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Fluidigm (NASDAQ:FLDM)

Q2 2013 Earnings Call

August 01, 2013 5:00 pm ET

Executives

Un Kwon-Casado

Gajus V. Worthington - Co-Founder, Chief Executive Officer, President and Director

Vikram Jog - Chief Financial Officer and Principal Accounting Officer

Analysts

Sung Ji Nam - Cantor Fitzgerald & Co., Research Division

William R. Quirk - Piper Jaffray Companies, Research Division

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Peter Lawson - Mizuho Securities USA Inc., Research Division

Un Kwon-Casado

Good afternoon, everyone. Welcome to the Fluidigm Q2 2013 Earnings Conference Call. At the close of market today, Fluidigm released financial results for the second quarter ended June 30, 2013. During this call, we will review our results and provide commentary on recent commercial activity and market trends. Following these comments, we will host a Q&A session. Presenting for Fluidigm today will be Gajus Worthington, our President and CEO; and Vikram Jog, our Chief Financial Officer. This call is being recorded and the audio version will be archived in the Investors section of our website.

During the call and subsequent Q&A session, we will be discussing plans and projections for our business, future financial results and market trends and opportunities, including, among others, guidance regarding expected 2013 total revenue, operating expenses, stock-based compensation expenses, capital spending expectations for the development of the single-cell and production genomics market, anticipated new product launches and future prospects and growth opportunities.

These statements are forward-looking and are subject to substantial risks and uncertainties that may cause actual results to differ materially from currently anticipated events or results.

Risks relating to our business and operating results are contained in our Form 10-Q for the quarter ended March 31, 2013, filed with the SEC and will be contained in our upcoming Form 10-Q for the quarter ended June 30, 2013.

We advise investors to review these risk factors carefully. Fluidigm disclaims any obligation to update these forward-looking statements. During the call, we will also present certain financial information on a non-GAAP basis. Reconciliation between GAAP and non-GAAP results are presented in a table accompanying our earnings release, which can be found in the Investor section of our website.

I will now turn the call over to Gajus.

Gajus V. Worthington

Thanks, Un. Good afternoon, everyone, and welcome to today's call. We are extremely pleased with our performance in the second quarter as we surpassed our internal expectations and achieved record instrument shipments and revenues. The fundamentals of our business and the large market opportunities we address have never been stronger.

In the second quarter of 2013, we grew total revenues by 35% year-over-year to $17.5 million. Our total revenue growth in the first half of 2013 was 34% year-over-year, a nice increase from the 22% growth we experienced for the full year 2012.

Based on our strong performance in the first half of the year, the acceleration of our end markets and our current visibility into the remaining half of 2013, we are increasing our full year revenue growth guidance to a range of 27% to 31%, above our previous range of 22% to 26%.

Consistent with our stories since we've been public, our leadership in a rapidly growing single-cell genomics market has been a key driver to our success. Our early focus on single-cell genomics has enabled us to be intimate with the evolving needs of this market and to develop products accordingly. Today, Fluidigm offers the only complete solution in the market that simplifies the complexity of single-cell isolation, sample preparation, and genomics-based analysis. We have been rewarded with strong adoption by leading researchers across a variety of different biological research fields. We are confident that the market will continue to broaden and encompass more researchers as early customers of our C1 Single-cell Auto Prep System begin to publish. We are aware of several high-impact publications currently under review that should be out in the second half of this year.

That feedback from our early C1 customers has been very positive, with platform working out-of-the-box across a diversity of different cell types. As a case in point, we had a C1 customer who purchased the system in the second quarter and was able to produce meaningful data in just 2 weeks to present at their initial results at the International Society for Stem Cell Research Conference in June.

Our overall single-cell genomics revenue in the quarter more than doubled year-on-year and represented approximately 45% of our product revenue. Contribution from sales of the C1 system introduced in late June of 2012 was a primary driver.

In line with the percentages seen in previous quarter's, roughly 30% of our C1 sales were bundled with a BioMark HD. Introduction of the single-cell messenger RNA sequencing application late last year has catalyzed interest in, and sales of the C1 system. For the first time, researchers are able to reproducibly and cost-effectively sequence full transcript domes from individual cells. We are continuing to execute against our C1 application menu expansion strategy communicated last year. We announced today the availability of single-cell micro RNA protocol used in conjunction with the BioMark HD and expect to introduce a single-cell whole genome amplification chip and protocol by year's end.

During the quarter, we also further enhanced the utility of the C1 platform withstanding protocols that allow customers to image and gain phenotypic information on single cells that can then be correlated to the genomic profile. Based on all of this, the building momentum behind single-cell genomics, adoption by thought-leading researchers, excellent science soon to publish, adoption of the C1, the strengthening of our BioMark product line and our execution, we reiterate our previously stated opportunity of 700 Fluidigm systems for Single Cell Analysis by the end of 2015.

Our revenue growth also continues to be supported by nonacademic production customers who utilize our products for high throughput applications in industrial or applied settings. In contrast to our single-cell genomics business, production genomics customers value simple, streamline workflows, high reproducibility and significantly reduced cost given their operational focus. The main types of customers we serve for these applications include AgBio C companies, biorepositories and clinical laboratories. Increasingly, we have seen more clinical laboratories embrace both our genotyping and targeted resequencing sample preparation solutions in a range of applications.

Based on internal market research, we estimate a potential revenue opportunity of over $300 million in our target production genomics applications across AgBio, biorepository and clinical laboratories. This is a large opportunity for us to continue to take share from legacy technologies and support our growth.

We're also excited about our recent co-marketing partnership announcement with Olink Bioscience. This significantly expands the capabilities of the BioMark HD System to include protein analysis. Olink Bioscience’s Proseek assay enables substantial multiplexing of immunoassays without compromising performance. Proseek uses pairs of DNA-labeled antibodies to bind the proteins of interest in a highly specific manner. The DNA access a reporter molecule and can be quantified using the BioMark HD. In less than a day, researchers can profile 96 samples across 92 proteins from an extremely small amount of starting material. This is a dramatic improvement over legacy multiplex immunoassay platforms, which are limited to a few tens of assays due to antibody cross reactivity. The first available panel focuses on oncology, but additional of panels targeted for cardiovascular disease and inflammation are expected later this year.

In summary, our strong performance in the second quarter of 2013 is a testament to our strategic focus in the single-cell and production genomics markets. Our enabling microfluidics technology and products, and our disciplined commercial execution. We are confident in our outlook for the remainder of the year and feel great about Fluidigm's long-term future. I will now hand the call over Vikram.

Vikram Jog

Thanks, Gajus. I hope you've all had a chance to review our second quarter 2013 earnings release. I'll walk you through the operating results and highlights. In the second quarter of 2013, our product revenue grew 35% to $17.3 million. We had an especially strong quarter for instrument revenue, which grew 47% year-over-year to $10.2 million, driven primarily by sales of the C1 Single-Cell AutoPrep System, which was launched last year in late Q2.

Single-cell genomics continues to be a strong growth driver for the company and approximately 50% of the BioMark HD systems sold during Q2. We're motivated by single-cell gene expression research.

Our total consumables revenue, both IFCs and assays, were $7.1 million during the second quarter, an increase of 21% over the prior year's quarter. Chip revenue growth was driven by production genomics customers including Access Array and gene expansion application. Chip pull-through in the first quarter was within our historical range of $40,000 to $50,000 per system per year for our analytical systems and higher than our historical range of $10,000 to $15,000 per system per year for our preparatory systems. The high utilization under preparatory systems was driven by a high throughput production genomics application.

Of the installed base of approximately 780 instruments at the end of the second quarter, analytical instruments were roughly 62% and preparatory systems, which includes C1 systems, were roughly 38%. Geographic revenues as a percentage of total product revenues for the second quarter were as follows. United States, 59%; Europe, 26%; Asia-Pacific, 9%; Japan, 2%; and 4%, Other. We are very pleased with the growth in our 2 largest geographies, the United States and Europe were both up 56% year-over-year. While revenues in Japan were down year-over-year, we experienced growth in bookings during the quarter.

Net loss for the quarter was $4 million, compared to a net loss of $4.6 million in the prior year second quarter. And non-GAAP net loss for the second quarter of 2013 was $1.7 million, compared with the $2.8 million non-GAAP net loss for the second quarter of 2012. Q2 product margins were 3 points higher than the year-ago quarter at 72%. This increase was driven by increased IFC capacity utilization and favorable production yields and sales of the C1 instruments, which has a higher margin compared to other instruments. For long-term modeling purposes, I would continue to encourage you to think of our business as a high 60% product margin business.

Turning now to OpEx. Research and Development expenses were $5 million in the second quarter of 2013, compared to $4 million in the second quarter of 2012, and $4.2 million in Q1 of 2013. The sequential and year-over-year increase in R&D expenses were primarily driven by an increase in headcount and other compensation related costs and an increase in facility expenses. SG&A expenses were $11.6 million in the second quarter of 2013 compared to $9.4 million in the year-ago period and $11.1 million in Q1 2013. The year-over-year increases in SG&A expenses were driven by increased headcount and other compensation-related costs, and to a lesser extent, increased spending on sales and marketing activities. Stock-based compensation expense was $1.7 million in the second quarter of 2013, compared to $1.1 million in the second quarter of 2012.

Moving on to the balance sheet now. Total cash, cash equivalents and investments were $83.5 million at the end of Q2 2013, compared with $86.9 million at the end of Q1 2013 and $83.7 million at December 31, 2012.

Net cash used for operating activities were $3.5 million in the first half of 2013 compared to $10.6 million in the year-ago period. In the second quarter of 2013 we used $1.1 million of cash to acquire IP from Helicos BioSciences. As a reminder, in Q1 of 2013, we received the cash payment of $3.1 million for our minority equity investment in Verinata Health. Inventory was $7.2 million, down slightly from the $7.4 million at the end of first quarter 2013, and accounts receivables were $10.8 million compared to $10.1 million at the end of Q1 2013.

As a result of strong cash collections, our DSO decreased to historic low 56 days at end of the second quarter of 2013, compared to 62 days at the end of Q1 2013.

Shifting gears to our guidance. We are increasing our full year 2013 total revenue growth to a range of 27% to 31%, above our previous guidance of 22% to 26% growth. Operating expenses in 2013 are now projected to be between $65 million and $68 million, up $2 million from our previous guidance. Stock-based compensation expense is expected to be between $6 million and $7 million, up $500,000 from our previous guidance. Capital spending is expected to be between $4 million and $5 million, in line with our previous guidance. I'll now turn the call over to the operator to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question coming from Sung Ji Nam from Cantor.

Sung Ji Nam - Cantor Fitzgerald & Co., Research Division

I was wondering, Gajus, in terms of your strength in North America and just given the current environment with the sequestration. I'm just -- are you guys seeing any impact from that and just kind of curious as to where your customers might be getting the funding from to acquire these systems?

Gajus V. Worthington

We're not seeing any effect from sequestration and this has been the consistent story in what's been a budget constraint environment since Q3 of 2011. I think the basic premise here that we put forward, which has turned out to be true over and over again was that if you have really unique enabling tools that customers will find the money for, then in fact, that's what we observed again. There's a variety of different sources for this funding. Some of it is independent fund-raising funding, some of it is taking -- funding from other places, but the single-cell genomics market continues to be differentiated and we just didn't see no effect from sequestration.

Sung Ji Nam - Cantor Fitzgerald & Co., Research Division

Great. And then just my follow-up is, are there a lot of customers purchasing the C1 system as a standalone? Just curious as to what proportion of the customers are just...

Gajus V. Worthington

It does happen, and it happens more now as a result of their launch of the messenger RNA sequencing application, which came out at the end of last year. But that being said, as we reported, still, 30% of our C1 systems that are going out now are going bundled with the BioMark and at the remainder, some of those are going to customers that currently have a BioMark today. So the portion of C1 systems that are standalone is a minority.

Operator

And our next question is coming from Bill Quirk from Piper Jaffray.

William R. Quirk - Piper Jaffray Companies, Research Division

So guys, with a number of single-cell publications, as well as C1 placements ramping, can you talk a little bit about just visibility into the overall BioMark and C1 placements?

Gajus V. Worthington

Sorry, Bill, visibility with respect to what?

William R. Quirk - Piper Jaffray Companies, Research Division

With respect to future placements. In other words, it strikes us that with the number of publications ramping, so should the interest as well.

Gajus V. Worthington

Yes, and indeed that's part of what gives us a confidence about the continued growth of the market, which in turn was part of our consideration when we raised guidance. So there's no question that the rate of adoption of the C1 platform, the consistency with which a meaningful fraction of these customers are purchasing new BioMark systems, the rate of publication, as well as just the scientists going on with the systems had it been installed already as I noted during the prepared remarks, some of this has happened very fast. All of that goes into our continued confidence about the growth of this market and about our position in it.

William R. Quirk - Piper Jaffray Companies, Research Division

Got it. And then as a follow-up, can you just talk to the overall gross margin improvement? How much of this is improvement in terms of absorption versus, say, favorable mix with, say, ongoing placements of BioMark? And then maybe as a side question, I realize you don't want to get into too much detail about individual margins, but could you perhaps just order for us or give us some sense as to -- if you had your -- you're going to sell C1 first or your BioMark first and I guess can you just give us a sense of the relative order of magnitude from a margin standpoint?

Gajus V. Worthington

Sure. So first, we expect the margin -- margins were 72%, so that's up 300 basis points year-over-year. That was mainly due to increased chip capacity utilization and very solid production yields. The sales of the C1 instrument also reached that higher as that has a higher products margin compared to our other instruments. With respect to the question about preference, I'll answer that question a little bit differently than I would have even a couple of quarters ago. I think a couple of quarters ago, I think I would have said, well, it's good to sell a C1 because then you know that, that could pull along a BioMark. Actually what's starting to happen now, they're actually pulling each other along. So BioMark can go in now and then drag 1 or even 2. We see even cases where they've dragged 2 C1s along as well, so I really -- I don't have a favorite child right now, I think.

Operator

And our next question is coming from Shaun Rodriguez from Cowen & Company.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

It sounds like your production genomics opportunity is really materializing nicely, and yet I think last quarter you discussed how you thought you're actually pretty I think immature organization or in terms of your infrastructure to fully exploit the opportunities there, which really, I think, speaks to the potential. So I was just looking for an update on where you are, again, organizationally, and how you progress in terms of realigning to really exploit this opportunity?

Gajus V. Worthington

Sure, Shaun. So we still have quite a bit of improvement to make. That being said, we have made some meaningful ones even in last quarter. One has to do with this greater understanding of this market. It's a very diverse market with lots of different applications. So you really have to do is deep-dive into all of the different segments to really understand where the value proposition that we have is the most resonant, and of course, also one of the biggest growing opportunities. I think that we've made substantial progress in that even in the last quarter and that's why we draw your attention specifically to things like AgBio and biorepositories as two of the really interesting areas for us to continue to focus on. So that has in turn led to better commercial focus and discipline in the field, which is -- immediately has an impact. And I'd also add that we found quite a bit of resonance with our sequencing sample preparation solution in clinical applications. Some of that is cancer related. But -- and some of it has other applications as well, but in any case, I'd say that the alignment of focus around specific applications within the production genomics market has been the meaningful improvement and we still have other levers to pull organizationally to improve our execution in that market.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

That's helpful. And then you noted that preparatory instrument pull-through was above the historical 10,000 to 15,000 range. Did Access Array pull through tick-up? I know you talked about some higher volume opportunities that came in last quarter. Or was this really C1 coming in and driving that utilization to come in above the range?

Gajus V. Worthington

Access Array actually was a primary contributor here. This is what -- do exactly what I was referring to a moment ago. We're finding more resonance with the Access Array in very high throughput production applications, particularly those that are clinical. So there was a meaningful uptick in the pull-through for the Access Array and also there was a contribution from the C1, although with that installed base, a lot of those customers are still just getting up and running. So it's primarily an Access Array phenomenon.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Okay, and looking for an update on the centers that you established and announced. I think that would include the Broad, the Sanger in Singapore. Just an update on whether you've seen activity at those. Hit an inflection yet? Or really what's the feedback from them in terms of the demand coming from their researcher communities?

Gajus V. Worthington

Well, it's reflected in our results. All 3 are doing extremely well. The Broad is a bit ahead of the other 2 because they got an earlier start. So it's ahead both in terms of the commercial development that's in the penumbra of the Broad and also with respect to the science. However, all 3 of them -- when I say that with respect to the science, I mean that, that probably the point at which publications were submitted for review, but all 3 actually have significant publication manuscripts that have been submitted for review, and I believe one of them has already been accepted. So they're doing great. It's been a real treat to watch the evolution of the science in all 3 of these centers and to see they're effective in their vicinity, as well the scientific community.

Operator

[Operator Instructions] So we'll take our next question coming from Peter Lawson from Mizuho Securities.

Peter Lawson - Mizuho Securities USA Inc., Research Division

It's just that I think the second quarter you've been above that $10,000 to $15,000 range for the prep at this stage. How far are you on that range? And I guess the second question around that is just around the C1 annuity stream, how big is that?

Gajus V. Worthington

Exactly how far we are above the range, but it's enough to draw attention to it. It is the second quarter that we've seen this behavior. We have -- we won't reset the range until we see at least another quarter of consistent behavior and it's from similar sources so that we have a direct cause and effect. We're still at -- it is early to declare the pull-through rate on the C1 platform. This is due to I think the number of systems that we've installed and the fraction of which are up and running yet. So it's still too hard to say what exactly what that pull-through is. I think that we're still modeling it ourselves as between the historical range of the Access Array and our analytical systems; that is, between $15,000 and $30,000 per system per year. I realize that's a wide range, but that's best we can do for you right now.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Okay. And just around the guidance. The increased revenue guidance, what was that, was that increased confidence around Access Array or C1? And then just on the OpEx side of things, what drove that modest $2 million delta in OpEx?

Gajus V. Worthington

The raise is primarily due to the acceleration of the single-cell genomics market, primarily, and that affects the C1 obviously, primary effect and also it affects the BioMark. The performance of the Access Array is a much lesser consideration in our raise of guidance, although we're very pleased with how the pull-through was on that. And now I've forgotten your second question. What was your...

Peter Lawson - Mizuho Securities USA Inc., Research Division

It was on the OpEx.

Gajus V. Worthington

Opex, right. So the increase is due to a couple of things. One, we're spending a bit more on sales and marketing and you could see some of the effects of that in the first half. The other is potential additional spending on litigation, which might or might not transpire, but we're budgeting for it.

Operator

I do show one follow-in question coming from Shaun Rodriguez from Cowen & Company.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

So there was a pretty interesting geographic dynamics in the quarter. I guess 1 that I'd like to understand a little bit better is Japan, just clearly, that's accounted for much lower percentage of sales than it has, and commentary from others in the group this earnings season has been pretty mixed, ranging from -- there's some good stimulus opportunities to it's pretty sluggish. So I guess I really just want to understand the key dynamics impacting you there. And then in the context of your guidance, do you expect that to moderate or normalize more to historical levels or will that really be incremental to your revised expectations?

Gajus V. Worthington

So, from a revenue perspective, Japan was weak this quarter. However, our Japan order bookings were up year-over-year. And despite the revenue performance, we actually see signs that Japan is beginning to stabilize. This is due to, I know small part, they have change in management in Japan, which I think has had its first opportunity to make a meaningful impact that we see in our order book. But also to the continued stimulus spending in Japan, which is at least in part directed into markets where we're a primary participant. So we're actually starting to feel better about Japan.

Shaun Rodriguez - Cowen and Company, LLC, Research Division

Okay. Then one last one. The Olink partnership as that was really interesting. So I guess -- it's early, so I just want to kind of understand the opportunity overlap, if you will. Do you have any sense of where is the overlap of your BioMark installed base between those who obviously -- they're using for nucleic acids today, but those who might be interested in protein multiplexing research or whether this is -- this would truly represent an incremental opportunity for you guys to talk to new researchers?

Gajus V. Worthington

It's a bit of both. There are definitely customers in cell biology who are very interested in RNA signatures in conjunction with protein expression signatures. It's something that we heard a fair amount from our cell biology customers. It's also a totally new opportunity for us. So there are plenty of biomarker researchers who really focus on proteins to -- really to the exclusion of nucleic acids. So it's a combination of both. It will be definitely an added menu application to some of our existing BioMark customers -- I think, particularly, those that are in core labs and academic research institutions and those that are cell biologists, but it also opens up a totally new opportunity to us in the pure protein analysis market.

Operator

And I'm showing my final question, again, coming from Peter Lawson.

Peter Lawson - Mizuho Securities USA Inc., Research Division

Guys, just around the, what is it, the DKMS, the HLA typing business, I don't know if you mentioned that. Did you get a nice effect from that on the prep pull-through?

Gajus V. Worthington

HLA typing is a great example of a very high throughput production genomics application so that -- and DKMS has been a great customer.

Peter Lawson - Mizuho Securities USA Inc., Research Division

And you saw that last quarter and also this quarter, is that right?

Gajus V. Worthington

We announced the relationship with DKMS in Q1 and they started to do the HLA typing back then, and the -- Q2 is the first full quarter of their activity.

Peter Lawson - Mizuho Securities USA Inc., Research Division

And then just on your commentary around single-cell, how much -- what percentage of your revenues was that in the quarter?

Gajus V. Worthington

45%.

Operator

I'm showing no further questions in the queue. I'd like to turn it back to Un Kwon-Casado for any concluding remarks.

Un Kwon-Casado

We'd like to thank everyone for attending our call today. A replay of this call will be available on the investor section of our website. This now concludes the call, and we look forward to the next update following the close of the third quarter of 2013. Good evening, everyone.

Operator

Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.

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