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Fluidigm (NASDAQ:FLDM)

Q3 2013 Earnings Call

October 30, 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

Douglas Schenkel - Cowen and Company, LLC, Research Division

William R. Quirk - Piper Jaffray Companies, Research Division

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

Matthew Pommer - Oppenheimer & Co. Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Fluidigm Third Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Un Kwon-Casado, Vice President of Corporate Development. You may begin your conference.

Un Kwon-Casado

Thank you. Good afternoon, everyone, and welcome to the Fluidigm Third Quarter 2013 Earnings Conference Call. At the close of market today, Fluidigm released financial results for the third quarter ended September 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 portion will be archived in the Investor 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 and product margin expectations for the development of the single-cell and production genomics market, strategies for product development and anticipated new product launches and future market conditions, prospects and growth opportunities. These statements are forward-looking and are subject to substantial risks and uncertainties that may cause actual events or 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 June 30, 2013, filed with the SEC, and will be contained in our upcoming Form 10-Q for the quarter ended September 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. And with that, I will now turn the call over to Gajus.

Gajus V. Worthington

Thanks, Un. Good afternoon, everyone, and thank you for joining us today. In the third quarter, strong execution across the company drove Fluidigm to both record quarterly total and instrument revenues, the highest since our initial public offering nearly 3 years ago. Total revenues of $18.3 million grew 43% year-over-year and were up 37% year-to-date. Q3 instrument revenue growth of 61% was very robust, with contributions not only from the continued adoption of the C1 Single-Cell AutoPrep System, but also, the BioMark HD System. Our industry-leading product margins remained at 72%. And finally, we continue to make commercial investments to position us well for future success.

Based on our trajectory and outlook for the remainder of the year, we are increasing our full year 2013 total revenue growth guidance to a range of 32% to 34%, above our previously increased range of 27% to 31%.

Single-cell genomics continues to be our primary differentiator and driver of growth. It is exciting and rewarding to spearhead a new era of biological research that increasingly migrates towards single cell analysis. Understanding biology at single-cell resolution will enable fundamental new insights in basic and translational research, with downstream impact to improve diagnostics and therapeutics. That said, we are early in the evolution of the single-cell genomics market and remain focused on driving continued market development and setting the pace of innovation.

Our single-cell genomics revenue grew over 100% year-over-year, driven by C1 and BioMark sales, and represented approximately 45% of our product revenue in the quarter. We continue to see a consistent percentage of our C1 and BioMark packages, as approximately 30% of our C1s were bundled with the BioMark in the quarter. We are stimulating new single-cell customers to jump into this nascent and exciting field. These customers were previously on the sidelines due to the daunting workflow and cost of isolating and preparing single-cell samples for genomics-based analysis. The C1 has changed this. We believe we are succeeding in democratizing single-cell genomics.

At the end of the third quarter, we had sold nearly 160 BioMark systems that were motivated by single-cell research. The number of total installed C1 systems continues to expand, with just under 100 total units at the end of the third quarter. It will continue to expand the application menu of the C1 to enable new analytical modalities and more fundamental biological experimentation. We believe this will further expand the community as single-cell researchers and also increase consumables pull-through. As an update, we remain on track to introduce single-cell whole genome amplification for the C1 by the end of the year. This application will allow researchers to cost-effectively perform DNA sequencing on individual cells in a simple and reproducible manner.

Customer interest in single-cell DNA sequencing is high, especially in research fields such as cancer and immunology. Our initial protocol will focus on targeted DNA sequencing of up to 480 regions, utilizing the Access Array platform subsequent to the C1 processing. Into next year, we expect to broaden support towards whole exome and whole genome DNA sequencing of individual single cells.

We believe our growth and success in this market will be heavily influenced by the pace of adoption of Single-Cell Analysis by basic and translational researchers. A key indicator of success -- of customer adoption is the number, pace and quality of scientific publications. Today, we have approximately 100 single-cell publications referencing Fluidigm products. In addition, we are excited to report our C1 customers have just begun to publish their research utilizing the system. The first 2 C1 peer-reviewed scientific articles were published in the third quarter, one by a high-profile cardiology researcher at UCSF that studied reprogramming of iPS cells to heart cells. And another group from the Sanger Institute, an EMBL that describes single-cell RNase data analysis. Another published us recently, which compared the performance of the C1 to plate-based methodologies. We are delighted that these researchers from Stanford concluded that the C1 results were better in nearly every respect versus placed -- plate-based methodologies. Results from the C1 were superior even when using the same chemistry in microtiter plates. We are aware of several other publications in the queue, and these publications will help support broader market adoption.

Outside single-cell genomics, we saw a strong consumables utilization from our production genomics key accounts, in particular, from the human clinical segment. We also experienced growing adoption of the Access Array platform for targeted clinical resequencing applications. Overall, approximately 20% of our Q3 revenue was derived from clinical lab customers. Our strategy and production genomics continues to be focused on pursuing high sample throughput applications with significant cost and workflow needs.

Finally, we have a strong quarter for sales driven by research applications outside of single-cell genomics to pharma biotech companies and academic core labs. We're pleased by this result in the quarter but anticipate this may moderate going forward.

In conclusion, we are very pleased with our third quarter performance and are confident in our new full year outlook. Our conviction around single-cell market opportunity and our positioning within it has never been stronger. We also have a sizable and growing business in production genomics that drives high-margin recurring consumables revenue and diversification from academic end markets. I'm extremely proud of the Fluidigm team and our solid execution across every function in this quarter. I will now hand the call over to Vikram for a more detailed review of our financial results. Vikram?

Vikram Jog

Thanks, Gajus. I hope you've all had a chance to review our third quarter 2013 earnings release. I will walk you through the operating results and highlights.

In the third quarter of 2013, our product revenue grew 43% to $18 million. We had another strong quarter for instrument revenue, which grew 61% year-over-year to $10.9 million, driven by sales of the C1 Single-Cell AutoPrep and BioMark HD System.

Single-cell genomics continues to be a strong growth driver for the company, and approximately 65% of the BioMark HD System sold during Q3 were motivated by single-cell gene expression research. Our total consumables revenue, both IFCs and assays, were $7.2 million during the third quarter, an increase of 22% over the prior year's quarter.

Chip pull-through in the third 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 high throughput production genomics applications.

Of the installed base of approximately 845 instruments at the end of the third quarter, analytical systems were roughly 60% and preparatory systems, which include C1 systems, were roughly 40%. Geographic revenues as a percentage of total product revenues for the third quarter were as follows: United States, 56%; Europe, 22%; Japan, 15%; Asia Pacific, 5%; and 2%, other. Japan was especially strong this quarter under new management and as a result of government stimulus. We expect stimulus to continue to have a positive impact, but we expect year-over-year growth to moderate in Q4.

Net loss for the year was $4.3 million compared to a net loss of $4.2 million in the prior-year third quarter. Non-GAAP net loss for the third quarter of 2013 was $1.5 million compared with the $2.5 million non-GAAP net loss for the third quarter of 2012. These refer to the reconciliation of GAAP to non-GAAP information attached to the third quarter 2013 earnings release for details.

Q3 product margins of 72% were in line with the year-ago period. Despite the product mix shift, our product margins remained flat year-over-year because of slightly higher consumables margin.

For modeling purposes, I would continue to encourage you to think of our business as a high 60% product margin business. There are 3 main factors that could pull down margins in the future. First, as noted in our recent 8-K filing, we are planning to consolidate and expand our Singapore manufacturing operations in the third quarter of 2014. Secondly, as we have stated before, we would like to reserve pricing flexibility to add high-volume key accounts in the future. And lastly, if we were to initiate modifications to our manufacturing processes in anticipation of seeking regulatory clearances for our products, our margins could be impacted.

Turning now to OpEx. Research and development expenses were $5 million in the third quarter of 2013 compared to $4.1 million in the third quarter of 2012, and $5 million in Q2 2013. The year-over-year increase in research and development expenses were primarily driven by increased headcount.

SG&A expenses were $12.1 million in the third quarter of 2013 compared to $9.1 million in the year-ago period and $11.6 million in Q2 2013. The year-over-year increase in SG&A expenses were driven mainly by headcount, increased legal fees and higher tradeshow and marketing expenses. Stock-based compensation expense was $1.7 million in the third quarter of 2013 compared to $1 million in the third quarter of 2012.

Moving onto the balance sheet. Total cash, cash equivalents and investments were $82.8 million at the end of Q2 -- Q3 2013 compared to $83.5 million at the end of Q2 2013 and $83.7 million at December 31, 2012. Net cash used for operating activities was $4.8 million in the first 9 months of 2013 compared to $14 million in the year-ago period.

Inventory was $8 million, up from $7.2 million at the end of the second quarter of 2013, and accounts receivable were $12.4 million compared to $10.8 million at the end of the second quarter of 2013. Our DSO was 61 days at the end of the third quarter of 2013 and in line with our financial model that has us operating at a DSO of 60 to 65 days this year.

Shifting gears to our guidance. We're increasing our full year 2013 total revenue growth to a range of 32% to 34%, above our previous guidance of 27% to 31% growth. Operating expenses in 2013 are projected to be around the top end of the previously provided range of $65 million to $68 million. Stock-based compensation expense and capital spending are projected to be in line with previous guidance of between $6 million to $7 million and $4 million to $5 million, respectively. I will now turn the call over to the operator to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Doug Schenkel of Cowen & Company.

Douglas Schenkel - Cowen and Company, LLC, Research Division

Given the C1 strength in the quarter, I was a bit surprised to see that the pull-through on analytical instruments went above your guidance range. I say this only because I think it usually takes new instruments a little while to ramp and -- from a consumable utilization standpoint and also because C1 thus far has had a lower annuity stream than Access Array. So I'm just wondering what's going on here. Is C1 consumable use ramping a bit more quickly than expected or are production genomics initiatives on the Access Array side maybe taking off a little bit more quickly than expected, or maybe a combination of both? It just looked like a really good number there on the consumable side.

Gajus V. Worthington

Doug, it's Gajus. So first off, I just want to clarify. I think you said analytical systems, but clearly, you mean preparatory system?

Douglas Schenkel - Cowen and Company, LLC, Research Division

Yes, yes, yes. I'm sorry, yes.

Gajus V. Worthington

No problem. So a couple of things. The main reason for the pull-through on preparatory systems being above our range is because of the production -- the effect of high-volume production genomics customers for the Access Array. As it relates to the C1, we're happy with the pull-through that we're experiencing thus far, but it's still early in the adoption of the platform. And they do have bursty behavior from initial customers, some who get after it right away, some who take some time to spool up. So the -- just to go back to the main impact there was high-volume utilization by production genomics on the Access Array.

Douglas Schenkel - Cowen and Company, LLC, Research Division

Okay. No, that's great and it is helpful. And then I guess, maybe just sticking with the, I guess, almost the math on the quarter. I'm trying to triangulate a little bit between the data, the different data that you provided in terms of number of BioMarks you placed and the percentage of those that were placed for single-cell purposes. It seems like the C1 placement number in the quarter was probably almost, if not above, the equivalent of the total you placed in the first half. Are we in the right neighborhood with that estimate?

Gajus V. Worthington

Yes. We didn't break out the C1 specifically there, Doug. What I can say is that we're really happy with sales of that platform. And also I'll point out, for the BioMark too, it was a very strong BioMark quarter.

Douglas Schenkel - Cowen and Company, LLC, Research Division

Okay. And last one on Japan, you are one of a few companies that have talked about a real rebound in Japan, as a result of stimulus activity over there, especially on the academic side. But beyond that, you guys clearly have struggled for a while from an organizational standpoint in Japan. It sounds like that was also a key contributor to growth, so recognizing there -- as you said in your prepared remarks, there's going to be a moderation in growth year-over-year in Japan. Do you believe this, that the organizational changes that you put into place now position you for continued growth in Japan over the next several years?

Gajus V. Worthington

Yes. We feel very good about our new management there. She's done a fantastic job and in relatively short order. So we have renewed confidence in the growth of our operation there in Japan.

Operator

Our next question comes from the line of Bill Quirk of Piper Jaffray.

William R. Quirk - Piper Jaffray Companies, Research Division

First question for me, can you just talk to the upcoming release of the DNA applications for C1 and just how that fits into your longer range goal, of talking about a $200 million single-cell market a couple of years out. Is this inclusive of DNA? Is this additive? How should we think about that?

Gajus V. Worthington

That number, about $200 million by the end of 2015, definitely included DNA also. So it's part of our strategy to maintain leadership in this growing market. So there's a lot of demand for the single-cell DNA sequencing, and the applications are -- even in advance of the former release of this product, there's already publications out there citing how single-cell DNA sequencing will be used. And there are applications that frankly surprised some of us, including myself. At cancer sequencing -- single-cell cancer sequencing is pretty obvious place to go, so is the immune system. But there are other applications like cell lineage, which is part and parcel of the development of all kinds of human disease, that they really can only be addressed by doing single-cell sequencing. So we're starting with targeted DNA sequencing with -- that will utilize the Access Array, and we think that's where the lion's share of the demand is right now. But that's quickly going to evolve into demand for whole exome sequencing, followed by whole genome sequencing of individual cells. So anyway, just to reiterate, DNA -- single-cell DNA sequencing was absolutely part of our market model for the $200 million market by the end of 2015. We're very pleased by the demand we're already experiencing for this application on the C1, and it's really going according to plan.

William R. Quirk - Piper Jaffray Companies, Research Division

Excellent. And then Gajus, can you just talk a little bit or perhaps expand on, I think it was a chromatic [ph] comment, that's something on the order of, I think I heard this number right, about 20% of revenue was generated from the clinical labs. If I heard that number correctly, would you mind maybe expanding on what sort of applications that they're using within your portfolio?

Gajus V. Worthington

Yes. So it's varied. And increasingly, adoption of the Access Array at the front end of next-generation sequencing platforms for really a pretty wide variety of clinical applications. These range from things like carrier screening to cancer screening to obviously HLA typing, which we've talked about before. There is a shift in the installed base, that is a shift in the clinical practice, going from traditional capillary-based sequencing to next-generation sequencing, and we are definitely benefiting from that. The Access Array is the -- is the best workflow for a high throughput environment. And in particular, has a very even coverage and very reproducible results. So that -- those play especially well to a clinical setting. So this has really picked up in the last 1.5 year, 2 years, and we see that continuing.

William R. Quirk - Piper Jaffray Companies, Research Division

Excellent. And then if I can sneak one last one in. Clearly, I haven't seen much negative impact of all the sort of the challenges, I should say, on the academic side in the U.S. with the partial government shutdown. As we kind of look into early '14 and what could be another budget battle forming here, as I think it's mid-February is when they've got to come to a new agreement on the debt ceiling. Gajus, any way to get a handle or to handicap kind of what the research community might respond? From your perspective, we haven't seen any effect thus far. I'm guessing you're probably in a pretty good shape for that as well.

Gajus V. Worthington

Well, the way we view it, and I'll just reiterate what we've said many, many times now, that we believe that perhaps, particularly in a budget pressured environment, there is a bias towards innovative products that differentiate researchers from one another. And this is particularly true for single-cell genomics. So our strategy in dealing with the uncertainty associated with sequestration or budget negotiations or what have you, just keep doing what we've been doing, which is to continue to innovate, continue to set the pace for new applications within the single-cell genomics market. And thus far, that's played out exactly like we hoped it would. And that is that there's been a disproportionate move of interest and dollars to these applications from more traditional, what I'll call, generic research tools and research applications.

Operator

Our next question comes from the line of Sung Ji Nam of Cantor.

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

So going back to Doug's first question about preparatory system pull-through -- consumable pull-through, you guys have seen consistent pull-through above your historical range. And was -- understanding that the C1 pull-through is still in the early stages, just curious as to why you might not be updating that? And if you actually -- if there's a possibility they could go back down to kind of the historical range, what could be the biggest driver of that?

Gajus V. Worthington

Well, thanks, Sung Ji. The reason why we're not resetting it is because we want to have a clear and consistent picture and data on what the actual pull-through for the C1 is. And it's confounded by a couple of things, it's confounded by the fact that it's new, and there are systems out there that we've shipped that take a while for people to turn on and take a while for people to actually do the steady-state biological experimentation for which they purchased the system. It's also confounded by the fact that we have multiple price points at different types of consumables. For example, for the workload that serves the BioMark versus the workflow that serves next-generation sequencing. And we've been very pleasantly surprised by the continued -- actually, the stimulation of interest in the BioMark platform as a result of enabling things like single-cell RNAse. So all these things kind of go into a model together, and it hasn't been long enough to have consistent data that we can then draw a nice black line box around to give you the number. But there certainly isn't anything that we see right now which would cause the pull-through rates that we're observing right now to substantially revert. Because fundamentally, what's transpiring is that we're adding customers on our Access Array business there, higher throughput than we've had historically, with these production genomics customers. And the C1 thus far, inherently has had a very nice pull-through, even right out of the chute. So we'll get you that revised number as soon as we've got some reproducible behavior on the part of our customers that we can really rely on.

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

Okay, that's very helpful. And then secondly, you talked about strong sales to pharma companies. If you could maybe give us specifics in terms of what kind of applications you're seeing stronger growth within that segment?

Gajus V. Worthington

Well, within pharmaceutical companies, it's pretty varied. Some of it is in the development side, some of it is in the basic research side. Most of it is in the basic research. Some of it has to do with the emerging stem cell applications within pharma that could eventually become single-cell like. But it's really not possible to characterize that generally, because these are -- there's a variety of research applications that pharma engages in and use our platform for. So I'm sorry not to be able to provide like a lot of color there, is anything that I -- any specific application that I would highlight would really, in this case, be a one-off on a customer-by-customer basis.

Operator

[Operator Instructions] Our next question comes from the line of Matthew Pommer of Oppenheimer.

Matthew Pommer - Oppenheimer & Co. Inc., Research Division

I was just curious. So you mentioned that 20% of the revenues were from clinical lab, but I was wondering if you could give us a more detailed breakout by end market.

Gajus V. Worthington

Hi, Matt. It's Gajus. What do you mean by breakout by end market?

Matthew Pommer - Oppenheimer & Co. Inc., Research Division

I guess, the production genomics/government academic. As I understand it, clinical lab is a segment within there.

Gajus V. Worthington

Here you go. For Q3, academia and government is around 64%; pharma biotech, around 11%; what we call commercial Ag-Bio, 3%; clinical labs, 19%; and other, 2%. Year-to-date, academia and government is around 61%; pharma biotech, around 8%; commercial Ag-Bio, around 6%; clinical labs, 21%; other, 4%. Is that what you're looking for?

Matthew Pommer - Oppenheimer & Co. Inc., Research Division

Yes, that's very helpful. And then I was kind of struck by something you mentioned in the -- factors that could pull down gross margins, specifically in advance of regulatory clearance. I was wondering if you could sort of -- maybe sort of place that in terms of timing perspective. And then just more -- talk about your diagnostics strategy. In the past, you've mentioned circulating tumor cells. I'm interested if there's any update you could provide there?

Gajus V. Worthington

So let me start with the diagnostic strategy, and I'll go back to your question about the impact of regulatory work on our product margins. So our diagnostic strategy is very simple. We would like to be in a position to provide our tools to clinical customers who wanted to utilize them. The -- that very well may require, at some point down the road, that we get regulatory -- FDA regulatory approval for one or more of our products, and that includes a reach through into manufacturing, of course. So the applications are varied. Certainly, there's a lot of interest in circulating tumor cells. There's been a lot of interest in advanced cancer diagnostics, new cancer diagnostic that utilize single cell. But there's also a lot of existing things, and I mentioned this earlier in the prepared remarks, that or actually -- sorry, it was a question, the Access Array, which does not do single-cell generally, is being utilized more routinely for sequencing applications at our clinical. So in any case, eventually, our customers might really need us to get regulatory approval for one or more of our products. And if we decide to do that, then there will at least be a transient effect on margins, as we'll have to do a substantial amount of work, mainly related to documentation and perhaps somewhat related to the flow of manufacturing. But those things will cost more as we're implementing them. And thus, could provide some headwind for margins while we're doing that. We haven't made a decision to do these things yet. And if we do, we'll certainly let you know. And then at that time, we could probably give you some specific guidance about how that might affect margins going forward. But for the time being, there's nothing in the near term, the very near term that we see affecting our product margins. We will have some amount of headwind as a result of the expansion of our manufacturing facility in Singapore. The bulk of that will transpire next year. But the other reasons that we encourage you to continue modeling us in the high-60s obtain [ph] that, we said them already, that we want to reserve pricing flexibility for high-volume customers. And I've already spoken about the potential for impact from regulatory efforts.

Operator

[Operator Instructions] I'm not showing any further questions at this time. I would like to turn the program back to Un for closing remarks.

Un Kwon-Casado

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

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a good day.

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