908 Devices Inc. Q1 2023 Earnings Call

May 9, 2023

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Good morning, ladies and gentlemen, and welcome to the nine zero wait devices first quarter 2023.

Results Conference call.

At this time all lines are in a listen only mode.

Following the presentation, we will conduct a question and answer session.

If at any time during this call you require immediate assistance. Please press star zero for the operator.

This call is being recorded on Tuesday may nine 2000 Chinese fee.

I would now like to turn the conference over to MS. Kelly <unk> Investor Relations. Please go ahead.

Thank you good morning binary devices released financial results for the fourth quarter and full year a good December 31 2022.

If you've not received this news release or if you'd like to be added to the Companys distribution list. Please send an email to IR I know eight devices Dot com joining me today from nine away, It's Kevin Clark, Chief Executive Officer, and co founder and Joe Griffith Chief Financial Officer.

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

These statements involve material risks and uncertainties that could cause actual results whereby to materially differ from folks that debated.

Additional information regarding these risks and uncertainties appears in the section entitled forward looking statements in the press release kind of weight that ice has issued today.

For a more complete with your description. Please see the risk factors section of the company's annual report on Form 10-K for the year ended December 31, 2022, and in our other filings with the Securities and Exchange Commission.

Except as required by law 98 devices disclaims any intention or obligation.

Update or revise any financial projections or forward looking statements.

Because of new information future events or otherwise.

This conference call contains time sensitive information and is accurate only happened the live broadcast March seven 2023.

That I would like to turn the call over to Kevin.

Thanks, Kelly good morning, and thank you for joining our fourth quarter 2022 earnings call. Throughout 2022, we continued on our mission to support the critical to life applications of our customers.

I want to thank our team for their dedication and commitment to serving our customers throughout the year.

We ended the fourth quarter with $11 6 million in revenue, bringing our total revenue for 2022 to $46 9 million up 11% from the prior year for the full year. Our desktop revenue grew by more than two times, our overall growth rate at 25% in line with our expectations.

We also saw strong recurring revenue contributions more than 100% increase year over year.

While the underlying need for our products remained strong as forecasted adverse macroeconomic factors impaired our progress in Q4.

As previously communicated we aim to see protracted capital purchasing cycles in mid 2022, and we continue to see them here in Q1.

While we anticipate these industry headwinds to persist through the first half of 2023 I'm confident in our long term trajectory and feel we are doing the groundwork needed for both near term and long term success.

We are keeping a tight rein on our operating expenses, Joe will provide more details shortly on some recent actions we have taken in that regard.

We are developing and launching new products to meet the growing demand for robust analytics at the point of need.

We are pursuing diversified end markets forensics bio processing and research and.

And importantly, we are retaining a solid cash position with multiple years of runway.

We've made some encouraging progress throughout the year now I'd like to provide a brief update on our progress across the five focus areas, we set for 2022.

Starting with our first objective of driving customer adoption for desktops, we grew our combined rebel and ZIP chip base to more than 350 devices, adding 80 devices over the year nearly one quarter of these placements are within top 20 pharmaceutical companies with 10 accounts now each having a half.

It doesn't devices or more.

This larger combined footprint across top pharma is important as it strengthens our ability to serve these customers and allows us to broaden our conversations as we define develop and launch additional bio analytic products.

We have also been seeding future rebel opportunity through broadening our base of users with more rebel orders from new customers than existing when.

When looking at the full year roughly two thirds of devices were placed with new customers.

Desktop consumable purchases and service revenues were up year over year by more than 55%.

In Q4, we also received our second highest number of scheduled consumable orders, indicating our customers intend to incorporate <unk> into their 2023 priorities.

While we have seen the bio processing industry and specifically the preclinical process development customers become under pressure in the second half of 2022, we are still seeing enthusiasm for our products and a strong underlying fundamental need for more analytics to enable more advanced therapeutics or.

Our desktop devices today are being used in support of advanced therapies, and the forecasted pipeline of cell therapy as a key driver of our expanding total addressable market in the coming years.

According to the alliance for regenerative Medicine. There are now 2220 active clinical trials for advanced therapies up slightly for mid year 2022, and there has been an 11% year over year increase in the number of cell and gene therapy developers worldwide.

At the recent advanced therapies week conference in Miami. This January the main theme was the need to accelerate corporate investments in Digitization and analytics, our messaging for the need to transition analytics from disparate offline manual instruments to outline an online automated and connected solutions.

Right and clear.

For our handhelds, we grew our <unk> 908 base past 2000 devices, adding 370 devices over the year as mentioned in this year's United States President State of the Union address tragically. The opioid crisis continues with best of more than 70000 individuals annually.

This crisis continues to be a major driver of customer adoption in December the Washington Post ran a week long series on federal steadily search in the U S. The first article profile the season Homeland Security investigations agent, who uses our <unk> device at overdose seems to quickly determine when a lethal batch of fentanyl hits the streets.

The article highlights the crucial time loss for investigative leads when sample.

To a lab, which can take weeks to process. This is just untenable.

The applications for trace fentanyl detection are pervasive we received multiple orders for the Amex last year from the department of corrections in New England, the Midwest and the west.

Minnesota Corrections official noted that the Amex 90 weight has been an integral tool to combat the introduction of narcotics into Minnesota State prisons.

As a result of such impact we are continuing to build the pipeline of opportunity.

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Apologies, we're going to start from the top now that we have both the webcast and dial in all folks on the line.

Thank you. This morning Dino eight devices released financial results for the first quarter ended March 31, 2023, you have not received this news release or if you'd like to be added to the Companys distribution list. Please send an email to IR at nine or eight devices Dot com joining me today from 900, it is Kevin cannot Chief Executive Officer.

Before we begin I would 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.

Additional information regarding these risks and uncertainties appears in the section entitled forward looking statements in the press release nine way devices issued today.

A more complete list and description. Please see the risk factors section of the Companys annual report on Form 10-K for the year ended December 31 2022.

And in its other filings with the Securities and Exchange Commission.

Except as required by law nine alright devices 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 conference call contains time sensitive information is accurate only as of the live broadcast may nine 2023 with that I would like to turn the call over to Kevin.

Thanks, Joe Good morning.

And thank you everyone for joining our first quarter 2023 earnings call I'd like to start off by thanking our team for their hard work and dedication as we continue to demonstrate encouraging process across our business.

First quarter revenue increased 14% year over year to $9 5 million and replaced 78 devices, bringing our installed base to more than 2400 devices.

Thirdly, we saw continued strength in recurring revenue, which grew 67% over the prior year period. We are pleased to see this increasing need for accessories consumables and service as it demonstrates that our customers truly value analysis at the point of need.

Overall, I'm pleased with our execution given the continuing challenges within the bio processing space Importantly, our technology broadly extensible with applications across different end markets. Our handheld products are serving critical forensics market applications, including the devastating rise of counterfeit pharmaceuticals.

We view the diversity of our end markets as a key advantage.

I'm confident in our long term trajectory and feel we are doing the groundwork needed for both near term and long term success.

And equally positioned to both capture the bio processing opportunity in front of us while executing with our handheld devices.

In January we started the year off with the launch of our first online device Nathan that provides real time monitoring and control of glucose in lactate and cell culture implementation processes, Nathan as a complement to our rebel device and a precursor to rebel online. We are encouraged by the feedback we've been receiving from perspective.

Customers and the increasing opportunities we've seen in the funnel over the past few months, particularly in the cell therapy space and adds to our growing portfolio of desktop products for process analytics.

Now I'd like to provide you a brief update on the progress we have made across our three focus areas for 2023.

Starting with our first objective penetrate and radiate across key accounts, our focus is to penetrate new accounts to create a foothold and then radiate across these accounts to drive broader enterprise adoption for our handheld we continue to expand our international presence last year, we received our need.

Stock number which was a significant step in facilitating the procurement process for <unk> device. We now have a purchased vehicle in place, which is valid for up to five years and provides NATO member states in four additional countries with the ability to purchase up to approximately 80 units in a streamlined fashion with <unk>.

This in place we have already seen a handful of units purchased and look forward to growing international adoption. We're proud to receive this designation for the next 90 weight, which is becoming recognized as the standard bearer for handheld chemical detection and identification.

We also received additional Nx 908 orders, who use in Europe , and the middle East during the quarter. The U S State Department and existing customer purchased several units intended for use in Ukraine.

Customs and border agency in Saudi Arabia purchase multiple units, primarily for narcotics detection and identification.

We are pleased with the traction we're gaining internationally along with the broader adoption within our enterprise accounts.

Closer to home in January the Ohio Attorney General's Office announced the expansion of the Amex nine or eight program in southeast, Ohio. This is the final region and the statewide rollout which began in October of 2021.

The announcement Attorney General Dave Yost noted that <unk> has the potential to revolutionize how drug testing is done in Ohio, we valued our partnership with the Ohio Attorney General's office, and we are working to replicate the success across other states as the meat remained substantial we believe programs like this will be impactful in every.

Single state across the United States. In fact today is national Federal awareness day day dedicated to raising awareness about the dangers of federal most often found in counterfeit pharmaceuticals. According to the CDC best always involved in more depth of Americans under 50 than any other causes that including heart disease cancer and all.

All other accidents and just last month the by the administration declared tetlow mixed with diluting as an emerging threat in the us.

Fortunately as we work closely with first responders, who identified <unk> as a growing concern early on we added this analyzed to our Nx device software nearly three years ago and our customers have deals the capability now to deal with this issue. This is a great example is how additional value is unlocked for our customers with.

Continuous service and support offerings we.

We will continue to ensure our handheld device provides our customers with rapid actual answers enables them to keep our community safe as the peso crisis evolves.

Desktops, we've been working over the quarter to engage potential additional OEM partners of Bioreactors cell expansion systems and integrated cell therapy platforms. The aim being to add online analytics to their systems for real time monitoring control of key process parameters, such as glucose and lasted throughout the cell therapy process from prosper.

Development through clinical manufacturing the value proposition is clear online analytics enhance this process understanding as well as reduces the risk of contamination and saves operator time as technicians no longer need to enter the program to perform manual sampling.

Turning to our second objective advancing and broadening our product portfolio.

Our core mission has developed devices that are simple to use smart by providing customers with robot answers at the point of need and connected for improved process understanding first responders need to be equipped with devices that provide them with answers where and when they need it to that and we continually add.

<unk> to our <unk> <unk> software in the first quarter. We released version three four that added four additional analyte targets. We also released the core clear and charge station and maintenance accessory that improves the devices usability and maximizes uptime.

As previously mentioned, we have created an interface control protocol to make it easy for our handheld to be integrated into new ecosystems, such as robots drones and other related workflow equipment. We recently supported dual draws integration of Nx 90, <unk> aerosol and vapor detection capabilities with their downs.

<unk> technology to enable a male screening platform that protects operators and allows them to safely perform inspections on packages. This is a great example of how <unk> can help expand the reach of critical chemical detection and connect to a broader set of users.

For our desktops released a data analysis tool for our rebel device that is built on the jumped statistical software package raw data from the rebel can quickly and easily be visualized and just one click leveraging a statistical software at many of our customers are to use users can now more easily accessed through modest amounts of information.

The rebel provides for improved process understanding by easily visualizing amino acid depletion or accumulation trends over the course of time within a bioreactor and facilitating adjustments to the strategy.

To that end as previously noted we are collaborating with UK based center for process intubation or CPI to optimize cell culture media and beating strategies and small volume Thats bioreactors and process scale up using our rebel and now Nathan devices using rebel daily detailed amino acid data.

<unk> generated for both <unk> and $2 50 runs and the data was analyzed using rebels new data analysis software tool.

Adding in depleted essential amino acids, along with low levels of three media CVI scientist achieved a meaningful tighter increase while keeping toxic metabolites low and maintaining a high cell viability with maven scientists were able to implement the continuous control strategy for glucose which is highly desirable.

To achieve healthy growing conditions taken together rebel and Nathan enabled process development scientists to optimize tighter and sell goods, while preventing accumulation of toxic metabolites that can negatively impact protein <unk>.

<unk> Biopharma.

Manufacturing company resilience has adopted the rebel analyze it to inform an optimized cell culture feed strategies in perfusion Bioreactors and a monoclonal antibody expressing cell line resilience process engineers demonstrated a 50% increase in titer, while reducing cost of goods by adding back only in nutrients itself depleted.

Sales culture media and feed costs are significant in the perfusion process well outline media analysis resilience can now optimize and accelerate biotherapeutic development to reduce cost of goods and time to submission.

Our Zip chip CE aspect, which is a complement of our maven and rebel devices is an offline device used for monitoring key process parameters and for rapid characterization of multiple product critical quality attributes or Cta. This fast separation method was highlighted in a newspaper publishing analysts.

Our Royal Society of chemistry publication in this paper Amgen researchers used our chip device to separate and characterized by specific antigen binding biotherapeutic fragments within 12 minutes or less and with higher resolution and better sensitivity than traditional LC Ms methods.

Similarly in a webinar hosted by LTC scientists from Ireland's National Institute for Bio processing research and training for Niobrara presented on how our ZIP chip CE device accelerates peptide mapping workflows for analysis of Mab critical quality attributes scientists believe that flip chip provides robust.

The determination of important quality attributes in less than 20 minutes, which provides a faster alternative to more standard lpns approaches that can take hours.

These examples illustrate our devices are providing our customers with robust and real time analytics that enable them to improve product quality and process efficiency.

And finally, turning to our third objective laying the Gnomic Foundation.

We see a clear an emerging need for accelerating mass spec based workflows to address proteomics and metabolomics opportunities at the U S. Hoopoe conference in March Dr will Thompson and Scott.

98 devices presented a poster and lightning talk titled W are fun high throughput multi omics using microchip capillary electrophoresis, which utilized <unk> chip for the tablets and our prototype SPE enabled chips for proteomics on thermo scientific six floors mass spectrometers.

Dr. Thompson in collaboration with Duke University, researchers will expand on the investigation into multi omics and his oral at the American Society for mass spectrometry conference or <unk> in June .

Those who show our prototype Microfluidic chips enabled independent metabolomics, <unk> plus top down bottom up proteolix from a single sample containing 20 microliters of dry blood also in SMS. We are presenting a record 19 posters with collaborators from key research institutions Biopharma.

Physical companies in that stack vendors.

We look forward to discussing these highlights and takeaways on our next earnings call with that I'll turn it back over to Joe for more details on our financials.

Thanks, Kevin our revenue for the first quarter of 2023 was $9 5 million compared to $8 3 million in the prior year period, representing an increase of 14% over the prior year period.

Handheld revenue from our <unk> product for the first quarter 2023 was $6 2 million, an increase of $1 7 million compared to $4 5 million in the prior year period.

62, Amex 900 handheld devices during the first quarter the increase in handheld revenue was primarily driven by an increase in the recurring revenue for our <unk> devices will service and accessories.

Desktop revenue primarily from our rebel is it chip interface and making products for the first quarter 2023 was $3 1 million.

13% decrease from $3 6 million in the prior year period.

We shipped four rebel six chip interfaces and six mainline devices during the quarter we.

We will continue to breakout placements by device in the near term however, as our portfolio broadens, we will focus more on overall revenue and combined desktop placements as the key metrics for growth. The decline in desktop revenue was primarily due to a decrease of device placements year over year.

We were encouraged to see the uptick in recurring revenues demonstrating the value that our devices bring to our customers recurring revenues consisting of consumables accessories and service revenue for the first quarter 2023 increased 67% to $4 2 million compared to $2 5 million in the prior year period.

The increase in recurring revenue was primarily related to higher service revenue and higher handheld accessory and consumable revenue, including the Arrow module.

Notably recurring revenue as a percent of total product and service revenue has increased from 31% in Q1 2022 to <unk>, 45% in Q1 2023.

Gross profit was $4 4 million for the first quarter of 2023 compared to $4 1 million for the prior year period.

Gross margin was 46% for the first quarter 2023, as compared to 50% for the prior year period.

The decline in gross margin was largely due to lower device production builds and higher noncash charges for stock based compensation and intangible amortization during the first quarter of 2023.

Total operating expenses for the first quarter of 2023 were $17 4 million compared to $13 7 million in the prior year period.

This was driven by an increase in personnel related costs from the impact of head count added throughout 2022, as well as the zero point $8 million increase in stock based compensation and a zero point $3 million increase in acquisition related costs for intangible amortization and valuation of contingent milestones.

Net loss for the first quarter of 2023 was $12 5 million compared to $9 4 million in the prior year period.

We ended the first quarter of 2023 with approximately $161 million in cash and cash equivalents during the quarter, we paid down $15 million of debt and ended the first quarter with no debt outstanding.

Looking ahead for 2023 as of today, we are not seeing meaningful improvement in the capital purchasing cycles within bio processing, particularly affecting our rebel placements.

We expect these pressures to persist into at least the third quarter of the year.

Our team is working hard to educate existing and potential customers on the value of the technology and broaden adoption across sites. So it's funding becomes available we have a high priority for our customers.

Notably we are seeing strong adoption of our handheld devices that serve the forensics market in this challenging macro environment, we view it as a competitive advantage that our extensible technology serves a diversity of users and end markets.

So that being said, we anticipate second quarter revenue growth to be centered around our handheld device revenue and recurring revenues similar to what we experienced in the first quarter.

While ongoing pressure in the bioprocess environment is likely to continue longer than we had previously anticipated. We are seeing very strong adoption of our handheld devices, which we believe will offset this impact.

Taken together, we still expect full year revenues to be in the range of $48 million to $52 million representing growth of 2% to 11% over full year 2022.

At this point I would like to turn the call back to Kevin for some closing comments.

Thanks, Jeff in summary, we're pleased with the progress we made towards our goal in the first quarter. Looking ahead. We believe we are uniquely positioned to capture the opportunity in front of us for three reasons first we have a robust roadmap and strategy a process analytical technologies beyond any one product.

Creating a full portfolio of complementary devices from our current portfolio, including rebel Zip tip interface and made them plus our exciting and differentiated roadmap products to come including one that will be announced later this year.

Second we have a diverse operating with our handheld devices in the forensic space. We believe these handhelds will continue to be critical with the rising geopolitical uncertainties and the ongoing Sentinel crisis.

Third we have a strong cash balance with the runway through 2025.

We have remained efficient and thoughtful on spend and head count working to ensure expenses are not outpacing our revenue growth.

With that I'd like to first thank you for bearing with us for our technical challenges here in the operator call today, but we would like to open it up for questions.

Thank you, Sir ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the number one on your Touchtone phone.

I would like to advise our request. Please press star followed by the number killed.

Your first question comes from the line of Dan Arias from Stifel. Please go ahead.

Good morning, guys. Thanks for the questions, Kevin or Joe maybe just to start on the rebel.

Obviously, a lot going on in the bioprocess market right now so on system placements.

The idea that we really shouldnt expect acceleration install numbers until <unk>.

Given Joe's comment on not seeing any improvements and then our utilization amongst those that do have a rebel.

Can you kind of just talk about the larger versus the smaller company user trends and are you expecting any improvement there just in terms of utilization for the folks at.

Have gotten over the hump and do have a system and presumably are trying to use it.

Yeah sure. Thanks, Dan maybe I'll start off and pass to Joe for some additional details on it but yeah as we stated.

In Q4, we do expect rebel placements to be to be muted with some of the bio processing pressures that are being seen out there for capex in particular.

While our expectations are modest that we are experiencing what others are trailing the industry and it is clearly an industry phenomenon not specific to 908.

We're just seeing capex sale cycles extended and lifecycle of existing and people just even pausing purchase outright or needing more authority to sign off.

But we do look at.

The fact that we have a growing portfolio of desktops, we actually replaced 16 desktop devices as a whole.

For the quarter and we're really using this time to expand that product portfolio and continue the strategy to build out.

A process analytical technologies that are all interconnected.

We're really focused today on that utilization, if you will and really focus on showing the value of our of our products to our customers and thats demonstrating tighter improvements quality improvements we were fortunate to be able without some of these these recently and to US it's really a strategy of it's not round a single product called <unk>.

But really the portfolio of process analytics technologies regarding utilization specifically.

The utilization for our rebel pull through has largely been unchanged from Q4. So Q4 is really tracking at a similar amount around the half a kit per month that we're seeing on average a bit higher perhaps but about that versus our nominal goal of around one kit.

We have been asked by you and others in the past I can read I set out by as you're suggesting buy buy smaller companies or maybe by therapeutic modality. We're working on that we do really just have small numbers. It does make it challenging to slice and have meaningful statistical data there, but we can say we are becoming aware of more <unk>.

SaaS customers using our products and some of those customers are using it for more like process monitoring applications.

We have examples of where those those customers are consuming kind of three to four times. Our average. So so right now we're really been focused on driving that utilization.

And maybe to add a few different pieces said and as of today as I mentioned, we're not seeing meaningful improvement in the capital purchasing cycles within bio processing, particularly affecting those of other placements and we do.

See that expectation.

The rigid set in our Q4 earnings call.

We will likely see the pressures persist into at least Q3 as I mentioned or is it three in Q4 of last year for in Q1.

We see continued improvement there, but probably not to the levels that we saw in the first nine months of 2022 until possibly Q4 <unk>.

Our team is working hard really to educate existing and potential customers on the value of the technology being and right now were notably really seeing that strong demand for our handheld devices that helps to offset some of those current market concerns.

Yes, okay.

Okay, and then maybe just on the handheld side and the sales funnel that you have the year, Kevin you've talked about these enterprise opportunities that you've been working on I think you'd kind of call them, 25% to 100 systems or so.

How is that group of potential customers tracking just in terms of.

Confidence in orders that can sort of serve to backfill. The army contract that was rolled off and ultimately where do you think the desktop sorry, the handheld business and placement total.

Can can go to this year I know youre not going to be too specific but just some help on a year over year given the army contract would be helpful.

Yes, yes.

Absolutely I'll start off and pass it to Joe Joe again here, but we're excited for the pipeline.

Where we're at today and as we know we're progressing Tencent is testing and trials on the pilot programs and then turn to the enterprise accounts.

We're seeing that we've got plenty of funnel to work with and great conversations for this early in the year in particular with existing customers looking to rollout more.

Devices and.

We have factored in the status of these enterprise accounts into our guidance that we reiterated today and we highlighted things like Ohio, which has been growing quite quite well for us and seeing continued success, there and value being demonstrated with that program and we're looking to get pilot programs going in other state and local areas, including Tennessee, We've made some good progress.

And so I'd say, we've got great progress and pipeline progression across the board for handhelds, that's across all our areas federal military.

Call it the outside the army, but.

Then also large opportunities within state local and international to the U S. Army is definitely one of our examples Great example of a large enterprise adoption historically and there are other customers in the pipeline for 20 to 100, plus devices and Kevin was alluding to some of those opportunities working with each as they get Bud.

<unk> allocation and funding for purchase seeing very positive momentum on this front and we have over 2000 devices in the field, but plenty more sockets out there. So we don't really feel limited.

And we do see path to positive unit growth in 2023 for our handhelds. Despite the fulfillment of that U S. Army device order, which you recall is approximately 100 devices over the first nine months of 2022.

Yeah.

Okay. Thank you very much guys.

Thank you.

Your next question comes from the line of premium ceded that from SBB Securities. Please go ahead.

Yeah, Hi, Kevin.

Thanks for the questions.

The rebel and maven.

You are building here.

Process analytical technologies.

I mean, I appreciate the market environment that you're in.

These instruments are on the sort of the smaller side of our lower side of capital equipment.

So I'm wondering what you can do from your end to drive adoption of these in this what appears to be a more tougher environment.

Im wondering what youre seeing on cell therapy side customers are you seeing some.

Are you seeing more interest on the cell therapy side versus the Mab side, just maybe help us dissect that a little bit.

What you can do from your side in terms of data collaborations partnerships and whatnot.

To potentially.

To drive growth here for rebel and David.

Products and the process analytical technologies.

Yes, yes sure. Thanks, Puneet I think you are right I mean, we are focused on building out our platform.

I think Youre also right in that our capex prices are perhaps a little more reasonable than some other tools, but they're still not inexpensive in that our rebel.

List price is approximately 150000 U S dollars. So it still takes groups to the budget and it is still considered a capex purchase for our growing portfolio here they would all be in that definition.

And as we've talked about headline rate, we've just seen customers just be more cautious and be more.

Discerning and moving forward with our with the Capex commitment at this time and we've seen people that believe they were budgeted and have it be pushed right on them.

I believe that the process analytical technologies the need is growing in importance I don't think there is much debate about that I think it's really a matter of that timing with how people are looking at recovery in call. It a bit of a reset in the pharma biopharma area and in bio processing in particular autonomy can do during this time and we are taking.

The advantage of that time to be able to have more intimate engagement with these customers and showcase the values that the whole portfolio can provide maybe in terms of its control of glucose at low levels rebel enable to inform feeding strategies and flip chip looking at critical quality attributes in our new product.

And engaging with key opinion leaders now to get out later this year so.

There is a lot we can do there we were happy to see that resilience, what's publicly out there with some successes they've had mirroring what we've been seeing with CPI and working closely with them. So I think there's a lot we can do there maybe one bit.

A data or factoid that also might be helpful. If you triangulate the sales process often involves people sending in demos and when people ask for a demo generally you need a material transfer agreement. So our quarter to date, we've done more material transfer agreements than we have in all of Q1. So we are seeing from <unk>.

<unk> and activity I think it's really around how fast those close and how fast is that does that segment. If you will recover.

Okay got it.

Helpful.

On on.

On the guide itself.

And maybe for Joe.

Obviously, you're moderating.

Desktop instruments and install base potentially for that but.

What gets you potentially on the sort of the higher end of the guide if things were to recover sort of in the second half and what have you.

Contemplating and what gets you to the lower end of the guide.

If things were to get worse. So maybe just talk about those dynamics, where you feel that where you think you will have the strength is it more on the Amex 908 side and maybe.

Just where things can potentially be weaker.

The environment for us to continue thank you.

Sure.

It doesn't spending most of our time looking to the midpoint and the high end of that range and making sure. We have a path to get there led by strength to the amex nine weight in our handhelds or there are a few levers they will take us to that high end.

First would be stronger adoption of new products and anticipated we get excited when thinking about where ultimately our new products can go we need to crawl walk and then run with those products.

To balance that enthusiasm with the fact that we are in the early stages with both may have been in the to be launched products in the second half.

So conversation of handheld enterprise accounts that you touched on you have a number of big swing items in our pipeline but.

But they do take time to develop as you know.

Get through their procurement processes.

Sometimes it takes years, but we'll continue to build that pipeline for the opportunity and we've had some great conversations with our handheld customers.

Seeing some encouraging early signals for the year to be able to see that path to the top line our top of the range.

Got it Okay, alright, guys. Thank you.

Thank you.

You.

Your next question comes from the line of Steven Mah from TD Kelly. Please go ahead.

Great. Thanks for taking the questions.

You spent some time talking about the macro challenges in extended capital purchasing cycles.

Are there any plans to do a reagent rental or lease structure on the rebel.

I will have to pay upfront or capitalized equipment.

That's a great question and something that we have talked about through the years and are looking at that as a potential option and talking to a few customers that we have confirmed that they don't have the capital spending here in 2023. So we are looking at as a tool in the tool bag.

To be able to present to specific customers.

But ultimately want to ensure we see the value of the technology.

And getting the device place splitting those unique situations, we will entertain with customers the ability.

For them to pay a certain amount make an investment upfront and then have access to the technology and see the value within their workflows. So yes, we are working through that.

I'd add to that that we're trying to be responsive to our customers' needs right now and we know they are constrained and as we talked at length, we really want to show them the value of our product is in visit Capex, but if we can create an on ramp to the adoption of that that unit by mechanisms like Joe described that'd be great. It's not a wholesale.

<unk> of our business model, where we're not doing anything like that at this time. It is still a capex sale and we think thats the right way to go.

Joe said, we're listening to our customers and just trying to be responsive in the short term.

Okay, and so if you did decide to go in that direction I guess could that be what like back half of this year or this is just something that really on the radar.

Yes, I think to be determined.

As Kevin said, mostly just being responsive to our customers.

Okay got it and then one more you talked about penetration.

Into new customers is a key strategy of the 78 devices placed in the quarter could you give us a sense of the percentage of sales to new customers versus existing customers.

Sure Yes.

You are right, we do like to have both.

New sales.

Intensive.

We have as we said on the Q4 call. We've got 10 accounts now with six or more units, we've been adding to that.

We have a couple of accounts now with maven.

Added into mix that now have actually all our product Zip chip rebel Nathan all our desktop products. There. So so we're seeing a good mix I would say.

Think of that just in in our Q1 in particular here. We saw about a 70 525 split with our 16 desktop placements to larger versus smaller biopharma companies.

Some of those new some of those <unk>.

<unk>.

Okay, great. Thanks for that color and if I can sneak one more in.

So could you give us some color on the European sales traction I know you previously said on.

On our prior earnings call Youre, putting additional sales.

And then support efforts in Germany via the <unk> acquisition, just any color if possible on how thats going in Europe . Thank you.

Yeah, absolutely we've been investing across the board in our international assets and as we reported to you last year and I think we're pretty pleased with the progress that is now showing up and we're seeing measurably in the case of our handhelds in particular there.

We've seen great progress of that pipeline across the board in Q1 for the handhelds and the federal state and local but certainly on the international side of things, which gives us confidence in our ability to execute here in 2023.

We have a higher sales leaders in the middle East we moved a channel manager from the bus.

And we've made other personnel investments there and all have really been centered around driving growth internationally and we're seeing some return on those investments now and we highlighted that NATO.

The contract vehicle is one example, there.

For handheld the biggest budgets are in the U S and that Hasnt changed but there are sizable opportunities internationally and they share similar concerns with the U S counterparts here after the use of the technology and we do see it as a growth opportunity, especially here in 2020.

Okay, great. Thank you.

Thank you.

Next question comes from the line of Jacob Johnson from Stephens. Please go ahead.

Hey, good morning.

Maybe just one more on the macro I just said I think everybody is seeing elongated sales processes right now given the macro environment, but I'm just curious if we go kind of a level higher in terms of like the funnel of.

Of interest the inbounds, you're getting in general kind of how is that trending.

I think you've talked about it a little bit and puneet to answer, but I figured I'd give you opportunities I've set out some more.

Yes, absolutely I mean, I think as we discussed in the Q4 call. We anticipated that it was going to be muted over the first half and now we're seeing signs that that likely is extending into into Q3 of this year.

Trey that we've got a broad portfolio of discussions now going on with customers that are at a 0.8 point type of variation of Capex prices.

And utility from bread and butter analytes that her maiden provides with glucose lactate to more forward leaning optimization tools like our rebel device. So we are we are excited to have that I would say that we've been working to make sure we're engaging prospects customers a comprehensive existing fielded.

<unk> et cetera, So we really didn't get any out there, including the more senior levels and having the leadership team out there and engaging.

I think the key folks in these organizations and our customer base and making sure. We can we can support them there.

I wouldn't say that we're seeing.

Concentrated step up in activity here.

In our Q1 activities or Q2 to date and I think thats that.

Why it is anticipated that we still see things needed here for a bit in the case of our desktops, but youre right. We did put a little tidbit out there very forward portion of that demo cycle are those material transfer agreements, which we saw more executed here quarter to date that we did in all of Q1, So we take that as a good sign.

We think that will take some time to close but we also in terms of the utilization we're trying to get these customers and we are seeing them being active we also reported in Q4 that it was the second highest quarter.

On record of consumable orders blanket orders that are that are anomaly at one kit per month. So we're working with customers to drive that utilization and drive that value and benefit.

Out of it but we're also very pleased Jacob that we've got our handhelds and we've got that diversified position with our our handhelds and the forensics market. During these times.

Got it thanks for that Kevin.

Then maybe just for Joe on the outlook for FY2023 it seems like the mix of revenues and they are going to be more handheld.

This year than previously thought.

I know you don't guide to margins, but I think we were we're targeting kind of mid fifties gross margin this year any change in that expectation.

But there is not any changes in that expectation and as we kind of looked at the Q1 margins.

I'd say the main factors with gross margin variations will continue to be mix and scale and in Q1 was primarily driven by lower device production builds where we didn't initiate as many builds in Q1 'twenty three.

On the desktop side compared to the prior year period, and also that higher noncash charges that I mentioned both.

<unk> based comp of intangibles of about 200 basis points each impact.

We do see that opportunity to improve gross margin with our new products in our consumables and we're not at scale today in our.

Margins overall as you mentioned being in the mid fifties and we expect this to continue on a go forward basis for the full year 2023.

Got it thanks for taking the question test.

Thank you.

Your next question comes from the line of Matt <unk> from William Blair. Please go ahead.

Hey, good morning.

One of the thought maybe Kevin just on the new product side obviously.

Market weakness.

Squarely on the bio processing side, but just wanted to check in on your plans for additional product launches in the back half of the year and if any.

Customer pressures are meeting customer feedback as they're examining how bucket endpoints or the way youre thinking about new product development.

Yep Yep, Thanks, Matt Yes.

We certainly view innovation in new products is a key component to 908 in our heritage here in our growth strategy.

So we were really pleased with the acquisition, we did a trace analytics and.

In August of last year, and how things are going there and how that's integrating and combining into our roadmap and our product development effort great group of talented individuals that got added there and really some awesome technology. So we got one new product out here in January that integrates the trace technology with our with the Navy product which is.

A prelude to our to our rebel online, which we've discussed the aseptic sampling approaches is key I wouldn't think I wouldn't say anything has changed in the priority of building out that portfolio of process analytical technologies and tools and the appetite of customers. When we engaged select customers on what those new products are going to.

Including discussing what the rebel online will be in working to engage them as we work through our stage gate process for rebel online. So I don't think Theres a change in sentiment with the needs that these customers have I think there's just a bit of a near term delay in their adoption, but we're trying to take advantage of that that time to have this great engaged.

Vinson and build out the complete portfolio and engaging more of a partner discussion. We're finding now because we can talk about that whole portfolio.

Good to hear and then final one maybe just around.

The sales funnel.

And a couple of times that you referenced amped that maybe being a new opportunity and obviously.

I presume the conversations of product development continued happened maybe.

You referenced the material transfer today is there anything in terms of the mix of the funnel.

Hi.

<unk> processing.

Location customer type that you could share with us.

Yes, I would say that as we look at the funnel for our for our desktop. So we're trying to develop things in the U S and internationally for that we're seeing both examples there again I would say one great thing is that we are able to take may even out to rebel customers and we're picking up new customers.

With Nathan that don't have any of our desktop products. While we certainly now have a couple of examples and proof points of customers, having all of our desktop products. We now have customers that only have are made and that gives us an opportunity.

It's also interesting to us that some of those areas quite of interest would be in that cell and gene therapy application area. Some of these integrated technologies that are interested in adding analytics and we think that opens up possibilities for US here. We had 16 desktop devices as I previously mentioned in Q1 that replaced them and they were roughly.

Split between 70 525 between larger and smaller Biopharma companies and we have about a third of our desktop devices overall in top 20, biopharma. So it's a meaningful percentage, but we do have a number of units in early stage biotech. So if we look at what has closed and what's in our pipeline, it's a mix between <unk>.

Shifting customers from small biotechs, and some large biotech coming back for our large biopharma coming back. So I don't think I think a one specific trend in there, but hopefully a bit of color that's useful.

Okay.

Alright, thank you.

Thank you there are no further questions at this time I would now like to turn the call back over to Mr. Kevin King for any closing remarks.

Yes. Thank you first I would like to thank you for bearing with us on a plethora.

Operator.

All logistics errors, but we're very excited for how the quarter went in and we're pleased to be able to reiterate the guide today and March forward and make progress. So thank you for your time.

Thank you Sir thank you so much presenters ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a lovely day.

908 Devices Inc. Q1 2023 Earnings Call

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