Welcome to Twist Bioscience Fiscal 2021 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference call over to Jim Thorburn, Chief Financial Officer.

Thank you, operator. Good afternoon, everyone. I'd like to thank all of you for joining us today for the Twist Bioscience conference call to review our fiscal 2021 second quarter financial results and business progress. We did issue our financial results earlier this afternoon, which is available at our website at www.twistbioscience.com.

Thank you, Jim, and good afternoon, everyone. During the second quarter of fiscal 2021, we reported strong revenue and robust order growth with progress across all four areas of our business: synbio, NGS, biopharma, and data storage. While we remain in the middle of a pandemic and the landscape is evolving, we see customers returning to the lab after receiving vaccinations, and there is incredible excitement around new applications of synbio and genomic technologies, including drug discovery, gene editing, liquid biopsy, and minimal residual disease, or MRD. We grew revenue to $31.2 million for the quarter, an increase of 62% over the second quarter of 2020, with trends coming from both synbio and NGS across multiple industries. Notably, no single customer accounted for a significant percentage of our revenue, indicating broad and diversified strength. In addition, we reported $41.7 million in orders, an increase of 69% over the second quarter of fiscal 2020, a strong signal for the remainder of fiscal 2021. Now I'd like to dive into the details of our four business segments. Beginning with synthetic biology, we reported $12.9 million in revenue with orders coming in very strong at over $20 million for the quarter as we continue to expand our footprint in the market.

Thank you, Emily. As Emily noted, we continue to prove out the power of our platform and had another very robust quarter. Revenue for the quarter was $31.2 million, up sequentially 11% and year-over-year 62%. Orders were $41.7 million, up sequentially by 24% and year-over-year 69%. Gross margin for the second quarter was 39%. We shipped to approximately 1,700 customers in the quarter and 2,100 customers year-to-date. We concluded the quarter with cash and short-term investments of approximately $555 million. Now I'll provide more details on orders for the second quarter. NGS orders for the second quarter were $18.6 million, compared to $16.7 million in our quarter ended December 31, 2020, reflecting a 90% year-on-year growth, which reflects the increased adoption and increasing number of NGS applications. During the quarter, we also received orders from approximately 700 NGS customers, and our top 10 accounts placed orders totaling approximately $8 million.

Thank you, Jim. In conclusion, in the first half of our fiscal year, we reported almost $60 million in revenue with strong momentum heading into the second half of the year. Looking forward, for synbio, we expect continued growth and diversification of our revenue stream, continued commercial ramp for clonal ready gene friends and DNA prep, as well as production ramp for IgG. We also expect the rollout of our B2B solutions to allow us to capture specific multi-sized institutions and an ongoing preparation of the infrastructure and software platform for our factory of the future to enable strong growth in 2022 and beyond. For NGS, we expect continued revenue growth and customer ramping production, including the technical addition of near mine and continued conversion of impact queries to Twist sequencing. For biopharma, we intend to find additional partnerships and add programs, with the majority generating milestones and royalties. In addition, we will continue to advance our internal pipeline of antibodies and pursue out-licensing opportunities targeting our first out-licensing program in 2022. Finally, we will continue to drive our engineering roadmap towards our third maturization, execute on the IARPA contract, and pave the way for market adoption of this new storage medium. With that, let's open up the call for questions. Operator?

And our first question is coming from the line of Doug Schenkel with Cowen. Your line is open.

This is Eleni for Doug. I have one question on the competitive landscape, and then I will ask a follow-up question. There are a number of companies that seem to be emerging into the market with the concept of taking a more distributed model for oligos and gene synthesis. What is your view on that? And specifically, are they competitive, complementary, or neither? At a higher level, is the distributed model attractive? And how are you positioning for it?

Thank you. That's a great question. Right now, the distributed model is for markets that are adjacent to us because the quality is just not there enough to be in the market that we serve in gene synthesis and synbio. For instance, as a comparison, you can buy an oligo for $0.03 on our website, while the distributed model goes for $50 per oligo, which represents a very different product offering. Moreover, we have extremely high quality and can make oligos up to 300 base pairs, so at this point, what we see is that we don't have demand from our customers to make DNA in the lands. What we hear is that people want high quality, low price, and quick turnarounds, and we believe we're very well positioned to deliver that. At the same time, we're agnostic to the chemistry of a platform, and if there is better chemistry available, we will be delighted to deploy it on our platforms.

That's very helpful. And for my follow-up, I have a question on the guidance. Is the increase in gross margin due to a higher share of the NGS markets in Q2, or is there something else driving the upside there?

Yes. No, the increase in gross margin guidance is due to a higher share of NGS. Plus, we've increased our overall guidance from $110 million to $118 million, and up to $121 million to $129 million. So we're leveraging our fixed costs, which means it's a combination of increased revenue plus the higher NGS margins.

Our next question is coming from the line of Catherine Schulte with Bard. Your line is open.

This is Tom on for Catherine. First, I want to touch on the core academic customer. It seems like from order trends rather than activity levels have improved, but I wanted to get a sense for what you saw in the quarter. Specifically, are there any geographic dynamics to call out here, given we've heard the U.S. has sort of lagged from a recovery standpoint?

Good question. The dynamics in the quarter were interesting. January started off a little bit weaker. If we go back to January, the vaccine rollout was just starting. As the quarter progressed, we saw increasing orders, so the academic sector recovered significantly from previous trends. We had a good quarter in Asia, with revenue up by $2.7 million, nearly 3x or 2x what we saw last year. Europe also performed very strongly. We are doing well in all regions, and the products are being well received by customers. The number of customers actually increased to 1,700. So over the last year, our customer base has grown, and we've seen a steady increase in bookings, which totalled over $41 million, highlighting the strength of the portfolio. Healthcare was up, and industrial biotech was doing extremely well. It was noticeable that we continued to broaden out the platform, excluding our Ginkgo business.

Great. And as a follow-up, I appreciate the clarity on expectations around some additional biopharma partnerships. It seems like the pipeline is strong. I just want to get a sense of expectations regarding development timelines and budgets. Are those fairly consistent with any sort of COVID uncertainty at this point? Do you expect biopharma to be operating in a new normal, with budgets fairly locked in at this point?

You're asking about the spending budgets or budget for our customers?

Yes. The customer spending budgets as well as their development timelines.

In biopharma, we made a significant push in that area over the last few quarters, both with the biopharma team that is covering antibody optimization for partners. You can see that the number of partners has been growing, and the number of programs is expanding. We are doing really well in pharma. While COVID has been challenging for society, it has been beneficial for us because we conducted our own discovery program against COVID. We managed to show that not only can we target tough drug targets, but we can do it very quickly. So right now, we see the biopharma funnel as being strong, and our response to it has been more of a tailwind than a headwind.

Our next question is coming from the line of Tycho Peterson with JP Morgan. Your line is open.

This is Casey on for Tycho. Can you elaborate a little on the academic market's rebound given your earlier commentary? And how that can serve as upside to NGS numbers? I know you've raised your NGS guidance for the full year, but is there any upside there from academic recovery?

Yes. The academic sector is up by, I would say, roughly 20% in terms of orders, which is good positioning us well for the second half. However, this increase is not significant enough to materially impact NGS. Most of the academic pickup relates to synbio, although we don't break it out. The good news is we did pick up orders without seeing a major drop in academic over the last year, and it's a good early indicator of recovery there. In terms of NGS, we had a very strong first half, and we've raised our guidance, even though we are working with one supplier who is constrained in providing us with products in the short term. We feel optimistic about where we stand, with strong orders and broad customer base adoption. We believe the increasing number of large accounts working with us is continuing to grow, and we are very bullish about where we can take the business. We are, as you probably saw, increasing our investment in Portland in anticipation of strong growth in '22 and '23.

Got you. And then maybe just regarding COVID— you've mentioned previously that COVID isn't really material to the business. I'm wondering if things have changed regarding the new variants, research into variant spread, and so forth?

Yes, thank you. Regarding the variants, as you may remember, about a year ago in March, we launched our first COVID test for NGS to enable scientists to read the entire virus sequence to detect variants and understand the variations better. We anticipated a year ago that the variants would be significant. As they have emerged, we have launched new positive controls, and I think we now have more than 15 variants available on our website. On the technical side, we have tested the potency of our assays against different variants. Significantly, variants are top of mind, and we are providing tools to our customers to help in the detection and study of those variants.

Our next question is coming from the line of Vijay Kumar with Evercore. Your line is open.

Congrats on a good print here. I had three questions. Jim, the supply headwind that you mentioned, is that baked into the guidance? Asking differently, without the supply headwind, would the revenue guidance have been higher?

Vijay, I appreciate your questions. Yes, the supply headwind is accounted for in the guidance. We're working closely with the supplier and have a good relationship with them. We will provide an update on our next earnings call. We had a very strong first half, and when we're growing as rapidly as we are, we have been anticipating supply issues. We increased our inventory over the past year. We're experiencing significant increases in demand, but we are working it out. We have everything baked into the guidance, and we'll keep you updated as we resolve the situation.

Any way to quantify, Jim? I'm looking at your end-of-year guidance. You guys did about 120% growth for the first half. However, the annual guidance at the high end anticipates about 50% growth. Is that where it's impacting you on the NGS side?

Yes, the supply headwind is affecting the NGS side as well. Although we did raise guidance, we wanted to highlight that there is a headwind there. We’ll provide updates on the next earnings call, as we are actively working to resolve it.

One for you, Emily. I missed the part where you made comments on data storage, having reached an important milestone. If you could simplify where we are towards the end goal? I think you guys had to hit certain cost metrics. Where are we in that journey, and what was this update? That would be helpful.

Yes, happy to do it, Vijay. As you remember, the goal is to reach a price point of $100 per terabit. To achieve that, we need to manufacture DNA at 150-nanometer dimensions on silicon. We started at 50 microns last year, demonstrated the ability to scale down to 10 microns, and are currently working with a 1-micron chip. Let me clarify: the goal is actually to get to 150 nanometers. We've gone from 50 microns down to 10 microns and have the 1-micron chip in hand. The milestone achieved this quarter is that we successfully synthesized 200 base pair oligos on that chip. The features on this chip are 1 micron apart, and the dimension of the features is 300 nanometers. It's a significant achievement to reach this point. We believe we are producing the longest DNA on the smaller feature of silicon, placing us at the cutting edge. We're not finished with our 1-micron chip; we have a few more experiments to conduct regarding the synthesis speed, quality, and cost. But it's certainly a strong step forward. After completing the 1-micron chip, our next aim will be to design and build the subsequent chip to reach 150 nanometers. So we are not at the goal yet for $100, but this is definitely another significant step towards it.

Our next question is coming from the line of Puneet Souda with SVB Leerink. Your line is open.

First question, maybe this was briefly covered. In terms of the guidance raise, can you provide insight on the contributions? Is that primarily driven by NGS? Regarding the type of customers contributing, despite the supply headwind, where do you see liquid biopsy or other NGS applications trending?

To summarize the question: in terms of the guidance compared to last quarter's guidance, we increased from $110 million to $118 million and revised it up to $121 million to $129 million. We increased NGS guidance from approximately $54 million to $58 million and up to $63 million to $67 million. In terms of the headwinds we are experiencing, those are included in the guidance, and we're actively working through that. It's a week-to-week issue, and we'll provide updates in future earnings calls. But we are experiencing very strong growth. Although we do not break out into liquid biopsy, I would highlight that the number of large customers we're dealing with has increased again. We are currently at 170, with 65 having adopted. There are strong trends across all our businesses, and it's encouraging to see the academic segment rebound, which is up roughly 20% in orders. We believe we are well-positioned for the second half of this year. Additionally, you probably noticed we increased our CapEx for the year in anticipation of ramping up Portland next year, and we expanded our footprint in Portland as a cost-effective expansion option for the future.

That's very helpful. Regarding the assays used in liquid biopsy, do you have early indications on how you think those initial trials will head? How confident are you in getting involved in more extensive trials as they approach commercial phases? Also, regarding the biopharma front, the outsourcing trend in discovery is rising. What are your longer-term expectations in getting involved with a more significant number of trials? In the near term, do you expect any trial enrollments or perhaps entering a Phase I trial? Any updates there would be super helpful.

Yes, thank you, Puneet. Starting with the last question regarding biopharma: our funnel around biopharma is very strong. It's clear that there is substantial interest in what we offer for discovery and optimization because our antibodies are human-derived and even optimized from day one. However, we do not have a clear timeline for when the first swift antibody will enter the clinic because our partner is responsible for managing that timeline. It’s just a matter of time until this antibody progresses to the clinic, but to clarify, our partners will be handling that work. On the liquid biopsy front, we are indeed involved with several liquid biopsy products. We can only publicly discuss GRAIL since they mentioned using Twist exclusively. We cannot disclose other customers that have not publicly shared. We have historically performed very well in competitive bake-offs and can observe that our revenues have consistently increased quarter after quarter. Those liquid companies rely on us for sourcing DNA to validate their products and evaluate their assays as they prepare for commercial launches. Thus, we feel quite positive about the long-term prospects for our LGT NGS pipeline.

I'm not showing any further questions at this time. I would now like to turn the call back over to Emily Leproust for any closing remarks.

Thank you very much, operator. We've had a very strong first half of our fiscal year, with momentum moving into the remainder of the year. We see that our products are resonating with our customers. Our addressable markets continue to expand, and we have a team in place to drive innovation. We hold ourselves accountable to execute aggressively as we move forward and look forward to sharing our progress with you in the months ahead. Thank you very much for your time today.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.