Quanterix Corporation (NASDAQ:QTRX) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good day, and thank you for standing by. Welcome to the Quanterix Corporation First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is be recorded. I would now like to hand the conference over to your speaker today, Mike Doyle, Chief Financial Officer. Please go ahead.

Mike Doyle: Thanks very much. Good afternoon, everyone, and thanks for joining us today. With me on today’s call is Masoud Toloue, President and CEO of Quanterix. Before we begin, I’d like to remind you about a few things. The call will be recorded and will be available on the Investor Resources section of our website. Today’s call will contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act. These forward-looking statements are based on management’s beliefs and assumptions and on information available as of the date of this call. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

The risks and uncertainties that we face are described in our most recent filings with the Securities and Exchange Commission. To supplement the company’s financial statements presented on a GAAP basis, the company has provided certain non-GAAP financial measures. Management uses these non-GAAP measures to evaluate the company’s operating performance in a manner that allows for meaningful period-to-period comparison and analysis of trends in its business. Management believes that such measures are important in comparing current results with other period results and are useful to investors and financial analysts in assessing the company’s operating performance. The non-GAAP financial information presented here should be considered in conjunction with and not as a substitute for the financial information presented in accordance with GAAP.

Investors are encouraged to review the reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures set forth in the appendix’s presentation and in the earnings release issued earlier today. With that, I will turn the call over to Masoud.

Masoud Toloue: Thank you, Mike, and good afternoon, everyone. On today’s call, I’ll cover progress on our comprehensive transformation plan, results and recent developments in the clinical use of plasma biomarkers. We see 2023 as a year of focus and disciplined execution as we build the organization for future growth. I’m pleased to say we continue to make progress on our transformation plan in order to deliver quality products to our customers. Since initiating the plan, we have identified the gaps required for industrial manufacturing, taken steps to improve the stability and scale of common assay components and have begun early stages of validating and transitioning these improvements into operations, a process that will continue throughout this year.

While still early, several of the recently implemented operational processes have positively impacted yields and efficiencies. Successful outcome of our transformation will be new product SKUs and operating lines to efficiently manufacture those products by the end of this year and transitioning customer demand from our existing assays to new assays through 2024. In making these changes, we believe our customer experience will be significantly improved and operating efficiencies will benefit our margins, setting us in the right trajectory to scale revenue profitably. I’ve never been more confident and proud of our talented people. Transformations like these usually don’t happen in such high intensity and tight time frames, but it’s the individuals in the company and their resolve that are propelling us forward.

Led by our operating, commercial and service leaders and talented executive leadership team, it’s a focused march towards successfully running the company while implementing the transformation by end of year. Moving on to first quarter results. We delivered $28.5 million in total revenue, up 10% from the fourth quarter of ’22. Q1 consumable revenues increased by 25% quarter-over-quarter, while collaboration and instrument revenue modestly declined. Collaboration being the reduction in licensing and 3% decline in instruments, primarily due to softness in Asia Pac related to economic uncertainty. One of our advantages in this area is that macro uncertainties and reluctance for CapEx purchases can be partially offset by customers performing research and clinical trial work through our Accelerator program.

GAAP gross margin was 59.5% and non-GAAP gross margin was 53.1%, which both represent sequential increases of over 1,000 basis points over Q4 ’22. I do want to point out that we expect gross margin headwinds in the second half of ’23 as we begin implementing assay efficiency improvements and carry 2 SKUs for our top products into our manufacturing lines. This work is often noisy as we refine the assay in the final stages and can increase scrap and other costs in the near term. That said, we still expect to exit ’23 with gross margins higher than ’22. Our cash decreased approximately $9.1 million since last quarter, in line with expectations, and we ended Q1 with $329 million in unrestricted cash. Given the first quarter results, we are modestly adjusting upwards our guidance for the full year.

We are targeting revenues in the range of $104 million to $111 million and non-GAAP gross margins in the mid-40s on a percentage basis and GAAP gross margin in the high 40s. The sales guidance increase is driven by consumables, accelerator services and continued collaboration revenues offsetting potential softening of instrument revenue. Now I’ll turn over the call to Mike to discuss some more financial details. Mike?

Mike Doyle: Thanks, Masoud. First, an overall comment about our performance. It’s nice to start the year with a solid performance out of the gate. First quarter performance was ahead of our expectations and consensus for both revenue and gross margin. As Masoud mentioned, we’ve bumped our guidance slightly to reflect our Q1 performance and expectations for 2023. That said, our guidance also reflects our continued management of demand as we continue our work redeveloping our assays and dealing with the broader macroeconomic pressures in the global economy, which we believe is creating softness in our instrument demand. Now let me review the details of our first quarter 2023 performance. For your reference, for those following on the call, I’m starting on Slide 4.

Our total revenue for the first quarter of 2023 was $28.5 million, a decline of $1.1 million or 3.7% from the first quarter of 2022. In the first quarter of 2022, we had $1.2 million in licensing revenues from our agreement with Lilly, which is not recurring in 2023. Excluding the impact of this license revenue, total revenue was flat year-over-year. We had a product revenue of $19.3 million in the first quarter, a decline of $1.4 million or 6.6% versus the first quarter of 2022. Within product revenue, instrument revenue is the biggest driver of the decrease, declining $1 million or 15.4% versus the first quarter of 2022, primarily due to reduced demand in our Asia Pac region. First quarter consumables revenues declined slightly from the first quarter of last year, down $0.4 million or 2.8%.

As we have stated previously, we continue to manage production and demand for consumables as we address the assay quality. Services and other revenue were $8.6 million for the quarter, down $0.2 million or 2.6% from the first quarter of 2022. Now let’s move on to gross margin for the quarter. Our GAAP gross profit and margin was $16.9 million and 59.5% for the first quarter of 2023 compared to $14.6 million and 49.3% in the first quarter of 2022. Our non-GAAP gross profit margin was $15.1 million and 53.1% in the first quarter as compared to $12.8 million and 43.2% in the first quarter of last year. The improvement in gross margin on both a GAAP and non-GAAP basis was driven by a few things. We have a onetime benefit year-over-year due to the timing of our physical inventory, which was in the first 2 weeks of January last year.

This onetime productivity benefit was approximately 300 basis points on our margin. We did a good deal of inventory cleanup last year, scrapping over $1 million in materials in Q4 alone and made a number of changes to our inventory management practices, which resulted in lower than typical inventory adjustments in the first quarter of 2023. This had a positive benefit of approximately 500 to 600 basis points on gross margin. We had open positions in our manufacturing organization and overall lower headcount year-over-year due to the restructuring we executed in August of 2022. This benefited our gross margin by 250 basis points. Overall, a strong gross margin performance for the quarter aided by a few items that are nonrecurring. Our updated full year guidance reflects our go-forward view on gross margin for 2023.

Our overall operating expenses declined $6.4 million from $32.7 million in the first quarter of 2022 to $26.3 million in the first quarter of 2023. The primary driver was reduced costs due to the restructuring action we took in August of last year. Our net loss declined from a negative $18.2 million in the first quarter of 2022 to a negative $6.1 million in the first quarter of 2023 due to improved gross margin, reduced operating expenses and a $3.4 million increase in interest income. I will now review cash, which is on Slide 5. We ended the first quarter with $332.3 million in cash, a decline of $9.1 million from our year-end cash balance of $341.3 million. The first quarter of the year is often our largest cash burn period as we make our annual bonus and year-end commission payouts.

Our balance sheet remains in excellent shape, and we remain well positioned in a difficult economic environment. Let’s turn to guidance, which is highlighted on Slide 7. As mentioned earlier, we are modestly increasing our guidance for 2023. We expect our revenues to be in the range of $104 million to $111 million. And as a reminder, we’re still managing our demand and shipments as we continue our assay redevelopment. For the full year 2023, we expect GAAP gross margin to be in the high 40s and non-GAAP gross margin percent in the mid-40s. As Masoud mentioned, we expect margin headwinds in the second half of 2023 as we fill open positions and increase staffing, incur greater scrap and excess costs as we do initial runs of new assays on our production line and outpace some materials as we complete the assay redevelopment.

With that, I’ll turn it back to Masoud.

Masoud Toloue: Thank you, Mike. In closing, I would like to mention the recent FDA decision granting accelerated approval of the SOD1 ALS drug Tofersen based on neurofilament light as a secondary endpoint. As with many neurodegenerative diseases, a lack of quantitative primary indicators of disease has hampered the development of new therapeutics in this space. For example, changes in SOD1 indicate Tofersen is working as intended, but is not necessarily a predictor of clinical efficacy. It’s the blood biomarker NfL, which researchers do believe has a relationship with clinical efficacy, leading to what you saw was accelerated approval of the therapy. This new approach to NfL as a neuro drug development tool will be an important long-term tailwind for investment in future neuro research, approval and reimbursement of therapies.

To date, pharma and biotech companies have already incorporated the tracking of NfL into over 100 clinical trials for Alzheimer’s, Parkinson’s, Huntington’s, MS, and we expect this to grow in the long term. Second, as you know, the history of Alzheimer’s therapeutic development has not been a happy story. There’s a great yard of over 200 compounds tested in various clinical trials that have failed with a failure rate of over 99%. Today, over 50 million people around the world suffer from Alzheimer’s disease or dementia. And within the next 30 years, that number was expected to triple without a therapy. The recent announcements by Eisai and Lilly are real hope that this doesn’t happen. We are encouraged by recent results and hope these therapies provide relief to the sufferers of this relentless and debilitating disease.

It is becoming clear that Simoa blood-based biomarkers are going to play an integral part of research and clinical applications, most recently as demonstrated by Simoa’s P-tau217 role as an important early blood biomarker for Alzheimer’s disease. Quanterix’ Simoa technology is one of the very few platforms out there that can reliably detect these difficult to measure tau proteins. You need high sensitivity detected in blood and we have demonstrated that in research, clinical trials and soon diagnostics. Our expectations for the long-term growth of this company and its leadership role in neuro are high. The combination of the FDA approving the first-ever blood-based neurosurrogatebiomarker, along with recent positive readouts on Alzheimer’s drugs have signaled a true kickoff and start to what we believe will be a neuro decade of new discoveries and therapies.

Quanterix is poised to be part of that. Let’s take some questions. Operator?

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Puneet Souda from SVB Securities.

Operator: Our next question comes from the line of Kyle Mikson of Canaccord Genuity.

Operator: And your next question comes from the line of Matthew Sykes Goldman Sachs.

Operator: And there are no further questions at this time, presenters. Well, thank you so much for joining today’s conference call. You may now disconnect.