Q2 2023 Rapid Micro Biosystems Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to rapid micro Biosystems Sketchy 2020 earnings call.
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After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
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I would now like to turn the conference over to Mike.
Please go ahead.
Yeah.
Good morning, and thank you for joining the rapid micro Biosystems second quarter 2023 earnings call.
Joining me on the call are Rob <unk>, President and Chief Executive Officer, and Shaun <unk> Chief Financial Officer.
Earlier today, we issued a press release announcing our second quarter 2023 financial results.
A copy of the release is available on the company's website at rapid micro bio dot com under investors in the news and events section.
Before we begin I'd like to remind you that many statements made during this call maybe considered forward looking statements within the meaning of federal Securities laws, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095 any statements contained in this call that relate to expectations or predictions of future events.
<unk> results or performance are forward looking statements, including but not limited to statements relating to rapid micro's financial condition anticipated year end cash balance cash runway future revenue in system placements expectations for business development and growth customer.
Interest and adoption of the growth direct system expectations for our new RMB nucleus mold alarm and the potential impact of macroeconomic uncertainty and the public health crises on rapid micros business.
Actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors for a list and description of the risks and uncertainties associated with rapid micros business.
Please refer to the risk factors section of our annual report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2023 as amended as such risks are updated in our subsequent filings with the SEC.
We urge you to consider these factors and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance. This conference call contains time sensitive information and is accurate only as of the live broadcast today August four 2023.
Rapid micro disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward looking statements, whether because of new information future events or otherwise.
And with that I'll turn the call over to Rob.
Thank you Mike.
Morning, everyone and thank you for joining us to review our second quarter 2023 results.
I will begin this mornings call with a summary of our second quarter performance, followed by an update on the progress of our execution related to our growth strategy.
I will then turn the call over to Sean for a more detailed review of our financial results and outlook.
Total revenue was $5 million.
Getting a 30% increase compared to Q2 last year and above the guidance. We provided in May we placed two systems in the second quarter and completed three validation.
Based on our strong performance in the first half of the year. We are reaffirming our full year 2023 total revenue guidance of at least $22 million representing growth of at least 30%.
Despite macroeconomic uncertainty leading to cautious customer spending our teams are navigating these conditions and staying focused on strong execution to deliver our full year guidance.
We were pleased once again with our execution across both products and services during the second quarter I'd like to especially highlight the strong recurring revenue in the quarter, which increased over 40% compared to the second quarter last year, we had a record quarter in consumables revenue, which was driven by both.
Higher pull through per validated system and more validated growth directs in the field.
Service revenue was also strong during the quarter driven by annual contract renewals.
While Sean will provide additional P&L details I wanted to emphasize the importance of recurring revenue, which drives predictability and demonstrates the durability of our business model.
And there is also a strong indicator of the value we are providing to our customers as evidenced by the increasing use of our growth direct systems and their worldwide manufacturing operations.
With a benefit of two separate revenue streams, we believe solid double digit recurring revenue growth is sustainable.
And while our recurring revenue is subject to some quarterly variability due to order timing or other customer specific decisions. Most of our revenue comes from large established global customers, who are using the growth direct on commercially approved products.
We continue to execute against our strategy to advance system opportunities through our sales funnel and accelerate growth direct placements.
As an example late in the second quarter, we closed a multi system order with one of the world's largest <unk> based in Asia.
As we discussed on our call last quarter, we are excited about the opportunity and demand for our technology in this important region.
This was a significant and well earn win for our commercial team and highlights that our technology continues to resonate with both large global biopharma as well as CMO customers.
With respect to high impact customer activities, we partner with the New England, PDA, which is a local chapter of the parental drug Association for an educational event in June .
This event brought together existing and prospective customers as.
As well as industry peers and highlighted quality control challenges in today's pharmaceutical manufacturing environment.
These events are important opportunities for our rapid micro team members to facilitate collaborative discussions among local biopharma industry leaders and other professionals in the pharmaceutical quality control ecosystem.
The event was hosted in our Lowell, Massachusetts manufacturing facility and attendees were given a tour an up close look at the growth direct system.
As well as our state of the art automated media production lines.
The meeting also featured expert presentations and discussions on how that growth direct and enhanced data integrity and.
Improved quality and minimize operating risks.
As we move through the second half of 2023, we have a number of customer events planned two of which I will highlight.
First in early October we will present, an exhibit at the PDA pharmaceutical Microbiology conference in Washington, D. C, where we will host three poster presentations and had a growth directly available for customer demonstrations.
As a reminder, this is the largest annual microbiology conference that we attend and includes global industry professionals representatives from academia and regulatory authorities.
And then in November we had planned a combined growth direct day and customer Advisory Board event in Europe .
Building on past successes. This event will feature a multi day sessions focused on customer testimonials user group discussions approaches global adoption of the drug direct and other high value topics.
These and similar events help us build and advance opportunities within our funnel and importantly allow us to engage with industry thought leaders regulators customers and prospects to discuss the growth direct value proposition a faster time to result data integrity cost savings patient safety and automation.
Now I'll provide a brief update on our product development efforts.
We are pleased to report that the commercial launch of our mobile arm software product is progressing on plan attachment rates to new system sales and upgrades to existing growth directs are encouraging our teams are effectively leveraging onsite and virtual education and training programs to increase awareness customer engagement has been positive in <unk>.
We are confident we are on the right track.
While it is still early in the commercial ramp we are pleased with our progress and expect to continue to build momentum over the balance of the year and into 2024.
With respect to rapid sterility, we are on track with our development and are increasing our focus on commercialization.
We look forward to sharing additional details on this important product later this year.
Turning to a brief update on our manufacturing capabilities I am pleased to announce this morning that our backup consumable manufacturing line and are likely to Massachusetts facility has been completed.
This is an important milestone and demonstrates our global customers that we are committed to providing them with world class service and continuity of consumable supply.
In summary through the first half of 2023, we achieved over $10 million in revenue.
Presenting a growth of 25% compared to the first half of 2022.
This compares to our guidance for full year 2023, total revenue of at least $22 million.
We continue to attract many of the best companies in the world to our growth direct platform and our existing customers continued to benefit from the significant value of our platform as they use more of our systems consumables and services and their mission critical manufacturing operations.
In the second quarter, we achieved an all time high and consumable revenue.
This coupled with our service contract revenue demonstrates strong customer satisfaction and use and validates our recurring revenue model.
And finally, our commercial execution continues to improve as we remain laser focused on our growth strategy and specifically advancing growth opportunities through our sales funnel and accelerating system placements.
And with that I'll now turn the call over to Shaun to discuss our second quarter performance John .
Thanks, Rob and good morning, everyone.
Second quarter, 2023 revenue increased 30% to five point or $1 million compared to $3 9 million in Q2 2022.
We placed two growth direct systems in the second quarter. The same number we placed in Q2 last year.
Product revenue, which is comprised of systems and consumables also increased 30% to $3 2 million in Q2 compared to $2 $4 million last year. This performance was driven by consumables, which increased by almost 50% compared to Q2 last year and accounted for the majority of the year over year growth as Rob.
Just we had a record quarter on consumables, which was led by both new systems coming online and strong pull through per average validated system, which was over $90000 on an annualized basis. This.
This compares to the $80000 per average validated system. We generated in 2022, we are making good progress in this area and are on track to achieve our goal of high single digit percentage growth in this metric for the full year.
Service revenue increased 29% to $1 8 million in the quarter compared to $1 $4 million last year with solid growth in both validation and service contract revenue.
We completed the validation of <unk> systems in the second quarter. The same number as last year as of June 30, We had a total of 108 validated systems, which contributed to a 36% increase in service contract revenue compared to the second quarter last year.
Second quarter recurring revenue increased 44% to $3 $6 million.
Compared to $2 $5 million last year, driven by the strong growth in both consumables and service contract revenue.
Nonrecurring revenue was $1 4 million in Q2, which was flat with the prior year quarter.
Turning to gross margins product margins were negative $1 5 million in Q2 compared to negative <unk> $8 million in the second quarter last year.
The decline was mainly due to lower production volumes and manufacturing efficiency and consumables due to downtime on our automated manufacturing lines to implant enhancements that will benefit future margins.
While some of these activities have continued into Q3, we expect them to be substantially completed by the end of the quarter benefiting gross margins in Q4 and beyond.
Service margins were negative <unk> 4 million in Q2, a slight improvement compared to last year.
The benefit from higher service contract revenue was partially offset by the cost of investments to expand our capabilities and serve our growing global customer base.
On a combined basis, our second quarter gross margin percentage was negative 38% down slightly compared to last year.
Moving down the P&L total operating expenses were $13 2 million in the second quarter, consisting of $3 2 million in sales and marketing $3 $2 million in R&D and $6 $7 million in G&A.
Excluding zero point $6 million in retention costs related to the plan, we announced last August total Opex was $12 6 million in Q2.
This compares to total operating expenses of $12 9 million in the second quarter of 2022.
Net loss was $14.0 million in Q2. This compares to a net loss of $13 $1 million last year.
Net loss per share was <unk> 33 in Q2 compared to net loss per share of <unk> 31 in the prior year quarter.
With respect to noncash expenses and capital expenditures depreciation and amortization was <unk> 8 million stock compensation expense was $1 2 million and capital expenditures were <unk> 2 million in the second quarter.
I'll now turn to our 2023 outlook for the full year in the third quarter.
We are reaffirming our previous full year 2023 revenue guidance of at least $22 million, which represents growth of at least 30% and assumes we will place at least 15 systems.
While our teams have effectively navigated macroeconomic uncertainty and the first half of the year and our customers are generally large and established companies we.
We are still operating in a dynamic environment.
Customers are continuing to scrutinize, the timing and scale of purchase decisions, which may result in higher variability in our quarterly revenue.
Our guidance continues to reflect this uncertainty and we are continuously assessing the environment and monitoring customer interactions for changes in purchasing decisions.
For the third quarter, we expect commercial revenue of at least $5 $5 million, which assumes at least for system placements.
This guidance includes two systems that were part of the multi system order from a new customer in Q2 that Rob mentioned earlier, which were already placed in July .
We continue to expect to complete at least 14 validation in 2023, including at least four in the third quarter.
With respect to validation revenue, we expect both Q3 and Q4 to be higher than Q2 with strong growth versus the comparable 2022 periods.
As a reminder, validation can experience some quarter to quarter variability based on the timing of customer validation activities for previously placed systems as well as the lag between system placements and related validation work for new system placements.
Shifting to gross margins, we expect sequential improvement in both Q3 and again in Q4, as we benefit from higher production volumes and cost reduction activities and consumables increased productivity and service and leverage from higher sales, particularly in systems and service.
Gross margin improvement continues to be a top strategic objective for us we are focused on driving cost reduction and increasing manufacturing efficiency and products and increasing productivity and efficiency in services.
We continue to expect these actions as well as the benefit of higher sales volumes to lead us to positive gross margins in 2024 with expansion to 50% to 60% as the business continues to scale over time.
With respect to operating expenses, we continue to expect between $12 5 million and $13 $5 million per quarter over the balance of 2023.
With variability, mainly driven by nonrecurring retention costs that will impact Q3, as well as the timing of new product development activities.
Finally, we had approximately $113 million in cash cash equivalents and investments as of June 30 cash.
Cash burn was approximately $9 million in the second quarter.
Looking forward to the second half of the year, we expect cash burn in Q3 to be consistent with Q2.
And then to decline in Q4, as we realized cash benefits from working capital management.
As a result, we continue to expect to end 2023, with cash and investments at or slightly below $100 million. We remain confident that this provides us with cash runway at least into 2026.
That concludes my comments on our full year and Q3 outlook. So at this point, we will open the call up for questions operator.
Floor is now open for your questions to ask a question at this time. Please press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of potential Shaban with Morgan Stanley . Your line is open.
On the call. Thank you for taking our questions.
With the challenging macro for sustained here could you share what you're seeing from customer related to budget scrutiny.
And how is the customers' time to make purchase decisions.
Good morning.
Yes. This is Rob so what we are.
Seeing is consistent with what we reported in Q1, there is none of it hasnt been a material difference.
We're still seeing increased budget scrutiny basically it just to a tighter filter.
The mattikalli that being said some customers are certainly moving faster than others. So it hasnt been dramatically change in some cases, we have seen.
Budgets pushed to the right throughout throughout Q2.
But our countermeasures against that.
We believe our effective and are working and that's why we're reaffirming guidance.
I think increasingly we're also encouraged with the interactions we're having with customers at the senior level.
Ensuring that our.
<unk> direct projects Rollouts are being prioritized. This further gives us.
<unk> in our outlook. So again in summary, no major change throughout the.
The year year to date here, just a continuation of the theme of general budget tightening and increased scrutiny.
Got it that's helpful color.
And then.
With backup consumable manufacturing facility in Lexington, now up and running.
Financial impacts are incremental costs, and we should be contemplating as that facility begins to ramp.
Now how you go John .
It's a backup facility it will not be active but it is ready to go. So if we need it we will use it it will not be we will not be operating two separate consumer manufacturing facilities at the same time.
Got it thank you very much.
Our next question comes from the line of Dan Arias with Stifel.
Line is now open.
Hey, Good morning, guys, Rob maybe just a version of the first question. There I mean, obviously the forecast for the year is intact.
And I know youre not guiding are talking about 2024, right now, but just given the timeline that you guys work with do you feel good about the tenor of the conversation today.
In a way that would set you up for say the beginning of 2020 core to be intact, because it feels like a lot of the business that youre.
So you are booking today and you're realizing today with stuff that's been in the funnel and it doesn't.
Nicely not falling out. So question is like are you set up okay for the next six to 12 months.
Based on the environment that we're in right now yes.
Yes, Dan we like the outlook, maybe a little more color from the first from the first.
The first question clearly over the past year are.
Focus on commercial execution is ensuring we have the full team intact up and trained which we essentially do at this point incredibly encouraged.
With the caliber of talent that we have and our commercial team.
Touched on and you goes.
Question, we're also.
Probably the best it's ever been and rapid Micros history access to senior decision makers.
Inside customers and increasingly we're getting exposed to.
Better visibility and insight into global rollout plans, which we believe.
We will help us stay stay prioritize certainly no guarantees in that but it's certainly a great leading indicator our funnel is healthy again with the three regions up.
A number of the.
The right number of.
Reps in the field generating leads and enhanced marketing we feel good about our funnel the composition of cost of geographies LNG biologics etcetera I would also say it's important to note.
Our consumables business and I think you heard quite a bit about that in.
In the continent, but that as I look at that as a very very important leading indicator as existing customers continue to increase usage of our system to validate through consumables and services consumption that is typically a good leading indicator to great.
A great customer experience and it could be a good leading indicator and many times can be for future purchase decisions across global.
Global networks, which also helps us to stay a prioritized and helping us withstand some of these some of the budget scrutiny. So those are the those are the.
Both nomadic.
I would say longer range and clearly in the short term here Sean touched on we have already had two placements in Q3, which is helpful. Because Q3 can be a tricky quarter with with holidays, and vacations and customer access so well with all the above it's a long way of saying.
We are optimistic about about the future and the outlook.
Okay, well thats good.
You did sound pretty pleased with the recurring revenue.
The quarter, So I guess, Sean how do we think about that tracking into next year, you mentioned that double digits are sustainable.
In March that that item up to that lineup.
Upward as the installed base continues to grow here, yes, Dan I think that's clearly the expectation we.
We will say recurring was 70% of revenue in Q2, that's probably not where we're going to be going forward as we get system placements ramping.
But we clearly expect that we're going to see good growth in recurring both pieces of it as we get more systems validated in customer sign up for contracts as well as just.
Building growth in consumables through not just new systems coming online, but with existing systems, increasing utilization and us, bringing customers more and more customers and who are using systems at higher volumes like cell and gene therapy. So we expect those are trends that we see now and are going to continue as we go forward that are going to help us to <unk>.
<unk> had good growth in recurring.
Okay are you.
Within the model is the idea that the cell and gene guys or the more intense users.
It's still holding up now would that be demonstratable, if we'd looked under the hood of the consumables number today, because obviously within that set of customers is a lot going on there. So just curious whether.
The way that we've thought about things traditionally is holding true today.
I think at the dance, Rob I think at the at the site level Thats generally true this LNG customers tend to be high consumers of our.
In environmental monitoring application, it's typically quite high volume, but the biologics segment is larger and has.
As a sizable pool.
Pull through and use as well and the biologics segments. In other segments also are our heavier users of our water and <unk> products. So it's sort of it's sort of a mixed.
<unk>.
Reviewed depending on the segment.
I would say that.
Within biologics, we have plenty of runway just in that space to get this metric to increase meaningfully over time and get us into kind of the expected range that we expect the business to get to over time that we've talked about in the past and I think high volume cell and gene can just accelerate that potentially so that customer mix is going to be.
It really will just kind of go with how fast we grow but clearly the expectation is that we are going to grow this metric meaningfully over timeframe.
Okay. Okay last one for me and then I'll hop off Sean on the downtime for the production line through the comments that you made there suggests that by by <unk>, you really aren't dealing with a gross margin headwind as it relates to the starts and stops there.
Yes, I mean, we always have downtime Dan.
This was a case, where we have some things that we're doing right now it started in Q2 some of them are still going on now where it's.
Making a short term investment and that downtime as part of that investment to drive positivity going forward. So we're doing some things that get one example, I'd give you is we have historically manufactured our water and bio burden consumables manually and we are working right now to get that moved over onto the automated process, which will have a lot of benefits, including lower cost.
Cost of product. So this I'd call. This kind of more of a more of a onetime thing we will likely have things like this in the future I wouldn't expect it to be every quarter by any means.
So I think as we March forward through the year I think the guidance is we expect margins to get better sequentially each quarter in Q3 and Q4.
We are not guiding to positive gross margins in Q4, I think the possibility still exists or if we can drive some system upsides and we get things done that we need to get done from a cost reduction standpoint over the second half. So I think this is this is something that was a conscious decision. We think it's the right thing to do and we expect it to benefit us as we get late in the year end.
<unk> into 'twenty four.
Yes, Okay very good guys. Thank you.
Thanks, Dan well, Thanks, Dan and you go we're going to wrap up the call now. Thank you for everyone for joining us today.
Okay.
Sure.
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