Twist Bioscience Q2 2023 Earnings Call Transcript

There are 13 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Twist Biosciences Fiscal 2023 Second Quarter Financial Results Conference Call. Later, we will conduct a question and answer session. You will then hear an automatic message, Advice in your hand is raised. I would now like to turn the conference call over to Angela Bidding, Senior Vice President of Corporate Affairs and BSG Officer. Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone. I'd like to thank all of you for joining us today for Twist Biosciences conference to review our fiscal 2023 Second 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 Doctor.

Speaker 1

Emily LaCrouse, CEO and Co Founder of Twist and Jim Sorburn, 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 and then Emily will come back to discuss our upcoming milestones and direction. We will then open the call for questions. We would ask that you limit your questions to a maximum of 2 and then re queue as a courtesy to others on the call.

Speaker 1

As a reminder, this call is being recorded. The audio portion will be archived in the Investors section of our website and will be available for 2 weeks. During today's presentation, we will make Looking statements within the meaning of the U. S. Federal securities laws.

Speaker 1

Forward looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results in financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in our press release we issued earlier today as well as those more fully described in our filings with the Securities and Exchange Commission. The forward looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward looking statements, except as required by law. We'll also discuss financial measures that do not conform with generally accepted accounting principles, including adjusted EBITDA.

Speaker 1

Information may be calculated differently than similar non GAAP data presented by other companies. When reported, a reconciliation between these GAAP and non GAAP financial measures will be included in our earnings documents, which can be found on our Investor Relations Website is www.twistbioscience.com. With that, I'll now turn the call over to our Chief Executive Officer and Co Founder, Doctor. Emily Leproust.

Speaker 2

Thank you, Angela, and good morning, everyone. It is a busy time for Twist. I'm very pleased with our performance through the first half of the fiscal year. In Q2, we delivered our Q1 of $60,000,000 in revenue. In addition, this morning, we announced that we have taken Strategic actions to accelerate our path to profitability.

Speaker 2

I am happy to share that we expect to achieve a quarterly run rate that is adjusted EBITDA breakeven for both the core and biopharma businesses as we exit the September of 2024 quarter in about 15 months. Today, I will focus on 3 main things. 1st, our confidence in our near term revenue growth second, our decisive actions designed to achieve adjusted EBITDA breakeven in the near term and third, the drivers of growth in all businesses moving forward. Beginning with top line growth for our revenue generating businesses, I am pleased to share very strong results for the Q2 of fiscal 2023 We reported record revenue of $60,200,000 exceeding our guidance of 56,500,000 Strength in the core business, particularly NGS, drove beat. Orders came in at $64,200,000 indicating Moving into the second half of our fiscal year.

Speaker 2

During the quarter, we began commercial shipments out of our Wilsonville, Oregon facility, We continue to see increasing enthusiasm for our genes, gene fragments, oligopolies and labry products with our consistent rapid turnaround time driving that demand. I'd like to note that this is for our standard Speed Jeans. We have not yet taken orders for Fast Jeans, which we expect to launch in the fall with premium pricing. We continue to take market shares from our peers and remain far ahead of emerging players because of our Together with our Perfect Weighted Jeans at the scale and price unavailable elsewhere, which continues to resonate with our customers. Our reliable products and exceptional customer service has been key to creating loyalty with our customers, which then facilitates reorders and quarter over quarter revenue growth.

Speaker 2

In addition, our customer surveys continually state that we are their preferred provider because ordering is easy and we over deliver on turnaround time. For NGS, we see customers advancing development of their test and also gaining traction within the market. Our NGS revenue is significantly linked to the commercial ramp of our customer test. And while that can be quarter to quarter lumpiness, we have confidence that revenue will grow year over year. The point to remember As our business is sticky, we grow with our customers and our customer base continues to expand.

Speaker 2

In biopharma, we began integrating the Boston team at the end of the calendar year following the contractual limitations of the acquisition. We continue to see opportunities ahead, particularly as we now have an integrated team and portfolio of services. While it's true that the funding environment for emerging biotech companies has been constrained, our share of the bus from our services market is small and largely untapped by our commercial team. That said, we are facing some internal headwinds as we replatform systems and integrate commercial territories. We've made changes to address these challenges and expect the revenue lift will come within 6 months.

Speaker 2

We continue to sign collaborations and agreements with customers and we are expanding our wallet share with existing partners. As an example, we announced another agreement with Astellas in April, our 3rd collaboration with this pharmaceutical company. We do expect fewer milestone royalties for corporations as we move forward as we are now prioritizing near term top line revenue growth. Our commercial team for synbio, NGS and Biopharma is now firing on all cylinders and we are seeing large opportunities ahead. I will now move from top line to operating expenses and our significant actions to accelerate our past profitability.

Speaker 2

As you know, the fact of the future outside of Portland, Oregon is now shipping products to customers. In fact, all of our genes, genes fragments and the Vast majority of Oligo pools have been made in Oregon for more than a month. To accelerate our top line to reach profitability, we conducted a comprehensive review to reengineer our cost base and achieve this goal more quickly. We have made difficult decisions, We are sizing many teams throughout the organization, which will result in the elimination of approximately 270 positions to operate more efficiently while still continuing to support our high growth focus area. It is difficult to say goodbye to the many talented and committed Twisters who have been integral in our success to date.

Speaker 2

We wish them well. We will support them as they identify their next opportunities and we look forward to what they will achieve as they bring their experience front west to the larger ecosystem. To provide a bit more color on the shape of the organization moving forward, the sales force will remain largely intact to drive top line growth. We removed the duplication of synbio production across South San Francisco and Portland, significantly lowering our fixed cost structure. In addition, we will size the biopharma teams focused on revenue generating partnerships, deprioritizing the majority of our internal assets.

Speaker 2

Throughout the organization, we streamlined teams, including R and D, to focus on programs where Twist has a clear competitive advantage and to selectively deploy our platform in areas where we see the greatest potential for long term value creation. In Data Storage, we remain integrally involved in market development and continue to advance our technology. We do not see a near term competitor close to a commercial launch at this time, and that's significant. It enables us to substantially reduce our operating Thank you for the participation for Data Storage, while continuing our efforts at a more modest level, yet still we made ahead of the competition. We will focus our efforts on the storage of the Service business model and plan to delay the distributed on premise approach until after the service business has proven to be a success.

Speaker 2

We expect to demonstrate an end to end gigabyte Century Archives service by the end of Century Archive Solution. As I said, we believe we will deliver on all of this while reducing the overall cash flow. Moving into our future growth, we see many opportunities ahead. As we look forward to planned launch of Fas genes and Symbiodes 4, We will be targeting the $1,400,000,000 DNA makers market. These are scientists and researchers in large pharmaceutical companies and academia that currently make their own DNA instead of buying it as they need it faster and more cost effectively than we believe it can be delivered from virtually any source today.

Speaker 2

This is one area that we are confident will increase our synbio contribution margin as we believe we will be able to command the premium price that leverages dynamic pricing for rapidly delivering these products. Additionally, we do not expect Commercial headcount to pursue this large market as we believe our e commerce portal and digital marketing capabilities enable us to acquire customers cost effectively. For NGS, our customers continues to increase, particularly in the oncology space. We have several large commercial customers and a growing mid tier group of development stage customers with the potential for compounding growth. In both instances, Truss is poised to grow with them.

Speaker 2

We continue to be included in more and more assets, and we believe the growth of our NGS opportunity will be sustainable for the In the near term, we plan to run RNA workflow tools to our NGS portfolio. Scientists often run RNA assays multiple times For the same samples as RNA changes at different time points and different issues in both normal and busy states, providing a large market That complements our DNA workflow tools. RNA workflow are just primarily within the research market, an area where we have a significantly smaller footprint to date, but believe we can grow and expand. We expect to launch several RNA tools in the near future. In Biopharma, we continue to see opportunities for our competitively priced high value services even more so with the integration of the offerings.

Speaker 2

We will focus on selling services that drive top line revenue while we digest the resizing of the organization. The largest shift will be away from R and D on our internal assets until we see some of ensuing out licensing antibody leads where we have done the most work. For data storage, the very large opportunity remains within our sights. Because we are not seeing direct competitors at this time, we are slowing our investment. Therefore, we have revised our commercial plans while we advance at a more modest rate without losing our 1st mover best in class competitive advantage.

Speaker 2

With that, I'll turn it over to Jim.

Speaker 3

All right. Thanks, Emily. We had another quarter robust execution at Twist Despite the volatile macroeconomic environment, revenue for quarter 2 was $60,200,000 which is year over year growth of was approximately 25% and a sequential increase of 11%. Orders were $64,200,000 for the quarter, an increase of approximately 17 And gross margin for the quarter is 7.8%. We shipped to approximately 2,100 customers as compared to 2,000 in quarter 2 fiscal 2022 and we ended quarter 2 with cash investments of approximately 388,000,000 Our NGS revenue for quarter 2 was $29,000,000 which is year over year growth of 26%.

Speaker 3

As we noted in our previous earnings call, we had a couple of larger customers push shipments from the December quarter into January. Our 2nd quarter orders were $28,000,000 a sequential decline of 10% but growth of 19% year over year. As Emily stated, revenue growth in NGS is linked to the ramp of our customer tests, which can drive some quarter to quarter lumpiness in revenues. The top 10 customers accounted for approximately 38% of our NGS revenue and we served approximately 600 NGS customers in fiscal Our pipeline for larger opportunities continues to scale and we're now tracking 270 accounts, of from 264 noted in our last earnings call. 131 have adopted Twist as compared to 130 last quarter.

Speaker 3

Now turning to synbio, which includes genes, DNA preps, IgG, libraries and oligopoly. Synbio revenue for the quarter rose to $24,100,000 representing a sequential growth of 11% and a year over year increase of approximately 31%. Orders for the quarter were $30,900,000 which represents a 16% sequential increase at a 31% year over year growth. Some of the highlights include shipping to approximately 1660 synbio customers, which has grown from approximately 1400 in the Q2 of fiscal 2022. The customer base includes many biotech and large pharma companies.

Speaker 3

Genes revenue increased to $18,000,000 which is year over year growth of approximately 27%. We shipped approximately 152,000 genes in fiscal quarter 2, which is an increase of approximately 23% year over year. And all of those pools had another strong quarter with revenue of $3,300,000 with demand primarily coming from the Healthcare segment. Now to biopharma. Our biopharma revenue for the Q2 of fiscal 'twenty three was $7,000,000 down sequentially from $8,200,000 Orders for the quarter were $5,300,000 down sequentially from $6,900,000 in the Q1, primarily due to integration challenges Emily described.

Speaker 3

That said, we had 93 active programs at the end of the quarter and added 3 more milestone and royalty agreements, which brings the total to 66, up sequentially from 63. I'll now cover our revenue breakdown by industry and our regional progress. Healthcare revenue for the Q2 of fiscal 2023 was $33,800,000 as compared to $24,100,000 in the same period of fiscal 2022. Industrial Chemical revenue was $14,400,000 in the Q2 of fiscal 'twenty three as compared to $14,100,000 in the Q2 of fiscal 'twenty two. Academic revenue was $11,100,000 in the Q2 of fiscal 2023 as compared to $9,500,000 in the same period of fiscal 2022.

Speaker 3

EMEA revenue rose to $18,800,000 in Q2 fiscal 'twenty three versus $15,200,000 in Q2 fiscal 'twenty two. APAC continued to see recovery in China with our revenue in China increasing to approximately $2,000,000 up from $1,400,000 in the prior quarter. For APAC, overall revenue increased to $6,500,000 compared to $4,500,000 for the same period of 2022. U. S, which includes Americas, Revenue increased to $34,900,000 in the 2nd quarter versus $28,500,000 for the same period of fiscal 2022.

Speaker 3

Now moving down the P and L. Our gross margin for quarter 2 was 30.8% with cost of revenue for the quarter of 41,700,000 The change in gross margin was expected as the cost of revenue increased sequentially from $29,400,000 primarily due to approximately $5,000,000 associated Commercialization of the Syn Bio Labs and Factory of the Future. In addition, we had approximately 1,000,000 scrap associated with the Factory of the Future Our operating expenses for our fiscal quarter, including R and D, SG and A, Change in fair value and mark to market adjustments of acquisitions was approximately $80,100,000 as compared to $79,200,000 in Q2 fiscal 2022. To break it down, R and D for this fiscal Q2 was $27,400,000 a decline from $31,200,000 in the same period of fiscal 2022, primarily due to the conclusion of Revilar. This includes DNA storage R and D spend of $5,000,000 and biopharma R and D spend of $4,700,000 in the 2nd SG and A in quarter 2 was approximately $54,000,000 Faxutyed Future Pre commercialization costs included in SG and A were approximately $6,000,000 for the 1st month of the quarter when the factory was not yet commercial.

Speaker 3

In addition, we have a number of labs that are still in pre commercial phase and will transition to COGS as they are qualified in the second half of fiscal Stock based compensation for the quarter was approximately $10,000,000 Depreciation and amortization for the quarter was $7,100,000 an increase from $5,800,000 in the previous quarter and associated with the commercialization of Factory of the Future. CapEx, Cash investments in the quarter too was approximately $9,000,000 which brings total CapEx cash spend for the 1st 6 months of the fiscal year to 21,000,000 As we've highlighted, the launch of Fact of the Future is going very well. We had a strong quarter of operational And as noted, we continue to see year over year growth in Syn Bio and NGS businesses. We're focused on achieving adjusted EBITDA breakeven and then profitability as we scale. We are resizing the organization by approximately 25% with reductions aimed at managing our operation cost structure, lowering our revenue breakeven point and limiting our investment in data storage as we transition to breakeven.

Speaker 3

Note the reductions outside of the U. S. May be delayed as we work through the required regulatory processes. About 60% of the staff reductions affect the COGS line and 40% effect OpEx. In particular, we have resized the Biopharma Group to achieve breakeven at $40,000,000 instead of revenue of $80,000,000 And for the core business, we have streamlined the organization across the board in order to achieve breakeven of $285,000,000 instead of 300 The cash restructuring costs are estimated to be approximately $9,000,000 to $11,000,000 We anticipate cash savings of approximately $9,000,000 to $11,000,000 per quarter on a go forward basis beginning in the Q1 of fiscal 2024.

Speaker 3

The savings primarily impacting our operations as we exit Gene Manufacturing in South San Francisco and ramp up the factory's future as well as moderate our investments in R and D with the majority of the spend reductions in biopharma and DNA storage. Because we've taken actions to address our cost structure, we do believe it is prudent to revise our revenue for fiscal 2023 as we digest these changes. We're revising this guidance to approximately $235,000,000 to $238,000,000 versus our prior guidance of $261,000,000 to 269,000,000 synbio revenue ranges $96,000,000 to $98,000,000 and that's down from $104,000,000 to 106,000,000 NGS revenue range is $113,000,000 to $114,000,000 down from $120,000,000 to $123,000,000 biopharma revenue is $26,000,000 and that's down from $37,000,000 to $40,000,000 For the second half of fiscal twenty twenty three, we anticipate revenue of approximately $60,000,000 to $61,000,000 in quarter 3 and $62,000,000 to $63,000,000 in quarter 4 and gross margin to be approximately 30% in Q3 and 36% in Q4. For the full fiscal year, we're projecting gross margins of approximately 35% to 36%. We're decreasing operating Expense guidance for the year to approximately $313,000,000 to $319,000,000 as compared to our previous guidance of $330,000,000 We're now projecting R and D expense of $112,000,000 to $114,000,000 as compared to our previous guidance of $130,000,000 We expect SG and A to be $197,000,000 to $200,000,000 and that's a decrease from our previous guidance of $204,000,000 Mark to market is projected to be a credit of $5,000,000 Onetime separation costs from our reduction in force are projected to be $9,000,000 to $11,000,000 Depreciation and amortization is projected to be approximately $29,000,000 Our projection for stock based compensation declined to approximately $43,000,000 from $50,000,000 Operating expense for DNA Storage is expected to be approximately $40,000,000 compared to the previous guidance of $46,000,000 And for fiscal 2024, we also expect $40,000,000 operating expense for data storage Compared to previous guidance of $57,000,000 Net operating loss for the year is projected to be approximately $230,000,000 to $234,000,000 which includes one time charges of approximately $9,000,000 to $11,000,000 for separation costs.

Speaker 3

CapEx for the year is projected to be $40,000,000 a decrease from the previous guidance of $50,000,000 ending cash projected to be $320,000,000 compared to previous guidance of $300,000,000 In summary, we had record revenue in quarter 2. We are commercially shipping from the Factory of the Future. We are focused on managing the business and our cost structure as we scale. Importantly, we expect to exit fiscal 2024 with the 4th quarter adjusted EBITDA breakeven for the core and biopharma business. We define adjusted EBITDA as EBITDA plus add back for stock based compensation.

Speaker 3

And we're also projecting ending cash balance $220,000,000 at September 30, 2024 and that's up from our previous guidance of 170,000,000 With that, I will now turn the call back to Emily.

Speaker 2

Thank you, Jim. We continue to have aggressive goals and we have aligned the business to pursue significant As importantly, we announced decisive and proactive actions to accelerate our path to profitability, preserving cash and mitigating risk, all the while leveraging our outside opportunities in the marketplace. We've always evaluated the business from every lens And we remain laser focused on achieving adjusted EBITDA breakevens for our core and biopharma businesses, while maintaining optionality on investments for the incredible upside we see in data storage. Our core business in Syn Bio and NGS continue to scale And we have near term opportunities for each with an energized commercial team to deploy. We are resizing and refocusing the BioPharma organization for an integrated offering that we believe will drive top line revenue growth and we have moderated our stand for data storage while ensuring we maintain our competitive edge.

Speaker 2

We revised our guidance to a cautious level with potential for upside. We have been strategic in our actions this quarter, positioning us as a leaner, leaner organization, specifically focused on disruptive market opportunities for profitable and scalable growth. With these substantive changes, we believe we are operating for a position of strength in the current environment, accelerating our projecting time line to adjusted EBITDA breakeven And we will be given for both the Core and Biopharma Businesses as we exit the September 2024 quarter or about 16 months from now. We remain extremely excited about Rising the Future. And with that, let's open the call for questions.

Speaker 2

Operator?

Speaker 4

Thank you.

Operator

As a reminder, to accommodate all participants in the queue, we ask that you please limit yourself to one question and follow-up. If you have additional question, you may reenter the queue. Time permits. And our first question coming from the line of Vijay Kumar with Evercore ISI. Your line is open.

Speaker 4

Hey, guys. Congrats on the revenue we had in And thanks for taking my question. I guess my first question is on the guidance here. It makes sense for the guidance to be reset given the environment. The back half here, I think, implied as high single digit.

Speaker 4

And it looks like All segments were cut, but perhaps biopharma a little bit more than the others. Can you just talk about the macro environment? Is this has what has changed versus 3 months ago from a macro perspective? And how much of this is Twist specific versus the general environment that you're seeing? And how comfortable are you in this

Speaker 3

Thanks for the question. So if we step back, there's a number of things going on. One is in terms of biopharma, We feel very good about where we're at. The challenges we've had in biopharma is just purely integration. So that's an execution issue.

Speaker 3

We acquired Averis last year. We had an EnerSys. It was important that we supported Averis to I'll be positioned to achieve that R and M. And consequently, we had this independence between Twist and Verus. And then as we started to integrate, we realized we had some integration challenges.

Speaker 3

We are launching the new offering And we feel good about where we're positioned. And because of the internal challenge there, we reduced the revenue outlook for biopharma. It's a large market. We've got a great service offering. So we feel very well positioned.

Speaker 3

In terms of the other two areas, Syn Bio and NGS, we've just reduced the organization by approximately 25%. We believe it's going to take some time to digest That reduction, the overall order growth rate is solid. We continue to see an NGS Growth of large customers, we're launching new products. At the same time, taking 25% of the organization, We believe we need to be prudent in terms of our outlook in terms of top line. I think the advantages that we're positioning the company So this is internal, But we really, really believe that we're well positioned from the platform.

Speaker 3

We're seeing large customer growth. So It's more prudence on our part.

Speaker 4

Understood. And just sorry, Jim, on Just to clarify that point, what you're saying is 25% headcount reduction. And did that come from the commercial side? Because I think what you're saying is orders and customers, the market seems to be healthy, but this is more A function of the restructuring actions you've taken and hence the die cuts here in the back half?

Speaker 3

That's correct. Yes, the market is strong. We're up as we highlighted year over year. We're growing faster than the market. We're focused on launching new products.

Speaker 3

So this is just about pure internal Issue in terms of digesting such a large change. I mean, we've done a great job in terms of launching The future is going exceptionally well. Turnaround times are excellent. Customer feedback is great. And at the same time, we believe Over the next 6 months, we're going to be prudent in terms of our outlook due to the reduction of the organization by 25%.

Speaker 4

Understood. And then one on the gross margins, Jim. If I look at your 3rd quarter and 4th quarter commentary here, 4th quarter revenue is up a couple of 1,000,000, but I think the implied gross profit dollars are up $4,000,000 What drives that Gross margin, the 36% gross margin strength in Q4, and is that the right jump off point for next year? How should we think about gross margins for RAC24?

Speaker 3

Yes, good question. I mean, as we continue to scale, Yes. You can imagine we've adjusted the cost structure. We're going to digest that, continue to grow Launchfast genes. So That 36% is starting off point for next year.

Speaker 3

And as we continue to scale, we're going to see incremental improvements in gross margin. I mean, our focus is get to adjust EBIT to breakeven for the core business by Q4 next year. We want to leverage the factory of the future, What's driving the new products, vaccines, what's driving the new products in NGS. And we're very, very well positioned to see gross margin Improvement next year.

Operator

Thank you. And our next question coming from the line of Matt Fuchs with Goldman Sachs. Your line is now open.

Speaker 5

Hi, this is Evie on for Matt. Are you feeling any weakness from the biotech funding environment? And then what is your exposure as a percentage of revenue look like for that?

Speaker 3

So in terms of the biotech funding environment, I mean, clearly It's having an impact on the overall industry. I mean, we see it as an opportunity. In terms of where we're at with Verus and the Our biopharma integration, we're going to be launching our integrated offering. We've taken Adjustments in terms of the organization. We're very focused on streamlining the business.

Speaker 3

We anticipate getting to adjusted EBIT Breakeven at 40 for biopharma. And at the same time, there's a huge open market, there's a huge market for us. The As you saw last quarter, the number of customers dealing with this is solid. We continue to see Strong growth in terms of the number of projects and the outlook with the offering, we're feeling good about that outlook. So I think overall, maybe there is issues.

Speaker 3

However, our issues have been internal. And sorry, I missed the second question you asked.

Speaker 5

Just what was the like percent exposure as a percentage of your overall revenue to the biotech environment?

Speaker 3

We don't we haven't disclosed that overall. Our healthcare revenue is about 50 odd percent of our overall business and that's been growing year over year. So I mean, it gets back to the strength of our product offering NGS. We provide our customers with just Sequencing costs, fast time from sample to sequencer, synbio, we continue to scale into biotech. And with the biopharma business, we'll have integrated offerings.

Speaker 3

So we see ourselves moving into the large pharma customers. That continues to be a good trend for us. So overall, if you look at our orders, our orders are up Year over year, revenue is up year over year. So this is I mean, we're focused on execution. We believe that due to Our platform, we can provide significant value to our customer base.

Speaker 5

Okay, great. That's helpful. Thank you. And then Where is the cost reduction mostly weighted towards? Is it like towards one specific segment or is it pretty equal across

Speaker 6

the board?

Speaker 3

Cost reductions are across the board, we're managing our data storage investment. We've adjusted the biopharma cost structure. And for the core business, We've migrated our Gene business to Factory of the Future. So we're leveraging the Factory of the Future and investment made there And taking advantage of the fast turnaround time. So it's the 3 segments.

Speaker 3

The outcome is for core business, I. E, NGS And Syn Bio and Biopharma, the goal is to adjust the EBITDA breakeven by Q4 next year And exit next year, strong cash position.

Speaker 5

Great. Thank you.

Operator

Thank you. And our next question coming from the line of Medler with William Blair. Your line is open.

Speaker 7

Hey, good morning. I wanted to ask about data storage. So obviously you mentioned you're moderating expenses there. But you also mentioned that you feel like you have a significant lead. Just curious why that level of reduction in spend Was the right one that you contemplate perhaps more or pausing or maintaining the investment?

Speaker 7

Just sort of Given that it's a modest reduction, just want to get a sense for what was contemplated and why end up settling on sort of that level of investment?

Speaker 2

Yes. Thank you, Matt. Very, very great question. I think we see a tremendous opportunity in the data storage For long term value creation, but at the same time we have to deliver short term value creation. So we have to make some very So, it's full capital allocation decisions.

Speaker 2

What we are seeing is The market for the test storage is the more we sense it, the more certain we are about it. At the same time, as I mentioned, we were head and shoulders ahead of the competition. And so we see our data storage investment as The labor that we have in managing the business and so as we are focusing on adjusted EBITDA breakeven For the core and biopharma business and ending getting there with as much cash in the bank as possible, we are able to Lower our investment in data storage without losing our competitive edge. And so what that means is we'll have to do less. So we'll do a bit less of Market Development.

Speaker 2

We are not going to do the early access with the gigabyte chip. Instead, we'll show the end to end demonstration, Which is important that the system is going to show us we can do data in, data out, but we don't have to go commercial with that system. Instead, we're going to focus On going commercial with the next chip, the terabyte chip, which is going to be disruptive from a Total cost of ownership point of view. And so that's a significant change. The gigabyte chip was more for demonstration.

Speaker 2

And so we're not going to commercialize something that the translation systems we're going to focus on commercializing

Speaker 7

Okay, understood. And then if we sort of look at your quarterly results, I think those bear out that in Syn Bio and NGS, you entered And it's more challenging on the outside looking into look at biopharma and assess How that has been going, just given the number of acquisitions that you've made there. From that side, looking in that market seems to be a bit more crowded and certainly evolving. What's your assessment of kind of you mentioned sort of the right assets, We're also going through some internal changes. What's your assessment for the offering you have there relative So your assessment of competition and how you think you've been growing perhaps either measured by win rate or Pitches or revenue, what sort of the right metrics you're looking at internally that give you confidence that that asset is really competitive and differentiated?

Speaker 2

Yes. No, that's a very, very good question. And so from a technology point of view, Our technology our individual technology from the original Twist, we know that that is Very strong best in class technology. We have scientific data That the mouse that we got from at Verisk is a slow head to head with other mouse is Best in class as well. And so the combination together plus the addition of Inseminco that we had it, Our belief is that, that is the best set of tools comprehensive goal stand out So from a technology point of view, we are extremely confident.

Speaker 2

From a commercial point of view, it's a different story. In the change that In biopharma, we had to completely retool our sales team. And so we're in a situation where We have a fantastic technology that we strongly believe in, disruptive in the Twist spirit where when we go in, we go in with an And we've just now put in place the commercial team that is going to and monetize that technology. So in terms of metric to look at, what we will report to the street is Orders have been down and so what we're going to look for is a reversal of orders and orders It's the first step to getting to revenues and in biopharma is all the orders are upfront payments. So usually there's 100% conversion to revenue.

Speaker 2

So What we're looking at is orders. And then in terms of from internal metric, it's Classic sales business development metrics, what are the activities And really how many new customers we get in, we have a secret weapon with our CSO, Aaron Sato, It's outdoor opener and then we can have the sales team to come mop up. And Then we are extending the scientific level of our sales team to be able to do more of that. So at this point We are very confident in the technology we have and it's a sales business development execution from now on.

Speaker 8

Okay. Thank you.

Operator

Thank you. And our next question coming from the line of Stephen Ma with Cowen. Your line is now open.

Speaker 9

Great. Thanks for the question. A question for Jim. Could you give us some color on the CapEx pullback In 2023 from $50,000,000 to $40,000,000 And then a follow-up on that. Is there going to be any impact on the Fact of the Future build out and the fast gene and RNA launches and other launches out of the fact of the future because of that?

Speaker 3

Yes. Thanks for the question, Steve. In terms of the CapEx pullback, it's just fiscally managing our CapEx. We see no impact. The key thing for us over the next 4, 5 months is to execute in terms of The business taking into account the impact of the reduction headcount.

Speaker 3

So As part of this, we have an ongoing focus in terms of managing both our CapEx, managing our net working capital And continuing to drive growth and at the same time manage the balance sheet. So just part of prudent management And there'll be no impact in terms of the Factory of the Future.

Speaker 9

Okay. Thanks for that color. And then a question for Emily. On the enhanced whole genome sequencing and enhanced whole exome sequencing Early access programs, can you give us some color on how the response has been and how the traction has been there? And then secondly, I noticed that the press Julis on Aster Insight.

Speaker 9

Could you give us a little bit of color on how the economics and revenue share work with a partner like Aster Insight? Thank you.

Speaker 2

Great questions. So on EWGS, the initial customer We are going to leverage that technology to the Agricultural business, where cost per sample is Extremely tight. Internally, we say that's where our price is king. And so, The technology that we've developed internally is really going to enable those AgBio Customers to do 1,000, 100 of 1000, 1,000,000 of samples At the very low cost with very high resolution on the tumor type that they are looking for. And so those are big contracts.

Speaker 2

When they land, it's going to be big, big lumps. So It's going to take a little bit of time, but the initial technology assessment is extremely Positive. What's the second question? I'm

Speaker 3

sorry, yes.

Speaker 9

It was upon the economic share With Aster Insight on your kits, were you using some of their content on your

Speaker 2

Yes. So I mean what we can say is that it's built with our design It's some custom NGS tools and they have a great channel, but yes, we're not sharing the economics.

Speaker 8

Okay. All right. Thank you.

Speaker 2

Thank you, Steve.

Operator

And our next question coming from the line of Sung Ji Nam with Scotiabank. Your line is open.

Speaker 10

Hi, thanks for taking the questions. Just to expand on Matt's question earlier with regards to just If you could provide more color around kind of the rationale and your thought process in terms of the timing and the magnitude of the restructuring, and what gives you confidence that this might not be overly aggressive or I guess not sufficient enough to drive growth in the future? Just kind of you could give us a bit more information there.

Speaker 8

Yes, I mean, thank you. I think you go Emily.

Speaker 2

Maybe I'll start and with the high level And Jim will keep filling the details. So the general principle was that from a Company morale point of view, we wanted to do it once and done. And so we didn't want a drip, drip, drip. And so we get Really, really deep so that we don't have to do it. At the same time, we also know that we have some strategic And so we get deep enough to make sure that we left room for Those 2 strategic hires that have to happen.

Speaker 2

So that was The high level guiding principle and I'll let Jim fill in the details.

Speaker 3

Yes. So in terms of timing, we launched the Back to the Future in the middle of the quarter from commercialization. It's going really well. We've invested significantly over the last 18 months. And in terms of Yes, the timing right now, we're seeing the benefit of our investment, and we're seeing the opportunity in the marketplace.

Speaker 3

We've got a lot of interest in terms of Factory of the Future. We're getting well positioned to launch fast jeans. And what's important to us also is maintaining a strong balance sheet to support the business as we move from Losses to adjusted EBIT to breakeven by Q4 next year. So this gives us the runway for our core business to get there. And at the same time, we see opportunity for top line growth and continued opportunity for R and D organization This restructuring supports the balance sheet, supports the company and supports our focus on innovation and growth.

Speaker 10

Okay, got it. And then in terms of the fast genes, could you remind us kind of where the key remaining That's in terms of from the market development standpoint or manufacturing capability standpoint that are remaining before your launch?

Speaker 2

Yes. Thank you. Great question. So all of the genes as of late March, Gene, Gene fragments and most of the other pools are being made in Wilsonville, Oregon. And so we now stress That factory under high volume and we're very happy with the performance, the turn And the final yields are equivalent to what we were getting in the South San Francisco fab.

Speaker 2

And the turnaround time right now is blazing fast. I think our average is about 10 days and 90th percentile of genes Shipping in 14 days, so it's really great performance. And now in terms of Fasgene, To your questions, there is 2 avenues that we're still working on and they are both on software. The first avenue is We have internally some software tools that we're finalizing to enable FastGiant. So the process is the same, but we are adding more software tools such that there is less human intervention, less thinking in terms of what has to happen next and that means that the genes will spend less time waiting In the freezer of what has to happen next, so that's the software tools.

Speaker 2

The software team is doing fantastic. It's on track. 2nd piece is a software tool and that is the external tool, the e commerce tool that needs to be Updated. We are adding a key feature of dynamic pricing that would be In our view, very critical in extracting the most value out of the speed that will be created.

Operator

And our next question coming from the line of Luke Serkut with Barclays.

Speaker 6

Hey, guys. Good morning. Couple of things here. So I just wanted to follow-up on Doc's question about The step up in the margins there in 4Q with minimal step up in revs and You provided some early color there, but I thought that the fact of the future and the fast genes coming online, that was all going to be incremental. So talk about kind of the dynamic there about maybe cannibalizing some of your past work with the

Speaker 3

Yes. And just in terms of the step up in margin from quarter 3 to quarter 4, that's driven by top line revenue growth. As we continue to leverage the fact to the future, in terms of the impact to restructuring, We see our cost benefits really coming in Q1 'twenty four, and The step up you're seeing there is partial impact of the cost benefit as we leverage factoring future in Q4 This year, but as you move into Q1, you see the full benefit, the cost improvements and then you get the impact of the fast genes as we launch them in So the fast genes benefit is all fiscal 2024 and you see also the Full benefit of the cost reductions in starting Q1 of 2024. In the short term, we see Partial benefit from cost reductions. You see the benefit of leveraging the fixed cost as we scale revenue sequentially.

Speaker 3

And then as you move into next year, we will anticipate moving towards adjusted EBITDA breakeven by Q4 of Fiscal 2024.

Speaker 6

All right. So I mean, this is just a follow-up on that. So if it's I get that you're recognizing a lot of those cost benefits, but So on the guide down, is it that the fast genes and the fact of the future is taking longer to ramp?

Speaker 3

So the guide down is, so 2 key components. 1 is the guide down is on the biopharma business. Why is the biopharma business guide down? It's because we've had internal integration issues from a commercial point of view. In terms of both Synbio and NGS, the only reason we've taken the guide down is we see some potential Risk of digesting a 25% reduction in our organization.

Speaker 3

It's not because of any market issues. It's because of our own Internal prudence in terms of managing such an organizational transition.

Speaker 6

All right, great. And then last here for Emily. On the internal candidates and the decision there, you said that you're going to I think you said you're going to stop the internal development. So, I thought when you guys had those, it was basically and this might be oversimplifying it, but I thought when you had those, it was basically the code that you could just So talk about the incremental spend that those required. And then Just I guess the lack of what was driving I guess the lack of interest among partnerships there for those candidates?

Speaker 2

Great question. So yes, we've been developing some internal candidates. Those were Those were R and D investments. We are not throwing away the investment that we've done. What we are doing is slowing further investment into those assets.

Speaker 2

And so we're Now monetizing those assets and as we monetize them as that creates upside, We'll decide then how we allocate the capital, but That could be the trigger to further develop other assets, but at this point it's prudent for us to As said, the Biofron business such that can be adjusted EBITDA breakeven at $40,000,000 revenue instead of $80,000,000 And so there will be less R and D effort on our own assets, but We are not stopping the monetization effort of the assets We've been doing and I wouldn't say that there's no interest, but we don't We only have limited capabilities on outsourcing antibodies. We've done at least we have an end of 1. We had out licensing last year. But We have limited time and resources inside the company to do it. And so we don't want to get the R and D Development ahead of the monetization keys and so that's what we're doing.

Speaker 6

Okay. Thanks.

Operator

Thank you. And our next question coming from the line of Puneet Souda with SVB Securities. Your line is now open.

Speaker 11

Yes. Hi, Emily and Jim, thanks for taking the question. So first one really is, Why is this guide cut the last one? Just given the situation in the macro, the biotech Funding and the DX moderations, which I think everyone on this call is aware of. Those things are not necessarily immediately improving in the market.

Speaker 11

We have seen guide reductions from a number of companies multiple times. So At this point in time, sort of workforce reductions are also happening at diagnostic companies and they're cutting spend. So Your reduction of 25% is one of the most meaningful in this space. So given all that dynamic, I mean, Just help us understand what gives you confidence in this in the guide overall for 2023 and for FY 2024. There was a 3 €1,000,000 guide before with 49% gross margin.

Speaker 11

Can you just update us on that FY 2024 guide too? Thank you.

Speaker 3

All right, Puneet. I can start and Emily can polish off what I'd say. So in terms of what gives us confidence, We highlighted our orders were strong in this last quarter. We continue to on the NGS side, continue to Build out portfolio, continue to build out customer base. On the Syn Bio side, Factory of Future commercialization And this last quarter has gone extremely well.

Speaker 3

As Emily has highlighted on the call, our turnaround times are excellent. Number of customers continues to increase. So in terms of the guide outlook for NGS and synbio, We are looking at the reduction just purely due to digesting the reduction headcount. As you said, it's Very meaningful. It's meaningful because we've invested significantly in fact to the future that's going well.

Speaker 3

And we're seeing opportunities in terms of upside and at the same time because we have such a meaningful reduction headcount, we're going to be prudent in terms of outlook. In terms of biopharma, this is purely internal execution issue with the absorption of ARBARIS and execution in terms of being able to integrate commercial organization, we could not do that for the last year. We're launching We feel good in terms of the number of active projects. We're at 95 last quarter. We're seeing strong interest from our customer base.

Speaker 3

And at the same time, because of the meaningful reductions, we want to be prudent in terms Right, look. In terms of where we're going next year, as we continue, we see the margin increase from Q3 to Q4. As we continue to leverage the factory future, We see the benefits of the cost reductions. We'll see the launch of the fast genes. And our outlook for next year is to get to adjusted EBITDA Breakeven by Q4, and we will continue to give updates in terms of our progress on each of the quarterly earnings call.

Speaker 3

So I'll maybe turn it over to Emily to round that out.

Speaker 2

I think, Jimmy, you covered it well.

Speaker 11

Okay. And then on pricing of the products, can you just update us, do you expect to raise any pricing on the NGS or Syn Bio products? And overall competition in the market. Just can you sort of give us a sense of what you're seeing from some of the larger competitors, the competitive dynamics changing in the market? Thank you.

Speaker 2

Yes, great question. So we did our 2nd annual price increase on NGS that was well received In synbio, we did do a price increase last summer, but there is none planned at this point, Except for launching the FASG. In synbio, our strategy is to increase the value of the product In addition to the amazing scale and quality and ease of ordering, we are going to add speed and Using an approach of dynamic pricing, we are confident we'd be able to get the premium pricing. And so That's the price increase that's coming into Bayer, but it's in exchange to providing better value to the customer.

Operator

Thank you. And our next question coming from the line of Tom Peterson with Baird. Your line is open.

Speaker 8

Yes, thanks for the questions. Tom on for Catherine. I was just wondering if you could provide any more color On the revenue expectations by product line for fiscal 3Q and 4Q given the overall reductions in the guide for the year.

Speaker 2

Jim, can you take that?

Speaker 3

Yes, sorry, I forgot to hit on mute, so apologies. So Tom, thanks for the question. So overall, We've given the guide for both of our biosimilianGS and also for biopharma for the year. So We didn't break it out because of just the quarter transition. We've given overall I would look for Q3, revenue is going to be $60,000,000 $61,000,000 Q4, dollars 60 $2,000,000 to $63,000,000 is the range.

Speaker 3

And for Syn Bio, the range for the year is $96,000,000 to 98, NGS revenue $113,000,000 to $114,000,000 and biopharma $26,000,000 So in terms of the outlook, we believe it's prudent. Why is it prudent? We've just taken a 25% Reduction in the organization. And yes, I mean overall, business is up 25% year over year for total business. The pipeline looks good.

Speaker 3

We continue to launch new products. We continue to get great feedback, strong feedback from the marketplace. And at the same time, I mean, we've made a meaningful I really appreciate the contribution of everybody who's supported Twist and the growth. And at the same time, as we go forward, we're very So I'm getting to profitability and the first milestone there is getting to adjusted EBITDA Q4 next year, and we're positioned to do that. And the overall environment, we're getting comments overall environment is tough.

Speaker 3

However, we got a great portfolio And we're growing faster than the market and we're going to leverage our investments and we're going to deliver solid results as we continue to scale and get to adjusted EBIT to breakeven.

Speaker 8

Got it. Thanks. That's helpful. And then maybe just one more from me on the OpEx guidance reduction. I mean, obviously appreciate the significance of the headcount reduction.

Speaker 8

As we look forward towards that adjusted EBITDA target for fiscal 4Q of next year, how As we think about if there's any more room for additional OpEx reductions, I guess how much flexibility do you still see left within the business? Thanks.

Speaker 3

So in terms of business, I mean, we're nobody can predict the future. However, what we're going to do is manage the business based on the environment. So a couple of key metrics. What does the environment look like overall? I would say it's tough.

Speaker 3

However, we're growing significant in that environment. We made investments in the factory of the future. We will manage our investments and we'll manage our investments, Get to adjusted EBITDA breakeven and then we'll focus on getting to profitability. As Emily has highlighted, we've moderated our investment in DNA Storage. So based on the environment, we are going to make the take the decisions to ensure that we're delivering value for shareholders, our customers and employees.

Speaker 3

And part of that is having a strong balance sheet. And part of it another part of it is We've got to continue the strong execution and innovation that Twist Culture is known for, and we're focused on supporting that and transitioning to the growth opportunities delivering fast genes in Q4 calendar this year.

Speaker 8

Got it. Thanks.

Operator

Thank you. And our next question coming from the line of Rachel Van Stel with JPMorgan, your line is open.

Speaker 12

Great. Thanks for taking the question. So a few questions here on biopharma. It looks like active partnerships between legacy biopharma and Embares was roughly 112 active programs during fiscal 4Q, that's up down to 95 during And then it looks like today you have 93 active programs. So can you just walk us through how much of that step down was really due to programs being cut?

Speaker 12

And do you expect additional And then as a follow-up to that, you've mentioned that challenges from biopharma are purely just integration and execution related. So can you just help us understand what exactly was the breakdown there from the integration issues?

Speaker 2

Yes. Thank you. Great question. So In terms of another effective program, the way it works is we get an order for a program. We reported that an order and then probably these are the next quarter or the one after that is done.

Speaker 2

We've provided the answers And then that gets booked revenue and then that program goes down, right? And so it's not that those programs were cut. There may have been a very small number of cancellations, but most likely those are programs That have been completed and moved to revenue and that's why revenue is the lagging metric and order is the leading And then in terms of the commercial integration, we had to let Adveris Run on its own and so there were territories conflict and There were some technology that has to be learned And that took a bit more time than we wanted and it happened a bit later than we wanted. But at this The territories have been rationalized. We have replatformed all the systems.

Speaker 2

And I'm confident that the BD sales team is having high activities and we have The right cadence of getting in front of new customers and closing them.

Operator

Thank you. Great.

Speaker 12

Then maybe just a follow-up quick here. There's been Quite a few questions on guidance and macro backdrop, so maybe I'll just shift gears over to DNA Data Storage. I appreciate that you're rationalizing some of the spend that Just given the macro backdrop, but can you just talk about what are your plans for your enzymatic offering? If I recall, you were planning on getting that fully online to support that DNA data storage offering, which Going to be kind of key to the thesis in terms of the competitive positioning as peers have entered with their own enzymatic products. So can you walk us through, Does that timeline shift at all for your enzymatic offering?

Speaker 12

And can you give us a tech update in terms of how that's trended as well? Thank you.

Speaker 2

That's a great question. And so yes, we are delaying the on premise technology development And we mostly we are 100% needed an enzymatic synthesis for that on premise. We had said too that we could use And that we'll have the choice of chemical In the current decisive actions that we've made, we have not touched the We think even though the first product for data storage is going to be an in house machine, Right now, we saw that there is some potential advantage for us to use the enzymatic program that we have been And so we have optionality that the first product could be enzymatic or chemical. We are pursuing both, but I'm optimistic that we may leverage

Operator

Thank you. And I will now turn the call back over to Emilie Lefers for any closing remarks.

Speaker 2

Thank you very much for joining us today and appreciate Getting a little bit beyond schedule. We look forward to seeing some of you at Goldman Sachs, William Blair and Scotiabank in the next few months ahead. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

Earnings Conference Call
Twist Bioscience Q2 2023
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