Q3 2023 Rapid Micro Biosystems Inc Earnings Call
Thank you for holding and welcome everyone to the rapid micro Biosystems third quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one.
One on your telephone keypad, if you'd like to withdraw your question again press the star one.
I'll now turn the call over to Mike Boyer Investor Relations. Mr. Broadly go ahead.
Yeah.
Good morning, and thank you for joining the rapid Mike Systems' third quarter 2023 earnings call. Joining me on the call are Rob <unk>, President and Chief Executive Officer, and Shaun work as Chief Financial Officer.
Earlier today, we issued a press release announcing our third quarter 2023 financial results.
Copy of the release is available on the Companys website at rapid microbiome dot com under investors and the news and events section.
Before we begin I would 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 Securities Private Securities Litigation Reform Act of 1090 fives.
Any statements contained in this call that relate to expectations or predictions of future events 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 an <unk>.
Planned activities related to the company's business development and growth customer interest and adoption of the growth direct system expectations for RMB nucleus mold alarm and rapid sterility and the potential impact of macroeconomic uncertainty 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 Exchange Commission on March 10 2023.
As amended as such risk factors are updated in our subsequent filings with the SEC we.
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 November three 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 Good morning, everyone and thank you for joining us to review our third quarter 2023 results.
I will begin this morning's call with an overview of our third quarter performance followed by a review of the progress we have made in advancing 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 $6 1 million.
Representing a 30% increase compared to Q3 last year and above our guidance for the third consecutive quarter.
The strength was broad based with growth of approximately 30% in both product and service revenue for the second consecutive quarter.
Based on our solid year to date results and supported by a strong balance sheet. We are reaffirming our guidance of at least $22 million in revenue representing approximately 30% growth for the full year.
During the third quarter, we placed five growth direct systems, including at least one in each of North America, Europe and Asia.
This included the placement of a system with a new top five global pharma customer.
As a result, our customer base now includes two thirds of the global top 20 pharmaceutical manufacturers.
We also completed four validation in the quarter.
With all three sales regions staffed our funnel has expanded meaningfully since the start of the year and is well balanced geographically biologics and cell and gene therapy customers remain our largest opportunity as a growth. The rest is ideally suited for the high volume testing full automation robust data integrity and SaaS.
Turnaround time required in these segments.
That being said, we also have meaningful opportunities in segments, such as small molecule and sterile injectable manufacturing or our global commercial presence is providing insight and access to new opportunities.
As many of you are aware there are several thousand clinical trials for biologics and approximately 1000 clinical trials for cell and gene therapies ongoing today.
With the growth direct customers can achieve faster time to results improve data integrity enhanced accuracy and greater sample capacity than current methods and these high value segments the value proposition of using the only fully automated rapid detection platform for microbial quality control clearly a rare.
<unk> with this customer base.
In fact, the growth direct is currently being used in the manufacture of five of the six commercially approved car T therapies and effective place a system with the one remaining therapy later this quarter.
We also have a significant footprint within biologics manufacturing, which remains our largest segment for system placements, notably.
According to the USDA there are close to 700 licensed biologic therapies currently on the market, which creates a large growth opportunity.
Our significant progress in penetration into the commercial cell and gene and biologics market combined with our presence within the majority of the global top 20 pharma companies speaks to the value proposition of the growth correct.
We are proud to be trusted partners on these critical lifesaving therapies and believe that this level of success keeps us on a path to establishing a growth or act as the industry standard pro forma microbial QC testing globally.
As we continue to focus on our commercial execution and specifically on accelerating system placements one of our objectives is to increase opportunity generation and the velocity of our funnel through direct customer engagement.
We recently opened a growth direct demonstration lab in our Lexington, Massachusetts facility and have already hosted several prospective customers. This new lab complements our state of the art automated consumable manufacturing line and provides a platform to showcase our comprehensive set of manufacturing and operations capabilities to customers.
During these tailored customer interactions. We include detailed discussions of our professional services, which include validation and system integration support.
This high touch approach to selling instills confidence in our customers and reinforces our position as a trusted long term strategic partner of choice. Additionally, we continue to use our customer demonstration lab near Munich, Germany to host high value events for our European customers.
In early October we again participated as a platinum sponsor at the annual PDA pharmaceutical Microbiology conference.
In addition to the conference we hosted an invite only event, where a prospective and existing customers are paired with members of our commercial and executive leadership team to enable deeper engagement with key users and decision makers over the three day conference and including our customer event, we generate numerous high quality leads.
And finally in late November Johnson, and Johnson will host a multi day growth direct event at their site in <unk>, Switzerland.
Purpose of this event is to facilitate collaboration and education by bringing together industry thought leaders customers and prospective customers to discuss current business goals and to share best practices.
We anticipate that over 60 customer participants will attend and the event will feature expert panel discussions on topics, such as automation and regulatory approaches using the growth direct.
In addition, participants will tour a local customer site that includes a fully validated growth direct system in a GMP environment.
New product development is another important component of our growth strategy. Our goal is to innovate new products that solve customer challenges create meaningful differentiation and competitive advantage strengthening partnerships and enhanced the growth in <unk> value proposition.
Additionally, we expect innovative products, such as mobile arm and rapid sterility to become new sources of revenue growth and drive margin expansion.
With respect to rapid sterility, we continue to increase focus on commercialization and expect to be able to provide a more significant update next quarter.
In summary, we continue to make good progress against our growth strategy accelerating system placement remains our highest priority. Despite the ongoing challenges posed by the macroeconomic environment. We have achieved nearly 30% growth year to date through Q3, which demonstrates that the actions we have been taking to improve our commercial execution.
And enhance customer experience are gaining traction.
Additionally, we are focused on leveraging internal cost initiatives, which combined with the scale. We are beginning to achieve will continue to drive gross margin improvement and with that I'll now turn the call over to Shaun to discuss our third quarter performance Sean.
Thanks, Rob and good morning, everyone.
I'll start with a recap of our third quarter 2023 results followed by our updated outlook Q.
Q3 revenue increased 30% to $6 1 million compared to $4 7 million in Q3 2022.
We placed five growth direct systems in the third quarter of this year compared to three in Q3 last year.
Product revenue, which is comprised of systems and consumables increased 31% to $4 2 million in Q3 compared to $3 $2 million last year. The growth in revenue was primarily driven by the two additional system placements in the quarter.
Consumable revenue increased on a year over year basis, but was down slightly on a sequential basis. Following a record second quarter due mainly to the timing of customer shipments between Q2 and Q3, both this year and last year.
Service revenue increased 27% to $1 9 million in the third quarter compared to $1 $5 million last year. The increase was largely driven by higher recurring service contract revenue, which grew almost 40% in the quarter.
Third quarter recurring revenue increased 17% to $3 4 million.
Compared to $2 $9 million last year, driven by the growth in both consumables and service contract revenue.
Nonrecurring revenue was $2 7 million in Q3 compared to $1 8 million in the prior year quarter.
Turning to gross margins product margins were negative $1 5 million in Q3 compared to negative $2 4 million in the third quarter last year.
<unk> was mainly due to higher placements and production volumes and systems and favorable consumables product mix in Q3, this year as well as the one time write off of expired materials and consumables in Q3 last year.
This improvement was partially offset by the impact of planned downtime on our automated consumables manufacturing line to implement enhancements that will benefit future margins as we discussed on our last earnings call. These enhancements are now substantially complete and we expect them to start making a meaningful contribution to improved consumables margins beginning in the fourth quarter of this year.
Sure.
Service margins were negative <unk> $1 million in Q3 compared to negative <unk> $4 million last year leverage from higher revenues and better productivity drove the improvement in service margins in the quarter.
On a combined basis, our third quarter gross margin percentage was negative 27%, representing an 11 percentage point improvement on a sequential basis, and a 32 percentage point improvement compared to the third quarter last year.
Looking at margin improvement another way, our total cost of revenue only increased 3% year over year compared to the 30% increase in total revenue we realized in the same period.
This illustrates the progress we are making in implementing manufacturing efficiencies and cost reductions across both products and services as well as the benefits of higher revenue increasing production volumes and tight control of overhead costs. We are laser focused on the activities. We believe will drive significant long term and sustainable improvement in our gross margins.
Continuing down the P&L total operating expenses were $12 8 million in the third quarter, consisting of $3 $5 million in sales and marketing $3 $1 million in R&D and $6 2 million in G&A.
This compares to total operating expenses of $14 1 million in the third quarter of 2022.
The decrease was largely due to nonrecurring costs incurred in the third quarter of last year associated with the strategic review process initiated by our board of directors in that period.
Net loss was $13 4 million in Q3. This compares to a net loss of $16 3 million in Q3 last year. This improvement was largely due to higher revenue better gross margins and lower operating expenses in Q3 this year.
Net loss per share was 31 in Q3 compared to net loss per share of <unk> 38 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 3 million and capital expenditures were <unk> 5 million in the third quarter.
I'll now turn to our outlook, we are once again 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.
Compared to Q3, we expect Q4 system revenue to be relatively consistent consumable revenue to be slightly lower due mainly to shipment timing and service revenue to be higher due to increased validation activity. We expect to complete at least five validation in the fourth quarter, which is consistent with our prior guidance.
In light of the current macroeconomic environment, our customers continue to scrutinize, the timing and scale of purchase decisions and while our guidance continues to reflect this uncertainty and our teams continue to effectively navigate this environment. We expect these headwinds to persist through the end of the year.
Shifting to gross margins, we expect sequential improvement in Q4, as we benefit from higher production volumes and cost reduction activities and consumables as well as the benefit of higher revenue and increased productivity 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 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.
We expect Q4 operating expenses to be between $12 million $13 million.
Finally, we finished third quarter with approximately $104 million in cash cash equivalents and investments cash burn was approximately $9 million in the period.
In the fourth quarter, we expect cash burn to be slightly less in Q3, as we realized cash benefits from working capital management.
As a result, we expect to end 2023, with cash and investments slightly below $100 million.
And remain confident that this will provide us with cash runway at least into 2026.
That concludes my comments so at this point, we will open the call up for questions operator.
Certainly at this time, if you'd like to ask a question. Please press star one on your telephone keypad again that is star one on your telephone keypad.
Yes.
Chaos Savant with Morgan Stanley Your line is open.
Good morning, guys. This is edmund on for agents. Thank you for taking my questions.
To start with five systems placed in the quarter your guidance implies for the remainder of <unk>.
Just wondering what under lies your confidence in being able to deliver that in <unk> and what are you currently have baked into your guidance in terms of a year end budget flush.
Yes. So this is this is Rob speaking lessee thinks of that question really our confidence.
And delivering the full.
Delivering our guidance comes from a couple of different areas first of which we've got a full team staffed as discussed in our remarks.
Globally, we've got good penetration into the top.
Customers Global top 20, we've got increasing senior access into.
The senior leadership of the top 20, and notably that.
The conversations that we're having.
It gives us confidence and insight into the purchasing approaches and timing within these large cut.
Customers, the funnel, notably and importantly looks the way we want it to look to.
To give us confidence in our outlook and another strong leading indicator. We look at is is customer experience, which.
Which we measure closely.
And as in is quite high so the.
The combination of these elements is what gives us confidence in our in our outlook now with regards to Q4 budget flush we're not <unk>.
We're not seeing it and B, we don't expect the traditional if you will budget flush nor are we seeing what I would call budget freeze. So it's been fairly consistent with what we've seen in previous quarters that we've we've we've mentioned so it really is a customer by customer.
<unk> and <unk>.
In some cases not all in some cases the growth rate has been prioritized.
As a as a corporate level initiatives.
But more resilient too.
To the current budget environment, although in some cases, we've seen customers push projects to the right into 2024, so the combined elements of all the above.
What gives us confidence in our outlook for Q4.
Great Rob. Thank you for the detail that's Super helpful. And then in terms of project wrap it for a certain validation platform I was wondering if you could help us benchmark how that project is performing and are you seeing the same magnitude of impact between both existing customers and new customers and finally, if you could remind us aside from dedicated project management.
What are some of the other areas of opportunity that you guys are leveraging new show up and shorten the ramp time.
Yes. So we are seeing we are seeing broad based.
Performance with new and existing and for those that are that are listening that aren't aware of it I'll just I'll just back up project rapid as a as a project.
Sure.
Designation that for an umbrella set of activities that we have to accelerate our validation processes.
And there is multiple elements that that.
We need to work through with our customers under good manufacturing principles to go from an installation to the system of record through various.
Validation processes to ensure the system is.
Validated for use in a manufacturing environment.
So over over over time, we've improved our our capability in this regard we have over 100 systems validated globally.
In GMP environments, and we've learned with our customers.
Not only to accelerate the process, but also to harmonize our process and we've worked hand in glove one of the most exciting things we've done as a company is harmonized our global validation processes with with our large customers and both our existing customers as I touched on in our new customers benefit.
From that so some of the activities that.
Help to accelerate our validation on our project rapid.
<unk> been touched on we've got project management in place. So this is dedicated global product management.
This is effectively a.
Project management process to get from an installation to validation. So we've got dedicated product managers, we have very experienced validation personnel, who go in on site with customers, we've improved our documentation and our data. So we're able to bring data to bear.
To accelerate the process versus generating data on site and we're just we're down the learning curve, we understand where validation processes can be accelerated where they typically slow down where customer challenges are so we're able to come in with a deep experience base in order to accelerate the process.
We do this.
Globally across all the sites that we interact with.
Our view is one of our fulcrum capabilities and it's one of the areas that customers strongly appreciate our capabilities.
Great Rob Thank you for the answers and the time today.
Dan areas with.
Stifel. Your line is open.
Hey, good morning, guys. Thanks for the questions Rob maybe just a follow up on your new versus existing customer comment. There. When you think about the sales funnel that will translate to orders and revenue next year, how does the mix look when it comes to placements at those new accounts versus repeat purchases and then as a follow up to that.
The cell and gene therapy side, you sound kind of positive. There can you just talk about how those conversations are going and obviously there are some ups and downs with some of those companies.
And the things that they're experiencing these days.
And just the spending level that you might expect there. So how does your visibility compare there to the other parts of the market.
Yes, Dan Thanks for the question so.
With regards to new versus existing.
It's it's balanced.
It was weighted towards existing customers as you may imagine and you heard we brought a new one on so as we continue to chip away at some of the larger customers out there are our funnel our outlook and our funnel is weighted in that direction.
Given our land and expand strategy that being said again as with the full team out there across North America, Europe, and Asia, we are generating new opportunities now.
Now kind of across our segments that include both new and existing so we like the way our funnel looks with regard to both new and existing and as I mentioned.
We're excited about what we're hearing and seeing with some of our larger customers and getting better insight into their and to enter a rollout.
Plans and budgets against those on the cell therapy front I think you've heard with regard to car T. In particular, our cell and gene generally in car T. In particular, we've done well there our value proposition resonates resonates quite well.
So I think thats a situation where.
Our particular technology fits their manufacturing needs quite well and it's really the.
In our view the only real fully automated system.
Can serve their needs now more broadly in cell and gene therapy.
We are active with <unk> operate in that space that GMO businesses is healthy as well as obviously the broader ecosystem with plasma manufacturers and other.
We need to be helping as well. So we're obviously watching it were strong in this space broadly.
But as I mentioned on the call as well we've got a good footprint in biologics manufacturing, which is our largest segment and small molecule as well. So we watch our segment mix carefully and while we're strong in cell and gene therapy. It certainly isn't the only segment that we're that we're focused on and.
And again, it's important to note that biologics is our is our largest segment.
Got you, Okay, and then Sean on consumables, how do you think pull through tracks on an annualized per system basement into year end and then can you just touch on why consumables will be down next quarter I think that's actually two sequential down quarters.
Seems like you feel pretty good about momentum so maybe just touch on.
Our consumables phases over the next.
When the two quarters sure, yes, so I didn't break it out we still expect to grow single digits in.
In year over year pull through effectively when we look at the full year I think.
When do we get the high single digits.
We may have a few headwinds that may keep us from getting quite to where we thought we'd get to a couple of quarters ago, but it's mainly due to timing.
So if you kind of break down Q3, and Q4 Q3, and a couple of things working against US in terms of year over year growth. One is that we had some a couple of hundred thousand dollars worth of shipments pushed from Q2 to Q3 last year.
And with a record quarter last quarter, we pulled probably is somewhat similar amount from Q3. This year into Q2. This year so that comp is challenged.
Directions as a result of that.
Thinking about Q4, Q4 is actually kind of the opposite of systems in a sense that most of our customers tend to shut down mid December in terms of receiving new material. So it tends to be a little bit of a lighter quarter on a relative basis. So I would say that in some kind of more transient timing issues in terms of shipments are really driving what we expect to see in.
Q4, I think as we go forward from there it's really.
We do continue to expect to see that pull through number move up.
We're working very hard and Rob talked about project rapid kind of move in customers not only through validation, but also into routine use of those systems and pulling through the consumables and we've got we've got kind of a full court press on that front and that gives us confidence that we'll see that sequential growth pick up again in 'twenty four.
Okay. Okay.
Okay, if I could sneak one more in here just on gross margins do you think the improvement that you see over the next couple of quarters, because I think it's something you are looking for is.
Is that going to be driven more by the product side or the services side and then on gross margin positivity for next year is the latest thought that you've sort of <unk>.
Crossover to positivity at the end of the year to exit 'twenty, four or could that happen sooner.
Yes, so I expect improvement to be both product and services.
<unk> talked a little bit about productivity and service there was an improvement in a pretty good improvement this quarter in service and I think as as everything kind of comes from system placements and as we're getting back on a trajectory now where placements are stepping up.
It is going to drive more validation opportunities for us and the other one that.
I never lose sight of is service contracts.
Almost every month now we have new customers moving into a situation where they need to start buying service contracts from us. So that we expect those two things to drive growth and services and I talked on the call a bit about about products across both systems and consumables.
But consumables in particular is an area, where we're investing a lot of time and energy as you know we did some things on the line over the past couple of quarters that we expect to yield benefits starting this quarter.
So I would expect.
The improvement to come from both areas within the business I think as you look at what I expect to happen over the coming quarters on margin I mean thinking about Q4, we improved 11 percentage points from Q2 to Q3, that's probably not a bad way to think about what we expect to happen based on our outlook at this point.
We've also talked about the fact that a couple more system placements getting us up into high single digits could get us the positivity and I think thats still true.
So didn't give you a couple of points to triangulate on there relative to Q4 margin expectations and then.
If we assume just for argument's sake, our typical kind of quarterly trend within a year, we typically step down in placements from Q4 to Q1, so that obviously put some negative pressure on margin. So we'll talk about guidance.
When we announced Q4, but I would expect that we will see revenues stepped down placements typically step down in Q1, unless we see some other things happening and we'll talk more about that when we give guidance, but if we assume the normal the normal trend.
I would expect that you'd be you'd probably be negative in Q1 from there on out it really depends on the ramp on placements and business activity. So <unk>.
Later part of the year is more likely.
It could could we get there kind of.
Middle of the year, possibly.
But we'll give you more color on that and we were ready to give you guidance for next year.
Yes, Okay I can work with that thanks, a lot guys.
Sure.
Yes.
Steven Mah with TV Cowen Your line is open.
Great. Thanks for taking the questions.
Can you give us an update on the timelines on the rapid sterility offering its been in beta testing for some time now and then also.
Have you been getting any early inbounds on the rapid sterility offerings from either new or existing customers and can you discuss the impact on how you think about your sales funnel.
In 2024.
Yes. Thanks. Thanks for the question, it's Rob So we have not given a timeline on rapid sterility.
I've mentioned in the past couple of calls that we're increasing our focus on commercialization.
So we'll let you know.
That should be a bit of indicators.
Our tracking through the development process development has gone well, we're incredibly encouraged and what we're seeing as far as our internally generated data feedback from our feedback from our beta customer and it's given us the.
The confidence to focus increasingly on commercialization activities as I mentioned, we will have more significant and robust update for everyone next quarter.
And we'll be excited for that discussion.
With regard to inbounds were not commercially it's not.
Commercially marketed currently so clearly there is.
There is interest in a rapid royalty offering we've done we've done meaningful voice of customer work and believe we have the right.
Features and benefits and value proposition that this market is looking for all under the under the umbrella and ages of our growth direct system with data integrity and full automation. So we're very excited about about the commercial potential for the for the system, but again, we haven't been marketing and we're not.
Not in that mode, right now, but more to follow as we as we move through time here.
Okay, great. Thanks for the color.
Okay.
A question actually for us.
Sean now.
On the on.
On the ASP it looks like they've normalized in Q3 versus Q2, maybe you can discuss some of the trends there.
And then a question maybe for Rob.
And do you expect to have to give.
Multi some.
Either promotions or discounts is that going to be part of your sales and marketing strategy.
Yes, Hi, Steve its Sean.
Are you talking about system specifically.
Yes.
Yes.
And this may lead into Rob's question, So Hello comments too.
Yes, so I think we.
Yes, I wouldn't necessarily tie directly to multi system deals, but we obviously look at strategic customers.
There are times that we will do certain things for.
Specific customers from a pricing standpoint to either get them onboard kind of get them on the on the team.
That happens with some variability so that can impact how asps move from quarter to quarter. So.
That's clearly not the norm.
We're happy overall with where we are in Asps this year.
And our.
Our expectation is we're going to continue to look at opportunities to move them up as we go forward.
Yes, Steve so.
I think.
In many markets with the higher the volume opportunity.
Price will be.
<unk> be an area of focus and one of the one of the elements of our business is moving through as we become a larger and larger piece of enterprise discussions and enterprise Rollouts, especially.
Especially in Big pharma, we will engage with.
With the procurement teams and have those discussions about about about price and volume. So that's in the ordinary course as Sean touched on where.
We watch Isps carefully and we're happy with.
Where we are where we are and where we're trending with them.
And we always in Denver to make sure we're getting we're getting paid for the value that we provide.
But but certainly with larger enterprise rollouts, the pricing is going to be a bit different than.
A smaller one off sale for sure.
Yes.
Great. Thanks, that's helpful and if I can sneak one last question.
You guys talked a lot about your marketing activities.
Your demo labs in Germany and in Massachusetts.
Massachusetts.
When I look at the.
Your sales and marketing spend to be relatively flat from 2022.
How should we think about sales and marketing opex going forward.
This is going to be.
We have a steady state or is that going to be increasing thank you.
Yes, I think year over year comparison, Steve last Q3 last year was a bit of an anomaly we had a restructuring that we executed on land.
A number of things came out of that that we're kind of one time. So I would say, where we are now fully staffed as Rob mentioned.
As more where I expect to be so I think if the comp was impacted by that we've increased spend kind of on the base organization and activities.
Since last year, and I would think about that as us being fully staffed and we'll continue to invest in that area, but I wouldn't expect to see.
Large increases in that spend in the near term at this point.
Okay, great. Thank you.
Great well thanks for the question, Steve and thank you all for your time, we are going to wrap up the live call now.
This concludes today's call. We thank you for your participation you may now disconnect.
Okay.
Okay.
Okay.
[music].
[music].
Thank you for holding and welcome everyone to the rapid micro Biosystems third quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one.
On your telephone keypad, if you'd like to withdraw your question again press the star one.
I'll now turn the call over to Mike Boyer Investor Relations Mr. Barclays Go ahead.
Yes.
Good morning, and thank you for joining the rapid Mike Heim Systems' third quarter 2023 earnings call. Joining me on the call are Rob <unk>, President and Chief Executive Officer, and Shaun work as Chief Financial Officer earlier today, we issued a press release announcing our third quarter 2023 financial results.
Copy of the release is available on the company's website at rapid microbiome dot com under investors and 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 Securities Private Securities Litigation Reform Act of 1090 fives any.
Any statements contained in this call that relate to expectations or predictions of future events 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 an <unk>.
Land activities related to the company's business development and growth.
<unk> interest and adoption of the growth direct system expectations for RMB nucleus mold alarm and rapid sterility and the potential impact of macroeconomic uncertainty 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 Exchange Commission on March 10 2023.
As amended and such risk factors are updated in our subsequent filings with the SEC we.
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 November three 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 Good morning, everyone and thank you for joining us to review our third quarter 2023 results.
I will begin this morning's call with an overview of our third quarter performance followed by a review of the progress we have made in advancing 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 $6 1 million.
Representing a 30% increase compared to Q3 last year and above our guidance for the third consecutive quarter.
The strength was broad based with growth of approximately 30% in both product and service revenue for the second consecutive quarter.
Based on our solid year to date results and supported by a strong balance sheet. We are reaffirming our guidance of at least $22 million in revenue representing approximately 30% growth for the full year.
During the third quarter, we placed five growth direct systems, including at least one in each of North America, Europe and Asia.
This included the placement of a system with a new top five global pharma customer.
As a result, our customer base now includes two thirds of the global top 20 pharmaceutical manufacturers.
We also completed four validation in the quarter.
With all three sales regions staffed our funnel has expanded meaningfully since the start of the year and is well balanced geographically biologics and cell and gene therapy customers remain our largest opportunity as a growth. The rest is ideally suited for the high volume testing full automation robust data integrity and fast.
Turnaround time required in these segments.
That being said, we also had meaningful opportunities in segments, such as small molecule and sterile injectable manufacturing or our global commercial presence is providing insight and access to new opportunities.
As many of you are aware there are several thousand clinical trials for biologics and approximately 1000 clinical trials for cell and gene therapies ongoing today.
But the growth direct customers can achieve faster time to results improve data integrity enhanced accuracy and greater sample capacity than current methods and these high value segments the value proposition of using the only fully automated rapid detection platform for microbial quality control clearly a rare.
<unk> with this customer base.
In fact, the growth direct is currently being used in the manufacture of five of the six commercially approved car T therapies and effective place a system with the one remaining therapy later this quarter.
We also have a significant footprint within biologics manufacturing, which remains our largest segment for system placements, notably.
According to the FDA there are close to 700 licensed biologic therapies currently on the market, which creates a large growth opportunity.
Our significant progress in penetration into the commercial cell and gene and biologics market combined with our presence within the majority of the global top 20 pharma companies speaks to the value proposition of the growth direct.
We are proud to be trusted partners on these critical lifesaving therapies and believe that this level of success keeps us on a path to establishing the growth or act as the industry standard pro forma microbial QC testing globally.
As we continue to focus on our commercial execution and specifically on accelerating system placements one of our objectives is to increase opportunity generation and the velocity of our funnel through direct customer engagement.
We recently opened a growth direct demonstration lab in our Lexington, Massachusetts facility and have already hosted several prospective customers. This new lab complements our state of the art automated consumable manufacturing line and provides a platform to showcase our comprehensive set of manufacturing and operations capabilities to customers.
During these tailored customer interactions. We include detailed discussions about professional services, which include validation and system integration support.
This high touch approach to selling and you still have confidence in our customers and reinforces our position as a trusted long term strategic partner of choice. Additionally, we continue to use our customer demonstration lab near Munich, Germany to host high value events for our European customers.
In early October we again participated as a platinum sponsor at the annual PDA pharmaceutical Microbiology conference.
In addition to the conference we hosted an invite only event where prospective and existing customers are paired with members of our commercial and executive leadership team to enable deeper engagement with key users and decision acres over a three day conference and including our customer event, we generate numerous high quality leads.
And finally in late November Johnson, and Johnson will host a multi day growth direct events at their site in <unk>, Switzerland.
Purpose of this event is to facilitate collaboration and education by bringing together industry thought leaders customers and prospective customers to discuss current business goals and to share best practices.
We anticipate that over 60 customer participants will attend and the event will feature expert panel discussions on topics, such as automation and regulatory approaches using the growth direct.
In addition, participants will tour a local customer site that includes a fully validated growth direct system in a GMP environment.
New product development is another important component of our growth strategy. Our goal is to innovate new products that solve customer challenges create meaningful differentiation and competitive advantage strengthening partnerships and enhanced the growth in <unk> value proposition.
Additionally, we expect innovative products, such as motor alarm and rapid sterility to become new sources of revenue growth and drive margin expansion.
With respect to rapid sterility, we continue to increase focus on commercialization and expect to be able to provide a more significant update next quarter.
In summary, we continue to make good progress against our growth strategy.
Accelerating system placement remains our highest priority. Despite the ongoing challenges posed by the macroeconomic environment. We have achieved nearly 30% growth year to date through Q3, which demonstrates that the actions we have been taking to improve our commercial execution and enhance customer experience are gaining traction.
Additionally, we are focused on leveraging internal cost initiatives, which combined with the scale. We are beginning to achieve we will continue to drive gross margin improvement and with that I'll now turn the call over to Sean to discuss our third quarter performance Sean.
Thanks, Rob and good morning, everyone.
I'll start with a recap of our third quarter 2023 results followed by our updated outlook Q.
Q3 revenue increased 30% to $6 1 million compared to $4 7 million in Q3 2022.
We placed five growth direct systems in the third quarter of this year compared to three in Q3 last year.
Product revenue, which is comprised of systems and consumables increased 31% to $4 2 million in Q3 compared to $3 $2 million last year. The growth in revenue was primarily driven by the two additional system placements in the quarter.
Consumable revenue increased on a year over year basis, but was down slightly on a sequential basis. Following a record second quarter due mainly to the timing of customer shipments between Q2 and Q3, both this year and last year.
Service revenue increased 27% to $1 9 million in the third quarter compared to $1 5 million last year. The increase was largely driven by higher recurring service contract revenue, which grew almost 40% in the quarter.
Third quarter recurring revenue increased 17% to $3 4 million.
Compared to $2 $9 million last year, driven by the growth in both consumables and service contract revenue.
Nonrecurring revenue was $2 $7 million in Q3 compared to $1 8 million in the prior year quarter.
Turning to gross margins product margins were negative $1 5 million in Q3 compared to negative $2 4 million in the third quarter last year.
Improvement was mainly due to higher placements and production volumes and systems and favorable consumables product mix in Q3, this year as well as the one time write off of expired materials and consumables in Q3 last year.
This improvement was partially offset by the impact of planned downtime on our automated consumables manufacturing line to implement enhancements that will benefit future margins as we discussed on our last earnings call. These enhancements are now substantially complete and we expect them to start making a meaningful contribution to improve consumables margins beginning in the fourth quarter of this year.
<unk>.
Service margins were negative <unk> 1 million in Q3 compared to negative <unk> $4 million last year leverage from higher revenues and better productivity drove the improvement in service margins in the quarter.
On a combined basis, our third quarter gross margin percentage was negative 27%, representing an 11 percentage point improvement on a sequential basis, and a 32 percentage point improvement compared to the third quarter last year.
Looking at margin improvement another way, our total cost of revenue only increased 3% year over year compared to the 30% increase in total revenue we realized in the same period.
This illustrates the progress we are making in implementing manufacturing efficiencies and cost reductions across both products and services as well as the benefits of higher revenue increasing production volumes and tight control of overhead costs. We are laser focused on the activities. We believe will drive significant long term and sustainable improvement in our gross margins.
Continuing down the P&L total operating expenses were $12 8 million in the third quarter, consisting of $3 5 million in sales and marketing $3 1 million in R&D and $6 $2 million in G&A.
This compares to total operating expenses of $14 $1 million in the third quarter of 2022.
The decrease was largely due to nonrecurring costs incurred in the third quarter of last year associated with the strategic review process initiated by our board of directors in that period.
Net loss was $13 4 million in Q3. This compares to a net loss of $16 3 million in Q3 last year. This improvement was largely due to higher revenue better gross margins and lower operating expenses in Q3 this year.
Net loss per share was 31 in Q3 compared to net loss per share of <unk> 38 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 3 million and capital expenditures were zero point $5 million in the third quarter.
I'll now turn to our outlook, we are once again 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.
Compared to Q3, we expect Q4 system revenue to be relatively consistent consumable revenue to be slightly lower due mainly to shipment timing and service revenue to be higher due to increased validation activity we.
We expect to complete at least five validation in the fourth quarter, which is consistent with our prior guidance.
In light of the current macroeconomic environment, our customers continue to scrutinize, the timing and scale of purchase decisions and while our guidance continues to reflect this uncertainty and our teams continue to effectively navigate this environment. We expect these headwinds to persist through the end of the year.
Shifting to gross margins, we expect sequential improvement in Q4, as we benefit from higher production volumes and cost reduction activities and consumables as well as the benefit of higher revenue and increased productivity 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 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.
We expect Q4 operating expenses to be between $12 million $13 million.
Finally, we finished the third quarter was approximately $104 million in cash cash equivalents and investments cash burn was approximately $9 million in the period.
In the fourth quarter, we expect cash burn to be slightly less in Q3, as we realized cash benefits from working capital management.
As a result, we expect to end 2023, with cash and investments slightly below $100 million.
And remain confident that this will provide us with cash runway at least into 2026.
That concludes my comments so at this point, we will open the call up for questions operator.
Certainly at this time, if you'd like to ask a question. Please press star one on your telephone keypad again that is star one on your telephone keypad.
Tash Savant with Morgan Stanley Your line is open.
Good morning, guys. This is edmund on for <unk>. Thank you for taking my questions.
Just to start with five systems placed in the quarter your guidance implies for the remainder of <unk>.
Just wondering what lies your confidence in being able to deliver that in <unk> and what are you currently have baked into your guidance in terms of.
Year end budget flush.
Yes. So this is this is Rob spring Nancy Thanks for the question I had been really our.
Our confidence.
And delivering the full.
Delivering our guidance comes from a couple of different areas first of which we've got a full team staffed as I discussed in our remarks.
Globally, we've got good penetration into the top.
Customers to global top 20, we've got increasing senior access into.
The senior leadership of the top 20, and notably that the.
The conversations that we're having.
It gives us confidence and insight into the purchasing approaches and timing within these large.
Our customers the funnel, notably and importantly looks the way we want it to look.
To give us confidence in our outlook and another strong leading indicator. We look at is is customer experience, which.
Which we measure closely.
And as in is quite high so.
The combination of these elements is what gives us confidence in our in our outlook now with regard to Q4 budget flush we're not.
We're not seeing it and B, we don't expect a traditional if you will budget flush nor are we seeing what I would call a budget freeze. So it's been fairly consistent with what we've seen in previous quarters that we've we've we've mentioned so it really is a customer by customer.
Situation in.
In some cases not all in some cases the growth direct has been prioritized.
As a corporate level initiatives, so it's a bit more resilient too.
To the current budget environment, although in some cases, we've seen customers push projects to the right into 2024, so the combined elements of all of the above.
What gives us confidence in our outlook for Q4.
Great Rob. Thank you for the detail that's Super helpful. And then in terms of project wrap in for a shortened validation platform. I was wondering if you could help us benchmark. How the project is performing and are you seeing the same magnitude of impact between both existing customers and new customers and finally, if you could remind us aside from dedicated project management.
What are some of the other areas of opportunity that you guys are leveraging your shipment shorten ramp time.
Yes. So we are seeing we are seeing broad based.
Performance with new and existing and for those that are that are listening that aren't aware of it I'll just I'll just back up project rapid as it is a project.
<unk>.
Designation that for an umbrella set of activities that we have to accelerate our validation processes.
There's multiple elements that that.
We need to work through with our customers under good manufacturing principles to go from an installation to the system of record through various.
Validation processes to ensure the system is.
Validated for use in a manufacturing environment.
So over over over time, we've improved our our capability in this regard we have over 100 systems validated globally.
In GNP environments, and we've learned with our customers.
Not only to accelerate the process, but also to harmonize the process and we've worked hand in glove one of the most exciting things we've done as a company is harmonized our global validation processes with with our large customers and both our existing customers as I touched on in our new customers benefit.
From that so some of the activities that.
Help to accelerate our.
Our validation on our project rapid.
It had been touched on we've got project management in place. So this is dedicated global product management.
This is effectively a.
Project management process to get from an installation to validation. So we've got dedicated product managers, we have very experienced validation personnel, who go in on site with customers, we've improved our documentation and our data. So we're able to bring data to bear.
To accelerate the process versus generating data on site and we're just we're down the learning curve, we understand where validation processes can be accelerated where they typically slow down where customer challenges are so we're able to come in with a deep experience base in order to accelerate the process and we.
We do this.
Globally across all the sites that we interact with.
Our view is one of our fulcrum capabilities and it's one of the areas that customers strongly appreciate our capabilities.
Great Rob Thank you for the answers and the time today.
Dan areas with.
Stifel. Your line is open.
Hey, good morning, guys. Thanks for the questions Rob maybe just a follow up on your new versus existing customer comment. There. When you think about the sales funnel that will translate to orders and revenue next year, how does the mix look when it comes to placements at those new accounts versus repeat purchases and then as a follow up to that.
On the cell and gene therapy side, you sound kind of positive. There can you just talk about how those conversations are going and obviously there are some ups and downs with some of those companies and the things that they are experiencing these days.
And just the spending level that you might expect there so how does visibility compare to the other parts of the market.
Yes, Dan Thanks for the question so.
With regard to new versus existing.
And so.
It's balanced.
Yes.
The weighted towards existing customers as you may imagine.
You heard we brought a new one on so as we continue to chip away at some of the larger customers out there.
Our outlook and our funnel is weighted in that direction, given our land and expand strategy that being said again as with the full team out there across North America, Europe, and Asia, we are generating new opportunities now.
Now kind of across our segments that include both new and existing so we like the way our funnel looks with regard to both new and existing and as I mentioned.
We're excited about what we're hearing and seeing with some of our larger customers and getting better insight into their and to enter a rollout.
Plans and budgets against those on the shelf therapy front I think I heard with regard to car T. In particular, our cell and gene generally in car T. In particular, we've done well there our value proposition resonates resonates quite well.
So I think it's a situation where.
Our particular technology fits their manufacturing needs quite well and it's really the.
In our view the only real fully automated system.
Can serve their needs more broadly in cell and gene therapy.
We are active with <unk>, who operate in that space that GMO business is healthy as well as I'd say, the broader ecosystem with plasma manufacturers and other.
We need to be helping as well. So we're obviously watching it were strong in this space broadly.
But as I mentioned on the call as well we've got a good footprint in biologics manufacturing, which is our largest segment and small molecule as well. So we watch our segment mix carefully and while we are strong in cell and gene therapy. It certainly isn't the only segment that we're that we're focused on and.
And again, it's important to note that biologics is our is our largest segment.
Got you, Okay, and then Sean on consumables, how do you think pull through tracks on an annualized per system basement into year end and then can you just touch on why consumables will be down next quarter, I think thats actually two sequential down quarters, yes. It seems like you feel pretty good about the momentum so maybe just touch on.
Our consumables phases over the next one.
One of the two quarters sure, yes, so I didn't break it out we still expect to grow single digits in.
In year over year pull through effectively when we look at the full year I think.
Do we get the high single digits.
We may have a few headwinds that may keep us from getting quite to where we thought we'd get to a couple of quarters ago, but it's mainly due to timing.
So if you kind of break down Q3, and Q4 Q3, and a couple of things working against US in terms of year over year growth. One is that we had some a couple of hundred thousand dollars worth of shipments pushed from Q2 to Q3 last year.
And with our record quarter last quarter, we pulled probably at somewhat similar amount from Q3. This year into Q2. This year. So that comp is challenge both directions as a result of that.
You're thinking about Q4 Q4 is actually kind of the opposite of systems in a sense that most of our customers tend to shut down mid December in terms of receiving new material. So it tends to be a little bit of a lighter quarter on a relative basis. So I would say that in some kind of more transient timing issues in terms of shipments are really driving what we expect to see in <unk>.
Q4, I think as we go forward from there it's really.
We do continue to expect to see that pull through number move up.
And we're working very hard and Rob talked about project rapid kind of move in customers not only through validation, but also into routine use of those systems and pulling through the consumables and we've got we've got kind of a full court press on that front and that gives us confidence that we will see that sequential growth pick up again in 'twenty four.
Okay.
Okay, if I could sneak one more in here just on gross margins do you think the improvement that you see over the next couple of quarters I think it's something you are looking for is.
Is that going to be driven more by the product side or the services side and then on gross margin positivity for next year is the latest thought that you've sort of <unk>.
Crossover to positivity at the end of the year to exit 24 could that happen sooner.
Yes, so I expect improvement to be both product and services.
Talk a little bit about productivity and service there was an improvement in a pretty good improvement this quarter in service and I think as is.
Everything kind of comes from system placements and as we're getting back on a trajectory now where placements are stepping up.
It's going to drive more validation opportunities for us and the other one that.
I never lose sight of is service contracts.
Almost every month now we have new customers moving into a situation where they need to start buying service contracts from us. So that we expect those two things to drive growth and services and I talked on the call a bit about about products across both systems and consumables.
But consumables in particular is an area, where we're investing a lot of time and energy as you know we did some things on the line over the past couple of quarters that we expect to yield benefits starting this quarter.
So I would expect.
Is that to come the improvement to come from both areas within the business I think as you look at what I expect to happen over the coming quarters on margin I mean thinking about Q4, we improved 11 percentage points from Q2 to Q3, that's probably not a bad way to think about what we expect to happen based on our outlook at this point.
We've also talked about the fact that a couple more system placements getting us up in the high single digits could get us the positivity and I think thats still true.
If we assume just for argument's sake, our typical kind of quarterly trend within a year, we typically step down in placements from Q4 to Q1, so that obviously put some negative pressure on margin. So we'll talk about guidance.
When we announced Q4, but I would expect that we will see revenues stepped down placements typically step down in Q1, unless we see some other things happening we will talk more about that when we give guidance, but if we assume the normal the normal trend.
I would expect that you'd be you'd probably be negative in Q1 from there on out it really depends on the ramp on placements and business activity. So <unk>.
Later part of the year is more likely.
Could could we get there kind of.
Middle of the year, possibly.
But we'll give you more color on that and we were ready to give you guidance for next year.
Yes, Okay I can work with that thanks, a lot guys.
Sure.
Yes.
Steven Mah with TV Cowen Your line is open.
Great. Thanks for taking the questions.
Can you give us an update on the timelines on the rapid sterility offering its been in beta testing for some time now and then also.
Have you been getting any early inbounds on the rapid sterility offerings from either new or existing customers and can you discuss the impact on how you're thinking about your sales funnel.
In 2024.
Yes. Thanks. Thanks for the question, it's Rob So we have not given a timeline on rapid sterility. We have mentioned in the past couple of calls that we're increasing our focus on commercialization.
So we will let.
But that should be a bit of indicators.
Our tracking through the development process development has gone well, we're incredibly encouraged and what we're seeing as far as our internally generated data feedback from our feedback from our beta customer and it's given us the.
The confidence to focus increasingly on commercialization activities as I mentioned, we will have more significant and robust update for everyone next quarter.
And we'll be excited for that discussion.
With regard to inbounds were not commercially it has not.
Being commercially marketed currently so clearly there is.
There is interest in a rapid sterility offering we've done we've done meaningful voice of customer work and believe we have the right feature.
<unk> and benefits and value proposition that this market is looking for all under the under the umbrella and ages of our growth direct system with data integrity and full automation. So we're very excited about about the commercial potential for the for the system, but again, we haven't been marketing it and we're not we're not in.
That mode right now, but more to follow as we as we move through time here.
Okay, great. Thanks for the color.
A question exit for us.
Sean now.
Sure.
On the ASP it looks like they've normalized in Q3 versus Q2, maybe you can discuss some of the trends there.
And then a question maybe for Rob.
Do you expect to have to give.
Multi system.
Either promotions or discounts is that going be part of your sales and marketing strategy.
Yes, Hi, Steve its Sean.
Are you talking about systems specifically.
Yes.
Yes.
And this may lead into Rob's question, so he'll have comments too.
Yes, so I think we yes.
Wouldn't necessarily tied directly to multi system deals, but we obviously look at strategic customers.
There are times that we will do certain things for.
Specific customers from a pricing standpoint to either get them onboard kind of get them on the on the team.
That happens with some variability so that can impact how asps move from quarter to quarter. So.
That's clearly not the norm.
We're happy overall with where we are in Asps this year.
And we.
Our expectation is we're going to continue to look at opportunities to move them up as we go forward.
Yes, Steve So so I think it is.
Many markets with the higher the volume opportunity.
Price will be an area of focus and one of the one of the elements of our business is moving through as we become a larger and larger piece of enterprise discussions and enterprise Rollouts.
Especially in Big pharma, we will engage with with the procurement teams and have those discussions about above about price and volumes.
It's in the ordinary course as Sean touched on were.
We watch Asp's carefully and we're happy with.
Where we are where we are and where we're trending with them.
We always in Denver to make sure we're getting we're getting paid for the value that we provide but but but certainly with larger enterprise rollouts the pricing is going be a bit different than.
Smaller one off sale for sure.
Okay.
Okay, great. Thanks, that's helpful and if I can sneak one last question.
You guys talked a lot about.
Our marketing activities with your demo labs in Germany and in Massachusetts.
Massachusetts.
When I look at the your sales and marketing spend looks to be relatively flat from 2022.
How should we think about sales and marketing opex going forward.
Is it going to be.
A steady state or is that going to be increasing thank you.
Yes, I think year over year comparison, Steve last Q3 last year was a bit of an anomaly we had a restructuring that we executed on then.
A number of things came out of that that we're kind of one time. So I would say, where we are now fully staffed as Rob mentioned.
As more where I expect to be so I think that the comp was impacted by that we've increased spend kind of on the base organization and activities.
Since last year, and I would think about that as us being fully staffed and well continue to invest in that area, but I wouldn't expect to see.
Large increases in that spend in the near term at this point.
Okay, great. Thank you.
Great well thanks for the question, Steve and thank you all for your time, we are going to wrap up the call now.
This concludes today's call. We thank you for your participation you may now disconnect.