Alpha Teknova, Inc. Q4 FY2025 Earnings Call

Good day, and welcome to Teknova's Fourth Quarter and Full Year 2025 Financial Results Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Ms. Jennifer Henry, Senior Vice President of Marketing. Please go ahead.

Thank you, operator. Welcome to Teknova's Fourth Quarter and Full Year 2025 Earnings Conference Call. With me on today's call are Stephen Gunstream, Teknova's President and Chief Executive Officer; and Matthew 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 of 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 to Teknova's website and at www.sec.gov/edgar. Non-GAAP financial measures should always be considered only as a supplement 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 fourth quarter and full year 2025 earnings call. 2025 was another year of strong all-around execution for Teknova. Our top line revenue growth accelerated to 7% compared to 2024 despite a challenging macro environment. Revenue from sales of our catalog products led the way, growing by low double digits compared to 2024. The number of customers actively buying our clinical products increased to 60, 25% more than during 2024. We set new standards for customer service levels, delivering approximately 95% of our products on time in 2025. And we beat both our gross margin and adjusted EBITDA targets while utilizing only $10 million of cash, substantially better than our free cash outflow guidance of $12 million. Now as we look to 2026, I want to discuss why I believe Teknova has reached an inflection point in the growth strategy we articulated during our initial public offering back in June of 2021. First, we have become a critical supplier of GMP-grade reagents to developers of emerging therapies and diagnostics. Second, we deliver research-grade reagents to a large, diverse, predictable and growing set of customers. And third, with the revenue growth we anticipate, Teknova will offer an attractive financial profile of 60% to 65% gross margins and 25% to 30% adjusted EBITDA margins. Starting with our GMP-grade reagents. As I noted earlier, we are a critical supplier to 60 clinical customers, 50 of which are biopharma related. We believe we are now supporting at least 70 therapies from these 50 customers. Notably, we are increasing both the total number of therapies and the number of later-stage therapies we support as many of these therapies move closer to commercialization. We believe that at the end of 2025, we supported 5 therapies in Phase II or later and 12 in Phase I, up from 3 and 10, respectively, at the end of 2024. We now believe that we will be supporting at least one commercial therapy by the end of 2027. The remaining 10 of our Clinical Solutions customers are primarily within the life science tools and diagnostics market segment. We supply these customers with everything from private label proprietary reagents for use in bioprocessing workflows to GMP-grade ready-to-use sample isolation and preparation reagents for use in cancer screening applications. We believe that similar to the therapies we support directly, these customers will scale their use of our products significantly as the diagnostics or therapies they're supporting or developing receive FDA approval. Now shifting to our research-grade reagents. Over the last 30 years, we have built a diverse and predictable business that has grown on average in the low double digits. This growth is attributable to our ability to provide a wide breadth of high-quality critical reagents for the entire life science community, combined with our ability to consistently achieve best-in-class turnaround times. This is why we have attracted over 3,000 customers while maintaining an overall 95% annual customer retention rate and a low customer concentration with only 18% of our total revenue coming from the top 10 Lab Essentials customers in 2025. As we look forward, we plan to build on these strengths by streamlining order to purchase experiences and expand further into private label manufacturing, particularly in the life science tools and diagnostics market segment. Already, many of our larger customers utilize Teknova to manufacture their proprietary formulations or direct inclusion in their kits or to produce bulk reagents for in-house manufacturing of their kits. We believe this capability will allow us to further penetrate high-growth market segments like sequencing, spatial genomics, and cancer screening. Finally, we will generate significant operating leverage in our P&L as our revenue increases. That's because the investments we've already made in our facilities, IT infrastructure and automated processes and equipment will enable the company to generate more than $200 million in revenue with limited additional operating and capital expenditures. As a result, we believe that incremental revenue will continue to drop to the bottom line at a rate of approximately 70%. Considering our current cost structure and anticipated revenue growth this year and next, we, therefore, expect to become adjusted EBITDA positive by the end of 2027. Now let's talk about some possible catalysts for our business over the next 12 to 18 months. Given that we have begun to see investments in our growth strategy pay off as well as some market stabilization in life science tools, diagnostics, and bioprocessing, we have decided to invest further in our commercial capabilities and activities, focusing on select market segments where we feel we have a differentiated product offering. Although relatively modest at approximately $2 million per year, we believe these investments will allow us to accelerate revenue growth towards the end of 2026 and into 2027 by expanding our presence with customers in these attractive market segments. We are excited to turn our primary focus back to investing in the business and away from cost-cutting. In addition, there has been an uptick in reported biotech funding in Q4 2025 and early in Q1 2026. Based on historical data, we see approximately a 4-quarter lag between funding changes and their effects on our revenue. Therefore, if the increases in biotech funding continue, we would expect to see growth in biopharma-related revenue beginning in Q4 2026. Aside from funding, we also believe that some of the therapies and diagnostics we support may receive FDA approval in 2027, which we believe would result in an increase in the frequency and volume of purchases of our products. Lastly, as we have mentioned previously, we believe there is an opportunity to expand our product portfolio through collaborations and acquisitions. While we have spent recent years investing in infrastructure systems and scalability, numerous other companies have focused on developing novel products and technologies. By acquiring or collaborating closely with these companies, we believe we can expand our product portfolio and geographic footprint. The combination of our operational and commercial scale with our potential collaborators, novel products and technologies creates a great opportunity to drive additional top-line growth and margin expansion over the longer term. All things considered, we believe we are well positioned to drive sustainable above-market revenue growth of 20% to 25% over the longer term and deliver long-term value for our shareholders. I will now hand the call over to Matthew to talk through the financials.

Thanks, Stephen, and good afternoon, everyone. I'm pleased with our financial performance in 2025. As Stephen mentioned, we finished the year with momentum, delivering 8% and 7% year-over-year revenue growth in the fourth quarter and full year of 2025, respectively. This marks our sixth straight quarter of revenue growth, and we significantly improved free cash outflow from $13.5 million in the full year 2024 to $9.8 million for the full year 2025. Total revenue for the fourth quarter 2025 was $10.0 million, an 8% increase from $9.3 million for the fourth quarter 2024 and $40.5 million for the full year 2025, a 7% increase from $37.7 million for the full year 2024. Lab Essentials products are targeted at the research use only or RUO market and include both catalog and custom products. In 2025, approximately 75% of Lab Essentials revenue was derived from catalog products and 25% from custom products. Lab Essentials revenue was $6.8 million in the fourth quarter of both 2025 and 2024 as the increase in the number of customers in 2025 was largely offset by lower average revenue per customer. For the full year, Lab Essentials revenue was $31.0 million in 2025, up 7% compared to $28.9 million in 2024. The increase in Lab Essentials revenue for the full year 2025 was attributable to an 11% increase in the number of customers, partially offset by a 3% decrease in average revenue per customer. 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. In 2025, approximately 90% of Clinical Solutions revenue was derived from custom products and 10% from catalog products. Clinical Solutions revenue was $2.7 million in the fourth quarter 2025, a 47% increase from $1.9 million in the fourth quarter of 2024. The increase in Clinical Solutions revenue in the fourth quarter 2025 was attributable to an increased number of customers, partially offset by lower average revenue per customer. For the full year, Clinical Solutions revenue was $7.7 million in 2025, an 8% increase from $7.1 million in 2024. We added Clinical Solutions customers in 2025, growing from 48 customers in 2024 to 60 that spend more than $5,000 annually. Average revenue per customer decreased 14% in 2025 to $128,000. We expect revenue per customer to increase over time when a subset of these customers ramp up their purchase volumes as they move through clinical trial phases. However, this metric can be affected by the addition of newer clinical solutions or GMP catalog customers who typically order less. Just as a reminder, due to larger average order size in Clinical Solutions compared to Lab Essentials, there can be more quarter-to-quarter revenue lumpiness in this category. On to the income statement. Gross profit for the fourth quarter of 2025 was $3.2 million compared to $2.1 million in the fourth quarter 2024 and $13.4 million for the full year 2025 compared to $7.2 million for the full year 2024. Gross margin was 32.5% in the fourth quarter 2025, which is up from 23.0% in the fourth quarter 2024 and 33.2% for the full year 2025, which is up from 19.2% for the full year 2024. The increase in gross profit percentage in the fourth quarter 2025 was primarily driven by higher Clinical Solutions revenue and manufacturing efficiency gains. The increase in gross profit percentage for the full year 2025 was primarily driven by the $2.8 million nonrecurring and noncash charges in 2024 related to the disposal of expired inventory and write-down of excess inventory. Excluding these nonrecurring and noncash charges, gross profit and gross margin would have been $10.0 million and 26.5%, respectively, in 2024. The improvement in gross margin from 26.5% to 33.2% was driven primarily by higher revenue and manufacturing efficiency gains. Operating expenses for the fourth quarter 2025 were $7.9 million and for the fourth quarter 2024 were $7.8 million. Excluding the nonrecurring charges of $0.5 million in the fourth quarter of 2025 related to nonrecurring transaction expenses, operating expenses were down $0.4 million. The decrease was driven by an overall net reduction in general and administrative spending, somewhat offset by increased investment in our sales and marketing efforts. Operating expenses for 2025 were $30.4 million compared to $33.4 million in 2024. Excluding nonrecurring charges of $0.5 million in 2025 and $1.4 million in 2024, operating expenses decreased $2.1 million. The decrease was driven by reduced headcount and spending primarily on facility costs, insurance, freight and professional fees as well as by lower stock-based compensation expense due to one-time costs incurred in connection with the stock option repricing that occurred in 2024. At the end of the fourth quarter 2025, we had 158 associates compared to 173 a year prior. Net loss for the fourth quarter 2025 was $4.8 million or $0.09 per diluted share compared to a net loss of $5.7 million or $0.11 per diluted share for the fourth quarter of 2024. Net loss for the full year 2025 was $17.3 million or $0.32 per diluted share compared to a net loss of $26.7 million or $0.57 per diluted share for the full year 2024. Adjusted EBITDA, a non-GAAP measure, was negative $1.8 million for the fourth quarter of 2025 compared to negative $3.2 million for the fourth quarter of 2024. Adjusted EBITDA for the full year 2025 was negative $6.7 million compared to negative $14.5 million for the full year 2024. Excluding the $2.8 million inventory charge, adjusted EBITDA would have been negative $11.7 million for the full year 2024. On to cash flow and balance sheet. Capital expenditures for the fourth quarter 2025 were $0.3 million compared to $0.6 million for the fourth quarter 2024. Capital expenditures for the full year 2025 and 2024 were both $1.1 million. Free cash flow, a non-GAAP measure, which we define as cash provided by or used in operating activities, less purchases of property, plant and equipment, was negative $0.8 million for the fourth quarter 2025 compared to negative $1.5 million for the fourth quarter 2024. Free cash flow for the full year 2025 was negative $9.8 million compared to $13.5 million for the full year 2024. This decrease compared to prior periods for both the quarter and the full year was primarily due to lower cash used in operating activities. As of December 31, 2025, we had $21.3 million in cash, cash equivalents and short-term investments and $13.2 million in gross debt. Turning to our 2026 guidance and outlook. We are providing 2026 total revenue guidance of $42 million to $44 million. At the midpoint, this implies approximately 6% revenue growth compared to 2025. Over the last several quarters, other than in biotech, we saw strength from life science tools, diagnostics and other end markets that we serve. While we saw an uptick in the amount of capital raised in the biotech industry in the fourth quarter 2025, we are looking for evidence that this can be sustained for longer before becoming more bullish on a recovery in this sector. Customer conversations about 2026 orders are encouraging, but we have yet to see a material change in the number of larger orders from our Clinical Solutions customers, which are critical to faster growth. As we have indicated before, due to the high percentage of fixed costs associated with our operations, we estimate that each additional dollar of revenue drops through at a marginal cash rate of approximately 70% with some variability quarter-to-quarter in reported results due to GAAP accounting. We expect to see gross margin in the mid-30s percentage range in 2026 compared to 33% in 2025 based on the midpoint of our revenue guidance. The company posted operating expenses, excluding nonrecurring charges, below $8 million for the seventh quarter in a row. After two years of significant cost-cutting, we have successfully maintained our cost structure since early 2024 and are now in a position again to make prudent investments for growth. Now that we see early signs of a market recovery in biotech specifically, we have decided to increase our investment in sales and marketing by approximately $2 million in 2026. Our expectation is that this investment will pay off as soon as the end of 2026, but more likely in 2027 in the form of double-digit revenue growth rates. At this higher spending level, we expect to become adjusted EBITDA positive in the range of $52 million to $57 million in annualized revenue. If customer end markets are stronger in 2027 and our stepped-up commercial activity bears fruit as expected, then we should report a positive adjusted EBITDA quarter by the end of 2027. The company saw a reduction in free cash outflow during the fourth quarter of 2025, both sequentially and versus prior year. This is the lowest quarterly free cash outflow in nearly five years when we began our transformation. Once again, the company is pleased to report that free cash outflow for the full year 2025 of $9.8 million was below our guidance of less than $12 million. As we turn to 2026, the company expects free cash outflow to be less than $10 million due to the increased investment in our commercial capabilities. In conclusion, we are excited about the future and the company's competitive positioning in a market with attractive fundamentals. We believe our decision to shift our posture towards investment should drive faster growth and in the medium to long term and with it also significant margin expansion. With that, I will turn the call back to Stephen.

Thanks, Matt. Overall, we were very pleased with our fourth quarter and full year 2025 performance and the progress we made against our strategic priorities. 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 the line of Brendan Smith with TD Cowen. I wanted to ask a bit more about some of the emerging segments you mentioned that could be notable growth drivers in the coming quarters like sequencing, spatial genomics, cancer screening. Can you expound just a bit on how some of that $2 million in additional investments into commercial capabilities could realistically index to some of those markets and maybe just your general outreach strategy to really tap into whatever you see as the best entry point for Teknova?

Sure. Thanks, Brendan. Yes, this is part of the reason we're doing the commercial investment. In the last year or so, we've seen some increased sales from those particular customers. And without significant commercial investment, we've been able to expand wallet share. Most of these are already somewhat a customer of ours. So we see this pretty exciting. From a commercial investment, part of the investment goes to bringing in a couple of people in the field that have great relationships with these customers, have worked with them in the past and can give us a little bit more focus on that. And another part is really around building the branding and awareness towards those customers so that they think of us first. And we're doing quite a bit more private labeling for these customers as well. And so the fact that we're already in a lot of their discovery and development is a natural segue for us to have these conversations about much larger volumes and orders and do some private labeling. So we're pretty excited about it.

Got it. And maybe if I could, just a quick kind of high-level follow-up to your commentary on the 4-quarter lag from biopharma funding changes. I guess, would you expect any particular revenue segments within your business to maybe feel some of that faster than others and potentially pull forward if things continue to look good? I'm just mostly wondering what you think the likely possibilities for potential upside to guidance this year could be.

Yes, absolutely, Brendan. I mean the one segment that's the most affected by the biotech funding is what we call our custom biopharma. It's custom products, whether they're research or clinical solutions products, that are custom-made for the biopharma industry. This has historically represented about 25% of our revenue. When we saw biotech funding go up significantly in the 2020, 2021 time frame, we were able to track that particular segment to be about a 4-quarter lag on the way up, maybe a little bit faster, 3 to 4 quarters on the way down. And so that's the segment that would probably have the most impact. We might see it a little bit earlier depending on which of the actual accounts that were in with loss of wallet share go up and get funding first. So there's a chance there's something going to be looking at it. And of course, there's been a lot of work over the last couple of years of just preparing for a moment where people can raise money again. And I do think that they're going to be eager to spend it. But at this point in time, as Matt said, it's not built into the plan for 2026. So we're going to keep our eye on it.

One moment for our next question. And that will come from the line of Matt Larew with William Blair.

This is Jacob Krahenbuhl speaking on behalf of Matt. I want to follow up on the points you recently discussed, particularly focusing on the adjusted EBITDA target you set for 2027. You mentioned aiming for positive adjusted EBITDA by the end of that year. I recall you previously indicated a requirement of being in the $50 million to $55 million annual revenue range, which now appears to be adjusted to $52 million to $57 million. This change likely reflects the additional $2 million in operational expenses you plan to incur each year, which is understandable. However, this still implies that, based on the midpoint of your guidance this year, you anticipate significant revenue growth in the high 20% range by 2027. I would appreciate it if you could elaborate on what you're observing in the end markets that has prompted a more cautious outlook for this year compared to 2027, and what developments you are looking for in those markets—beyond merely an increase in spending from your biopharma customers—that might bring some of that optimism forward into 2026 instead of waiting until 2027.

Yes, I can take that one, Stephen, and you can add anything I missed. We feel positive about our goal of being EBITDA positive by the end of 2027. To clarify, this means we need to achieve around $13 million to $14 million in quarterly revenue by the end of next year, which we feel good about. We are excited about our investments and believe they will yield results based on our past experiences. While the timing of seeing benefits is uncertain and depends partly on the industry's recovery and our ability to penetrate new accounts, we are encouraged by the biotech fundraising we observed in Q4. The early part of 2026 appears to be moving in a positive direction, and we hope for sustained momentum throughout 2026, which would positively affect 2027. Our optimism for 2027 is increasing, and there are potential upsides for 2026 if our efforts yield faster results or if the market continues strong capital raising activities. Overall, we expect 2027 to be another robust year as we aim to reach our goals by then. Stephen, did I miss anything?

Yes. To put it simply, at the midpoint of our guidance, we're discussing approximately $10 million to $11 million in revenue each quarter. As Matt mentioned, reaching $13 million per quarter is achievable through various avenues. We have therapies nearing commercialization, diagnostic advancements approaching the market, support from biotech funding, and our own commercial investments. We genuinely believe we're close to our targets. However, timing poses a significant challenge for us, and we want to ensure that we actually see revenue before making commitments on guidance.

Great. I wanted to ask about your transition from RUO to GMP customers. You mentioned that you're supporting 60 clinical customers by the end of 2025. Could you help us understand the average expected revenue increase per customer as they move through each phase of the trial? Additionally, could you confirm the number of therapies you mentioned that you're supporting in Phase II and beyond? I may have missed that detail, so a recap would be helpful.

We are currently supporting 50 clinical customers, which are those who have made purchases exceeding $5,000 over the past year, specifically throughout 2025. Some companies have not succeeded, so this reflects actual purchases for 2025. In terms of therapies, we are supporting over 70 therapies, including 5 that are at Phase II or later and 12 in Phase I. The transition from a Phase I therapy to a commercialized therapy results in approximately a 30-fold increase in spending. The increase from a late-stage Phase II or Phase III therapy to commercial is about tenfold. Therefore, the scaling of purchases can be understood as 1x to 3x to 30x, indicating significant growth in purchase volumes, provided we are backing a commercialized therapy.

One moment for our next question, and that will come from the line of Matt Hewitt with Craig-Hallum.

And this might kind of tie into that last response, but with the average revenue per customer down this year, but that's a function of adding new customers. When you look back historically, is there an average time frame before you start to see those ramp up? Or is it completely customer dependent and the therapies that they're working on and maybe other things that you really can't tie out and say, boy, it should take about 12 months before we see them go from a low volume to a higher volume?

Yes, it's somewhat dependent on the therapies. There are a few factors that are affecting the average revenue per customer. We're looking at the therapies purchased, and the average is calculated per customer, which means some customers are using multiple therapies. This can create some inconsistencies. Generally, early-stage customers tend to invest heavily during the preclinical phase. As we introduce more therapies at that stage, the average revenue may decrease. However, as they progress through the clinical pipeline, the spending typically increases significantly, especially in Phase II where costs can reach hundreds of thousands per therapy. The timing of these developments is very much linked to the specific therapy. The clinical trials can take 7 to 10 years from start to finish, but we are excited about making progress towards completion. Each therapy has unique milestones, and we have a roadmap for these, which is why we anticipate supporting one by the end of 2027, and possibly more. Ultimately, the timing for approvals and the different therapies will influence these outcomes. We're confident we're moving closer to that point, while also expanding our overall pipeline. As these therapies transition into the commercial phase, we should see the average revenue increase.

That makes sense. Over the past year, the FDA and other agencies have released either draft guidance or more formal guidelines. It appears the government is aiming to reduce the drug development timeline from the historically lengthy 10-plus years to something significantly shorter, utilizing AI and modeling on the front end or potentially eliminating the need for Phase III confirmatory studies if the appropriate data is available. How will this reduction in time frame impact your model, if at all? Is there anything you can do to ensure you are positioned early in what could ultimately be a shorter development process?

Yes, Matt, the shorter the time frame, the greater the impact on the business. As they move into commercialization, there's significantly more spending involved, which could provide a strong boost for the business overall. Many candidates are already in Phase II or Phase III, often because they are classified as breakthrough therapies or rare diseases. It's encouraging to see this progress. We are fortunate that many of our clients are already utilizing our services in the early stages due to our ability to quickly produce small batches of custom formulations. There aren't many suppliers that can do that while remaining compliant and scaling through commercialization. Therefore, we believe we hold a strong position in this specific area. If the FDA permits shorter time frames, we could see benefits over time.

One moment for our next question, and that will come from the line of Matthew Parisi with KeyBanc Capital Markets.

This is Matthew Parisi on for Paul Knight at KeyBanc. Congrats on the quarter. Just a quick question around cell and gene customers. What was the total number of cell and gene customers for 2025?

Good question, Matthew. I want to make sure I don't misquote this, but this is one we can get to you afterwards, and we'll put it out with a separate deck, I believe, unless Matt, you know at the top of your head.

I would like to mention that in 2025, 24% of our total revenue came from customers related to cell and gene therapy. This figure is quite similar to what we had in 2024. I hope this information is useful.

Thank you. That is all the time that we have for question and answers as well as today's conference call. This concludes today's program. Thank you all for participating. You may now disconnect.