Q2 2023 Alpha Teknova Inc Earnings Call
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Good day and welcome to Tech know the second quarter 2023 financial results Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then hear an automated messages.
So what's driving your question press Star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker, Mr. Mitcham Investor Relations. The floor is yours, great. Thank you operator, welcome to technologies second quarter of 2023.
The earnings Conference call with me today on the call are Steven Gulfstream Technologies, President and Chief Executive Officer, and Matt Law Technologies, Chief Financial Officer, who will make prepared remarks, and then take your questions.
As a reminder, the forward looking statements that we make during this call, including those regarding our business goals and expectations for the financial performance of the company are subject to risks and uncertainties that may cause actual events or results to differ.
Additional information concerning these risk factors is included in the press release the company issued earlier today and they are more fully described in the company's various filings with the SEC.
Today's comments reflect the Companys current views, which could change as a result of new information future events or other factors and the company does not obligate or commit itself to update any forward looking statements, except as required by law.
The company's management believes that in addition to GAAP results non-GAAP financial measures can provide meaningful insight when evaluating the company's financial performance and the effectiveness of its business strategies.
We will therefore use non-GAAP financial measures of certain of our results. During this call reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this afternoon, which is also posted two technologies website and are available on the SEC website non-GAAP financial measures should always be considered only.
As a supplement to and not as a substitute for or as superior to financial measures prepared in accordance with GAAP. The non-GAAP financial measures. In this presentation may similarly differ from similarly named non-GAAP financial measures used by other companies.
Please also be advised that the company has posted a supplemental slide deck to accompany today's prepared remarks.
It can also be accessed on the Investor Relations section of Tech numbers website and on today's webcast and now I will turn the call over to Steven.
Thank you Sir.
Good afternoon, and thank you everyone for joining us for a second quarter of 2023 earnings call.
Technology is a leading producer of critical reagents for the life sciences industry to accelerate the introduction of novel therapies vaccines and molecular diagnostics that will help people live longer healthier lives.
We manufacture high quality custom reagents with short turnaround times, and our position to scale with our customers as they advance their products from discovery to commercialization.
We had an excellent second quarter, both financially and operationally against a difficult market backdrop.
Our ability to deliver in these challenging conditions is a testament to the dedication of our very talented team and the diversity of our market segments. We increased revenue sequentially by 26% and continued to execute on our key initiatives to position the company for sustainable long term growth.
Our sales in the second quarter were $11 5 million the second highest quarterly revenue in our company's history. We.
We had a notable uptick in clinical solutions benefiting from the migration of a large customer from lab essentials as it prepares to enter clinical trials.
In addition, we are actively and effectively manage our operating expenses, reducing our free cash outflow in the second quarter to $6 2 million, giving us confidence that we will achieve our free cash outflow target of $30 million for the year, Despite a lower near term revenue outlook.
Okay.
We remain optimistic about the long term potential of our target markets and are excited about the progress we've made in the second quarter to execute our long term growth strategy.
First our new state of the art modular manufacturing facility is now certified for GMP grade production.
We are enthusiastic about the potential of this multi year investment will unlock for the business.
We have already hosted a number of high profile customers and have been very encouraged by the reaction to the facility and the company's transformation.
Our customer audit is our customer audit schedule is nearly full for the remainder of 2023, increasing our confidence that this investment will begin to bear fruit in mid to late 2024.
As a reminder, we believe this new facility plus our existing operating infrastructure will give us the capacity to deliver approximately 200 million in annual product revenue when fully utilized.
Next on the R&D front I am pleased to say, our new product pipeline is progressing ahead of schedule.
In July we built upon the recent launch of our AAV two buffer screening kit by extending our portfolio to include the AAV eight serotypes.
We expect to launch AAV six in AAV nine by the ended the year.
Early feedback on the product line has been very positive with some customers already in discussions about scaling up with our proprietary buffer formulations.
We believe this buffer kit can save our gene therapy customers months as they develop their product.
As they develop their production workflows.
In addition, we launched more than 20 reagents to streamline and simplify the entire AAV bio production process.
We expect to become an even more valued supplier to these customers as they advance their therapies towards commercialization.
Lastly, I want to take a moment to discuss our view of the current market environment.
In the near term, we continue to see emerging biotech historically, one of our larger growth segments focused on conserving capital by delaying reducing or canceled in clinical trials.
We still believe this to be temporary particularly against the backdrop of the total number of trials underway and encouraging recent clinical outcomes.
We are particularly encouraged by the advancements in gene therapy, we saw a notable approval for an AAV gene therapy for Duchenne muscular dystrophy, we.
We believe this approval demonstrates the potential value of AAV gene therapies, an area in which we have recently developed and will continue to develop a number of proprietary product offerings.
The combination of our new products with our operational capabilities positions us well to participate in this segment as the market evolves.
Yeah.
As we turn to our revenue outlook for the remainder of 2023, we now expect a mid single digit percentage year on year decline in topline revenue with a return to year on year growth in the fourth quarter of 2023.
Even with this change in guidance, we continue to track towards our previously communicated free cash outflow target of approximately $30 million for fiscal 2023.
I will now hand, the call over to Matt for a discussion of the financials.
Thanks, Steven and good afternoon, everyone.
Total revenue was 11 5 million for the second quarter of 2023, a slight decline from $11 7 million in the set.
Quarter of 2022.
Selecting the continued headwinds associated with lower demand from early stage biopharma customers, but partially offset by delivery of a large order to a significant customer during the quarter.
<unk> essentials products are targeted at the research use only or are you a market and include both catalog and custom products.
Lab Essentials revenue was $7 6 million in the second quarter of 2023, a 10% decrease from $8 4 million in the second quarter of 2022.
The decline was attributable to a decreased number of customers, partially offset by higher average revenue per customer.
Clinical solutions products are made according to good manufacturing practices.
Or GMP quality standards and are used by our customers primarily as components or inputs.
On the development and manufacturer of diagnostic and therapeutic products.
Clinical solutions revenue was $3 7 million in the second quarter, a 24% increase from $2 9 million in the second quarter of 2022.
The growth in clinical solutions revenue was attributable to an increased number of customers, partially offset by lower average revenue per customer.
We expect revenue per customer to increase over time as they ramp up their purchase volumes. However, this metric can be affected by the mix of newer clinical customers, who typically order less.
Just as a reminder, due to the larger average orders in clinical solutions compared to lab essentials, there can be quarter to quarter revenue Lumpiness in this category.
As a case in point during the second quarter of 2023.
We delivered a large GMP order to a diagnostics customer who had previously purchased lab essentials products in 2022.
Okay.
Turning to the income statement gross profit for the second quarter of 2023 was $5 1 million compared to $5 2 million in the second quarter of 2022.
Gross margin was 43, 9% of revenue in the second quarter of 2023, which is down from 44, 9% of revenue in the second quarter of 2022.
Despite increased overhead costs, including depreciation from our new manufacturing facility, our gross margins were down only slightly compared to the second quarter 2022.
As higher margin clinical solutions revenue represented a larger percentage of our total revenue in the second quarter of 2023 compared to the second quarter of 2022.
Sequentially gross margins were up significantly due to lower labor costs and also a favorable clinical solutions revenue mix.
Okay.
Operating expenses for the second quarter of 2023 were $12 1 million compared to $11 9 million for the second quarter of 2022.
Excluding a noncash impairment charge related to certain fixed assets of $2 2 million in the second quarter of 2023.
Operating expenses were down $2 million compared to the second quarter of 2022.
The decrease was driven by reduced spending primarily in professional fees and occupancy costs.
In the second quarter 2023, the company decided to cease further use and development of certain manufacturing machinery and equipment as we completed qualification of our new manufacturing facility prepared for our ISO recertification audit and also consolidated facilities.
Additionally, changes in the market price of previously impaired assets were identified the company reviewed the recoverability of the carrying value of these assets and as a result recorded a noncash impairment charge of $2 2 million related to these long lived assets.
Net loss for the second quarter of 2023 was $7 2 million or <unk> 25 per diluted share compared to a net loss of $6 2 million or <unk> 22 per diluted share for the second quarter of 2022.
The company recorded minimal non current tax expense this quarter against its pretax loss losses due to increases in our valuation allowances against incremental net operating loss carry forwards.
Yes.
Adjusted EBITDA, a non-GAAP measure was negative $2 3 million for the second quarter of 2023.
Compared to negative $4 9 million for the second quarter of 2020 to the.
The decrease was primarily driven by lower net loss after adding back the $2 2 million noncash impairment charge recorded in the second quarter of 2023 compared to the second quarter of 2022.
Turning to the cash flow and balance sheet.
Capital expenditures for the second quarter of 2023 were $2 3 million compared to $10 9 million for the second quarter of 2022.
This marks the fourth straight quarter of sequential decreases in capital expenditures we.
We have now substantially completed the capital investment in our new manufacturing facility.
Free cash flow, a non-GAAP measure, which we define as cash provided by or used in operating activities less purchases of property plant and equipment was negative $6 2 million for the second quarter of 2023 compared to negative $16 8 million for the second quarter of <unk>.
2022.
This decrease compared to the prior year period was due to both lower cash used in operating activities and a decrease in capital expenditures.
Turning to the balance sheet as of June 30th 2023, we had $23 7 million in cash and cash equivalents and $22 1 million in gross debt.
For 2023 outlook.
We are lowering our 2023 total revenue guidance to a range of 37 million to $40 million.
At the midpoint. This assumes revenue decrease of approximately 7% compared to 2022.
With respect to product categories, we now expect lab essentials revenue to be down 9% to down 5%.
Compared to 2022, and clinical solutions revenue to be down 15% to up 5% compared to 2022.
The company continues to manage expenses aggressively at the end of June The company had 232 associates down from 251 at the end of the first quarter of 2023 and 290 at the end of 2022.
The company posted operating expenses, excluding nonrecurring charges below 10 million the first quarter, we have done so since 2021.
Similarly, the company saw a reduction in free cash outflow.
During the second quarter of 2023. This marks the fourth straight quarter of lower cash outflow and is consistent with the company's expectations for the year. Despite our lower revenue outlook as we anticipate operating expenses and capital expenditures to continue to trend downward over the course of the year.
In addition to cash on hand, we have access to our revolver up to $5 million and ATM facility.
Based on our guidance, we expect approximately $11 8 million and free cash outflow in the second half of 2023.
We believe that we have already made the step up investments needed to execute on our growth strategy and can scale without significant additional investment.
With that I'll turn the call back to Steven.
Thanks Pat.
Overall, we were pleased with our performance in the second quarter of 2023.
Long term outlook for our end markets remains positive.
We're committed to executing on our strategy to help our customers accelerate the introduction of novel therapies diagnostics and other products that improve human health.
We will now take your questions.
Yeah.
Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced so withdraw. Your question. Please press star one again due to time restraints. We ask that you. Please limit yourself to one question and one follow up question. Please standby, while we compile the Q&A roster.
Okay.
Our first question will come from the line of Steven Mah with Cowen Your line is open.
Great. Thanks for taking the questions.
Appreciate the color you gave on the macro landscape and how it's impacting tech Nova.
Just looking at some of the recent guidance down by your peers.
Some of them have guided down more significantly than than you.
I appreciate that.
Color you gave.
The growth drivers new products that are coming online the new GMP facility, but is there anything else that gives you confidence.
On the New guide.
Sure. Thanks Steven.
Okay.
I would have to.
Kind of go back to when we lowered guidance last year, we started seeing the impact of the early stage biopharma customer.
I think we're pretty early initiatives there compared to others.
A combination of being pretty closely tied to the spending patterns and not having a lot of our revenues adopted stock Destocking allows us to get a closer view.
Towards the end of this the back half of this year.
And I would also say that we are pretty diverse in our offering while a lot of the growth drivers of the business in the last two or three years have been any sort of early stage biopharma. We serve really all the way from research through commercialization and not solely biopharma, but also cover the life science tools and diagnostics sales. So I think we're a little.
More diverse.
That said, obviously, we do believe the long term strategy and the business will be the migrate these customers from research to clinical and we have seen a slowdown.
And that slowdown has continued throughout the back half of this year. Hence the reason we are lowering guidance.
Okay. That's helpful color.
I appreciate the color you also gave on the increased customer interest on your GMP facility.
Can you give us a sense of what you think the sales cycle is to convert these people that are doing the facility audits to two customers. Thank you.
Sure Yes, it takes a while I mean this is a is a long term strategy to engage with customers.
Preclinical development, and then scale with them as they go down that pipeline.
We did talk about a large customer here that might be a great example for us to use although it's not on the therapeutic side. It does follow a very similar pattern.
We engaged with this customer in 2021, we'll start with fashion.
In 2022, and the back half of 2022.
We delivered a research grade product for their verification.
Preclinical trial work.
Demonstrate that we can manufacture the product that their product work as they would like it to work before going on to make a GMP grade version of that product after delivering that.
Order came in in the first half.
2023, after the first quarter of 2023.
<unk> GMP grade for validation. So they can use those products to go into clinical trials and.
And so we delivered that in Q2 and you can see the revenue there and of course, you can see although the financial impact that has been we do shift towards more clinical solutions as well as the type of size of those of those orders.
So that's just getting them into the clinical trials now, it's probably another year and for this one and this particular diagnostics. So it's probably.
Current timeline some of these other but just from the Onboarding process and then you can see that we're talking anywhere between 12 and 24 months of assessments with the scale up but that is essentially the strategy and the more we get in that early stage funnel, we believe that.
Not only the scale up they'll become extremely sticky API.
Manufacturer for this product going forward.
Great. Thank you.
Thank you one moment for our next question.
And that will come from the line of Matt <unk> with William Blair. Your line is open.
Hey, good afternoon.
First wanted to ask about.
Opex.
And so obviously you talked about it being sort of flat.
The year over year.
Excluding the impairment charges.
As volumes start to scale back next year in particular.
Yes.
Can you maybe just remind us how you think about <unk>.
Above opex.
Just wondering.
Capacity.
Right now to be able to absorb.
The rest are happening.
Payback youre a little bit quiet.
Did you get that I think you're saying flat year on year, excluding impairment charges are you asking how those scale over time.
Yes.
Yes, sorry, I was just as the year.
That facility will start to come online next year, just how to think about opex trending.
2024.
Flat year over year and 23.
Yeah, I think thanks for the question Matt.
Yes first of all I mean, I think we've obviously been very happy with the way we've been able to manage opex cost down here during the course of this year and.
Expecting those to stay at or slightly down from these levels. So were.
Demonstrating that we've been able to manage costs in terms of what that means for the future as they set a little bit in the remarks, I mean, when we say we feel like we've made the investments necessary to vehicles scaled the business with limited additional investments.
Of course, we're not providing any specific FY 'twenty for guidance at this point, but I think you can assume that.
As we start to grow back which we.
<unk> to do in the FY 'twenty for that we would not need to increase those expenses or substantially in any way. So we haven't gotten into all the detailed preparation of our budget or anything but in principle. We believe that that we can we can grow this business with with holding those up operating expenses.
Does that help answer your question.
Yes, yes. It does thank you.
The second question Matt.
Reclassified from long term debt to current portion this period.
Noticed that.
And there is a covenant related to TTM revenue.
At December 31, so is the reclassification related to the guidance reduction.
And I guess, just maybe help us get comfortable.
With that amount of debt outstanding relative to year cash position.
Cash outflow this year.
Yes, good good observation, Matt we did reclassify our.
Debt from long term to short term for this this quarter.
Just two two to be open we did have a covenant.
Were out of compliance with the covenant following the quarter actually in July period here.
And.
We have notified our lender of this situation and are in discussions with them on a preliminary basis, so far if.
They have not issued any kind of.
Notice to us at this point and don't plan to until after the quarter statement is filed here. So.
That is the reason why the why the debt has been reclassified from from long term to short term until we are able to resolve the situation with them.
Yeah.
Thank you one moment for our next question.
And that will come from the line of Paul Knight with Keybanc. Your line is open.
Matt I guess, it's fair to say the ATM no action on that.
Right, we have but we will of course be filing the 10-Q tomorrow.
And at this point there has been no no use of the ATM.
And David I guess.
Regarding the macro it does look like.
If arm data is correct.
Have had.
Overall trials start to grow a little bit in the first.
Half of the year are you seeing that.
It's a hard one to measure at the moment, because we have multiple competing factors here right. We have scaled up our commercial organization, we do see our funnel increasing.
Which would indicate that that is true, but also we're putting our efforts towards attracting those customers.
But I will say that the cycles are longer and the size of the trials still seem to be.
Smaller than they used to be but I'm in agreement with you. It does feel like when you talk to customers that they are starting to think about how to move this thing forward.
We still have the conversations with customers that are really stuck in trying to maintain their capital and the timing of when those actual builds happen is still undetermined.
Would it be fair to say that the kind of the components of the <unk> the larger more medium size.
Biotechs are.
Not really deteriorating would that be fair and then the last follow on would be what portion of revenue is emerging biotech right now do you think.
Yes, I'm not sure I can I can comment that we have had mentioned that new facility opened and we probably had.
Four or five customers come through there now and they've been both large and small and so we have not necessarily seen a specific trend on the size, but I will say that wherever you are engaging with customers is very early on.
The fact that the facility is just now coming online.
Okay. Thanks.
Thank you one moment for our next question.
And that will come from the line of Mark Massaro with <unk>. Your line is open.
Hey, guys. Thanks for taking the questions.
Steve and obviously, you've called out some soft.
Stop climate in biotech and cell and gene therapy.
Very much consistent with what all of your peers have said Theres really no surprises there, but I'd be curious to hear your thoughts on.
Other areas of your business, which are diversified and.
In areas like diagnostics.
Food Agriculture, I guess, what are you seeing across those other segments of your end markets.
Yes, great question Mark.
And so outside of the sort of Biopharma early stage biotech, we do serve across all those segments from everything from academic too.
By a life science tools diagnostics to food neck, and I would say generally speaking the majority of those are kind of within line of expectations. Historically, we are coming over a couple year on year comparison as you can see if you look at the first half of last year. The end of 'twenty, one and early part of 2022, we had a lot of.
Larger biotech builds being made for clinical trials that then those were put on hold.
So a year on year comparisons not.
Exactly fair from a financial perspective, but when you look take a step down.
We do see hotspots within spatial.
Genomics, which I'm sure you're aware of that.
That group is growing quite nicely and then some of the more novel diagnostic sites like liquid biopsy and other genomic type of diagnostics, we're seeing some pick up there that is.
Probably favorable or equal to what has been <unk>.
Previously in like in the 'twenty, one time period, excluding COVID-19 related diagnostic so.
We do benefit from that and being a diverse business that can support all of these customers.
Yes that makes sense and congrats on the ribbon cutting of the GMP grade facility.
Maybe can you just remind us.
The new facility.
It's likely to enable whether it's from new customers size of customers.
Maybe just walk us through sort of how you see the business changing in the next couple of years.
Yes. This is something we're really proud of what we spent the last two years building out this facility.
It really takes the company to a position where we can bring customers in and Theyre not concerned about the long term ability for us to deliver for them and like I said, we've had a number of customers that are already in every one of them said this is where we want our stuff made this is perfect and what we're looking for it.
Moving towards over time so.
That's all very positive.
From the capabilities of the debt facilities.
And bind with our existing other facilities, we can get to about $200 million in total revenue from a capacity standpoint, but probably more relevant here is the fact that we have built a facility that specializes in these sort of less than 1000 liter batch sizes. All the way down we can we can do one liter bags or even smaller in this facility.
And is extremely flexible in how we operate with the with the number of redundancies.
Well so.
What we're finding and we bring some of these customers and it's not just the sort of the fact that we have this capacity, but we've built a purpose built facility that can do this custom manufacturing that these small scales.
And then scale with them all the way up through commercialization and Theyre excited and we are too so I think.
The early indicators on US is that this is the right type of capability for them for the long term.
And we're now kind of working them through the audit schedules and bring them in and we'll do the pilots and then over the course of the next couple of years hopefully get.
<unk> become one of their key suppliers as they go into clinical trials.
Okay. Thanks for the color.
Yes.
Thank you one moment for our next question.
Okay.
And that will come from the line of Jacob Johnson with Stephens. Your line is open.
Yes, Thanks for taking my question good.
Good afternoon.
Maybe just another one on guidance as it relates to clinical solution kind of the implied back half number there and I understand you had kind of a lumpy order in <unk>, but it still at the midpoint implies something kind of lighter than <unk>.
I understand.
The macro environment, but could you just speak to.
Why such a step down in the back half and maybe related the softness youre seeing is it customers ordering less than you thought they would previously or some of these orders getting pushed into 2024.
Yes.
Take it first and then Steve can comment if he wants so yes, I think from your observation is fair Jacob.
Our back half guidance for our implied guidance for the for the clinical solutions business and certainly in step down from what we've seen here in Q2.
In general what we're seeing is the environment is essentially unchanged.
We've been seeing earlier in the year and of course in Q2, we did have this.
Particularly large order from one customer.
Go through during the quarter. So we've gotten a nice boost during Q2 so.
Q3, and Q4, we'd expect it to go back to more normal what we're seeing in this environment.
Although of course, we are expecting that to.
To come back as the as the environment improves but in terms of smaller orders of fewer customer then that's even community.
I don't think there are fewer customers I think we're getting smaller orders or delays, mostly and it's a combination of both have been some customers that used to order.
Seven figures last year are still dedicated to using technology for their builds but theyre talking about.
Small six figures now for this year instead of seven figure type of things so.
That is that as a primary piece and we do have some customers that have <unk>.
Planned that originally there'll be like a Q3 order Q4 delivery or Q2 order Q3 delivery that have gone out one or two quarters.
Thank you.
Even they are not sure about the timing of when they are going to exactly meet those based on their own capital constraints. So.
That's what we're seeing there.
Excitement is there and it's not like we are.
Losing customers, it's really very much a market dynamic.
Got it that's really helpful. Thanks for that Steven and then we haven't talked about AAV attack in the Q&A. So maybe a question on that just one how has the initial reception and then two can you just talk about initial launches from here it sounds like two more this year, but how many more.
Beyond that.
And then also can you just remind us kind of how we should think about the revenue contribution from that.
And I'll leave it there thank you great.
Great I'll start with the revenue contribution I mean, obviously the products, we're selling now and as AAV.
<unk>.
But for screening kits.
<unk> is relatively insignificant.
Two the overall business because the whole point of the screening candidates to get customers to try out a set of buffers that we know are going to work for them to help on that policy and step where the separate MTA from full cabinets and then get them into the right reagent that then they can scale up through process development and into clinical trials. So this is a long.
Term strategy here that will then play out over overtime.
And allows us to kind of engage with them and get them into this trials faster than they would otherwise be able to do so so the revenue contribution there is relatively small but the portfolio itself is important to make as broad as possible right. So we want to support all of their production for AAV from end to end.
And across many serotypes. So yes, we have two out now we plan to have two out again by the end of the year two more and we'll continue to go through I think there's probably 10 or 11, serotypes, but of which four or five of the most popular which we're kind of knocking out at the moment and then we launched this other suite of reagents that are going to make it too.
People are making their own.
Standard reagents for licenses for purification or <unk>.
They can just buy our off the shelf reagents and will continue to build out that portfolio throughout the rest of the year. So that they can be kind of a one stop shop for them as they start going down that process development piece and capture more dollar share as they move into the clinical trials. So.
Again altogether, maybe over time, they will add up to be a decent amount of revenue in the early stages, but certainly as these these go into clinical trials, that's where we'll see the biggest update.
Got it thanks for taking the questions.
Thank you and Im showing no further questions in the queue. At this time. This concludes today's program. Thank you all for participating you may now disconnect.
Okay.
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