Quanterix Corporation (NASDAQ:QTRX) Q2 2022 Earnings Conference Call August 8, 2022 4:30 PM ET
Company Participants
Masoud Toloue – President, CEO
Mike Doyle – CFO
Conference Call Participants
Puneet Souda – SVB Leerink
Max Masucci – Cowen
Matt Sykes – Goldman Sachs
Operator
Hello, thank you for standing by. And Welcome to the Quanterix Corporation Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Mike Doyle, the CFO. 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 Chief Executive Officer of Quanterix. Before we begin, I would 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 that 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. To supplement the Company’s financial statements presented on a GAAP basis, the company has provided certain pro-forma financial measures. Management uses these pro-forma 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 and assessing the company’s operating performance.
The pro-forma 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 pro-forma measures to the most directly comparable GAAP financial measures set forth in the appendix of this presentation. The risks and uncertainties that we face are described in our most recent filings with the Securities and Exchange Commission.
With that, I will now turn the call over to Masoud.
Masoud Toloue
Thank you, Mike. And good afternoon everyone. We’re a unique and transitional moment both at Quanterix and in the broader life science industry. Never before have there been more measurable parameters to assess normal or disease processes in human health. Using new biometrics screening, imaging, genomics, and proteomics technologies this industry is about being more lab parameters to discover and help make decisions in this assessment and diagnosis and treatment of disease. Perhaps even more importantly, industry participants are accelerating understanding that multi-marker approach is and the data associated with them will treat better predictive indication of changes and protein state and expression.
Quanterix sits in a key translational space in its continuum where our ultra-sensitive detection of protein uniquely propels new discoveries and early indications of disease. Alzheimer is one of those diseases where there is an early symptom-free phase that if detected could revolutionize the way we treat patients. An important step in this direction, last week we launched the first pTau-181 plasma laboratory develop test for clinical diagnostics and research. This is an early move as we arm researchers and clinicians with new tools to provide insights into poorly understood pathologies and empower therapeutics companies with a growing menu of multiplex blood-based markers to advance brain health.
Now, Quanterix is at a pivotal juncture where operations and ability to scale and have not kept up with growth and customer demand for our Simoa technology. This has manifested itself into quality challengers that will in the near term have impaired our growth rates. Costs to manufacture assays with current processes are not attrition in the long-term. Following our strategic review and top down assessment of our operations, we announced a comprehensive plan was imperative as to fully realize the potential of Simoa while ensuring the company’s technology’s built and scaled with operational rigor and excellence. First, we have set in motion an assay redevelopment program with the objective of improving our ability to manufacture and deliver high quality assays at scale.
We anticipate making initial progress this year and expect to complete this program in ’23. Second, we have refocused and aligned our capital and resources along three go-forward principles: Quality, Innovation, and Positioning Quanterix to unlock the value of translational markets. We have initiated several decisive actions to reallocate resources and capital, eliminating projects and reducing spend on initiative not related to assay redevelopment and an innovative research. These adjustments will put us on a path to accelerate the return to strong growth and put us in a position to achieve positive cash flow. These actions will result in a reduction in force affecting approximately a 130 employees across the company’s worldwide operations.
On to our Q2 results. We reported total revenues of $23.5 million which represents a 7% decline year-over-year. Revenues were impacted due to reduction in consumer revenue as we addressed assay quality challenges. As shown on Slide 3, consumable revenue declined year-over-year by 29%. As I discussed, we have initiated critical steps to realign our business so we can focus on improvements required to remediate these challenges. On a pro-forma basis, Q2 gross margin was 28.3% versus prior year Q2 pro-forma gross margin of 47.5%. Our Q2 growth margin reflects the reallocation of resources mainly headcounts for ongoing quality-related activities as well as on adjustments relating to shipping costs to our cost of goods sold.
These increases the cost of goods, have a corresponding reduction in operating expenses with no overall change to the company’s total expenses. Mike will provide additional details in a moment. We believe presentation of pro-forma gross margin provides visibility into the progress of our quality process initiatives and their improvement on a cost of quality. Forward-looking, we now expect total year ’22 revenue to be flat compared to total year ’21. On a longer-term basis, we expect to return to double-digit revenue growth in 2024 when the benefit of our restructuring and business realignment plan are fully realized and to accelerate at a faster pace once new growth categories are unlocked.
Difficult but necessary changes to improve our operations in cost structure are far reaching and will affect approximately 25% of our employees across the company worldwide. We regret the impact of these changes on our departing employees and would like to thank them for their contribution to our company. Moving forward from here, we’re committed and focused on executing to achieve our operational, market, and growth goals. We are dedicated to advancing our mission of transforming diagnostics of neurodegenerative disease, biomarker research and discovery. Today, we also announced that Kevin Hrusovsky has stepped down as our Company’s Executive Chairman and is leaving our Board of Directors.
As we move forward, in the next phase of our company’s evolution, this is also a natural point in the evolution of our Board structure. I would like to thank Kevin for all his efforts and helping Quanterix become a leader in our field. With Kevin’s departure, the board has appointed Martin Madaus to serve as Independent non-Executive Chairman of the Board. Martin is deeply familiar with our company and industry and we look forward to working with him in his new role as we embark on the next phase of our journey.
Now, I’ll turn it over to Mike to discuss some more financial details. Mike?
Mike Doyle
Thanks, Masoud. I’m here to provide some additional financial details about our second quarter 2022 performance. And for your reference for those following on the call would be Slide 3. As Masoud noted, our total revenue in the second quarter of 2022 was $23.5 million, a 7% decrease versus the second quarter of 2021 revenue. We have product revenue in the second quarter of $14.8 million and a decrease of 21% versus the second quarter of 2021. Within product revenue, consumables revenue was the biggest driver at the shortfall declining 29% versus the second quarter of 2021.
As Masoud discussed, we had quality-related issues that we are addressing. Instruments decline 4% versus the second quarter of 2021. While we’re during this second quarter, we shipped 10 instruments for the value of $1.9 million to a new customer which we did not record revenue due to the start-up nature of the business. We will be recording this revenue when the cash is received.
Second quarter 2022 service revenue increased 51% versus the prior year second quarter to $8.5 million, included within services revenue is $2.7 million recognized during the second quarter of 2022 from our collaboration with Eli Lilly announced during our Q4 2021 release. I’d now like to spend some time talking about gross margin for the business. During the second quarter based on a deep-dive review of the business, we made a few changes in how we capture costs in our P&L this quarter. We’ve changed the cost allocation of three departments based on your focused activity and quality and operations. In addition, we are capturing freight cost not built to customer and recorded as operating expenses as a pro-forma adjustment to cost to goods sold.
We’ve made these changes to give greater visibility and of our quality activity and allow investors to better monitor our progress. First let me walk you through the impact of that change from the first quarter of this year to the second quarter of this year. If you look at Slides 5 and 6, we have rich gross margin and operating expenses from the first quarter GAAP to our second quarter pro-forma presentation. When you look at the gross margin change from our GAAP Q1 performance to pro-forma Q2, both the allocation change and freight expenses had corresponding operating expense decreases which you can see on Slide 6.
Of the gross margin decline of 21 percentage points from our first GAAP to our second quarter pro-forma, 16 of the 21 points relates to the allocation change and pro-forma freight adjustments. The remaining difference reflects volume and mix shortfall primarily due to the decline in consumable revenue mentioned previously, partially offset by the improvement in our excess and obsolete charge. [Volatility] in margin performance for the quarter versus prior year and for your reference that will be captured on Slide 7. Our second quarter 2022 pro-forma gross margin was 28.3% compared to 47.5% in the second quarter of 2021.
There are few factors that drove this change. First, revenue decline versus prior year with a biggest shortfall coming from my highest margin product: Consumables. Our volume and mix contributed 10 percentage points to the margin decline. The change in allocation we made in Q2 impacted margin approximately 7 percentage points versus the second quarter of 2021.
Our pro-forma operating expenses totaled $31.6 million in the second quarter of 2022, an increase of $5.9 million versus operating expenses in the second quarter of 2021. Major expense drivers were headcount increases, stock compensation expense, and increased lease expense related to the new facilities in Bedford, Massachusetts.
We are considering our options including terminating lease, our sub-leasing some or all of this space in order to reduce the drag on operating expenses. During the second quarter of 2022, our cash balance decreased by $13 million and in unrestricted cash balance was $361.3 million at June 30, 2022, and basic weighted average shares outstanding of earnings per share totaled $36.9 million for the second quarter of 2022. Cash outflow from operations was $8 million during the quarter driven by higher operating expense primarily driven by headcount increases and CapEx partially offset by tenant improvement rebates from our landlord-owned in the New Bedford facility.
With approximately $10 per share in cash and no debt, our balance sheet remains in excellent shape and we are well-positioned with adequate resources to pursue our strategic objectives. The difficult decision we have made with our restructuring announced today will reduce expense on an annualized basis by approximately $25 million excluding the impact of our leased facilities in Bedford, Massachusetts. [Workshops] offset the reduction in revenue guidance and allows us to continue to strategically invest going forward. The changes we have made and how we show our financial results will provide greater visibility to investors going forward and will allow you to see our progress towards improved quality and scalability.
With that, I’ll turn it back to Masoud.
Masoud Toloue
Thank you, Mike. Before we go into questions, I want to summarize the few important points. First, the market opportunity in neuro degenerative research and the demand for ultrasensitive tools for early biomarker detection has never been stronger. From grant agency spend, clinical enrollment the drug and late-stage trials, we expect continued growth in this category.
Second, we have shown through our over 1800 publications that Simoa technology is a robust and critical element in advancing discovery and accelerating drug approvals from research to post-market clinical studies. Similar blood-based testing can enable non-invasive cost effective identification of patients more likely to benefit from disease modifying therapy, accelerating trial enrollment and increasing profitability of approval.
There is no mistaking that we do have some challenges, both we’ve sized and understand them and have a comprehensive operational plan to address. This plan will improve our quality and manufacturability of our assays along with both scale and improve our cost structure in preparation to accomplish our translational goals. It’s the single greatest priority of the company and we have aligned our resources around it. At the conclusion of this transformation, success will be profitably capturing a larger share of the proteomics market innovating and growing at a much faster pace than before and in a leading position to propel new discoveries, advancing nerve degenerative disease research and diagnostics.
We can now open the line for questions. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Puneet Souda with SVB Leerink. You may proceed.
Puneet Souda
Yes. Hi Masoud, thanks for question. So, first one is really I mean can you talk a little bit about the quality challenges and just walk us through that, why was this not sort of detected or identified earlier. And also, help us understand sort of what is the ongoing impact to sort of how much is it to the clinical trial side of the business versus to the academic side of the business. Help us to just understand what is what exactly happened in the quality side of consumables?
Masoud Toloue
All right, Puneet. Thanks for the question. So, on the consumer quality side, clearly as you can see from some of the charts that we provided. We have a high cost of quality for our assays and that cost involves our manufacturing process, some product stability and that the comp for that includes rework scrap our distribution costs. And so, that level of rework required to center our products with quality is then going to be something that we want to continue or sustainable on the future. So, that’s why we’re launching this redevelopment program for our assays to make sure we have sustainable growth. On the question related to the clinical customers, we’ve done a lot of work in piloting some of our redevelopment efforts and our Accelerator Lab.
And so, the work that’s done in our Accelerator Lab includes a lot of initiatives around quality. And so, from that perspective a lot of our clinical customers and the work that we’re doing and Accelerator benefit from that. And so, we are able to mitigate and work around many of the quality challenges we have. That being said, it’s going to be a significant effort and that’s why we’ve reduced our guidance for the year.
Puneet Souda
Okay. And then, on the guidance part, I mean, sort of what gives you confidence in this flat year-over-year guide. I mean, you’re as you said the 25% of the employees are being laid off. So, just I wanted to understand I mean what gives you confidence given that this obviously causes a disruption within the workforce, morale and such. So, there could be further impact on that and just walk us through what gives you confidence on the flat number for the year?
Mike Doyle
Yes. So that’s — good question. The concept of the guidance. We believe first-of-all there’s no decrease in demand. I would say that demand for Simoa products and our ultrasensitive detection is unmatched. And our customers need the ability to measure these proteins at low levels. So, that’s a strong positive. Two, obviously with the high growth we had we have to take a step back on developing some of the products and assays so that we’re consistent in that growth in the future. We focused in this reduction in force to really around two tenants as I talked about on the call. One, the focus on quality and this redevelopment program. And two, around our innovation.
And so, from a focus and resource perspective, we haven’t reduced that at all. We’d put all our effort on in those baskets. And we think that this new focusing helps from a cost perspective and a focusing perspective.
Puneet Souda
And just last one from me. Does this impact your agreement with Eli Lilly or other private prior commitments that you have with pharma companies including prior every call you had agreements with Abbott and BARDA and other government agencies as well. So, just wanted to understand which one to those are impacted at this point?
Masoud Toloue
None of those that you mentioned are impacted. We don’t have any don’t expect any impacts to the collaboration that we have or that we’ve announced. We don’t anticipate any impact to them at all.
Puneet Souda
Okay, alright. Thank you.
Masoud Toloue
Thanks, Puneet.
Operator
Thank you. [Operator Instructions]. Our next question comes from Max Masucci with Cowen. You may proceed.
Max Masucci
Hey, thanks for taking the questions. We’ve been a longtime supporter of Quanterix and the company’s mission. This will be a bit more blunted out with the questions. I guess just to start, what triggered this strategic review of the business, it sounds like manufacturing scale was one area of focus. But can you explain the other items that were on the short list of key findings from this strategic review, whether it’s quant actions, competitive positioning, but in proteomics ecosystem or anything else?
Masoud Toloue
Hi Max, thanks for the question. Yes. Do we — first of all, I think with me coming on board, I think it’s natural that there is a strategic review of the operating model and then anyone new coming to our business is going to take a look up how we want to allocate our resources and our capital. And when we did a strategic review it was clear as you can see from some of our charts that our cost to get product to a customer is significant and we do a lot of rework and then scrap and our distribution cost. And that is not going to be something that’s sustainable in the future as we look for a profitable growth. That’s number one. Number two, we think this is an incredible time where there’s several trials, several work and around research and diagnostics that’s being done and a few therapeutics in the market that are becoming in the next couple of years.
And what better time to take a top down look at the business and get it into shape for meeting what we think is going to be pre strong demand going forward. So, it’s sort of that hopefully provide some color on why the review, why the look back, and why the focus are on our operations.
Max Masucci
Okay, got it. And as a company with a relatively mature installed base compared to specialty tools peers, consumable for that ran nicely for years. And still very long way for growth even in research and biopharma end markets. I guess one would assume that you probably would be able to break through to casual breakeven since with volume leverage but it doesn’t necessarily sound like that’s the case after the strategic review. So, any Quanterix under lineup major transformation nearly 10 years ago and just approved out the technology in biopharma and research market so far strategic entry into diagnostics. Now wasn’t part due to the success that women are generated by implying a similar approach.
So, I’m so relatively unclear whether they go forward strategy as more-or-less diagnostics focus. And just how you’re prioritizing go-forward.
Masoud Toloue
Yes. So, the way we think about this is first — all of our revenue today are in the research and translational market around academia, pharma, and our CROs. And that’s what is discovery of a new biomarker or that’s a translation of that biomarker into the clinic or during a clinical trial. So, that’s the majority of our revenues and we want to ensure that we can sustain that base on a go-forward basis.
Now that being said, as these markers are moving in this translational space and in pharma, you could see the utility for them in a diagnostic setting. And our view here is look we want to be able to offer the test in a diagnostic setting in our LDT laboratory.
We announced our first pTau-181, up or down purpose. But we don’t anticipate a lot of volume or a lot of demand for that until there is a therapy in the market. So, it’s important to begin to make some small steps in the diagnostic space. We think there will be a bigger steps in the future but now we want to focus our efforts on this translational place that Quanterix plays very well.
Mike Doyle
One comment, actually he mentioned cash flow. When we did the deep-dive, one of the things it highlighted is this cost of quality that Masoud talks to and the ongoing need to put additional resources and have additional expenses associated with product we work and getting it in a place where we can go to market, it’s going to be a drag on us getting to cash flow breakeven. And I think we and I believe that is we get these results and actually “x” bright versus the internal forecast we did. And likes but I am just getting the cash flow breakeven. So, we believe this was a necessary next step and in addition see other things that Masoud mentioned.
Max Masucci
Okay, got it. Final one, just with north of $300 million in cash reduction in the size of the organization, I think there has been a — there is a comment made lay around it, desired it. Gain access to technologies that can improve your multiplex in capabilities but just generally speaking you do have a strong balance sheet. How should we think about how you’re going to be prioritizing these and that balance sheet M&A and things of that sort?
Mike Doyle
Yes so, our clear focus today is really one — we want to make sure that we have scalability. I think that demand and that opportunity that we see in the market for Simoa is our number one important. The more we can scale and get these products to customers that need it that is going to be our focus. Number two, you talked a little bit about the multiplex and our efforts to continue around higher sensitivity, that’s another, that’s our second area where we have to continue innovating as a company and we have some very interesting projects that we hope to talk about in the future as we progress on some of those initiatives.
That’s where we’re really focusing, the resources. We have the cash balance to be able to focus on those two priorities and we talked about some of the focusing, like hey this is where we want to pay attention to. If there was something that helped inorganically, one of those two initiatives we take a look at it but we wouldn’t want to take anything or look at anything that was distracting.
Max Masucci
Yes. Thanks for the color, it’s transparent.
Mike Doyle
Thanks, Max.
Operator
Thank you. [Operator Instructions]. Our next question comes from Matt Sykes with Goldman Sachs. You may proceed.
Unidentified Analyst
Hey guys this is Dave on for Matt. Can you provide any additional color on how instrument growth has been trending and what do you expect going forward?
Masoud Toloue
Hey, Dave. Instrument growth, I think when you look at the placement activity I mentioned, we didn’t build for it. Instrument growth has been consistent with similar to Q1 and similar to Q4 in the prior year. So, the placement activity from an instrument standpoint was actually good. HDx up a bit more this quarter if you remember last quarter was a little software and SRx was up. So, from an instrument placement standpoint, I think we are performing consistently. So, I don’t see challenges there at this point.
Unidentified Analyst
Good, thanks.
Operator
Thank you. [Operator Instructions] Our next question comes from Kyle Mikson with Canaccord. You may proceed.
Unidentified Analyst
Thank you. Hi, everyone. This is Alex [Indiscernible] on for Kyle Mikson. So just question on competition. So LabCorb’s NFL blood-based test facilitate the detection and verification of size [Indiscernible] July. There’s also the Siemens, our CRM NFL assay, which achieved BDD in March of 2022. So I was kind of highlight some of the differentiation of your cell tests versus some of these competitors. And is it mostly like a sensitivity, value proposition or do you feel that that’s not like paint a picture? [Indiscernible] of your cell tests versus some of these competitors? And is it mostly like a sensitivity, value proposition? Or do you feel that that’s not like paint a picture? Thank you.
Masoud Toloue
Hey, Alex, your line was breaking up. We heard the second part of your question about the Siemens NFL test, didn’t catch the first part of your question. But maybe I can start on the Siemens, and then you could repeat the first part. So when we look at our test, RNFL, we, two things are important. And two things are important to keep in mind. First, we have the largest number of publications around neurofilament light, versus any other company or provider of that platform. So that publication record is incredibly strong.
We talked about last quarter, this, big, large normative study around NFL and baselining, NFL levels, in order to create a baseline based on weight, and BMI. And so that was a incredible study across 1000s of people that provide a lot of information and make the data points of NFL incredibly useful to both users of Samoa and other users. So that’s a very important point. And then finally, I just want to make a comment that it’s the — if you’re looking at sensitivity, it’s a combination of great antibody, but it’s also the Samoa technology, it’s going to allow that ultra sensitivity and give you the best results.
So it’s a combination of both. We support Siemens in their initiative. We talked about Siemens being a partner, and then using our antibody. And so we want to promote the use of Samoa and our NFL product all around. I didn’t catch the first part of your question. Could you repeat that?
Unidentified Analyst
Apologies for the miscommunication on my end. So that’s a great answer. My first question was actually just specifically, the question. And it was really to LabCorp and how they launched in NFL, a blood based test in mid July?
Masoud Toloue
Yes. So we saw that from LabCorp. I think that’s a great testament to what we’re going to see as more and more interest in a marker for brain health. And I think that’s an excellent indicator that there’s an appetite in the market. Brain Health is probably one of the most difficult and costly ways to diagnose pathology or disease. And it was a very — it was a big plus, we applaud that. And we hope that there’s more, more companies out there that are going to be doing testing with NFL.
Unidentified Analyst
Excellent. Thank you for that. Thank you for providing me some more color on that. And one additional question and then I will hop off. And apologies on the call kind of to hop between calls came in on volume today. So just to kind of highlight one of your goals for 2022. So you were able to see BDD for pTau-181 test for all sides, and very short order. Another one of your objectives is to achieve a [Indiscernible] validation for pTau-181, as well as clinical trials for pTau-181 and other AD biomarkers. I was just curious if you could provide any more color on any data? Thanks.
Masoud Toloue
Your line was breaking up again, but I think I got the basis of the question. So just to provide an update. We received our pTau-181 breakthrough designation last year and our NFL breakthrough designation this year, and those continue. They’re both single site IBD applications with the agency. And the big update or change, I think was a couple of weeks ago when we launched at AAIC, the first pTau-181 laboratory developed tests for as an aid in the diagnostic. And so, we think that progress is very important, because one, it’s very available in the near term to our Accelerator Laboratory. Two, it provides a great sandbox for us to work with pharma and CROs that are very interested in LDT test. And then three, is being the first one in the market with the most sensitive platform, we think it paves a great way for more work in the future. We don’t expect it from a diagnostic standpoint to be a big revenue generator. But I think paving this way as a first step is an important milestone for us and happy to say that we achieved it.
Unidentified Analyst
Thanks very much.
Masoud Toloue
Thank you, Alex.
Operator
Thank you. And I’m not showing any further questions. At this time. I would now like to turn the call back over to Mr. Toloue for any further remarks.
Masoud Toloue
So thank you for participating today. We look forward to you on our next quarter call.
Operator
Thank you. This concludes today’s conference. Thank you for participating. You may now disconnect.
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