Earnings Call Transcript - TKNO Q3 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Teknova Third Quarter 2025 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, Senior Vice President of Marketing, Jennifer Henry. Please go ahead.

Jennifer Henry, Senior Vice President of Marketing

Thank you, operator. Welcome to Teknova's Third Quarter 2025 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 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 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. And now I will turn the call over to Stephen.

Stephen Gunstream, President and Chief Executive Officer

Thank you, Jen. Good afternoon, and thank you, everyone, for joining us for our third quarter 2025 earnings call. We were encouraged by our third quarter results. Revenue increased by 9% compared to the same period last year, making it the fifth consecutive quarter of year-over-year growth. That growth was driven by strength in sales of our Lab Essentials products, revenue from which grew 16%. We also executed extremely well operationally. I'm pleased with the progress we have made to prepare Teknova for long-term sustainable above-market growth. Through investments we've made in distributor management, purchasing integration and price optimization, we have succeeded once again in growing revenue double digits in catalog products, which represents the majority of our Lab Essentials revenue compared to the same period last year. We have also increased and diversified our Clinical Solutions customer base, which we believe will translate to significant revenue growth as these therapies and diagnostics move towards commercialization in the next 2 to 3 years. Operationally, we continue to execute extremely well. Key projects to drive operating efficiency and reduce costs such as moving to electronic batch records, automating high-throughput dispensing lines and adding larger batch size capabilities are on track and expected to be operational in 2026. We are already seeing the results from previous investments through improved operational metrics such as on-time delivery, which allow us to further differentiate Teknova from other reagent suppliers in the marketplace. The progress made operationally over the past couple of years has given us more confidence in our ability to scale Teknova to more than $200 million in annualized revenue without significant additional capital investments. We also remain active in pursuing potential tuck-in acquisitions and collaborations to bolster our capabilities, reduce our time to profitability and accelerate top line growth. Now I'd like to turn my attention to the broader market. As a reminder, we do not have material exposure to the geopolitical environment given that our sales are predominantly in the United States. Only about $1 million annually of our raw materials we estimate are imported and less than 4% of 2024 revenue was directly attributable to government research institutes and academic institutions. Nonetheless, we do have exposure to changes in biotech funding levels because approximately 25% of our total revenue is derived from purchases of custom products by biopharma customers, most of which are supporting therapies in preclinical or early-stage clinical trials. While the value of catalog products purchased by customers in this segment remains steady and growing in 2025, we have seen continued delays in larger purchases of custom products. Though we observed a sequential uptick in biotech funding in the third quarter, unless we see sustained improvement in the biotech funding environment or advancement through clinical trials of the therapies we already support, we expect only modest improvement in this end market in 2026. Fortunately, the other 75% of our revenue from sales of catalog products and custom products across all other market segments has grown in the low double digits for the year-to-date period, and we are seeing an uptick in demand for custom reagents in these other segments of the market, such as animal health, life science tools and diagnostics. Taken together, we remain very confident in our strategy and are optimistic for the long term. First, we have a foundational business that is predictable and growing that can support the company until the biopharma market returns to historical growth rates. Second, we have demonstrated our ability to execute operationally and commercially. And finally, we continue to attract and onboard new Clinical Solutions customers, which we believe, in combination with our Lab Essentials products will allow us to achieve a sustainable 20% to 25% top line growth as therapies and diagnostics migrate from research to commercialization. I will now hand the call over to Matt to talk through the financials.

Matthew Lowell, Chief Financial Officer

Thanks, Stephen, and good afternoon, everyone. Overall, we delivered great financial results for the third quarter of 2025. As Stephen noted, revenue was $10.5 million, a 9% increase from $9.6 million in the third quarter of 2024. Once again, strong sales from the catalog portion of our Lab Essentials products drove our revenue growth in the quarter. Lab Essentials products are targeted at the research use only or RUO market and include both catalog and custom products. Lab Essentials revenue was $8.3 million in the third quarter of 2025, a 16% increase from $7.2 million in the third quarter of 2024. The increase in Lab Essentials revenue was attributable to higher average revenue per customer and to a lesser extent, a larger number of customers. 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 third quarter of 2025, a 13% decrease from $2.0 million in the third quarter of 2024. The decrease in Clinical Solutions revenue was attributable to lower average revenue per customer, partially offset by an increased number of customers. We expect revenue per customer to increase over time as a subset of these customers ramp up their purchase volumes as they move through the phases of clinical trials. 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 the 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 income statement highlights. Gross profit for the third quarter of 2025 was $3.2 million compared to $0.1 million in the third quarter of 2024. Gross margin for the third quarter of 2025 was 30.7%, which is up from 0.9% in the third quarter of 2024. The increase was primarily driven by $2.8 million of nonrecurring and noncash charges during the third quarter of 2024 related to the disposal of expired inventory and write-down of excess inventory. Excluding those nonrecurring and noncash charges, the gross profit would have been $2.9 million and gross margin would have been 29.8%, respectively, in the third quarter of 2024. The improvement in gross margin from 29.8% to 30.7% was driven primarily by higher revenue. Operating expenses for the third quarter of 2025 were $7.2 million compared to $7.5 million for the third quarter of 2024. The decrease was driven by an overall net reduction in general and administrative spending. At the end of the third quarter of 2025, we had 161 total associates compared to 165 a year earlier. Net loss for the third quarter of 2025 was $4.3 million or negative $0.08 per diluted share compared to a net loss of $7.6 million or negative $0.15 per diluted share for the third quarter of 2024. Adjusted EBITDA, a non-GAAP measure, was negative $1.6 million for the third quarter of 2025 compared to negative $2.2 million for the third quarter of 2024, excluding the impact of the $2.8 million charge related to inventory. Now for cash flow and balance sheet highlights. Capital expenditures for the third quarter of 2025 were $0.4 million compared to $0.3 million in the third quarter of 2024. Free cash outflow, a non-GAAP measure, which we report as cash used in operating activities plus purchases of property, plant and equipment was $2.4 million for the third quarter of 2025, which was the same as the third quarter of 2024. Turning to the balance sheet. As of September 30, 2025, we had $22.1 million in cash, cash equivalents and short-term investments and $13.2 million in total borrowings. Now for our outlook. We are reiterating 2025 total revenue guidance of $39 million to $42 million. Based on persistent softness in demand for our Clinical Solutions products from biopharma customers, in particular, we now expect to finish slightly below the midpoint of that range. Revenue from sales of our catalog products, which represents the majority of our Lab Essentials and a small portion of Clinical Solutions revenue was up at a mid-teens growth rate in the third quarter of 2025 as spending on discovery work continues to be robust in certain pockets of the market. On the other hand, growth was minimal from custom products, which represents a modest portion of Lab Essentials and the large majority of Clinical Solutions revenue as the macro environment remains favorable for early-stage small to midsized biopharma customers and for their clinical work in particular. As we look ahead to next year, we expect modest growth in custom biopharma products, representing about 25% of our total revenue and low double-digit growth in the remaining 75% of total revenue, which is not as impacted by the weak biotech funding environment. Gross margin was up over the prior year quarter and down sequentially. As we explained at the time, during the second quarter, several cost categories that normally fluctuate skewed favorably, whereas this quarter, the effect was more balanced. Our gross margins are very sensitive to the effect of these fluctuations due to the size of our business. We still believe that over longer periods of time, approximately 70% of incremental revenue will flow through to gross profit. Our gross margin target for fiscal year 2025 remains in the low 30s. Although we ended the third quarter below target spending levels, partly due to timing considerations, we continue to expect operating expenses of at least $8 million in the fourth quarter, allowing us to moderately increase our investment in sales and marketing compared to last year, positioning ourselves for the market's broader recovery. At these spending levels, we continue to believe we will become adjusted EBITDA positive in the range of $50 million to $55 million in annualized revenue. The company continues to expect free cash outflow of less than $12 million for the full year 2025. As we have communicated previously, based on reasonable assumptions about future growth and spending plus current liquidity, we believe that we do not need to raise additional capital to execute on our organic growth strategy. With that, I will turn the call back to Stephen.

Stephen Gunstream, President and Chief Executive Officer

Thanks, Matt. We believe the long-term outlook for our end markets remains positive, and we are committed to helping our customers accelerate the introduction of novel therapies, diagnostics and other products that improve human health. We will now take your questions.

Operator, Operator

The first question comes from the line of Steven Etoch of Stephens Inc.

Steven Etoch, Analyst

Maybe just to start, just given the recent rhetoric around MFN pharma tariffs and just the subsequent announcements around onshoring capacity and pharma production, how have customer conversations trended thus far into the second half of this year?

Stephen Gunstream, President and Chief Executive Officer

Yes. Thanks, Mac. So I would say we like the idea of these leading indicators, whether it's biotech funding or the MFN results, but we're not yet seeing the impact from the customers. So I think there's optimism across the board, but the actual actions of maybe purchasing more ramping up purchases, we have not yet seen, which is why we've been here before, and we want to make sure that we're cautious and seeing that when these things start to happen, if they're sustained for an extended period of time, we believe it will impact the sort of the emerging therapy side. At this point in time, I would say we're seeing some nice growth in the large pharma. We're actually seeing some nice growth in some of the emerging therapeutic companies that have been purchased by larger companies, but those that are still constrained by capital are operating in a way that they're rationalizing the pipeline or slowing things down at the moment. So at this point in time, Mac, there's been pretty limited conversations about ramp-up there.

Steven Etoch, Analyst

Okay. Fair enough. I'd also like to get a little bit of an update on the RUO+ initiative. It's been, call it, a little over a year since that's been put into place. Is there any update on how the efforts are trending there?

Stephen Gunstream, President and Chief Executive Officer

Yes. It's an important part of our portfolio, and it filled a really nice gap for us and that we put a lot of effort and investment into this new facility. We have a lot of customers that want to use the new facility but are not quite ready for GMP, and it's a great landing spot for them, where they can get their products made in the facility. They get a lot more flexibility in their formulations. They get sort of improved quality that is very similar to GMP, but not quite all the way to GMP at a price that's not the exact same as GMP, right? So for us, it allows us to get a little bit of a price premium for using that facility, but not actually committing them to some more controls around the changes they want to make and get their products to them sooner. So this is a really nice landing spot. We're seeing customers come in there. Those will sit in that Lab Essentials business because it's part of their research use only. And the goal there is obviously to migrate them to GMP, and we see a lot of customers actually sitting in that pathway right now.

Operator, Operator

Our next call comes from the line of Brendan Smith of TD Cowen.

Brendan Smith, Analyst

I appreciate all the color on actually the funding environment impact or potential impact into next year. Actually, just wondering if you could maybe give really any more color there on actually the expected product mix that could kind of come in some of these different scenarios that might help drive that compensation you're talking about the possibility of a more protracted biotech slowdown. I guess really just wondering if there are any specific products within that custom portfolio that you're seeing particular interest in and what maybe your expectations are for those into next year?

Stephen Gunstream, President and Chief Executive Officer

Yes. So Brendan, if you're asking about like what type of product mix we typically sell into the custom biopharma, is that correct? And how we see that changing over time?

Brendan Smith, Analyst

Yes, more specifically like into next year, if you're confident that the rev mix that you're seeing now could kind of compensate for any potentially protracted biotech funding slowdown, just kind of wondering if there are specific products within there that you're kind of seeing special interest into next year that could help drive that.

Stephen Gunstream, President and Chief Executive Officer

Yes, I believe you are asking about the potential for continued conservation of capital in the biotech environment, particularly in emerging markets over the next 6 to 12 months. We are fortunate that 75% of our business is growing in double digits, and this growth is consistent across all market segments and our three main product lines: agar plates, cell culture media, and buffers. We are excited about this aspect of our business and our strong performance. We are also noticing an increase in interest in our tools and diagnostics, where we provide various products for both discovery and custom clinical trials. Currently, we have a growing number of clinical customers and are experiencing predictable baseline growth in the double digits. This level of growth is similar to what we experienced between 2009 and 2019 when the business grew by 12%. We feel confident in our position to advance our therapeutic strategy and are focusing on bringing in more customers in other market segments.

Operator, Operator

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

Matthew Larew, Analyst

Matt, your comments on 2026, if you've got 75% of revenue growing low double digits and modest growth of 25%, that seems to suggest something around 10% as a starting point. So I guess, is that math right? And then on the Clinical Solutions side, you've called out a couple of times this year the growth in the number of customers. I know that's a metric you update annually, but maybe just if you can help us how that is tracking new customer acquisition relative to perhaps years past and your own expectations this year.

Matthew Lowell, Chief Financial Officer

Yes. Thank you, Matt. It's a bit early to make precise comments about 2026, and we'll definitely address that in our next call when we discuss year-end earnings. However, I wanted to share some high-level insights on our current perspective. You're correct that we've focused on two aspects of the business: the 25% related to custom biopharma and the remaining 75%. As Stephen mentioned, the market environment has been fairly stable over the last few quarters in the custom biopharma, also known as bioprocessing. We haven't observed any strong indicators suggesting a change in the near future, but we plan to update that perspective each quarter, and we should have more data by the time of our next call. On the other hand, as Stephen pointed out, the rest of the business is performing very well, and we don't anticipate changes in that area soon. It's beneficial to have this diversity in our portfolio as these two segments are currently behaving differently. Generally, that's the outlook we have at the moment. Regarding the Clinical Solutions business, we've been adding customers and will provide an update on those numbers at year-end. We're seeing an increase in larger customers, although the composition might differ among end markets, as Stephen noted, particularly between life sciences and tools versus biopharma. Regardless, we're pleased to welcome these customers, which have significant revenue potential moving forward. Overall, things are looking promising, and while there may be some shifts in the mix, we'll see how the year concludes.

Stephen Gunstream, President and Chief Executive Officer

Yes. I'd just add, Matt, that on that particular thing, when we talk about increasing, I think it's particularly a positive statement that we're increasing despite companies that we supported last year are really no longer in existence in many ways, right? So we have to overcome that barrier and then add new ones. So I feel like the team is executing really well there. Of course, there's always more we can do. And at the end of the year, we'll give you guys a better update on that.

Matthew Larew, Analyst

Within kind of the new modality world, cell and gene therapy, there's been, I'd call like a, kind of a grab bag of clinical updates throughout the year, some quite positive, particularly in some recent gene therapy indications, some perhaps more negative. And obviously, we're now a bit a year or so into some of the fast-track efforts, whether it's Fast Track or RMAT, whatever it might be. Just within your customer group, what's your exposure like to those various type subgroups? And do you have customers that have an opportunity to participate in these programs? And how has that affected either their demand or how they're working with you?

Stephen Gunstream, President and Chief Executive Officer

Yes. It's been a mixed bag for us, where some have performed well and engaged in various programs, while others have faced significant constraints recently. By the end of 2024, we reported having 48 clinical customers, with 39 in biopharma. Out of those 39 biopharma customers, 23 were focused on cell and gene therapy. This illustrates our exposure at that time. While I don't think there have been drastic changes since then, there are some later-stage projects that are progressing as planned. Some of these have been acquired by new entities that are now managing and executing them. Additionally, there are others that are more sensitive, particularly in the mRNA and certain gene therapy areas, which have experienced both positive and negative developments over the past year. As a company, our expertise lies in producing custom small batches of reagents not specifically linked to any one therapeutic area, allowing us to engage across the entire market.

Matthew Larew, Analyst

Just the last one for me. Gross margins year-to-date are up about 600 basis points, and that's despite Clinical Solutions being flattish, slightly down year-to-date, so largely scale driven. You referenced, Matt, a number of, I guess, both completed in process and planned projects to continue to improve efficiency. I know scale is a big piece. Is that kind of the right gross margin improvement trajectory to think about? Or are some of the projects you referenced more or less impactful in terms of go forward?

Matthew Lowell, Chief Financial Officer

Thank you for bringing up those initiatives, Matt. We are focused on a variety of completed and ongoing projects for next year. I believe that a key factor influencing our margin performance over several quarters, not just one, is our cost structure characterized by high fixed costs and low variable costs. We have previously mentioned that approximately 70% of incremental revenue contributes to our margins. While some projects may slightly alter this ratio, the overall trend is expected to remain strong. It's important to note that, even though there may be fluctuations from quarter to quarter related to that 70%, this figure is most applicable when discussing cash flow—where about 70% of cash translates directly. Accounting for inventory and production can lead to some variations, as we have seen in this and the previous quarter, but fundamentally, our high fixed cost structure will enable us to maintain strong performance heading into next year, aligned with our anticipated growth.

Operator, Operator

Our next question comes from the line of Tollef Kohrman with Craig-Hallum.

Tollef Kohrman, Analyst

You talked about process improvements taking effect in '26. Are there any other areas you're looking to drive more efficiencies?

Stephen Gunstream, President and Chief Executive Officer

Yes, absolutely. This has been a recurring theme for us. Over the past five years, we've identified many inefficient processes and implemented the necessary IT infrastructure to effectively monitor and address these areas. Our focus is on enhancing efficiencies. There are various types of efficiencies to consider; on the operational side, we can examine labor and direct labor savings. Importantly, if we can increase output without increasing fixed costs, that significantly benefits our bottom line and enables us to maintain our workforce while growing revenue. As noted, we had 161 employees at the end of Q3, and at one point, we had over 300 employees with similar revenue levels. We've made immense progress in improving efficiency and will continue to do so moving forward. Efficiency isn't just limited to operations; it's vital for all supporting functions as well. We're heavily investing in IT infrastructure and optimizing processes based on metrics, which also extends to our commercial strategies. It’s a guiding principle for us. While it would take quite a while to cover all the specifics, it’s evident that we are concentrating on two main objectives: driving revenue growth as we guide customers through the therapeutic pipeline, and continuously optimizing our processes across all areas, including operations, commercial, and HR.

Operator, Operator

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

Vidyun Bais, Analyst

This is Vivian on for Mark. I'll actually just keep it to one. So I think you touched on briefly maybe some incremental spend on the sales force, just trying to get ahead of a recovery in funding. Could you just remind us where your sales force sits today and kind of at what levels you might feel rightsized?

Stephen Gunstream, President and Chief Executive Officer

Yes. We often discuss the number of people we have in the field, but we view it more broadly as a commercial organization. We're referring to modest increases since the start of the year, possibly just a few additional employees here and there. However, many of these changes are focused on process improvements aimed at driving efficiency. Over the next year, you can expect an overall increase of fewer than 10 employees for the entire commercial organization, which includes customer support, marketing, and field sales.

Operator, Operator

I'm showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.