Alpha Teknova Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 13, 2024

There are 8 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to Technova's First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Jennifer Henry, Senior Vice President of Marketing. Please go ahead.

Speaker 1

Thank you, operator. Welcome to Technova's Q1 2024 earnings conference call. With me on today's call are Steven Gundstream, Teknova's President and Chief Executive Officer and Matt Lowell, Teknova's Chief Financial Officer, who will make prepared remarks and then take your questions. As a reminder, the forward looking statements that we make during this call, including those regarding business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning these risk factors is included in the press release the company issued earlier today, and they are more fully described in the company's various filings with the SEC.

Speaker 1

Today's comments reflect the company's current views, which could change as a result of new information, future events or other factors, and the company does not obligate or commit itself to update its forward looking statements except as required by law. The company's management believes that in addition to GAAP results, non GAAP financial measures can provide meaningful insight when evaluating the company's financial performance and the effectiveness of its business strategies. We will therefore use non GAAP financial measures of certain of our results during this call. Reconciliations of GAAP to non GAAP financial measures are included in the press release that we issued this afternoon, which is posted on both Technova's and the SEC's website. Non GAAP financial measures should always be considered only as a supplement to and not as a substitute for or as superior to financial measures prepared in accordance with GAAP.

Speaker 1

The non GAAP financial measures in this presentation may differ from similarly named non GAAP financial measures used by other companies. Please also be advised that the company has posted a supplemental slide deck to accompany today's prepared remarks. It can be accessed on the Investor Relations section of Technova's website and on today's webcast. And now, I will turn the call over to Stephen.

Speaker 2

Thank you, Jen. Good afternoon and thank you everyone for joining us for our Q1 2024 earnings call. Technova is a leading producer of critical reagents for the life sciences industry that accelerates the introduction of novel therapies, vaccines and molecular diagnostics that will help people live longer healthier lives. We manufacture high quality customer agents with short turnaround time and we can scale with our customers as they advance their products from discovery to commercialization. We had a strong start to 2024 with revenue, adjusted EBITDA and cash outflow in line with our expectations.

Speaker 2

From a revenue perspective, we saw sequential improvement of $1,400,000 or 18% versus Q4 2023 and growth over prior year of 2% overall with 7% growth specifically in clinical solutions. We were also encouraged that our Q1 2024 revenue was driven by a diverse set of customers with no direct customer representing more than 10% of revenue. Our clinical solutions customer count continues to increase providing a positive indicator for the long term as these customers migrate their therapies towards commercialization. All told, we remain confident in our $35,000,000 to $38,000,000 full year revenue guidance for 2024. In addition to the solid performance on our top line, we are executing ahead of plan from a cost management perspective.

Speaker 2

Matt will provide more details on our operating and capital expenditures, but at a high level, we've already started seeing the benefits from our cost control efforts within the first quarter of 2024. Our first quarter adjusted EBITDA was a $2,300,000 improvement over prior year, a quarter with similar top line revenue and we expect to meet or beat our cash outflow guidance of $18,000,000 for the full year. Operationally, we are executing well. Our new facility is now regularly generating revenue with more than 4 times the work orders completed in the Q1 compared to the Q4 of 2023. The combination of our new state of the art facility, quality management system and purpose built process using equipment are enabling customers to receive custom research or clinical grade reagents in weeks instead of months.

Speaker 2

As an example, in January we onboarded a new customer that needed a large number of different custom reagents delivered in single use bags. We were able to deliver nearly 20 custom buffers in less than 6 weeks from when the customer placed the order. We believe this rapid turnaround time, particularly for first time orders is substantially faster than other suppliers in the market. Most important, we allowed our customer to keep its clinical trials on schedule. This quarter also proved to be successful with respect to the launch of new products and capabilities.

Speaker 2

First, at the annual meeting of the American Society of Gene and Cell Therapy last week, we launched our latest product in our AAV tech solution, the AAV Tech AAV Stabilizer. This proprietary formulation protects the capsid throughout the AAV downstream filtration purification process. After testing multiple serotypes we have shown up to a 50% increase in AAV tighter yield when using the stabilizing reagents. We also launched Buildtech, a first of its kind custom configurator providing access to high quality customizable buffers with exceptionally short turnaround times and no minimum order quantities. Our custom configurator is easy to use and by leveraging our modular manufacturing platform, Billtech products ship in a matter of days.

Speaker 2

We believe this will enable the customization of multiple iterative buffers needed during early stage research and design of experiments. Ultimately, this allows process development scientists to focus on advancing science instead of spending their time mixing buffers. Finally, I'd like to take a moment to provide my view on how the market is evolving. I believe we are seeing a stabilization in what has been a very challenging biotech environment over the past couple of years. Recent biotech funding improvements combined with our own positive leading indicators such as increased engagement and quoting with customers previously focused on preserving capital support a more optimistic outlook going forward.

Speaker 2

Given that we typically see about a 4 quarter lag between changes in industry funding levels and revenue recognition, We think these indicators point toward a more positive market environment in early 2025. In summary, we had a strong start to the year. We are excited about the progress we have made over the past couple of years and believe we are in position for long term success. I will now hand the call over to Matt to talk through the financials.

Speaker 3

Thanks, Stephen, and good afternoon, everyone. Results for the Q1 of 2024 from a revenue perspective were similar to the Q1 of the prior year, but an 18% increase sequentially. Overall, we delivered solid financial results for the Q1 of 2024. Total revenue for the Q1 of 2024 was $9,300,000 a 2% increase from $9,100,000 for the Q1 of 2023. Lab Essentials products are targeted at the research use only or RUO market and include both catalog and custom products.

Speaker 3

Lab Essentials revenue was $7,300,000 in each of the first quarters of 20242023. Lab Essentials revenue was consistent as the slight increase in number of customers was offset by a slight decline in average revenue per customer. Notably, we have seen a modest increase in the number of Lab Essentials customers compared to the Q4 of 2020 3. Clinical Solutions products are made according to good manufacturing practices or GMP quality standards and are primarily used by our customers as components or inputs in the development and manufacture of diagnostic and therapeutic products. Clinical Solutions revenue was $1,700,000 in the Q1 of 2024, 7% increase from $1,600,000 in the Q1 of 2023.

Speaker 3

The increase in clinical solutions revenue was attributable to an increased number of customers, partially offset by lower average revenue per customer. Notably, here too we've seen an increase in the number of clinical solutions customers compared to the Q4 2023. We expect revenue per customer to increase over time as customers ramp up their purchase volumes. However, this metric can be affected by the mix of newer clinical customers who typically order less. Just as a reminder, due to the larger average orders in Clinical Solutions compared to lab essentials, there can be quarter to quarter revenue lumpiness in this category.

Speaker 3

Gross profit for the Q1 of 2024 was $2,200,000 compared to $2,400,000 in the Q1 of 2023. Gross margin was 23.8% in the Q1 of 2024, which is down from 26.6 percent in the Q1 of 2023. Decrease in gross profit percentage was primarily driven by increased overhead costs, largely depreciation expense following the completion of our new manufacturing facility in mid-twenty 23, partially offset by reduced headcount. Operating expenses for the Q1 of 2024 were $10,200,000 compared to $11,400,000 for the Q1 of 2023. Excluding the non recurring charges recorded in the Q1 of 20242023 of $1,300,000 $700,000 respectively, each related to a reduction in workforce, operating expenses were down $1,700,000 The decrease was driven primarily by reduced headcount and spending in particular in professional fees despite $500,000 in one time non cash expense related to option repricing

Speaker 2

in the Q1 of 2024.

Speaker 3

Net loss for the Q1 of 2024 was $8,100,000 or $0.20 per diluted share compared to a net loss of $8,800,000 or $0.31 per diluted share for the Q1 of 2023. Adjusted EBITDA, a non GAAP measure was negative $3,800,000 for the Q1 of 2024 compared to negative $6,100,000 for the Q1 of 2023. Capital expenditures for the Q1 of 2024 were $100,000 compared to $4,300,000 for the Q1 of 2023. This marks the 7th straight quarter of sequential decreases in capital expenditures. Free cash flow, a non GAAP measure, which we define as cash used in operating activities plus purchases of property, plant and equipment was negative $6,700,000

Speaker 2

for the

Speaker 3

Q1 of 2024 compared to negative $12,000,000 for the Q1 of 2023. This decrease compared to prior quarter is due to lower cash used in operating activities and significantly reduced capital expenditures. Turning to the balance sheet. As of March 31, 2024, we had CAD 21,600,000 dollars in cash and cash equivalents and $12,100,000 in gross debt. Turning to our 2024 guidance and outlook, we are reiterating 2024 total revenue guidance of $35,000,000 to 38,000,000 dollars At the midpoint, this implies a revenue forecast that is approximately flat compared to 2023.

Speaker 3

With respect to product categories, we continue to expect approximately 10% growth in lab essentials revenue with the remainder coming from clinical solutions revenue. The company continues to manage expenses aggressively while preserving the critical investments we believe will allow us to achieve our long term growth targets. The company posted operating expenses excluding non recurring charges below $10,000,000 for the Q4 in a row and stood at $8,900,000 for the Q1 of 2024, despite absorbing $500,000 in one time non cash expense related to the option repricing. This trend continues to reflect steps we've taken to reduce operating expenses. In total, the savings generated by the most recent RIF and other associated cost saving measures are expected to reach approximately $8,000,000 on an annualized basis by the Q2 of 2024 when compared to the Q4 of 2023.

Speaker 3

We finished the Q1 of 2024 with 174 associates, down 31% from the year ago quarter. While the company saw an increase in free cash outflow compared to Q4 of 2024, this is consistent with the company's expectations for the year and is higher due to certain larger payments only occurring during the Q1. We anticipate lower average quarterly free cash outflows for the remainder of the year. As such, the company continues to expect free cash outflow

Speaker 2

of less than

Speaker 3

$18,000,000 for the full year 2024. With that, I will turn the call back to Stephen.

Speaker 2

Thanks, Matt. Overall, we were pleased with our performance in the Q1 of 2024. We believe the long term outlook for our end remains positive and we are committed to executing on our strategy to help our customers accelerate the introduction of novel therapies, diagnostics and other products that improve human health. We will now take your questions.

Operator

Thank Our first question will come from the line of Jacob Johnson with Stephens. Your line is now open.

Speaker 4

Hey, thanks. Congrats on the quarter. Good afternoon. Stephen or Matt, I guess just on the clinical solutions in the quarter, really strong. Steven, I heard you say no real customer concentration in the quarter.

Speaker 4

But then I heard Matt say, hey, it's a lumpy business. If we kind of run rate this 1Q clinical number, it's probably trending a bit better than the full year. So maybe just anything you'd call out in the quarter or any thoughts about kind of the outlook for clinical solutions as the rest of

Speaker 2

the year plays out? Thanks. Thanks, Jacob. Yes, I would say, I mean, it is a lumpy business, right? We're talking about $1,700,000 per quarter and some of these orders can be $500,000 or more.

Speaker 2

So it's hard to take this as a single run rate. I think we want to get another couple of quarters underneath us to get a confidence in the full year. But I will say that accurate in my statement there at the beginning around not having a very large customer. As you remember last year Q2, which we'll talk about, I'm sure next Q2, we did have a large customer there. So I just want to make sure pointed out that it feels pretty good and the fact that there is a diverse set of customers coming through.

Speaker 4

Got it. Thanks for that, Stephen. And then maybe just as a follow-up, just on the Build Tech solutions offering. If I'm kind of reading this correctly, it seems like this allows customers to kind

Speaker 3

of go

Speaker 4

online and customize a product online. I'm just curious about that kind of strategy of them kind of tinkering it with themselves versus maybe coming to you to work with you directly on this and maybe tinkering with it online can lead to them coming to you further. But I'm just kind of curious that the digital component of that versus maybe other custom solutions you've done and the strategy behind

Speaker 2

that? Absolutely. So first, I think it's very complementary to what we've done in the past. So in this case, we as a custom reagent manufacturer are very quick in our turnaround time. So customers can come to us with a formulation and we do see a lot of these buffer formulations that come to us and we can get that in production within a week where our on time delivery for these custom like buffer formulations is 6 to 14 days at the moment and we're 95% of the time on time for those.

Speaker 2

Now the challenge there for a lot of our customers is that when they're doing a DOE or a big experiment, our minimum order size there is 8. So you're buying 8 of the exact same buffer and then you're scaling out to many of those. And what we found over time is a lot of our customers love that offering once they've kind of narrowed down to exactly what they're going to work with or 2 or 3 sets. But these early discovery phases, they want to say walk a pH up across a number of ranges or they want to tweak a salt or something like that. And so what happens is they end up doing that making those buffer in house in 1 liter formats.

Speaker 2

And so what we spent some time doing over the last 6 months is finding a way that we can actually make 1 liter custom format and ship in 1 to 2 days. And so the combination of the low minimum order quantity or no minimum order quantity, I should say, and the speed allows us to take their efforts in the lab and transfer to us so they can focus on other things. And we do think this is a big deal for I would say 2 pieces. One is this is a market that has not really been touched by from a commercial perspective, from a supplier perspective just because of the challenge of making custom buffers really quickly. And we think that is a large market.

Speaker 2

And of course, we have a somewhat starting limited offering of that now, but we'll be building that over time. And the other part that's exciting about this is that this kind of marks a step for us that it's going to expand over time. Whereas if you think about the complexity of doing what we're doing now is customizing these orders online, getting them priced, getting them into our ERP then getting them into the production floor and guided through that entire production environment and shipping within 1 to 2 days. We think as we build this out and scale this is going to set a new standard for the industry of how we do this. So yes, we're excited about it.

Speaker 2

I think it's not a sort of a cannibalism strategy is very much a complementary. We're now going to access things that we haven't been able to talk to them about before. Got it.

Speaker 4

Thanks, Stephen. That's really helpful context.

Speaker 2

I'll leave it there.

Operator

Thank you. One moment for our next question please. Our next question comes from the line of Stephen Mab with TD Cowen. Your line is now open.

Speaker 5

Great. Thanks for the question and congrats on the quarter. Maybe just a follow-up to Jacob's question on Build Tech. Are there existing companies that are doing something similar? Or are you building out this market of de novo?

Speaker 2

I think I believe we are the only ones that have offered anything like this. So this is definitely a view that there are a lot of researchers that spend a lot of time in the lab, missing concentrates or weighing their own powders to do exactly what we're going to offer them. And the reason they do that is because the minimum order size are too large and the turnaround time is too long. So that's why we're pretty excited about it.

Speaker 5

Okay, got it. Yes. And I appreciate you gave sort of a range of like representative prices per liter bottles. But maybe just talk about I know it's early, but the demand for Build Tech, given the 40% to 50% increase in costs, just can you give us any color on the early stage demand? And what's the ROE on producing Build Tech?

Speaker 5

Is it really because you can optimize it without having to do bulk orders? Is that the value proposition as you're saving time and money? Help us understand

Speaker 2

a little bit better. Thanks. Yes, absolutely. So first, on the demand side, we launched this last week. So we're still very much in the early stages.

Speaker 2

We are at the ASGCT last week and had a banner up and we had a number of people come by and take pictures. And then quite honestly, they're pretty blown away that we could do this so quickly. And it does feel like one of those moments for some of them that have kind of said, hey, this is true innovation. This is very exciting. I can now get 10 or 20 buffers in a couple of days instead of a couple of weeks with us doing it in house.

Speaker 2

And then you of course have the people that are stuck making the buffers and they're very excited to not have to make the buffers anymore. And there's a big difference here, right? You're making them in a lab versus in a clean room in an ISO5 environment where we have standardized QC tests that are USD standards versus them actually measuring the pH and conductivity and things like that on their own. And so from their perspective, it's very much a question of time and effort versus outsourcing it to us to do. And I think they recognize the quality and they certainly recognize the speed, especially in these larger experiments or say you're trying to purify protein or a viral particle or something like that where just a small change in pH or a small change in salt or an additive that you put in there can actually mean the difference between higher low yield or higher low purity.

Speaker 2

So I think it's one of these things where it's a behavior change. So it may take a little bit of time to sort of build out and really convert the number of customers over. But certainly, we are receiving some orders and people are pretty excited about it.

Speaker 5

Okay. Appreciate it. The color is helpful. And then maybe one for Matt on the gross margin. Stephen mentioned that the new orders going through the facility, I think you mentioned it was 4 times versus last quarter.

Speaker 5

But can you help us out with how we should think about the gross margin improvements as more products go through the facility and you're amortizing more of the fixed costs of the facility? Thanks.

Speaker 3

Yes. Thanks for the question, Steve. Yes, the gross margin leverage is a real thing and I think we're showing it here even with this modest improvement quarter over quarter sequentially. As we've mentioned before, our costs at this point are largely fixed, particularly in the production area. So as we grow in revenue, we're expecting to see on the order of 70% or so of that incremental revenue drop through to gross profit.

Speaker 3

So more comparing to the last quarter rather than the year ago quarter is a little better in this case. You can see we were 17%, 18% in the last couple of quarters. We've been able to show some increased revenue and that's already picking up and flowing through to gross margin more or less as expected. So I think as we continue to grow the top line, you'll see that kind of leverage that 70% or so drop through to revenue and that's what we're looking to do as the year progresses.

Speaker 5

Okay, got it. So the gross margin improvements from your perspective are as you're tracking?

Speaker 3

Yes. Yes, absolutely.

Speaker 5

Okay. All right, great. That's all for me. Appreciate it.

Speaker 3

Thank you. Thanks, Stephen.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Matt Larew with William Blair. Your line is now open.

Speaker 6

Hi, good afternoon. Stephen, you referenced sort of an external leading indicator in improved biotech funding, which as you've alluded to, will take some time to play out. In terms of internal leading indicators, I want to ask maybe about 2. 1 would be maybe the number of customers you've had in to qualify or audit to take a look at the new facility if that activity has picked up? And then maybe just the other would be, you referenced increasing sequential number of customers in the businesses.

Speaker 6

I'm just curious maybe if that's a mix of old customers, of new customers, would you be curious for any comments on that as well?

Speaker 2

Yes. Thanks, Matt. So first on the customers who qualify the new facility, we've had we haven't disclosed exactly how many we've had at this point in time, but we have seen a number already through the facility this year. We did get through a large backlog last year, but we are now scheduled out kind of through the fall this year and squeezing more in. So I think from that perspective, pretty happy with where they are.

Speaker 2

And of course, it's much more fun as we go through it now and there's constantly being work orders being produced in the facility. So that is part of the indicator. I would say the second part of your question is one of the ones that I think is more interesting, which is what I said that we do have a number of increased number of customers, both in clinical solutions and Lab Essentials. We obviously really closely watch that Clinical Solutions number. And despite the lower average revenue per customer, that number has been on a continual increase over the actually 6 some quarters now at this point.

Speaker 2

So that's very positive for us. What I was referencing in the call was we did have a number of customers that bought actually quite a bit from us in 2022 that were in 2023 very much in the conservation of capital mode and bought very little or not at all. And those customers have now started reaching out to us to talk about other things that we can do with them this year as they scale back up. So I do see that as a positive without a doubt. The timing of when those orders come through and when we recognize them is a little bit blurry at the moment and we don't want to count on it until we actually get the orders in and then we start.

Speaker 6

Okay. And then obviously making progress on profitability and cash used here, the CapEx went up, I think, Matt, you said 7th straight quarter, it's been down. Just as we think now about throughout the year and then perhaps even beyond, maybe just remind us what kind of capacity you now have in place from a revenue perspective, when we should maybe expect things like maintenance CapEx to start flowing in? And then just to support, I think, Steven, you referenced 125 new reagents in the deck and obviously this new strategy and service offering, just any additional investment or G and A type support that might be required to help push that? Thanks.

Speaker 3

Maybe I'll just start on the CapEx question, Matt. Yes, we did and have seen some pretty dramatic decreases in capital expenditures over the last 2 years. Of course, that was largely expected. And I would say, at this point, they're virtually 0. And I wouldn't expect it to stay at virtually 0.

Speaker 3

But we're obviously investing where we only believe is absolutely necessary. We've made a lot of investments, so it's

Speaker 2

just not

Speaker 3

a lot of reason to do more than that right now. There will be some there are some things on the horizon where we expect the capital to come back up, whether that's maintenance or some small kind of growth CapEx investments related to internal capabilities. And I'm speaking on the facilities side here primarily. In terms of some of these other areas that we're talking about new capabilities and investments, there will be some investment there too. This digital infrastructure and things will require some investments to support.

Speaker 3

But I would not see us, I guess, substantially increasing the CapEx where it is going to go up from this level because it has to, but I think we're going to be able to maintain it. I think we're kind of at a on the plus or minus $2,000,000 range per year and that will fluctuate up or down depending on what projects we're working on. But I think that's a reasonable place to assume that's more normal than where we are right now. I'm not sure if I answered all your question or there was another piece of it, but please let me know.

Speaker 6

That was the one. Thanks, Matt.

Speaker 3

Thank you, Matt.

Operator

Thank you. One moment for our next question, please. Our next question comes from the line of Mark Massaro with BTIG. Your

Speaker 7

This is Vivien on for Mark. Thanks for taking the question. I'll maybe just keep it to 1. So I know you guys talked about the lag time for biotech ordering. As far as the 3 cell and gene therapy customers entering Phase 3 clinical trials later this year, I think you called out in Q4.

Speaker 7

I'm just curious if you have any early ordering patterns or early conversations that are noteworthy there? Thanks.

Speaker 2

Yes, we're probably we will not go into details about those specific customers, but those are still on track. And we started working with 1 already from a production perspective. So all of that is playing out just as we talked about at the beginning of the year. And we continue to talk about what they will need if they're successful in going to commercial, which is probably more of a late 2025, 2020 6 timeframe.

Speaker 7

Okay, understood. I'll leave it there.

Operator

Thank you. This concludes our Q and A portion. This concludes the conference call. Thank you for your participation. You may now disconnect.

Operator

Everyone, have a wonderful day.

Remove Ads
Powered by Quartr
Earnings Conference Call
Alpha Teknova Q1 2024
00:00 / 00:00
Remove Ads