Quantum-Si incorporated (NASDAQ:QSI) Q2 2023 Earnings Call Transcript

Quantum-Si incorporated (NASDAQ:QSI) Q2 2023 Earnings Call Transcript August 7, 2023

Quantum-Si incorporated beats earnings expectations. Reported EPS is $-0.18072, expectations were $-0.2.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Quantum-Si Second Quarter 2023 Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to Juan Avendano, Head of Investor Relations for Quantum-Si. Juan, please go ahead.

Juan Avendano : Good morning, everyone. Thank you for joining us. Earlier today, Quantum-Si released financial results for the second quarter ended June 30, 2023. A copy of the press release is available on the company’s website. Joining me today are Jeff Hawkins, Chief Executive Officer; and Jeff Keyes, Chief Financial Officer. Before we begin, I’d like to remind you that management will be making certain forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding this risk and uncertainties appears in the section entitled Forward-looking Statements of our press release.

For a more complete list and description of risk factors, please see the company’s filings made with the Securities and Exchange Commission. This conference call contains time-sensitive information that is only accurate as of the live broadcast today August 7, 2023. Except as required by law, the company disclaims any intention or obligation to update or revise any forward-looking statements. During this call, we will also be referring to certain financial measures that are not prepared in accordance with U.S. Generally Accepted Accounting Principles or GAAP, including EBITDA and adjusted EBITDA. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is included in the press release filed earlier today.

With that, I will turn the call over to Jeff Hawkins.

Jeff Hawkins : Thank you, Juan. Good morning, everyone, and thank you for joining us. In today’s call, we will provide a business update to present our second quarter financial performance and provide an outlook for the remainder of 2023. We will then open the line for questions. As a reminder, the goal of Quantum-Si is to bring next-generation in sequencing to every lab, everywhere. Our proprietary technology delivers deeper unbiased proteomics insights that we believe will accelerate scientific research, enable the discovery of new biomarkers and ultimately power the development of new therapies and diagnostic tests that will positively impact human health. While we continue to make solid progress with our commercialization activities in the second quarter, we experienced some challenges that prevented us from meeting our revenue expectations.

First, early customer feedback identified a set of software features that were important for our customers to efficiently analyze and interpret their experimental data. Second, we experienced some customer implementation challenges due to the wide range of biological sample types, sample preparation methods and sequencing applications customers wanted to perform with our technology. Finally, we observed some general extension to the sales cycle as the internal purchasing process at our customers has slowed down from what we experienced in the beginning of the year. I would now like to provide more color on each of these items as well as share other updates on our progress during the quarter. Our first corporate priority is to commercialize Platinum, Carbon and the 2M chip.

Our commercial organization build-out is well underway. Under the leadership of our Chief Commercial Officer, Dr. Grace Johnston, we are building a truly world-class team across sales, marketing and customer support. Despite experiencing some implementation challenges in the quarter, our commercial team collaborated closely with customers to resolve the challenges and ensure the customers felt valued, supported and equally as important, excited about the potential of our technology to advance their future research. The customer feedback about the quality of our commercial team members and the support they have provided has been very positive. We are excited about the team that Grace is building, and we are confident that they will build positive and lasting relationships with leading researchers globally.

Our sales funnel is also strong and is tracking well ahead of our expectations for 2023. Quantum-Si’s technology addresses gaps in currently marketed technologies, and it is clear, customers are interested in exploring how Platinum can positively impact their research. From a geographic standpoint, approximately 70% of the funnel is made up of U.S.-based customers and 30% from Europe. This change in geographic mix from prior quarters is the result of having more U.S.-based sales professionals. From a market segment perspective, academic customers continue to represent the largest opportunity in the funnel with biotech customers being the second largest market segment today. As we have shared on previous earnings calls, we were actively building out our commercial marketing team.

And with that team in place, we expected to launch outbound marketing efforts to drive greater awareness of our technology and grow our sales funnel. In the second quarter, we made key hires in our commercial marketing team and implemented our first outbound marketing campaign. The early market feedback from these campaigns has been positive and reinforces our belief that our technology builds a significant unmet need in the proteomics market. As stated at the beginning of the call, early customer feedback identified a set of software features that were important for customers to efficiently analyze and interpret their experimental data. Our product marketing team did an excellent job engaging with the customers to clearly define what enhancements were needed.

These requests were communicated to our software team who’ve got straight to work on these enhancements. And I am pleased to report the team delivered an upgraded version of software in early July. The new software version has been released to our customers, and the feedback to date has been very positive. Additionally, during the second quarter, we began to observe a general lengthening of our customers’ capital purchasing process. We have instrument sales that entered the customers’ capital purchasing process during the quarter that continue to move along at a moderated pace. We have no reason to believe that these capital purchases will not ultimately be approved but we are being advised by our customers that they are experiencing this process slowdown in general.

We continue to believe that in the current macro environment, having a low-cost instrument will be advantageous to customer adoption. Our second priority is to lead with innovation. During the second quarter, we experienced some customer implementation challenges due to the wide range of biological sample types, sample preparation methods, and sequencing applications customers wanted to perform with our technology. As we dug deeper into each of these areas, we determined that our current R&D strategy and programs were not aligned optimally to our core capability and had gaps in terms of addressing the full scope and complexity of the proteomics workflow. As such, we have initiated a strategic review of current R&D programs and our R&D organizational design capacity.

We are near the completion of that process and expect to implement the necessary changes during the current quarter. While that process is not yet complete, I would like to share some of our thinking and initial actions taken thus far. Consistent with other proteomic detection technologies, customers select the biological sample type and sample preparation method they use. The range of sample types and sample prep message utilized in proteomics is extensive and often some level of optimization is required to make them compatible with the downstream detection technology. One solution we have been pursuing to address this area is Carbon, our automated sample prep instrument. While Carbon could help reduce sample prep variation and streamline the end-to-end workflow of our platform, it is not an absolute requirement for our Platinum protein sequencing instrument and may not be the best solution long term.

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There are commercially available liquid handling platforms and sample prep chemistry that may be an equal or better fit for customers and allow us to instead focus our internal resources on our core competencies in protein sequencing. To this end, we have put the beta testing and launch of Carbon on hold while we complete an evaluation of the business case and assessment of potential options to address this portion of the customer workflow. Another consideration in our go-forward product strategy will be to drive greater focus and investment in our core capabilities in protein sequencing, and therefore, we will look to leverage more industry partnerships and customer consortiums to address items like sample prep, workflow automation or the development of specific sequencing applications.

Finally, we are looking closely at our organizational design to ensure that we fully resource the most critical areas to our success, such as applications development. During the second quarter, we recognized the need for greater resourcing in applications development and redeployed some of our internal resources to this effort. The resulting outcome is that we were able to successfully deliver five new application notes demonstrating the capabilities of our protein sequencing technology. We believe that once complete, the realignment of our R&D efforts will position us to deliver additional product improvements before the end of 2023, while also ensuring a pipeline of technology improvements that will support a steady cadence of releases throughout 2024.

Our third priority is to preserve financial strength. We remain committed to continuously improving our fiscal discipline. In this vein, one objective in the announced R&D strategic review is to prioritize the programs that have the broadest customer appeal while maintaining a base level of investment into a pipeline of longer-term projects that will drive significant improvements to our core technology in the future. We intend to continuously evaluate all of our investments across the company to ensure that the capital we have been provided is utilized to maximize shareholder value and our financial runway. Finally, on the operations front, we are continuing to work through several initiatives to lower manufacturing costs, including in the areas of procurement, automation and our in-sourcing versus outsourcing strategy.

These initiatives have the clear goal to secure our supply chain and enhance our margin position as we continue to scale up. In closing, launching a novel technology into a new market always involves some bumps in the road. Our focus remains on ensuring we execute a commercial strategy that prioritizes the early customer experience and seeks to strike a balance between long-term success and near-term revenue attainment. Given this philosophy, we expect to continue with a controlled rollout for the remainder of the year. We will continue to closely monitor customer feedback and implementation success metrics throughout this time frame. That data will ultimately determine how the commercial team accelerates our new customer implementation efforts.

I will now turn the call over to Jeff Keyes to review our financial results. Jeff?

Jeff Keyes : Thank you, Jeff. First, I would like to say how excited I am to be on board with Quantum-Si. We have an excellent leadership team and all of us are aligned and focused on commercial execution and delivering the best and most innovative solutions to our customers. I personally come from a background of leading a series of companies through rapid change in growth and where extreme financial discipline was paramount. I plan to draw upon these experiences to help lead Quantum-Si through a continued financially disciplined approach that ensures we utilize our existing capital in the best way for rapid commercial growth, while at the same time, maximizing our capital runway. Now let’s discuss the details of our Q2 2023 financial results.

Revenue in the second quarter of 2023 was $205,000, which consisted of revenue from our Platinum instrument and associated consumable kits. At the end of the second quarter, we had two units that were in backlog and revenue was deferred. We anticipate recognizing revenue on these units in Q3. Gross profit in the second quarter was $78,000 and gross margin was 38%. Our gross margin will be somewhat variable for the near future as we work through our initial stages of commercialization and also be impacted by the timing and mix of instruments versus consumable sales. GAAP operating expenses in the second quarter of 2023 were $27 million compared to $30.2 million in the second quarter of 2022. The decrease was primarily due to a $2.6 million lower research and development expense and $600,000 lower SG&A expenses.

Included in those amounts is a decrease of stock-based compensation by $1.9 million, with the remaining $1.3 million comprising large decrease in general and administrative expenses, offset by higher sales and marketing expenses as we ramp up our commercial operations team. Net loss for the second quarter of 2023 was $25.6 million compared to $32.4 million in the second quarter of 2022. Adjusted EBITDA for the second quarter of 2023 was a loss of $22.9 million compared to a loss of $25.8 million in the second quarter of 2022. The reconciliation table of adjusted EBITDA to GAAP net loss is provided in our press release filed earlier today. As of June 30, 2023, we had $297.2 million in cash and cash equivalents and investments in marketable securities.

Our guidance for the rest of 2023 includes our controlled commercialization execution approach as we align our R&D resources towards capabilities and feature enhancements that have the broadest customer appeal. Finally, I am reiterating that our non-GAAP operating expenses are expected to be flat compared to 2022, while still ensuring that we have all the resources and capabilities for our commercial execution plan and our existing cash, cash equivalents and investments in marketable securities will provide runway into 2026. Now I’ll turn the call back over to Jeff Hawkins for closing remarks.

Jeff Hawkins : Thank you, Jeff. Over the last quarter, we made great strides in the build-out of our commercial team and have received valuable feedback from customers as we continue our thoughtful and controlled commercialization of Platinum. We believe the outcome of our strategic review of R&D will better position us to deliver additional product improvements before the end of 2023, while also ensuring a pipeline of technology improvements that will support a steady cadence of releases throughout 2024. Going forward, we will continue to be laser-focused on delivering the technology capabilities and applications customers want most, while maintaining a high level of fiscal discipline over the use of our capital resources. Operator, please open the line for questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Kyle Mikson with Canaccord.

Kyle Mikson : So Jeff, appreciate all the, I guess, commentary around like, I guess, what’s been happening lately and why the revenue came in where it is and why you’re kind of doing some of these initiatives now and what’s going to be happening going forward like the software and implementation of sales cycle stuff. But I guess, like obviously, less revenue than last quarter, you put up $0.25 million in revenue last quarter on almost $0.5 million in orders. Maybe that makes some sense given there was likely pent-up demand early in the launch. But I guess like why weren’t you able to convert those orders exiting 1Q into revenue or at least generate more revenue than the last quarter? Again, like $0.5 million in orders exiting the quarter just kind of interesting. And then maybe, Jeff, could you just share any comments on the orders, like the dollar number of orders in second quarter and the backlog exiting the quarter as well?

Jeff Hawkins : Yes. Thanks, Kyle. I’ll take your — the last part of the question first. So we exited the quarter, as Jeff Keyes said, with two instruments in the backlog that we would expect to convert in the third quarter. With respect to sort of events during the quarter that impacted revenue. As I said in the prepared remarks, it had a lot to do with just some of the implementation challenges that we experienced with customers. And when we experience these things, we react sort of in real time, meaning we deploy our applications team to help those customers validate a given sample type or validate a sample prep method they’re using and we don’t want to sort of keep expanding the installed base and end up in a situation where we’re unable to provide the level of support needed. So we had to sort of measure our activities on the commercial front to ensure we could really provide that high level of support on the implementation front.

Kyle Mikson : Okay. I mean that’s — yes, that’s helpful. And again, it sounds like some of the changes that you’re making are going to be done by the end of the second quarter. I mean, are you — is it safe to say that in the second half or I guess by the end of the year, a lot of these — I’ll use the word issues, but they’re just kind of like bumps and growing pains, I guess that will happen along the way. Those will be worked out by the end of the year and you’ll kind of at least enter the fourth quarter or ’24 at like a solid run rate you’ll be comfortable with?

Jeff Hawkins : Yes. Kyle, I think that’s a fair way to assess it. We’re learning a lot every day in the market. We’re prioritizing the various improvements that customers want to see or the applications that they’d like us to open up or help them optimize. We’re deploying people in real time to these activities, as I mentioned in the prepared remarks, we’ll go even further with that, with the sort of the finalization of the R&D strategic review. I mean the goal is to have sort of been the smoothest implementation sort of area we can be in for 2024. But even saying that, we do expect that we’ll continue to evolve and enhance the product for the foreseeable future. There’s a lot of headroom technologically here to continue to expand the capabilities and enable our customers to do more and more, and we’ll continue to invest in that.