Earnings Call Transcript - TWST Q4 2023

Operator, Operator

Welcome to the Twist Bioscience’s Fiscal 2023 Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Please be advised that this call is being recorded. I would now like to turn the conference call over to Angela Bitting, Senior Vice President 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 Bioscience’s conference call to review our fiscal 2023 fourth quarter and full year 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, acting CFO of Twist. Emily will begin with a review of our recent progress and Jim will report on our financial and operational performance. Emily will come back to discuss our upcoming milestones and directions. We will then open the call for questions. We would ask that you limit your questions to only one 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 Investors section of our website and will be available for two weeks. During today’s presentation, we will make forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results in financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in 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, Dr. Emily Leproust.

Dr. Emily Leproust, CEO

Thank you, Angela, and good morning, everyone. Fiscal 2023 was a year of growth and strong execution for Twist. We grew our business with revenues increasing 20% year-over-year. We completed the internal integration of our Biopharma group and implemented strategic actions to align our cost structure aimed at optimizing our operations with a clear focus on increasing gross margin along our accelerated path to profitability. We invested in our best-in-class innovation to set the stage for near- and long-term success. And now, we are focused on profitable and stable growth moving into fiscal 2024 and beyond. Getting into the specifics for the fourth quarter, we grew revenue to $66.9 million and $245.1 million for the full year, exceeding our updated guidance for the quarter and the year. Our gross margin was approximately 37% for both the quarter and the year. We ended the year with approximately $336 million of cash, cash equivalents, and investments. Across the business, our efforts over the last 24 months in building the Wilsonville facility, expanding our production line, and streamlining workflows are now benefiting both our SynBio and NGS product lines to allow us to deliver what our customers need. Within our factory in Wilsonville, we analyzed each process in the SynBio workflow to remove excess time, and our production data shows that we are able to turn genes around in six business days, consistently. This is an incredible feat and one that requires all hands on deck to optimize every process and procedure. This robust workflow now allows us to make more SynBio products in less than half the time we could a year ago. On Tuesday, we launched Express Genes, which we previously called Fast Genes. This is the first product that will directly benefit from the time and infrastructure investments in our Wilsonville facility. With Express Genes, we have the opportunity to increase the contribution margin for the SynBio product group as well as our overarching gross margin. I’d like to note four important things about how the launch of Express Genes impacts our business. First, our clonal gene services are the bread and butter of the SynBio products. About half of our clonal gene orders qualify for this Express Genes service today with an eye towards expanding to the majority of clonal gene orders moving forward. Genes that do not qualify for Express service will continue to be ordered at the standard speed and will be priced starting at $0.09 per base pair. For Express Genes, it is the same great product delivered faster, and we charge a premium price for that speed. The price will be dynamic based on how full the fab is. Second, all genes whether standard or Express will be manufactured on the same manufacturing line. This is a streamlined highly automated process where all genes go through the same steps. Standard genes will either wait before or after synthesis, as we will use standard genes to maximize chip utilization. This is similar to how airlines use standby passengers to run planes that are as full as possible. Third, with higher revenues through premium pricing for Express Genes, we expect to see margins improve. Our objective with pricing is to expand our market opportunity significantly into the makers’ market as well as capturing additional customers within the buyers’ market. This means that our offering must resonate as a cost-effective alternative to customers making and cloning the genes themselves. Working with pricing experts, our initial dynamic price range is designed to optimize our pricing in a way that will not alienate existing customers. At the same time, we expect to increase our margin from this differentiated product line while serving a large unmet need for our current and future customers. Fourth, because we are making all genes at extra speed, our gene capacity for our Wilsonville site is now close to double compared to the 10-day turnaround time production timeline. That’s a strategic and key point that allows us to continue to scale. A further note that we have implemented the improvement in turnaround time throughout the SynBio product line, so our gene fragments can now be delivered in two business days and oligo pools in three business days. For fragments and oligo pools, we are pleased to offer this product at competitive pricing without the premium. The enhanced speed and efficiency of our operations have allowed us to gain a stronger foothold in the market while maintaining healthy contribution margins for this product line. With the successful launch of Express Genes, our aim is twofold: to scale up our gene volume with existing customers and to attract new customers, thereby expanding our market reach. In the initial phase of launch, we are directing our efforts towards our current customer base. Once we know the workflow is tried and true, we will amp up our marketing efforts, targeting customer convergence from competitors as well as new customers who have not yet used Twist for their clonal gene needs. As we run Express Genes, we expect the book-to-bill ratio will essentially approach 1, as there are so few days between order and delivery. As such, orders of SynBio become less informative. The trend to watch will be revenue growth in SynBio. Importantly, the speed of Express Genes unlocks additional applications including long genes, complex genes, additional IgG antibodies as well as mRNA production. So not only are Express Genes an opportunity to increase margin and take market share, but they also lay a foundation for growth into the future. Moving to NGS, over the course of the year and particularly in the fourth quarter, we saw the work we have done with customers to optimize their workflow over time begin to pay off. Several key customers are now scaling production for validation and commercialization. In addition, we see strength driving into the middle of the market. We see an increasing number of customers using our RNA-seq workflow and several customers are implementing our minimal residual disease or MRD workflow. We believe both of these product groups validate our innovative approach to develop and commercialize products that our customers need. At a high level, our Life Sciences, Bio and NGS products grew at more than 23% year-over-year. Production is reaping. As we think about our trajectory towards profitability, we believe we have set our efforts up for success. We have momentum going into the fiscal year with the launch of Express Genes and the ability to unlock future product lines. We have NGS traction with the top and middle of the market as well as initial RNA-seq and MRD uptake and an energized team that is committed to driving the business forward towards profitability and scalable growth. As a management team, we have a strong track record for executing against our strategy, growing our customer base and driving best-in-class product innovation. We are now laser-focused on increasing our gross margin and driving towards profitability. Turning to Biopharma, we have effectively addressed our internal integration challenges and as of early October, our commercial team was fully staffed with all territories covered. We’ve shared that it typically takes about six months for a new representative to come up to speed and orders for Biopharma directly translate into revenue in the three to six months' time frame. For the fourth quarter, orders increased quarter-over-quarter for the first time this fiscal year. We see this uptick as a positive sign of health for the overarching Biopharma services business. Of note, the majority of our orders came from large pharma. The last few months, we announced agreements with Ono Pharmaceutical, Bayer, and more. We are cautiously optimistic that the fourth quarter of 2023 will represent the low point for Biopharma revenue as the spectrum of SynBio all the way through Biopharma services is gaining traction. The Biopharma group continues to provide a strategic advantage, allowing us to utilize our SynBio products including genes, fragments, oligo pools laboratories, and IgG antibodies, all the way through to antibody discovery optimization and humanization services, differentiating us from our competition and providing upside through potential milestones and royalties. Our acquisition of Abveris broadened our offering beyond synthetic libraries and enabled in vivo discovery through animal models. This has been integral in extending our comprehensive offering. Now fully integrated, Biopharma provides a full menu of in vivo, in vitro, and in silico services to our customers. This means that we have a powerful comprehensive offering that can meet varying customer needs under one roof. For example, our large pharma and biotech customers often pick and choose from a broad menu based on their needs, whereas smaller companies often benefit from a full end-to-end offering. Finally, our in silico services enable us to provide more sequences and hits for our customers in vivo and in vitro projects, which maximizes their chances of success. For data storage, we have made progress in our approach to enzymatic synthesis for this application. We are working to implement an industrial-grade codec, the encoding and decoding algorithm, with a large industry partner. We remain on track with our plan to demonstrate an end-to-end gigabyte Century Archive workflow by the end of December with the early access launch of a terabyte Century Archive solution expected in calendar 2025. On the corporate side, we added a key operational leader in Mark Buck as our SVP of Operations. He brings a military background as well as deep expertise in supply chain, quality, and production. At his prior company, he was responsible for 21 production facilities, and we look forward to the perspective he brings with respect to optimizing our operations further for scale and improving gross margin. With that, I’ll turn it over to Jim.

Jim Thorburn, CFO

All right. Thank you, Emily. We’re happy to report we hit another record in orders and revenue for our fourth quarter and full fiscal year 2023. I want to thank all our Twisters, customers, and partners who made this possible. Revenue for quarter four grew to $66.9 million, which brings our revenue for fiscal year ending September 30th to $245.1 million as compared to $203.6 million in fiscal '22, and that’s year-over-year growth of approximately 20%. Orders increased to $71.1 million for the quarter, bringing orders for the year to approximately $264 million and that’s year-over-year growth of 17%. Our gross margin for the quarter increased to 36.6% and was 36.6% for the year. We also increased our customer base to approximately 3,450 and that’s up from 3,300 in fiscal '22. We ended the year with cash investments of approximately $336.4 million. Now, I’ll provide a deeper dive starting with NGS. NGS revenue for the fourth quarter grew to approximately $37.1 million compared to $29.2 million in the fourth quarter of fiscal '22, and that’s an increase of 27% year-over-year. For the full year, revenue increased to $123.7 million for fiscal '23 as compared to $99.3 million in fiscal '22, and that’s year-over-year growth of 25%. The record revenue for fiscal '23 was due primarily to an increase in revenue from our top 10 customers, which accounted for approximately 37% of revenue for the year. We served approximately 1,020 NGS customers in fiscal '23 and believe our NGS products have a compelling competitive advantage and save our customers' downstream sequencing costs. This advantage is reflected in our orders for the fourth quarter of $39.1 million and $131.5 million for the year, and that’s 26% year-over-year growth. As we’ve noted in our previous calls, we track the larger account opportunities that is accounts we believe have potential to be larger than $250,000 per year. Overall accounts remain at 279 with 131 adopted, the same as last quarter. At this stage, we believe we identified the vast majority of players in this market, and we’ll be focused on landing and expanding these accounts. Now turning to SynBio products, which includes genes, DNA preps, IgG, G&A libraries, and oligo pools. We had another strong year and are excited about leveraging our investments in our Wilsonville facility. SynBio revenue for the quarter was $26.5 million, bringing revenue for fiscal '23 to $98.2 million, up from $80 million in fiscal '22 as we continue to expand our customer base and product offering. SynBio orders for quarter four were $26.2 million, which brings our fiscal '23 orders to $110.9 million, up from $90.7 million in fiscal '22, and that’s 22% year-over-year growth. Some of the highlights include growing our customer base to approximately 2,700 SynBio customers in fiscal '23 as compared to 2,300 in fiscal '22. We increased our genes revenue to $73.5 million versus $61.5 million, which is year-over-year growth of approximately 20%. We shipped 634,000 genes in fiscal '23 as compared to 558,000 in fiscal '22. Oligo pools revenue grew to $14.5 million and that’s up from $12.4 million in fiscal '22, mainly due to strong growth in academic and large pharma customers. Libraries revenue was $10.2 million, and that’s up from $6.1 million, predominantly due to growth in large pharma and industrial biotech. For Biopharma, revenue for the fourth quarter was $3.4 million, bringing the total revenue from Biopharma to $23.2 million in fiscal '23, and that’s a decline from $24.2 million in fiscal '22. Importantly, orders for the quarter rose sequentially to $5.8 million from $3.5 million in quarter three, and the number of active programs declined from 82 to 69. However, new projects started in the quarter increased from 34 in quarter three to 44 in the fourth quarter, and that’s associated with the recovery in orders. The total number of completed programs as of September 30th was 806, with 68 including milestones and/or royalties. I’ll now briefly cover our revenue breakdown by industry and give you a regional update. Healthcare revenue rose to $137.1 million for fiscal '23, compared to $106.4 million in fiscal '22. Industrial chemical revenue rose to $59.3 million and that’s up from $57.9 million in fiscal '22. Academic revenue was $45.8 million and that’s up from $37.1 million in fiscal '22. On a regional basis, EMEA revenue rose to $71.4 million versus $62.1 million in fiscal '22. APAC increased to $22.5 million compared to $19.1 million in fiscal '22, including China revenue of $7 million, which is flat with the previous fiscal year. The U.S., including Americas revenue increased to $151.3 million in fiscal '23 versus $122.5 million for fiscal '22. Now moving down to P&L. Our gross margin for the fourth quarter increased to 36.6%, bringing our overall gross margin to 36.6% for the year. Cost of revenues increased from $119.3 million in the prior year to $155.4 million in the year ended September 30, 2023. Major factors contributing to the increase in cost of sales were a $14.7 million increase in material costs due to higher volume, $9.9 million payroll, and approximately $12 million depreciation and amortization costs. Our operating expenses for fiscal 2023, which includes R&D, SG&A, and changes in fair value and mark-to-market adjustments of acquisitions, decreased to approximately $306.8 million as compared to approximately $319 million in fiscal '22. To break it down, R&D for the year was $106.9 million, a decline from $120.3 million in the previous fiscal year, primarily due to the conclusion of Revelar. Depreciation included in R&D was $4 million for fiscal '23. SG&A for the year was $190 million and that’s a decline from $212.9 million, which includes a $43 million reduction in stock-based compensation expense, offset by increases in pre-commercialization costs, facilities, payroll, and IT-related service costs. OpEx includes approximately $38 million for data storage spend in FY23. Change in fair value of contingent considerations and indemnity holdbacks for the year resulted in a gain of $6 million versus a gain of $14 million in fiscal '22. For restructuring and other costs, we invested approximately $16.2 million for the strategic initiatives we announced in May, with $9.4 million to support our valued employees with severance packages, as well as asset impairment charges of $6.8 million. Stock-based compensation for the year was approximately $30.3 million as compared to $80 million in fiscal '22. Depreciation and amortization costs were $29 million for fiscal '23. Loss from operations was approximately $217.2 million in fiscal '23 as compared to $234.8 million in fiscal '22. Other income and expense was a gain of $14.3 million associated with interest income. CapEx for the year declined significantly to approximately $28 million from $101.9 million in fiscal '22, and we exited the year with $32.1 million in inventory, down from $39 million at the end of fiscal '22, and concluded the year with cash and investments of approximately $336 million. I will now provide updated financial guidance for fiscal '24. We enjoyed record bookings in quarter four and are excited about the launch of our Express Genes. Our Wilsonville facility is doing well, and we took actions during the year to manage our cost structure as we transitioned SynBio activities to Wilsonville. For fiscal '24, we expect total revenues to increase in the range of approximately $285 million to $290 million, SynBio revenue of approximately $113 million to $116 million, NGS revenue of $147 million to $149 million, and Biopharma revenue approximately $25 million. Gross margin is expected to be approximately 39% to 40%, with operating expense in the range of approximately $294 million to $298 million, which includes $100 million to $102 million in R&D expenses and $194 million to $196 million in SG&A expenses. Loss from operations guidance before taxes is expected to be approximately $180 million to $188 million, which includes stock-based compensation of $58 million to $60 million and depreciation and amortization of approximately $40 million. Data storage operating expense is projected to be approximately $37 million to $39 million. CapEx for FY24 is projected to be approximately $20 million, ending cash of approximately $245 million. For the first quarter of fiscal 2024, we expect overall revenue of $67 million to $68 million, SynBio revenue of $27 million, NGS revenue of $36 million to $37 million, Biopharma revenue of $4 million, gross margin of 38% to 39%, OpEx of $73 million and loss from operations of $47 million to $48 million. In summary, we continue to maintain financial discipline throughout the organization and make progress in reducing our operating losses. We expect to exit the fourth quarter of fiscal '24 with $78 million in revenue and our estimated loss from operations to be $38 million to $40 million, which excludes any one-time adjustments including stock-based compensation of $15 million, depreciation of $10 million, and data storage cash operating expenses of $8 million. We continue to make decisive and proactive actions to achieve profitable growth. To achieve this, we’re focused on scaling the Express Genes offering and leveraging our investment in the Wilsonville facility, managing our costs and continuing to execute by growing revenue and expanding our gross margin. We’re incredibly excited about the future and confident that the year ahead will bring many exciting milestones and achievements. With that, I’ll turn the call back to Emily.

Dr. Emily Leproust, CEO

Thank you, Jim. I’d like to take a minute to thank all of the Twisters for their dedication, commitment, and excellence through the last fiscal year. The year requires perseverance and discipline across the board, and our financial results reflect the hard work of the team. Our SynBio and NGS groups are stronger than ever, demonstrating consistent and sustained growth in revenue, customers, and market share. We expect our strategic investments in this area will fuel our next leg of growth and past profitability. In the months ahead, we look forward to reporting on the uptake of our Express Genes launch and the resulting impact on gross margin. We’ve given guidance for fiscal 2024, and in that guidance, we assume that Express Genes will grow over time with some current customers transitioning to this new product, but primarily from new opportunities moving forward as we leverage our digital marketing infrastructure and tools to reach new customers and a long tail of the DNA makers. The Biopharma service group booked increasing orders in the fourth quarter, and we expect the positive momentum to continue. In addition, we continue to advance our solutions for DNA data storage that has the potential to be a valuable asset longer term. In summary, we exceeded fiscal 2023 with a solid cash position, growing revenues, reduced cost structure, and incredible opportunities ahead. We have built a diversified and complementary portfolio of products, services, and future opportunities that put the company in a strong position to achieve consistent and sustained growth while minimizing risk. Our gross margin for fiscal 2023 was just under 37%. This is an area of our current and future focus. In May, we implemented strategic adjustments aimed at optimizing our operations with a clear focus on enhancing gross margins. Our objective is to set a positive trajectory to our financial performance, moving towards profitability as a business. Looking at the financials, we can exceed this target if we grow at the same rate as the market. We believe we’re positioned to take market share, exceeding the market CAGR. We look forward to delivering increasing value to each of our shareholders as we continue to work in service of our customers, who inspire us each and every day to go faster, run harder, and truly make a difference in the world. With that, let’s open the call for questions. Operator?

Operator, Operator

Thank you. Our first question comes from Luke Sergott with Barclays.

Luke Sergott, Analyst

I guess, when I look at the guide, can you talk about how much of the guidance implies or bakes in the Fast Genes? You see the margin step up here from 38 in Q1 and ending the year at 39, 40. Kind of give us a sense of the cadence there and how the Fast Genes or how much of your guide bakes in this business in the revenue and margins?

Dr. Emily Leproust, CEO

Do you want to take it, Jim?

Jim Thorburn, CFO

Yes, I’ll start. Luke, thanks for the question. We’re excited about the launch of Express Genes this week. As Emily mentioned, we’re currently assessing pricing. The Factory of the Future is progressing well, and we have positive expectations regarding our performance as we close this year, particularly with our margins. Revenue rose by approximately $3 million from Q3 to Q4, resulting in a similar increase in gross margin dollars. This illustrates our leverage from Q3 to Q4. Looking ahead to fiscal year '24, we are aware of some macroeconomic factors that we need to consider. We’re receiving positive feedback from the market regarding Express Genes, and, as always, we are cautious with our forecasts. Both NGS and SynBio are performing well, and we anticipate that Express Genes will provide additional support. We want to ensure our guidance is thoughtful. Last quarter, we noticed improvement in Biopharma, and we expect solid growth in gross margin as we progress into next year. As we continue to scale the factory, we believe there will be further upside in gross margin. We are committed to maintaining a strong cash position and focusing on operational excellence. Now, I’ll pass it over to Emily to provide more details on Express Genes.

Dr. Emily Leproust, CEO

Thank you, Jim. We are one week into the launch of Express Genes, and we've received good orders so far. We have experimented with premium pricing, starting at 50% on Monday, then 60% on Tuesday, dropping to 40%, returning to 40%, and today we are at 20%. It's encouraging to see that we are getting orders. On Monday, we expect to have our first shipment of Express Genes. It's still early, but I'm quite optimistic about the demand.

Luke Sergott, Analyst

Can you share the feedback you’re receiving for Express Genes? Where is this feedback coming from? In the makers’ market, are you seeing most interest from pharmaceuticals or is it more widespread? Additionally, many companies in that market have internal teams. Could you discuss the conversations you’ve had with them, their plans, and how they are considering ramping up on the Express Genes platform?

Dr. Emily Leproust, CEO

Yes, I'd like to provide a quick clarification. We have introduced Fast Genes on our website and it's available for review. However, the launch has been somewhat subdued on purpose since we only issued a press release. Currently, our focus is on our existing customers, allowing them the option to upgrade to Fast when they place orders. We are not actively promoting this launch yet, as we plan to do so early in calendar year 2025. The goal is to ensure that the process is fully refined, so any new customers experience exceptional performance from the start. We believe it's more effective to test new products with our current customers. Thus far, we haven’t reached out to new customers in the DNA bio space. However, we have seen a solid mix of interest from a diverse range of customers, including large pharma, small pharma, and academic institutions.

Operator, Operator

Our next question comes from Matt Sykes with Goldman Sachs.

Matt Sykes, Analyst

Maybe just to follow up on the Express Genes. Just one point of clarification, Emily, you said that you’re going to do the marketing launch in calendar year '25, did you mean '24? And then...

Dr. Emily Leproust, CEO

Thank you, Matt. Thank you. Yes.

Matt Sykes, Analyst

And then, just on your current penetration of the makers market with your standard genes, can you give us a reminder of where you are today and what the potential white space is to expand into that market? I think just giving that context of sizing would be helpful in terms of what the opportunity is.

Dr. Emily Leproust, CEO

Thank you for the proofreading on the play. Our analysis indicates that the makers market, specifically people who do cloning themselves, is valued at $1.4 billion. This includes individuals purchasing enzymes, PCR primers, mutation kits, competent cells, agar plates, and more. We believe this is the market we can target with the DNA bio site. Currently, we have a very small share of the DNA makers, primarily those focused on creating long genes. These customers buy shorter genes, around 1.8, 3, and 5 kb from us, which they then assemble into larger genes themselves. This represents the limited portion we currently serve. However, there is substantial potential to reach a larger segment of the DNA makers market, which primarily consists of those needing shorter genes—5 kb, 3 kb, and 1 kb—but they require them quickly. Currently, the only option is to clone these genes themselves. With the launch of our Express Genes, we see a significant opportunity to cater to this demand.

Matt Sykes, Analyst

And then, just to follow-up on Express Genes, I think it would be helpful just for us to understand how you are going to communicate the Express Genes either revenue or margin contribution over the course of next year. Just to give us a sense of how that’s going. I think following up on Luke’s question about the gross margins, I guess, would have expected there to be a little bit more gross margin expansion given the premium pricing. How should we kind of think about tracking that? And what’s your kind of level of disclosure on a quarterly basis for that business specifically?

Jim Thorburn, CFO

Yes, Matt, I can touch on that. If you look at our Q and you look at the K, you’ll see that we do cover the gene revenue and gene shipments. If you look over the last few years, you will see that our gene pricing has, in fact, increased over the last 2, 3 years. Every quarter, you’ll be able to see, right, what’s the gene revenue and how many genes we shipped and what’s the average price per gene. So, you’ll be able to track it that way. We’ll start giving more insight on that in our earnings call as we go forward.

Operator, Operator

Our next question comes from Vijay Kumar with Evercore ISI.

Vijay Kumar, Analyst

I have two questions regarding guidance. For Q1, we have solid front-loaded guidance that suggests mid-20s growth. However, looking at the components, NGS appears to be up around 50% according to the guidance, while SynBio seems to be a bit softer. The annual guidance suggests that SynBio growth rates may continue to decelerate. Could you discuss the assumptions regarding these segments and what you are observing in the end markets?

Jim Thorburn, CFO

Yes. I mean, I can start, Vijay. Thanks for the question. So NGS, we’re doing extremely well. We ended the year with very strong NGS orders, just under $40 million, making great progress on NGS. Obviously, some of that’s driven by some of our liquid biopsy customers, MRD customers. So we feel well positioned. In terms of SynBio, with another strong year of growth, the overall business, if you step back and look at it, excluding Biopharma, I think everybody is familiar with our Biopharma issues, and it’s good to see that Biopharma is recurring. Year-over-year, NGS products and SynBio products, I mean, the orders and revenue are 24%, 25%. We feel good about our Express Genes. The guide for this quarter reflects the fact that we get vacation at year-end for some of our customers. So, we ended the year in a good solid position. Doing well in terms of both NGS and SynBio, and it will take time, when we’re looking at the guide as in previous years. There’s always some macroeconomic environment issues that we need to comprehend. I was thrilled to see that in terms of margins, if you look sequentially, we’ve gone from low-30s up towards 37%. You look at the revenue growth last quarter, almost 100% of that fell through in margins. So that gets back to the point in terms of leverage we talked about. We’re going to manage our cost structure going forward. We’re very focused on profitability. We’re excited about the opportunity Express Genes brings in terms of margin enrichment. As I highlighted to Matt, we’ll be giving an update on a quarterly basis in terms of pricing for genes. So, factory’s doing well. We’re well positioned. And at the same time, when we’re building our forecast, we want to take and comprehend any potential macroeconomic impact.

Vijay Kumar, Analyst

Jim, regarding the operating leverage you mentioned, if we examine the trend in gross margin, it appears to be increasing at a more gradual pace. Comparing the exit rates from Q4 to Q1, it looks like operational expenses will decrease while revenues are expected to rise by about $10 million from Q1 to Q2. Could you provide insights into any additional cost measures being implemented? What factors are influencing operational expenses, and why are we anticipating a slower increase in gross margin?

Jim Thorburn, CFO

Yes. In terms of gross margin ramp, if you look at the revenue on a go-forward basis, the revenue is almost flat with Q4. The gross margin ramp will come later in the year as we continue to leverage the fixed costs in the factory for the future. I think what’s interesting as you do take a look at our forward guidance, the loss from operations this coming quarter is about $47 million to $48 million, and revenue $67 million to $68 million. If you look at the guidance we gave for Q4, we’re projecting revenue of roughly $78 million and the loss from operations is $38 million to $40 million. So revenue is up by roughly $10 million, and loss from operations is down by roughly $8 million to $9 million. So our focus is, as we scale, reduce the loss. That loss from operations also includes stock-based comp of $15 million and depreciation of $10 million. As we continue to scale, you’ll see that loss from operations decline, so cash loss declines. This year, the numbers are fairly noisy, but there’s a step-up in stock-based comp. The thing to focus on next year is, what is our cash operating loss as we go forward. And that’s going to decline sequentially throughout the year.

Operator, Operator

Our next question comes from Puneet Souda with Leerink Partners.

Puneet Souda, Analyst

So maybe, Emily, I’ll start with one sort of a high-level question for you. I mean, you’re seeing NGS growth here. Your orders are up on NGS. Your top end of your fiscal '24 guidance is just sort of slightly shy of where Street was in revenue. And you just delivered 20% growth. You’re expecting what implies somewhere around 17% to 18% next year, mid-20% for 4Q, December ending quarter. So again, all of this looks like you’re doing better versus what the backdrop is. You’re expecting significant pickup from Express Genes. It seems like you’re production ready. So, I think the question is really the demand in the market, which according to most of the life science tools peers is weak, to put it briefly. So maybe just help us understand how Twist is seeing the market sort of differently versus other NGS oligo peers and overall what we’re hearing from the broader market? Just help us contextualize where you think you’re going to continue to win, and despite the market backdrop.

Dr. Emily Leproust, CEO

Thank you for your thoughtful question. Ultimately, our success comes down to our platform, which relies on two key factors: our innovative silicon technology and our strong commercial execution. This is evident in our guidance for next year. While the demand among our peers appears to be weak, our products stand out. In challenging conditions, our platform truly excels. For instance, our main customers in NGS are diagnostic firms. Given the difficulties they face with funding and reimbursement, they require improved margins, which is what we deliver. Additionally, at Twist, our quality and comprehensive solutions enable our customers to enhance their margins due to the reduced sequencing costs. This is particularly relevant now as some longstanding customers transition to commercialization, benefitting us as DNA is consumed per patient. In the pharmaceutical sector, particularly in SynBio, there are funding pressures, which affect researchers as they aim to develop their therapies using cutting-edge technologies. We provide more opportunities for these researchers, and our significant investment in speed allows them to advance their work more quickly. The success we see is a result of the exceptional efforts of our team and the unique advantages of our technology. Although competitors may attempt to replicate our marketing strategies, the focus remains on genuine product capabilities. Ultimately, our platform enables us to excel.

Puneet Souda, Analyst

If I could address Biopharma, you seem to be suggesting a high-single-digit growth. Could you specify how much of that is derived from services or any anticipated milestone payments? When we analyze some of the antibody discovery competitors, it's clear that the market is adversely affected by the significant pullback of emerging biotechs. Can you discuss the proportion of large pharma compared to these emerging biotechs? Additionally, what implications does this have for the new projects you expect to undertake in Biopharma in fiscal 2024?

Dr. Emily Leproust, CEO

Maybe I’ll start. So the guide implies no maximum royalties. It’s all a fee for service guide. I agree with you that if you look year-over-year, the growth looks not very big. However, actually, if you look at the low point of Biopharma in '23 compared to the higher point to Q4 2024, we’re going to see some substantial growth. We had a stumble in commercial execution, and so we had a few quarters of Biopharma services going down, but now we’ve rebuilt the commercial team. We had sequential growth in our orders. As we say inside the Company, we’ve done it one quarter in a row, and now we have to just do it again. I expect to see some significant growth when you look from the low point to Q4, and that’s the direction we want to go.

Puneet Souda, Analyst

And then if I could ask one brief one to Jim. Jim, what are you expecting for to spend on data storage in fiscal 2024? And then, maybe if you can provide how should we think about the cash burn as we go into sort of the next two years?

Jim Thorburn, CFO

Yes. Overall, the operating expense for data storage is projected to be between $37 million and $39 million for this year. In terms of cash burn, we anticipate it to be around $30 million to $32 million for data storage.

Operator, Operator

Our next question comes from Catherine Schulte with Baird.

Catherine Schulte, Analyst

Maybe first, it looks like you are, but can you just confirm that you’re still expecting to achieve adjusted EBITDA breakeven for NGS and SynBio in the fourth quarter? And thanks for parsing out the DNA data storage spend. But how should we be thinking about adjusted EBITDA loss for Biopharma for the year?

Jim Thorburn, CFO

Yes. As we highlighted, I mean, our focus is getting to adjusted EBITDA breakeven for Biopharma, NGS, and SynBio as quickly as possible. You look at the guidance we’ve given, loss from operations in Q4 next year, roughly $38 million to $40 million that comprehends stock-based comp of $15 million, depreciation of $10 million, and there you get data storage cash cost in Q4 of approximately $8 million. As you can see from those numbers that we’re within striking points of getting to breakeven from a cash position. As we continue to scale, I mean, our focus is, as Emily highlighted in the call, to get profitability as fast as possible and have a very solid balance sheet to support the growth going into '25.

Catherine Schulte, Analyst

And then, Emily, just to your point on the ramp for Biopharma throughout fiscal '24, how much visibility do you have in that $25 million number? Maybe how much is already accounted for in current programs versus assumptions around winning new products, because it does imply a pretty steep ramp throughout the year? And is there any way to quantify the impact of the new Bayer partnership?

Dr. Emily Leproust, CEO

Yes. Great question. As we’ve mentioned previously in Biopharma, for services, we get orders, and we can convert those orders into revenue in two to three quarters. The great quarter that we had in Q4 will be converted from an order point of view into revenue in the coming two quarters. In terms of visibility, we have the visibility of the order. This is pretty much as much as we have. And then, to get to that other number, we have definitely a funnel, and we do measure the strength of the funnel. Now that we have a commercial team in every territory, we can track and push each of those business managers to make sure that they achieve their quota.

Operator, Operator

Our next question comes from Steven Mah with TD Cowen.

Steven Mah, Analyst

I’ve got a three-part follow-up question on Express Genes. One on the existing customers. Are you doing a dynamic pricing model with them? And then, if so, what’s been the early reaction to that pricing model? Is that something that’s new to them? And then second, how long do you expect to be in this early launch mode? And then, third, given that Express Genes, the turnaround time seems to be a little bit faster. Is there a new annual revenue capacity for the Factory of the Future we should keep in mind? Thank you.

Dr. Emily Leproust, CEO

Thank you, Steve. Our e-commerce dynamic pricing has two key elements. One aspect is subtle, allowing customers to order genes in the usual way while also presenting a clear option to choose Fast Gene. At the moment of ordering, customers can clearly see that for an additional dollar, they can receive enhanced benefits, making it a straightforward decision. While the subtlety exists, customers still need to choose whether to opt for it. In response to your inquiry about early reactions, we found that 20% of customers are selecting the Express Genes option depending on the pricing. This trend is ongoing. Regarding your second question about the duration of the early launch phase, we anticipate it will continue until early 2024. Matt doesn’t need to correct me on this. That’s when we plan to fully launch to all customers. And what was your third question? I believe there was an initial question I can't recall. Yes. In terms of capacity, if all the orders were placed quickly, it would essentially double the capacity in our manufacturing facilities. We haven't put a dollar amount on that yet, but we will in the future.

Operator, Operator

Our next question comes from Sung-Ji Nam with Scotiabank.

Sung-Ji Nam, Analyst

Just to pile on one more question on Biopharma. Just for that customer base, kind of curious whether you’re seeing any signs of improvement. Obviously, there are definitely macro factors that everyone is talking about. But do you think the growth next year is largely due to Twist’s own integration efforts and restructuring efforts that are bearing fruit? Or are you kind of seeing any signs of improvement whether from a reprioritization standpoint from large pharma or even smaller biotech at this point?

Dr. Emily Leproust, CEO

I recognize that there is definitely funding pressure in the Biopharma sector. Our analysis over the past few quarters indicates that this was largely a self-inflicted issue rather than a result of market challenges. The difficulties we faced were more related to our commercial execution. We have a very strong offering with our in vivo, in vitro, and in silico capabilities. I believe we are unique in providing such a wide range of opportunities. If we execute well commercially, we can achieve significant success in the current market. Recently, we have been concentrating on larger companies, which has proven effective. While we remain open to all customers, we have particularly focused our efforts on larger pharmaceutical companies.

Operator, Operator

Our next question comes from Matthew Larew with William Blair.

Madeline Mollman, Analyst

This is Madeline on for Matt. Just a quick one for me on the Express Genes. I know it’s early stages now, but I was just wondering if there was sort of an optimum proportional breakdown between Express Genes and the more standard clonal genes that you’re targeting long-term or that allows the Factory of the Future to be at its maximum efficiency, if there is sort of ideal breakdown between the two pricing points?

Dr. Emily Leproust, CEO

So, as a point of clarification, what we have is something that is actually quite unique because it’s the same production line for Express and standard, meaning that if all our customers decided to pick express genes, we will be able to make them all express. This is very different from what other companies can do. Maybe they can do a few genes fast by cutting the queue and skipping ahead and managing their backlog. For us, we don’t have to do that. We’ve built something that is intrinsically fast for 100% of the genes. To go back to your question around optimum pricing, for us, our goal will be to maximize our gross margin dollars. So, making sure that the fab is fully utilized and finding the pricing that maximizes the penetration into the DNA makers, ultimately really delighting our customers, enabling them to do their science faster; I think that would be a win-win. They’ll get faster science, and we’ll get more orders; we believe we will be able to take very significant market share. The intrinsic technology really enables us to be very flexible on what the ultimate price is going to be. If need be, we can make all orders express. That is hugely differentiating.

Operator, Operator

Thank you. There are no further questions at this time. I’d like to turn the call back over to Emily for any closing remarks.

Dr. Emily Leproust, CEO

As we’ve shared today, it is a very exciting time for Twist. We’ve launched Express Genes this week that is further differentiating our SynBio product offering, and we have taken steps to position the Company for enduring and consistent growth. In fiscal 2024, we have the opportunity for expanding margin, and we look forward to keeping you apprised of our progress. Thank you.

Operator, Operator

Thank you for your participation in today’s conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.