Earnings Call Transcript - TWST Q3 2022

Operator, Operator

Welcome to the Twist Bioscience Fiscal 2022 Third Quarter Financial Results Conference Call. I would now like to turn the conference call over to Angela Bitting, SVP of Corporate Affairs and Chief ESG Officer.

Angela Bitting, SVP of Corporate Affairs and Chief ESG Officer

Thank you, operator. Good morning, everyone. I'd like to thank all of you for joining us today for Twist Biosciences conference call to review our fiscal 2022 third 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 financial and operational performance. Emily will come back to discuss our upcoming milestones and direction. We will then open the call for questions. 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 2 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 cannot at this time, predict the full extent of the ongoing impact of the COVID-19 pandemic and any resulting business or economic impact. We disclaim any obligation to update any forward-looking statements except as required by law. With that, I will now turn the call over to our Chief Executive Officer and Co-Founder, Dr. Emily Leproust.

Emily Leproust, CEO and Co-Founder

Thank you, Angela, and good morning, everyone. During the third quarter, we continued to benefit from our position as a high-quality low-cost leader, especially in the midst of a volatile macroeconomic climate. We reported record revenue of $56.1 million and almost $60 million in orders with strength coming from both Synbio and NGS. Beginning with Synbio, we reported strong revenue of $22.1 million, and while we did see some disruption coming both from the China lockdown and COVID, we did well from both the manufacturing and commercial perspective. As a reminder, we make all of our genes in the United States, which provided an advantage over companies who make genes in China. Orders for the quarter were $20.5 million, with a decrease sequentially due primarily to foreign exchange impacts in Europe, which is overall consistent with our pattern last year. We have completed the build-out of our additional capacity, which allows us to produce over 200,000 genes per quarter, enabling us to meet the increasing demand for genes, particularly as we bring on the factory of the future in Portland. We received a temporary certificate of occupancy for the factory of the future in late June and are now in the process of bringing it up to the site. We will go through the startup process of IQOCPQ, which is instrumentation qualification, operational confirmation, and production qualification. This is a process that we have gone through each time we move locations. So, it’s a familiar activity we've completed successfully three times. In the past, we physically moved the equipment from one site to another over a short period of time, usually a weekend, which was significantly more difficult than setting up a new fab with new hardware while running a 24/7 production schedule. This time, for the factory of the future, while entailing all new hardware, we will continue operations in San Francisco. We remain on track to generate the initial revenue out of the factory of the future in January 2023, and as a reminder, bringing this lab online will be a significant lever for DNA production. There is a large market of people who currently make their own DNA because they need it more quickly than it is accessible today. With the factory of the future, we have the ability to significantly reduce our turnaround time to address this market opportunity. As a side benefit, we expect that we'll be able to command premium pricing and enjoy better margins. We intend to begin operations with our Synbio product suite and work towards introducing genes with faster turnaround times shortly thereafter. For NGS, we reported revenues of $27.8 million and orders of $30.4 million. We forecast a strong back half of the year for NGS, and this quarter is consistent with our guidance. The strength in NGS is driven by many factors, including the scale-up of customers developing liquid biopsies as they prepare to launch a commercial test and our success in expanding within existing customers as well as securing new business wins. During the quarter, we launched two new products for cancer research, the methylome panel and our product to support customers in developing Minimal Residual Disease tests or MRD. These products build out our oncology offering and further differentiate us from our competition. For MRD specifically, we introduced a disruptive product that is customizable and highly cost-effective with a rapid turnaround time. Unlike PCR or amplicon-based tests, which capture two specific sequences, our panel captures up to 500 sequences and is highly scalable and compatible with other genome protocols. To be clear, this product must incorporate into our customers' workflows and must go through pilot testing, validation, and verification before scaling up for commercial use. We expect revenues to grow as customers go through this process. We also launched several new controls for monkeypox and other viruses. Importantly, we see continued success with our circulating tumor DNA oncology controls, which we believe will be less dependent on public health cycles than respiratory controls. This product line as a whole has delivered consistent revenue and serves as a nice entry point into new accounts. This week, together with our partner, we received emergency use authorization for our NGS assay for the identification and differentiation of SARS-CoV-2 pangolin lineages, as well as the identification of specific genomic mutations. While we're more than two and a half years into the pandemic, the virus continues to evolve, and our customers still need the most robust tools to respond. During the quarter, specifically at the conference in June, it was clear that the sequencing landscape is back, with new providers entering the market and bringing differentiated solutions. We believe that as the cost of sequencing comes down, it will continue to drive the upward trajectory of sequencing volumes overall. As it relates to our NGS tools, specifically targeting liquid biopsy and MRD, we expect demand to increase, particularly in applications that require deep sequencing. Importantly, our products work with a variety of sequencers for both short and long reads. We're increasing our capabilities and look forward to the continued growth of this market.

James Thorburn, CFO

Thank you, Emily. We had another good quarter at Twist. Revenue for Q3 was $56.1 million, which is a sequential growth of 17% and year-over-year growth of 60%. This brings our year-to-date revenue to $146.3 million. Orders were $59.7 million for the quarter, a sequential increase of 9% and 53% year-over-year, bringing our year-to-date orders to approximately $164 million. Gross margin for the quarter was 44.8%. We shipped to approximately 1,900 customers for the quarter and have now shipped to approximately 3,000 year-to-date, and we ended the quarter with cash investments of approximately $528 million. Now, let’s provide a deeper dive starting with NGS. As we have highlighted on our previous calls, we anticipated a pickup in our NGS orders for the second half, and in the third quarter, orders rose to $30.4 million, an increase of 64% year-over-year and sequential growth of 29%. This increase was primarily due to liquid biopsy as well as other clinical and diagnostic applications. During the quarter, we received orders from approximately 550 NGS customers, which is a decline from 750 in the previous quarter. This is due to fewer customers ordering COVID controls. Our COVID control revenue has not been material. The top 10 NGS customers placed orders of approximately $14 million, or 48% of our orders, primarily due to the increase in demand from our liquid biopsy customers. Our pipeline for larger opportunities continues to scale, and we're now tracking 249 accounts, up from 231 noted in our last earnings call. One hundred fourteen have adopted Twist, an increase from 104 last quarter. The increased orders flowed through and our NGS revenue for the third quarter increased to $27.8 million, which is up sequentially 20% and an approximate 50% year-over-year increase, with the top 10 customers accounting for 50% of our revenue during the quarter. Returning to Synbio, orders which include genes, DNA preps, IGG libraries, and all good pools declined sequentially to $20.5 million in the third quarter from $23.6 million. This is primarily due to a decline in clonal gene orders, which we believe is mostly related to seasonality, as we experienced a similar slowdown this time last year. Synbio product revenue for the quarter was approximately $22.1 million, up from $18.4 million, a 20% sequential increase and approximately 54% year-over-year. Some highlights include shipping to approximately 1,500 Synbio customers. Gene revenue was strong in the quarter and rose to $17.4 million, up from $14.2 million in the second quarter and $11.2 million in the third quarter of fiscal '21. We shipped approximately 163,000 genes in the quarter, which is up from 124,000 last quarter. All good pools had a strong quarter with revenue of $3.3 million, up from $2 million in Q3 FY '21, with the increased demand primarily from the healthcare segment. Now, regarding biopharma, we continue to scale our biopharma business; orders rose to $8.8 million from $7.8 million in the second quarter, and revenue for the quarter was $6.2 million down from $6.6 million in quarter two, primarily due to project timing issues and five project cancellations, primarily due to budget constraints. For our Twist biopharma antibody platform, we now have 53 partners, up sequentially from 47 and have 50 active programs with 67 programs completed and back in the hands of our partners. Of our total programs, 55 include milestones and royalty agreements. Our Abaris Twist Boston business is doing well with 54 customer service in the quarter, including 37 projects on the Beacon platform. Please note that orders may not translate into revenue, but they provide a trend line for each product group.

Emily Leproust, CEO and Co-Founder

Returning to the revenue breakdown by industry. Healthcare revenue in Q3 was $29.4 million, up from $17.4 million in the third quarter of fiscal '21. Industrial Chemical revenue in Q3 was $15.7 million, up from $9.4 million in the third quarter of fiscal '21. Academic revenue in Q3 was $9.5 million, which is up from $7.7 million in the third quarter of fiscal '21. I'll now briefly cover our regional progress. EMEA third quarter revenue was $15.5 million, compared to $12.7 million in the third quarter of fiscal '21. APAC continues to deliver robust growth, revenues increasing to $4.8 million, up from $3.1 million in the third quarter of fiscal '21. The U.S., including Americas, revenue was $35.8 million in Q3 of fiscal '22 versus $19.3 million for the same period of fiscal '21. Now moving down the P&L. Our gross margin for the quarter was approximately $25.2 million, or 44.8% of revenue, as compared to 40% in Q3 FY '21 and up from 38.3% in Q2. The increased gross margin reflects the impact of higher revenues, particularly higher NGS revenues and leveraging our fixed costs. Also note that the factory of the future startup costs are recorded in G&A, and COGS includes stock-based compensation of $1.2 million and depreciation of $1.7 million for the quarter.

James Thorburn, CFO

Now to operating expenses. Our Q3 operating expenses, which include R&D, SG&A, and change in fair value and mark-to-market adjustments of acquisitions, was approximately $86.3 million, as compared to $79.2 million in quarter 2. To break it down, R&D for the quarter was $36.8 million, an increase from $31.2 million in quarter 2, primarily due to increased spending associated with biopharma, including Abveris and Revelar, as well as increased data storage and IgG spending. SG&A in quarter 3 was $53.7 million as compared to $54 million in quarter 2. Startup costs for the factory of the future included in G&A expenses were $4 million in quarter 3, up from $2 million in quarter 2. Change in fair value of contingent considerations and indemnity holdbacks for the quarter resulted in a gain of $4 million versus a gain of $6 million in quarter 2. Stock-based compensation for quarter 3 was approximately $20 million. Depreciation was $3.1 million for the quarter, and amortization of $1.4 million was primarily associated with acquisition and amortization of intangibles. Our net loss before tax was approximately $51.2 million, compared to a loss of $6.8 million for quarter 2. CapEx for the quarter was $40 million, including approximately $30 million for the factory of the future. This now brings the factory of the future CapEx investment to approximately $73 million. Given the global supply chain challenges, we have been strategically investing in our inventory, which means approximately $43 million, compared to $45 million at the end of quarter 2. We ended the quarter with cash investments of approximately $528 million. Now, I'll provide updated financial guidance for fiscal '22. We enjoyed strong bookings in the quarter; however, due to seasonality, more SARS-CoV-2 variants continuing to emerge, we're projecting Q4 revenue to be approximately $56.5 million, bringing our revenue for the year to approximately $203 million. That’s up from the previous guidance range of $191 million to $199 million. Synbio revenue in quarter 4 is estimated to be $21 million, sequentially down from Q3, which was particularly strong combined with lower Q4 revenue expectations in the year. Our Synbio guidance for the year is now $80 million, which is up from the previous guidance of $71 million to $73 million. NGS revenue is estimated to be $27 million in quarter 4, and our total revenue is now projected to be approximately $97 million for NGS, which is up from our previous guidance of $94 million to $96 million. Biopharma revenue, including Twist Boston, is estimated to be $8.5 million, and our biopharma revenue guidance for the fiscal year is expected to be $26 million, compared to our previous guidance of $26 million to $30 million. Our FY '22 gross margin is projected to be approximately 40%. Operating expenses, which include R&D, SG&A, and mark-to-market are expected to be approximately $330 million for the year, including $125 million in R&D expenses, which is down from our previous guidance of $130 million. Mark-to-market for the year is projected to be $12 million, and favorable factory of the future startup costs inclusive of SG&A are expected to be $12 million for the year. Our net loss guidance before tax for the year will be approximately $250 million, which includes stock-based compensation of approximately $80 million, depreciation of $14 million, and amortization of intangibles projected to be $5 million. CapEx for FY '22 is projected to be in the range of $95 million to $100 million. As we highlighted on our last call, we're focused on managing our cash and scaling our core business to $300 million in annual revenue and adjusted EBITDA breakeven. We have plans to scale our biopharma business to adjusted EBITDA breakeven at $80 million in annual revenue, and we believe we have the cash runway to achieve both. And with that, I'll turn the call back to Emily.

Emily Leproust, CEO and Co-Founder

To echo Jim’s comments, we remain focused on driving towards profitability. Specifically for Synbio, we are focused on bringing the factory of the future online outside of Portland, Oregon, with initial revenue generated from this facility in January 2023. For NGS, moving into our fourth quarter with $30 million in other revenues, we expect to finish the second half strong. We will continue to focus on expanding within existing customers, offering differentiated products, and expanding our market share as we seek to enter the market between the standard and the sequential, particularly in the areas of liquid biopsy, MRD, and RNA. In biopharma, we expect to have partnerships, programs, and move up the value chain both for our service offerings and for our internally generated antibodies. As we get closer to the earnout for the Boston team, we are planning an integrated portfolio of antibody discovery and optimization offerings, capitalizing on efficiencies and demonstrating that one plus one equals more than two. The combined solution truly differentiates Twist from the rest of the pack, and we look forward to cross-selling as well as broadening our reach following the earnout period. In data storage, we have a roadmap to reach terabyte scale. We have our first fully integrated electronic control enhanced and are actively bringing the system to achieve synthesis of up to 1 gigabyte of data in a single run. We will continue to drive market awareness while actively participating in the development of interoperability standards for the industry. Overall, while we cannot control the overarching macro environment, we have a differentiated platform technology in our silicon-based DNA synthesis process. We have an exceptional team that comes to work every day to be the best. We have a plan to reach adjusted EBITDA breakeven for the core business without accessing the capital markets again, and we have tremendous opportunities ahead to grow our market share in each area, introduce new products, and disrupt markets. With that, let's open up the call for questions.

Operator, Operator

Our first question comes from Matthew Sykes with Goldman Sachs.

Matthew Sykes, Analyst

Maybe the first question just on the biopharma business. I know the full-year guide is coming at the low end of your previous guidance. You guys talked about some project cancellations due to budget constraints but also about trying to shift into later-stage programs. Could you talk about your mix of potential emerging biotech targets and their funding issues? Do you expect additional project cancellations? And then secondly, what is the strategy to move into later-stage for biopharma? And how do you think that plays out from a timing standpoint?

Emily Leproust, CEO and Co-Founder

As you are aware, there are a little bit of macroeconomic headwinds where the funding for private companies in biotech is a little bit more difficult now than it was a few quarters ago. We are seeing a little bit of that. However, we have a very strong and differentiated offering, and we have a large number of partners. Therefore, we are not as sensitive as if we only had a few partners experiencing issues. The combination of our offering and the breadth of the people we are talking to insulates us a little bit. And as a reminder, we are the high-quality low-cost leader with leading edge competence in antibody discovery. Our offering continues to resonate quite well. As far as your second point regarding biopharma, we have been able to secure historical Twist antibody discovery, so we can participate to a greater extent in later-stage value add. We have not done that yet with the Twist Boston team that we brought in, as historically, that was not their business model. We can now apply the learnings on how to approach commercialization of our services from the original Twist Biopharma and apply those to the Twist Boston, allowing us to participate more in the downstream economics. The timing is still in flux, but it presents the upside that we want to begin capturing.

Matthew Sykes, Analyst

And taking the other side of it, you mentioned the competitive advantage regarding cost. Given your scale and cost advantage, not just in biopharma but probably more importantly in Synbio, do you think that Twist is competitively advantaged in this space considering the cost containment environment we are in? Do you believe that will resonate if this cost conservation environment continues into 2023? How well-positioned do you feel in that area?

Emily Leproust, CEO and Co-Founder

Yes, absolutely. On the Synbio side, that is definitely a strong selling point. We've always been significantly less expensive than our competitors with exceptionally high quality, same or higher than the competition. So there are some segments where that resonates really well. If you look at the larger competitors, their approach is often to train more data points to gain an advantage. Having a lower-priced vendor partner is extremely advantageous to their business model. Therefore, we are already entrenched as strong. On the biopharma side, in our previous interactions with some companies, the budget was not an issue. Now, it has become one. So for the biopharma segment, where they buy our tools, our everyday products are resonating. This creates a significant impedance match compared to the services, which are somewhat premium-priced.

Vijay Kumar, Analyst

Congrats on the third quarter results. Jim, one on the guidance here. If I look at the gross margin for the quarter, it was really strong, but the guidance implies a step down in Q4. Your book-to-bill came in a little low, and you implied that Q4 revenues may be flattish quarter-over-quarter. Was there any timing of revenues that benefited in Q3? Could you explain what drove the strength in the Q from the revenue and gross margin perspective?

James Thorburn, CFO

We had a really strong quarter—particularly in NGS. Overall, Synbio revenue was also good. We do have seasonal trends primarily driven by EMEA, as we saw a similar step down last year in orders. When putting together our plan, we are mindful of the vacation periods in some European countries for Q4. Therefore, we're prudent in our forecasting for the quarter, while maintaining a strong outlook for NGS orders. Overall, the pipeline continues to expand, and we are optimistic about Q4.

Emily Leproust, CEO and Co-Founder

Regarding data storage, we are currently at the alpha chip stage. Going from alpha to beta involves three components: the base silicon chip containing the CMOS logic; the top layer of the chip where DNA is synthesized; and the chemistry to integrate those components. The transition from alpha to beta in the CMOS section is complex and advanced, but we've achieved significant progress there. The primary risk lies in the top silicon layer, yet we believe the risk is manageable. We have moved from 5-micron features to the final stages of developing a 1-micron chip. In terms of perspective, our chip has 256 million features in comparison to competitors who may only have 256 features at 100 microns. This gives us a clear advantage.

Luke Sergott, Analyst

On factory of the future, can you give a sense of the backlog that you're seeing there? How quickly will the new capacity fill and contribute to revenues? Will it be long-term or short-term?

James Thorburn, CFO

We are currently going through qualification for the factory of the future. We anticipate that by the end of this year, we will start initial debugging, testing, and running initial tests. Revenue shipments will not commence until early next year. This quarter, we had a solid uptick in terms of NGS and Synbio orders. We've increased our capacity further in San Francisco, and we're well-positioned to see the factory of the future’s full impact next year as we begin recording revenue in January of 2023. For China, we had another strong quarter in Asia. Our actual revenue for China is about $1.7 million, which is flat with last quarter and last year. We are anticipating a revenue of $7 million for China this year, despite the impact from the Chinese market. We have done exceptionally well servicing our customers and are optimistic about our growth opportunities in China and Asia, where we are gaining customers in Korea, Japan, and other countries.

Puneet Souda, Analyst

Emily, a couple of questions for me. In biopharma, are the cancellations you’re seeing pushing out the timeline to get a product into the clinic or Phase I? What are you doing to ensure that you strengthen the incoming funnel for projects, especially since guidance reduction is related to that? Smaller biotechs are under pressure and could potentially affect those projects as well. So, how do you intend to build a stronger funnel for 2023?

Emily Leproust, CEO and Co-Founder

With respect to program timelines, once we complete our work, the antibodies go to another party for preclinical development, after which they advance to the clinic. Therefore, we don't have a direct impact on those program timelines. However, we understand that some partners may be rationalizing their programs, with some moving toward obtaining IND approval. We anticipate some delays, but we remain steadfast in our approach and are diligently diversifying our projects to foster resilience in this market. We are also innovating our product offerings to meet the evolving needs of our customer base, particularly at Twist Boston where we are responding with new offerings that are better tailored to partner needs.

Puneet Souda, Analyst

Jim, regarding gross margin, came in strong this quarter, but you're guiding for a follow-up that could be lower. With the factory of the future coming online, shouldn't that impact gross margins at least initially in 2023? What does the margin cadence look like in the upcoming quarters?

James Thorburn, CFO

As we launch the factory of the future, we will likely be underutilizing capacity, impacting gross margin initially. However, our aim is to efficiently scale the factory as quickly as possible, targeting adjusted EBITDA breakeven at $300 million in revenue with an anticipated gross margin of about 51%. As we expand the business, we project margins to range from 55% to 60%. This quarter's gross margin of 45% was notable and reflects a strong position moving forward.

Emily Leproust, CEO and Co-Founder

Thank you for joining us today. Our team continues to execute across the board, and we are on track for adjusted EBITDA breakeven with significant opportunities in Synbio, NGS, Biopharma, and data storage. We look forward to seeing you at the upcoming UBS and Baird Conferences. Thank you so much.