Rapid Micro Biosystems Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Rapid Microbiosystems Q2 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer I would now like to turn the conference over to Mike Puiuli, please go ahead.

Speaker 1

Good morning. Thank you for joining the Rapid Micro Biosystems Q2 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 Q2 2023 financial results. A copy of the release is available on the company's website at rapidmicrobio.com under Investors in the News and Events section.

Speaker 1

Before we begin, I'd like to remind you that many statements made during this call may be considered forward looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 GrowthReq system, expectations for our new RMB Nucleus Mold Alarm and the potential impact of macroeconomic uncertainty and the public health crises 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 the 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 amended, As such, risks are updated in our subsequent filings with the SEC.

Speaker 1

We urge you to consider these factors, and you 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 turn the call over to Rob.

Speaker 2

Thank you, Mike. Good morning, everyone, and thank you for joining us to review our Q2 2023 results. I will begin this morning's call with a summary of our Q2 performance, followed by an update on the progress of our execution related to our growth strategy. I will then turn the call over to Sean for a more detailed review of our financial results and outlook. Total revenue was $5,000,000 representing a 30% increase compared to Q2 last year and above the guidance we provided in May.

Speaker 2

We placed 2 systems in the 2nd quarter and completed 3 validations. Based on our strong performance in the first half of the year, we are reaffirming our full year 2023 total revenue guidance of at least $22,000,000 representing growth of at least 30%. Despite macroeconomic uncertainty leading to cautious customer spending, Our teams are navigating these conditions and staying focused on strong execution to deliver our full year guidance. We were pleased once again with our execution across both products and services during the Q2. I'd like to especially highlight the strong recurring revenue In the quarter, which increased over 40% compared to the Q2 last year, we had a record quarter in consumables revenue, which was driven by both higher pull through per validated system and more validated Growth RX in the field.

Speaker 2

Service revenue was also strong during the quarter driven by annual contract renewals. While Sean will provide additional P and L details, I want to emphasize the importance of recurring revenue, which drives predictability and demonstrates the durability of our business model. It is also a strong indicator of the value we are providing to our customers as evidenced by their increasing use of our GrowthDirect systems in their worldwide manufacturing operations. With the benefit of 2 separate revenue streams, we believe solid double digit recurring revenue growth is sustainable. And while our recurring revenue is subject to some quarterly variability due to order timing or other customer specific decisions, Most of our revenue comes from large established global customers who are using the GrowthDirect on commercially approved products.

Speaker 2

We continue to execute against our strategy to advance system opportunities through our sales funnel and accelerate growth direct placements. As an example, late in the Q2, we closed a multi system order with 1 of the world's largest CDMOs based in Asia. As we discussed on our call last quarter, we are excited about the opportunity and demand for our technology in this important region. This was a significant and well earned win for our commercial team and highlights that our technology continues to resonate with both large global biopharma as well as CDMO customers. With respect to high impact customer activities, We partnered with the New England PDA, which is a local chapter of the Parenteral Drug Association for an educational event in June.

Speaker 2

This event brought together existing and prospective customers as well as industry peers and highlighted quality control challenges in in The event was hosted in our Lowell, Massachusetts manufacturing facility and attendees were given a tour and up close look at the GrowthDirect system as well as our state of the art automated media production line. The meeting also featured expert presentations and discussions on how the Growth Direct can enhance data integrity, improve quality and minimize operating risks. As we move through the second half of twenty twenty three, we have a number of customer events planned, 2 of which I will highlight. First, in early October, we will present an exhibit at the PDA Pharmaceutical Microbiology Conference in Washington DC, where we will host 3 poster presentations and have a growth directive available for customer demonstrations. As a reminder, This is the largest annual microbiology conference that we attend and includes global industry professionals, representatives from academia and regulatory authorities.

Speaker 2

And then in November, we have planned a combined Growth Direct Day and Customer Advisory Board event in Europe. Building on past successes, this event will feature multi day sessions focused on customer testimonials, user group discussions, Approaches to global adoption of the Go Direct and other high value topics. These and similar events help us build and advance opportunities within our funnel And importantly allow us to engage with industry thought leaders, regulators, customers and prospects to discuss the Growth Direct value proposition, A faster time to result, data integrity, cost savings, patient safety and automation. Now I'll provide a brief update on our product development efforts. We are pleased to report That the commercial launch of our mobile arm software product is progressing on plan.

Speaker 2

Attachment rates to new system sales and upgrades to existing growth directs are encouraging. Our teams are effectively leveraging on-site and virtual education and training programs to increase awareness. Customer engagement has been positive and we are confident we are on the While it is still early in the commercial ramp, we are pleased with our progress and expect to continue to build momentum over the balance of the year and into 2024. With respect to rapid sterility, we are on track with and are increasing our focus on commercialization. We look forward to sharing additional details on this important product later this year.

Speaker 2

Turning to a brief update on our manufacturing capabilities, I am pleased to announce this morning that our backup consumable manufacturing line in our Lexington, Massachusetts facility has been completed. This is an important milestone and demonstrates our global customers that we are committed to providing them with world class service and continuity of consumable supply. In summary, Through the first half of twenty twenty three, we achieved over $10,000,000 in revenue, representing growth of 25% compared to the first half of twenty twenty two. This compares to our guidance for full year 2023 total revenue of at least $22,000,000 We continue to attract many of the best companies in the world to our GrowthDirect platform and our existing customers continue to benefit from the significant value of our platform as they use more of our systems, consumables and services in their mission critical manufacturing operations. In the Q2, we achieved an all time high in consumable revenue.

Speaker 2

This coupled with our service contract revenue Demonstrates strong customer satisfaction and use and validates our recurring revenue model. And finally, our commercial execution continues to improve As we remain laser focused on our growth strategy and specifically advancing growth direct opportunities through our sales funnel and accelerating system placements. And with that, I'll now turn the call over to Sean to discuss our Q2 performance. Sean?

Speaker 3

Thanks, Rob, and good morning, everyone. 2nd quarter 2023 revenue increased 30% to $5,000,000 compared to $3,900,000 in Q2 2022. We placed 2 GrowthDirect systems in the 2nd quarter, the same number we placed in Q2 last year. Product revenue, which is comprised of systems and consumables, also increased 30% to $3,200,000 in Q2 compared to $2,400,000 last year. This performance was driven by consumables, which increased by almost 50% compared to Q2 last year and accounted for the majority of the year over year growth.

Speaker 3

As Rob discussed, we had a record quarter in consumables, which was led by both new systems coming online and strong pull through per average validated system, which was over $90,000 on an annualized basis. This compares to the $80,000 per average validated system we generated in 2022. We are making good progress in this area and are on track to achieve our goal of high single digit percentage growth in this metric for the full year. Service revenue increased 29% to 1 point compared to $1,400,000 last year with solid growth in both validations and service contract revenue. We completed the validation of 3 systems in the 2nd quarter, the same number as last year.

Speaker 3

As of June 30, we had a total of 108 validated systems, which contributed to a 36% increase in service contract revenue compared to the 2nd quarter recurring revenue increased 44 percent to $3,600,000 compared to $2,500,000 last year, driven by the strong growth in both consumables and service contract revenue. Non recurring revenue was $1,400,000 in Q2, which was flat with the prior year quarter. Turning to gross margins. Product margins were negative $1,500,000 in Q2 compared to negative $800,000 in the Q2 last The decline was mainly due to lower production volumes and manufacturing efficiency in consumables due to downtime on our automated manufacturing line to implement enhancements that will benefit future margins. While some of these activities have continued into Q3, we expect them to be substantially completed by the end of the quarter, benefiting gross margins in Q4 and beyond.

Speaker 3

Service margins were negative $400,000 in Q2, a slight improvement compared to last year. The benefit from higher service contract revenue was partially offset by the cost of investments to expand our capabilities and serve our growing global customer base. On a combined basis, our 2nd quarter gross margin percentage was negative 38%, down slightly compared to last year. Moving down the P and L. Total operating expenses were $13,200,000 in the 2nd quarter, consisting of $3,200,000 in sales and marketing, $3,200,000 in R and D and $6,700,000 in G and A.

Speaker 3

Excluding $600,000 in retention costs related 2nd quarter of 2022. Net loss was $14,000,000 in Q2. This compares to a net loss of $13,100,000 last year. Net loss per share was $0.33 in Q2 compared to net loss per share of $0.31 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 $200,000 in the 2nd quarter.

Speaker 3

I'll now turn to our 2023 outlook for the full year and the Q3. We are reaffirming our previous full year 2023 revenue guidance of at least $22,000,000 which represents growth of at least 30% and assumes we will place at least 15 systems. While our teams have effectively navigated macroeconomic uncertainty in the first half of the year and our customers are generally large and established companies, We are still operating in a dynamic environment. Customers are continuing to scrutinize the timing and scale of purchase decisions, which may result in higher variability in our quarterly revenue. Our guidance continues to reflect this uncertainty, and we are continuously assessing the environment and monitoring For the Q3, we expect commercial revenue of at least $5,500,000 which assumes at least 4 system placements.

Speaker 3

This guidance includes 2 systems that were part of the multisystem order from a new customer in Q2 that Rob mentioned earlier, which were already placed in July. We continue to expect to complete at least 14 validations in 2023, including at least 4 in the Q3. With respect to validation revenue, we expect both Q3 and Q4 to be higher than Q2 with strong growth versus the comparable 2022 periods. As a reminder, validations can experience some quarter to quarter variability 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. Shifting to gross margins, we expect sequential improvement in both Q3 and again in Q4 as we benefit from higher production volumes and cost reduction activities in consumables, Increased productivity and service and leverage from higher sales, particularly in systems and service.

Speaker 3

Gross margin improvement continues to be a top Productivity and efficiency in services. We continue to expect these actions as well as the benefit of higher sales volumes to lead us to positive gross margins in 2024 with expansion to 50% to 60% as the business continues to scale over time. 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 nonrecurring retention costs that will impact Q3 as well as the timing of new product development activities. Finally, we had approximately $113,000,000 in cash, cash equivalents and investments as of June 30. Cash burn was approximately $9,000,000 in the 2nd quarter.

Speaker 3

Looking forward to the second half of the year, we expect cash burn in Q3 to be consistent with Q2 And then to decline in Q4 as we realized cash benefits from working capital management. As a result, we That concludes my comments on our full year and Q3 outlook. So at this point, we'll open the call up for questions. Operator?

Operator

Your first question comes from the line of Tejas Savant with Morgan Stanley. Your line is open.

Speaker 4

Thank you for taking our questions. With the challenging macro persisting here, could you share what you're seeing from customer related to budget screening? And how has the customers' time to make Purchase decisions trended since last quarter.

Speaker 2

Yes. This is Rob. So what we're We're seeing is consistent with what we reported in Q1. There's not a it hasn't been a material difference. We're still seeing increased budget scrutiny.

Speaker 2

It's basically just A tighter filter, thematically. That being said, some customers are certainly moving faster than others. So it hasn't been dramatically changed. In some cases, we have seen budgets pushed to the right throughout Q2. But our countermeasures against that, we believe are effective and are working and that's why we're reaffirming guidance.

Speaker 2

I think increasingly, we're also encouraged with the interactions we're having with customers at the senior level and ensuring that our Growth direct projects and rollouts are being prioritized. This further gives us confidence in our outlook. So again, summary, no major change Throughout the year to date here, just a continuation of the theme of general budget tightening and increased scrutiny.

Speaker 4

Got it. That's helpful color. And then with backup consumable manufacturing facility in Lexington now up and running, Are there any financial impact or incremental costs that we should be contemplating as that facility begins to ramp?

Speaker 3

Hi Yuko, Sean. It's a backup facility. It will not be active, but it is ready to go. So if we need it, we will use it. It will not be we will not be operating 2 separate consumer manufacturing facilities at the same time.

Speaker 4

Got it. Thank you very

Speaker 3

much.

Operator

Our next question comes from the line of Dan Arias with Stifel. Your line is now open.

Speaker 5

Hi, good morning guys. Rob, maybe just a version of the first question there. I mean, obviously, the forecast for the year is intact. I know you're not guiding or talking about 2024 right now, but just given the timeline that you guys work with, Do you feel good about the tenor of the conversation today in a way that would set you up for, say, the beginning of 2024 To be intact, because it feels like a lot of the business that you're booking today and you're realizing today was stuff that's been in the funnel and doesn't It's nicely not falling out. So question is like, are you set up okay for the next 6 to 12 months Just based on the environment that we're in right now.

Speaker 2

Yes. Dan, we like the outlook. Maybe a little more color from The first question, clearly over the past year, our focus on commercial execution is ensuring we have the full team intact Up and Trained, which we essentially do at this point, incredibly encouraged with the caliber of talent that we have in our commercial team. They touched on in Yuko's question, we're also probably Best has ever been in Rapid Micro's history access to senior decision makers inside customers And increasingly, we're getting exposed to better visibility and insight into global rollout plans, which we believe Will help us stay prioritized. Certainly no guarantees in that, but it's certainly a great leading indicator.

Speaker 2

Our funnel It's healthy again with the 3 regions up, a number of the right number of reps in the field generating leads And enhanced marketing, we feel good about our funnel, the composition, the cost of geographies, cell and gene, biologics, etcetera. I would also say it's important to note Our consumables business, I think you heard quite a bit about that in the comments. But that is I look at that as a very, very important leading indicator as Existing customers continue to increase usage of our systems through consumables and services consumption. That is typically a good leading indicator To great customer experience and could be a good leading indicator and many times can be for future purchase decisions across Global Networks, which also helps us to stay prioritized and is helping us withstand some of these some of the budget scrutiny. So those are the I would say thematic, I would say longer range and clearly in the short term here, as Sean touched on, we already have Two placements in Q3, which is helpful because Q3 can be a tricky quarter with holidays and vacations and customer access.

Speaker 2

So Well, with all the above, it's a long way of saying, we're optimistic about the future and the outlook.

Speaker 5

Okay. Well, that's good. And yes, you did sound pretty pleased with the recurring revenue in the quarter. So I guess, Sean, how do we think about that tracking into next year? You mentioned that double digits are sustainable.

Speaker 5

Do you think you can and march that Double digits are sustainable. Do you think you can and march that item up to that lineup Upward as the installed base continues to grow here.

Speaker 3

Yes. Dan, I think that's clearly the expectation. We'll say recurring with 70% of revenue in Q2, that's probably not where we're going to be going forward. Right. As we get system placements ramping, but we Clearly expect that we're going to see good growth in recurring both pieces of it as we get more systems validated and customers sign up for contracts as well as just Building growth in consumables through not just new systems coming online, but existing systems increasing utilization And us bringing more and more customers in who are using systems at higher volumes like cell and gene therapy.

Speaker 3

So We expect those are trends that we see now and are going to continue as we go forward that are going to help us to continue to have good growth in recurring.

Speaker 5

Okay. Are you Within the model, is the idea that the cell and gene guys are the more intense users, is that still holding up now? Would that be demonstrable if we looked under the hood at the Consumables number today? Because obviously within that set of customers is there's a lot going on there. So just curious whether the way that we have thought about things traditionally is Holding true

Speaker 2

today? I think at the and this is Rob. I think at the site level that's generally true. The cell and gene customers tend to be high consumers of our In environmental monitoring application, it's typically quite high volume, but the Biologics segment is larger and has a sizable Pull through and use as well. And the biologic segments and other segments also are heavier uses of our water and bioburden products.

Speaker 2

So It's sort of a mixed review depending on the segment.

Speaker 3

Yes. But I would say that within biologics, We have plenty of runway just in that space to get this metric to increase meaningfully over time and get us into kind of the expected range that we expect The business to get to over time that we talked about in the past. And I think high volume cell and gene can just accelerate that potentially. So that customer mix is going to be Yes, it really will just kind of govern how fast we grow, but clearly the expectation is that we are going to grow this metric meaningfully over time.

Speaker 5

Okay. Last one for me and then I'll hop off. Sean, on the downtime for the production lines, did the comments that you made there suggest that By 4Q, you really aren't dealing with a gross margin headwind as it relates to the starts and the stops there?

Speaker 3

Yes. I mean, we always have downtime, This was a case where we have some things that we're doing right now. We started in Q2. Some of them are still going on now where it's making a short term investment and that down time is part of that investment to drive positivity going forward. So we're doing some things.

Speaker 3

One example I'd give you is, we have Historically manufactured our water and bioburden consumables manually and we are working right now to get that moved over onto the automated process which will have a lot of benefits Including lower cost of product. So this I'd call this kind of more of a one time thing. We will likely have things like this in the future, I wouldn't expect it to be every quarter by any means. So I think as we march forward through the year, I think the guidance is we expect margins to get better sequentially each Quarter in Q3 and Q4. We are not guiding to positive gross margins in Q4.

Speaker 3

I think the possibility still exists there. If we can Drive some system upsides and we get things done that we need to get done from a cost reduction standpoint over the second half. So I think This is something that was a conscious decision. We think it's the right thing to do and we expect it to benefit us as we get late in the year and move into 2024.

Speaker 5

Yes. Okay. Very good, guys. Thank you.

Speaker 2

Thanks, Dan. Well, thanks, Dan and Yuko. We are going to wrap up the live call now. Thank you for everyone for joining us today.

Powered by Quartr
Earnings Conference Call
Rapid Micro Biosystems Q2 2023
00:00 / 00:00