Twist Bioscience Corporation (NASDAQ:TWST) Q2 2023 Earnings Call Transcript

Twist Bioscience Corporation (NASDAQ:TWST) Q2 2023 Earnings Call Transcript May 5, 2023

Operator: Good morning, ladies and gentlemen, and welcome to Twist Bioscience’s Fiscal 2023 Second Quarter Financial Results Conference Call. I would now like to turn the conference call over to Angela Bitting, Senior Vice President, Corporate Affairs and EGS Officer. Please go ahead.

Angela Bitting: Thank you, operator. Good morning, everyone. I’d like to thank all of you for joining us today for Twist Bioscience’s conference call to review our fiscal 2023 second 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 and then Emily will come back to discuss our upcoming milestones and direction. We will then open the call for questions. We would ask that you limit your questions to a maximum of two and then requeue as a courtesy to others on the call.

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 two weeks. During today’s presentation, we will make forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results in 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 our 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. We’ll also discuss financial measures that do not conform with generally accepted accounting principles, including adjusted EBITDA. Information may be calculated differently than similar non-GAAP data presented by other companies. When reported a reconciliation between GAAP and non-GAAP financial measures will be included in our earnings documents which can be found on our Investor Relations website at www.twistbioscience.com. With that, I’ll 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. This is a busy time for Twist. I’m very pleased with our performance for the first half of the fiscal year, in Q2 we delivered our first quarter $50 million in revenue. In addition, this morning we announced that we have taken strategic actions to accelerate our path to profitability. I am happy to share that we expect to achieve a quarterly run rate that is adjusted EBITDA breakeven for both the core and biopharma businesses as we exit the September of 2024 quarter in about 16 months. Today, I will focus on three main things. First, our confidence in our near term revenue growth. Second, our decisive actions designed to achieve adjusted EBITDA breakeven in the near term.

And third the drivers of growth in all businesses moving forward. Beginning with top line growth for our revenue generating businesses, I am pleased to share very strong result for the second quarter of fiscal 2023, with reported record revenue of $60.2 million exceeding our guidance of $56.5 million. Strength in the core business particularly NGS drove the beat order, came in at $64.2 million indicating solid growth moving into the second half of our fiscal year. During the quarter we began commercial shipments at of our Wilsonville Oregon facility the Factory of the Future, which we believe will deliver manufacturing efficiencies, leading to margin improvement going forward. We continue to see increasing enthusiasm for our Gene Fragments, Oligo Pools and elaborate products with our consistent rapid turnaround time driving that demand.

I’d like to note that this is for our standout speed genes. We are not yet taking orders for fast genes, which we expect to launch in the fall with premium pricing. We continue to take market share from our peers and remain far ahead of emerging players because of our consistent turnaround time together with our perfect way genes as a scale and price unavailable elsewhere, which continues to resonate with our customers. Our reliable products and exceptional customer service has been key to creating loyalty with our customers, which then facilitates reorders and quarter-over-quarter revenue growth. In addition, our customer surveys continually state that we are their preferred provider because ordering is easy and we overdeliver on turnaround time.

For NGS, we see customers advancing development of their test and also gaining traction within the market. Our NGS revenue significantly lean to the commercial ramp of our customer base. And while there can be quarter-to-quarter lumpiness, we have confidence that revenue will grow year-over-year. The point to remember is our business is sticky. We grow with our customer and our customer base continues to expand. In Biopharma, we began integrating the Boston team at the end of the calendar year, following the contractual limitations of the acquisition. We continue to see opportunities ahead, particularly as we now have an integrated team and portfolio of services. What is true that the funding environment for emerging biotech companies has been constrained our share of the buyers’ market services market is small and largely untapped by our commercial team.

That said, we are facing some internal headwinds as we retouched on system and integrated commercial territories. We’ve made changes to address these challenges and expect the revenue lift will come within six months. We continue to sign collaborations and agreements with customers and we’re expanding our wallet share with existing partners. As an example, when we had those arguments with Astellas in April, our third collaboration with the pharmaceutical company. We do expect fewer milestone royalties for corporations as we move forward as we are now prioritizing near-term topline revenue growth. Our commercial team for SynBio NGS and Biopharma is now firing on all cylinders and we are seeing a large opportunities ahead. I will now move from top line to operating expenses and our significant actions to accelerate our path to profitability.

As you know the factors of the future outside of Portland, Oregon is no shipping products with customers. In fact all of our genes, gene fragments and the vast majority of Oligo Pools have been made in Oregon for more than a month. To accelerate our top line to reach profitability, we conducted a comprehensive review to re-engineer our code base and achieved these goals more quickly. We have made difficult decisions resizing many teams throughout the organization, which will result in the elimination of approximately 270 positions to operate more efficiently while still continuing to support our high growth for these area. It is difficult to say goodbye to the many talented and committed Twisters we’ve been integral in our success to date. We wish them well.

We will support them as identify the next opportunity and we look forward to where they will achieve as they bring their experience front Twist to the larger ecosystem. To provide a bit more color on the shape of the organization moving forward, the sales force will remain largely intact to drive topline growth. We remove the duplication of SynBio production across South San Francisco and Portland, significantly lowering our fixed cost structure. In addition we resize the Biopharma team’s focus on revenue generating partnerships, reprioritizing the majority of our internal assets. Throughout the organization we streamline teams including R&D to focus on programs where Twist has a clear competitive advantage and to selectively deploy our platform in areas where we see the greatest potential for long-term value creation.

In data storage, we remain integrally involved in market development and continue to advance our technology. We do not see any near-term competitor or close to a commercial launch at this time, and that’s significant. It enables us to substantially reduce our operating expenses for data storage, while continuing our effort at the moment it’s level yet still remains ahead of the competition. We will focus our efforts on the storage as a service business model and plan to delay the distributed on-premise approach until after the service business has proven to be a success. We expect to demonstrate an end-to-end gigabytes Century Archive service by calendar 2023. Following on this in early calendar year of 2025, we expect to launch a terabyte Century Archive solution.

With that said, we believe we will deliver on all of this, while reducing the overall cash flow. Moving into our future growth, we’ve seen many opportunities ahead. As we look forward, the planned launch of fast genes in SynBio this fall, we will be targeting the $1.4 billion DNA makers market. These are scientists and researchers and large pharmaceutical companies in academia that currently make their own DNA instead of buying it, as they need it faster and more cost effectively than we believe it can deliver from literally any close today. This is one area that we are confident will increase our SynBio contribution margin, as we believe we’ll be able to command a premium price that leverages dynamic pricing for rapidly delivering this product.

Additionally, we do not expect to add commercial head count to pursue this large market, as we believe our e-commerce portal and digital marketing capabilities enable us to acquire customer cost effectively. For NGS, our customers continues to increase, particularly in the oncology space. We have several large commercial customers and then growing mid-tier group of development stage customers with the potential for compounding growth. In both instances, Twist is poised to grow with them. We continue to be included in more and more assets and we believe the growth of our NGS opportunity will be sustainable for the foreseeable future. In the near term, we plan to an RNA workflow tools to our NGS portfolio. Scientists often run RNA assays multiple times for the same sample as RNA translates different time points in different issues in both normal in this state providing a large market opportunity that complements our DNA workflow tools.

RNA workflows are just primarily within the research market, an area where we have a significantly smaller footprint to date, but believe we can grow and extend. We expect almost several RNA tools in the near future. In Biopharma, we continue to see opportunities for our competitively priced higher value services even also with the integration of the offerings. We are focused on selling services that drive topline revenue, while we digest the resizing of the organization. The largest shift we’d be aware from R&D on our internal assets until we see some of them zooming out licensing antibody leads, where we have done the most work. For data storage, the very large opportunity remains within our sites, because we’re not seeing direct competitors at this time we are slowing our investment.

Therefore, we revised our commercial plans while we advance at a more modest rate with us using our first model best in class competitive advantage. With that, I turn it over to Jim.

James Thorburn: All right, thanks, Emily. We had another quarter of robust execution at Twist despite the volatile macroeconomic environment. Revenue for quarter two was $60.2 million, which is year-over-year growth of approximately 25% and a sequential increase of 11% .Orders were $64.2 million for the quarter, an increase of approximately 17% year-over-year and gross margin for the quarters 7.8%. We shipped approximately 2100 customers as compared to quarter two fiscal ’22. And we ended quarter two with cash and investments of approximately $388 million. Our NGS revenue for quarter two was $29 million which is year-over-year growth of 26%. As we noted in our previous earnings call, we had a couple of larger customers pushed shipments from December quarter into January.

Our second quarter orders were $28 million, a sequential decline of 10% with growth of 19% year-over-year. As Emily stated, revenue growth in NGS is linked to the ramp of our customer tests which can drive some quarter-to-quarter lumpiness in revenues. The top 10 customers accounted for approximately 38% for NGS revenue and we served approximately 600 NGS customers in fiscal quarter two. Our pipeline for larger opportunities continues to scale and we’re now tracking 270 accounts, up from 264 noted in our last earnings call, 131 have adopted Twist as compared to 130 last quarter. Now turning to SynBio which includes genes, DNA preps, IGG, libraries and Oligo Pools. SynBio revenue for the quarter rose $24.1 million representing sequential growth of 11% and year-over-year increase of approximately 31%.

Orders for the quarter were $30.9 million, which represents a 16% sequential increase and a 31% year-over-year growth. Some of the highlights include shipping to approximately 1600 SynBio customers which has grown from approximately 1400 in the second quarter of fiscal ’22. The customer base includes mainly biotech and large pharma companies. Genes revenue increased to $18 million, which is year-over-year growth of approximately 27%. We shipped approximately 152,000 genes in fiscal quarter two, which is an increase of approximately 23% year-over-year. And Oligo Pools had another strong quarter with revenue of $3.3 million with demand primarily coming from the Healthcare segments. Now to Biopharma, our Biopharma revenues for the second quarter of fiscal ’23 was $7 million, down sequentially from $8.2 million orders for the quarter of $5.3 million, down sequentially from $6.9 million in the first quarter, primarily due to integration challenges Emily described.

That said, we had 93 active programs at the end of the quarter and added three more milestone and royalty agreements which, brings the total to 66 up sequentially from 63. I’ll now cover our revenue breakdown by industry and our regional progress. Healthcare revenues for the second quarter of fiscal ’23 was $33.8 million as compared to $24.1 million in the same period of fiscal ’22, industrial chemical revenue was $14.4 million in the second quarter of fiscal ’23 as compared to $14.1 million in the second quarter of fiscal ’22. Academic revenue was $11.1 million in the second quarter of fiscal ’23 as compared to $9.5 million in the same periods of fiscal ’22. EMEA revenue rose to $18.8 million in Q2 fiscal ’23 versus $15.2 million in Q2 fiscal ’22.

APAC continue to see recovery in China with our revenue in China increasing to approximately $2 million, up from $1.4 million in the prior quarter. For APAC overall revenue increased to $6.5 million compared to $4.5 million for the same period of ’22. U.S. which includes Americas revenue increased to $34.9 million in the second quarter versus $28.5 million for the same period of fiscal ’22. Now moving down to P&L, our gross margin for quarter two was 30.8% with cost of revenue for the quarter of $41.7 million. The change in gross margin was expected as the cost of revenue increased sequentially from $29.4 million primarily due to approximately $5 million associated with the commercialization of SynBio Labs and Factory of the Future. In addition, we had approximately 1 million scrap associated with the Factory of the Future in the quarter.

Our operating expenses for the fiscal quarter including R&D, SG&A, change in fair value and mark-to-market adjustments of acquisitions, which crossed the $80.1 million as compared to $79.2 million in Q2 fiscal ’22. To break it down R&D for the fiscal second quarter was $27.4 million, a decline from $31.2 million in the same period of fiscal ’22, primarily due to the conclusion of . This includes DNA storage R&D spend of $5 million and biopharma R&D spend of $4.7 million in the second quarter of fiscal ’23. SG&A in quarter two was approximately $54 million, Factory of the Future pre-commercialization costs included in SG&A were approximately $6 million for the first one for the quarter when the factory was not yet commercial. In addition, we have a number of labs that are still in pre-commercial phase and we’ll transition to COGS as they’re qualified in the second half of fiscal ’23.

Stock-based compensation for the quarter was approximately $10 million. Depreciation and amortization for the quarter was $7.1 million, an increase from $5.8 million in the previous quarter and associated with the commercialization of the Factory of the Future. CapEx cash investments in the quarter two was approximately $9 million, which brings total CapEx cash spend for the first six months of fiscal year is $21 million. As we’ve highlighted the launch of the Factory of the Future is going very well, we had a strong quarter of operational performance and as noted, we continue to see year-over-year growth in SynBio and NGS businesses. We’re focused on achieving adjusted EBITDA to breakeven and then profitability as we scale. We are resizing the organization by approximately 25%.

The reductions aimed at managing our operation cost structure. Lowering our revenue breakeven point and limiting our investment in data storage as we transition to breakeven. Note the reduction first side of the years maybe delayed as we work through the required regulatory processes. About 60% of the staff reductions effect the cost line and 40% effect our banks. In particular, we have resized the biopharma group to achieve breakeven at $40 million instead of revenue of $80 million and for the core business, we have streamlined our organization across the board in order to achieve breakeven of $285 million instead of $300 million. The cash restructuring costs are estimated to be approximately $9 million to $11 million. We anticipate cash savings approximately $9 million to $11 million per quarter on a go forward basis beginning in the first quarter of fiscal ’24.

Savings primarily impacting our operations as we exit gene manufacturing South San Francisco and we’ll ramp up the Factory of the Future, as well as moderate our investments in R&D for the majority of the spend reductions in biopharma and DNA storage. Because we have taken actions to address our cost structure, we do believe it is prudent to revise our revenue for fiscal ’23, as we digest these changes. We are revising this guidance to approximately $235 million to $238 million versus our prior guidance of $261 million to $269 million. SynBio revenue range is $96 million to $98 million and that’s down from $104 million to $106 million. NGS revenue range is $113 million to $114 million, down from $120 million to $123 million. Biopharma revenue is $26 million and that’s down from $37 million to $40 million.

For the second half of fiscal ’23, we anticipate revenue of approximately $60 million to $61 million in quarter three, and $62 million to $63 million in quarter four. And gross margin to be approximately 30% in Q3 and 36% in Q4. For the full fiscal year, we’re projecting gross margins to approximately 35% to 36%. We are decreasing operating expense guidance for the year to approximately $313 million to $319 million, as compared to our previous guidance of $330 million. We’re now projecting R&D expense of $112 million to $114 million as compared to our previous guidance of $130 million. We expect SG&A to be $197 million to $200 million and that’s a decrease from our previous guidance of $204 million. Mark-to-market is projected to be a credit of $5 million, one-time separation costs from a reduction in force are projected to be $9 million to $11 million.

Depreciation and amortization is projected to be approximately $29 million, our projection for stock-based compensation decline to approximately $43 million from $50 million. Operating expense for DNA storage is expected to be approximately $40 million, compared to the previous guidance of $46 million. And for fiscal ’24, we also expect $40 million operating expense for data storage compared to previous guidance of $57 million. Net operating loss for the year is projected to be approximately $230 million to $234 million, which includes one-time charges of approximately $9 million to $11 million for separation costs. CapEx for the year is projected to be $40 million a decrease from the previous guidance of $50 million ending cash projected to be $320 million compared to previous guidance of $300 million.

In summary, we had record revenue in quarter two we’re — commercially shipping from the Factory of the Future. We’re focused on managing the business and our cost structure as we scale. Importantly, we expect to exit fiscal ’24 for the fourth quarter adjusted EBITDA to breakeven for the core and biopharma business. We define adjusted EBITDA as EBITDA plus add back for stock-based compensation. And we’re also projecting ending cash balance of $220 million at September 30, 2024 and that’s up from our previous guidance of $170 million. With that, I’ll now turn the call back to Emily.

Emily Leproust: Thank you, Jim. We continue to have aggressive goals, and we have aligned the business because we simplified opportunities. As importantly, we announced decisive and proactive actions to accelerate our past ability preserving cash and mitigating risks, all the while leveraging our outside opportunities in the marketplace. We always evaluate the business from every lens and we remain laser focused on achieving adjusted EBITDA breakeven for the core and biopharma businesses while maintaining optionality on investments for the incredible upside we see in data storage. Our core business in SynBio and NGS continue to scale and we have near-term opportunities for each season energized commercial team to be deployed.

We are resizing and refocusing the biopharma organizations from an integrated service offering that we believe will drive top-line revenue growth. And we have moderated our stand for data storage while ensuring we maintain our competitive edge. We revised our guidance to a cautious level with potential for upside. We have been strategic in our action this quarter positioning us as a leaner, meaner organization specifically focused on disruptive market opportunities for profitable and scalable growth. With these substantive changes, we believe we are operating from a position of strength in the current environment, accelerating our projecting timeline to adjusted EBITDA breakeven for both the core and biopharma businesses as we exited the September 2024 quarter, about 16 months from now.

We remain extremely excited about pricing the future. And with that, let’s open the call for questions. Operator?

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Q&A Session

Operator: And now first question coming from the line of Vijay Kumar with Evercore ISI. Your line is open.

Vijay Kumar: Hi, guys, congrats on the revenue beat in the quarter and thanks for taking my question. I guess my first question is on the guidance here. It makes sense for the guidance to be reset given the environment. The back half here I think implied is high single digits, and it looks like all segments were cut, but perhaps Biopharma little bit more than the others. Can you just talk about the macro environment, is this – what has changed versus three months ago from a macro perspective, and how much of this is Twist specific versus stuff, the general environment that you’re seeing and how comfortable are you in this high single digit growth for the back half?

James Thorburn: Thanks, Vijay. Thanks for the question. So we step back as a number of things going on. One is in terms of Biopharma, we feel very good about where we’re at. The challenges we’ve had in Biopharma is just purely inspirational. So that’s an execution issue. We acquired various last year we had been as important that we supported Abveris to be positioned to achieve that our NIM. And consequently we had this independence between Twist and Abveris. And then as we started to integrate, we realized we had some integration challenges. We are launching the — the new offering and we feel good about where we’re positioned and because of the internal challenges there, we reduced the revenue outlook for Biopharma. As a large market, we get great service offering.

So we feel very well positioned. In terms of the other two areas, SynBio and NGS we have just reduced the organization by approximately 25%. We believe it’s going to take some time to digest that reduction. The overall order growth rate is solid. We continue to see in NGS growth in large customers. We’re launching new products. In the same time 20%, 25% of the organization, we believe we need to be prudent in terms of our outlook in terms of top line. I think the advantages that we’re positioned with company to get to adjusted EBITDA breakeven earlier and come out with a stronger balance sheet. So this is internal, but we really believe that we’re well-positioned from the platform. We’re seeing large customer growth. So it is more prudent on our part.

Vijay Kumar: Understood. And just, sorry, Jim. On just to clarify that point, what you’re saying is 25% headcount reduction and did that come from the commercial side because I think what you’re saying is orders and customers, the market seems to be healthy. But this is more a function of the restructuring actions you’ve taken and hence the guide cuts here in the back half.

James Thorburn: That’s correct. Yes, the market is strong. We’re up as we highlighted year-over-year. We’re growing faster than the market. We’re focused on launching new products. So this, this is just about pure internal issue in terms of digesting such a large change. I mean, we’ve done a great job in terms of launching Factory of the Future, it’s going exceptionally well. Turnaround times are excellent. Customer feedbacks, great. And at the same time, we believe for the next six months, we’re going to be prudent in terms of our outlook, due to the reduction of the organization by 25%.

Vijay Kumar: Understood. And then one on the gross margins, Jim. If I look at your third quarter and fourth quarter commentary here, fourth quarter revenues up a couple of million, but I think the implied gross profit dollars were up $4 million. What drives that gross margin that 36% gross margin strength in Q4, and is that the right jump off point for next year? How should we think about gross margins for FY ’24?