Earnings Call Transcript - TWST Q1 2023

Operator, Operator

Welcome to Twist Bioscience's Fiscal 2023 First Quarter Financial Results Conference Call. I would now like to turn the call over to Angela Bitting, Senior Vice President of Corporate Affairs and Chief ESG Officer.

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 2023 first 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. Emily will come back to discuss our upcoming milestones and direction, and then we'll open the call for questions. (Operator Instructions) 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 be making 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 and 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 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. For the first quarter of fiscal '23, we reported revenues of $54.2 million, consistent with our guidance shared on our fiscal year-end call in November, and we posted strong orders of $64.7 million. When we turned the first quarter across SynBio and NGS, it is a story of an expanding customer base, making it for a larger percentage of our revenue, meaning that we are attracting more customers with an increasing potential to extend within existing accounts. Beginning with SynBio, we reported revenues of $21.7 million, above our guidance of $21 million. In addition, we reported orders of $26.6 million. We continue to ship our clonal genes starting at 10 business days. Gene Fragments and Oligo Pools in ex U.S. take 5 days, and we see this consistent turnaround time benefiting our expanding share of the DNA buyers market. We shipped our first revenue-generating products out of the Factory of the Future last week, which, as we said previously, means that we are now delivering the same products with turnaround time equivalent to our South San Francisco site. We shipped Oligo Pools and Gene Fragments from our Wilsonville site and leveraged our load balancing software to send orders to the right location. We expect to be shipping clonal genes next month. In addition, we'll be focused on decreasing turnaround time for clonal genes significantly with the launch of our fast genes offering expected this fall, which will enable us to tap into new markets, specifically within the DNA makers market. We shared our competitive advantage across all platforms during our Factory of the Future visit at the end of November. Virtually every product we make is built out of our silicon platform to manufacture synthetic DNA at scale. This front-end proprietary advantage enables a significantly different variable cost profile for Twist Oligo synthesis, which then feeds into all of our product lines. Speaking specifically to the cost of making a gene, today, our variable cost for oligo synthesis is less than $1 for clonal genes, with total viable cost of approximately $35 to $40 per gene. This cost profile enables us to continue to serve our customers as the low-cost, high-quality provider, while still achieving a contribution margin of 65% to 70% for SynBio products. In addition, a key component of our cost advantage is the scale we have built and continue to drive. Moving forward, we expect to continue to leverage this advantage to pursue customers who currently make their own DNA because they need it faster, the group we call the DNA maker. We believe we'll be able to command premium pricing for these genes. To provide a bit more context around who makes the DNA makers market, these are medical and academic research scientists who make their own DNA rather than buying. We know from the Bureau of Labor Statistics field research that as of 2019, there were 270,000 of these scientists in the United States alone. These are all potential customers. We believe the maker market is ripe for disruption with wrapping DNA synthesis with a reasonable price offering. While the process of price discovery is analyzed to maximize margins for this particular product. Genes are available today from competitors at a fast turnaround time, but their capacity is limited, and the cost can be up to $1 per base, which is cost prohibitive for most researchers. An analogy of a market that has been disrupted in a similar way is the use of kits to purify DNA. It was a complicated process that required multiple time-consuming steps. This market was disrupted by offering a kit that contained ready-to-use components to make the process simple and seamless. Initially, some scientists exited it, whether based on price, but today, these kits are used globally. We see a direct parallel here in converting DNA makers into DNA buyers by applying similarly appealing products to change behavior. Beyond 5 genes, we believe we have an opportunity to launch additional products out of our Wilsonville facility, including RNA, long fragments, and GMP DNA. Moving to NGS, we reported revenue of $24.4 million, just short of our guidance, and orders of $31.2 million for the quarter. As we shared last quarter, we see another back-half loaded story here, with larger customers ordering in the last two quarters of our fiscal year. As expected, we saw a few key customers move orders out from December into the first calendar quarter. We remain confident in our fiscal year guidance that NGS will continue to grow substantially year-over-year. We see this business continue to expand with new sequencing offerings and game-changing clinical applications. Our targeted solutions leverage the higher degree of shipping efficiency from our oligos. Therefore, our solution decreases the cost per percent for our customers, and we are essentially selling a gross margin improvement. We continue to work with various existing and new sequencing companies, and we are sequencer agnostic. As this cost of sequencing comes down, we believe volumes will continue to increase as we have seen over the last two decades. Importantly, we believe that for indications like oncology, where clinical applications, including liquid biopsy and minimal residual disease require deep sequencing, panel and exome sequencing will continue to be the mainstay. We see the reduction of sequencing costs driving reimbursement across key areas, encouraging access by a broader group of patients, which will create subsequent volume increases. In addition, we continue to expand our COVID control offerings in new disease areas as well as cancer with our latest COVID control release during the quarter. While we see consistent ordering, it is not material due to the evolving nature of the pandemic. As a royalty note, we do not plan to file a 510(k) application for our SARS-CoV-2 panel that received emergency use authorization from the FDA in 2021, as revenue was not material for this product. We believe the opportunity across cancer continues to grow while COVID products are decelerating. For Biopharma, we recorded $8.2 million in revenue, a bit ahead of our guidance, and $6.9 million of orders. Of note, we signed a multi-target agreement with Astellas that was announced in January. We are now focused on enabling our sales team to sell the integrated offering between our South San Francisco and Boston offices. Under one roof, we offer in vitro synthetic library, in vivo discovery and screening, and in silico lead optimization, candidate selection and optimization with AI and machine learning. We believe this offers a fully integrated antibody discovery engine with a guaranteed deliverable. As we are now operating as an integrated team, our total partners active and completed programs will include the historical average business. As of December 31, 2022, we have served 278 partners, with 95 active programs and 63 of our programs having milestones and/or royalties associated with the project. In addition, we continue to advance many internal candidates through the early discovery stage and we have several antibodies that have reached the preclinical stage and are closer to potential out-licensing by biotechnology-Biopharma partners. Turning to data storage, we continue development work on our first data storage system, which combines our proof-of-concept chip with the recently assembled proof-of-concept writer. We have engineered a scalable end-to-end system to store data in DNA and are now writing software to coordinate all the steps required to code, write, sequence, and decode digital data. Once completed, we will begin to run the system in pilot production. All of this work supports the release of early access to our first product, the Century Archive, which we expect to be available towards the end of the calendar year. With that, I'd like to turn the call over to Jim to talk through our financials. Jim?

James Thorburn, CFO

All right. Thank you, Emily. We had another strong quarter of execution at Twist despite a volatile macroeconomic environment. Revenue for quarter 1 was $54.2 million, which is year-over-year growth of 29% and a sequential decline of 5%, which is in line with our guidance of $54 million. Orders were $64.7 million for the quarter, a sequential increase of 4% and 30% growth year-over-year. Gross margin for the quarter was 45.7% and we shipped approximately 2,100 customers, and that's up from approximately 1,800 customers in quarter 1 fiscal '22 and we ended quarter 1 with cash and investments of approximately $439 million. For NGS, revenue for quarter 1 was 24.4%, slightly below our guidance, and 27% year-over-year growth. As we noted in our previous earnings call, we had a strong fourth quarter and a couple of our larger customers pushed shipments from the December quarter into January and were negatively impacted by the COVID pandemic in China, which continues to impact our China revenue in the current quarter. Our first quarter orders were $31.2 million, which is a record. It represents sequential growth of 10% and 43% growth year-over-year. This growth reflects the strength of our product portfolio with the top 10 customers accounting for approximately 40% of our NGS revenue, and we served approximately 600 NGS customers in fiscal quarter 1. Our pipeline for larger opportunities continues to scale, and we're now tracking 264 accounts, and that's up from 257 noted in our last earnings call, with 130 having adopted Twist and that's an increase from 131 last quarter. Now turning to SynBio, which includes genes, DNA preps, IgG, libraries, and Oligo Pools. SynBio revenue for the quarter was $21.7 million, exceeding our guidance and representing a year-over-year increase of approximately 21%. Orders for the quarter were $26.6 million, which represents 20% growth year-over-year. Some highlights include shipping to approximately 1,600 SynBio customers, which has grown from approximately 1,270 in quarter 1 fiscal '22. The customer base, as Emily noted previously, includes biotech and large pharma companies. Genes revenue increased to $16.2 million, which is up from $13.5 million in the first quarter of fiscal '22, representing last year-over-year growth of approximately 20%, and we shipped 134,000 genes in the quarter, an increase of 7% year-over-year. Oligo Pools performed strongly with revenue of $3.7 million, primarily driven by demand from the healthcare segments. Now in Biopharma, we continue to scale our antibody discovery business. Biopharma revenue for fiscal first quarter '23 was $8.2 million, reflecting year-over-year growth of 70%, in line with our prior guidance. Orders for the quarter were $6.9 million, down sequentially from $9.4 million in the fourth quarter. Biopharma orders have been impacted by an overall weaker environment, and we did not see the Pharma Christmas in the quarter as we've seen in past years. That said, we added four more milestone and royalty agreements, bringing the total to $63 million, up from the $59 million noted in the previous earnings call. While Emily reported total Biopharma metrics including historical adverse agreements, solely for the first quarter of fiscal '23, we had 95 active programs for the combined Twist and various antibody services. I'll give a quick update in terms of the breakdown by industry and a quick update on our regional progress. Healthcare for the first quarter was $30 million compared to $21.1 million in the same period of fiscal '22. Industrial Chemical revenue was $13.6 million in the first quarter of '23, as compared to $12.5 million in the first quarter of '22, and academic revenue was $10 million in the first quarter of '23, compared to approximately $8 million in the same period of fiscal '22. On a regional basis, EMEA revenue rose to $16.3 million in the first quarter of fiscal '23, compared to $15.4 million in Q1 fiscal '22. As we noted earlier, the APAC region was negatively impacted by the COVID pandemic in China, but had a slight increase in revenue to $4.3 million, compared to $4 million for the same period of fiscal '22. U.S., including Americas revenue, increased to $33.6 million in the first quarter compared to $22.6 million for the same period in '22. Now moving down the P&L. Our gross margin for quarter 1 was 45.7%, with cost of revenue for the quarter of $29.4 million. The cost of revenue does include $1.1 million of stock-based compensation expenses and $3 million in depreciation. Net operating expenses for the fiscal quarter, including R&D, SG&A, and change in fair value and mark-to-market adjustments of acquisitions, totaled approximately $69.4 million compared to $78.9 million in Q1 fiscal '22. To break it down, R&D for the fiscal quarter was $31.2 million, an increase from $22.6 million in the same period of fiscal '22. This includes DNA storage spend of $6.1 million and Biopharma spend of $7.7 million in the first quarter of fiscal '23. The major contributors to the increased R&D spend were primarily increased compensation costs of $5 million associated with hiring additional employees, including an additional 12 in DNA data storage. Depreciation for R&D in quarter 1 was approximately $1 million. SG&A in Q1 reflects approximately $18 million in credits from a combination of stock forfeitures associated with departing employees and the release of annual holdbacks as we determine that various revenue hurdles were met. The Abveris team came very close to achieving their earnout, and we look forward to fully integrating the Boston team into the Twist organization. We remain very enthusiastic about the team and the potential opportunity for the combined Abveris and Twist organization. Factory of the Future pre-commercialization costs included in SG&A were $12.5 million in the first quarter, which includes compensation costs of $4.3 million; material expenses of $4.7 million associated with pre-commercialization training activities; facilities and depreciation costs of $1.8 million; and $1.2 million for services. Stock-based compensation for the quarter was a credit of $2 million due to the aforementioned credits primarily associated with the Abveris acquisition. Depreciation and amortization for the quarter was $5.8 million, and CapEx spend in the quarter was approximately $12 million. We will now cover our outlook for fiscal year '23. We continue to project fiscal '23 revenue in the range of $261 million to $269 million, including SynBio revenue of $104 million to $106 million; NGS revenue of $120 million to $123 million; and Biopharma revenue of $37 million to $40 million. There has been no change to our revenue projections from our previous guidance during November. For the second quarter of fiscal '23, we anticipate revenue of approximately $56.5 million, which breaks down as follows: SynBio revenue of $24 million, a sequential increase reflecting the higher orders NGS revenue of $25 million. Although orders were strong at approximately $31 million in quarter 1, we see the beneficial impact of those orders translating into revenue in the second half of our fiscal year. Biopharma revenue of approximately $7.5 million reflects the lower orders we saw in quarter 1. We anticipate gross margin for quarter 2 to be approximately 30% as we adapt to the costs associated with the Wilsonville manufacturing facility. As we scale our revenue in the second half of fiscal '23, we're projecting our gross margin to be 39% to 40% for the year, consistent with the guidance provided in our previous earnings calls. We decreased our operating expense guidance for the year to approximately $330 million, down from previous guidance of $365 million, primarily due to an expected reduction of stock-based compensation. We're now projecting R&D expense of $130 million compared to $138 million in our previous guidance. We expect SG&A expense of $204 million, down from our previous guidance of $227 million, primarily due to the impact of lower stock-based compensation. Mark-to-market is projected to be a credit of $4 million for the year. Depreciation and amortization is projected to be approximately $29 million, and our projection for stock-based compensation has declined from $83 million to $50 million for fiscal '23 due to the combination of the aforementioned credits. Additionally, we reduced the number of projected shares granted to our executives and employees to approximately 1 million stock awards at a lower share price than originally projected. Net loss for the year is projected to be approximately $225 million, a decrease from $260 million. With CapEx projected to be $50 million, our ending cash is projected to be approximately $300 million. Furthermore, there is no change to our fiscal '24 guidance provided in November. In summary, we had a robust start to our fiscal year with record orders in quarter 1. We shipped our initial commercial products from the Factory of the Future in January, and we're focused on scaling our business to achieve adjusted EBITDA breakeven in our core and our pharma businesses. With that, I'll turn the call back to Emily.

Emily Leproust, CEO and Co-Founder

Thank you, Jim. In November, we outlined our 3-year plan to adjusted EBITDA breakeven for our core business, and this remains our focus. When we see our shareholders' feedback that achieving profitability is top of mind. This fits with our operating plan that we have been executing for the past few years. Working toward that objective in SynBio, we will ramp our manufacturing capabilities in Wilsonville, Oregon to increase revenue from our Factory of the Future, building on our first shipment at the end of January. Looking to the full-time frame, we expect to bring down our turnaround time and offer fast gene products for all of our customers and expand our commercialization efforts into the maker market. For NGS, we expect continued expansion of our customer base as well as a few large customers generating revenue in the back half of the fiscal year. In addition, we are looking towards RNA workflows to augment our DNA workflows with a consistent focus on owning the workflow between the sample and the sequencer. In Biopharma, we are beginning to offer an integrated portfolio of antibody discovery and optimization services, capitalizing on efficiencies between our in vitro, in vivo, and in silico approaches. In data storage, we're making good progress to bring up the chip and our new pilot production DNA 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 seek to partner with leaders to set the stage for commercial success while preparing the market for DNA data storage. We remain extremely excited about our opportunities ahead and look forward to keeping you updated on our progress. With that, let's open the call for questions. Operator?

Operator, Operator

And our first question comes from Steve Mah with Cowen.

Steve Mah, Analyst

My first question is about the DNA makers. There's a comparison in the prep market that people have started exploring. With 270,000 commercial scientists, I believe some of them will be utilizing lower-cost options. Can you provide insight into how you plan to monitor this market to determine the pricing necessary for adoption in the academic sector? Also, how long do you anticipate it will take to make this discovery?

Emily Leproust, CEO and Co-Founder

Steve, your line was a bit choppy, but thank you for your question. You're asking about the 270,000 gene makers in academia and how we'll handle price discovery. I can share that in the past, we had a uniform pricing model for academia and industry, meaning we didn't differentiate pricing between those two groups. Recently, we started to differentiate a little bit. With the fast gene offering, there likely will be a different price for academia versus industry, just to account for the value of the product to those two different groups. That's number one. Number two, we've been supporting teams at the iGEM competition every year, which includes thousands of students who apply synthetic biology. In the past, iGEM teams had to do their own cloning. They would obtain parts from Gibson assembly and mutagenesis. We've provided, I believe, 20,000 bases to every iGEM team for the last few years. Our goal is to get the best and brightest students used to not cloning anymore. It will take some time, but we think that, similarly, right now in academia, nobody does their own prep. They use kits. We believe that over time, we can drive this transformation. We will focus on price, and we have been working on changing the mindset that it’s easier and faster to get the gene from companies like us.

Steve Mah, Analyst

Got it. Really appreciate that. Next question, on gross margins. This is a question for Jim. The gross margins in the quarter were maybe a bit lower than we expected. Can you give us some color on that? And then some commentary regarding gross margin recovery in fiscal year '24 back up to 49%?

James Thorburn, CFO

Yes. Steve, if I picked up your question correctly, you mentioned that gross margin was a little lower. Gross margin in Q1 was 45.7%. We are projecting that to decline to 30% this quarter as we bring on the costs associated with the Factory of the Future. As we scale the business, we've touched on the makers market, which presents a huge opportunity for us, around $1.4 billion. We're already seeing strong SynBio growth over this last year. Orders were significant in the first quarter. We feel good about achieving growth in the second half. First-half revenue is about 40% of the business, which is in line with previous years. So we can see growth in the second half driven by continued strength in SynBio, NGS, and pharma, with pharma picking up. We feel good about our guidance of $261 million to $269 million. As we continue to scale, we maintain our forecast for gross margins at 39% to 40%. For next year, we anticipate gross margins in the range of 49% as we highlighted previously. This will be achieved by executing and scaling the Factory of the Future, leveraging our fixed costs and continuing to expand our customer base.

Operator, Operator

Our next question comes from Matt Sykes with Goldman Sachs.

Unidentified Analyst, Analyst

This is on for Matt. I realize that you just started shipping commercially from the Factory of the Future, and you've discussed the launch of fast gene in the fall of this year. Could you talk about how you've been able to break into the gene makers market prior to that launch? Or will the launch be an inflection point for getting into that market?

Emily Leproust, CEO and Co-Founder

Great question. We've been entering the maker market over the last few years with our long gene offerings. What we've learned is that some customers buy short genes and assemble them with short genes to make long genes. So they buy short genes, but they are makers of long genes. When we offer our long gene offering, it is very fast and cost-effective, and some of our revenue growth comes from converting long gene makers. So we are somewhat already in the DNA makers market. However, we will need the speed, which, as you pointed out, we should see an inflection point upon the launch.

Unidentified Analyst, Analyst

Okay. Great. That's helpful. Additionally, what do you think the potential gross margin uplift will be for fast gene this year? Will it ramp enough for us to see it reflected in '23 or will that primarily come in next year?

James Thorburn, CFO

Overall, we see our gross margins in Q1 just under 46%. This quarter, we forecast gross margins around 30%. We're launching our fast genes this fall. This year, gross margins are anticipated in the range of 39% to 40%. As fast genes gain traction next year, we continue to scale our operations, leveraging fixed costs. This ramp-up is principally driven by volume and the success of fast genes, so we expect the benefits to materialize in FY '24.

Operator, Operator

Our next question comes from Sung Ji Nam with Scotiabank.

Unidentified Analyst, Analyst

I have a couple of high-level end-market trend questions. Starting with Biopharma, I was wondering, obviously, there is solid growth there, but I expect a bit more muted growth in the next quarter. Are you able to call out trends you're seeing in the near term, particularly across different segments within biopharma? Do you expect the weakness to be prolonged throughout the year? Any color would be helpful.

Emily Leproust, CEO and Co-Founder

Thank you, Sung Ji. I'll answer your first question, and Jim can cover the second regarding global markets. In terms of Biopharma, some trends we're noticing indicate that some of our customers are experiencing funding headwinds, while others are larger companies and may face lesser funding challenges. I see this as an opportunity for us. It may take time to add them, but our offering can extend their budgets effectively. Another trend is that customers might spend differently, perhaps allocating less to upfront discovery and more towards later-stage work, which could mean that projects may decrease from ten to eight per year. We're only beginning to penetrate the market, so securing one or two projects for us could still be a win despite these conditions. We're stepping back to rely on the strengths of our best-in-class platform with our in vitro, in vivo, and in silico work. Last year, we worked to integrate the Abveris team closely to achieve their earnout. Now we can operate as one team and offer one product offering. The integration of those three domains is a powerful offering that will enable us to capture more market share even with the Biopharma sector facing headwinds. Jim, would you like to take the second question?

James Thorburn, CFO

Yes. In terms of China, I've met with our China team in the last couple of weeks. It’s interesting because China was impacted in the first quarter, specifically in October and November due to lockdowns. Then, as the economy opened up, teams were hit with COVID, impacting sales. In Q1, we saw sales in China decline to just over $1 million, roughly $1.4 million. We anticipate a modest pickup this quarter. In our second quarter, which is in March, we see significant growth if conditions normalize during the latter half of the year. Last year, our revenue in China was about $7 million, despite the first half pandemic impacts. We expect China to rebound to about $9 million this year. Additionally, in Europe, we observe positive growth year-over-year. The December quarter is typically tricky due to holiday vacations, but we continue to discover opportunities in Biopharma and expand our SynBio portfolio in Europe. NGS is also performing well, and with the successful launch of the Factory of the Future, we are well-positioned for the next year.

Operator, Operator

Our next question comes from Luke Sergott with Barclays.

Luke Sergott, Analyst

Could you touch on the gross margin strength you had in the first quarter? It usually experiences a seasonal step down, but this came in well above what we expected.

James Thorburn, CFO

In Q1, our gross margin came in just under 46%, driven by product mix and managing our contribution margins effectively. Both SynBio and NGS saw strong contribution margins, reaffirming our direction. The projected downturn to 30% in Q2 is driven by the fixed cost associated with the Factory of the Future.

Luke Sergott, Analyst

On the revenue guidance for the second quarter, is this primarily due to capacity constraints at the Factory of the Future? I'm trying to understand if the first quarter gross margin at full utilization should trend lower as you bring in new fixed costs to ensure revenue remains flat.

James Thorburn, CFO

You're correct in your understanding. During Q1, the South San Francisco facility was at full capacity, and we experienced an uptick in gene revenue. The step down in gross margin is due to integrating fixed costs. We continue to build our customer base and saw solid performance in SynBio, contributing to consistent margins in NGS. The full impact of operations, along with our commitment to revenue growth, will support the second half.

Luke Sergott, Analyst

Lastly, on the record bookings, can you discuss if this was driven mostly by Biopharma and the increased number of active programs?

James Thorburn, CFO

Yes, it’s interesting because we achieved record bookings in NGS, which raises the question of why Q2 might not be higher compared to what we are projecting. The reason is due to those orders affecting the latter half of the fiscal year. We saw strong growth in SynBio, particularly in genes, with continuous improvements in turnaround times and customer experience. This leads to successful value propositions that engage new customers.

Operator, Operator

Our next question comes from Matt Larew with William Blair.

Matthew Larew, Analyst

Your price per gene has increased significantly over the last four quarters, surpassing the positive trend you've had for several years. Could you discuss the key drivers behind that increase? Additionally, what factors to consider leading up to the launch of fast genes?

Emily Leproust, CEO and Co-Founder

Thanks for your question, Matt. While looking at the price per gene, it’s important to be cautious. In our offerings, short genes are priced at $0.09 per base, while long genes are at $0.15 per base. As we penetrate more into the makers market where long genes are preferred, the average selling price increases due to the higher cost for longer bases. Conversely, when we have strong sales in Biopharma, the average gene size tends to decrease as antibody genes are smaller, which slightly lowers ASP in that context. In addition to this, we have recently implemented price increases; on NGS, we conducted our second annual price increase in January. On the SynBio side, we started increasing prices last summer, which also contributes positively. As for what remains prior to bringing fast gene to market, we need to ensure our Factory of the Future is fully operational. Our instruments are already set up, however, we need software capabilities to produce genes more quickly. We also need to ensure our e-commerce can efficiently handle fast and slow gene pricing and bookings to facilitate a smooth order experience for our customers. Lastly, we will enhance our digital marketing to reach the 270,000 potential maker customers effectively without personal engagement.

Operator, Operator

Our next question comes from Vijay Kumar with Evercore.

Vijay Kumar, Analyst

Emily, my first question is about the guidance and revenue assumptions. Your order growth was 30% in Q1, but the guidance for Q2 at 17% raises some concerns. Is there something affecting the macro environment? Did China significantly impact this quarter, and is the progress in gene production still ongoing? The quarterly revenue of $65 million translates to approximately $260 million annually, which matches your revenue guidance. Are there any capacity issues as you work on bringing the Factory of the Future online?

Emily Leproust, CEO and Co-Founder

To begin, as you noted, the order growth in Q1 was 30% year-over-year. However, our guidance aligns with a historical trend wherein the first half often accounts for 40-45% of total revenue. The market is promising, and we have technology, a dynamic sales team, and excellent products. If executed well, we should navigate through this. Jim, would you like to add?

James Thorburn, CFO

You are correct; we saw strong orders, especially in NGS. However, factors like lockdowns in China and people reacting to COVID during the holidays impacted shipments and revenues. We do expect the normalization of demand as COVID impacts fade out. Our customer base is expanding, and we look forward to successful execution in the year ahead.

Vijay Kumar, Analyst

Lastly, Jim, regarding the second half cadence for revenues and gross margins, I see the implied first half around 37-38%, needing to hit 40% in the back half. What is driving this growth? Could you comment on the comparisons, particularly concerning the potential impacts on revenue growth?

James Thorburn, CFO

Our bookings in Q1 were strong; we set records in NGS. The second half projections reflect solid growth. Looking at NGS, we expect to see revenue in excess of 70 million by targeting larger opportunities with existing customers. Strong operational performance and ongoing cost optimization will contribute to gross margin recovery. We have a focused plan moving forward.

Puneet Souda, Analyst

Emily and Jim, following up on NGS, can you elaborate on the second half pickup? Is this primarily driven by liquid biopsy customer demand? How much of the pickup is attributed to volume versus pricing?

James Thorburn, CFO

That pickup will primarily come from larger NGS customers, driven by orders for liquid biopsy. We're focused on securing more volume as we continue to grow our customer base as well as elevating the quality of service.

Puneet Souda, Analyst

Others in the reagents sector have commented on a softness affecting smaller biotechs. Are you seeing any weakness on your end?

Emily Leproust, CEO and Co-Founder

Currently, we aren't experiencing significant impacts from smaller biotech firms in terms of demand; our focus has remained on clinical product offerings.

Operator, Operator

Our next question comes from Rachel Vatnsdal with JPM.

Noah Burhance, Analyst

This is Noah for Rachel. Just clarifying on NGS, you mentioned the annual price increase you pushed through in January. Could you discuss how orders trend pre- and post-price increase?

Emily Leproust, CEO and Co-Founder

We aim to set prices based on the perceived value, understanding cost pressures. The reception has been positive when we implement price increases, leading to growth.

Noah Burhance, Analyst

Regarding your data storage product, you partnered with big tech firms. Have you had any conversations with these partners recently, especially given tightening budgets in the tech industry?

Emily Leproust, CEO and Co-Founder

We've established an industry for data storage and created the DNA data storage alliance. The perspective is shifting as we provide concrete solutions addressing deep archiving needs. The market shows awareness of the technology and its implications, paving the way for adoption.

Operator, Operator

There are no further questions. I'd like to turn the call back over to Emily Leproust for closing remarks.

Emily Leproust, CEO and Co-Founder

Thank you very much for joining us today. I apologize for running a few minutes late, and we look forward to seeing you at AGBT next week and at the Cowen Healthcare and Barclays Conference in March. Thank you.

Operator, Operator

Thank you. This does conclude the program. You may now disconnect. Everyone, have a great day.