Earnings Call Transcript - DNA Q4 2024

Joseph Fridman, Director of Communications and Corporate Affairs

Good evening. I'm Joseph Fridman, Director of Communications and Corporate Affairs here at Ginkgo, where it's my fifth year. During that time, I've had the pleasure and the privilege of working with our Investor Relations team, usually behind the scenes of these earnings calls. And so it's exciting to be supporting you today in this more front-facing role. I'm joined by Jason Kelly, our Co-Founder and CEO; and Mark Dmytruk, our CFO. Thanks, as always, for joining us. We're really looking forward to updating you on our progress today. As a reminder, during the presentation today, we will be making forward-looking statements. These involve risks and uncertainties. So please refer to our filings with the SEC to learn more about these risks and uncertainties, including in our most recent 10-K. Today, in addition to updating you on the quarter and the full year results, we're going to provide updates on our path toward adjusted EBITDA breakeven as well as customer progress in our cell engineering business across both our services and tools offerings and the latest offerings in our biosecurity business. As usual, we'll end with a Q&A session, and I'll take questions from analysts, investors, and the public. You can submit questions for that to us in advance via X, please tag your post with the #GinkgoResults or e-mail us at investors@ginkgobioworks.com. I'll be checking that throughout the call. All right. Over to you, Jason.

Jason Kelly, Co-Founder and CEO

Thanks, Joseph, and thanks, everyone, for joining us. We always start with our mission of making biology easier to engineer. And similar to last quarter, our focus for that mission is on these three key objectives. First, we want to reach adjusted EBITDA breakeven while maintaining a cash margin of safety. We ended this quarter with $562 million in cash and no bank debt and significantly exceeded our original cost-cutting target for 2024. You're going to see this reflected in a dramatically reduced level of cash burn in Q4 versus Q3. I'm really happy to see this. A cash margin of safety is what protects Ginkgo from having to raise capital in conditions that aren't favorable, and we want to keep our cash war chest large while reducing cash spending and expanding our sources of revenue. This is a simple strategy: drive costs down and keep expanding, and we executed on it really well in the second half of 2024, and we will keep pushing on it in 2025. That is not changing. Second, while we cut costs, we need to keep serving our current customers and adding new customers. Q4 saw us achieve a record number of technical milestones in a single quarter, showing our team's ability to continue to deliver great new science for our customers. I'm really proud of that delivery across the team. Finally, we want to grow our cell engineering revenue and continue to expand our tools offerings, which I'm going to talk a lot more about in the strategic section. Okay. I'm excited to get into all of that. But first, I want to hand it over to Mark to discuss the financial results for the quarter.

Mark Dmytruk, CFO

Thanks, Jason. I'll start with the Cell Engineering business. Cell Engineering revenue was $35 million in the fourth quarter of 2024, up 29% compared to the fourth quarter of 2023. This increase was primarily driven by growth with large biopharma customers and government accounts, partially offset by declines with smaller customers in the industrial biotech segments. As we've discussed previously, this customer mix shift has been a headwind to growth in prior quarters, and so we're very pleased to now see the positive impact of the shift in this quarter's revenue. On a full-year basis, Cell Engineering services revenue was $174 million in 2024. As a reminder, in the third quarter of 2024, Ginkgo recognized $45 million in noncash revenue from a release of deferred revenue relating to the mutual termination of a customer agreement we had with Motif FoodWorks, one of our platform ventures. Excluding this impact, cell engineering revenue was $129 million in 2024, down 10% compared to the full year of 2023. This decrease was driven by the customer mix shift discussed previously, along with commercial changes related to the restructuring. In the fourth quarter of 2024, we supported a total of 138 active programs across 85 customers on the Cell Engineering platform. This represents a 5% increase in active programs year-over-year. As we discussed in our previous 2024 earnings calls, the nature of programs that we take on with our customers has evolved significantly following our adjustments to commercial terms and the launch of our tools offerings. As such, going forward, we are no longer going to report a new program metric. However, we are going to provide additional perspective on active programs in the quarter, which I will discuss in a moment. Before I do that, I will close out 2024 by noting that we added a total of 31 new programs and contracts in Q4 of 2024, of which 14 were generally comparable in size and scope to historically reported new programs and were included in the current active program count on the prior slide. In addition, we commenced 17 other customer contracts in the quarter that represent a variety of small deal archetypes. These are generally much smaller in scope and shorter in duration. We are very pleased that we've been able to continue the momentum with our biopharma customer base, including five new large pharma logos and seven new data points contracts. Now going forward, we're going to provide you with a revenue-generating active program count metric that we think will be more useful to analysts that are using this to model revenue. This metric will include all programs that generated revenue in the quarter, including smaller programs that I refer to as other contracts on this slide. Further, in this metric, we will only include programs that were revenue-generating in the quarter. So for example, at any point in time, we have a significant number of programs that are either just starting or are wrapping up, and so they aren't generating any meaningful revenue. We'll exclude those for you, which will give you a better indication of revenue per program in the quarter, and you can measure how that trends over time in a more meaningful way. In the appendix, we've provided you with a preliminary look at this new metric for the past four quarters as a reference, and we welcome your feedback. Now turning to Biosecurity. Our Biosecurity business generated $9 million of revenue in the fourth quarter of 2024 at a gross margin of 17%. Revenue and gross margin were down quarter-over-quarter, and as you'll note, lumpy during the course of the year due partly to the timing of signing of a customer contract in Q2 of this year. On a full-year basis, Biosecurity revenue for 2024 was $53 million, down 51% from $108 million in 2023. As a reminder, our K-12 COVID testing contracts ended in the third quarter of 2023, and the business has now moved entirely towards building out both domestic and international infrastructure for Biosecurity. And now I'll provide more commentary on key items for the rest of the P&L. We've changed the presentation of this slide this quarter to align with our segment reporting disclosures. We believe this will give you more insight into the underlying profitability of our two segments. And specifically, we'll give you more information on the cost structure and how that is changing as we undertake our restructuring. A full reconciliation between segment operating loss, adjusted EBITDA, and GAAP net loss can be found in the appendix. Segment operating expenses. So starting with the more significant items in segment OpEx. In the fourth quarter of 2024, Cell Engineering R&D expense decreased 31% from $73 million in the fourth quarter of 2023 to $50 million in the fourth quarter of 2024. And Cell Engineering G&A expense decreased 49% from $40 million in the fourth quarter of 2023 to $21 million in the fourth quarter of 2024. These decreases were driven by our restructuring efforts. On a full-year basis, Cell Engineering R&D expense decreased from $336 million in 2023 to $272 million in 2024. G&A expense decreased from $171 million in 2023 to $115 million in 2024. Net loss. It is important to note that our net loss includes a number of noncash income and/or expenses as detailed more fully in our financial statements. Because of these noncash and other nonrecurring items, we believe adjusted EBITDA is a more indicative measure of our profitability. As noted, we are now showing you adjusted EBITDA at the segment level so that you can more clearly see the relative profitability of Cell Engineering and Biosecurity. The significant improvement in Cell Engineering segment operating loss in the fourth quarter of 2024 compared to the comparable prior year period was due to the previously discussed drivers of improved revenue and reduced operating expenses. Moving further down the page, you'll note that total company adjusted EBITDA in the fourth quarter was negative $57 million, which was up from negative $101 million in the fourth quarter of 2023. The principal differences between segment operating loss and total company adjusted EBITDA in the fourth quarter relate to the carrying cost of excess leased space, which you can see was $9 million in Q4 and $26 million in the year. This cost represents the base rent and other charges relating to leased space, which we are not occupying net of sublease income. We will continue to break that out for you going forward since that is a cash operating cost that is not related to driving revenue right now and can be potentially mitigated through subleasing. On a full-year basis, total Ginkgo adjusted EBITDA was negative $293 million, which was up from negative $365 million in 2023. This improvement in adjusted EBITDA can be attributed to the impact of the previously mentioned third-quarter noncash deferred revenue release as well as the restructuring implemented over the last three quarters. Finally, I'll just make one additional comment relating to cash burn in the quarter. Cash burn in the fourth quarter of 2024 was $55 million, down significantly from $114 million in the third quarter of 2024. This significant decrease in cash burn sequentially was a result of the restructuring and it was further impacted positively by higher revenue, which was partly driven by the successful completion of a number of technical milestones in the quarter, as mentioned by Jason. We would further expect to reduce the cash burn run rate significantly from this level by the fourth quarter of 2025, though we expect some lumpiness in the progression during the year due to timing of working capital and one-time payments. Jason will discuss our increased target for OpEx reductions later in the presentation. As we did last year, we'd also like to provide you with some updated data points relating to downstream value share. On the left-hand side of the chart, you can see that as of the end of 2024 we have the potential to earn up to $1.7 billion in milestone payments based on customer collaborations previously entered into, with the majority of those payments dependent on successful commercialization of a product. This figure does not include potential royalties. On the right side of the page, we are showing you the full total of programs for which we currently have downstream value share potential, including those with royalties. While it is harder to estimate the total potential value on royalty deals, you'll see the volume of programs there remain substantial. You'll also see that the decrease in potential milestone payments was approximately $700 million when comparing 2024 to 2023. We do expect a reduction in milestones if a program doesn't meet a technical goal or a customer changes commercial direction. Previously, we made up for these decreases with new milestone-bearing programs. As a result of the commercial changes we implemented in Q2 and our focus on tools offerings that generate near-term revenue, we did not book a significant amount of new potential milestones in the year. Now I'd like to provide some commentary on our outlook for the full year 2025. Before I get into the Cell Engineering revenue numbers, there are two important points of context. Firstly, I want to reiterate that our primary objective is to reduce cash burn. We like Ginkgo's competitive position and are very encouraged by what we're seeing with our tools offerings. However, we are still selling into a challenging biotech R&D market and are being diligent with respect to new business that we take on. Secondly, the government segment has been a source of growth for us in the past year and our momentum there has been very strong. However, given current uncertainties in this area, we are baking that risk into the low end of our guidance. That said then, our Cell Engineering revenue guidance is a range of $110 million to $130 million. We believe we are taking a conservative approach in providing this guidance range. We could see potential upside to this range coming from our new tools offerings where we have a solid BD pipeline and as discussed earlier, closed a number of new biopharma deals in Q4. Our Biosecurity revenue guidance for 2025 is at least $50 million. As we have in the past, we are guiding to our approximate current level of contracted backlog for the year, including an expected midyear program renewal and have a pipeline of opportunities we are pursuing beyond that. Also to clarify, this business is almost entirely dependent on government funding, which is a risk we have been managing since we started operations in the Biosecurity space. We are providing guidance here under the assumption that our government contracts continue. Finally, we expect total revenue for the year 2025 to be in a range of $160 million to $180 million. In conclusion, we're pleased with our overall execution of the restructuring thus far as evidenced by the reduction in cash burn in Q4. We are very encouraged by the early traction we are seeing in tools. However, we also acknowledge that we continue to operate in a very uncertain macro environment. We believe we are taking a prudent approach to managing both our risks and growth opportunities along a path to adjusted EBITDA breakeven by the end of 2026 while maintaining a cash margin of safety. One final footnote. On the financial reporting front, I can confirm that we remediated our SOX material weakness and wanted to express my appreciation to the team for all the work that went into addressing that. So back over to you, Jason.

Jason Kelly, Co-Founder and CEO

Thanks, Mark. Similar to the last two quarters, I'm going to use the first strategic section to focus on Ginkgo's efforts to reduce costs and update you on our restructuring efforts. Next, I'll cover our expansion into life science tools and services. This is a big change we made last summer. We now have some data on how it's going. We're seeing a market trend in the biopharma industry towards needing more data for AI models where customers haven't been well served by traditional life science tools companies and CROs. I think there's a nice opening for Ginkgo there. Finally, I'll share more details on the specific tools and service offerings in Ginkgo data points and Ginkgo automation, where we've been getting good traction with customers over the last six months. So let's get started. When we announced our restructuring less than a year ago, we set a $100 million spending cut target for 2024, with an additional $100 million reduction set for 2025. In our Q3 call last November, we reiterated those targets, having achieved a considerably accelerated site consolidation and cost takeout. Today, we've achieved a $190 million annualized run rate reduction through Q4 when compared to Q1, and that's partially offset by a headwind where we have increased rent charges related to the Bio Fab 1 facility. You can see that reflected in our quarterly cash burn in Q4 2024 being reduced down to $55 million. As I said, having a cash margin of safety is very important to me as that is how you avoid having to take on dilutive fundraising when you don't want to. I'm absolutely thrilled to see the progress on our cash burn here while still having over $560 million in cash and cash equivalents with no bank debt at the end of Q4. Among our peers, pursuing advanced technology and AI in biotech, we're in a really strong position, and we plan to keep it that way. I want to thank the Ginkgo team for the incredibly hard work in 2024 while undergoing a lot of change to get us to where we are today. There's still a lot of work to do in '25, but I do really like our position from here. You can see also our progress reflected between Q1 and Q4 of 2024. We really like this chart comparing total revenue to cash expenses, and that's inclusive of the cost of sales. My goal in 2025, like I said, is to keep this trend going. As Mark mentioned, we are being conservative with our revenue guidance in '25, given uncertainty around government R&D funding, obviously, a lot of changes there. But we've already taken steps to further drop our cash expenses, and I'm hopeful we'll do even better than the $60 million annual improvement that we have as our target shown there. Honestly, this is getting easier as we see what is working and not working throughout the business based on the changes we made last summer. We can move very quickly at Ginkgo. We showed that in 2024, and we're on an even more solid footing now. So the rate that we can make changes should only improve in the following year. I'm also really proud of the team for their quick work in spinning down and moving out of those various sites you see on this map, in particular, their work on the Lesaffre acquisition of Altar, ensuring that we retain critical access to technologies, and overall, the operational team's ability to maintain customer delivery while moving equipment and people has been really impressive. So we were in too many sites. Those were mistakes that we made over the past couple of years, and being able to in the face of drawbacks and biotech move out of those quickly and consolidate around what was working has been really impressive. I will say, please don't hesitate to reach out if you are growing biotech and looking for space in Cambridge or Boston. I am the friendliest biotech landlord here. We've been making headway on subleases, but we still have a lot of lab space available that we'd love to get you into. I want to note as well that despite our site consolidation, we still maintain technical and programmatic teaming and corporate entities in Europe that are at work and delivering on our European contracts, including a very exciting new one that I'll mention later today, the RANGER program. So I mentioned Ginkgo has been expanding outside of our original solutions business into tools and services. I want to give a little more color on that for where we're headed in 2025. The first bit here, as you can see, our historic solutions activities, we are really selling to sort of the head of R&D of a large biopharma. That was the kind of deal negotiations you would see at JPMorgan; they took a long time to close. They were large programs, multiyear big checks, and they included downstream value in the form of milestones or royalties. The big change in 2024 was in addition to those solutions deals, we started selling tools. And for tools, the customer is not the head of R&D but someone that reports to that head of R&D or reports to the person that reports to the head of R&D. If you look on this chart that I quite like, at the high end, we have a lot of customization and technical risk taken on by a biotech company. An extreme form of this would be a small biotech in Cambridge developing a unique drug and hoping to license it to a large biopharma partner. That's essentially the asset licensing model at the high end of technical risk, the high end of customization. You also get a lot of value for that; you can get bought out for these billion-multibillion-dollar deals for preclinical or clinically proven drug assets that are pre-commercial. As you go down that curve a bit, you get to our solutions business at Ginkgo. These are highly customized deals, large milestones, and royalties, which Mark shared; more than $1.7 billion of milestones and then a whole bunch more of royalties on top of that. However, again, this is highly customized, and we are taking on some technical risk. We met more technical milestones than ever in the last quarter, but sometimes we don't meet them, and that hurts us on the revenue side. We're certainly dependent on customers to commercialize to see the really big value in the downstream. So I'll talk about this in a second. It just takes a while to get to. That dotted line in the middle sort of represents where you go to the point where you're not customizing as much, you're not taking technical risks, and you lose the reach-through into the customer's revenues on their products. But you get a more easily scalable business. We're going to talk about data points, which is our business that's most akin to traditional CRO, generating large data assets for customers to order, often for AI model training. I'm not going to talk about it much today, but we've released AI models online that folks should try out. The other business where we're seeing a lot of traction is our equipment business. We're selling our automation platform here at Ginkgo, and that has been going really well. As I mentioned, our restructuring less than a year ago set a target for a $100 million spending cut for 2024 with an additional $100 million reduction for 2025. In our Q3 call last November, we reiterated those targets, having achieved a considerably accelerated site consolidation and cost takeout. We've achieved a $190 million annualized run rate reduction through Q4 when compared to Q1, partially offset by a headwind where we have increased rent charges related to the Bio Fab 1 facility. You can see that reflected in our quarterly cash burn in Q4 2024 being reduced down to $55 million. Having a cash margin of safety is very important to me as that is how you avoid having to take on dilutive fundraising when you don't want to. I'm thrilled to see the progress on our cash burn while still having over $560 million in cash and cash equivalents with no bank debt at the end of Q4. Among our peers pursuing advanced technology and AI in biotech, we're in a really strong position, and we plan to keep it that way. I want to thank the Ginkgo team for the incredibly hard work in 2024 while undergoing a lot of change to get us to where we are today. I do really like our position from here.

Joseph Fridman, Director of Communications and Corporate Affairs

Great. Thanks so much, Jason. As usual, for the Q&A, we'll start with a question from the public. I'll remind the analysts on the line that if you'd like to ask a question, please raise your hand on Zoom, and I'll call on you and open up your line. Thanks, everybody. All right. Let's get started with a question from X. So this was in response to our post. It comes from an indiscernible source. The question is, what are the ideal customer personas Ginkgo needs to close for new client acquisition?

Jason Kelly, Co-Founder and CEO

Yes, happy to take that. This is actually a key strength at Ginkgo, just given our experience in the solutions business. The short answer is it varies depending on what we're selling. For a solutions deal, our ideal customer persona there is the head of R&D, if it's a large biotech like Novo Nordisk or Merck. For a small biotech, it's the CEO because we're doing basically an outsourced research project. We're almost like an outsourced R&D team for that R&D leader. If we're selling data points, it will be, if it's a drug company, really a lead for a drug program. There are many more of those than heads of R&D. That's exciting to me. It gives us a wider set of folks to engage with, but they're still sort of 1 or 2 levels below the head of R&D. Finally, if it's automation, it's generally individuals in the companies who handle building out a new work cell or integrated automation setup.

Jason Lai, Analyst, Morgan Stanley

This is Jason on for Tejas. Starting off, maybe just a question on the 2025 guidance. What are your assumptions in the 2025 guide for some of the new offerings Ginkgo has launched, namely tools, data points, and Ginkgo Automation? Are you anticipating a material contribution from any of these offerings in 2025?

Mark Dmytruk, CFO

I’d be happy to take that. We are, I think, being relatively conservative in the guide with respect to the new offerings. For context, in 2024, your sort of baseline is single-digit millions of contribution from that. In the guide, I think we're anticipating at least getting into double-digit millions in terms of revenue contribution. There are certainly upside opportunities from the tools offerings, but within the guide, we're being relatively conservative there.

Jason Kelly, Co-Founder and CEO

The only thing I’ll add to that is, we’re coming from basically a standing start on that in mid-’24. It’s gotten well enough that you’re seeing me direct more of our sales and commercial effort in that direction. We’ll see. I mean, data points has real wind in its sails, especially in the near term, and automation on a slightly longer term. So knock on wood again, but we are trying to be conservative given it’s a new business.

Jason Lai, Analyst, Morgan Stanley

If I could ask a follow-up question. Can you reiterate expectations to reach adjusted EBITDA breakeven by year-end 2026? Where does Ginkgo need to finish in 2025 from an EBITDA perspective for us to feel comfortable about reaching this target? Can you provide some color on some of your assumptions regarding achieving the target?

Mark Dmytruk, CFO

I think a good way to frame it is to look at where we finished in Q4 of 2024. That was adjusted EBITDA of negative $57 million. The levers we have are really revenue costs and then sublease. On the cost front, we talked about increasing the cost takeout run rate by another $60 million by the end of this year. On a quarterly basis, Jason, you would see at least a $15 million contribution to adjusted EBITDA just from that alone. Largely speaking, the actions that get us that $60 million have already been taken or are in motion. We will also continue to push on the cost lever. We aren’t saying we’re done there. Throughout 2025 and 2026, we think there would be additional opportunities on the cost front. Revenue growth, of course, would be a contributor as would sublease mitigating the $65 million on an annual run rate basis of excess space cost. It’s a challenging market, so we aren’t banking necessarily on being able to do that. There’s another opportunity down the line in downstream value share in 2026.

Jason Kelly, Co-Founder and CEO

If you look at the biotech market today, it’s generally a tough market, with less investment in R&D and so on. We launched these new products, which again, I’m happy they’re going well, but they are new for us. You see us being conservative on revenue guidance because from my standpoint, costs are under our control. As we move to breakeven, I’ll be looking at that, right? If we’re doing better on revenue grade, we’ll take out costs. It’s a simple equation, nothing more complicated than that. And I do think we have plenty of levers.

Evie Kslosky, Analyst, Goldman

Filling in for Matt tonight. How should we think about the margin profile differences between the traditional foundry, data points, and automation? I understand it's early days, and revenue is limited at this point, but I'm trying to get a sense of where growth will help push you towards EBITDA breakeven?

Mark Dmytruk, CFO

On the data points business for the tools offerings, we are targeting margins you would see in a solid CRO services market of 40% plus gross margins. I will just say the business is still not even close to being at scale where you can understand what’s possible in terms of gross margin. We do think our offering there is pretty differentiated. We also think we have a way to scale into growth in a cost-effective way. So that’s how we’re targeting it. Compared to the traditional solutions offerings, we were using to some extent downstream value share there to get to margins. We were willing to do business at a much lower gross margin profile. This has evolved, and you see that in the cost structure coming down.

Evie Kslosky, Analyst, Goldman

What are you seeing in your sales funnel now that you've opened up your sales process toward more tools? Are you seeing the volume pickup you sort of expected through the less customized, less risky offerings?

Jason Kelly, Co-Founder and CEO

I was so excited about this. We had seven new data points deals in the last quarter and five new logos to Ginkgo. We found with the data points—a customer said, 'I talked to you all 1 year ago, and we kind of left saying, wow, we can’t really get behind the royalties and milestones for this kind of project. I assume you listened to us, and that's why you've updated your business model.' We have new interactions, even with places we’ve talked to before, and we’re now treated much more like a straightforward CRO interaction, so it’s much faster to close. We can do smaller proof of concept, and I encourage customers listening on the call to try a relatively small project to generate a data set and see how it works in your area.

Mark Massaro, Analyst, BTIG

I know the new administration has been in office not long. I'm curious; in your Biosecurity guidance, you assumed no change to government contracts. There could be some changes. So help us better understand who these contracts are with and if you think there are synergies remaining between your Biosecurity business and your core Cell Engineering business.

Jason Kelly, Co-Founder and CEO

We have government contracts both on the Cell Engineering side and Biosecurity. Cell Engineering contracts are traditional R&D contracts with places like DARPA and ARPA. With the current environment, we need to be conservative on the guidance for government contracts. I think there will be an era where the new leadership has new plans and ideas—some of which could be good opportunities for us. Most government funds will continue, but it's just a question of project by project.

Mark Dmytruk, CFO

Yes, you'll get an enhanced version of the current active program metric. This will provide better insight into actual revenue per program at Ginkgo. We want to give you a better sense of the real revenue per program because the current metrics include programs that are starting or stopping and aren’t directly contributing revenue.

Joseph Fridman, Director of Communications and Corporate Affairs

Thanks so much, everyone, for joining us.