Earnings Call Transcript - TWST Q2 2023

Operator, Operator

Good morning, everyone, and welcome to Twist Bioscience's Fiscal 2023 Second Quarter Financial Results Conference Call. I will now hand it over to Angela Bitting, Senior Vice President, Corporate Affairs and EGS Officer. Please proceed.

Angela Bitting, SVP, Corporate Affairs

Thank you, operator. Good morning, everyone. I'd like to thank all of you for joining us today for Twist Bioscience's conference call to review our fiscal 2023 second quarter financial results and business progress. We issued our financial results release this morning, which is available at our website at www.twistbioscience.com. With me on today's call are Dr. Emily Leproust, CEO and Co-Founder of Twist; and Jim Thorburn, CFO of Twist. Emily will begin with a review of our recent progress on Twist businesses. Jim will report on our financial and operational performance and then Emily will come back to discuss our upcoming milestones and direction. We will then open the call for questions. We would ask that you limit your questions to a maximum of two and then requeue as a courtesy to others on the call. As a reminder, this call is being recorded. The audio portion will be archived in the Investors section of our website and will be available for two weeks. During today's presentation, we will make forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results in financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in our press release we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements except as required by law. We'll also discuss financial measures that do not conform with generally accepted accounting principles, including adjusted EBITDA. Information may be calculated differently than similar non-GAAP data presented by other companies. When reported a reconciliation between GAAP and non-GAAP financial measures will be included in our earnings documents which can be found on our Investor Relations website at www.twistbioscience.com. With that, I'll now turn the call over to our Chief Executive Officer and Co-Founder, Dr. Emily Leproust.

Emily Leproust, CEO

Thank you, Angela. And good morning, everyone. This is a busy time for Twist. I'm very pleased with our performance for the first half of the fiscal year; in Q2 we delivered our first quarter of $50 million in revenue. In addition, this morning we announced that we have taken strategic actions to accelerate our path to profitability. I am happy to share that we expect to achieve a quarterly run rate that is adjusted EBITDA breakeven for both the core and biopharma businesses as we exit the September 2024 quarter in about 16 months. Today, I will focus on three main things. First, our confidence in our near-term revenue growth. Second, our decisive actions designed to achieve adjusted EBITDA breakeven in the near term. And third, the drivers of growth in all businesses moving forward. Beginning with top line growth for our revenue-generating businesses, I am pleased to share our very strong results for the second quarter of fiscal 2023, with reported record revenue of $60.2 million exceeding our guidance of $56.5 million. Strength in the core business, particularly NGS, drove the beat; orders came in at $64.2 million indicating solid growth moving into the second half of our fiscal year. During the quarter, we began commercial shipments from our Wilsonville, Oregon facility, the Factory of the Future, which we believe will deliver manufacturing efficiencies leading to margin improvement going forward. We continue to see increasing enthusiasm for our Gene Fragments, Oligo Pools, and elaborate products with our consistent rapid turnaround times driving that demand. I'd like to note that this is for our standout speed genes. We are not yet taking orders for fast genes, which we expect to launch in the fall with premium pricing. We continue to take market share from our peers and remain far ahead of emerging players because of our consistent turnaround time, together with our perfect way genes at a scale and price unavailable elsewhere, which continues to resonate with our customers. Our reliable products and exceptional customer service has been key to creating loyalty with our customers, which then facilitates reorders and quarter-over-quarter revenue growth. In addition, our customer surveys continually state that we are their preferred provider because ordering is easy and we overdeliver on turnaround time. For NGS, we see customers advancing development of their tests and also gaining traction within the market. Our NGS revenue significantly leans on the commercial ramp of our customer base. And while there can be quarter-to-quarter lumpiness, we have confidence that revenue will grow year-over-year. The point to remember is our business is sticky. We grow with our customer and our customer base continues to expand. In Biopharma, we began integrating the Boston team at the end of the calendar year, following the contractual limitations of the acquisition. We continue to see opportunities ahead, particularly as we now have an integrated team and portfolio of services. What is true is that the funding environment for emerging biotech companies has been constrained; our share of the buyers' market services market is small and largely untapped by our commercial team. That said, we are facing some internal headwinds as we touched on systems and integrated commercial territories. We've made changes to address these challenges and expect the revenue lift to come within six months. We continue to sign collaborations and agreements with customers and we're expanding our wallet share with existing partners. As an example, when we had those agreements with Astellas in April, our third collaboration with the pharmaceutical company. We do expect fewer milestone royalties for corporations as we move forward as we are now prioritizing near-term top-line revenue growth. Our commercial team for SynBio, NGS, and Biopharma is now firing on all cylinders, and we are seeing large opportunities ahead. I will now move from top line to operating expenses and our significant actions to accelerate our path to profitability. As you know, the Factory of the Future outside of Portland, Oregon is now shipping products to customers. In fact, all of our genes, gene fragments, and the vast majority of Oligo Pools have been made in Oregon for more than a month. To accelerate our top line to reach profitability, we conducted a comprehensive review to re-engineer our code base and achieved these goals more quickly. We have made difficult decisions resizing many teams throughout the organization, which will result in the elimination of approximately 270 positions to operate more efficiently while still continuing to support our high growth for these areas. It is difficult to say goodbye to the many talented and committed Twisters that have been integral to our success to date. We wish them well. We will support them as they identify the next opportunity, and we look forward to where they will achieve as they bring their experience from Twist to the larger ecosystem. To provide a bit more color on the shape of the organization moving forward, the sales force will remain largely intact to drive top-line growth. We remove the duplication of SynBio production across South San Francisco and Portland, significantly lowering our fixed cost structure. In addition, we resize the Biopharma team's focus on revenue-generating partnerships, reprioritizing the majority of our internal assets. Throughout the organization, we streamlined teams including R&D to focus on programs where Twist has a clear competitive advantage and to selectively deploy our platform in areas where we see the greatest potential for long-term value creation. In data storage, we remain integrally involved in market development and continue to advance our technology. We do not see any near-term competitor close to a commercial launch at this time, and that's significant. It enables us to substantially reduce our operating expenses for data storage while continuing our effort at the moment’s level, yet still remains ahead of the competition. We will focus our efforts on the storage-as-a-service business model and plan to delay the distributed on-premise approach until after the service business has proven to be a success. We expect to demonstrate an end-to-end gigabyte Century Archive service by calendar 2023. Following on this in early calendar year of 2025, we expect to launch a terabyte Century Archive solution. With that said, we believe we will deliver on all of this while reducing the overall cash flow. Moving into our future growth, we've seen many opportunities ahead. As we look forward, the planned launch of fast genes in SynBio this fall will target the $1.4 billion DNA makers market. These are scientists and researchers in large pharmaceutical companies in academia that currently make their own DNA instead of buying it, as they need it faster and more cost-effectively than we believe we can deliver from literally any close today. This is one area that we are confident will increase our SynBio contribution margin, as we believe we'll be able to command a premium price that leverages dynamic pricing for rapidly delivering this product. Additionally, we do not expect to add commercial headcount to pursue this large market, as we believe our e-commerce portal and digital marketing capabilities enable us to acquire customers cost-effectively. For NGS, our customers continue to increase, particularly in the oncology space. We have several large commercial customers and a growing mid-tier group of development-stage customers with the potential for compounding growth. In both instances, Twist is poised to grow with them. We continue to be included in more and more assets, and we believe the growth of our NGS opportunity will be sustainable for the foreseeable future. In the near term, we plan to add RNA workflow tools to our NGS portfolio. Scientists often run RNA assays multiple times for the same sample as RNA translates at different time points in different tissues in both normal and disease states, providing a large market opportunity that complements our DNA workflow tools. RNA workflows are just primarily within the research market, an area where we have a significantly smaller footprint to date but believe we can grow and extend. We expect to launch several RNA tools in the near future. In Biopharma, we continue to see opportunities for our competitively priced higher-value services even also with the integration of the offerings. We are focused on selling services that drive top-line revenue while we digest the resizing of the organization. The largest shift would be away from R&D on our internal assets until we see some of them zooming out, licensing antibody leads, where we have done the most work. For data storage, the very large opportunity remains within our sights, because we're not seeing direct competitors at this time and we are slowing our investment. Therefore, we revised our commercial plans while we advance at a more modest rate using our first model as our best-in-class competitive advantage. With that, I turn it over to Jim.

James Thorburn, CFO

Thank you, Emily. We had another strong quarter at Twist despite the uncertain macroeconomic landscape. Our revenue for the second quarter was $60.2 million, reflecting a year-over-year growth of about 25% and a sequential rise of 11%. We received $64.2 million in orders during the quarter, marking a 17% year-over-year increase, and our gross margin was 30.8%. We served around 2,100 customers compared to the same quarter last year and ended the quarter with cash and investments totaling approximately $388 million. Our NGS revenue stood at $29 million for the quarter, which represents a 26% year-over-year growth. As mentioned in our prior earnings call, some larger customers postponed shipments from December to January. Our second-quarter orders amounted to $28 million, showing a sequential drop of 10% but a 19% increase year-over-year. Revenue growth in NGS is tied to the increase in our customer tests, which can lead to fluctuations in quarter-to-quarter revenues. The top 10 customers represented about 38% of NGS revenue, and we supported approximately 600 NGS customers in the second fiscal quarter. Our pipeline for larger opportunities continues to expand; we are now monitoring 270 accounts, up from 264 in our last earnings call, with 131 adopting Twist compared to 130 last quarter. Now, regarding SynBio, which encompasses genes, DNA preps, IGG libraries, and Oligo Pools, revenue increased to $24.1 million, a sequential growth of 11% and a year-over-year rise of about 31%. Orders for the quarter were $30.9 million, reflecting a 16% sequential increase and 31% year-over-year growth. Highlights include shipping to roughly 1,600 SynBio customers, up from about 1,400 in the second quarter last year. Our customer base primarily consists of biotech and large pharmaceutical companies. Gene revenue grew to $18 million, corresponding to a year-over-year increase of nearly 27%. We shipped around 152,000 genes in the second fiscal quarter, representing a 23% year-over-year increase. Oligo Pools also had a strong quarter with revenue of $3.3 million, mainly driven by demand from healthcare sectors. Regarding Biopharma, we saw revenues of $7 million in the second quarter, down from $8.2 million sequentially; orders were $5.3 million, down from $6.9 million in the first quarter, primarily due to integration challenges. We ended the quarter with 93 active programs and added three more milestone and royalty agreements, bringing the total to 66, up from 63. Now, let's discuss our revenue breakdown by industry and regional performance. Healthcare revenues for the second quarter stood at $33.8 million compared to $24.1 million last year. Industrial chemical revenue reached $14.4 million in the second quarter versus $14.1 million a year ago. Academic revenue was $11.1 million this quarter, increasing from $9.5 million in the same period last fiscal year. EMEA revenue grew to $18.8 million in Q2 from $15.2 million the previous year. APAC saw recovery in China with revenue increasing to about $2 million from $1.4 million in the prior quarter. Overall, APAC revenue rose to $6.5 million compared to $4.5 million for the same period last year. In the U.S., revenue, including Americas, climbed to $34.9 million in Q2 from $28.5 million last year. Our gross margin for the second quarter was 30.8%, with cost of revenue amounting to $41.7 million. The change in gross margin was anticipated as cost of revenue increased sequentially from $29.4 million, mainly due to about $5 million related to the commercialization of SynBio Labs and the Factory of the Future, as well as around $1 million in scrap associated with the factory. Our operational expenses for the fiscal quarter—encompassing R&D, SG&A, changes in fair value, and mark-to-market adjustments—totaled $80.1 million compared to $79.2 million last fiscal year. Breaking it down, R&D expenses for the second quarter were $27.4 million, down from $31.2 million last year due to the conclusion of a project that included DNA storage R&D spending of $5 million and biopharma R&D spending of $4.7 million. SG&A for this quarter was approximately $54 million, including $6 million for pre-commercialization costs related to the Factory of the Future. Several labs are still in pre-commercial phases and will transition to COGS as they qualify in the latter part of fiscal '23. Stock-based compensation for the quarter was about $10 million. Depreciation and amortization amounted to $7.1 million, increasing from $5.8 million in the last quarter due to the factory's commercialization. CapEx cash investments in Q2 were approximately $9 million, bringing total CapEx cash spend for the first six months of the fiscal year to $21 million. As emphasized earlier, the Factory of the Future is launching successfully; we experienced strong operational performance and continued year-over-year growth in our SynBio and NGS businesses. Our goal is to achieve adjusted EBITDA breakeven and eventual profitability as we scale. We are resizing the organization by about 25% to manage operational costs, lower our revenue breakeven point, and limit our investment in data storage during this transition. The staff reductions affect approximately 60% of cost lines and 40% of our banks. Specifically, we've resized the biopharma group to reach breakeven at $40 million instead of aiming for $80 million in revenue, and for the core business, we've streamlined our organization to achieve breakeven at $285 million instead of $300 million. Estimated cash restructuring costs are about $9 million to $11 million. We expect to see cash savings of roughly $9 million to $11 million per quarter starting in the first quarter of fiscal '24. These savings will primarily impact operations as we terminate gene manufacturing in South San Francisco and increase activities at the Factory of the Future while moderating investments in R&D, primarily in biopharma and DNA storage. Due to adjustments in our cost structure, we believe it is prudent to revise our revenue guidance for fiscal '23 as we adapt to these changes. We are adjusting our guidance to approximately $235 million to $238 million, down from $261 million to $269 million. The SynBio revenue range is revised to $96 million to $98 million, down from $104 million to $106 million. The NGS revenue range is adjusted to $113 million to $114 million, reduced from $120 million to $123 million. Biopharma revenue is now projected at $26 million, down from $37 million to $40 million. For the second half of fiscal '23, we anticipate revenue to be around $60 million to $61 million in Q3 and $62 million to $63 million in Q4. Gross margin expectations for Q3 are around 30% and 36% in Q4. For the full fiscal year, we expect gross margins to be approximately 35% to 36%. We are decreasing operating expense guidance for the year to roughly $313 million to $319 million, down from our previous guidance of $330 million. R&D expenses are projected to be between $112 million and $114 million, down from $130 million. SG&A is now set at $197 million to $200 million, reduced from $204 million. Mark-to-market is projected as a $5 million credit and one-time separation costs from the reduction in force are expected to be between $9 million and $11 million. Depreciation and amortization is anticipated to be around $29 million, while stock-based compensation projection has been lowered to about $43 million from $50 million. Operating expenses related to DNA storage are expected to be around $40 million, down from previous guidance of $46 million. For fiscal '24, we also expect $40 million in operating expenses for data storage compared to earlier guidance of $57 million. The net operating loss for the year is anticipated to be approximately $230 million to $234 million, which incorporates one-time charges of about $9 million to $11 million for separation costs. Our CapEx for the year is projected to be $40 million, down from $50 million in earlier guidance, with ending cash expected to be $320 million compared to previous forecasts of $300 million. In conclusion, we achieved record revenue in the second quarter. We are actively shipping from the Factory of the Future and are focused on managing the business and our cost structure as we scale. Importantly, we aim to exit fiscal '24 with adjusted EBITDA breakeven for our core and biopharma businesses. We define adjusted EBITDA as EBITDA plus stock-based compensation that we add back. We are also projecting an ending cash balance of $220 million at September 30, 2024, up from our previous guidance of $170 million. Now, I’ll turn the call back to Emily.

Emily Leproust, CEO

Thank you, Jim. We continue to have aggressive goals, and we have aligned the business because we simplified opportunities. As importantly, we announced decisive and proactive actions to accelerate our path to profitability, preserving cash and mitigating risks, all the while leveraging our outside opportunities in the marketplace. We always evaluate the business from every lens, and we remain laser-focused on achieving adjusted EBITDA breakeven for the core and biopharma businesses while maintaining optionality on investments for the incredible upside we see in data storage. Our core business in SynBio and NGS continues to scale, and we have near-term opportunities for each season energized commercial team to be deployed. We are resizing and refocusing the biopharma organizations from an integrated service offering that we believe will drive top-line revenue growth. And we have moderated our stand for data storage while ensuring we maintain our competitive edge. We revised our guidance to a cautious level with potential for upside. We have been strategic in our actions this quarter, positioning ourselves as a leaner, meaner organization specifically focused on disruptive market opportunities for profitable and scalable growth. With these substantive changes, we believe we are operating from a position of strength in the current environment, accelerating our projecting timeline to adjusted EBITDA breakeven for both the core and biopharma businesses as we exit the September 2024 quarter, about 16 months from now. We remain extremely excited about pricing the future. And with that, let's open the call for questions. Operator?

Operator, Operator

And now we will take the first question from Vijay Kumar with Evercore ISI. Your line is open.

Vijay Kumar, Analyst

Hi, guys, congrats on the revenue beat in the quarter and thanks for taking my question. I guess my first question is on the guidance here. It makes sense for the guidance to be reset given the environment. The back half here I think implies high single digits, and it looks like all segments were cut, but perhaps Biopharma a little bit more than the others. Can you just talk about the macro environment? What has changed versus three months ago from a macro perspective, and how much of this is Twist specific versus stuff, the general environment that you're seeing, and how comfortable are you in this high single-digit growth for the back half?

James Thorburn, CFO

Thanks, Vijay. Thanks for the question. So we step back, there are a number of things going on. One is in terms of Biopharma, we feel very good about where we're at. The challenges we've had in Biopharma are just purely internal. So that's an execution issue. We acquired Abveris last year; we had been important that we supported Abveris to be positioned to achieve that our NIM. Consequently, we had this independence between Twist and Abveris. Then as we started to integrate, we realized we had some integration challenges. We are launching the new offering, and we feel good about where we're positioned. Because of the internal challenges, we reduced the revenue outlook for Biopharma. As a large market, we have a great service offering. So we feel very well positioned. In terms of the other two areas, SynBio and NGS, we have just reduced the organization by approximately 25%. We believe it's going to take some time to digest that reduction. The overall order growth rate is solid. We continue to see NGS growth in large customers. We're launching new products. At the same time, with a 20%, 25% reduction of the organization, we believe we need to be prudent in terms of our outlook for top line. I think the advantage is that we're positioned with the company to get to adjusted EBITDA breakeven earlier and come out with a stronger balance sheet. So this is internal, but we really believe that we're well-positioned from the platform. We're seeing large customer growth, so it is more prudent on our part.

Vijay Kumar, Analyst

Understood. And just, sorry, Jim. To clarify that point, what you're saying is that the 25% headcount reduction did come from the commercial side because I think what you're saying is orders and customers in the market seem to be healthy. But this is more a function of the restructuring actions you've taken, hence the guide cuts here in the back half.

James Thorburn, CFO

That's correct. Yes, the market is strong. We're up as we highlighted year-over-year. We're growing faster than the market. We're focused on launching new products. So this, this is just about pure internal issues in terms of digesting such a large change. I mean, we've done a great job in terms of launching the Factory of the Future; it's going exceptionally well. Turnaround times are excellent. Customer feedback is great. And at the same time, we believe for the next six months we're going to be prudent in our outlook due to the reduction of the organization by 25%.

Vijay Kumar, Analyst

Understood. And then one on the gross margins, Jim. If I look at your third quarter and fourth quarter commentary here, the fourth quarter revenues are up a couple of million, but I think the implied gross profit dollars were up $4 million. What drives that gross margin that 36% gross margin strength in Q4, and is that the right jump-off point for next year? How should we think about gross margins for FY '24?

James Thorburn, CFO

Yes, good question. As we continue to scale, you can imagine we've adjusted the cost structure. We're going to digest that and continue to grow, launch fast genes, so that 36% is our starting point for next year. And as we continue to scale, we're going to see incremental improvements in gross margin. I mean, our focus is to get to adjusted EBITDA breakeven for the core business by Q4 next year. We want to leverage the Factory of the Future. We want to drive in the new products fast genes; we want to drive new products in NGS, and we are very well positioned to see gross margins improve next year.

Operator, Operator

Thank you. And our next question coming from the line of Matt Sykes with Goldman Sachs. Your line is now open.

Unidentified Analyst, Analyst

Hi, this is Eve on for Matt. Are you feeling any weakness from the biotech funding environment? And then what does your exposure as a percentage of revenue look like for that?

James Thorburn, CFO

So in terms of the biotech funding environment, I mean, clearly, it's having an impact on the overall industry. I mean, we see this as an opportunity in terms of where we're at with Abveris and the Biopharma integration. We're going to be launching our integrated offering. We've taken adjustments in terms of the organization, and we're very focused on streamlining the business. We anticipate getting to adjusted EBITDA breakeven at $40 million for Biopharma, and at the same time, there is a huge open market; there's a huge market for us. As you saw last quarter, the number of customers dealing with us is solid. We continue to see strong growth in terms of the number of projects, and the outlook with the offering, we're feeling good about that outlook. So I think overall, there may be issues; however, our issues have been internal. And sorry, I missed the second question you asked.

Unidentified Analyst, Analyst

Just what was the like percent exposure as a percentage of overall revenue to the biotech environment?

James Thorburn, CFO

We haven't disclosed that; overall, our healthcare revenue is about 50% of our overall business, and that's been growing year-over-year. So, I mean, it gets back to the strength of our product offering. NGS, we provide customers just sequencing cost, fast time from the sequencer. SynBio, we made to scale into biotech. With the Biopharma business, we will have an integrated offering. So we see ourselves moving into the large pharma customers, and that continues to be a good trend for us. Overall, if you look at our orders, our orders are up year-over-year, revenue is up year-over-year. So this is, I mean, we focused on execution; we believe that due to the platform, we can provide significant value to our customer base.

Unidentified Analyst, Analyst

Okay, great. That's helpful. Thank you. And then, where is the cost reduction mostly weighted towards? Is it like towards one specific segment, or is it pretty equal across the board?

James Thorburn, CFO

Cost reductions are across the board. We're managing our data storage investments. We've adjusted the Biopharma cost structure and for the core business, we've migrated our gene business to Factory of the Future. So, we're leveraging the Factory of the Future investment made there and taking advantage of the fast turnaround time. So this is across segments; the outcome is for core business, i.e., NGS and SynBio and Biopharma; the goal is to get to adjusted EBITDA breakeven by Q4 next year, exit next year with a strong cash position.

Operator, Operator

Thank you. And our next question coming from the line of Matt Larew with William Blair. Your line is open.

Matt Larew, Analyst

Hi, good morning. About data storage, so obviously, you mentioned you're moderating expenses there, but you also mentioned that you feel like you have a significant lead. Just curious why that level of reduction in spend with the right one that you contemplate perhaps more or pausing or maintaining investment, just sort of given as a modest reduction. Just wanted to get a sense for what was contemplated and why it is settling on sort of that level of investment?

Emily Leproust, CEO

Thank you, Matt. That's a great question. We see a huge opportunity in data storage for long-term value creation. However, we also need to create short-term value, which requires us to make careful capital allocation decisions. The more we analyze the data storage market, the more confident we become in our position. We believe we are well ahead of our competitors, and view our data storage investments as a key factor in our business management. While we aim for adjusted EBITDA breakeven for our core and biopharma segments, we want to do this while maintaining a strong cash position. This allows us to reduce our investments in data storage without sacrificing our competitive advantage. Consequently, we will be doing less market development and will not pursue early access with the gigabyte chips. Instead, we will provide an end-to-end demonstration, which is crucial as it will show our capability in data management without needing to commercialize that system. Our focus will shift towards growing the commercial aspect with the upcoming terabyte chip, which will offer significant advantages in total cost of ownership. This is a notable change; the gigabyte chip was primarily for demonstration purposes, and we won't be commercializing it. Instead, we will concentrate on launching a service-based chip that is set to disrupt the market, leading to revenue growth and strong margins right from the start.

Matt Larew, Analyst

Understood. Looking at your quarterly results, it appears that in SynBio and NGS, you have entered the market as disruptors, capturing market share and growing faster than the market. Assessing biopharma from an outside perspective is more challenging, especially considering the many acquisitions you have made in that sector. It seems that market is becoming increasingly crowded and is evolving. What is your perspective on having the right assets? You mentioned some internal changes. How do you evaluate your offerings in relation to your competition and how you have been growing, whether that’s measured by win rates, pitches, or revenue? What metrics do you focus on internally that provide you with confidence that your asset is competitive and differentiated?

Emily Leproust, CEO

Yes, that's a very, very good question. From a technology point of view, our technology - our individual technology from the original Twist, we know that is very strong best-in-class technology. We have scientific data that the amounts that we got from Abveris is a slow head-to-head with all the amounts as best-in-class as well. The combination together, plus the addition of in-silico that we had it, our belief is that that is the best set of tools comprehensive goalstand out as you can have for antibody discovery. From a technology point of view, we're extremely confident, and from a commercial point of view, it's a different story. In the change that we made, the decisive action as we did the sales team is untouched basically. However, in biopharma, we had to completely retool our sales team. We're in a situation where we have fantastic technology that we strongly believe is disruptive in the Twist spirit; where when we're going, we're going with an advantage, and we just now put in place the commercial team that is going to monetize that technology. In terms of metrics to look at what we reported to the street is orders; orders have been done. So what we're going to look for is a reversal of orders, and orders is the first step to getting into revenues, and in biopharma, all the orders are upfront payments. Usually, there is 100% conversion to revenue. We're looking at orders. In terms of internal metrics, it's a classic sales business - metrics, what are the activities, and really - how many new customers are we getting in? We have a secret weapon with our CSO, Aaron Sato, who is an outdoor opener, and then we can have the sales team come up. We're extending the scientific level of our sales team to be able to do all that. At this point, we are very confident in the technology we have, and it's a sales business development execution from now on.

Matt Larew, Analyst

Okay. Thank you.

Operator, Operator

Thank you. And our next question coming from the line of Steven Mah with Cowen. Your line is now open.

Steven Mah, Analyst

Okay, great, thanks for the question. A question for Jim, could you give us some color on the CapEx pullback in 2023 from $50 million to $40 million? And then the follow-up on that, is it going to be any impact on the Factory of the Future build-out and the fast gene and RNA launches and other launches out of the Factory of the Future because of that?

James Thorburn, CFO

Yes, thanks for the question, Steve. In terms of the CapEx pullback, it's just physically managing our CapEx. We see no impact. The key thing for us over the next four or five months is to execute in terms of picking in factory reduction in headcount. So as part of this, we have an ongoing focus in terms of managing with our CapEx, managing our net working capital, and continuing to drive growth while managing the balance sheet. So, it's part of prudent management, and we have no impact in terms of the Factory of the Future.

Steven Mah, Analyst

Okay. Thanks for that color. And then a question for Emily on the enhanced whole genome sequencing and enhanced whole exome sequencing early access programs. Can you give us some color on how the response has been and how the traction has been there? And then secondly, I noticed the partial release on Aster Insights. Could you give us a little bit of color on how the economics and revenue share work with a partner like Aster Insights? Thank you.

Emily Leproust, CEO

Yes, great question. So on eWGS, the initial customer feedback has been very positive. We are going to leverage that technology to the agricultural business where the cost per sample is extremely tight. Internally, we say that's where our pricing scheme. The technologies that we've developed internally are really going to enable those Ag Bio customers to do thousands, hundreds of thousands, millions of samples at a very low cost with very high resolution on the genotype that we are looking for. Those are big contracts. When they land, it's going to be big, big lumps, but that means it's going to take a little bit of time but the initial technology assessment is extremely positive. I forgot, and what was the second question? I'm sorry I didn't hear.

Steven Mah, Analyst

It was on the economic share with Aster Insights on your kits where you're using some of their content on your platform?

Emily Leproust, CEO

Yes, what we can't say is that it's built with our engineering expertise with some customer NGS tools, and they have a great channel, but we're not sharing the economics.

Operator, Operator

Thank you. Our next question coming from the line of Sung-Ji Nam with Scotiabank. Your line is open.

Sung-Ji Nam, Analyst

Hi, thanks for taking the questions. Could you expand on Matt's question earlier, with regards to just either if you could provide more color around kind of the rationale and your thought process in terms of the timing and the magnitude of the restructuring? And what gives you confidence that this might not be overly aggressive or I guess not sufficient enough to drive growth in the future? Just kind of if you could give us a bit more information there.

James Thorburn, CFO

Yes, I mean, yes - go ahead, Emily.

Emily Leproust, CEO

Maybe I'll start - and with high level, and Jim will fill in the details. The general principle was that from a company morale point of view, we wanted to do it once and done. We didn't want a drip, drip, drip approach, so we got really, really deep so that we didn't have to do it. At the same time, we also know that we have strategic hires that we have to make, so we got deep enough to make sure that we'll have room for those strategic hires that have to happen. So that was the high-level guiding principle. I'll let Jim fill in the details.

James Thorburn, CFO

Yes. In terms of timing, we launched the Factory of the Future in the middle of the quarter for commercialization; it's going really well. We've invested significantly over the last 18 months. In terms of the timing right now, we're seeing the benefit of our investment, and we're seeing the opportunities in the marketplace. We have a lot of interest in terms of Factory of the Future. We're getting well-positioned to launch fast genes, and what's important to us, also, is maintaining a strong balance sheet to support the business as we move from losses to adjusted EBITDA breakeven by Q4 next year. This gives us the runway for our core business to get there. At the same time, we see opportunity for top line growth and continued opportunity for our R&D organizations anyway. This restructuring supports the balance sheet, supports the company, and supports our focus on innovation and growth.

Sung-Ji Nam, Analyst

Okay, got it. And then in terms of the fast genes, could you remind us kind of where the key remaining steps are in terms of market development standpoint or manufacturing capability standpoint that are remaining before your launch?

Emily Leproust, CEO

Yes, no thank you for that great question. All of the genes, as of late March, gene fragments and most of Oligo Pools are being made in Wilsonville, Oregon. We now have stress tested that factory under high volume, and we're very happy with the performance; the turnaround time and the final yields are equivalent to what we were getting in the South San Francisco fab. The current time right now is blazing fast. I think our average turnaround is about 10 days, and 90 percentile of gene shipping in 14 days. It's really, really great performance. In terms of fast genes, to your question, there are two avenues that we're still working on that are both on software. The first one is we have some internal software tools that we are finalizing to enable fast genes. The process is the same, but we're adding more software tools such that there is less human intervention, less human thinking in terms of what has to happen next. That means that the genes will spend less time waiting in the freezer. So that's the software tools; the software team is doing fantastically, and it's on track. The second piece is just sort of an external tool, the e-commerce tool that needs to be updated; we're adding a key feature of dynamic pricing that would be, in our view, very critical in extracting the most value out of the speed that will be created.

Sung-Ji Nam, Analyst

Great, thank you so much.

Operator, Operator

Thank you. And our next question coming from the line of Luke Sergott with Barclays. Your line is open.

Luke Sergott, Analyst

Hi, guys, good morning. A couple of things here, so I just wanted to follow up on the question about the step-up in the margins there in 4Q with minimal step up in revenues. You provided some early color there, but I thought that the Factory of the Future and the fast genes coming online, that was all going to be incremental. So talk about kind of the dynamic there about maybe cannibalizing some of your past work with the fast genes and how the Factory of the Future is coming online?

James Thorburn, CFO

Yes. Just in terms of the step up in margins from quarter three to quarter four, that's driven by top line revenue growth as we continue to leverage the Factory of the Future. In terms of the impact of the restructuring, we see our cost benefits really coming in Q1, '24, and the step-up you're seeing there is the partial impact of the cost benefits due to leverage Factory of the Future in Q4 this year. As we move into Q1, we see the full benefit of the cost improvements, and then you get the impact of the fast genes as we launch them in the fall. The fast genes benefits will be all fiscal '24. You also see the full benefit of the cost reductions starting Q1 of '24. In the short-term, we see partial benefit from cost reductions; we see the benefit of leveraging fixed costs as we scale revenue sequentially. As you move into next year, we will anticipate moving towards adjusted EBITDA breakeven by Q4 of fiscal '24.

Luke Sergott, Analyst

I just want to follow up on that. I understand that you're seeing many of those cost benefits, but regarding the guidance reduction, is the ramp-up of the fast genes and the Factory of the Future taking longer than expected?

James Thorburn, CFO

No. So the guide down is, so the two key components. One is that the guide down is on the Biopharma business. Why is Biopharma business guide down? It's because we've had internal integration issues on a commercial point of view in terms of both SynBio and NGS. The only reason we've taken a guide down is we'd see some potential risk of digesting a 25% reduction in our organization. It's not because of any market issues; it's because of our own internal prudence in terms of managing such an organizational transition.

Luke Sergott, Analyst

All right, great. And then last here for Emily on the internal candidates and the decision there. You said that you're going to, I think you said you're going to stop the internal development. So I thought when you guys had those, it was basically, and this might be oversimplifying it, but I thought when you have those, it was basically the code that you could just store or like keep on ice. So talk about the incremental spend that those require. And then I guess the lack of what was driving, I guess, the lack of interest among partnerships there for those candidates?

Emily Leproust, CEO

Great question. So, yes. We've been developing some internal candidates; those were R&D investments. We're not scrapping away the investment that we've done. What we are doing is slowing further investments into those assets. We are focusing now on monetizing those assets as the accretive side. We'll decide then we are going to allocate the capital, but that could be the trigger to further develop other assets. At this point, it's prudent for us to send the biopharma business such that it can be adjusted EBITDA breakeven at $40 million revenue instead of $18 million. There will be less R&D efforts on our own assets, but we are not stopping the monetization effort of the asset that we've been doing. I wouldn't say that there is no interest, but we don't have - we only have limited capabilities on outsourcing antibodies. We've done at least we've NF1; we had out-licensing last year, but we have limited time and resources inside the company to do it. We don't want to get the R&D development ahead of the monetization scheme. So, that's what we're doing.

Luke Sergott, Analyst

Okay, thanks.

Operator, Operator

Thank you. And our next question coming from the line of Puneet Souda with SVB Securities. Your line is now open.

Puneet Souda, Analyst

Yes hi, Emily and Jim. Thanks for taking the questions. So first one is really, why is this guide cut the last one, just given the situation in the macro, the biotech funding, and the Dx moderations, which I think everyone on this call is aware of. Those things are not necessarily immediately improving in the market. We have seen guide reductions from a number of companies multiple times? So at this point in time, sort of - workforce reductions are also happening and diagnostic companies, and they're cutting spend. So your reduction of 25% is one of the most meaningful in this space. Given all that dynamic, I mean, just help us understand what gives you confidence in the guide overall for '23 and for FY '24, there was a $350 million guide before with 49% gross margin. Can you just update us on that FY '24 guide too? Thank you.

James Thorburn, CFO

All right, Puneet. I can start, and Emily can polish off what I say. In terms of what gives us confidence, we highlighted our orders. We're strong in this last quarter. We continue to, on the NGS side, continue to build our portfolio, continue to build our customer base. On the SynBio side, the Factory of the Future commercialization in this last quarter has done extremely well, as Emily just highlighted on the call. Our turnaround times are excellent, and the number of customers continues to increase. In terms of the guide outlook for NGS and SynBio, we're looking at the reduction just purely due to digesting the reduction in headcount, and that is very meaningful. It's meaningful because we've invested significantly in the Factory of the Future that is going well, and we are seeing opportunities on the upside. At the same time, because there is such a meaningful reduction in headcount, we're going to be prudent in our outlook. In terms of biopharma, this is purely internal execution issues with the absorption of Abveris and execution in terms of being able to integrate the commercial organization. We could not do that for the last year. We're launching the integrated offering. We feel good in terms of the number of active projects; we're at 95 last quarter. We're seeing strong interest from our customer base. We're making meaningful reductions in headcount, and we want to be prudent in our outlook. In terms of where we're going next year we continue to see the margin increase from Q3 to Q4, as we continue to leverage the Factory of the Future. We see the benefits of the cost reductions. We'll see the launch of the fast genes, and our outlook for the next two years is to get to adjusted EBITDA breakeven by Q4. We're going to continue to give updates in terms of progress on each of the quarterly earnings call. I'm going to turn it over to Emily to run that.

Emily Leproust, CEO

I think, Jim, you covered it well.

Puneet Souda, Analyst

Okay. And then on pricing of the products, can you just update us? Do you expect to raise any pricing on the NGS or SynBio products, and overall competition in the market? Just can you sort of give us a sense of what you're seeing from some of the larger competitors, the competitive dynamics changing in the market? Thank you.

Emily Leproust, CEO

Yes, great question. So we did our second annual price increase on NGS that was well received. In SynBio, we did do a price increase last summer, not planned at this point. Except for launching the fast gene. In SynBio, our strategy is to increase the value of the product. In addition to the amazing scale and quality and ease of ordering, we're going to add speed, using an approach of dynamic pricing, we are confident we'd be able to get premium pricing. So that's the price increase coming in SynBio, but it's in exchange for providing better value to the customer.

Operator, Operator

Thank you. And our next question coming from the line of Tom Peterson with Baird. Your line is open.

Tom Peterson, Analyst

Yes, thanks for the question. Tom on for Catherine. I was just wondering if you could provide any more color on the revenue expectations by product line for fiscal 3Q and 4Q given the overall reduction in the guide for the year.

Emily Leproust, CEO

Jim, can you take that?

James Thorburn, CFO

Yes, sorry, I forgot I was on mute. Tom, thanks for the question. Overall, I mean we've given the guide for SynBio and NGS and also for Biopharma for the year. We didn't break it out because of just the quarter transition. Overall outlook for Q3 revenues is $60 million to $61 million, Q4 $62 million to $63 million; the range; and for SynBio, the range for the year is $96 million to $98 million, NGS revenue $113 million to $114 million, and Biopharma $26 million. The outlook, we believe it's prudent. Right? Why is it prudent? We've just taken a 25% reduction in the organization. Overall, the NGS business is up 25% year-over-year for total business. The pipeline looks good; we continue to launch new products, and we continue to get great feedback from the marketplace. At the same time, we've made a meaningful reduction in our headcount. We really appreciate the contribution of everybody who has supported Twist and the growth. We are very focused on getting to profitability, and the first milestone there is getting to adjusted EBITDA Q4 next year, and we're positioned to do that. The overall environment, any comments on the overall environment are tough. However, we have a great portfolio, and we're growing faster than the market. We're leveraging our investments, and we are going to deliver solid results as we continue to scale and get to adjusted EBITDA breakeven.

Tom Peterson, Analyst

Got it. Thanks. That's helpful. And then maybe just one more for me on the OpEx guidance reduction, and obviously appreciate the significance of the headcount reduction, basically look forward towards that adjusted EBITDA target for fiscal 4Q of next year. How should we think about if there's any more room for additional OpEx reductions? I guess how much flexibility do you still see left within the business? Thanks.

James Thorburn, CFO

So in terms of the business, I mean, nobody can predict the future. However, what we're going to do is manage the business based on the environment. A couple of key metrics, what does the market environment look like? Overall, we're seeing significant growth in that environment. We've made investments in the Factory of the Future, and we will manage our investments and we'll manage our investments to get to adjusted EBITDA breakeven and then focus on getting to profitability as Emily has highlighted. We've moderated our investment in DNA storage. Based on the environment, we will then make the decisions to ensure that we're delivering value for our shareholders, our customers, our employees. Part of that is having a strong balance sheet; and that’s part of it is we've got to continue strong execution and innovation that Twist culture is known for, and we're focused on supporting that transition to growth opportunities and delivering fast genes in Q4 calendar this year.

Tom Peterson, Analyst

Got it. Thanks.

Operator, Operator

Thank you. And our next question coming from the line of Rachel Vatnsdal with JPMorgan. Your line is open.

Rachel Vatnsdal, Analyst

Great, thanks for taking the question. So a few questions on Biopharma. It looks like active partnerships between legacy at Biopharma and Abveris was roughly 112 active programs during fiscal 4Q; that's set down to 95 during fiscal 1Q, and then it looks like today you have 93 active programs. Can you just walk us through how much of that step down was really due to programs being cut, and do you expect additional declines in program count throughout the year? And then as a follow-up to that, you've mentioned that challenges from Biopharma are purely just integrational and execution related. So can you just help us understand what exactly was the breakdown there from the integration issues?

Emily Leproust, CEO

Yes. Thank you, great question. In terms of the number of active program work, we get an order for a program. We reported as an order probably until the next quarter or the one after that is done. We've provided the answers to the customers. Then that gets revenue, and the program goes down, right? So it's not that those programs were cut; they may have had a very small number of cancellations. Most likely, those are programs that have been completed and moved to revenue, and that's why revenue is the lagging metric and order is the leading metric. Then in terms of the commercial integrations, we had to leave Abveris to run on its own. There were territories conflict, and there were some technologies that had to be learned. That took a bit more time than we wanted, and it happened a bit later than they were on it. At this point, the territories have been rationalized; we have re-platformed all the systems, and I'm confident that the BD sales team is having high activities and we have the right cadence of getting in front of new customers and closing them. Thank you.

Rachel Vatnsdal, Analyst

Great. And then maybe just a follow-up here, and there has been quite a few questions on guidance macro backdrop. Maybe I'll just shift gears over to DNA data storage. I appreciate that you're rationalizing some of the spend there, operating just given the macro backdrop, but can you just talk about what are your plans for your enzymatic offering? If I recall, you were planning on getting that fully online to support that DNA data storage offering, which is going to be kind of key to the thesis in terms of the competitive positioning as peers have entered with their own enzymatic products. Can you walk us through if that timeline has shifted for your enzymatic offering and give us a tech update in terms of how that's trended as well? Thank you.

Emily Leproust, CEO

It's a great question. Yes, we are delaying the on-premise technology development; we mostly needed enzymatic synergies for that on-premise. We had said that we could use enzymatic in-house and that we could have the choice of chemical and enzymatic. In the current decisive actions that we've made, we have not touched the enzymatic program. We think even though the first product for the test storage, it's going to be an in-house machine. Right now, we saw that there is some potential advantage for us to use the enzymatic program that we have been pursuing, and so we have optionality. The first product could be enzymatic or chemical; we're pursuing both, but I'm optimistic that we may leverage the enzymatic technology for that first data storage launch.

Operator, Operator

Thank you. And I will now turn the call back over to Emily Leproust for any closing remarks.

Emily Leproust, CEO

Thank you very much for joining us today and appreciate getting a little bit beyond schedule. We look forward to seeing some of you at Goldman Sachs, William Blair, and Scotiabank in the next few months ahead. Thank you.

Operator, Operator

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