Well, that was rough. Shares of Fluidigm (FLDM 2.94%) dropped 33.7% the day the laboratory equipment developer announced second-quarter and first-half 2019 operating results.
The crushing defeat came at the hands of Wall Street expecting growth that has yet to materialize. The shocking decline might have been influenced by the stock's impressive year-to-date performance following its appearance on Mad Money's Lighting Round segment, but Q2 operating results and Q3 guidance were disappointing nonetheless.
Management was blunt about the disappointing results, but also struck an optimistic tone about the trajectory of the business on the second-quarter earnings conference call. While the business appears to be running in place today, Fluidigm expects to turn a corner in 2020. Should investors believe that?
Image source: Getty Images.
By the numbers
It can be difficult for a company selling machines to reach the scale necessary to enable profitable operations. From 3D printers to DNA sequencers, the business model of selling hardware revolves around selling the chemical reagents needed to run the machines, called consumables. Selling one instrument brings in one chunk of revenue for the hardware, but creates the opportunity to pull in a high-margin, recurring revenue stream of consumables over the machine's life.
Fluidigm has sold niche laboratory equipment for years built on its expertise in microfluidics and single-cell analysis, which enable a wide range of experimental techniques that are only just now taking off, thanks to the rise of immuno-oncology and cell-based medicines. While investors and Wall Street expected the business to be growing at a more impressive clip by now thanks to the company's newest platform of mass cytometry machines, that's been weighed down by weakness from its legacy machines. In short, Fluidigm is caught between its past and future.
That struggle certainly showed up in first-half 2019 operating results. The business has grown revenue and gross profit at a healthy clip, but the gains have been more than offset by increases in operating expenses. That's left the business with a growing top line and deepening losses.
|
Metric |
First Half 2019 |
First Half 2018 |
Change (YoY) |
|---|---|---|---|
|
Revenue |
$58.3 million |
$51.7 million |
13% |
|
Gross profit |
$32.3 million |
$27.0 million |
20% |
|
Operating expenses |
$61.2 million |
$52.4 million |
17% |
|
Operating income |
($28.8 million) |
($25.4 million) |
N/A |
|
Interest expense |
$3.2 million |
$5.8 million |
(45%) |
|
Net loss |
($39.2 million) |
($29.5 million) |
N/A |
Data source: Press release. YoY = Year over Year.
The sharp increase in net loss was almost entirely driven by a $9 million charge on the early extinguishment of debt, which also dropped Q2 interest expense to just $491,000. Management wisely took advantage of a soaring stock price to retire $150 million in convertible debt around the time of the first-quarter 2019 operating results announcement. Shares may have given up all of the gains since then, but a healthier balance sheet will be more permanent.
That said, the overall trends don't look good, but management said the first-half 2019 operating results simply tell a story of a business in transition. Fluidigm is increasing its investment in research and development as well as selling, marketing, and administrative expenses to modernize its legacy base of microfluidics instruments (the portfolio weighing on the business) and pounce on the opportunity in mass cytometry machines (the portfolio with solid growth opportunities).
Investors are right to remain cautious, but a deeper look at metrics that don't appear on the income statement does show a path out of the current rut. If Fluidigm is going to successfully break out in 2020 as management expects, then a few things need to happen.
Image source: Getty Images.
Here's how Fluidigm can break out
Perhaps the most worrisome first-half trend for Fluidigm was the 5% year-over-year decline in consumables revenue. Management says that was due to three factors. First, the company notified customers late last year it would increase prices in early 2019, which caused a surge in Q4 consumables revenue and a lull in orders in the first several months of this year. Second, legacy microfluidics machines continue to create a drag on the business, but mass cytometry consumables revenue grew 35% from the first half of 2018. Third, orders in the U.S. were weak, but that has a lot to do with slower sales in the summer months and the fact that many institutions start their fiscal years in October.
More encouraging is the fact that Fluidigm's mass cytometry machines are now placed in more than 50% of European cancer research institutions, have been cited in over 850 peer-reviewed publications to date, and are involved in 50 ongoing clinical trials.
The growth opportunity of mass cytometry has never really been questioned, but the weakness in the installed base of legacy microfluidics machines is more surprising. That makes it important for investors to watch the ongoing modernization of the portfolio.
Fluidigm is confident it can reignite growth in the installed base of Juno instruments (one of the legacy microfluidics machines) with new consumables products, namely the new RNA-seq library prep kits. The new product will allow researchers to utilize the company's legacy machines to run experiments that quantify the RNA in a biological sample. RNA codes for proteins and is ever-changing, so it can be a valuable beacon in the quest for clinically relevant data. It's a roughly $300 million per year opportunity.
The business has also launched a bevy of new consumables products to drive adoption of its mass cytometry machines, including its Maxpar direct-immune profiling assay and a diagnostic panel that can screen patients being considered for cellular medicines or organ transplantation.
Fluidigm thinks the combination of a reinvigorated microfluidics franchise and continued growth in its mass cytometry portfolio could help the business to turn the corner in 2020. Can investors trust that outlook? On the one hand, there are a number of solid tailwinds that don't appear on the income statement. On the other hand, hardware companies can be tricky investments, so individual investors need to remain vigilant of the company's success pouncing on the opportunities ahead. But if you liked the long-term potential of the company in February, then the recent stock decline is a gift considering the progress made since then.
