908 Devices Inc. (NASDAQ:MASS) Q4 2023 Earnings Call Transcript

908 Devices Inc. (NASDAQ:MASS) Q4 2023 Earnings Call Transcript March 5, 2024

908 Devices Inc. beats earnings expectations. Reported EPS is $-0.23, expectations were $-0.27.
MASS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, everyone, and welcome to the 908 Devices Fourth Quarter 2023 Financial Results Conference Call. My name is Seb and I will be the operator for your call today. [Operator Instructions] I will now hand the floor over to Kelly Gura, Invest Relations to begin. Please go ahead.

Kelly Gura: Thank you. This morning, 908 Devices released financial results for the fourth quarter and full year ended December 31, 2023. If you’ve not received this news release or if you’d like to be added to the company’s distribution list, please send an email to ir@908devices.com. Joining me today from 908 is Kevin Knopp, Chief Executive Officer and Co-Founder; and Joe Griffith, Chief Financial Officer. Before we begin, I’d like to remind you that management will make statements during this call that are forward-looking statements within the meaning of Federal Securities Laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled forward-looking statements in the press release 908 Devices issued today.

For a more complete listing description, please see the Risk Factors section of the company’s annual report on Form 10-K for the year ended December 31, 2022, and in its other filings with the Securities and Exchange Commission. Except as required by law, 908 Devices disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only after the live broadcast March 5, 2024. With that, I would like to turn the call over to Kevin.

Kevin Knopp: Thanks, Kelly. Good morning, and thank you for joining our fourth quarter 2023 earnings call. We ended the fourth quarter with $14.4 million in revenue, up 23% from the prior year. Total revenue for 2023 was $50.2 million, up 7% from the prior year, with product and service revenue up 12%. I’m very pleased with how our team has continued to execute, stay focused on our customers, and deliver a solid close to the year. The variety in our product portfolio and our presence in multiple markets have been a strength and distinct advantage. Revenue from our handheld devices that serve the forensics market grew 28% in 2023 with consistent year-over-year growth each quarter. This growth significantly offset the macro headwinds that have pressured the life science instrumentation and bioprocessing markets which includes revenue from our desktop devices.

While we expect these headwinds to continue in the near term, particularly in the first half of 2024, we are encouraged by three indicators. First, we saw an uptick in fourth quarter bookings, resulting in our best desktop bookings quarter since Q4 2021, helped in part by contributions from our new products, MAVEN and MAVERICK. A second indicator is that we generated 25% more opportunities in the second half of 2023 for our desktop devices compared to the first half of the year, helped in part by our new product launches. And third, we generated 50% more leads in the second half of the year than over the first half, helping us fill the top of our funnel. We saw strong demand for our handheld devices throughout 2023 and expect demand will continue this year as applications for chemical detection and identification at the point of need continued to gain traction in the US and internationally.

We ended the year with 16 pilot accounts which have potential for more than 100 unit placements and 22 enterprise accounts which have potential for more than 1,000 unit placements, an increase of 25% year-over-year. Key drivers of handheld adoption continue to be significant level of ongoing geopolitical risk with conflicts in Europe and the Middle East, along with rising tensions in other areas such as in Southeast Asia with Taiwan. The ever-expanding fentanyl crisis is another key driver, including its unfortunate attempted use to disrupt elections with fentanyl being sent in the mail to election centers and officials. Between 2020, the year of our IPO, and 2023, revenues from our handheld portfolio have grown at a 29% CAGR, serving as a consistent contributor to top line growth.

We finished 2023 with zero debt and a healthy cash balance of over $145 million. We remain laser focused on balancing prudent cash management with necessary spending to support our top line growth objectives. As mentioned during our call a year ago, we set a target to ensure that our 2023 operating expense growth was paced with our revenue growth, which I’m proud to say we achieved. Entering 2024, we intend to remain good stewards of our cash as we continue our push into underserved handheld and desktop market opportunities. Now I’d like to provide a bit more detail on the progress we have made across our three focus areas during the past year. Starting with our first objective, penetrate and radiate across key accounts. Our focus is to penetrate new accounts to create a foothold and then radiate across these accounts to drive broader enterprise adoption.

For our handhelds, we steadily expanded our international presence and our MX908 device is now being deployed in 56 countries, up from 45 countries at the end of 2022. In 2023, 25% of our MX908 device sales were from outside North America, compared to 20% in 2022. We anticipate further growth in our international opportunities. In the fourth quarter of 2023 we were awarded a contract from DrugDetect EU, an innovative procurement project co-funded by the European Union for drug inspection in correctional institutions and prisons. The project requires detection solutions be available 24/7 to prevent delays to internal processes and it also mandates that solutions must be non-invasive and compliant with European data privacy laws. Our MX908 proudly meets these requirements.

Our initial contract includes multiple devices for correctional facilities in Greece and Belgium. After personnel were trained on a unit at the Ghent prison, the Belgian Minister of Justice publicly noted that they now can use our device continuously to combat drug use in prison, removing the need to call in a police dog. We look forward to partnering with the Belgian Ministry as they deploy our MX908, as well as supporting the DrugDetect project more broadly across the EU. Closer to home, the ongoing fentanyl crisis shows no signs of abating. The US Drug Enforcement Administration, or DEA, seized more than 77 million fentanyl-laced fake prescription pills in 2023, up over 50% from 2021. DEA laboratory testing also showed that seven out of 10 pills tested contained a potential deadly dose of fentanyl, an increase from six out of 10 pills in 2022 and four out of 10 pills in 2021.

To meet this overwhelming need, we continue to partner with state and local law enforcement agencies as they grapple with identifying and removing lethal counterfeit pharmaceuticals, often missed with fentanyl, from our communities. In August of 2023, we announced a pilot program with several Tennessee law enforcement agencies and drug task forces to enhance the speed and efficiency of the state’s drug identification process. The program’s primary objective is to decrease the quantity of illicit drug samples sent to central labs for testing, similar to our successful multi-year program in Ohio, which has resulted in significant reduction in evidence testing backlogs. The Tennessee pilot program began with an initial seed of eight MX908 devices, and we recently received an order for three additional devices in January of 2024, with more being planned this year.

During 2023, we also made significant progress with a multi-year project for the United States Department of Defense. In conjunction with our partner of the project, Smiths Detection, we were selected to provide initial production of 122 portable aerosol and vapor chemical agent detectors, otherwise known as AVCAD. Our high-pressure mass spectrometry technology enables these next generation chemical detector systems which will support worldwide missions for the U.S. Military. This is also a precursor to a potential full rate production award in 2025 that has the potential of providing over $10 million of revenue per year. Turning to our desktops, we are excited about our progress in cell therapies as tools that provide real-time analytics are pivotal in helping manufacturers develop more robust and reproducible processes.

In November we announced a collaboration with Terumo Blood and Cell Technologies to integrate our MAVEN device with Turumo’s Quantum Flex expansion system for real-time monitoring and control of glucose and lactate without the risk of manual sampling and with less labor. With MAVEN, lactate concentrations, which are highly correlated indicator of cell viability, can be continuously monitored to inform feeding strategies and when to harvest, both critical as they can vary patient by patient. Recently, we were thrilled to announce another collaboration with a leading cell therapy developer and manufacturer, Cellares, to integrate inline monitoring of key cell culture parameters. We are partnering with Cellares to adopt our MAVERICK in-line optical analyzer to be compatible with Cellares’ cell shuttle system, which is a fully integrated, scalable cell therapy manufacturing platform.

The benefit of real-time monitoring allows for immediate corrective action, while maintaining sample integrity and reducing contamination risk. This collaboration, along with Terumo BCT, demonstrates the complementary nature of our new and existing capabilities when used alongside other cell therapy biomanufacturing enablers. According to recently released data from the American Society of Gene and Cell Therapy, the number of Phase 3 trials increased for the first time in a year. As 2024 is shaping up to be a pivotal year, particularly for CAR-T therapies, we are proud to partner with Terumo BCT and Cellares to further advance the efficiency, safety, and cost effectiveness of these life-saving cell therapies. Turning to our second objective, advancing and broadening our product portfolio.

Our product strategy is to develop devices that are simple to use and that provide customers with robust answers at the point of need. We continue to enhance the value of our flagship handheld device with software and hardware accessories that provide our customers with additional capabilities. Last year we introduced the MX908 beacon for remote area monitoring of toxic aerosol and vapor hazards. Beacon leverages our MX908 device and aero module and adds a cloud-based solution that enables first responders to gather intelligence remotely and continuously, while ensuring public safety at large events and a key infrastructure. In November, our MX908 beacon was awarded a Gold Astors Homeland Security Award from the American Security Today for best CBR&E detection solution.

In 2023, we significantly advanced and broadened our bioprocess portfolio with the launch of two devices. In January, we launched MAVEN, our first online device that connects directly to the bioreactor, providing real-time monitoring and control of glucose and lactate in cell culture and fermentation processes. With its novel aseptic sampling probe, MAVEN enables cell-free, sterile, and safe sampling with no volume loss or prep required. Later in September, we launched MAVERICK, the first turnkey device that utilizes Raman spectroscopy for real-time in-line monitoring and control of multiple bioprocess parameters, with no modeling or development required. As an in-line device, MAVERICK is directly connected to the bioreactor, enabling scientists to take immediate corrective actions that improve product quality and process efficiency.

We were honored that the analytical scientists named MAVERICK one of the top 15 innovations in 2023. MAVEN, MAVERICK, and our REBEL cell culture analyzer enable process scientists to monitor and control critical process parameters and our ZipChip interface enables scientists to measure critical quality attributes. Taken together, we now have a complementary suite of PAT desktop devices which we plan to use to deepen our engagement with BioPharma customers this year and position us advantageously to seize opportunities as the current macro headwinds subside. And finally, turning to our third objective, laying an omics foundation. There’s a clear need for accelerating mass spec-based workflows to address proteomic and metabolomics opportunities.

We believe our ZipChip device, along with our prototype microfluidic chips, can ultimately meet this need for speed. During the fourth quarter there were several peer-reviewed articles published in scientific journals that noted the speed of our ZipChip device for high resolution separations. And here are a highlight from two articles. In a publication in the Journal of Analytical and Bioanalytical Chemistry, scientists from Ireland’s National Institute for Bioprocessing Research and Training, or NIBRT, highlighted the use of ZipChip for rapid characterization of AAV capsid proteins, with runs performed in as little as five minutes. Researchers concluded that ZipChip’s rapid characterization illustrates its strength in monitoring product quality during AAV production.

In a publication in the Journal of American Society for Mass Spectrometry, scientists from Amgen employed our ZipChip technology to enable rapid intact mass analysis of oligonucleotide single strands. Baseline separation of equal length oligos was achieved in less than four minutes compared to run times of 15 minutes with LC/MS analysis. In addition, with ZipChip, no method development nor ion pairing reagents are required. Overall, I’m pleased with the progress we made on our stated objectives in 2023, including the launch of two devices in the process analytical technology space and the continued penetration of our handheld and enterprise accounts. With that, I’ll now turn the call over to Joe for more details on our financials.

Joseph Griffith: Thanks, Kevin. Starting with our fourth quarter results, revenue for the fourth quarter 2023 was $14.4 million, up 23% from $11.6 million in the prior year period, primarily driven by an increase in handheld device revenue. Handheld revenue was $11.1 million for the fourth quarter 2023, up 57% from $7.1 million for the fourth quarter 2022, primarily related to an increase in device sales, with 116 MX908 handheld device shipments in the fourth quarter. Desktop revenue from our products serving the life science, instrumentation, and bioprocessing markets for the fourth quarter 2023 was $3.2 million, down 2% from $3.3 million in the prior year period. This included five ZipChip interfaces, three REBEL, 10 MAVEN, and five MAVERICK device shipments.

As a reminder, starting next quarter we will no longer break out placements by device. We’ll focus more on overall revenue and combine desktop placements as the key metrics for growth for our broadening desktop portfolio. We exited 2023 with a cumulative handheld and desktop install base of 2,853 devices, up from 2,385 exiting 2022. Recurring revenue, which consists of consumables, accessories, and service revenue, represented a third of total revenue in the quarter, and was $4.7 million, a $1.2 million decrease over the prior year period. This decrease was driven by a decline in handheld accessory and consumable revenue, offset in part by growth in service revenue. As a reminder in the prior year period, we had $2.2 million in recurring revenue from a large enterprise order with the U.S. Army.

Gross profit was $7.3 million for the fourth quarter of 2023, compared to $5.9 million for the prior year period. Gross margin was 51% for the fourth quarter 2023, consistent with the prior year period. For the fourth quarter of 2023, product and service gross margin improved to 51%, compared to 46% for the prior year period, which helped to offset $1.2 million of favorable gross margin from contract revenue in the prior year period. Total operating expenses for the fourth quarter of 2023 were $17 million, compared to $16.3 million in the prior year period. This increase was driven by stock-based compensation and an increase in commission expenses related to handheld revenues, offset in part by a reduction in G&A expenses. Net loss for the fourth quarter of 2023 was $7.4 million compared to $9.8 million in the prior year period.

Now moving on to our full year results. Total revenue for the full year 2023 was $50.2 million, up 7% from $46.9 million in 2022. This was primarily driven by an $8.3 million increase in handheld revenues, offset by a $3 million decrease in desktop revenues and a $2 million decrease in contract revenues. Total 2023 product and service revenues were $49.9 million, up 12% from $44.5 million in 2022. Handheld revenue was approximately $37.9 million for the full year 2023 compared to $29.5 million in the prior year period, representing growth of 28% year-over-year, primarily driven by an increase in device sales. Desktop revenue was $12 million for the full year 2023, a 20% decline compared to $14.9 million in the prior year period, as customers remain cautious in their capital expenditures.

Recurring revenue for the full year was a third of product and service revenue and was $16.5 million compared to $15.7 million in the prior year period, representing growth of 5% year-over-year. Recurring revenue growth was driven primarily by strong service revenue, which grew to 38% year-over-year, offset in part by $3.5 million in recurring revenue from a large enterprise order with the U.S. Army in the prior year period. Looking ahead, we expect recurring revenue for our product portfolio to continue to be around a third of product and service revenue for the full year 2024. Gross profit for the full year 2023 was $25.3 million as compared to $26 million in the prior year period. Gross margin was 50% for the full year 2023 as compared to 56% for the full year 2022.

Product and service growth margin was 50% for the full year 2023, as compared to 54% for the prior year period. The decrease in product and service growth margin was driven primarily by an increase in spending to reach scale within our operations and service functions, a temporary increase in the use of third-party contractors to train customers on our MX908, and a $0.6 million increase in non-cash stock-based compensation and intangible amortization. As we look ahead to 2024, we expect our gross margins to continue to be in the low 50s due to the impact of pricing, higher material costs, and overall product, service, and channel mix. Operating expenses for the full year 2023 were $68.1 million as compared to $61.4 million in the prior year period.

This increase was driven primarily by a $3.3 million increase in salaries and related costs and a $2.3 million increase in stock-based compensation, partially offset by a reduction in G&A expenses. Net loss for the full year 2023 was $36.4 million, compared to $33.6 million in the prior year period. We ended 2023 with $145.7 million in cash, cash equivalents and marketable securities with no debt outstanding. In 2023, we consumed $43 million, which includes $15 million used to pay off debt and $1 million used to pay contingent consideration for our prior acquisition. We enter 2024 with a strong cash position and zero debt, which we believe provides a multi-year runway to support our long-term growth objectives. Looking ahead in 2024, we expect revenue to be in the range of $52 million to $54 million, representing growth of 4% to 8% over a full year 2023.

This range presents a balanced view of several factors. First, while Q4 had some indicators of positivity for the life science, instrumentation, and bioprocessing markets, we’re assuming the pressures we saw throughout the year will persist through at least the first half of 2024. Second, despite these headwinds, we anticipate a step up in total desktop device placements during 2024, with rising contributions from newer products throughout the year as they progress through customer evaluations. And finally, we expect continued strength in our handheld devices, which serve the forensics market to bolster our overall growth as we continue to navigate a challenging macro environment for our desktops. As a result of these factors, taken together with delay in passing fiscal year 2024 US Federal budget, we expect revenue for 2024 to be slightly more weighted to the second half compared to prior years, with an expected split of roughly 40% in the first half and 60% in the second half.

Each year, we typically see a step down from Q4 to Q1 due to the seasonality of year-end budget cycles. This year we expect that to be even more pronounced, largely due to the delay in the passing of the federal budget and the strong performance of handhelds in the fourth quarter of 2023. At this point, I would like to turn the call back to Kevin.

Kevin Knopp: Thanks, Joe. We view 2024 as a transitional year for 908 Devices. We expect solid growth from our product serving the forensics market and overall revenue growth to accelerate throughout the year as the headwinds in the life science instrumentation and bioprocessing market begin to subside. With this anticipated improvement, we are well positioned to capture the opportunity in this market with an expanded product portfolio. We are confident that with an improved macro environment, we’ll be able to return to robust double-digit growth in 2025, which will solidify a path to profitability with our existing cash reserves. To get there, we are laser focused on three key areas for 2024. First is market expansion. Our focus here will be on broadening our market presence by actively engaging with new key accounts and developing strategic partnerships, while also expanding our reach across global enterprise accounts.

In 2023, we saw an increase in the pipeline of opportunities for our handheld devices with a 25% increase in enterprise potential. Given the strong growth of our handhelds in forensics, we will invest in areas where we believe we can drive higher growth, both domestically and internationally, and explore ways to further leverage our sales and marketing channel. Additionally, planned increases in NATO defense spending and spending in the Middle East are expected to have a positive impact. For our desktop products, we are working to introduce MAVEN and MAVERICK into advanced therapeutic modalities, establishing a presence with design wins, and strategic relationships with innovators in the cell therapy space. A second area of focus will be to leverage our expanded product portfolios to maximize opportunities and strengthen customer engagements.

Our PAT portfolio now includes at-line, online, and in-line analysis capabilities, providing real-time analytics for our customers. This has led us to being increasingly viewed as partners in the cell culture analysis for biologics and cell and gene therapy applications, enabling broader conversations and ultimately larger potential. With all the necessary desktop products in place to address near-term opportunities, we are being selective with our R&D investments, focusing on incremental rather than next generation advancements in 2024. And finally, we will execute a framework for sustained growth with the path to profitability. Our year-over-year operating expenses, excluding stock compensation are projected to remain flat in 2024, with R&D spend tempering now that major product launches of 2023 are complete.

We are committed to reaching profitability with our existing cash reserves, and this path will be solidified as we return to robust double-digit growth rates in 2025. I look forward to updating you on our progress across each of these initiatives throughout the year. With that, we’ll now open it up to questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] The first question comes from Puneet Souda from Leerink Partners. Please go ahead.

Puneet Souda: Hi, Kevin, Joe. Thanks for taking my questions. So first one is a demand question tied to the guide, actually. You have more products than ever before as a company with a number of launches and PAT. So just help us understand, as we look at 2024, when you look at the funnel, what gives you more opportunity, what gives you more excitement in terms of adoption of these products? And what are you hearing from the field today in terms of REBEL, MAVEN, and MAVERICK products gaining more adoption and sort of contributing? I’m simply asking that because, when we look at the bioprocessing industry, we are seeing some signs of recovery, but your products are very nascent still in this marketplace. So I just want to get a more nuanced view there if I could.

Kevin Knopp: Yes, absolutely. Thanks, Puneet. You’re right. I mean, we feel very happy that we’ve been able to expand our set of products and kind of go from a one product to a complete strategy of PAT products spanning at-line, online and in-line capabilities and with that it gives us a range of price points that are accessible to a customer, a range of capabilities from, call it, more the bread and butter analytes, glucose and lactate, all the way through to a very comprehensive panel with our REBEL at-line analyzer. So I think one of the things we’ve been seeing from that is across the board, despite this environment, we’re engaged now and being viewed more as a bit of a as a partner in cell culture analysis and really driving conversations perhaps at more of a senior strategic level within these accounts which I think ultimately is going to lead to more potential on it.

More specifically, I think we’re seeing MAVEN and MAVERICK get some keen interest in biologics, but also some cell therapy areas, and then REBEL as well, in the biologics space predominantly, but interest there as well in the cell therapy space.

Puneet Souda: Okay. That’s helpful. And of — if I can follow up on MX908, could you talk about the sort of the puts and takes here. It seems like there is a significant interest, just given the political uncertainties, war and other situations and as well as fentanyl crisis. It seems like the need for such a product is strong. But can you maybe take us through sort of the puts and takes, what we need to consider, what could drive expectations towards your higher end of your expectations versus towards the lower end, what are some of the puts and takes there? Appreciate it. Thank you.

Kevin Knopp: Sure, you’re right. I mean, we definitely saw a strong demand for our handhelds over 2023, and we do expect that to continue through this year. And you’re right, that application of trace chemical detection identification distributed at the point of need. It continues to get traction for us in the US and international. Robust need drivers that we did point out in the script, but significant levels as you read in the news every day of geopolitical risk across Europe and Middle East. And then, of course, the fentanyl crisis is not abating, unfortunately, there and it just continues to rear its head in a broader way. So we had some items in the script and in the prepared remarks there, but around seeing more and more adoption internationally.

We’re seeing larger deals developed internationally. We’ve seen good growth overall since the IPO. So really a 29% CAGR we’ve seen over the time between 2020 and 2023. And likely not the same growth level of 28%. We saw this there, but meaningful opportunity as we put out today in the guide.

Joseph Griffith: And maybe to tie together, both on the desktop side and the handheld side. As we think about 2024, our desktop growth that’s expected to be more variable than the handheld growth for reasons we called out in the remarks. With rising contributions from those new product launches, we are expecting desktop growth to rebound into positive territory in 2024. So we’re encouraged, we’re seeing some of those positive indicators and anecdotes that things are moving in the right direction. With the Q4 and product adoption, it was solid. Our base case does assume that the desktop spending shows gradual improvement during 2024. So on the whole, this year we expect 2024 to be better than 2023, likely not a material step change, but steady market improvement.

And if recovery trends are better than expected, and we see a case for accelerating desktop growth in the second half of the year, maybe towards the double digit range. But as a reminder, desktop revenues really is about 24% of our total 2023 revenues. And over the years, this number should rise and then over the next two years, but today handheld really remains our meaningful contributor. And on that handheld side, we have delivered the consistent growth above levels in the traditional lab mass tech market and grown 14% CAGR over the last two years. Maybe a few factors in play for 2024 relate to that growth, $2 million year-over-year step down in AVCAD [LREC] (ph) revenues anticipated in the guide, which translates to roughly a 5% drag on our handheld growth.

And we await the potential full rate production award as early as 2025 for AVCAD. There’s a bit of a gap in 2024. For 2024, the delays in the US federal budget will remain the — pressuring our handheld revenue growth. We see an opportunity to recapture the maybe Q1 weakness throughout the remainder of the year. So we do expect our 2024 handheld revenues to be in the kind of mid-single digits in the guidance range that we shared today.

Puneet Souda: Got it. That’s helpful, guys. Thank you.

Kevin Knopp: Welcome.

Operator: Our next question comes from Dan Arias from Stifel. Please go ahead.

Daniel Arias: Good morning guys, Thanks for the questions. Joe, maybe just digging into Kevin’s comments there and your comments there on bioprocess. When we look at the guide for the year, the $52 million to $55 million that you’re talking about, and we try to sort of impute some placement trend across the year for REBEL, can you maybe just talk about how the year might start versus finish on REBELs if we were to sort of get to the middle of that range? And then did I hear you right when you said desktops might step up this year? Kevin, the rebound that you mentioned, does that refer to instrument revenues for REBEL, MAVEN, and MAVERICK relative to 2023? I just want to make sure I clarify the way in which you’re thinking about 2024 over 2023.