Avid Bioservices Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 29, 2024

There are 10 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Avid Bioservices Third Quarter Fiscal 20 24 Financial Results Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call may be recorded. I would now like to hand the conference over to Tim Brauns of Avid's Investor Relations Group.

Operator

Please go ahead.

Speaker 1

Thank you. Good afternoon and thank you for joining us. On today's call, we have Nick Green, President and CEO Dan Hart, Chief Financial Officer and Matt Kwitniak, Avid's Chief Commercial Officer. Today, we will be providing an overview of Avid Bioservices' contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended January 31, 2024. After our prepared remarks, we will welcome your questions.

Speaker 1

Before we begin, I'd like to caution that comments made during this conference call today, April 29, 2024, will contain certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the current belief of the company, which involves a number of assumptions, risks and uncertainties. Actual results could differ from these statements and the company undertakes no obligation to revise or update any statement made today. I encourage you to review all the company's filings with the Securities and Exchange Commission concerning these and other matters. Our earnings press release includes discussion of certain non GAAP information. You can find our earnings press release, including relevant non GAAP reconciliations on our corporate website atavidbio.com.

Speaker 1

With that, I will turn the call over to Nick Green, Avid's President and CEO.

Speaker 2

Thank you, Tim, and thank you to everyone participating today via webcast. We are excited to report our results for the Q3 of fiscal 2024. Last quarter, we told investors that we expected revenues for quarter 3 and quarter 4 of fiscal 2024 to ramp upward. And as anticipated during the Q3, we recorded an increase in revenues of more than 30% as compared with the Q2 of 2024. And we continue to anticipate a strong quarter 4.

Speaker 2

Consistent with our pre release, we remain on track for full fiscal year 2024 revenue to be within our previously disclosed guidance range. Consistent with last quarter, we still feel quarter 2 of fiscal 2024 was a low watermark for Avid, and we look forward with optimism as our later stage pipeline begins to flow through the financials. The financial environment for our customers continues to strengthen, and we continue to benefit from our recently completed expansion program. During the quarter, we signed multiple new project agreements with both existing and new customers. The bookings for the period were quite strong, resulting once again in a new record high backlog breaking the $200,000,000 level for the first time.

Speaker 2

We are also encouraged to see an increasing proportion of these signings associated with early stage projects during quarter 3, representing the 2nd consecutive quarter on quarter increase from the low seen in fiscal quarter 1. We view this along with a number of other factors as signs of an improving financing environment for Biotech. In operations, we were delighted to cut the ribbon on our grand opening of our new cell and gene therapy or CGT facility and are happy now to be engaging with customers with our complete offering in place. Completing the construction of our CNGT facility represented the final step in a 3 year expansion program that has dramatically increased the company's service offerings and revenue generating capacity, transforming Avid into a stronger and substantially enhanced organization. Importantly, we expect to see strengthening cash flow and margins as we seize CapEx associated with the expansion and we benefit from the operating leverage of our newly completed facilities.

Speaker 2

As previously communicated, it was necessary to refinance our 2026 convertible notes prior to the closing of the quarter. This caused a delay in the filing of our quarter 3 results and required us to restate certain prior quarters. With the new instrument, we have extended our maturity of our debt to 2029, which provides us stability as we direct our efforts on filling our newly created capacity and to take advantage of the improving market conditions. Matt and I will provide additional details on business development and operations from the period following an overview of our Q3 fiscal 2024 financial results. And for that, I'll turn the call over to Dan.

Speaker 3

Thank you, Nick. Before I begin, in addition to the brief financial overview I'll provide on the call today, additional details on our financial results are included in our press release issued on April 24 and in our Form 10 Q, which was also filed on April 24 with the SEC. Before I begin, I would like to quickly touch upon the note acceleration that Nick mentioned in his opening remarks. First, there was a default stemming from a technical requirement relating to legend removal that led to the acceleration of our convertible senior notes due 2026. As a result of the note acceleration, in March, we conducted and closed an offering of 160,000,000 dollars aggregate principal amount of 7% convertible senior notes due on March 1, 2029.

Speaker 3

We used approximately $146,000,000 of net proceeds from the offering to repurchase and repay our 2026 notes. As disclosed in our recent filings with the SEC, we undertook an evaluation of our financial statements spanning for the period October 31, 2022 to October 31, 2023, including the 10 ks for the year ended April 30, 2023. The company's audit committee determined based on management's recommendation that certain recent periods would require restatement to reclassify the 20 26 notes from long term liabilities to current liabilities on our balance sheet and to account for incremental interest associated with our 2026 notes. There were no other material adjustments to our financial statements for each of the restated periods. I'll now provide an overview of our financial results from operations for the quarter 9 months ended January 31, 2024.

Speaker 3

Revenues for the Q3 of fiscal 2024 were $33,800,000 representing an 11% decrease as compared to revenues of $38,000,000 recorded in the same prior year period. For the 1st 9 months of fiscal 2024, revenues were $96,900,000 a decrease of approximately 11% compared to $109,500,000 in the same prior year period. The decreases in revenues for the Q3 9 months ended January 31, 2024 compared to the same prior year periods were primarily attributed to fewer manufacturing runs and a reduction in process development services from early stage customers. Additionally, during the 1st 9 months, revenues were also impacted by a reduction of revenue for changes in estimated variable consideration under contract where uncertainties have been resolved. Gross profit for the Q3 of fiscal 2024 was $2,400,000 or 7% gross margin compared to $9,800,000 or 26 percent gross margin in the Q3 of fiscal 2023.

Speaker 3

Gross profit for the 1st 9 months of fiscal 20 24 was $1,800,000 or 2% gross margin compared to a gross profit of $23,100,000 or 21% gross margin for the same period during fiscal 2023. The decreases in gross margin for the 3 9 months ended January 31, 2024 compared to the same prior year periods were primarily driven by fewer manufacturing runs, a reduction in process development services from early stage customers and an increase in our costs related to expansions for both the company's capacity and technical capabilities. Gross margin during the 9 months ended January 31, 2024 were also impacted by a reduction of revenue for changes in estimated variable under a contract where uncertainties have been resolved. A terminated project related to the insolvency of 1 of the company's smaller customers and a delay in the ability to recognize revenues of a customer product pending the implementation of a process change. SG and A expenses for the Q3 of fiscal 2024 were $6,400,000 a decrease of 10% compared to $7,100,000 recorded in the Q3 of fiscal 2023.

Speaker 3

SG and A expenses for the 1st 9 months of fiscal 20 24 were $19,200,000 a decrease of approximately 6% compared to $20,300,000 recorded in the same prior year period. The decreases in SG and A for both the 3 9 months ended January 31, 2024 compared to the same prior year periods were primarily due to decreases in compensation and benefit related expenses and consulting fees. Operating loss for the Q3 of fiscal 2024 was $4,000,000 a decrease compared to operating income of $2,700,000 recorded in the Q3 of fiscal 2023. Operating loss for the 1st 9 months of fiscal 2024 was $17,400,000 compared to the operating income of $2,800,000 for the 1st 9 months of fiscal 2023. The decreases in operating income for the 3 9 months ended January 31, 2024 compared to the same prior year periods were driven by a decrease in gross profit, partially offset by reduced SG and A.

Speaker 3

During the Q3 of fiscal 2024, the company's net loss was $6,000,000 or $0.09 per basic and diluted share, compared to a net loss of $200,000 or 0 per basic and diluted share for the Q3 of fiscal 2023. For the 1st 9 months of fiscal 2024, the company recorded a net loss of $17,600,000 or $0.28 per basic and diluted share as compared to net income of approximately $600,000 or $0.01 per basic and diluted share during the same prior year period. Our cash and cash equivalents on January 31, 2024 were $30,700,000 compared to $38,500,000 on April 30, 2023. This concludes my financial overview. I will now turn the call over to Matt for an update on commercial activities during the quarter.

Speaker 4

Thanks, Dan. During the Q3, we were encouraged by the strengthening of our bookings for the period. With new project agreements of $41,000,000 during the period, we ended the quarter with a backlog of $206,000,000 another record high for the company. The quarter's bookings include new customer projects as well as expansions from existing customers. The resulting backlog, which includes projects spanning a broad range of the company's capabilities, represents an increase of 17% as compared to $176,000,000 at the end of the Q3 of fiscal 2023.

Speaker 4

It is important to highlight the composition of these new bookings. As we reported earlier in the year, during the first and second quarters, Avid's new bookings were comprised primarily of later stage projects with a notable decline in earlier stage programs. Today, our pipeline remains weighted towards later stage programs, which generally take longer to execute and as a result, we expect that recognition of our backlog for these projects will extend beyond 1 year. Later stage programs have certain key advantages including a significantly higher probability of regulatory approval and the recurring and ramping commercial revenues associated with such approval. These later stage programs are exactly the type of projects that Abbott was targeting in initiating its expansion strategy.

Speaker 4

We believe they will be important contributors to filling our new capacity, not only as a result of the larger project values, but also in terms of the longer term and growing demand associated with commercial supply should they gain regulatory approval. Having said that, we were also pleased to see an incremental improvement in our pipeline mix during the Q3 marked by an increase in the value of early stage project bookings. Early stage programs, many of which have been postponed industry wide due to the challenging financing environment, which prevailed for much of calendar 2023 provide their own set of advantages including balance to our pipeline, broader capacity usage and shorter term revenue generation. While our pipeline remains weighted towards later stage work, we are encouraged by the levels of engagement we are now seeing with early stage customers about their programs and hope we are observing an improvement in the financing environment for the biotech sector as a whole. During the Q3, we continued to make progress with each of our active programs successfully translating backlog into revenue.

Speaker 4

Looking ahead, we see a healthy pipeline of opportunity in the market and we continue to pursue these programs aggressively through consistent engagement with both existing and prospective customers and elevating Abbott's brand recognition in the industry. We are very pleased with our progress during the period and remain on track to have an even stronger Q4. This concludes my overview of commercial activities. I will now turn the call back over to Nick for an update on operations and other achievements during the period.

Speaker 2

Thanks, Matt. We are pleased to report that during the Q3, we achieved significantly stronger revenues and an increase in bookings as compared to quarter 2 2024. This momentum is in keeping with the revenue and bookings ramp that we projected in the second half for the second half of the year. As we look ahead, we believe the 4th quarter revenues will be even stronger, making our second half twenty twenty four revenues one of the best in the company's history. With the opening of our cell and gene therapy facility located just 5 miles from Avid's mammalian operations, we have not only upgraded our capabilities, but expanded the breadth of our offerings.

Speaker 2

We can now service a larger market that includes CGT products, and we are better positioned to address the needs of large pharma customers. Of note, the PPQ campaign we delayed until after our Q2 maintenance shutdown has now been successfully completed. This is the first of a number of PPQ campaigns slated for our new mammalian line, Myford South, also known as Line 3 in coming quarters. These expanded capabilities are already paying dividends, successfully attracting the larger and later stage clients that we have discussed. And while our investment has impacted our current margins, we expect the growing utilization of our new capacity and capabilities will strengthen margins in the near term, establishing a new baseline for growth in the years ahead.

Speaker 2

In closing, I would like to acknowledge Avid's many successes during its 30 year history, achieving an industry leading regulatory track record and delivering more than 220 commercial batches to its customers. There are few CDMOs in our peer space who can claim such achievements. However, it has been our goal to elevate the organization beyond the size and capabilities of the past. To that end, we have worked diligently over the past 3 years to bring Avid into the future with significantly expanded opportunity. And today, we are delighted to see our strategic plan come to fruition.

Speaker 2

Over the past 3 years, the company has remained steadfast in its commitment to transformation that is now complete. Today, the business is a larger, more capable, world class organization, poised to service multiple CDMO markets, including a larger segment of the pharma market than at any time in the company's past. The late stage programs in our pipeline are making great progress. 1 of these high value programs has already achieved FDA approval and then others continue to advance through the approval process. When we combine the state of the art facilities and expanded technical capabilities with the value of our late stage pipeline and the strength of our commercial team, we believe we are well positioned to realize the strategic objectives of our expansion plan.

Speaker 2

As we continue to fill capacity and attract additional customers, we expect to achieve consistent growth and sustainable profitability and believe we are well on our way to establishing Avid as the supplier of choice for the industry. This concludes my prepared remarks for today, and we can now open the call to the operator for questions. Operator?

Operator

Thank you. And at this time, we'll conduct a question and answer Our first question comes from the line of Jacob Johnson from Stephens. Your line is open.

Speaker 5

Hey, thanks. Good afternoon, everybody. Nick, so a lot of positive commentary around the funding backdrop and I guess the end markets in general. I guess I'd be curious about some of the other unique dynamics that are going on in the end markets right now, most notably BioSecure and then the Novocatilent deal. I'm just curious, are you seeing additional opportunities present themselves after those events, which I think largely happened after you concluded the quarter you just reported?

Speaker 2

Yes, Sergey. It's an interesting one. We don't always, at the beginning of the conversation, necessarily understand exactly where the opportunity is coming from. So you mentioned 2, I guess, tailwinds in terms of our potential tailwinds in terms of our sector. So a client comes to us with a new opportunity.

Speaker 2

It's not always obvious that we whether it's something to do with BioSecure or whether it's to do with Catalent. But I think it's fair to say that there seems to be some correlation between those events and the number of opportunities that we're seeing materialize at the early stage of discussions at the beginning of this year. Obviously, the turnaround cycle of those isn't instantaneous. It's not widgets that we sell. So there's an ongoing discussion regarding those.

Speaker 2

Obviously, there's putting work statements together and converting those to revenues. But I think it's fair to say that with the dynamics that we see, we look forward with some optimism. And I think aside maybe from the inflation number that we saw a couple of weeks ago, most of the data we've seen out of the marketplace generally from November onwards has been positive.

Speaker 5

Got it. Thanks for that, Nick. And then maybe for Dan, you guys reiterated your FY 'twenty four guidance. I think I heard Matt and Nick both talk about a strong 4Q. Just given where we are in the quarter, for those of us who have models, if you want to give us any more specific detail on kind of how the quarter is playing out relative to the guidance you have, maybe that gives you the opportunity to do that?

Speaker 2

Yes. Jacob, I'll take that one. I mean, we left the guidance at the range that we did because that's what we've done in our pre release, to be frank with you. So we wanted to be consistent with what we've pre released. I think, again, with consensus out there, we're comfortable with that.

Speaker 2

And we were kind of just, I think, restating where we were and restating what you guys have been saying. So I wouldn't necessarily treat it any differently than where we were last quarter. We still expect to come in, in that range. And I think the consensus that we see out there looks in line with expectations. So hopefully, we can meet those or beat those, but that's certainly where we look we're looking at this stage.

Speaker 5

Got it. I had to try, Nick. I'll leave it there. Thanks for taking the questions.

Operator

Thank you. One moment for our next question. Our next question will come from the line of Sean Dodge from RBC Capital Markets. Your line is open.

Speaker 6

Yes, thanks. Maybe just following kind of Jacob's line of questioning there and more specifically on the bookings. You had $41,000,000 of new business you signed last quarter. We're a day away from wrapping this quarter. I guess when it comes to bookings, can you give us some sense of how those have trended recently or maybe some direction on how to think about where that will land this quarter?

Speaker 2

Yes. I can't go on to quarter 4, Sean. It's a quarter 3 call. I know albeit late. But again, I think we've kind of highlighted quarter 4 revenues being meeting consensus will be a really nice uplift on quarter 3, which was a good uplift upon quarter 4 in terms of revenues.

Speaker 2

In terms of bookings, The $41,000,000 was we were pleased with that. And I think as we go in the record backlog and as we go forward, I think my comments on the market would suggest that we're optimistic about those continuing to grow. But I would also just highlight that with the size of orders that we book and the timings between 1 quarter and the other, it's not always a smooth ride. So I am optimistic about continuing to see growing bookings and revenues, but I also expect to see some ups and downs along the way as we go forward. And again, I can't comment on quarter 4.

Speaker 2

I know we're very close to the end of that, but this is a quarter 3 call. So a little awkward as it may be, I still have to respect the quarter.

Speaker 6

Okay. And if we think about the Q3 result, the $41,000,000 are there anything notable or worth calling out there? Were there any wins that shifted or slipped out of the quarter into the current one? Were there any meaningful cancellations, anything that would affect how we think about trend or comparability there?

Speaker 2

Yes. I mean, again, we're looking back now to the end of January. So I was quite pleased with that considering where we were facing at the beginning of the quarter in November. So I thought that number was good in itself. Obviously, we'll always take higher, but I think the other thing that we saw was early phase opportunities increasing, which we haven't seen.

Speaker 2

So we had 0 in quarter 1, we had an increase in quarter 2, we had an increase again in quarter 3, which was kind of the sort of precursor to the slump that we saw going back to this time last year as it were or just slightly after. So that was a positive from my perspective. No major losses or cancellations or anything. And I think I've alluded to this in the prior conversations that the tone of conversations in the marketplace, I feel, is positive. I've had more conversations about bringing forward programs or accelerating than I have delays or pushing off or conserving cash.

Speaker 2

So it's nice to have those conversations. And again, I just reiterate that the gestation period of programs and projects and decisions in this industry is not the most rapid due to the regulatory environment, but it's good to see the tone making quite a significant change, I think.

Speaker 6

Okay. And then if we take so you said more early phase signings the last couple of quarters. You also talked about some of the later stage stuff that you

Speaker 7

had signed earlier progressing beginning to flow through.

Speaker 6

If we take kind of all of that, can you kind of help us walk through how we should be thinking about backlog conversion or backlog burn going forward?

Speaker 2

Yes. So I don't I think I've mentioned this before. Kind of once you've got if you've got the majority of your revenue now into that sort of later phase, there's a resistance then to elongating because effectively, if 100% of your revenue is in late phase and it took 15 months or so to convert, then 15 months is what it is. So I think as you start to see earlier phase business come into it, unless it's materially offset by late phase, which wouldn't be a bad thing, you'd expect to see it at worst staying where it is and potentially shortening and getting better. So that's another positive I think that would hopefully be materializing as we look into our next fiscal year, we would like to see.

Speaker 6

Okay, great. Thanks again.

Speaker 2

Thanks Sean.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Matt Hewitt from Craig Hallum Capital Group. Your line is open.

Speaker 8

Good afternoon. Thanks for taking the questions. Maybe to dig in a little bit more on the Catalent and BioSecure opportunity. You've had a couple large pharma companies come out here over the past week or so, kind of talking about they're having the conversations now. But maybe walk us through that process.

Speaker 8

And have you seen any change in maybe the sense of urgency from last quarter to where we sit today, not asking for specific numbers, but are you hearing those conversations kind of changing as more and more companies are looking to possibly use a new provider?

Speaker 2

Yes. I mean, I think, Matt, as you look at somebody who's maybe looking at that facing problem of do I want to switch a supplier, it can be very varied from one to another. I mean somebody who somebody may have been considered to place an order there. So I guess depending on their time line, they may already be committed to that in terms of meeting clinical. So that could be one scenario.

Speaker 2

If you're already there, you've already spent a significant amount of money in tech transferring into another facility. And we've always talked about this industry being sticky. There are quite big resistors to moving. But equally, I guess, ultimately, if one's looking at the future and you're concerned that you're not going to have a supply, then you have to start making some of those decisions. So I think it's an interesting dilemma.

Speaker 2

I think what the first comment is going to be or the first point, if you're going to look at moving or switching is who am I going to go to. So we do feel good about that quality track record that we have, being commercial and the commercial experience that we've established. And so hopefully, we're on the call list of that. It's then going to be looking at facility fit and talking through your capabilities and making sure that those match up with the program in question. And then it's obviously going through a detailed review work statement issue.

Speaker 2

And those could take several months in terms of executing. I think the fastest I've ever seen somebody walk up to the door and say, could you do something and actually convert it to a written signed order is about 6 weeks and that is extraordinarily unusual. I think you're probably talking more 3 to 6 months is a more normal phase And for bigger programs, they would go on longer than that. Again, depending on how severe they feel their situation being, those things can be motivated so faster. And I have seen MSAs take 6 to 8 months to negotiate, and I've seen people moving a lot quicker than that recently.

Speaker 2

So let's I certainly feel that there's a motivation to get into some very serious conversations around programs coming to Avid. Again, I just go back to my first comment. It's not always clear to us as to whether or not that's as a result of either one of those two factors, but we may have our suspicions.

Speaker 8

Got it. And then maybe shifting gears here a little bit, with the cell and gene therapy facility up and running or ribbon cut ready to go, How is the pipeline of opportunities looking there? How are those discussions going? Best guess on when we could see our first commercial run out of that facility? Anything along those lines would be helpful.

Speaker 8

Thank you.

Speaker 2

Yes. So first commercial run, I'm going to leave that one. I don't know when that would be. But what I would we'd be happy making GMP clinical material for the foreseeable future. I think it's, again, we'll bring a new facility and expecting a commercial product in the short term is a bit of a long push.

Speaker 2

But what we're seeing in that part of the market is similar to the mammalian side, which as I say, has been very positive indicator since November aside from the one I mentioned. I think it's fair to say that the Cell and Gene Therapy sector is lagging behind, but moving at a similar rate, albeit probably a quarter or 2 behind it or quarter, quarter and a quarter behind it would be my estimation. So we're seeing more proposals being requested, more interaction, better interaction, talking about the programs and where how they would fit. So we're feeling the optimism across the whole business. I think it's lagging in the cell and gene therapy, but nonetheless improving.

Speaker 2

So gone from a situation where at the end of quarter 2 in the whole business, we were disappointed in the year to date and felt like the quarter 2 should be the end and the low point. I think in quarter 3, I was holding short of as we went into quarter 3, I was holding short of cautiously optimistic being the statement. But I think it would be fair to say that as we see it at this moment, if it continues, then optimistic is not an word to use regarding what we're seeing at the moment. So long may it continue.

Speaker 8

Well, that's great to hear. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Max Monk from William Blair. Your line is open.

Speaker 7

Hey, good afternoon guys. Thanks for taking our questions. I wanted to ask one on overcapacity in the small scale mammalian drug suction space. Over the last months or so here, we've seen Lonza and Fuji both divest some assets there, move away from smaller scale bioreactors. We also heard Sartorius last week say that this is really where there's overcapacity or weak demand currently.

Speaker 7

So with that backdrop, how concerned are you about the impact of overcapacity in the 1,000,000 drug substance space you would play? And what do you think insulates you from some of those concerns that we've heard from other players in the space?

Speaker 2

It's really difficult for me to comment on what they're seeing. So if they're seeing that as overcapacity, again, I kind of, I would say, contradicts a little bit of what I've just been saying. So we're seeing good demands for Avid's services and capabilities. I'm not going to suggest for a minute that Avid is a bellwether for the whole industry. So we're not we aren't that big that we could suggest that we a perfect representation for the market, but we're certainly not seeing an overcapacity situation.

Speaker 2

So it's difficult for me to comment on people who are.

Speaker 7

Understood. Appreciate that commentary, Nick. Maybe just asking the bookings question another way here. So looking back over the last couple of years, bookings have stepped down sequentially in the fiscal Q4. Can you just help us think through any potential seasonality associated with bookings and then what that implies here potentially for the Q4 of this year?

Speaker 2

Again, can't comment on our quarter 4 this year in this call, but there's no reason to suspect seasonality in the quarter. It's there is a degree of lumpiness in the way that orders get lodged. I mean, again, I think I've said this on numerous occasions, you can if you're booking a late phase PPQ campaign, I'll use a number somewhere between $15,000,000 $25,000,000 or what have you just as an indication. If one of those falls in or what falls out of the quarter when you're booking €41,000,000 dollars that's quite a big difference. So 41 turns into 60 or 41 turns into 21.

Speaker 2

So those are a pretty big spread by one event that can be days apart. So until we have the critical mass to smooth those out and soften those, which obviously is every year that goes by that we grow, that's the case. I don't know how to change that. So but we don't I don't see any particular reason why quarter 4 should be any better or any worse than any other quarter in terms of signings.

Speaker 7

Understood. I had to try it. Maybe one just quickly from here on the margin side. So revenue and bookings are good in the quarter, margins again a little lighter than we were expecting. Can you just help us think through the margin ramp from here?

Speaker 7

Is it fair to think about the most recent quarter being a reasonable jumping off point moving forward? And if it is a reasonable jumping off point, how do you think about drop through to EBITDA from incremental revenue moving forward from here? Thank you.

Speaker 3

Yes. Thanks, Max. As far as looking at the revenues from Q2 to Q3, I think we had a reasonable flow through of our margin quarter over quarter. But going forward, until we hit ultimate capacity at a call it 40% plus or minus gross margin, We always say that if you drew a straight line from now till then, that's kind of how we're going to get there as we continue to grow the top line. It is going to be lumpy and we do have some additional expense that we've had this year that we've added from our expansions that has, I would say, depressed the margin a little bit.

Speaker 3

And there is a fair amount of non cash in that margin. But over time, our margin expansion is expected as top line grows and we benefit from our operating leverage.

Speaker 7

Understood. Thanks guys. Appreciate you taking our questions.

Operator

Thanks, Mike. Thank you. One moment for our next question. And our next question comes from the line of Paul Knight from KeyBanc. Line is open.

Speaker 9

Hi, Dan. Hi, Nick. Thanks for the time. Dan, what's the where are we with CapEx? I think that's more frankly the most common question from clients right now.

Speaker 9

It was about 4.7% in the January quarter. What should we think about in current quarter and years upcoming?

Speaker 3

Sure, Paul. Great question. The expansion CapEx is done. So going forward, any CapEx that comes through will be more software or what have you and maintenance. Though maintenance, because most of our equipment is brand new, we'll start fairly light and grow over the next couple of years.

Speaker 3

But I think the main question is as far as the growth and the expansion CapEx that's now complete. And I still think that this fiscal year, we're going to end at roughly around $32,000,000 of CapEx.

Speaker 9

Okay. And what a fraction of that going forward annually?

Speaker 3

That's right. We've said 2% to 5% of revenues. Clearly, the 1st couple of years we're going to be at that low end.

Speaker 9

Okay. And then Nick, I know it's a different beast with Lonza buying the Vacaville facility, but is there anything good or bad about a West Coast operation like that now being owned by Lonza?

Speaker 2

We like the West Coast as a location. So I mean, I think that it's a much larger capacity than we are. My understanding is I think the smaller reactors are the 12,000 liter upwards, but that's my understanding and up to 20,000 liters. So it's a market segment we don't operate in. Nobody really makes too many products in a 2,000 liter platform that would be made in a 20,000 liter stainless steel.

Speaker 2

So I don't think there's a lot of overlap in markets that we're serving. They did recently announce the they're exiting from their San Francisco facility a few months prior, I believe, which was the smaller scale facility. So that would probably be more notable for us that they haven't got a small scale offering on the West Coast. So hopefully, that's just some of our advantage. But it wouldn't surprise me as well.

Speaker 2

They did highlight, I think, dollars 500,000,000 worth of spending on that Vacaville site. So they may be putting some of that capability that they had a haywood into that facility. So again, it's I don't think there's anything negative from our perspective in all of that news. If anything, one might try to read a little bit positive from it. But Lonza are a good company and a capable organization, and I'm sure we'll be competing with them for a long, long time going forward, hopefully well.

Speaker 9

Okay. Thank you.

Operator

Thank you. And with no further questions in the queue, I'll turn it over to our CEO, Nick Green, for any closing remarks.

Speaker 2

Yes. So I'd like to thank everybody for participating on the call today and for their continued support. On a personal level, I'd just also like to thank my father who passed away 3 weeks ago. He was formational in my upbringing in this having one of the first CMOs in the world. And sorry to see him go, but thought I'd want to just say thanks in that regard.

Speaker 2

Again, we really appreciate everybody who's interested in Avid and the support for Avid from employees and also from our investors. And we look forward to speaking to you in the not too distant future over quarter 4 and fiscal year 2025 ahead. So again, thanks very much and look forward to speaking to you shortly.

Operator

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

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Avid Bioservices Q3 2024
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