Earnings Call Transcript - DNA Q1 2024

Megan LeDuc, Manager of Investor Relations

Good evening. I'm Megan LeDuc, Manager of Investor Relations at Ginkgo Bioworks. I'm joined by Jason Kelly, our Co-Founder and CEO; and Mark Dmytruk, our CFO. Thanks as always for joining us. We're looking forward to updating you on our progress. As a reminder, during the presentation today, we will be making forward-looking statements, which involve risks and uncertainties. Please refer to our filings with the Securities and Exchange Commission to learn more about these risks and uncertainties. Today, in addition to updating you on the quarter, we are going to provide more detail into our drive towards adjusted EBITDA breakeven and the necessary steps we're taking to get there. As usual, we'll end with the Q&A session, and I'll take questions from analysts, investors and the public. You can submit those questions to us in advance via X at #Ginkgoresults or e-mail investors@ginkgobioworks.com. All right. Over to you, Jason.

Jason Kelly, Co-Founder and CEO

Thank you all for joining us today. We always begin by emphasizing our mission of making biology easier to engineer, which is particularly crucial right now. Ginkgo is a company led by its founders, and my fellow founders and I have dedicated the last 15 years to building this organization, with many of our senior leaders contributing for over a decade. This deep commitment motivates us to maximize Ginkgo's potential. We are invested not just financially, but personally, and we want to see the same kind of return on your investment in Ginkgo. Today, we will announce significant changes in how we operate. These changes will be challenging for many on our team, and I want to be clear that they will involve substantial reductions in our workforce along with key operational improvements. Our mission is meaningful to everyone at Ginkgo, and we are prepared to make tough but necessary decisions to fulfill it. Today is one of those pivotal days. Ginkgo plays an increasingly vital role in the technology landscape of biotech, which underscores the importance of getting our strategy right. I am proud of our diverse customer base, which reflects our core belief that a unified platform can effectively deliver biotechnology R&D services to demanding clients across agriculture, food, industrial sectors, biopharma, and consumer biotech. Additionally, we’ve made significant strides in expanding our customer list, adding notable biopharma names such as Merck, Novo Nordisk, Boehringer, and Pfizer in just the past 18 months. However, a key next step for Ginkgo involves leveraging what we've learned from hundreds of customer programs to enhance our efficiency. I will discuss later how we plan to achieve greater scalability by simplifying our business. This includes consolidating our technology backend to a single automation platform and streamlining our frontend operations. We’ve received valuable feedback from our customers about our deal terms, and we aim to simplify those as well to boost sales velocity and ease the deal-making process. More details on that will follow, but first, Mark will cover our Q1 performance. We have observed some signals indicating a need for a shift in our approach, notably an uptick in programs without a corresponding increase in revenue. This is an issue I plan to address through the changes we will discuss today. Fortunately, we are in a strong financial position to implement these changes, holding $840 million in cash without any bank debt, giving us a significant safety margin. This is a strategic choice on our part, showing we are not making these adjustments out of desperation. We are also aiming to achieve adjusted EBITDA breakeven by the close of 2026. The internal mindset at Ginkgo, with many of our team listening now, will focus on collaboratively establishing our plan to reach this goal, which will require input and commitment from everyone to ensure we adhere strictly to our outlined strategy. Over the past few years, we’ve gathered extensive data from various growth initiatives, and we believe our team is ready to create the right plan and identify the best people to execute it. We will be working on this in the coming weeks. This approach aligns with feedback we’ve received from many investors, especially those who have been waiting to invest in Ginkgo. The common sentiment is that while they appreciate our vision and can see Ginkgo becoming a comprehensive services platform serving the entire biotech industry at scale, they question whether we can achieve this with our current capital. I believe our plans will reassure you that we can. Now, I will turn it over to Mark to share further details on our Q1 financials, and I will follow up with our execution strategy. Over to you, Mark.

Mark Dmytruk, CFO

Thanks, Jason. I'll start with the Cell Engineering business. We added 17 new cell programs and supported a total of 140 active programs across 82 customers on the Cell Engineering platform in the first quarter of 2024. This represents a 44% increase in active programs year-over-year with solid growth across most verticals. Cell Engineering revenue was $28 million in the quarter, down 18% compared to the first quarter of 2023. Cell Engineering services revenue, which excludes downstream value share, was down 15% compared to the prior year, driven primarily by a decrease in revenue from early-stage customers, partially offset by growth in revenue from larger customers. We believe the mix shift to be an overall positive and is indicative of market conditions, our refocused sales efforts on cash customers and the increased penetration of larger biopharma and government customers that we have discussed over the past few quarters. That said, the revenue in the quarter was below our expectation and the pipeline indicates a weaker-than-expected revenue ramp for the rest of the year. Jason will be discussing later in the presentation both how we're thinking about demand and our offering in this environment and the efforts we're taking to further focus the customer base. Now turning to Biosecurity. Our Biosecurity business generated $10 million of revenue in the first quarter of 2024 at a gross margin of 8%. We do expect the gross margin to improve in upcoming quarters based on the revenue mix in our contracted backlog. We're continuing to build out both domestic and international infrastructure for Biosecurity, especially with our recently announced Biosecurity products, Ginkgo Canopy and Ginkgo Horizon. And now I'll provide more commentary on the rest of the P&L. Where noted, these figures exclude stock-based compensation expense, which is shown separately. And we are also breaking out M&A-related expenses to provide you with additional comparability. OpEx. Starting with OpEx, R&D expense, excluding stock-based compensation and M&A-related expenses decreased from $109 million in the first quarter of 2023 to $94 million in the first quarter of 2024. G&A expense, excluding stock-based compensation and M&A-related expenses decreased from $71 million in the first quarter of 2023 to $51 million in the first quarter of 2024. The significant decrease in both R&D and G&A expenses was due to the cost reduction actions we completed in 2023, including cost synergies related to the Zymergen integration and subsequent deconsolidation. Stock-based compensation. You'll again notice a significant drop in stock-based compensation this quarter, similar to what we saw in each quarter in 2023 as we complete the roll-off of the original catch-up accounting adjustment related to the modification of restricted stock units when we first went public. Additional details are provided in the appendix to this presentation. 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. We've also included a reconciliation of adjusted EBITDA to net loss in the appendix. Adjusted EBITDA in the quarter was negative $100 million, which was flat year-over-year as the decline in revenue was offset by a decline in operating expenses. And finally, CapEx in the first quarter of 2024 was $7 million as we continue to build out the Biofab1 facility. Now normally, I would speak to our guidance next, but given our plans to accelerate our path to adjusted EBITDA breakeven through both customer demand-related changes and significant cost-related restructuring, Jason is going to first walk through those plans and then discuss guidance at the end. Before I hand it over to Jason, I'd like to provide some color on the cost restructuring we are planning. High level, we are committed to taking out $200 million of operating expenses on an annualized run rate basis by the time we have completed our site consolidation actions, which we expect by mid-2025. We expect at least half of that savings target to be achieved on a run rate basis by the fourth quarter of this year. The majority of our cost structure is in our people and facilities costs. And so workforce reductions across both G&A and R&D and site rationalization are the primary focus, though we see significant opportunities in other areas of cost as well. For clarity, our cost takeout estimate includes an assumption relating to our ability to manage our lease expenses relating to space we will no longer require. As I said, Jason will speak to the overall plan in more detail, including importantly, the customer demand side of this. And so now, Jason, back over to you.

Jason Kelly, Co-Founder and CEO

Thanks, Mark. The main focus today is our strategy to grow revenue while reducing costs to achieve adjusted EBITDA breakeven by the end of 2026. I will first discuss why we haven't seen revenue growth despite an increase in programs and how we plan to simplify our back-end automation technology to enhance scalability. Next, I will cover customer preferences regarding our service terms and how we intend to streamline our offerings to align with their feedback. Lastly, we are taking significant steps to cut costs, aiming for a $200 million reduction in our annualized run rate operating expenses by mid-2025 to reach our breakeven target in 2026. We will outline our high-level execution plan for these initiatives. Looking at the data, you can see that while the number of active programs on our platform has increased significantly over the year, our revenue from service fees has declined, which is disappointing. We've booked a substantial amount of fee bookings from these deals, yet we are struggling to convert them into immediate revenue. The core issue lies in the pace at which we are scaling these programs with our automation at Ginkgo. To provide some context, when an R&D leader from our client engages their internal scientists, they specify a desired scientific deliverable—such as an mRNA design similar to what we did for Pfizer or a manufacturing process for Novo Nordisk. These internal teams perform experiments by hand, generating limited data. Although this manual process works and offers flexibility, it is also labor-intensive. In contrast, when clients choose to work with Ginkgo, they benefit from our scientists, who use automation to gather larger data sets through high-throughput DNA sequencing and barcoding. This differentiation—small data from manual processes versus large automated data—is our expertise. However, it's important to note that while our method is not strictly superior, it has longer startup times for scaling new protocols. The faster we can generate large data sets, the quicker we can realize revenue. Since acquiring Zymergen and developing our technology, we are well-positioned to address these challenges. Currently, lab automation is at three levels: manual experimentation, task-targeted robot operation, and fully integrated work cells. We've focused on creating more scalable systems that can adapt to various protocols quickly, significantly reducing labor and cycle times. We have streamlined cart designs for our robotic automation systems, allowing us to scale up operations efficiently. We're also preparing to open a new facility, Biofab1, in mid-2025, designed to house these large installations, which will operate more like data centers, enabling rapid scaling of data generation for our customers. On the front end, we recognize that some of our service terms have posed challenges for customers. To improve our customer relationships, we are updating our terms to provide clients with intellectual property reuse rights and eliminating the downstream value share for many deals. This change is aimed at expediting deal-making and facilitating growth without needing extensive legal resources. We also introduced Lab Data as a Service, where our clients’ scientists can design experiments while utilizing our advanced infrastructure for larger data needs, which aligns with our mission to simplify biology engineering. This new offering allows us to tap into significant R&D budgets within client companies. We anticipate new opportunities in the AI sector, where companies are seeking large data sets to build innovative models in biotechnology. Our Lab Data as a Service is ideally positioned to meet this demand, and we welcome collaboration with AI companies looking for substantial data quickly. Now, addressing our cost structure, our annualized operating expenses currently stand at approximately $500 million, which is unsustainable relative to our near-term revenues. We aim to reduce expenses by $100 million by the end of 2024 and another $100 million by mid-2025. This reduction will involve consolidating operations and cutting back on non-essential spending. We acknowledge that these changes will impact our workforce, and we are grateful for the contributions of those affected as we strive to fulfill our mission. Looking ahead, we have revised our revenue guidance for 2024 due to changes in our deal structure and the anticipated impact of our restructuring efforts. We expect total revenue between $170 million and $190 million, with cell engineering services revenue projected at $120 million to $140 million. In conclusion, although we face challenging transitions, making decisive actions now while in a strong cash position is vital for our future success. We appreciate our team's dedication and support during this period of change.

Megan LeDuc, Manager of Investor Relations

Great. Thanks, Jason. I'll start with the questions from the public and remind the analysts on the line. Thanks all. Welcome back, everyone. We'll start with a retail question, and then we'll go down our list of analysts. So Rahul, you'll be first after our retail question. The first question comes from our IR inbox, and it's for you, Jason. Can investors get some insight on how data as a service is being received? A significant part of the original investment thesis was downstream value revenue, but now that has changed. Can you explain why data as a service is the right pivot and how it's being received?

Jason Kelly, Co-Founder and CEO

Yes, I addressed some of this earlier. We announced this at Ferment about a month ago, and it has been received very well. We currently have several customers in our sales pipeline, which is quite rapid for the products we offer. As I mentioned, we can sell this to a different budget pool within our clients. This allows us to approach the R&D department and present ourselves as an alternative to self-generating data. This means savings on reagents and the ability for teams to focus on different tasks. For smaller biotech firms, this might mean they don't even need to establish a lab or hire a team. We're introducing a new proposition to potential clients. Additionally, I can assure them that they own the intellectual property without any royalties, which significantly simplifies my role after selling Ginkgo's infrastructure for the last decade. I believe this is the ideal moment to capitalize on the substantial research budgets available. We can access this funding quickly with terms that are much more favorable for customers. I’m really enthusiastic about this being a major component of our business moving forward. Also, I find the developments in AI companies intriguing. Many of these firms, being software-centric and AI-focused, are building amazing models using existing public datasets like the protein data bank and GenBank. However, these resources will eventually be depleted, and soon, new large datasets will be essential. With our Lab Data as a Service offering, these companies can own that data. Why go through the trouble of creating your own lab? Utilizing Ginkgo’s infrastructure will be much more efficient, and our discussions with companies indicate they recognize this. I’m quite optimistic about these developments.

Megan LeDuc, Manager of Investor Relations

Great. Thanks, Jason. Like I said, Rahul from Raymond James, you're up first.

Rahul Sarugaser, Analyst

Can you hear me all right?

Jason Kelly, Co-Founder and CEO

Yes.

Rahul Sarugaser, Analyst

Terrific. Jason, Mark, congratulations on taking a reset quarter here. I'll start with a big global question. Jason, you mentioned that you have been in this field for a long time, and I believe most people on this call support biomanufacturing and synthetic biology. My question is, considering the attrition we’ve observed, along with the decrease in revenue and projects, what are the indicators that lead you to believe this is the right time? How is Ginkgo positioned appropriately? Additionally, as you evolve your business model, provided you are at the right time, how do you plan to avoid being seen merely as a large CDMO? That's all for me.

Jason Kelly, Co-Founder and CEO

Yes, I appreciate your point about biomanufacturing. I share your concerns. When we took Ginkgo public, our main customer base was in the industrial biotechnology sector, which many often equate with synthetic biology. However, they are not the same. Synthetic biology acts as a tools infrastructure, focusing on developing faster and easier methods for designing and engineering cells. The demand primarily arose from industrial biotech due to its complex genetic engineering needs. Unfortunately, this sector has experienced significant challenges, including higher interest rates and a drying-up venture capital ecosystem resulting in many companies going out of business. Despite these hardships, we demonstrated our capabilities as a tools platform and have expanded into biopharma, a field we were only lightly involved in when we went public. This shift shows the flexibility of Ginkgo. We have moved away from solely relying on industrial biotechnology startups to attracting larger biopharma and agricultural companies with substantial research budgets. On the topic of biomanufacturing, it remains tough, and breakthroughs are necessary. There's intriguing innovation in consumer biotech, like the introduction of new GMO house plants, but that sector has also faced difficulties. Regarding whether we envision Ginkgo as a large Contract Development and Manufacturing Organization (CDMO), I don't see that as problematic. The main issue with current Contract Research Organizations (CROs) is that they do not improve efficiency as they scale. When outsourcing to CROs like WuXi and Charles River, customers are simply transferring their data generation tasks to external labs, which still perform the same manual processes. In contrast, Ginkgo attracts customers for our large data assets, which offer automation or pooling that traditional CROs cannot provide. The question becomes whether there’s a demand for that. If there is, our approach benefits from economies of scale, making infrastructure cheaper as we increase our output. However, a significant portion of research spending still goes toward kits, equipment, and lab facilities, which CROs have largely failed to capitalize on due to the lack of compelling differentiation from what customers can achieve in-house. If we can create a flexible and scalable solution, we could capture more of that manual research budget. I’m open to being perceived in that manner, as long as it is understood that Ginkgo could potentially claim a substantial share of research budgets in the future if our approach proves successful.

Megan LeDuc, Manager of Investor Relations

Thanks, Rahul. Next up, we have Matt Sykes at Goldman Sachs. Matt, your line is now open.

Matthew Sykes, Analyst

Great. I guess kind of a high-level question for Jason or Mark, just as you kind of look at sort of the proof points of this restructuring and shift in what you're doing, particularly from how you're approaching customers. We had moved our model away from new program growth a while ago because we felt the correlation wasn't there in focusing on active programs. Revenue is obviously going to be key KPI. But as you kind of give advice to the sell side in terms of how to measure the success of this shift, what are some of the KPIs that we should really be focusing on at this point?

Jason Kelly, Co-Founder and CEO

Do you want to take a swing, Mark?

Mark Dmytruk, CFO

So I think, Matt, what you heard is that our primary focus will be on cash flow. Cash flow is influenced by both cash revenue and cash operating expenses, and that’s where much of the company's efforts will be directed. However, we also aim to progress toward profitability and reach adjusted EBITDA breakeven, which is crucial for Ginkgo's success. We need to demonstrate that our programs can be operated cost-effectively. On the topic of volume, which you mentioned, it will take some time to determine if there will be a substitute for the program metric. There will definitely be key performance indicators, but they might be things we report on without committing to specific guidance. We need to understand better the types of agreements we will be entering under the new commercial terms that Jason discussed today and the new offering like Lab Data as a Service.

Jason Kelly, Co-Founder and CEO

As a reminder, the way we do program counts today involve having things like downstream value share involved in order for it to count. I know a number of the analysts on the call do factor that into their modeling. And so part of what we're doing here is because we're changing the terms that they wouldn't count, and so we do want to give you all a picture of how things are going because when we sign deals, that does imply revenue in the future. I do know that's part of the modeling. So we'll work on that.

Matthew Sykes, Analyst

Got it. On the guidance commentary slide, Jason, you mentioned focusing on quality over quantity regarding programs. With the new approach and the inclusion of Lab Data as a Service, are there specific types of programs or end markets that are more appealing to achieve that balance of flexibility and scale while also ensuring quick implementation? Additionally, are there certain types of customers that could potentially generate revenue more rapidly, whether it’s through scaling on the platform or by introducing new programs?

Jason Kelly, Co-Founder and CEO

Yes, those are great questions. To start, you will continue to see us selling directly to the research budget. This includes our Lab Data as a Service model, where their scientists control our infrastructure or our scientists run a program in collaboration with corporate development. Corporate development negotiates research partnerships, like acquiring assets or signing partnerships with small biotech companies. We play a critical role in these agreements by providing the research partnership aspect. We still have a pipeline for these deals and will continue pursuing them, often involving downstream value share, especially targeting large biopharma companies and, to a lesser extent, large agricultural firms. On the other side, we see solid opportunities with smaller biopharma startups and biotechs that are navigating a constrained funding environment. These companies are focused on how much to invest in laboratory infrastructure and equipment, and they typically won't compromise on scientific control. Our Lab Data as a Service allows their scientists to operate our infrastructure, enabling us to serve these clients for the first time, which excites me. Lastly, in industrial biotechnology, we've faced challenges selling to larger companies since they don't engage in the same research partnerships as pharma. Although it’s a lower margin industry, they do have research budgets and teams. Therefore, Lab Data as a Service presents an opportunity to enter larger chemical and industrial biotech firms where we've experienced more resistance in strategic deals.

Matthew Sykes, Analyst

Yes. Appreciate it.

Jason Kelly, Co-Founder and CEO

I believe this approach is beneficial as these elements support one another. There’s a common perception that we should identify ourselves as a Chief Revenue Officer, particularly in relation to Lab Data as a Service. This is important because when we engage with the strategic side of the business, there’s often hesitation toward partnering with a CRO. When we speak to these stakeholders, they assess our scientists and our ability to manage multiyear agreements, and we excel in this area and maintain strong engagement with them. People already view us as a strategic partner. I’m particularly enthusiastic about our capacity to connect within the same customer but in different departments, as our established reputation will aid us in these interactions. I look forward to cross-selling to both mid-level and senior leadership in R&D, in addition to more strategic roles, as this will be advantageous for us.

Megan LeDuc, Manager of Investor Relations

Thanks, Matt. Next up, we have Mike Ryskin at Bank of America. Mike, your line is now open.

Michael Ryskin, Analyst

Can you hear me?

Jason Kelly, Co-Founder and CEO

Yes.

Michael Ryskin, Analyst

I want to return to the main point you made earlier, Jason. Looking at Slide 14, it illustrates the disconnect between active or new programs and their associated revenues over time. I am curious, while we only see overall totals for programs and revenues, are there any success stories or examples you can share? What lessons can be drawn from this? You mentioned challenges in achieving full scale in certain cases. With the cost cuts you are implementing, how can we be sure that this won't simply reduce the number of programs and revenues, essentially cutting everything in half by reducing headcount and footprint? How can you ensure that you are choosing a better strategy rather than just making cuts to existing resources?

Jason Kelly, Co-Founder and CEO

Yes, that's clear, Mike. I'll provide some details. First, we have several years of experience across many programs. As you may have noticed, we have seen growth in our program. Those who have followed us since our company went public are aware of this. Each year, we gather more data regarding what is easy to onboard and scale versus what is challenging. Additionally, we are focused on improving our backend processes to expedite our operations. We have a significant amount of bookings, which is actually a source of frustration for me. While we have many bookings, our ability to convert these into revenue through our infrastructure is currently too slow. Therefore, we need to address this backend issue. In terms of success cases, we have a track record with the types of programs we've handled before. If we've successfully delivered similar work for a customer in the past, it’s far easier to replicate that success. New types of programs tend to create more churn. Furthermore, there are still experiments we need to work on, such as assay onboarding. When customers come to us with specific projects, they often require particular assays that need to be manually onboarded onto our automation systems, which slows down the process. Until we complete these manual onboarding tasks, we cannot significantly increase revenue by running those assays at scale. Assay onboarding is something we aim to automate more effectively with our new approach. We have identified the areas that need improvement because we are managing numerous programs. Those will be our initial focus. This makes us confident that we can avoid the situation you're concerned about. However, the nature of what we sell will be different moving forward. We will not pursue projects for the first time in this new environment. We now have a clear path toward breakeven, so we don’t need to take those initial risks. We’ve learned a lot about what works and what doesn’t over the past few years. Continuing to pursue those initial projects would be a mistake, so you will see us refining our sales approach. I'm optimistic that with improved terms, we will secure more of the types of deals we prefer.

Michael Ryskin, Analyst

Okay. That does. And then just a quick follow-up on the cost reductions and the plan there, a significant reduction in labor at 25%. How do you ensure minimal disruption? Because you've been scaling up for a while, and you are still bringing on the new foundry operations, the Biofab1. So how do you manage both expansion and a meaningful headcount reduction simultaneously?

Jason Kelly, Co-Founder and CEO

Yes, I believe that’s a crucial challenge for us. It involves determining the areas where we need to invest to manage the transition while also supporting our key customers effectively. This is a significant focus during our early planning and will continue to be in the upcoming weeks as we refine our approach. After going public, we explored various avenues for growth and conducted extensive internal research aimed at long-term benefits. Some of these efforts were necessary a few years ago, like when we initiated work with mammalian cells. That internal research was essential for us to engage with the pharmaceutical industry effectively today. However, the gap between our efforts and the returns we see in the current environment is narrower. Therefore, we should prioritize internal research that is directly tied to customer projects and streamline the onboarding of automation and pooled screening processes. Moving forward, expect us to concentrate more on initiatives that generate revenue and allow us to scale our offerings for our target customers more rapidly. Does that make sense?

Megan LeDuc, Manager of Investor Relations

Thanks, Mike. But next up, we have Steve Mah at TD Cowen.

Poon Mah, Analyst

Apologies for the background noise. They picked an interesting day. Following up on Mike's question regarding the reduction in workforce and labor costs, I understand that you have good visibility in your services business and can easily take on projects. However, what about the one-third of your programs that involve more complex pharmaceutical partnerships? Can you clarify if the reduction in force is more targeted? Additionally, could you provide a percentage of the actual positions reduced and offer insight into what percentage of your total workforce this represents? I know you mentioned a 25% labor reduction, but further clarification would be helpful.

Jason Kelly, Co-Founder and CEO

Yes. So we're working through those numbers now to get to exact numbers. So we don't have the exact numbers now. We are planning to take 25% out of labor inclusive of a headcount reduction, but that's the process we're going through in the coming weeks. I will say that type of biopharma work is our highest priority stuff, right? So those are important long-term customers for us. We know there's a ton more business there. And so that's an area where you'll see us make sure that we can continue to serve those customers well.

Poon Mah, Analyst

Okay. Got that. All right. And then maybe one for Mark. Can you give us your confidence level in your ability to sublease the foundry real estate and consolidating it to Biofab1? Just how confident are you to be able to do that? You put out a pretty big number of kind of reducing up to 60% of the cost of that facility.

Mark Dmytruk, CFO

Yes. First, I want to emphasize our commitment to achieving the cost savings target, even if we are unable to secure the anticipated lease savings. Transforming the foundry operations is a significant challenge for us, and we need to ensure we can accomplish that. We are exploring options for subleasing or similar strategies to help reduce the lease costs, but these will largely depend on market conditions when we are prepared to proceed. We are not solely relying on these lease adjustments to meet our goals.

Poon Mah, Analyst

Okay. That's helpful. And if I could sneak one last quick one in, Mark. On the downturn value, I appreciate you guys pulling it because of lumpiness and lack of visibility. But are you going to add that back to guidance when you have good visibility and as you kind of approach maybe a milestone?

Mark Dmytruk, CFO

Yes. We have a substantial portfolio of potential downstream value share or royalty rights and milestone rights, and we are still considering that. In short, once it becomes a more predictable and steady source, we would begin to discuss it in that context and possibly include it in our revenue guidance. However, we are currently not in that position during this timeframe. Our main priority is to get Ginkgo to the adjusted EBITDA breakeven level without depending on uncertain downstream value share developments over the next two years.

Megan LeDuc, Manager of Investor Relations

Thanks, Steve. Next up, we have Edmund Tu at Morgan Stanley. Can you hear us, Edmund?

Jason Kelly, Co-Founder and CEO

Maybe not.

Megan LeDuc, Manager of Investor Relations

Edmund? Last call.

Tejas Savant, Analyst

Guys, can you hear me?

Jason Kelly, Co-Founder and CEO

Now we can. Yes.

Tejas Savant, Analyst

Sorry, I apologize. I'm having some lag issues here. Just a quick question from me on the implementation of your new RAC automation. How long do you think it will take to implement this new strategy? And will there be a ramp-up time associated with reaching optimal efficiency here? And how much improvement to the revenue conversion do you think you can drive with this?

Jason Kelly, Co-Founder and CEO

Yes. I'll discuss some timelines. One of the positives is that we're already making progress with this. In our current facility in Boston, we have a setup of RACs, and we now have about 15 or 20 of the carts. This allows us to begin transitioning workflows onto the RACs. The team responsible for designing, programming, and final manufacturing of the RACs is located in Emeryville, California. After production, the units are shipped here, enabling us to start the lab transfer and related work well before Biofab1 opens in mid-2025. This progress is not hindered other than by how much focus we give it and its priority among other company initiatives. I'm quite optimistic that we can expedite some of this work. However, there will still be a comprehensive transition to Biofab1, which is part of our cost-reduction strategy focused on simplifying our facilities. This is aligned with the mid-2025 timeline for Biofab1. Mark, do you want to add anything else?

Mark Dmytruk, CFO

So Edmund, the question was what impacts on revenue might we see from the sort of RAC-driven foundry, was that the question?

Jason Kelly, Co-Founder and CEO

Yes. How much faster we could pull it through.

Mark Dmytruk, CFO

Yes, I believe the process will be significantly faster. If you look at how we currently handle end-to-end cell programs, Ginkgo assumes a lot of the risk related to technical success and project timing. Planning and onboarding take considerable time because these projects are often complex and lengthy, putting the timing and technical risks on us. We receive payments through micro milestones, which affects how we recognize revenue, typically on a delayed basis. By removing much of this complexity, we will initiate shorter-cycle projects, which will reduce the need for technical or timing risks. I expect revenue recognition will be more evenly distributed and aligned with the actual work we do over a much shorter timeframe, possibly just months instead of years. While I can't specify if it will be 50% faster compared to similar projects, I do anticipate it will be significantly quicker from a revenue standpoint than comparable end-to-end Cell Engineering solutions projects.

Megan LeDuc, Manager of Investor Relations

Thanks, Edmund. I'm not seeing any other questions in the queue. So Jason, do you have any closing thoughts for us?

Jason Kelly, Co-Founder and CEO

No. As I mentioned, tough for us internally with the headcount reduction. I appreciate the support of the team. I think Ginkgo is going to come out of this in a much stronger spot to make biology easier to engineer. I think we have a chance to do that horizontal basis across the entire biotech industry. And so excited to go forward and do that. Thanks, everyone, for your questions.

Megan LeDuc, Manager of Investor Relations

Thanks all. We'll talk to you all next quarter. Have a good one.