Q3 2022 Berkeley Lights Inc Earnings Call

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Good afternoon, My name is Chris and I'll be your conference operator today at this time I'd like to welcome everyone to the Berkeley Lights third quarter 2022 earnings Conference call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session.

You'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.

To withdraw your question. Please press star one again.

Thank you Suzanne Hatcher, Vice President of Communications and Investor Relations you may begin.

Thank you operator, good afternoon, everyone and welcome to the Berkeley like third quarter 2022 earnings call reporting financial results for the quarter ended September 32022. My name is Suzanne Hatcher, Vice President of Communications and Investor Relations at Berkeley lights.

I'm joined today by Dr. Arthur <unk>, Chief Executive Officer and Michael.

<unk> Joshi, Chief Financial Officer.

Before we begin I'd like to remind you that management will make statements. During this call that are forward looking statements within the meaning of federal securities laws.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated.

For more information please refer to the risks uncertainties and other factors discussed in our SEC filings.

Except as required by law, Berkeley lights disclaims any intention or obligation to update or revise any financial projections or forward looking statements, whether because of new information future events or otherwise this.

This conference call contains time sensitive information and is accurate only as of the live broadcast November eight 2022 with that I would like to turn the call over to Arthur.

Thank you Susan and thank you everyone for joining guys.

We delivered solid results for the third quarter 2022, and demonstrated progress against our new strategic operating plan that we communicated during our last earnings call.

I'll start off at all.

Discussing our progress under the five pillars of our strategic operating plan.

Dan.

Turning it over to David.

Who will review our third quarter 2022 financial results.

In more detail.

In addition to our call today.

And we look forward to sharing more detail on.

Our new operating strategy at our Investor Day, which we are hosting next week on November .

<unk>.

Starting with our first strategic pillar of generating positive operating cash flow by early 2025.

We shared with you last quarter that under our new operating strategy focused on building, a growing profitable and sustainable business rather than pursuing growth at any cost.

In line with this goal.

We have updated our market driven product portfolio and strategy.

We believe will allow us.

Or are they.

Well.

Maintaining a disciplined approach.

And cash management.

I am pleased to report that in the third quarter be restarted by new and expanded roles and appropriately managed our cash.

The actions taken in July 2022 to optimize the business structure and processes resulted in an immediate decrease in operating costs and working capital to collateralize.

Do you expect to manage operating expenses and cash burn over the next three years with existing capital before creating positive operating cash flow in $2025.

Moving on to our second strategic pillar.

Prioritizing R&D investments through increased focus and rigor on development initiatives.

We made a number of significant advancements on the spot.

Yes.

We structured our R&D organization to enable focus and major activity.

Also we concluded it currently.

Partnerships and services business.

To allow us to dedicate resources to only the highest value logic.

The relentless focus on auto why they're.

Eliminated some high throughput screening.

Any service agreements that did not support our margin and profitability goals.

All create the opportunity to participate in downstream economics.

This milestone payment and royalties in line with that goal. We ended our collaboration agreement with Ginkgo Bio works in early September our.

Our partnership with Ginkgo over the last two years.

The real benefit and I'm certainly proud of the workflows at Berkeley lights things delivered.

However, the agreement no longer supported our profitability goal.

We remain committed to the contractually required processes as we wind down this collaboration.

Our collaboration agreement telemarketers or scientific Bayer crop science and listed are going very well and are each at different stages of completion.

The AAV development contract with Palomar is complete.

And they are evaluating outcomes, providing next steps as a reminder, the collaboration agreement with total as non exclusive rights to the viral vector.

Over the last quarter.

Significantly them are focused on the gene therapy viral vector development and manufacturing space.

Conducting market research and validation.

Spoke with nearly 100 companies currently in the cell and gene therapy space and presented our workforce solution.

We received overwhelmingly positive feedback been highlighting how our.

Screen up to T cell lines in about 10 days, enabling an unprecedented timeline and throughput.

Radical speed and cost that no other technology can match. This cannibalization confirmed our belief that the book to that technology.

No other technology can and.

Our technology is as evolutionary game changing an industry changing.

We continue to validate the unique capabilities of our platform to select three high value stable producer cell lines.

We'll improve the cost and therapeutically relevant manufacturing AAV based gene therapies.

Do you view this opportunity as our largest near term we've done a lot of it.

And we intend to dedicate ample resources for the development of this workflow for the balance of this year and throughout 2023.

We also made good headway on the emerging opportunity in PCI disability.

We have now validated with several customers about pumpkin rapidly isolate and recover functional TCR sequences from patients who receive personalized cancer vaccine.

And our partnerships and services team is actively exploring commercial partners interested in this significant opportunity.

Plan to share more on our strategy to anchor the gene therapy, and TCR discovery market at our Investor day.

Moving onto our first strategic pillar of delivering consistent commercial execution.

Through a new sales structure and enhanced portfolio and pricing strategy.

We placed A&P consistent during the third quarter.

Comprised of seven Capex, they spent and one tech access subscription model.

These systems were placed with nearly all new customers and spanned a variety of different applications from antibody discovery and cell line development.

Research and followed my industries to enable their tailored discovery and development, notably we stalled out that can be can be used specifically for vaccine development.

This quarter marks a positive proof point that our tech.

<unk> continues to be compelling and providing a competitive advantage, especially for <unk>, Seattle and top pharma, which continue to represent our largest customer segments.

In terms of our go forward product roadmap.

We made good progress against finalizing our analysis of our market and unmet customer needs in various segments.

Two customer he says we validated that our technology can also provide significant value in high growth academic research segments.

Example, gene editing and immune oncology application.

Top priority in 2023.

With the fall academic collaboration pilot programs to help guide the design of this new application.

Turning to our platform product and pricing roadmap as we discussed last quarter, we had.

Materially enhancing our approach to the market with the introduction of a more flexible configuration and pricing strategy that is focused on the total cost of ownership that includes lower barriers to entry in terms of instrument pricing with a higher recurring revenue growth model.

We are on track to launch the first of several application specific ecosystem models in early 2023.

Pilot program for the first few model.

I'll be can select will be offered globally and include two debt instead of the current fullness or cell line development.

The list price will be about half of the current because system, which will make this technology ideas.

For existing <unk> customers, who wanted to achieve additional output, but don't need the full capacity or want to access the technology at a lower price.

Higher margin consumables are being designed to operate with.

Because select model.

And we will offer a reagent rental programs to offer a variety of financing options to customers.

All of these actions support our strategy.

Our portfolio of platforms and is.

Allow us to access a wider array of potential customers in the market with policy more tailored to their needs.

And but.

Yes.

We will share a detailed product roadmap for the next several years, including pricing and targeted market segmentation at our upcoming Investor day on November 18th.

Turning to our fourth strategic pillar building a world class Lifesciences leadership team with a proven track record in profitably scaling life Sciences tools companies.

We rounded out our executive leadership team with the addition of Scott sharply as Chief Legal Officer, Scott has more than 25 years of experience serving as general counsel at companies ranging from startups to fortune 500 public.

Publicly traded entity.

His diverse skill set and managing corporate functions, including litigation compliance contracts Communications and government relations make him an excellent addition to our company.

Overall I am extremely pleased with the incredible talent, we have brought onto the Vocalized team and believe we have one of the most experienced management team in the small cap life sciences tools industry.

Our collective experience will be critical in advancing toward our goal of building a diverse lifestyle as tools and services company and driving a culture of innovation.

Customer centricity and a commitment to excellence in quality.

Finally, I would like to give an update on our fifth strategic pillar evaluating M&A opportunities that will help accelerate profitable growth and leverage our current cost structure.

This past quarter, we've conducted and synthesized market research to understand customers' unmet needs and competitive dynamics.

<unk> have helped us further refine our strategy and formulate data driven decisions on what markets to expand into and what inorganic options would be complementary to our business and technology.

We remain committed and even more bullish on our objective of pursuing synergistic M&A option that either expand our total addressable market all provide leverage.

SG&A and R&D expense structure.

In terms of synergistic M&A options that expand our total addressable market.

They include.

Complementary technology tuck ins that expand BLI offerings.

Expansion of service offerings to existing and new customers.

Technology licensing opportunities and.

Opportunistic M&A with market dislocations.

In terms of providing leverage to our current cost structure.

We are looking at consolidation opportunities that will enhance our commercial infrastructure or drive significant R&D and G&A synergies.

Overall I am pleased by our progress so far as we booked a class from Berkeley lights from a technology platform company to a diverse life sciences tools and services company.

<unk> continued to advance important changes to our business to lay a strong foundation for <unk>.

Ratable growth.

We have immense opportunities ahead of us and a strong plan in place to create value.

Shareholders.

Now I'd like to turn the call over to me to discuss our third quarter 2022 results.

Thank you Sir Arthur we are pleased with our financial results for the third quarter 2022 that reflected our team's commitment to execution through a challenging operating environment.

Looking at our results for the third quarter 2022, total revenue was $21 $4 million.

Down 12% compared to the third quarter of 2021 and up 12% sequentially.

Recall third quarter 2021 was the strongest quarter in company history and include a tailwind coming after the Covid lockdown, particularly in the APAC region.

By geography, North America accounted for 44% of our total revenue in the third quarter 2022, followed by APAC at 38% and EMEA at 18%.

Platform revenue was $11 8 million in the third quarter, 2022 down 17% compared to $14 1 million in the third quarter 2021, and up 83% sequentially.

Our installed base grew by eight placements during the third quarter of 2022, including seven Beacon placements and one tech access subscription.

This brings the total installed base to 128 platforms.

Year over year, we have grown the installed base by 23.

Representing a platform placement growth rate of 22%.

Recurring revenue was $7 million in the third quarter of 2022 up 48% compared to $4 7 million in the prior year and up 18% sequentially.

This marks the strongest quarter ever for recurring revenue and demonstrate the value that our platform generates for our customers.

The strength in recurring revenue was driven by consumable volume.

Particularly with pharma customers and continued growth in our service contracts as our installed base grows.

Revenue from partnerships decreased 52% to $2 $6 million in the third quarter 2022, compared to $5 $5 million in the prior year.

This was anticipated given that our development agreements are now completed with it.

Biosciences, and Thermo Fisher and the impact of pending our collaboration agreement with Ginkgo Bio works.

Gross profit for the third quarter of 2022 was $15 million.

Compared to $15 4 million in the prior year.

Gross margin for the third quarter of 2022 was 72% compared to 63, 4% in the third quarter of 2021, the significant increase in gross margin year over year was due to a higher mix of recurring revenue and the termination of the low gross margin profile.

Ginkgo fireworks collaboration agreement.

Operating expenses in the third quarter 2022 were $36 6 million.

Inclusive of $5 2 million of stock based compensation compared to Opex of $35 4 million inclusive.

Inclusive of $6 million of stock based compensation in the same period of the prior year operating.

Operating expenses in Q3 2022 included approximately $1 1 million.

Restructuring expenses related to a reduction in force.

During the quarter, we also reclassified certain R&D resources on expenses to SG&A that drive commercial execution and customer support.

These initiatives aligned with our strategy and drive R&D optimization and commercial execution.

This reclassification of expenses to SG&A will be done on a prospective basis and did not impact total operating expenses.

Net loss for the third quarter, 2022 was $21 6 million compared to a loss of $20 4 million for the prior year period.

All net loss numbers are inclusive of stock based compensation and restructuring expenses.

We ended the quarter with $134 $7 million of cash and short term investments.

Our available liquidity of $144 7 million, which.

Which includes our revolving credit facility.

Looking ahead to the remainder of 2022, we continue to expect full year 2022 revenue to be approximately in line with 2021 revenue as we realign the business around our strategic operating plan.

We were able to execute our plan in the third quarter of 2022, but remain cautious about global trends that can increase pressure on capex budgets and elongate sales cycle.

With that I will turn the call back to Sudhakar.

Thank you.

Over the coming months I look forward to continuing to share our progress consolidating newly implemented operating strategy, including at our Investor Day next Friday.

Hope to see many of you there.

With that we'll now open it up to questions operator.

Thank you as a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.

The first question is from <unk> <unk> with Morgan Stanley . Your line is open.

Hey, Good evening guys. This is edmund on for pages. Thank you for taking the question.

My first question is regarding your efforts to further expand high value partnership projects could you speak to what the final currently it looks like right now and have the conversations have been progressing what are some of the initiatives you have in place to drive these efforts and in.

In light of the context.

Notice seeing elongated.

Cycles, and Capex purchasing hesitation.

Are you starting to see signs of this in your conversations on partnerships and services.

Well, thank you for that question.

So that I'll start with the answer than me, who might be able to add some color to that.

Just to just to make it clear our partnerships and services business is focused on the highest value in the most profitable parts of our franchise and we have narrowed our focus on to two areas to stay and committed a lot of resources to that.

One is the gene therapy workflow for AAV.

And the second one is for TCR discovery.

We continue to perform some work for clients.

Clients in agrochemicals area as well.

However, most of our current resources with the future anticipation is on the AAV gene therapy and TCR disability.

On that AAV workflow. We have finished work for one client that has worked with the development work that was done for about seven quarters.

We are now in discussions with that client for production.

However.

We are also.

Going to work with many of the gene therapy clients is a very strong set of discussions as we discussed in the earlier comments and remarks.

Just because of the 100 potential clients, who could theoretically use this.

Type of service from Us.

And we're making sure that we have all of our capabilities fully ready before we go to the market and so there'll be a gap of about one quarter between our development effort, just finishing right now and when that becomes a fully commercial product.

Where will offer services.

Because the gene therapy area is.

Significantly.

High value areas for our pharmaceuticals, as well as our CMO clients, we haven't seen any hesitation of the capital spend the ones that you described for what I would be saying for the capital spending for from large pharmaceutical companies are small bio.

Thanks.

Got it that's very helpful and.

Could you provide us with more details on the decision to terminate your collaboration with ginkgo and what's involved in the wind down process should we continue.

Be expecting <unk> to be a customer in the future.

I think as of.

As we discussed it last time.

And he has been with ginkgo is completely terminations, we are going through contractually obligated process for the wind down you should not expect any further revenue from ginkgo.

We don't intend to work with ginkgo on any of the previous projects.

There is of course, the possibility of them being interested in our current workforce we are developing.

Like the AAV vector workflow for gene therapy, because they are also potentially a participant in the industry, but we are not under any discussions with them for that work right now.

Got it and.

Understanding that you probably don't want to guide to 23, just yet but with the CMV instrument launch in one half 'twenty three annual renewed focus on prioritizing high value partnership projects and services, how should we be thinking about.

Revenue in 2003, and similarly in light of the ginkgo contract termination, how do how should we be thinking about the gross margins. If you could provide anything for us to help frame. This in 'twenty three that would be super helpful. Thank you.

Yeah, Hey, Tejas this is Michael.

We reiterated our guidance for 2022.

But we're not ready.

Any guidance for 2023, we will do that in the Q4 call.

Now after the quarter is over.

Great. Thank you.

The next question is from Dan Arias with Stifel. Your line is open.

Good afternoon, guys. Thanks for the questions.

On the D eight placements during the quarter Thats, a nice number from a sequential standpoint can you just touch on what you heard from customers on why now is the right time to acquire a system was there something in particular that resonated with them or at least a couple of them just kind of curious what drove the step up there.

Hi, This is Michael so.

I'll start and maybe sit Arthur can jump in so as Arthur mentioned in his prepared comments a majority of our placements were with new customers and varied our customer segments as well as the applications.

No.

We believe that customers are still.

Value proposition of our instruments, and our and our consumable so.

Ill.

Even though capex budgets are being scrutinized and sales cycles are a little bit longer.

We're still seeing customers very interested in our and.

Our products and services.

Yes, I think just to just to provide more color I do not believe that there is anything specific about the timing of the year.

Why people are.

Doing this sequential improvement frankly, there's a lot more to do with more focus on commercial execution from the leadership and as you can imagine with the leadership transition. We've had in the last couple of quarters, we are making significant number of changes as well as additions to our commercial team.

So we continue to.

Cautiously optimistic that our performance will continue to improve.

With the caveat that there are.

Global macro that impact us just like any other company in our space.

Yeah, Okay, and I apologize for the background noise. If you guys are hearing some ear bud.

We just know who on the on the outlook here. The <unk> revenue number it does imply a step up that you haven't seen in a while so.

How much of that is tied to discrete things that are in the order book versus what you might assume for just sort of historical seasonality.

So couple of comments there right, we will see continued growth in our recurring revenue.

Customers continue to use our consumables and our kits. So we expect that to continue and that's a strong focus for the company to drive the recurring revenue. So we expect growth there.

On the partnerships and services side, as we mentioned last quarter and again this quarter.

Development contracts that have come to completion won't materialize in revenue. So we will see a continued slowdown there, but we expect.

Instrument revenues to be significantly higher we have a very strong funnel at this point and as Arthur mentioned.

We are.

Really pushing from a sales execution point of view as well as I'd like to mention that with our product roadmap and our flexible pricing programs.

We are enabling our customers to maybe overcome the <unk>.

Capex constraints that they might be achieving with the.

The tech access our subscription.

Capability that we're offering in our pricing models.

Okay.

Okay very good thank you guys.

Okay.

The next question is from Chad <unk> with Cowen Your line is open.

Hey, How's it going guys just chat online prestige in Ma.

Just wanted to touch a little bit on the commercial organization and the head count reduction last quarter.

But then we see sort of a tick up in SG&A can you speak to the cadence there and how you guys are feeling about that structuring.

Yes, I think we are in it.

Additionally, transitional year for commercial theme an expense management perspective.

We are now focused on putting appropriate leadership at each of our regional leaders.

As well as making sure the via appropriate number of staff too.

B available to support not only the sales function, but as you can imagine with this very sophisticated technology, there's a lot of demand on our field application specialists as well as our field service engineers and other people who are supporting the customers' early journey with this tool and its success.

As you have seen in the Companys performance over the last few years. It has taken some time for the recurring revenue, which is the consumables part of our business.

Become robust enough and actually this year is that we actually had a significant focus on that as well.

Resulting into substantial growth and we will continue to focus on that so you might see in a sale.

Sales and marketing expenses at overall mix of our expenses still continue to tick up while we rationalize the rest of the company's expense structure.

Yes, that's super helpful.

Still a large portion of the business coming from APAC could you just speak to maybe your thoughts on the geopolitical situation and.

And maybe any demand trends youre seeing from that region.

Yes, great question.

Haven't seen any impact from the geopolitical situation on our company's business there.

And again.

I'm not going to speak to what may happen to the geopolitical climate with respect to this specific.

Thought that we offer and we don't have currently in a service offering we do not believe we have any competitor in the world.

So.

Kind of uniquely positioned to participate in the marketplace across the world that is reflected in our results so far.

I will not be able to speak to the.

Any potential.

Decisions by either governments and what impact that might have on us so far we haven't seen any impact.

Got it and maybe just one last one to harp on previous question.

With potential R&D slowdowns to come.

Do you see an opportunity maybe to capture some some extra downstream economics.

Like a TCR discovery partnership.

And maybe sacrifice some upfront payment for some more lucrative downstream potential.

Look I think there is of course, a tradeoff to be made and.

We are continuously evaluating opportunities to capture the upstream.

Our own experience and frankly my experience as a leader in this industry for a long time is that.

Not all projects are equal.

And not all potential milestone payments materialize. So I think it is important for us to continue to use strong business judgment on when to take those kind of opportunities into our P&L.

And impact to our P&L, VR elevate being small and growing company in our space.

$85 million of.

Revenue at <unk>.

70% gross margin company, and we liked that place to be and we do not want to become a lower gross margin business, having said that I think as we enter the economic winter for our clients.

We'll explore those opportunistic.

Opportunities.

One by one basis.

Right now, we are not going out and making our India business dependent on those.

We'd like to stay focused and deliver the things that we actually committing to deliver for our customers.

Okay.

I appreciate the prudence, thanks for the questions guys.

Again as a reminder, that is star one to ask a question. The next question is from Mark Massaro with <unk>. Your line is open.

This is bill Lu on for Mike.

On the question.

Brooke.

Could you talk about an application specific model Hopkins. Thank you Paul.

And lower overall cost.

On track for launching.

And any initial metrics you could share a quantify.

Thanks.

Yes.

If I understood your question.

The Beacon select model as described in our earnings.

Yes.

You can go back and leave that one again it definitely has the same.

Application specific model, we'll be launching that in 2023 in the Q1 timeframe.

And it will be offered globally.

Believe that.

That.

The price point is going to be approximately half of our list price up to.

The full beacon system, however, the consumables pricing for that will be higher.

And it allows our customers to access the technology with a lower barriers for the capital. We believe that there is a lot more room for us to improve our pricing for that model.

On the consumables side, so total cost of ownership for the customer it would be quite similar.

It allows us to sell and lease placements into more customers then.

What we've been able to do with the price point that.

What is close to $2 million.

And in 2020 as they will continue to introduce.

Additional models the full detail of this will be discussed on all of our models and the platform launches.

Our November 18th at Investor Day.

Okay.

So I guess, what it might be premature.

Any updates to share.

Pam from.

From a Canada IPL.

Or maybe more broadly what are you hearing examiner obtainable.

Right now.

It's a fantastic question and I'd like to just.

Access to the November 18th call, we would be discussing at that.

That.

<unk>.

We offer a longer discussion and we would be describing from our new management perspective, what is the.

Stable.

And that we are going after.

Okay.

Okay.

We have no further questions at this time this will conclude the Berkeley lights third quarter 2022 earnings conference call. Thank you everyone for participating and you may now disconnect.

Okay.

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Yeah.