Earnings Call Transcript - TWST Q4 2022

Operator, Operator

Good day, and thank you for standing by. Welcome to the Twist Bioscience Fiscal 2022 Fourth Quarter and Year-End 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 call over to your speaker today, Angela Bitting, Senior Vice President of Corporate Affairs and Chief ESG Officer. Please begin.

Angela Bitting, Senior Vice President of Corporate Affairs and Chief ESG Officer

Thank you, operator. Good morning, everyone. I would like to thank all of you for joining us today for the Twist Bioscience conference call to review our fiscal 2022 fourth quarter and year-end financial results and business progress. We issued our financial results released 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. Emily will come back to discuss our upcoming milestones and direction, and then we'll open the call to questions. We would ask that you limit your questions to a maximum of two and then re-queue as a courtesy to others on the call. As a reminder, this call is being recorded. The audio portion will be archived in the Investor Relations 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 US 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 the 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. With that, I'll 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. This morning, we reported record revenue of $203.6 million for fiscal 2022 and $57.3 million for the fourth quarter. We continue to take market share in both Synbio and NGS by expanding our customer base, delivering differentiated high-quality products and anticipating market needs. In addition, our biopharma business continues to sign an increasing number of partnerships with biotechnology and pharmaceutical companies to conduct discovery and optimization projects. Fiscal 2022 has been one of macroeconomic construction, COVID shutdowns, geopolitical instability and more. And yet, we delivered 54% revenue growth year-over-year and we grew our customer base to over 3,000. In the slide deck for this earnings call, we have included a list of some of our customers who have published conducted webinars, case studies or as nodes using Twist products. You will see that the list is broad and deep and just a contraction of our total customer base. Our Twist team continues to demonstrate exceptional resilience in the face of challenges. Our silicon platform for DNA synthesis enables us to compete in multiple markets that each experienced different market dynamics, hence, reducing risk through diverse revenue and customer base. Taking a minute to highlight our technology. For those of you who may not have had the opportunity to visit our fab, we have miniaturized the process of making DNA using traditional DNA synthesis chemistry by making DNA using our proprietary silicon chip platform. We have been able to reduce the amount of reagents used by 99.8% compared to a plastic plate platform. These reagents are a material driver of COGS, so leveraging this dramatic reduction enables us to achieve significantly lower costs than our competition. The request on each chip, we make show pieces of DNA called oligonucleotides. The oligos are built day by day like stacking Lego blocks on top of another, and then they can go up to 300 bases in length. As a reminder, each base is one of the four building blocks of DNA, ACGT. This step of oligonucleotides and silicon chip is common for all of our products. We call it the front end, and it is where half of the magic happens, by magic, I mean, where the technological differentiation originates. The vast majority of our sales are customer products, meaning that the sequences of DNA are defined by clients. However, we have designed our technology such that on each chip, we can group orders for many customers and multiple projects. Indeed, the oligos for all of these orders are synthesized in parallel on the chip and because each chip can set aside up to 1 million oligos, we can leverage the silicon platform to achieve differentiated scale. Once we made the oligos, we extract them from the silicon chip, and they are then sent to the appropriate back-end workflow. This might be in NGS production, NGS target enrichment power, oligo pools, ADC protein, synthetic controls and so on. Each of these back-end processes is unique based on the SKU and flavor of DNA produced. But typically, operators work 24/7 to run batch processes for multiple orders on commercial automation. Because the front end provides scale, low-cost liquidity, the back-end processes are remarkable by how unremarkable they are. The second half is the magic that lies in the overall complex highly alternative processes of capturing an order of designing the oligos of synthesizing multiple orders of multiple customers on a single chip, of sending them to the correct back-end lab for further processing, quality control, packaging and shipping. This in-house developed software, we use to track and direct these complex reduction processes in an automated manner enable us to rapidly go from order placement to shipping at scale and low cost, which is another true differentiator. This workflow speed and efficiency continues to provide the foundation for our revenue growth, specifically for Synbio, we reported revenue of $54 million for fiscal 2022, an increase of more than 50% year-over-year and $21.6 million for the fourth quarter. The strength in Synbio came in across the board with genes and oligo pools extending significant growth. An important point to make is that our products that generate revenue in our Synbio verticals are used by pharmaceutical, biotech, industrial chemicals and agricultural companies as well as academic labs, which shipped approximately 558,000 genes in fiscal 2022 compared to 372,000 genes in fiscal 2021. To support our continued growth, we are ramping our Factory of the Future in Portland, Oregon with a 24/7 manufacturing team currently training and producing test products today. Of note, we have about 40 employees from South San Francisco that have moved to Portland, bringing with them experience in our manufacturing processes and intricate knowledge of the company culture. These employees are now training our new employees. With 177 employees in Portland as of today, we remain on track to begin shipping products out of Portland in January 2023. Initial manufacturing in Portland will focus on genes, gene fragments, oligo pools targeting turnaround times of approximately 10 to 12 days for genes, the same as our current average turnaround time for genes. As we ramp production in Portland, we expect to introduce Fast Genes, which we believe will offer significantly faster turnaround times, enabling us to tap into the DNA makers market with premium pricing while maintaining our position as the most cost-effective gene synthesis provider. We expect to introduce Fast Genes in the fall of calendar 2023. I'd like to personally invite you to tour our Portland manufacturing facility. On Tuesday, November 29, we will be arranging tours for investors and analysts who wish to visit. Please contact Angela if you'd like to give a tour. Turning to NGS, we continued our strong back half of the year with $29.2 million in revenue for the quarter, bringing our NGS revenue for fiscal 2022 to just shy of $100 million, above our guidance. For the year, NGS revenue grew approximately 37% faster than the market. Orders coming in at $28.2 million for the quarter, and we expect fiscal 2023 to again be back half loaded similar to 2022. I'd like to point out that recently, we shifted our service structure to our core business sales force. As we build our business, we moved from equal compensation for orders and revenues to one where sales commission is now 90% tied to revenue. Both orders and revenues continue to be important metrics to track, but the incentive for our sales team has shifted and along with it the significance of orders numbers going forward. If not, for the remainder of the organization, our bonus structure is based on both revenue and gross margin. On the market side, many of you are aware that the sequencing landscape continues to evolve with less expensive whole genome sequencing options now available and several new and exciting players introducing solutions for longer lead offerings. For Twist, these technical events will offer opportunities. Indeed, we are sequencer-agnostic and an enabler across platforms. We recently announced an agreement with Illumina, whereby we will manufacture and they will sell an Exome Target Enrichment kit. We believe that by leveraging their robust sales force and integrated installed base, we will reach a differentiated customer set. In addition, we're working with PacBio on a robust solution for their new Illumina sequencers. For Exome sequencing today, we offer a complete workflow solution, including target arrangement, hybrid blockers, adapters, EDI, etc. As the cost of sequencing comes down, we expect that over time, applications and groups will move from Exome sequencing to whole genome sequencing. When that happens, meaning when applications like germline sequencing, or government-funded initiatives to sequence populations move from Exome to whole genome sequencing, we will have an opportunity to continue participating through our current offerings. For the very large market opportunities like cancer screening, the dynamics will be different. Indeed, they will still require deep sequencing and panel and exome sequencing will continue to be the mainstay. For instance, customers pursuing liquid biopsy or minimal residual disease need deep coverage of specific genetic sequences, sometimes 5,000x coverage or more, to ensure capturing disease-driving mutations at low allele frequency with high sensitivity. For these applications, we expect it to be cost prohibitive to conduct all genome sequencing, even as the cost of sequencing decreases significantly beyond what we see today. Additionally, we believe that the reduction in sequencing costs will encourage adoption of liquid biopsy and MRD assets, as overall cash costs will decrease and make them increasingly palatable for reimbursement and routing adoption by customers. Of note, in these applications, Twist product pricing is expected to remain constant, even as the cost of sequencing drops. When we introduced our NGS offering in 2018, we anticipated this sequencing price reduction and our product portfolio evolved over time. In fiscal '21 and 2022, we introduced several new products in the NGS space, with the vast majority targeting cancer. We have launched our methylation solution, methylome panel, CFDA controls for liquid biopsy and a rapid cost-effective patient-specific MRD panel targeting up to 500 mutations. And we have added Oncology Focus Alliance Panels developed by key opinion leaders at leading institutions like the Broad and BGI. These products support our efforts to enable our customers and dominate the workflow between the sample and the sequencer. Moving forward, we see growth in NGS coming from clinical investments of liquid biopsy testing as well as taking market share in research applications. Because that is a long sales cycle for customers to add our target enrichment panels, they need to undergo pilot testing, verification, validation, regulatory clearance and clinical testing before broad-based commercialization plans. Once we're included in a test that reaches the market, it is very sticky, as they will need to revalidate through the regulatory agencies for any changes. Today, we have about 16% market share for target enrichment and library prep. We have a lot of market share to gain in addition to escalating volumes for customers who enter the commercial phase. We continue to win pilots, which bodes well for future growth. In biopharma, we reported $24.2 million in revenue for the fiscal year, tremendous growth over fiscal 2021 and yet still just short of our guidance. Revenue for the '22 fourth quarter was $6.5 million, almost all of which came in September. Importantly, orders for the fourth quarter remained strong at $9.4 million, and we fully expect strengthened biopharma returns in fiscal '23, given that in the conversations we are having, our positioning as the high-quality local feeder with a net partner is now more important than ever. For Twist Biopharma based in San Francisco, we currently have 59 partners in biopharma with 83 completed and 50 active programs. 59 of the 133 programs are at milestones and royalties associated with the projects. The Twist Boston team had 62 active programs ongoing as of September 30, 2022. As we look ahead, we expect continued growth across the portfolio as we are moving towards the combined product and service offering together with the Twist Boston team targeted for launch in the second quarter of 2023. Working together for a little over a year, we have incredible synergies that we believe will enable us to expand our reach and market share in the biopharma segment. With reference to Revelar, we did not see the outcome we were hoping for. We invested a small amount of capital to take a long shot. We did not exceed our original commitment, actually firing up quickly when the opportunity did not materialize. This illustrates our discipline when it comes to investment decisions. Moving to data storage. We now have 37 employees working on the team, including 31 engineers on incentives. We continue to bring up our proof-of-concept chip, which we expect will enable us to move from writing one megabyte of data to one gigabyte of data in a silicon chip. We are also working to integrate the chip into our prototype electrochemistry DNA writer system. This system will enable us to launch our first pilot to early access customers. Importantly, the central archive is expected to set a new standard for archived data retention longevity. In late October, we announced the appointment of Patrick Finn to our newly equipped position of President and COO. Patrick has been with the company for eight years, taking charge of controls, and he has demonstrated success. We conducted an external search for the provision and Patrick was the right person to lead our next phase of growth and fiscal responsibility. I look forward to partnering with Patrick and the executive team to achieve our aggressive objectives. With that, I'd like to turn over the call to Jim to take us through our financials. Jim?

Jim Thorburn, CFO

All right. Thank you, Emily. We had another great quarter and a terrific year of growth at Twist despite a volatile macroeconomic environment. Revenue for quarter four was $57.3 million, which brings our revenue for fiscal 2022 to $203.6 million with year-over-year growth of 54%. Orders were $62.1 million for the quarter, which brings orders for the fiscal year to approximately $226 million and that's an increase from $160 million last fiscal year and 42% growth year-over-year. Gross margin for the quarter was 44.9% and gross margin for the year was 41%, and that's up from 39% last fiscal year, reflecting improved leverage. We shipped to approximately 3,300 customers, and that's another record for Twist, and we closed the year with cash and investments of approximately $505 million. Our NGS business has another strong year and revenue was $99.3 million, which is 37% growth year-over-year. Our fourth quarter revenue was $29.2 million, and that's an increase of 36% year-over-year. This growth reflects the strength of our product portfolio with the top 10 customers accounting for approximately one-third of our NGS revenue and received approximately 1,200 NGS customers in fiscal 2022. Our pipeline for large opportunities continues to scale. We're now tracking 257 accounts, up from 249 noted on our last earnings call, 120 have adopted Twist, an increase from 114 last quarter. Now turning to Synbio, which includes genes, DNA preps, IGG libraries and oligo pools. The Synbio revenue for the year rose to $80 million compared to $52.7 million in fiscal 2021, and that's an increase of 52%. Some of the highlights include shipping to approximately 2,300 Synbio customers. This includes a diverse customer base, including biotech and large pharma companies. Gene revenue increased to $61.5 million, and that's up from $39 million, and we shipped approximately 558,000 genes in fiscal 2022, a significant increase from 372,000 in the previous fiscal year. Oligo Pools had a strong year with revenue of $12.4 million, up from $8 million in fiscal 2021 with increased demand primarily from the healthcare segment. We continue to scale our antibody discovery business and revenue for fiscal 2022 was $24.2 million, up from $7 million in fiscal 2021. Nevertheless, this was below the low end of our range of $26 million. As Emily noted earlier, orders of $9.4 million were back-end loaded in the quarter. Consequently, our quarter four revenue was $6.5 million, which was flat to the third quarter. For Twist Biopharma, our antibody platform now has 59 partners, up sequentially from 53, under 50 active programs with 83 programs completed then back in the hands of our customers. Of our total programs, 59 include milestone and royalty agreements. Abaris, our Twist Boston business is doing well with 62 customers serviced in the quarter, including 36 projects on the Beacon platform. I'll now quickly cover our regional progress. EMEA revenue rose to $62 million in fiscal 2022 versus $44.1 million in fiscal 2021. APAC continues to deliver robust growth for revenue increasing to $19 million in fiscal 2022 from $10.3 million in fiscal 2021, and the US revenue was $122.5 million in fiscal 2022 versus $77.9 million in fiscal 2021. Now moving down the P&L. Our gross margin for the quarter was 44.9%, and this brings our overall gross margin to 31.4% for fiscal 2022. Note the gross margin includes stock-based compensation of $4.5 million, depreciation of $6.5 million. Our operating expenses for the fiscal year, including R&D and SG&A change in fair value and mark-to-market adjustments of acquisitions was approximately $319 million as compared to $204.4 million in fiscal 2021. To break it down, R&D for the fiscal year was $120 million, an increase from $69 million in fiscal 2021. Core business R&D for fiscal 2022 contributed to $56 million compared to $37 million as we continue to invest in new products and process development. Antibody R&D was $25 million in fiscal 2022, up from $15 million, reflecting our continued investment in our antibody discovery business. Revelar spend was $14 million in fiscal 2022. Data storage spend was $25 million, up from $15 million in the previous year. We have previously given guidance that the original data storage spend would be $40 million. However, as the year unfolded, we managed that spend and manage that burn in data storage. SG&A for the fiscal year was $212.9 million, an increase of $135.9 million in fiscal 2021, and this includes compensation costs of $136 million, which includes stock-based compensation of $65 million. Start-up costs in SG&A for Portland were $16 million in fiscal 2022, including approximately $6 million in compensation costs. Change in fair value of contingent considerations and indemnity holdback for the fiscal year resulted in a gain of $14 million versus a gain of $0.5 million in fiscal 2021. Stock-based compensation for the year was approximately $18 million as compared to $37 million in fiscal 2021. Our net loss before taxes was $234.8 million for fiscal 2022, as compared to $152.7 million for fiscal 2021, primarily due to higher OpEx costs we highlighted earlier. CapEx for the fiscal year was $102 million. Portland CapEx for fiscal 2021 and fiscal 2022 accumulative is a total average of $87 million, which includes $46 million for improvements, $34 million for lab equipment and $7 million for capitalized software. We exited the fiscal year with $59 million in inventory and cash and investments of approximately $505 million as of September 30, 2022. I'd like to note that the report in conformance with accounting standards is published under U.S. GAAP, and there have been no material adjustments proposed by our independent auditors. I'll now provide guidance for fiscal 2023. We enjoyed strong bookings in quarter four, another record year of growth. However, due to the macroeconomic environment and as more SARS-CoV-2 variants continue to spread along with seasonal vacations this quarter, we're projecting our Q1 revenue to be approximately $54 million. Our fiscal 2023 guidance for the year is in the range of $261 million to $269 million. We estimate Q1 SynBio revenue to be approximately $21 million, and for the year, to be $104 million to $106 million. We estimate Q1 NGS to be approximately $25 million and for the year, $120 million to $123 million. Our NGS is down sequentially. The reason is that a couple of our large customers are taking shipments in the first quarter due to a seasonal impact of vacations. We estimate antibody discovery revenue for the first quarter will be approximately $8 million and for the year, $37 million to $40 million. Our fiscal 2023 gross margin is projected to be 39% to 40%, and our operating expense projected to be approximately $365 million for the year, which includes $138 million in R&D and $227 million in SG&A. Our net loss guidance before taxes for the year is expected to be approximately $260 million, which includes stock-based compensation of approximately $83 million, depreciation and amortization of approximately $26 million and data storage expense of approximately $46 million. CapEx for fiscal 2023 is projected to be approximately $50 million, with another $20 million expected to be deployed in Wilsonville, and cash balance projected at year-end of fiscal 2023 is expected to be $300 million. For fiscal 2024, we're projecting revenue to be approximately $350 million, including $50 million for antibody discovery. Gross margin is targeted to be approximately 49%, OpEx projected to be approximately $386 million, and operating loss is expected to be approximately $215 million, which includes stock-based compensation of approximately $90 million, depreciation and amortization of approximately $35 million and data storage operating expense of approximately $57 million. CapEx is anticipated to be $40 million, and the year-end cash balance in 2024 is expected to be $170 million. In summary, we had a record year and continue to build our capabilities, expanding our position as a provider of high-quality, affordable synthetic DNA to customers across multiple industries. We're now a leading supplier of NGS sample prep and we have scaled our antibody discovery capabilities, continuing to deliver on our DNA data storage strategy. Although there is macroeconomic volatility, we're excited about the opportunities ahead and are focused on executing the financial projections outlined in today's call. With that, I'll turn the call back to Emily.

Emily Leproust, CEO and Co-Founder

Thank you, Jim. As fiscal 2023 is now well underway, our focus remains on driving to our profitability in our core business. We've laid out the three-year guidance with the path to adjusted EBITDA and breakeven for the core business, and we are targeting $8 million revenue to reach adjusted EBITDA breakeven for biopharma. In Synbio, we expect to generate initial revenue out of the Factory of the Future located outside of Portland, Oregon in January 2023. As we qualify our production processes in this new facility, we will begin to add new products for Synbio that benefit from the larger square footage of the site, including Fast Genes, long panels, impossible genes, and R&D-based products. For NGS, we expect another back-half loaded deal with larger customers producing liquid biopsy tests as they continue to run their commercial results. With sequencing costs coming down, we remain focused on expanding our reach in cancer and owning the workflow between the sample and the sequencer. In biopharma, we are planning an integrated portfolio of antibody discovery and optimization offering, capitalizing on efficiencies between our synthesis library approach paired with individual discovery from our Boston team, complemented by our machine learning and AI collaborations. In data storage, we have our first fully integrated seamless chip with electronic controls in-house, and we are making good progress in bringing up the chip and our new pilot production in the data storage writer. We plan to launch our Century Archive solution as an early access offering in late calendar 2023. In parallel, we will continue to partner with leaders to set the stage for commercial success across the Century and accessible Archive solutions while preparing the market for DNA data storage. Overall, I'm reminded of the speech I gave when we went public a little over four years ago. At Twist, it hasn't always been easy. In fact, it has never been easy, but we always contribute to overcome the challenges we face. We have embodied the resilience and financial discipline throughout the organization to report another strong year of growth. And each day, we have the opportunity to go again confidently. With that, let's open the call for questions. Operator?

Operator, Operator

Thank you. One moment for our first question. Our first question comes from Steven Mah with Cowen. Your line is now open.

Steven Mah, Analyst

Oh, great. Can you guys hear me?

Emily Leproust, CEO and Co-Founder

Yes.

Steven Mah, Analyst

Okay, great. Thanks for taking the question. A question on the gross margins. I know they're dropping in fiscal year 2023 as the Factory of the Future scales. Then Jim, you mentioned it grows to 49% in fiscal year 2024. Would you expect the utilization percentage of the Factory of the Future in fiscal year 2024 to achieve that 49% gross margin guide? And then also, are you reiterating the 50% to 52% gross margins at $300 million in core revenues?

Jim Thorburn, CFO

Yes. So in terms of Factory of the Future utilization, we haven't disclosed what the utilization rate looks like. The 49% gross margin reflects the growth in top-line revenue and does reflect improved utilization. In terms of as we continue to scale the business, we still see a line of sight in terms of achieving the longer-term gross margin of 55% to 60% for the business.

Steven Mah, Analyst

Okay, great. Thanks for that. And then my second question, on MRD, Emily, you noted that the business is doing well. People are validating the MRD assays. Did you mean that the users are validating lab-developed tests? And then the second part of that is could you give us a sense of your mix of your MRD customers? Are these reference labs, academic hospitals, or basic R&D? Thank you.

Emily Leproust, CEO and Co-Founder

Yes, that's a great question. Thank you, Steve. So as a reminder, we provide the reagents to enable customers to run MRD tests. So we are not selling our own MRD tests, just to be clear. Therefore, the majority of our liquid biopsy and MRD customers are diagnostic companies that are developing and validating their own tests.

Operator, Operator

Thank you. One moment for our next question. And our next question comes from Catherine Schulte with RW Baird. Your line is open.

Catherine Schulte, Analyst

Hi, thanks for the question. I guess first, maybe the step down in NGS orders sequentially. Can you just talk to the drivers that were going on?

Jim Thorburn, CFO

Yes. I think a couple of issues. We had some large orders come in the previous quarter. As we noted in the call, a couple of our customers are actually asking us to ship in the first quarter of the calendar year. So that step down in orders is just a one-time event as these customers are pushing their orders out into Q1. We've got a very strong backlog in terms of the number of customers. Our pipeline continues to grow. So we're feeling good about where we're at. We're just dealing with, I think, the year-end vacations. We see some impact of lockdown in China. And at the same time, our customers are signaling a strong outlook for us on our NGS products and we anticipate that the first quarter of fiscal next year is going to be strong.

Catherine Schulte, Analyst

Okay. Got it. And then I think probably given the events of this week, you highlighted that no material adjustments have been proposed by your auditors. Can you—you’ve had a material weakness that's been highlighted in your filings for a while now. Can you just talk to how those remediation efforts are progressing? And any other comments you can make regarding the short report from earlier this week?

Jim Thorburn, CFO

Yes. So, thanks, Catherine. So eventually, three material weaknesses, one on order entry, other on journal entries and other on ITGCs. We've remediated the order entry weakness, we remediated the general entry weakness on ITGCs. The ITGC issue that remains, and that's purely due to user access issues. No impact on our financials. And in terms of the short report, a couple of things that were brought up in the short report. We in the business, I mean, we worked with both PwC and Ernst & Young. PwC is a great firm. We moved to Ernst & Young, because if you look at our business, we've significantly grown our health care business. Ernst & Young has a strong health care practice. We collaborate well with our auditors. And as highlights, we get no material weaknesses. And in terms of some of the personal references against me, I actually helped out an organization. We have got 230,000 ladies in prisons in this country to build careers, help them get trained, they get development and a lot of them move on to be executives in companies, which I think is a great social impact. I was actually offered share ownership. I was offered shares, but I decided to decline. I would prefer to believe a share. The statements in the report are totally wrong.

Emily Leproust, CEO and Co-Founder

And, Catherine, just as you know, we won't comment further on the short report. We're very happy to take questions on the business, but our statement speaks for itself.

Catherine Schulte, Analyst

Right. Thank you.

Operator, Operator

Thank you. One moment for our next question. And our next question comes from Matthew Sykes with Goldman Sachs. Your line is now open.

Matthew Sykes, Analyst

Hi, good morning. Thanks for taking my question. Emily, maybe the first one for you, just on the gene maker market as it relates to Factory of the Future capacity? I know you've mentioned in the past, it's like a $1.4 billion market. And what characteristics are important to them is turnaround time. Could you maybe just talk a little bit more about the improvement in turnaround time that the Factory of the Future will bring and just kind of talk a little bit more about, because I think originally, you thought that price was going to be a defining factor for that market, but it's really turnaround time. Could you just talk about what that market is really looking for? I'm sure it's turnaround time, but in addition, what else and how you can unlock that market to solve for the capacity that you're building with Factory of the Future to make sure that there's a significant enough market out there for what you're building?

Emily Leproust, CEO and Co-Founder

Hi, Matt. Thank you for the question. Now that we've been in the marketplace for a number of years, we shipped more than 0.5 million individual tubes and genes this year alone. We have a really good grasp of what customers want in the makers market. There are two groups. There are the big companies that in-source the work as well as academic labs that need DNA. What we find from those groups is speed is very important for them. Even if the DNA was free, they would not get it from us at the speed that we have now, which is the industry average. That's why we made an effort to lay a plan to offer them gene synthesis that is the same or faster than if they did it themselves. The reason we can do that is when we analyze the process that we use in South San Francisco, it's a 20-step back-end process of gene synthesis. It's not a linear production process today. It’s 20 steps, but we have 10 machines. So basically, the same order has to go to a machine twice, and that creates conflict. When we analyze the data, everything is logged in a database. We found that DNA is spending half of its time in freezers waiting for the next machine to be available. We know that intrinsically, the factory process can be half as fast if we can remove those production bottlenecks where the plate is waiting for the next machine. That’s what we've done in Portland. We now have 20 machines so that it’s a true linear production chain. The plates go into one machine, and we finish goes directly to the next one, so there is no wait time. That’s why we think it’s a low risk on the process side because we are not changing the chemistry or the instruments. It’s just the layout that enables us to offer Fast Genes, which will unlock the makers market. There’s also a commercialization strategy to leverage e-commerce and digital marketing. We will be making great effort on our e-commerce and our B2B solutions to make sure that, when we have Fast Genes, the transaction process that the customer has to go through is intuitive, frictionless, and beautiful.

Matthew Sykes, Analyst

Got it. Thanks, Emily. And then, Jim, one for you. Just looking at the fiscal 2024 guidance on the OpEx, which is $386 million. I know that there's $57 million of that is DNA storage. Could you talk a little bit about your expectations for R&D versus SG&A split within that $386 million and where the flexibility is within those two segments for SG&A versus R&D for that $386 million to maybe come down a little bit as you start moving closer to that time period?

Jim Thorburn, CFO

Yeah. In terms of the three specs, we haven't broken out the R&D portion. The flexibility we see is in terms of SG&A as we intend to continue to grow and leverage our investment in infrastructure. We've clearly slowed down the rate of growth of OpEx. We've been investing heavily over the last few years to build out our organization infrastructure. As we continue to scale the top line, we've highlighted in previous calls that OpEx will grow at a slower rate than top-line growth. As we continue to manage our data storage investment, continue to manage our SG&A, in particular, our back-end office infrastructure, we'll continue to see – to manage that cost base going forward, which will then support getting to adjusted EBITDA breakeven and getting to positive income. So we're very close to that at the end of 2024. As you can see, we've got plenty of cash runway as we get closer to that adjusted EBITDA breakeven, and we have the opportunity to manage our data storage spend.

Operator, Operator

Thank you. One moment for our next question. And our next question comes from Luke Sergott with Barclays. Your line is open.

Luke Sergott, Analyst

Great. Good morning, everybody. I have a quick question. Can you provide the foreign exchange assumption for next year and give us an idea of how that has trended throughout this year?

Jim Thorburn, CFO

Yes. So, look, it's Jim. Good morning. In terms of FX, most of our business is actually in dollars and most of our costs are actually in dollars. Although there is maybe a 10% impact, it’s not a huge impact on our business so far. In terms of the pricing on a go-forward basis, we're actually working with a lot of our NGS, particularly some of our larger customers who already locked in the prices. So, in terms of FX, yes, we see some impact around the fringes, but it's not a significant headwind for us.

Luke Sergott, Analyst

All right. Cool. Thank you. That's fine. On the rest of the business, so you talked about the NGS push-outs. So what are customers saying on why they pushed those orders out to Q1? And is this related to anything to all the new technologies out there?

Jim Thorburn, CFO

I'm not aware of the causes. It's just a matter of timing. The couple of customers that I'm aware of, it's just a timing issue. The end of December I'm going to be shipped in January based on their end customer demand. So I haven't heard anything about technology causing the issue. Emily, do you have any thoughts?

Emily Leproust, CEO and Co-Founder

Yes. No, I think it purely is the timing of their business. We have experience and the last weeks of December are always awkward in shipping, and this year is especially awkward. We think that most of our customers will be shut down the last week of December, and so we are planning for that.

Luke Sergott, Analyst

All right. I have one last question. You provided the 2024 guidance with a growth expectation of roughly flat growth, and achieving 30% by 2024 is quite impressive. I'm curious about the underlying assumption. Is there no expected acceleration from the Factory of the Future becoming operational? Is the growth primarily driven by the printers coming online, with plans to introduce more in 2024 as the business scales? Additionally, are there any mix dynamics related to Synbio or NGS as the Factory of the Future expands, considering there are margin implications?

Jim Thorburn, CFO

Yes. In terms of factory of the future ramp, we're seeing roughly—it's early days, yes, but we're seeing roughly a 50/50 split in terms of Synbio and NGS mix. In terms of outlook, the macroeconomic environment is still volatile. So we're projecting conservatively for a couple of years here. We've been prudent in our forecasting. In terms of capacity. We've made the investments. We've made about an $87 million investment, we got another $20 million to go, and that’s consistent with the previous guidance we've provided. We don’t see any headwinds from a capacity point of view as all that into as analysts highlight, the execution and then executing on the makers market.

Operator, Operator

Thank you. One moment for our next question. And our next question comes from Vijay Kumar with Evercore ISI. Your line is now open.

Vijay Kumar, Analyst

Hey, guys. Thanks for taking my question. Jim, I had one on accounting here. I think one of the points raised by the short orders, COGS being classified as CapEx. Can you comment on that? And when I looked at the last the third quarter 10-Q, some of the cost, the operating lease costs associated with the Factory of the Future were recorded in OpEx. Is that a change from how expenses were being recorded in the past, or is this as you move into a leased facility and it's just how the accounting works? Maybe address those two issues.

Jim Thorburn, CFO

In regard to COGS being transferred to the balance sheet, that's an interesting point, but I'm not sure where that idea originates. If you examine the growth and investment in capital expenditures, as shown in one of today’s slides regarding Portland, we have invested approximately $4 to $6 million in tenant improvements. We effectively took on the construction of the necessary improvements for 100,000 square feet and have developed the facilities for the labs, including the installation of offices and piping. The costs related to our investment in Portland are reflected on our balance sheet. What was the other part of your question, Vijay?

Vijay Kumar, Analyst

The operating expense, some of the lease expenses related to a factor of the future that's going under OpEx. Is that a change versus prior?

Jim Thorburn, CFO

The leasing expenses related to the Factory of the Future is part of startup costs and that prior to factory qualification that is sitting in SG&A, and that was $16 million for this year, and we call that out every quarter. So there's been no change in how we account for that.

Vijay Kumar, Analyst

Thank you. And maybe one on the gross margin cadence here. What's the confidence level that the gross margins are going up by 900 basis points from fiscal 2023 to 2024? That seems like a very steep ramp. And when I look at Q1, is there any first half versus second-half cadence issues here on gross margins when I look at fiscal 2023?

Jim Thorburn, CFO

If you look at last quarter, our gross margin was 45%. As we scale through the Factory of the Future and improve our utilization, we are successful in terms of growing in the makers market. We’ve got a number of levers there. You get the impact of reduced underutilized capacity. Second is in terms of the makers market, Emily has highlighted, we get a higher price for Fast Genes. In terms of investments, our R&D, that was another point made in the short report that our R&D increased from $70 million to $120 million, where we increased investment in Synbio and NGS from $37 million to $56 million. So we're hiring additional scientists and increasing investment in NGS and Synbio, continuing to refine our processes and launching new products. All those elements contribute to improving our gross margin.

Vijay Kumar, Analyst

Understood. And if I may, one last one. Revenues are up. I think when I look at the fiscal 2024 guide versus 2023, the expectations of revenue is up 30%, the OpEx up, I think, 6%, and I think our cash OpEx excluding FPC is low singles. Is that level of SG&A spend R&D spend enough to sustain the growth here?

Jim Thorburn, CFO

Yes, I mean, we look back over the last couple of years. We've increased R&D for Synbio and NGS. We've spent from $37 million in R&D for Synbio and NGS in 2021 to $56 million. So that’s about 50% growth. The Factory of the Future provides fast turnaround time and Fast Genes, which allows us access to the makers market. So it’s a combination of historical investment and the impact of the Factory of the Future and our investment in antibodies that allows us to deliver the growth that we're projecting.

Operator, Operator

Thank you. And the next question comes from Puneet Souda with SVB Securities. Your line is open.

Puneet Souda, Analyst

Yes, hi guys. Thanks for taking the questions. So, first one, what are you hearing from European customers in terms of the order book? And wondering if there was any NGS order book impact from that. Could you just elaborate just given the market conditions in Europe? We've been getting questions on that.

Jim Thorburn, CFO

In terms of the order book for Q3 and Q4, we experienced a sequential decline. However, feedback from our customers is selective and the outlook remains positive. Some orders are being delayed from Q4 to Q1. Discussions surrounding liquid biopsies and minimal residual disease are progressing well. In Europe, we had a surprisingly strong quarter in September, which was better than we expected. We are optimistic about the situation in China, although we are noticing some effects from lockdowns that will impact us as we move from Q4 into Q1 of our fiscal year. Therefore, we anticipate that the September to December quarter will show a downturn in China and Asia due to these lockdowns. Overall, our customer feedback is robust, attributed to the quality of our products. We position ourselves as a low-cost quality provider, and this market environment is advantageous for us.

Puneet Souda, Analyst

Okay. That's helpful. Emily, if I could ask on the liquid biopsy customers. I don't know if you provided that number; I think you had about 20 or so liquid biopsy customers in the past. Could you quantify, just given all the questions lately being asked, how large of a book of business is liquid biopsy today? Are these early validation versus any commercial products where your probes are being utilized, and what are your expectations for contribution in 2023 from these liquid biopsy customers? Because that's obviously an important driver even with the NovaSeq X plus launch, which is targeted more towards whole genome shift.

Emily Leproust, CEO and Co-Founder

Yes. Maybe I'll start, and Jim can fill in. Yes, we're actually starting to see revenue from customers that are likely in the commercial phase. We ship probably not always easy to know how they are used with customers if it's in validation or pilot. But in the past, most of our revenue was for the R&D, the development of the test. As we find bigger contracts and get bigger orders, now we're going to see a slow down in the commercialization phase. It’s what we can see, but…

Jim Thorburn, CFO

No, there’s not more I can really add but on our large accounts continues to grow. We feel well-positioned with liquid biopsy and the other applications. We discussed some of the feedback from customers. Some of it's timing. We continue to make inroads in the market. It’s all about execution over the next year. We have a great cash organization. We’ve got great products, so.

Puneet Souda, Analyst

Okay. Anything you can elaborate on in terms of how we should think about your guide for 2023 and 2024? Obviously, by 2024, these would be larger customers. I'm wondering in terms of overall contribution that you could see from liquid biopsy?

Jim Thorburn, CFO

No, we don't break that out. The reason for that is we have agreements with our customers. The only customer I think that has gone public is GRAIL.

Emily Leproust, CEO and Co-Founder

I think the one point we can comment on is what we shared before is liquid biopsy is a big part of our strategy for revenue growth, and that's why we have good confidence in our abilities to deliver this as assays go commercial.

Puneet Souda, Analyst

Okay. That's helpful. And if I could ask a more broader question. Just given the sort of the questions that have been asked lately in terms of pricing, what is your philosophy here in terms of pricing versus the market? Obviously, you've been competitive in the past. And as you scale in the Factory of the Future, could you sort of elaborate about your pricing expectations? Because I think the question is, this is a higher inflationary environment, and you are getting some benefits from the COGS at the Factory of the Future, but just could you elaborate a little bit on how you're thinking about pricing in 2023 within the guide that you've laid out? Thank you.

Emily Leproust, CEO and Co-Founder

Yes. So in a factory inflationary environment can be somewhat useful for us in production because since we use so much fewer reagents than anybody else, if the reagents go up 5%, 10%, 20% in prices, how the impact to us is a lot less significant than on the competition, so we're quite small. I think when we signed the lease in Portland, it’s a very long-term lease, and we basically capped the rate of increase on the rent for a long time. That's another great benefit to us. So that's on the cost side. On the price side, we plan to be value-priced. When we launch our Fast Genes, we expect that the ASP will be higher. However, it will be with the same production facilities. Therefore, we anticipate that margins will increase. Similarly, when we've launched the IgG product line, that is a great opportunity for us. IgG requires two genes to make one IgG, and the ASP is somewhere between $500 to $800 depending on the flavors of IgG that customers want. Again, that's an opportunity for us to boost our margins. We're always looking for opportunities. As we go up the value chain, either in Fast Genes or long genes or impossible genes or IgG, RNA products, you can see those are more differentiated, harder to make products, but still all help us dominate because of the silicon chip. They come from the silicon chip, but they have other higher-value products. We’ll be able to charge a premium for it and improve our margins.

Puneet Souda, Analyst

Got it. Okay. Thanks, guys.

Operator, Operator

Thank you. One moment for our next question. And the next question comes from Rachel Vatnsdal with JMP Chase. Your line is open.

Rachel Vatnsdal, Analyst

Hi. Thanks for taking the questions and fitting me in. So first up, on DNA data storage, you mentioned that you're launching that offering for early access customers late next calendar year. So can you just talk about how much of a contributor do you expect that DNA data storage to be towards the $350 million revenue guide in fiscal year 2024? And then, can you remind us what the gross margin profile for that DNA data storage offering is expected to be?

Jim Thorburn, CFO

We don't break out the data storage revenue contribution in the $350 million. Long-term gross margins for data storage could be quite compelling. Initial models indicate anything from 60% to 65% gross margins. Why is that? One is because of the technology. We do have a leading position in the marketplace. Expectations are we're going to leverage our investment under IP and that will be reflected in our gross margins.

Rachel Vatnsdal, Analyst

Great. And then there's a follow-up.

Jim Thorburn, CFO

Sorry, Rachel.

Rachel Vatnsdal, Analyst

Yes. Yes, you answered both of them. And then, just as a follow-up on that. You had previously mentioned that you were developing an enzymatic approach to support a full commercial launch for that DNA data storage. So can you just give us the latest update on your enzymatic offering? And what milestones do you have left before you can—how that enterprise should, be fully developed? Thanks.

Emily Leproust, CEO and Co-Founder

Yes. I think it's a great question. So we're not giving an update at this point on enzymatic synthesis, except to say that we are incorporating the chip, the CMOS chip that we have with the enzymatic synthesis to help drive our DNA data storage process. We are reemphasizing that enzymatic synthesis is going to be a key strategy of our better storage product offering. We are not giving any technical update at this point. However, what we are looking for is developing the process to add bases to do it at high quality, to do it at high speed. Most importantly, to do it at a low COGS. Jim just mentioned our margin profile and it cannot be done with 10,000 enzymatic synthesis where the NTP is not tethered to the enzyme. The only way to get low COGS and high margin is to tether that NTP to the enzyme. We think our approach is a winning approach. We’ll pick the most appropriate time for us to release technical details. We like what's happening, and we are pleased with our progress. We’ll reserve details for another day.

Rachel Vatnsdal, Analyst

Sounds great. That’s it for me. Thank you.

Jim Thorburn, CFO

Thank you.

Emily Leproust, CEO and Co-Founder

Thank you.

Operator, Operator

And the next question comes from Matt Larew with William Blair. Your line is now open.

Madeline Mollman, Analyst

Hi, thank you. This is Madeline Mollman speaking for Matt Larew. I have a quick question. Regarding biopharma, you've mentioned that it takes between 18 and 24 months for partners to progress from collaboration to filing an IND application. Now that you have been working on this program for over two years, could you share when you expect to begin seeing some downstream milestones and royalties?

Emily Leproust, CEO and Co-Founder

Yes. Thank you so much. Actually, we have a robust effort internally to track the progress of those assets and we have our own model on our views of the value. At this point, we're not quite ready to announce any of those milestones and royalty. But as we've said in the past, those will be upside to our plan. So stay tuned. It's definitely something that we track with our partners because we are definitely looking forward to both the utilization as well as the sensitive validation. One last point I'll make is that we’re not in the business of subsidizing our partners. As a reminder, we do make about 50% to 60% gross margin on the upfront fee that we charge. Therefore, the margin-related triggers will be upside and additional monetization on top of the gross margin that we made on the work that we did.

Operator, Operator

Thank you for your questions. At this time, I'd like to hand the conference back over to Emily Leproust for closing comments.

Emily Leproust, CEO and Co-Founder

Thank you very much for joining us today. I'd like to wish you all a wonderful Thanksgiving holiday this week. Hopefully, we see some of you live in Portland following the holidays and others virtually at the Evercore Health Care Conference in December. With that, thank you very much.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.