Alpha Teknova, Inc. Q1 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to Teknova's First Quarter 2024 Financial Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jennifer Henry, Senior Vice President of Marketing. Please go ahead.

Thank you, operator. Welcome to Teknova's First Quarter 2024 Earnings Conference Call. With me on today's call are Stephen Gunstream, Teknova's President and Chief Executive Officer; and Matt Lowell, Teknova's Chief Financial Officer, who will make prepared remarks and then take your questions. As a reminder, the forward-looking statements that we make during this call, including those regarding business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning these risk factors is included in the press release the company issued earlier today, and they are more fully described in the company's various filings with the SEC. Today's comments reflect the company's current views, which could change as a result of new information, future events, or other factors, and the company does not obligate or commit itself to update its forward-looking statements, except as required by law. The company's management believes that, in addition to GAAP results, non-GAAP financial measures can provide meaningful insight when evaluating the company's financial performance and the effectiveness of its business strategies. We will therefore use non-GAAP financial measures for certain of our results during this call. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this afternoon, which is posted on both Teknova's and the SEC's website. Non-GAAP financial measures should always be considered only as a supplement to, and not as a substitute for or as superior to, financial measures prepared in accordance with GAAP. The non-GAAP financial measures in this presentation may differ from similarly named non-GAAP financial measures used by other companies. Please also be advised that the company has posted a supplemental slide deck to accompany today's prepared remarks. It can be accessed on the Investor Relations section of Teknova's website and on today's webcast. And now, I will turn the call over to Stephen.

Thank you, Jen. Good afternoon, and thank you, everyone, for joining us for our first quarter 2024 earnings call. Teknova is a leading producer of critical reagents for the life sciences industry that accelerate the introduction of novel therapies, vaccines, and molecular diagnostics that will help people live longer, healthier lives. We manufacture high-quality custom agents with short turnaround times, and we can scale with our customers as they advance their products from discovery to commercialization. We had a strong start to 2024 with revenue, adjusted EBITDA, and cash outflow in line with our expectations. From a revenue perspective, we saw sequential improvement of $1.4 million or 18% versus the fourth quarter of 2023 and growth over the prior year of 2% overall with 7% growth specifically in Clinical Solutions. We were also encouraged that our first quarter 2024 revenue was driven by a diverse set of customers with no direct customer representing more than 10% of revenue. Our Clinical Solutions customer count continues to increase, providing a positive indicator for the long-term as these customers migrate their therapies towards commercialization. All told, we remain confident in our $35 million to $38 million full-year revenue guidance for 2024. In addition to the solid performance on our top line, we are executing ahead of plan from a cost management perspective. Matt will provide more details on our operating and capital expenditures, but at a high level, we've already started seeing the benefits from our cost control efforts within the first quarter of 2024. Our first quarter adjusted EBITDA was a $2.3 million improvement over the prior year, a quarter with similar top-line revenue, and we expect to meet or beat our cash outflow guidance of $18 million for the full year. Operationally, we are executing well. Our new facility is now regularly generating revenue with more than 4x the work orders completed in the first quarter compared to the fourth quarter of 2023. The combination of our new state-of-the-art facility, quality management system, and purpose-built processes and equipment are enabling customers to receive custom research or clinical-grade reagents in weeks instead of months. As an example, in January, we onboarded a new customer that needed a large number of different custom reagents delivered in a single-use bag. We were able to deliver nearly 20 custom buffers in less than 6 weeks from when the customer placed the order. We believe this rapid turnaround time, particularly for first-time orders, is substantially faster than other suppliers in the market. Most importantly, we allowed our customer to keep its clinical trials on schedule. This quarter also proved to be successful concerning the launch of new products and capabilities. First, at the Annual Meeting of the American Society of Gene & Cell Therapy last week, we launched our latest product in our AAV-Tek solutions, the AAV-Tek AAV Stabilizer. This proprietary formulation protects the capsid throughout the AAV downstream filtration and purification processes. After testing multiple serotypes, we have shown up to a 50% increase in AAV titer yields when using the stabilizing reagent. We also launched Build-Tek, a first-of-its-kind custom configurator providing access to high-quality customizable buffers with exceptionally short turnaround times and no minimum order quantities. Our custom configurator is easy to use, and by leveraging our modular manufacturing platform, Build-Tek products ship in a matter of days. We believe this will enable the customization of multiple iterative buffers needed during early-stage research and design of experiments. Ultimately, this allows process development scientists to focus on advancing science instead of spending their time mixing buffers. Finally, I'd like to take a moment to provide my view on how the market is evolving. I believe we are seeing a stabilization in what has been a very challenging biotech environment over the past couple of years. Recent biotech funding improvements, combined with our own positive leading indicators such as increased engagement and quoting with customers previously focused on preserving capital, support a more optimistic outlook going forward. Given that we typically see about a 4-quarter lag between changes in industry funding levels and revenue recognition, we think these indicators point towards a more positive market environment in early 2025. In summary, we had a strong start to the year. We are excited about the progress we have made over the past couple of years and believe we are in a position for long-term success. I will now hand the call over to Matt to talk through the financials.

Thanks, Stephen. Good afternoon, everyone. Results for the first quarter of 2024 from a revenue perspective were similar to the first quarter of the prior year, but an 18% increase sequentially. Overall, we delivered solid financial results for the first quarter 2024. Total revenue for the first quarter of 2024 was $9.3 million, a 2% increase from $9.1 million for the first quarter of 2023. Lab Essentials products are targeted at the Research Use Only or RUO market and include both catalog and custom products. Lab Essentials' revenue was $7.3 million in each of the first quarters of 2024 and 2023. Lab Essentials' revenue was consistent as the slight increase in the number of customers was offset by a slight decline in average revenue per customer. Notably, we have seen a modest increase in the number of Lab Essentials customers compared to the fourth quarter of 2023. Clinical Solutions products are made according to Good Manufacturing Practices or GMP quality standards and are primarily used by our customers as components or inputs in the development and manufacture of diagnostic and therapeutic products. Clinical Solutions revenue was $1.7 million in the first quarter of 2024, a 7% increase from $1.6 million in the first quarter of 2023. The increase in Clinical Solutions revenue was attributable to an increased number of customers, partially offset by a lower average revenue per customer. Notably, here too, we've seen an increase in the number of Clinical Solutions customers compared to the fourth quarter of 2023. We expect revenue per customer to increase over time as customers ramp up their purchase volumes. However, this metric can be affected by the mix of newer clinical customers who typically order less. Just as a reminder, due to the larger average orders in Clinical Solutions compared to Lab Essentials, there can be quarter-to-quarter revenue lumpiness in this category. Gross profit for the first quarter of 2024 was $2.2 million compared to $2.4 million in the first quarter of 2023. Gross margin was 23.8% in the first quarter of 2024, which is down from 26.6% in the first quarter of 2023. The decrease in gross profit percentage was primarily driven by increased overhead costs, largely depreciation expense following the completion of our new manufacturing facility in mid-2023, partially offset by reduced headcount. Operating expenses for the first quarter of 2024 were $10.2 million compared to $11.4 million for the first quarter of 2023. Excluding the non-recurring charges recorded in the first quarter of 2024 and 2023 of $1.3 million and $0.7 million, respectively, each related to a reduction in workforce, operating expenses were down $1.7 million. The decrease was driven primarily by reduced headcount and spending, in particular in professional fees, despite $0.5 million in one-time non-cash expense related to option repricing in the first quarter 2024. Net loss for the first quarter of 2024 was $8.1 million or $0.20 per diluted share compared to a net loss of $8.8 million or $0.31 per diluted share for the first quarter of 2023. Adjusted EBITDA, a non-GAAP measure, was negative $3.8 million for the first quarter of 2024 compared to negative $6.1 million for the first quarter of 2023. Capital expenditures for the first quarter of 2024 were $0.1 million compared to $4.3 million for the first quarter of 2023. This marks the seventh straight quarter of sequential decreases in capital expenditures. Free cash flow, a non-GAAP measure, which we define as cash used in operating activities plus purchases of property, plant, and equipment, was negative $6.7 million for the first quarter of 2024, compared to negative $12 million for the first quarter of 2023. This decrease compared to the prior quarter was due to lower cash used in operating activities and significantly reduced capital expenditures. Turning to the balance sheet. As of March 31, 2024, we had $21.6 million in cash and cash equivalents and $12.1 million in gross debt. Turning to our 2024 guidance and outlook. We are reiterating 2024 total revenue guidance of $35 million to $38 million. At the midpoint, this implies a revenue forecast that is approximately flat compared to 2023. With respect to product categories, we continue to expect approximately 10% growth in Lab Essentials revenue, with the remainder coming from Clinical Solutions revenue. The company continues to manage expenses aggressively while preserving the critical investments we believe will allow us to achieve our long-term growth targets. The company posted operating expenses, excluding non-recurring charges below $10 million for the fourth quarter in a row and stood at $8.9 million for the first quarter of 2024, despite absorbing $0.5 million in one-time non-cash expense related to the option repricing. This trend continues to reflect steps we've taken to reduce operating expenses. In total, the savings generated by the most recent reduction in force and other associated cost-saving measures are expected to reach approximately $8 million on an annualized basis by the second quarter of 2024 when compared to the fourth quarter of 2023. We finished the first quarter of 2024 with 174 associates, down 31% from the year-ago quarter. While the company saw an increase in free cash outflow compared to the fourth quarter of 2024, this is consistent with the company's expectations for the year and is higher due to certain larger payments only occurring during the first quarter. We anticipate lower average quarterly free cash outflows for the remainder of the year. As such, the company continues to expect free cash outflow of less than $18 million for the full year 2024. With that, I will turn the call back to Stephen.

Thanks, Matt. Overall, we were pleased with our performance in the first quarter of 2024. We believe the long-term outlook for our end markets remains positive, and we are committed to executing on our strategy to help our customers accelerate the introduction of novel therapies, diagnostics, and other products that improve human health. We will now take your questions.

Our first question will come from Jacob Johnson with Stephens.

Congrats on the quarter. Stephen or Matt, I guess, just on the Clinical Solutions in the quarter, really strong. Stephen, I heard you say no real customer concentration in the quarter, but then I heard Matt say, 'Hey, it's a lumpy business.' If we kind of run rate this 1Q clinical number, it's probably trending a bit better than the full year. So maybe just anything you'd call out in the quarter or any thoughts about kind of the outlook for Clinical Solutions as the rest of the year plays out?

Thanks, Jacob. Yes, I would say it is a variable business. We're looking at $1.7 million per quarter, and some of these orders can exceed $0.5 million. So it's challenging to view this as a consistent run rate. I think we would like to see another couple of quarters pass to gain confidence in the full year. However, as I mentioned earlier, we do not have a very large customer, but we did have one in last year's second quarter, which we will likely discuss next quarter. I just wanted to emphasize that it's encouraging that we have a diverse array of customers coming in.

Got it. And then maybe just as a follow-up, just on the Build-Tek Solutions offering. If I'm kind of reading this correctly, it seems like this allows customers to kind of go online and customize a product online. I'm just curious about that kind of strategy of them kind of tinkering it with themselves versus maybe coming to you to work with you directly on this, and maybe tinkering with it online can lead to them coming to you further. But I'm just kind of curious about the digital component of that versus maybe other custom solutions you've done and the strategy behind that.

Absolutely. It's very complementary to our previous work. As a custom reagent manufacturer, we have a quick turnaround time. Customers can approach us with a formulation, and we frequently receive buffer formulations that we can get into production within a week. Currently, our on-time delivery for these custom buffer formulations is 6 to 14 days, and we meet that deadline 95% of the time. However, many of our customers face a challenge when conducting experiments or designing experiments because our minimum order size is 8. This means they need to order 8 of the same buffer before scaling up. Over time, we've observed that customers appreciate this option once they have refined their work to 2 or 3 sets. In the early discovery phases, they often want to adjust parameters like pH or salt concentration. Consequently, they tend to make those buffers in-house in 1-liter formats. Over the past 6 months, we've focused on creating 1-liter custom formats that can be shipped within 1 to 2 days. The combination of a low or no minimum order quantity and fast shipping allows us to take on their lab efforts, so they can concentrate on other tasks. We believe this is significant for two reasons. First, this market has not been effectively addressed from a commercial or supplier standpoint due to the complexities associated with rapidly producing custom buffers. We recognize that it represents a substantial market opportunity. Currently, our offering is somewhat limited, but we plan to expand it over time. The second exciting aspect is that this marks an important step for us, which will evolve as we scale. The complexity involved in customizing orders online, pricing them, integrating them into our ERP, processing them on the production floor, and then shipping within 1 to 2 days sets a new industry standard, in our view. We are enthusiastic about this development. It is not a cannibalization strategy but rather a complement to our existing services. We will now have access to conversations and opportunities that weren't available to us before.

Got it. That's really helpful context. I'll leave it there.

Our next question comes from the line of Steven Mah with TD Cowen.

Great. Congrats on the quarter. Maybe just a follow-up to Jacob's question on Build-Tek. Are there existing companies that are doing something similar? Or are you building out this market de novo?

I think we are the only ones that have offered anything like this. There are many researchers who spend a lot of time in the lab, mixing concentrates or weighing their own powders to do exactly what we're going to provide. They do this because the minimum order sizes are too large and the turnaround time is too long. That's why we're pretty excited about it.

I understand. Thank you for providing a range of representative prices for the liter bottles. Can you discuss the early stage demand for Build-Tek, considering the significant 40% to 50% cost increase? Additionally, what is the return on equity for using Build-Tek? Is the main advantage that it allows optimization without needing to place bulk orders? Are the time and cost savings the key benefits? Please help me understand this better.

Yes, absolutely. So, first, on the demand side, we launched this last week. So, we're still very much in the early stages. We are at the ASGCT last week and had a banner up and we had a number of people come by and take pictures. And then, quite honestly, they're pretty blown away that we could do this so quickly. And it does feel like one of those moments for some of them that have kind of said, 'Hey, this is true innovation. This is very exciting. I can now get 10 or 20 buffers in a couple of days instead of a couple of weeks with us doing it in-house.' And then you, of course, have the people that are stuck at making the buffers and they're very excited to not have to make the buffers anymore. And there's a big difference here, right? You're making them in a lab versus in a clean room in an ISO-5 environment. We have standardized QC tests that are USB standards versus them actually measuring the pH and conductivity and things like that on their own. And so, from their perspective, it's very much a question of time and effort versus outsourcing it to us to do. And I think they recognize the quality and they certainly recognize the speed, especially in these larger experiments, let's say, you're trying to purify a protein or a viral particle or something like that, where just a small change in pH or a small change in salt or an additive that you put in there can actually mean the difference between higher or low yield or higher or low purity. So I think it's one of these things where it's a behavior change. So it may take a little bit of time to sort of build out and really convert the number of customers over. But certainly, we already are receiving some orders, and people are pretty excited about it.

Okay. Appreciate it. The color is helpful. And then maybe one for Matt on the gross margin. Stephen mentioned that the new order is going through the facility, I think you mentioned it was 4x versus last quarter. But can you help us out with how we should think about the gross margin improvements as more products go through the facility, and you're amortizing more of the fixed cost of the facility?

Yes. Thanks for the question, Steve. Yes, the gross margin leverage is a real thing, and I think we're showing it here, even with this modest improvement quarter-over-quarter sequentially. As we've mentioned before, our costs at this point are largely fixed, particularly in the production area. So, as we grow in revenue, we're expecting to see on the order of 70% or so of that incremental revenue drop through to gross profit. So more comparing to the last quarter rather than the year-ago quarter is a little better in this case. You can see we were 17%, 18% in the last couple of quarters. We've been able to show some increased revenue and that's already picking up and flowing through to gross margin more or less as expected. So, I think as we continue to grow the top line, you'll see that kind of leverage, that 70% or so drop through to revenue, and that's what we're looking to do as the year progresses.

Okay. Got it. So the gross margin improvements, from your perspective are, as you're tracking?

Yes. Yes, absolutely.

Okay. All right, great. That's all for me. Appreciate it.

Our next question comes from the line of Matt Larew with William Blair.

Stephen, you referenced sort of an external leading indicator in improved biotech funding, which, as you've alluded to, will take some time to play out. In terms of internal leading indicators, wanted to ask maybe about 2. One would be, maybe the number of customers you've had in to qualify or audit to take a look at the new facility, if that activity has picked up. And then maybe just the other would be, you referenced increasing sequential number of customers in the businesses. I'm just curious, maybe if that's a mix of old customers, of new customers? Would you be curious for any comments on that as well?

Thank you, Matt. Regarding the customers qualifying for the new facility, we aren't disclosing the exact number at this point, but we've already seen several customers this year. We cleared a significant backlog last year and are now scheduled out through the fall, while still managing to fit in additional clients. Overall, I'm pleased with our progress, especially since we're consistently generating work orders in the facility. On the second part of your question, which I find particularly interesting, we've seen an increase in customers, both in Clinical Solutions and Lab Essentials. We keep a close eye on the Clinical Solutions metric, and despite the lower average revenue per customer, that number has been steadily rising for over six quarters. This is a very positive development. I mentioned during the call that several customers who made substantial purchases in 2022 have been in conservation mode throughout 2023, buying very little or nothing at all. However, these customers are now reaching out to discuss other opportunities as they begin to scale up again, which I view as a positive sign. The timing of when these orders will come in and when we recognize them is currently uncertain, so we prefer not to rely on it until we actually receive the orders and start production.

Okay. We are making progress on profitability and cash usage, with capital expenditure down for seven consecutive quarters. As we look ahead throughout this year and possibly beyond, could you remind us of the current capacity from a revenue perspective and when we might expect maintenance capital expenditures to begin? Additionally, I believe Stephen mentioned 125 new reagents in the presentation, so are there any further investments or general and administrative support needed to enhance that effort?

I'll begin with the question about capital expenditures. We have indeed experienced significant decreases in capital expenditures over the past two years, which was largely anticipated. Currently, they are virtually at zero, and while I don't expect this to remain the case for long, we're focused on investing only where it's truly necessary. We've already made considerable investments, so there isn't much incentive to add more at the moment. There are certain upcoming areas where we anticipate an increase in capital expenditures, particularly for maintenance or small growth investments related to our internal capabilities, especially concerning facilities. In terms of new capabilities and investments, there will be some necessary investments in digital infrastructure and other areas that will require funding. However, I don't foresee a substantial rise in capital expenditures from the current level, as we aim to maintain it. I think we're operating in the range of about $2 million per year, which may vary based on the projects we're undertaking. I believe that's a reasonable assumption for a more typical level than what we're currently experiencing. If I haven't fully addressed your question or if there's more to discuss, please let me know.

That was the main one. Thanks, Matt.

Our next question comes from the line of Mark Massaro with BTIG.

This is Vivian on for Mark. I'll maybe just keep it to one. So I know you guys talked about the lag time for biotech ordering. As far as the 3 cell and gene therapy customers entering Phase III clinical trials later this year, I think you called out in Q4. Just curious if you have any early ordering patterns or early conversations that are noteworthy there.

Yes. We won't provide specifics about those customers, but they remain on track, and we've begun working with one from a production standpoint. Everything is unfolding as we outlined at the start of the year, and we continue to discuss their needs for commercial success, which is likely targeted for late 2025 or 2026.

Excellent. Understood, I'll leave it there.

Thank you. This concludes our Q&A portion. This concludes the conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.