Rapid Micro Biosystems, Inc. Q3 FY2025 Earnings Call

Good morning, and thank you for joining the Rapid Micro Biosystems Third Quarter 2025 Earnings Call. Joining me on the call are Rob Spignesi, President and Chief Executive Officer; and Sean Wirtjes, Chief Financial Officer. Earlier today, we issued a press release announcing our third quarter 2025 financial results. A copy of the release is available on the company's website at rapidmicrobio.com under Investors in the News and Events section. Before we begin, I'd like to remind you that many statements made during this call may be considered forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements, including, but not limited to, statements relating to Rapid Micro's financial condition, assumptions regarding future financial performance, anticipated future cash usage, statements relating to the company's term loan facility, guidance for 2025, including revenue, expenses, gross margins, system placements and validation activities, expectations for and planned activities related to Rapid Micro's business development and growth, including the expected benefits from our distribution and collaboration agreement with MilliporeSigma, customer interest and adoption of the Growth Direct System, and the impact of the Growth Direct System on their businesses and operations, and statements regarding the potential impact of general macroeconomic conditions on our business and that of our customers. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors, including our ability to meet publicly announced guidance, the impact of our existing and any future indebtedness on our ability to operate our business, our ability to access any future tranches under our debt facility and to comply with all its obligations thereunder, our ability to deliver products to customers and recognize revenue and market and macroeconomic conditions. For a more detailed list and description of the risks and uncertainties associated with Rapid Micro's business, please refer to the Risk Factors section of our most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission as updated from time to time in our subsequent filings with the SEC. We urge you to consider these factors, and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 7, 2025. Rapid Micro disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I'll turn the call over to Rob.

Thank you, Mike. Good morning, everyone, and thank you for joining us. I'll begin this morning's call with a brief overview of our third quarter performance. Next, I will discuss the record multi-system order we announced this morning and then review our MilliporeSigma partnership. I'll conclude my prepared remarks with a few comments on our updated 2025 outlook and then turn the call over to Sean for a more detailed review of our financial results and outlook. This morning, we reported total third quarter revenue of $7.8 million, above the midpoint of our guidance range, representing our 12th consecutive quarter of meeting or beating revenue guidance. Within product revenue, consumables, which are a key indicator of customer demand and usage, increased 40% to a quarterly record. This strong performance helped offset a difficult comparison in system revenue, which included 5 Growth Direct placements versus 7 in the prior year. Service revenue grew 12% compared to Q3 2024. Recurring revenue, which is comprised of consumables and annual service contracts, increased more than 30% year-over-year. Third quarter gross margins were 9%, reflecting a 70 basis point improvement from the prior year quarter. Higher revenue and productivity gains drove service margins to 40% in the quarter. While product margins were slightly negative, we expect progress on our product cost reduction and manufacturing efficiency initiatives to deliver positive product margins in Q4. Looking forward, we expect continued meaningful gross margin improvement in 2026. Now I'd like to turn to the significant commercial win we announced earlier this morning. In October, we secured a record multi-system order from an existing top 20 global biopharma customer, with contributions beginning in the fourth quarter and extending into 2026 and beyond. This customer is deploying Growth Direct Systems across multiple sites in North America, Europe and Asia Pacific. Additionally, the customer will utilize the Growth Direct platform across several manufacturing modalities and fully leverage all of our applications, including environmental monitoring, water and bioburden. This milestone underscores the Growth Direct platform's position as the leading fully automated solution capable of meeting the demands of increasingly complex, large-scale and global biopharmaceutical manufacturing. It also reflects the trust and strong partnerships we've built with our customers, and illustrates how customers have and will continue to adopt the Growth Direct platform. Importantly, we expect this customer to make additional purchases as they continue to expand and standardize across their network. This achievement is a testament to the outstanding work of our commercial team, and we are now focused on timely and efficient execution as our operations and service team support this global deployment. In addition to this multi-system order, broader customer engagement remains strong. Last week, we attended the annual PDA Pharmaceutical Microbiology Conference, the largest global industry event focused on microbiology and pharmaceutical manufacturing. Our key takeaways were twofold. Confirmation of the accelerating industry trend towards automation and validation from existing and prospective customers that the Growth Direct platform is the right product for modernizing pharmaceutical manufacturing and quality control. Now turning to our collaboration with MilliporeSigma. We remain closely engaged with our commercial team as they develop their global sales funnel. In the third quarter, they began to order Growth Direct Systems. Though as previously indicated, their purchase commitments will remain modest in 2025 and become more meaningful in 2026. Next week, Daiichi Sankyo will support our annual Growth Direct Day near their facility outside Munich, Germany. As you'll recall, this event will feature existing and prospective customers discussing the benefits and sharing best practices of the Growth Direct platform. And this year, we're pleased to welcome colleagues from MilliporeSigma and several of their prospective customers, making it our largest Growth Direct Day ever. In addition, later in November, our sales and marketing colleagues will work alongside the MilliporeSigma team in the Pharma Lab Congress, also taking place in Germany. This will be a valuable opportunity to jointly engage customers and further accelerate commercial momentum for both organizations. Turning to the second component of our MilliporeSigma collaboration. We are nearing completion of an initial product supply agreement. We are currently conducting material validation studies and assessing additional areas to potentially expand the scope of the agreement. This agreement is a meaningful step towards driving margin improvement as these programs are expected to lower our direct product costs and improve gross margins, with financial benefits starting in the second half of 2026. In summary, we're pleased with our execution and very encouraged by the momentum building as we exit 2025. With strong year-to-date performance across the business and initial contributions from the recent multi-system order, we are raising our full year total revenue guidance to at least $33 million, which includes at least 27 Growth Direct System placements. As we look ahead to 2026, there will be 3 core drivers of revenue growth. First, a robust pipeline. Our sales funnel remains strong with multiple customers planning multi-system global rollouts. These opportunities are similar to our recent record order motivated by a compelling ROI and a drive to standardize and automate global manufacturing networks. Second, our business model is anchored by an expanding global installed base of over 150 fully validated Growth Direct Systems, generating durable recurring revenue from consumable and service contracts. And third, our collaboration with MilliporeSigma continues to progress well. They have begun to order Growth Direct Systems, and are building a global funnel of opportunities that we expect to contribute meaningfully to system placements in 2026. In addition to these revenue growth drivers, we remain equally focused on improving profitability. Margin expansion will accelerate in 2026, driven by internal product cost reductions and manufacturing efficiency initiatives, as well as anticipated benefits from the MilliporeSigma supply collaboration. Finally, we are well positioned to capitalize on industry tailwinds, including the accelerating use of automation technology and increased investments in the onshoring of U.S. pharmaceutical manufacturing. The Growth Direct's strong customer value proposition, combined with our growing global top-tier customer base, optimally positions us for future pharma industry investment and growth. And with that, I'll turn the call over to Sean.

Thanks, Rob, and good morning, everyone. Third quarter revenue of $7.8 million increased 3% compared to the $7.6 million we reported in Q3 2024. We placed 5 Growth Direct Systems and completed 4 validations in the quarter, and now stand at 174 cumulative systems placed globally, including 152 fully validated systems. Product revenue was essentially flat at $5.2 million in Q3, with record consumable revenue offsetting the impact of 2 fewer system placements compared to Q3 2024. Service revenue was $2.6 million, an increase of 12% compared to Q3 last year, driven by higher service contract revenue resulting from an increase in the cumulative number of validated systems on a year-over-year basis. Third quarter recurring revenue, which consists of consumables and service contracts increased 32% to $4.8 million with consumables growing 40% in the period. Nonrecurring revenue, which is comprised mainly of systems and validation revenue, was $3 million. Third quarter gross margin was 9%, marking our fifth consecutive quarter of positive gross margins and a sequential improvement of over 500 basis points compared to Q2. Product margins were negative 7% in the quarter, compared to negative 1% in Q3 2024. While consumable margins improved meaningfully compared to Q3 last year as we continue to make good progress on our product cost and manufacturing efficiency initiatives, overall product margins were slightly lower due to a short-term shift in the mix of revenue from systems to consumables. On a sequential basis, Q3 product margins improved by 4 percentage points compared to Q2. Service margins were 40% in the third quarter compared to 29% in Q3 last year. The improvement was driven by higher revenue and productivity as well as lower service headcount. Total operating expenses were $12.1 million in the third quarter, representing a decrease of 5% from the $12.7 million we reported in Q3 2024, due largely to benefits from the operational efficiency program we announced in August last year. Within OpEx, R&D expenses were $3.5 million, sales and marketing expenses were $2.9 million and G&A expenses were $5.6 million. Interest income was $0.3 million and interest expense was $0.4 million in the third quarter. Net loss was $11.5 million in Q3 compared to a net loss of $11.3 million in Q3 last year. Net loss per share was $0.26, both in Q3 this year and last year. With respect to noncash expenses and capital expenditures, depreciation and amortization expenses were $0.8 million. Stock compensation expense was $1.1 million and capital expenditures were $0.1 million in the third quarter. We ended the quarter with approximately $42 million in cash and investments. Now I'll turn to our outlook. As Rob highlighted earlier, we are raising our full year 2025 revenue guidance to at least $33 million, which includes at least 27 Growth Direct System placements. This guidance reflects the initial contribution from the large multi-system customer order we recently received. We expect this order to contribute meaningfully to system placements and system revenue in Q4 with related installation and validation service revenue recognized in the first half of 2026. These new systems are also expected to begin generating consumable revenue as they ramp to routine use in the second half of 2026. Turning to consumables. We expect Q4 revenue to step down sequentially and be consistent with Q2 levels with variability driven by the timing of customer orders and shipments. With respect to service revenue, we expect to temporarily step down to roughly $2 million in Q4 due to the timing of validation activities. Specifically, most validations of recently placed systems were either completed by the end of Q3 or are planned for 2026, including the validation of systems under the multi-system order we received this quarter. We continue to expect to complete at least 18 validations in the full year 2025 with at least 3 in the fourth quarter. Turning to gross margins. We expect our gross margin percentage to be in the mid-single digits in Q4. Breaking this down, we expect positive product margins for the first time, driven by higher system placements and continued progress on our product cost reduction and manufacturing efficiency initiatives. Conversely, we expect service margins to step down both sequentially and year-over-year. This reflects lower service revenue and a challenging comparison to last year's Q4, which remains our highest service revenue quarter on record. For the full year, we expect our overall gross margin percentage to be in the mid- to high single digits. We expect further meaningful gross margin improvement in 2026, driven by our ongoing product cost reduction and manufacturing efficiency initiatives, as well as increasing volume leverage and anticipated benefits from the MilliporeSigma supply collaboration as we progress through the year. We expect operating expenses to step down from Q3 to Q4, and to now be around $48 million for the full year, with full year depreciation and amortization expense of approximately $3 million, stock compensation expense of $4 million and CapEx of $2 million. For the fourth quarter, we expect interest income of $0.5 million and interest expense of $0.6 million to largely offset each other. Finally, we continue to expect to end the year with roughly $40 million in cash and investments. That concludes my comments. So at this point, we'll open the call up for questions.

And our first question will be coming from Thomas Flaten of Lake Street Capital Markets.

Congrats on the quarter. Sean, I just want to make sure I understand. In the last call, you indicated that you would be at the low end of the 21 to 25 system placement and now you're going to be at least 27, which leads me to believe there might be more than $1 million in terms of the guidance raise. Can you just square that circle for me?

Yes. I believe there are several factors involved here, Thomas. Regarding the large multi-system order, we mentioned last quarter that we have several similar opportunities in the background that were not included in our guidance at that time. The transaction we are discussing today was not anticipated then, so it contributes positively to our outlook. However, we are facing some challenges in Q4 that affect our guidance. For instance, due to timing issues, we expect service revenue to be lower than previously projected for Q4, although this bodes well for service revenue in 2026. Overall, these factors are balancing out to result in an increase in our revenue guidance.

Got it. And then kind of at a broader level, I know the multi-system order is across 3 geographies, and you said that you're going to benefit from onshoring. I'm curious, though, if you look more broadly, the demand you're seeing from a geographical distribution, what does that look like?

Yes, Thomas, it's Rob. So it's generally consistent with where it has been. As you know, we operate in North America, Europe, and Asia. I think this most recent multi-system order is a good example and a good indication of the end market conditions we're observing. Things are not significantly stronger in one region compared to another, and it often depends on the specific company we're collaborating with. We anticipate variability quarter-to-quarter, and timing is always a factor depending on the global source of orders. However, the key takeaway from our announcement is that our value proposition is resonating. Customers are placing their trust in us for global deployment, and we're experiencing broad-based demand from our customer base for worldwide deployment. Notably, this particular win was not a result of U.S. onshoring, but we expect that to become a potential advantage in 2026 and beyond.

And our next question will be coming from Paul Knight of KeyBanc.

Rob, congratulations on securing the order this quarter. You mentioned that six units will be delivered in Q4 for this order. What is the total order size?

I didn't say total order size, nor do we say how many we're going to deliver this quarter specifically out of the order, Paul. But we're not going to disclose the exact order size, but you can think of it as a double-digit order.

Okay. The next question is regarding the analytical instruments. These instruments have become widely adopted across major biopharma companies. How many multiple orders are you currently looking at? How many customers are indicating that they need this on all three continents?

Yes, we are certainly striving for ubiquity, Paul. That is our ultimate goal. Historically, we have had customers purchase multi-system orders and deploy them globally. This recent instance of a large single order is significant, and we expect to see more of these in the future. We have several multi-system orders in our pipeline, and our plan is to continue developing and closing these deals to get our customers onboard. Additionally, we anticipate that the relationship with Merck Millipore will build on this momentum and success. This is our outlook for the next few years, certainly into 2026 and beyond.

And there's 2 aspects to Merck Millipore, right? A, you expect them to sell some units in their own channel and the other, more cost efficiencies. Where do you think you're on the cost efficiency journey with them? Are you just getting started and we really see that in '26?

Yes, I believe that's correct, Paul. This is Sean. We are currently examining the materials, as Rob mentioned. Some key components for our consumables can be sourced from Merck. However, it's important to go through testing and validation to ensure everything functions correctly and meets our performance standards. Then, we need to transition to manufacturing by managing our current inventory and shifting to the new materials. I estimate that we will start seeing benefits from this effort in the second half of next year.

And our next question will be coming from Brendan Smith of TD Cowen.

Congratulations on the performance. I wanted to understand how you perceive the current momentum in light of the existing market conditions. It's been noted that spending in the pharmaceutical and biotech sectors has been primarily directed towards instruments and services compared to other areas. While there’s still steady demand, there may be some variations. My question is whether, as companies prepare their budgets for 2026 and begin to feel more at ease with their spending, you anticipate this could lead to a significant growth opportunity similar to what we saw in the first half of next year, or if we should expect to continue seeing the steady sequential growth we've been experiencing in the upcoming quarters.

Yes, Brendan, it's Rob. I would say that we haven't seen a noticeable change. It's a bit difficult to predict at this point about 2026, although it seems to be improving slightly. As we've mentioned several times, the trend has remained fairly consistent over the past few quarters. CapEx budgets are being scrutinized more closely, and projects are undergoing greater diligence. However, compelling investments with high returns are still getting approval, and we've benefited from that. The recent announcement clearly shows that the pharmaceutical sector will continue to invest in high ROI projects. Additionally, as I've noted in previous calls, some recent projects demonstrate a strategic impact across multiple sites and have shown growth that is more resilient to budget constraints.

Got it. Yes, makes sense. And then really quickly, just maybe piggybacking off of the onshoring conversation a little bit. Is also something we get asked about quite a bit. I guess it's feeling like most people are assuming it's not going to be a huge factor in '26, but could maybe start to hit in '27. Does that kind of gel with how you're thinking about it or what you're hearing? Or should we think maybe more '28 plus? Just kind of...

I think it's unlikely that there will be a sudden influx of projects. Our experience with various construction projects, including new labs, suggests that the progress will not be uniform. Some sites are being built from scratch, while others are being expanded, which might move faster. There may be some inconsistency in the overall mix. As we mentioned previously, there could be delays due to design and architecture firms, which could affect timelines. However, we might start seeing some initial developments in 2026. In general, I believe 2027 could see more activity, and 2028 and beyond should definitely experience growth.

And our next question will be coming from Dan Arias of Stifel, Nicolaus & Company Inc.

This is Rowan on for Dan. Maybe a quick one. Regarding the large multi-system order in October, how long does it typically take to place, validate and start seeing a ramp on consumable pull-through from these systems? Just trying to get a better view on the timeline there. Or maybe just in general, as you alluded to having other, I guess, orders in the pipeline there, or potential orders in the pipeline?

Rowan, it's Sean. As we assess this particular deal, we anticipate it will proceed along a certain path. The placements are expected to significantly impact Q4. As we enter the first half of next year, we plan to have those systems installed and validated. We have a motivated customer, and we are prepared to collaborate with them during that timeframe to complete the work, which will positively influence our services during that period. In the second half of the year, we typically see validations completed, followed by the customer navigating their internal processes and starting to ramp up into GMP use. We expect to witness at least the initial stages of that in the second half of next year regarding consumable demand. This is the usual timeline we foresee. Different customers may progress at varying speeds due to factors like resources, but we feel confident about this particular case as there is strong alignment between us and the customer to follow that timeline.

Okay. And maybe just one more quickly. In the past, Rapid has alluded to wanting to penetrate adjacent markets such as personal care. How much traction are you all seeing in that market? What has become of those efforts?

Yes, thanks. It's Rob again. As we have mentioned, there are significant adjacent markets, with personal care being one of them. Our current strategy for Rapid Micro's direct sales is primarily focused on the global pharmaceutical and biopharma sectors. We aim to develop those adjacent markets like personal care and medical devices through our collaboration with Merck MilliporeSigma. These markets are large or have the potential to be large, but they tend to be a bit more fragmented and have different sales cycles. Therefore, leveraging the larger sales force that Merck MilliporeSigma has, which is more uniformly spread globally, is our approach to target these markets effectively. Our collaboration agreement facilitates and encourages this effort. Great. That seems to be the last question. Thank you all for your inquiries. We will wrap up the call now. We appreciate everyone's time and attention and look forward to speaking with many of you soon. Thank you.

And this concludes today's program. Thank you for participating. You may now disconnect.