Rapid Micro Biosystems Q1 2023 Earnings Call Transcript

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May 5, 2023

There are 5 speakers on the call.

Operator

Good morning, and welcome to the Rapid Micro Biosystems First Quarter Financial Results Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Followed by the number 1 on your telephone keypad. And finally, I would like to advise all participants that this call is being recorded.

Operator

Thank you. I'd now like to welcome Mike Belyer of Investor Relations to begin the conference. Mike, over to you.

Speaker 1

Good morning, and thank you for joining the Rapid Microbiosystems Q1 2023 earnings call. Joining me on the call are Rob Spignesi, President and Chief Executive Officer and Sean Wertjes, Chief Financial Officer. Earlier today, we issued a press release announcing our Q1 2023 financial results. A copy of the release is available on the company's website atrapidmicrobio.com under Investors in the News and Events section. Before we begin, I'd like to remind you that many statements made during this call Maybe considered forward looking statements within the meaning of federal securities laws, which were made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Speaker 1

Any statements contained in this call that relate to expectations or predictions of future events, Results or performance are forward looking statements, including but not limited to, statements relating to Rapid Micro's financial condition, Anticipated year end cash balance, cash runway, future revenue and system placements, expectations for business development and growth, Customer interest and adoption of the GrowthDirect system, expectations for our new RMB Nucleus mold alarm and the potential impact of macroeconomic uncertainty and the coronavirus pandemic on Rapid Micro's business. Actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors. For a list and description of the risks and uncertainties associated with Rapid Micro's business, Please refer to the Risk Factors section of our annual report on Form 10 ks filed with the Securities and Exchange Commission on March 10, 2023, as such risk factors are updated in our subsequent filings with the SEC. We urge you to consider these factors, You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. This conference call contains time sensitive information And is accurate only as of the live broadcast today, May 5, 2023.

Speaker 1

Rapid Micro disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward looking statements whether because of new information, future events or otherwise. And with that, I'll now turn the call over to Rob.

Speaker 2

Thank you, Mike. Good morning, everyone, and thank you for joining us to review our Q1 2023 results. I will begin this morning's call with a summary of our Q1 performance, followed by a brief discussion of the progress we are making to both accelerate growth direct system placements and advance our new product development opportunities. I will then turn the call over to Sean for a more detailed discussion of our financial results. Our execution in the Q1 was solid across systems, consumables and services.

Speaker 2

1st quarter total revenue was $5,000,000 representing growth of 21% compared to the Q1 last year. We placed 3 systems and completed the validation of 2 customer systems in a quarter. Recurring revenue increased 22 percent to $3,300,000 compared to Q1 last year. On our Q4 earnings call in March, we indicated that we had confidence in our plan to accelerate system placements in 2023 and return Rapid Micro to solid growth. We believe our Q1 performance is an early indicator of the effective execution against those plans.

Speaker 2

Based on our solid Q1 performance, The progress we've made to improve execution and our funnel of system placement opportunities, we are reaffirming our full year 2023 revenue guidance of at least $22,000,000 representing growth of at least 30% compared to 2022. That said, and as we discussed in March, we are still operating in a dynamic macroeconomic environment And our guidance reflects some of the uncertainty that this presents. Our highest priority remains accelerating GrowthDirect system placements. Now I want to discuss some of the progress that we have made as well as customer engagement activities that we have activated to support this priority. During the Q1 of 2023, I had the opportunity to visit customers across Europe and North America as we seek to strengthen existing partnerships and establish new relationships.

Speaker 2

With each visit, I am reminded of the challenges our customers face And keeping up with an increasingly complex manufacturing environment. Through these visits, my understanding of how our customers utilize the GrowthDirect I believe that the value proposition of the GrowthDirect system, including faster time to results, Automation and data integrity continues to resonate with our customers, which gives me confidence in our potential to grow both our recurring revenue And additional system placements. In March, we had the pleasure of hosting the quality leadership team of 1 of our key account customers at our Lexington facility. We believe that key account customers tend to be some of our strongest users of GrowthDirect Systems and represent a meaningful portion of our future multi system order opportunities. We were pleased to receive positive customer feedback on the Growth RX system and overall Rapid Micro experience.

Speaker 2

And we are excited about the prospect of collaborating with While meeting at our Lexington facility, we were also able to share the progress We have made expanding our own manufacturing capabilities. Once completed, Lexington will complement our primary manufacturing site in Lowell, Massachusetts And will include a backup consumable manufacturing line, full R and D capabilities and importantly a new GrowthDirect customer demo lab. Construction and validation is expected to be completed by mid year 2023. More recently in Europe, We held a 2 day workshop for protective customers, which covered the theory and practice of rapid micro methods, including regulatory compliance And a roundtable discussion of best practices. We believe that in person customer workshops are a highly effective element of our sales process That hands on experience with the Growth Direct demonstrates its value proposition to prospective customers.

Speaker 2

And finally, Over the coming weeks, we plan to host industry professionals, customers and prospective customers for site tours at our Lowell facility. And as we move into the second half of the year, we continue to plan for Growth Direct Days and to work with customers who are advocating our behalf Automating their MQC processes and the value of the GrowthDirect system. Now I would like to provide an update on our new product development efforts, which are another key element of our growth strategy. Following the recent launch of RMB Nucleus Mobile Arm, we have transitioned into our product commercialization This plan includes focusing on customer education, increasing awareness and driving utilization of this new software product offering. I'm excited to report that we are off to an encouraging start.

Speaker 2

New customers have a high level of interest in molds alarm and we are working with existing customers Educate them on the value of this product. Briefly, on our rapid sterility program, we have continued to make substantial progress with a top 20 global customer. We recently achieved an important development milestone and remain on track with our internal plans. We expect to provide additional details on this development program on future earnings calls. So to summarize a few key takeaways.

Speaker 2

We believe that our Q1 performance was solid across the business and above expectations in many We are executing against our plan to accelerate growth direct system placements. Our recurring revenue is growing meaningfully. Our funnel of new growth direct system opportunities remain solid and we are gaining traction on the commercial release of Mold Alarm and advancing development of rapid sterility. Before turning the call over to Sean, I want to highlight the press release we put out last night announcing the appointment of Mike Wissocki As our Senior Vice President of Sales and Marketing, effective Monday, May 8. Mike spent nearly 2 decades at General Electric and GE Healthcare And is a recognized commercial leader with a proven track record of implementing successful sales strategies that have driven significant revenue growth.

Speaker 2

Mike will be a member of our executive leadership team and we are excited to have him on board. Now, I

Speaker 3

would like to turn the call over to Sean to discuss our Q1 performance. Sean? Thanks, Rob. Good morning, everyone. This morning, we reported Q1 2023 revenue of $5,000,000 which compares to $4,200,000 of revenue in Q1 2022.

Speaker 3

We placed 3 Growth Direct systems in the Q1 compared to 2 in Q1 last year. Our Q1 2023 placements included 1 system that we previously forecasted in Q2, but were able to pull into Q1. Product revenue, which is comprised of systems and consumables, was $3,300,000 in Q1 compared to $2,600,000 in Q1 last year. The additional system placed in Q1 this year accounted for the majority of the year over year increase in product revenue. Consumables revenue grew 12% compared to Q1 last year.

Speaker 3

Service revenue was $1,700,000 in Q1 2023 compared to $1,600,000 in Q1 last year. We completed the validation of 2 systems in the quarter compared to 9 in the prior year quarter. Validation revenue was lower in Q1 this year, primarily as a result of Fewer system placements in 2022 versus 2021, which resulted in a lower volume of validation activity in the period. Also as a reminder, several validations that we expected to complete in Q4, 2021 were delayed into Q1 last year impacting the comparison. As of March 31, we had a total of 105 validated systems, which drove growth in service contract revenue of almost 50% in Q1 20 23 more than offsetting the lower validation revenue in the quarter.

Speaker 3

1st quarter recurring revenue increased 22 percent to $3,300,000 compared to $2,700,000 in Q1 last year, driven by growth in both consumables and service contract revenue. Non recurring revenue was $1,800,000 in Q1 compared to $1,500,000 in the prior year quarter. Turning to gross margins. Product margins were negative $1,700,000 in Q1 compared to negative $1,800,000 in the Q1 last year. The improvement was driven by continued progress on our manufacturing efficiency and product cost reduction initiatives in consumables.

Speaker 3

Despite the benefit of one incremental placement, system margins were lower in Q1 this year as they continue to be impacted by lower production volumes. Service margins were negative $100,000 in Q1 2023, which was essentially flat compared to Q1 last year. The benefit of higher service contract revenue and good service cost control were offset by lower validation revenue in Q1 this year. On a combined basis, our first quarter gross margin percentage was negative 36% compared to negative 46% last year. The year over year improvement was largely a result of ongoing progress on our manufacturing efficiency and product cost reduction initiatives In both Consumables and Systems, we are also focused on increasing productivity and efficiency in our service business.

Speaker 3

We continue to expect these activities as well as increasing volumes to lead us to positive gross margins in 2024. Moving down the P and L, Total operating expenses were $13,100,000 in the Q1 consisting of $3,500,000 in sales and marketing, $3,200,000 in R and D $6,500,000 in G and A. Excluding $900,000 in Tension costs related to the restructuring plan we announced in August last year, total OpEx was $12,200,000 in Q1. This compares to total operating expenses of $13,100,000 in the Q1 of 2022. Net loss was $13,900,000 in Q1 2023.

Speaker 3

This compares to a net loss of $14,900,000 in the Q1 last year. The year over year improvement was primarily due to higher interest income due to higher rates earned on our short and long term investments. Net loss per share was $0.32 in Q1 2023 compared to net loss per share of $0.35 in the prior year quarter. With respect to non cash expenses and capital expenditures, depreciation and amortization was $800,000 Stock compensation expense was $1,200,000 and capital expenditures were $800,000 in the Q1 of 2023. I'll now turn to our 2023 outlook for the full year and the Q2.

Speaker 3

We are reaffirming our previous full year 2023 revenue guidance. We continue to expect revenue of at least $22,000,000 which assumes we will place at least 15 systems and represents growth of at least 30%. As Rob mentioned, we are still operating in a dynamic macroeconomic environment. We are seeing customer budgets receive increased scrutiny, which And we are continuously assessing the environment and monitoring customer interactions for changes in purchasing decisions. For the Q2, we expect commercial revenue of at least $4,000,000 which assumes at least 2 system placements.

Speaker 3

From there, we expect We continue to build momentum as we move through the year with revenue and system placements accelerating as we move into the second half of twenty twenty three. We continue to expect to complete at least 14 validations in 2023 with at least 2 in the 2nd quarter. With respect to validation revenue, we expect Q2 to be similar to Q1. We then expect validation revenue to increase in the second half compared to the first half. Although there may be some quarter to quarter variability over the balance of the year based on the timing of customer validation activities for previously placed systems as well as the lag between system placements and related validation work for new system placements.

Speaker 3

Based on our revenue outlook, We expect our Q2 2023 gross margin to be lower than Q1 due to lower revenue and lower system production volumes and then improve as the year progresses as our cost reduction and manufacturing efficiency initiatives generate additional benefits, especially in consumables and volume leverage increases. With respect to operating expenses, we continue to expect between $12,500,000 13,500,000 per quarter over the balance of 2023 with variability mainly driven by non recurring severance expenses that will impact Q2 and Q3 of this year as well as the timing of certain new product development activities. Finally, we had approximately $122,000,000 in cash, cash equivalents and investments As of March 31, our Q1, 2023 cash burn included outflows related to the payment of several large 2022 expenses that we do not expect to recur over the balance of the year, including annual bonuses and costs related to the strategic alternatives review we completed in Q4. We also expect to realize significant cash benefits from working capital management, particularly ongoing inventory reduction activities over the balance of the year. As a result, we continue to expect to end 2023 with cash and investments at or slightly below $100,000,000 which is consistent with the guidance we provided in March.

Speaker 3

We remain confident that this provides us with cash runway at least into 2026. That concludes my comments on our full year and Q2 outlook. So at this point, we'll open the call up for questions. Operator?

Operator

Your first question comes from the line of Dijaz Zavant of Morgan Stanley. Your line is open.

Speaker 4

Hello. This is Yuko on the call for Tejas. Thank you for taking our questions. Maybe to start, could you comment on what you're hearing around tightening budgets among your customers? And do you see it worse in one region versus another?

Speaker 4

Or is it pretty similar across the for at this

Speaker 2

point. Yes. This is Rob, Yuko. There's no we're not perceiving any differences across The 3 primary regions in which we operate. And as far as the first part The question, budgets haven't been have certainly not been slashed.

Speaker 2

As we talked about in our remarks, They are in some cases just going through what can be considered more scrutiny, which could extend some of the processes. It just feels like there's Yes, a tighter filter on some of the internal processes with some of our customers.

Speaker 4

Okay. That's helpful color. Thank you. And then maybe somewhat of a related question. When you think about your current funnel, could you share the mix between existing and new customers?

Speaker 4

And how would you describe the proportional multiunit potential versus single units and how that trended over the last several months?

Speaker 2

Yes. So the best way to think about it, I won't break it down in a quantitative way, but the best way to think about it and this is a metric that We look at quite often. Think of it as a good balance between new customers and existing customers. We now have I'm incredibly encouraged by 3 nearly fully staffed commercial regions in North America, Europe and Asia. I'm Incredibly excited about the talent, the new talent that we're bringing on board as well as joining our existing top talent.

Speaker 2

So we've got our regions online. We're working with developing new customer opportunities and our funnel reflects that. And the best evidence we have that our existing customers are continuing to see a growth direct value proposition is our recurring revenue Our consumption of consumables and services. So that propagates into our funnel and we've got a healthy mix Across our regions of both new and existing. Clearly, we're a bit newer in the in our Asia region.

Speaker 2

So that's a little bit more weighted towards newer But on balance, we've got a good mix between new and existing. It's also important to note That we don't have much at all early emerging biotech exposure. The vast majority of our customer base As you know, tends to be the larger customers that we have around the world, mostly in global top 20, call it top 50, But very little early stage biotech exposure.

Speaker 4

Got it. Makes sense. And then just one last one for me. With RMB Nucleus, Mold Alarm launched and Cerility consumable beta testing underway. Based on customer feedback, where do you see the low hanging fruit in terms of product

Speaker 2

Yes. So future product pipeline beyond mold and sterility, Is that the question?

Speaker 4

Yes, that's right.

Speaker 2

Okay. Yes, so our product strategy is fundamentally the Growth Direct is we view it as a platform technology. So we view it So we view it, in the middle of a legacy, manual workflow, that we are able to automate, Accelerate and improve significantly with regard to data integrity. So our strategy is to provide more value in that workflow. So to move upstream in our product in the workflow and downstream that workflow, which informs our product strategy.

Speaker 2

So mold As an example of providing more value to the current workflow, but also a step downstream as well. And typically customers will seek to Identify any kind of organism downstream and that's a given them a kind of an early steer on that part of our strategy. Sterility is one step further in automating the vast majority of routine use consumables. And our product strategy It's very much that as well to have a fully automated system that automates the vast majority of daily routine use tests in any pharmaceutical manufacturing environment. So look for in the future, we won't get into too much detail now, but Moving upstream and downstream and also, as we enable data and data analytics, that general category It's very much part of our thinking about future product development and release.

Speaker 4

Thank you.

Speaker 2

Well, thanks Yuko. We're going to pass the call up the live call up now. Thanks to everyone for joining us today.

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Earnings Conference Call
Rapid Micro Biosystems Q1 2023
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