Twist Bioscience Corporation (NASDAQ:TWST) Q1 2023 Earnings Call Transcript

Twist Bioscience Corporation (NASDAQ:TWST) Q1 2023 Earnings Call Transcript February 3, 2023

Operator: Welcome to Twist Bioscience’s Fiscal 2023 First Quarter Financial Results Conference Call. . I would now like to turn the call over to Angela Bitting, Senior Vice President of Corporate Affairs and Chief ESG Officer.

Angela Bitting: Thank you, operator. Good morning, everyone. I would like to thank all of you for joining us today for the Twist Bioscience conference call to review our fiscal 2023 first quarter financial results and business progress. We issued our financial results release this morning, which is available at our website at www.twistbioscience.com. With me on today’s call are Dr. Emily Leproust, CEO and Co-Founder of Twist; and Jim Thorburn, CFO of Twist. Emily will begin with a review of our recent progress on Twist businesses. Jim will report on our financial and operational performance. Emily will come back to discuss our upcoming milestones and direction, and then we’ll open the call for questions. (Operator Instructions) As a reminder, this call is being recorded.

The audio portion will be archived in the Investors section of our website and will be available for 2 weeks. During today’s presentation, we will be making forward-looking statements within the meaning of the U.S. Federal Securities Laws. Forward-looking statements generally relate to future events to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission.

The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements, except as required by law. With that, I will now turn the call over to our Chief Executive Officer and Co-Founder, Dr. Emily Leproust.

Emily Leproust: Thank you, Angela, and good morning, everyone. For the first quarter of fiscal ’23, we reported revenues of $54.2 million, consistent with our guidance shared on our fiscal year-end call in November, and we posted strong orders of $64.7 million. When we turned the first quarter across SynBio and NGS is a story of an expanding customer base, making it for a larger percentage of our revenue, meaning that we are lending more customers with an increasing potential to extend within existing accounts. Beginning with SynBio, we reported revenues of $21.7 million, above our guidance of $21 million. In addition, we reported orders of $26.6 million. We continue to ship our clonal genes starting at 10 business days. Gene Fragments and Oligo Pools in ex U.S. 5 days, and we see this consistent around time benefiting our expanding share of the DNA buyers market.

We shipped our first revenue products out of the Factory of the Future last week, which, as we said previously, means that we are now delivering the same products with turnaround time equivalent to our South San Francisco site. We shipped Oligo Pools and Gene Fragments from our Wilsonville site and leveraged our low balancing software to send orders to the right location. And we expect to be shipping clonal genes next month. In addition, we’ll be focused on decreasing turnaround time for clonal genes significantly with the launch of our fast genes offering expected this fall, which will enable us to tap into new markets, specifically with DNA makers market. We shared our competitive advantage across all platforms during our Factory of the Future visit at the end of November.

Virtually every product we make build out of our silicon platform to manufacture synthetic DNA at scale. This front-end proprietary advantage enables a significantly different variable cost profile for Twist Oligo synthesis, which then feeds into all of our product lines. Speaking specifically to the cost of making a gene, today, our variable cost for oligo synthesis is less than $1 for clonal genes, with total viable cost of approximately $35 to $40 per gene. This cost profile enables us to continue to serve our customers as the low-cost, high-quality provider, while still achieving a contribution margin of 65% to 70% for SynBio products. In addition, a key component of our cost advantage is the scale we have built and continue to drive. Moving forward, we expect to continue to leverage this advantage to pursue the customers who currently make their own DNA because they need it faster, the group we call the DNA maker.

We believe we’ll be able to command premium pricing for these genes. To provide a bit more context around who makes the makers market, these are medical and academic research scientists who make their own DNA rather than buying. We know from the Bureau of Labor Statistics field research that as of 2019, there were 270,000 of these scientists in the United States alone. These are all potential customers. We believe the maker market is the right for disruption with wrapping DNA synthesis and within reasonable price offering. While the process of price discovery to analyze the way to maximize margins for this particular product. Genes are available today from competitors at a fast turnaround time but their capacity is limited and the cost can be up to $1 per day, which is cost primitive for most researchers.

The analogy of a market that has been disrupted in a similar way, they use engineers to purify DNA. It was a complicated process that requires making it better and many time-consuming steps. This market was disrupted by offering a kit that contain a ready-to-use components to make the process simple and seamless. Initially, some scientists exited it, it’s whether based on price, but today, these kits are used globally due to . We see a direct parallel here in commencing DNA makers into DNA buyers by applying similarly appealing products to convert behavior. Beyond 5 genes, we believe we have an opportunity to launch additional products out of our Wilsonville facility, including RNA, long fragments, and GMP DNA. Moving to NGS. We reported revenue of $24.4 million, just short of our guidance and orders of $31.2 million for the quarter.

As we shared last quarter, we see another back-half loaded here, with larger customers ordering in the last 2 quarters of our fiscal year. As expected, we saw a few key customers move orders out from December into the first calendar quarter. We remain confident in our fiscal year guidance that NGS will continue to grow substantially year-over-year. We see this business continue to expand with new sequencing offerings and game-changing clinical application. Our targeted solution leverage, the higher degree of shipment from our oligos. Therefore, our solution decreases the cost percent for our customers, and we are essentially selling a gross margin improvement. We continue to work with the various existing and new sequencing companies, and we are sequencer agnostic.

As this cost of sequencing comes down, we believe volumes will continue to increase as we have seen over the last 2 decades. Importantly, we believe that for indications like oncology, where clinical applications, including liquid biopsy and minimal residual disease require deep sequencing, panel and exome sequencing will continue to be the mainstay. And we see the reduction of sequencing costs driving reimbursement across key areas, encouraging access by a broader group of patients, which will create subsequent volume increases. In addition, we continue to expand our COVID control offering in new disease areas as well as cancer with our latest COVID control release during the quarter. While we see consistent ordering, it is not material due to evolving nature of the pandemic.

As a royalty note, we do not plan to file a 510(k) application for our SARS-CoV-2 panel that received emergency use authorization from the FDA in 2021, as revenue was not material for this product. We believe the opportunity across cancer continues to grow while COVID products are decelerating. For Biopharma, we recorded $8.2 million in revenue, a bit ahead of our guidance and $6.9 million of orders. Of note, we signed a multi-target agreement with Astellas that was announced in January. We are now focused on enabling our sales team to sell the integrated offering between our South San Francisco and Boston offices. In the one roof, we offer in vitro synthetic library, in vivo discovery and screening, and in silico lead optimization, candidate selection and optimization with AI and machine learning.

We believe this offers a fully integrated antibody discovery engine with a guarantee deliverable. As we are now operating as an integrated team, our total partners active and completed programs will include the historical average business. As of December 31, 2022, we have served 278 partners, with 95 active programs and 63 of our programs have milestones and/or royalties associated with the project. In addition, we continue to advance many internal candidates through the early discovery stage and we have several antibodies that have reached the preclinical stage and are closer to potential out licensing by biotech-Biopharma partners. Turning to data storage. We continue development work on our first data storage system, which combines our proof-of-concept chip with the recently assembled proof-of-concept writer.

We have engineered a scalable end-to-end system to store data and DNA and are now writing software to coordinate all the steps required to code, write, to sequence and decode digital data. Once completed, we will begin to run the system in pilot production. All of this work is in support of the release of early access to our first product, the Century archive, which we expect to be available towards the end of calendar year. With that, I’d like to turn the call over to Jim to talk through our financials. Jim?

James Thorburn: All right. Thank you, Emily. We had another strong quarter of execution at Twist despite a volatile macroeconomic environment. Revenue for quarter 1 was $54.2 million, which is year-over-year growth of 29% and a sequential decline of 5%, which is in line with our guidance of $54 million. Orders were $64.7 million for the quarter, a sequential increase of 4% and 30% growth year-over-year. Gross margin for the quarter was 45.7% and we shipped approximately 2,100 customers, and that’s up from approximately 1,800 customers in quarter 1 fiscal ’22 and we ended quarter 1 with cash and investments of approximately $439 million. For NGS revenue for quarter 1 was 24.4%, slightly below our guidance and 27% year-over-year growth.

As we noted in our previous earnings call, we had a strong fourth quarter and a couple of our larger customers pushed shipments from December quarter into January and were negatively impacted by the COVID pandemic in China, which continues to impact our China revenue in the current quarter. Our first quarter orders were $31.2 million, which is a record. It represents sequential growth of 10% and 43% growth year-over-year. And this growth reflects the strength of our product portfolio with the top 10 customers accounted for approximately 40% of our NGS revenue and we served approximately 600 NGS customers in fiscal quarter 1. Our pipeline for larger opportunities continues to scale, and we’re now tracking 264 accounts, and that’s up from 257 noted in our last earnings call and 130 are now adopted to Twist and that’s an increase from 131 last quarter.

Now turning to SynBio, which includes genes, DNA preps, IgG, libraries and Oligo Pools. SynBio revenue for the quarter was $21.7 million, and that’s exceeding our guidance and representing a year-over-year increase of approximately 21%. Orders for the quarter were $26.6 million which represents 20% growth year-over-year. Some of the highlights include shipping to approximately 1,600 SynBio customers, which has grown from approximately 1,270 in quarter 1 fiscal ’22. The customer base, as Emily noted previously, includes biotech and large pharma companies. Genes revenue increased to $16.2 million, and that’s up from $13.5 million in the first quarter of fiscal ’22 and last year-over-year growth of approximately 20%, and we shipped 134,000 genes in the quarter, and that’s an increase of 7% year-over-year.

Oligo Pools were in our strong quarter with revenue of $3.7 million and demand came primarily from the health care segments. Now to Biopharma, we continue to scale our antibody discovery business. Biopharma revenue for fiscal first quarter ’23 was $8.2 million, and that’s year-over-year growth of 70% and is consistent with our prior guidance. Orders for the quarter were $6.9 million, down sequentially from $9.4 million in the fourth quarter. Biopharma orders have been impacted by an overall weaker environment, and we did not see the Pharma Christmas in the quarter as we’ve seen in past years. That said, we added four more milestone and royalty agreements, which brings the total up to $63 million, and that’s up from the $59 million we noted in the previous earnings call.

While Emily reported total Biopharma metrics, including historical adverse agreements, solely for the first quarter of fiscal ’23, we had 95 active programs for the combined Twist and various antibody services. I’ll give a quick update in terms of breakdown by industry and a quick update on our regional progress. Health care for the first quarter was $30 million as compared to $21.1 million in the same period of fiscal ’22. Industrial Chemical revenue was $13.6 million in the first quarter of ’23 as compared to $12.5 million in the first quarter of ’22 and academic revenue was $10 million in the first quarter of ’23 compared to approximately $8 million in the same period of fiscal ’22. On a regional basis, EMEA revenue rose to $16.3 million in the first quarter of fiscal ’23 compared to $15.4 million in Q1 fiscal ’22.

As we noted earlier, APAC was negatively impacted by the COVID pandemic in China, but had a slight increase in revenue to $4.3 million as compared to $4 million for the same period of fiscal ’22. U.S., including Americas revenue increased to $33.6 million in the first quarter as compared to $22.6 million for the same period of ’22. Now moving down the P&L. Our gross margin for quarter 1 was 45.7% with cost of revenue for the quarter of $29.4 million. Cost of revenue does include $1.1 million of stock-based compensation expenses and $3 million depreciation. Net to operating expenses, our operating expenses for the fiscal quarter, including R&D, SG&A and change in fair value and mark-to-market adjustments of acquisitions were approximately $69.4 million as compared to $78.9 million in Q1 fiscal ’22.

To break it down, R&D for the fiscal quarter was $31.2 million, and that’s an increase from $22.6 million in the same period of fiscal ’22. This does include DNA story spend of $6.1 million and Biopharma spend of $7.7 million in the first quarter of fiscal ’23. The major contributors to the increased R&D spend were primarily increased compensation costs of $5 million associated with increased number of employees, which does include adding additional 12 DNA data storage. Depreciation for R&D in quarter 1 was approximately $1 million. SG&A in Q1 includes approximately $18 million credit due to a combination of stock forfeitures associated with departing employees and the release of annual hold back as we determine that various revenue hurdle.

The Abveris team came very close to achieving the earning, and we look forward to fully integrating the Boston team into Twist organization. We remain very enthusiastic with the team and the potential opportunity for the combined Abveris and Twist organization. Factory of the Future pre-commercialization costs include Included in SG&A were $12.5 million in the first quarter, which includes compensation costs of $4.3 million; material expenses of $4.7 million associated with pre-commercialization trading activities; facilities and depreciation costs of $1.8 million as well as services of $1.2 million. Stock-based compensation for the quarter was a credit of $2 million due to the aforementioned credits primarily associated with the Abveris acquisition.

Depreciation and amortization for the quarter was $5.8 million and CapEx spend in the quarter was approximately $12 million. We will now cover our outlook for fiscal year ’23. We continue to project fiscal ’23 revenue in the range of $261 million to $269 million, including SynBio revenue of $104 million to $106 million; NGS revenue, $120 million to $123 million; and Biopharma revenue was $37 million to $40 million. And there has been no change to our revenue projections from our previous guidance during November. For the second quarter of fiscal ’23, we anticipate revenue of approximately $56.5 million, which breaks down as follows. SynBio revenue of $24 million, a sequential increase reflecting the higher orders NGS revenue of $25 million.

Although orders were strong at approximately $31 million in quarter 1. We see the beneficial impact of those orders translating into revenue in the second half of our fiscal year. Biopharma revenue of approximately $7.5 million, and this reflects the lower orders we saw in quarter 1. We anticipate gross margin for the quarter 2 approximately 30% as we bring on the costs associated with the Wilsonville manufacturing facility. As we scale our revenue in the second half of fiscal ’23, we’re projecting our gross margin to be 39% to 40% for the year, which is in line with the guidance provided in our previous earnings calls. We decreased our operating expense guidance for the year to approximately $330 million as compared to previous guidance of $365 million primarily to reflect the expected reduction of stock-based compensation.

We’re now projecting R&D expense of $130 million as compared to $138 million in our previous guidance. We expect SG&A expense of $204 million, and that’s a decrease from our previous guidance of $227 million, primarily due to the impact of lower stock-based compensation. Mark-to-market is projected to be a credit of $4 million for the year. Depreciation and amortization is projected to be approximately $29 million and our projection for stock-based compensation that declined from $83 million to $50 million for fiscal ’23 due to the combination of the aforementioned credits. And in addition, we reduced a number of projected shares granted to our executives, employees to approximately 1 million stock awards at a lower share price than originally projected.

Net loss for the year is projected to be approximately $225 million, and that’s a decrease from $260 million. With CapEx projected to be $50 million and our ending cash is projected to be approximately $300 million. In addition, there is no change to our fiscal ’24 guidance we provided in November. In summary, we had a robust start to our fiscal year with record orders in quarter 1. We shipped our initial commercial products from the Factory of the Future in January, and we’re focused on scaling our business to achieve adjusted EBITDA breakeven in our core and our pharma businesses. And with that, I’ll turn the call back to Emily.

Emily Leproust: Thank you, Jim. In November, we outlined our 3-year plan to adjusted EBITDA breakeven for our core business, and this remains our focus. When we see our shareholders’ feedback that achieving profitability is top of mind. This fits with our operating plan that we have been executing in the past few years. Working toward that objective in SynBio, we will ramp our manufacturing capabilities in Wilsonville, Oregon to increase revenue out of our Factory of the Future, building on our first shipment at the end of January. Looking to on the full-time frame, we expect to bring down our current time and offer fast gene products for all of our customers and expand our commercialization efforts into the maker market. For NGS, we expect continued expansion of our customer base as well as a few large customers generating revenue in the back half of the fiscal year.

In addition, we are looking towards RNA workflows to augment our DNA workflows with a consistent focus on owning the workflow between the sample and the sequencer. In Biopharma, we are beginning to offer an integrated portfolio of antibody discovery and optimization services, capitalizing on efficiencies between our in vitro, in vivo and in silico approaches. In data storage, we’re making good progress to bring up the chip and our new pilot production DNA data storage writer. We plan to launch our Century Archive solution as an early access offering in late Canada 2023. In parallel, we will continue to seek to partner with leaders to set the stage for commercial success while preparing the market for DNA data storage. We remain extremely excited about our opportunities ahead and look forward to keeping you appraised of our progress.

With that, let’s open the call for questions. Operator?

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Q&A Session

Operator: . And our first question comes from Steve Mah with Cowen.

Poon Mah: My first question is on the DNA makers, there’s analogy with in this prep. This thing that people started branching out into. But given the 270,000 commercial, I think a part of them are going to be which have cheaper like grads flavor. Can you give us a sense of how you’re going to track this market to try to find the price to get the adoption in this academic market? And give us a sense of how long it will take for this discovery?

Emily Leproust: Steve. Your line was a very bit choppy, but thank you, You’re asking, for the 270,000 gene makers, those that are in academia, will do the price discovery. So — and now we’ll convert them. It’s going to be — 2 things that I’ll share. One, in the past, we had a uniform pricing at Twist for academia and industry, meaning that we didn’t differentiate pricing between those 2 groups. We’ve recently started to differentiate a little bit. And I expect that for fast gene, there probably would be a different price — there possibly could be a different price for academia versus industry just to account for the value of the product to those 2 different groups. That’s number one. Number two, what we’ve been doing for multiple years now is we’ve been supporting items, group every year, there is a competition with thousands of students where they apply synthetic biology.

And in the past, iGEM team had to do their own cloning. They’ll get part from the Gibson assembly and mutagenesis. And we’ve given, I think, 20,000 bases to every iGEM team for the last few years, and our goal is to get the best and brightest student early on, get them used to not clone any more. And it will take some time, but we think that similarly right now in academia, nobody does their own prep reasons. They’ll use kits. I think over time, we can drive this transformation. So we’ll be focused on price. And we’ve been already working in changing the frame of mind that you just don’t close just so much easier to and faster to get the clone from companies like us.

Poon Mah: Okay. Got it. Really appreciate that. And next question, on gross margins, it’s a question for Jim. So yes, the gross margins in the quarter was maybe a bit lower than we expected. Can you give us some color on that? And then also some color on the gross margin recovery in fiscal year ’24 back up to 49%.

James Thorburn: Yes. So Steve, if I picked up your question correctly. You said gross margin is a little lower. Gross margin in Q1 was 45.7%. We are projecting that to decline to 30% this quarter as we bring on the costs associated with the Factory of the Future. As we scale the business, and we’ve touched on the makers market, I mean it’s a huge opportunity for us, $1.4 billion. We’re already seeing strong SynBio growth over this last year. The orders were used in the first half — in the first quarter records. So we feel good about the growth in the second half. First half revenue is about 40-odd percent of the business, which is in line with previous years. So we can see growth in the second half driven by continued growth in SynBio, NGS, pharma, pharma picking up.

We feel good about the $261 million to $269 million. As we continue to scale, we see gross margins this year, consistent with our previous forecast of 39% to 40% in next year as we continue to scale the business. We see gross margins in the range of 49% as we highlighted below. And that’s driven by executing and scaling the Factory of the Future, leveraging our fixed costs and continue to do well in terms of expanding our customer base.

Operator: Our next question comes from Matt Sykes with Goldman Sachs.