operating expenses, allowing us to make continued progress towards profitability. With that, I’ll open the line for your questions.

Q&A Session

Operator: [Operator Instructions] Our first question is from John Sourbeer with UBS. Your line is now open.

Operator: Our next question is from Kyle Mikson with Canaccord Genuity. Your line is now open.

Operator: Our next question is from Dan Arias with Stifel. Your line is now open.

Operator: Our next question comes from Dan Brennan with TD Cowen. Your line is now open.

Operator: Our next question is from Catherine Schulte with Baird. Your line is now open.

Operator: Our next question is from Julia Qin with JPMorgan. Your line is now open.

Operator: Our next question is from Tejas Savant with Morgan Stanley. Your line is now open.

Operator: There are no more questions. So I’ll pass the call back over to the management team for closing remarks.

Doug Farrell: Thanks very much everybody for joining us today. If you did miss any portion of the call, the replay should be available within the next two hours or so. To access that please dial 866-813-9 403, international callers, please use (929) 458-6194. The conference call ID number sustained for both 573494. So thanks again. That concludes our call.