Q4 2023 Alpha Teknova Inc Earnings Call
Yeah.
Operator: Hello, and thank you for standing by. Welcome to Teknova's fourth quarter 2023 financial results conference call. At this time, all participants are in a listen-only mode.
Hello, and thank you for standing by welcome to technical fourth quarter 2023 financial results Conference call.
At this time all participants are in a listen only mode.
Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you need to press star 11 on your telephone. You will then hear an automated message advising you if your hand is right.
After the Speakers' presentation, there would be a question and answer session.
To ask a question during this session you need to press star one on your telephone.
You would then her automated message advising you'll hand is right.
Operator: To withdraw your questions, please press star 11 again. I would now like to hand the conference over to Jennifer Henry. You may begin. Thank you, operator. Welcome to Teknova's fourth quarter and full year 2023 earnings conference call. With me on today's call are Steven Gunstream, Teknova's president and chief executive officer, and Matt Lowell, Teknova's 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 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.
To withdraw your question. Please press star one again.
I would now like to hand, the conference over to Jennifer Henry You may begin.
Thank you operator.
Welcome to Teck Nova's fourth quarter and full year 2023 earnings conference call.
With me on today's call are Stephen Gulfstream, Techno, Vice President and Chief Executive Officer, and Matt Little Technical as 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 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 addressed.
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.
Jennifer Henry: Today's comments reflect the company's 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 its forward-looking statements, except as required by law. The company's management believes that, in addition to gap results, non-gap 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 posted on Teknova's website and at www.sec.gov. 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.
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 its 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 strategy.
We will therefore use non-GAAP financial measures a 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 posted to check that was website and at www Dot SEC Dot Gov Slash Edgar.
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.
Jennifer Henry: The non-GAAP financial measures in this presentation may 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 be accessed in the Investor Relations section of Teknova's website and on today's webcast. Now, I will turn the call over to Steven. Thank you, Jen. Good afternoon, and thank you everyone for joining us for our fourth quarter and full year 2023 earnings call. Teknova is a leading producer of critical reagents for the life sciences industry that accelerate the introduction of novel therapies, vaccines, and molecular diagnostics that will help people live longer, healthier lives.
non-GAAP financial measures in this presentation may 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 be accessed on the Investor Relations section of Tech Nova's website and on today's webcast and now I will turn the call over to Peter.
Thank you Chad.
Good afternoon, and thank you everyone for joining us for our fourth quarter and full year 2023 earnings call.
Technology is a leading producer of critical reagents for the life Sciences industry and accelerate the introduction of novel therapy vaccine and molecular diagnostics that will help people live longer healthier lives.
Stephen Gunstream: We manufacture high-quality customer agents with short turnaround times and are able to scale with our customers as they advance their products from discovery to commercialization. In 2021, we presented a strategy to position the company for long-term growth by attracting and onboarding custom RUO and GMP customers developing novel therapies, vaccines, and diagnostics. I'm pleased to say that now, despite a persistently adverse market environment since early 2022, we have executed on that vision and see early indicators of return on our investment. Most notably, we have grown our clinical customer base with annual clinical solutions revenue greater than $5,000 from 13 in 2020 to 34 in 2023. 28 of our clinical customers are biopharmaceutical related, 18 of which operate in the phalangein therapy market segment.
We manufacture high quality customer agents with a short turnaround time and are able to scale with our customers as they advance their products from discovery to commercialization.
In 2021, we presented our strategy to position the company for long term growth by attracting and Onboarding custom argue will MGMT customers developing novel therapies vaccines and diagnostics.
I am pleased to say that now despite a persistently adverse market environment since early 2022.
We executed on that vision and see early indicators of return on our investments.
Most notably.
We have grown our clinical customer base with annual clinical solutions revenue greater than $5000 from 13 in 2020 to 34 and 2023.
28 of our clinical customers our biopharma related.
18 of which operate in the cell and gene therapy market segment.
Stephen Gunstream: In fact, we believe three of our cell and gene therapy customers intend to purchase from us for phase three clinical trials in 2024. Meanwhile, while executing our growth strategy, we also took care to nurture our diversified picks and shovels business that supports the broader life sciences industry. Our base of over 2,500 customers not only creates additional revenue opportunities but also serves as a solid foundation in challenging market environments. Over the past year, we have improved our customer on-time delivery metrics and raised our customer net promoter score to an industry-leading level. We also enacted measures in early 2023 to increase production efficiency by eliminating low-value SKUs, which resulted in the highest average annual revenue per customer in our lab essentials product category in the last three years. In addition, we again demonstrated the stickiness of our business with our customer retention rate, which remained greater than 95% in 2023 for customers spending more than $10,000 annually with us.
In fact, we believe three of our cell and gene therapy customers intend to purchase from us for phase III clinical trials in 2024.
While executing our growth strategy. We also took care to nurture our diversified picks and shovels business that supports the broader life sciences industry.
Our base of over 2500 customers not only creates additional revenue opportunities.
Also serves as a solid foundation in challenging market environments.
Over the past year, we have improved our customer on time delivery metrics and raised our customer net promoter score to industry leading levels.
We also enacted measures in early 2023 to increase production efficiency by eliminating low value Skus, which resulted in the highest average annual revenue per customer and our lab essentials product category in the last three years.
In addition, we again demonstrated the stickiness of our business with our customer retention rate, which remained greater than 95% in 2023 for customer spending more than $10000 in EBIT.
Stephen Gunstream: While we are excited about our progress, we expect 2024 to continue to be challenging with no or modest revenue growth year over year. This is in part due to a Clinical Solutions customer shipment in the second quarter of 2023 that was unusually large, making for a difficult comparison. We also expect that early stage biotech customers will continue to preserve capital. Considering this backdrop, we made the difficult decision to reduce expenses through personnel and other cost reductions in mid-January of this year, which we believe will deliver approximately $8 million in OPEX savings on an annualized basis beginning in the second quarter of this year. The resulting expense reduction will put us in a stronger cash position and lower our adjusted EBITDA break-even revenue to between approximately $50 and $55 million annually. We carried out our January reduction in force, which affected approximately 15 percent of our associates, in a way that preserved our core differentiating ability to produce custom research and clinical grade reagents in weeks instead of months. Specifically, we removed layers of management, R&D roles associated with novel product introduction, and roles supporting custom production automation.
While we are excited about our progress we expect 2024 to continue to be challenging with no our modest revenue growth year over year.
This is in part due to our clinical solutions customer shipment in the second quarter of 2023 that was unusually large making for a difficult comparison.
We also expect that early stage biotech customers will continue to preserve capital.
Considering this backdrop, we made the difficult decision to reduce expenses through personnel and other cost reductions in mid January of this year, which we believe will deliver approximately $8 million in opex savings on an annualized basis, beginning in the second quarter of this year.
The result in expense reduction will put us in a stronger cash position and lower our adjusted EBITDA breakeven revenue to between approximately 50 and $55 million.
Okay.
Yeah.
We carried out our January reduction force, which affected approximately 15% of our associates in a way that preserves our core differentiated ability to produce custom research and clinical break reagents in weeks instead of months.
Specifically, we removed layers of management R&D.
R&D roles associated with novel product introduction.
Role supporting customer production automation.
Stephen Gunstream: I want to take a moment here to thank all of those individuals affected directly or indirectly by our risk. Many of these talented associates were critical to building the infrastructure and foundation we have today and positioning Teknova for long-term success. We remain optimistic about our long-term prospects and expect 2025 will be the year in which many of our investors and greater financial resources. In the near term, we will continue to onboard new target customers to advance our core strategy while continuing to manage expenses aggressively. I will now hand the call over to Matt to go through the financials. Thanks, Steven. Good afternoon, everyone.
I want to take a moment here to thank all of those individuals affected directly or indirectly by area.
Many of these talented associates were critical to building the infrastructure and foundation, we have today.
And positioning <unk> for long term success.
We remain optimistic about our long term prospects and expect 2025 will be the year in which many of our investments will produce even greater financial returns.
In the near term, we will continue to onboard new target customers to advance our core strategy, while continuing to manage expenses aggressively.
I'll now hand, the call over to Matt to talk through the financials.
Thanks, Steven and good afternoon, everyone results for the fourth quarter of 2023 from a revenue perspective, where similar to prior year as anticipated given the ongoing challenges in our markets over the past year.
Matthew C. Lowell: Results for the fourth quarter of 2023 from a revenue perspective were similar to the prior year, as anticipated, given ongoing challenges in our markets over the past year. Overall, we delivered solid financial results for the full year of 2023. On to revenue. Total revenue for the fourth quarter of both 2023 and 2022 was flat at $7.9 million and $36.7 million for the full year 2023, an 11% decrease from $41.4 million for the full year 2022. Lab Essentials products are targeted at the research use only (RUO) market and include both catalog and custom products.
Overall, we delivered solid financial results for the full year of 2023.
On to revenue total revenue for the fourth quarter of both 2023, and 2022 was flat at $7 9 million.
And $36 7 million for the full year 2023, and 11% decrease from 41 4 million for the full year 2022.
<unk> essentials products are targeted as a research use only or are you all market and include both catalog and custom products.
Matthew C. Lowell: LabEssentials revenue was $6.7 million in the fourth quarter of 2023, a 4% decrease from $6.9 million in the fourth quarter of 2022. For the full year, LabEssentials revenue was $28.8 million in 2023, a 9% decrease from $31.8 million in 2022. The decrease in LabEssentials revenue for the full year was driven by a 13% decrease in the number of customers.
Essentials revenue was $6 7 million in the fourth quarter of 2023.
4% decrease from $6 9 million in the fourth quarter of 2022.
For the full year lab Essentials revenue was $28 8 million in 2023% to 9% decrease from $31 8 million in 2022.
The decrease in lab essentials revenue for the full year was driven by a 13% decrease in the number of customers.
Matthew C. Lowell: $2,822 primarily resulting from an SKU rationalization program that was somewhat offset by a 5% increase in the average revenue per customer to $10,206. As a reminder, we also had a large customer migrate from Lab Essentials in 2022 to Clinical Solutions in 2023, which lowered the reported Lab Essentials growth rate. Clinical solutions products are made according to good manufacturing practices, or GMP, quality standards and are primarily used by our customers as components or inputs in the development and manufacture of diagnostic and therapeutic products.
2000, and 822, primarily resulting from an SBU rationalization program somewhat offset by a 5% increase in the average revenue per customer to $10206.
As a reminder, we also had a large customer migrate from lab essentials in 2022 to clinical solutions in 2023, which lowered the reported lab essentials growth rate.
Okay.
Clinical solutions products are made according to good manufacturing practices or GMP quality standards and are primarily used by our customers as components or inputs in the development and manufacturer of die.
Ignostic and therapeutic products.
Matthew C. Lowell: Clinical Solutions revenue was $0.9 million in the fourth quarter of 2023, a 14% increase from $0.8 million in the fourth quarter of 2022. For the full year, Clinical Solutions revenue was $6.7 million in 2023, a 20% decrease from $8.4 million in 2022. We added Clinical Solutions customers in 2023, growing from 25 customers in 2022 to 34 that spend more than $5,000 annually. Average revenue per customer in 2023 decreased 41% to $198,000.
Clinical solutions revenue was <unk> 9 million in the fourth quarter of 2023% to 14% increase from zero point $8 million in the fourth quarter of 2022.
For the full year clinical solutions revenue was $6 7 million in 2023% to 20% decrease from $8 4 million in 2022.
We added clinical solutions customers in 2023 growing from 25 customers in 2022.
<unk> 34 that spend more than $5000 annually.
Average revenue per customer in 2023 decreased 41% to $198000.
Matthew C. Lowell: We expect revenue for customers to increase over time as customers 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 on the income statement. Gross profit for the fourth quarter of 2023 was $1.3 million compared to $2.1 million in the fourth quarter of 2022, and $10.3 million for the full year 2023 compared to $17.5 million for the full year 2022. Gross margin was 17.0% in the fourth quarter of 2023, which is down from 26.7% in the fourth quarter of 2022 and 28.1% for the full year 2023, which is down from 42.2% for the full year 2022. The decrease in gross profit percentage for the fourth quarter of 2023 was primarily driven by increased overhead costs that were partially offset by reduced headcount.
We expect revenue per customer to increase over time as customers ramp up their purchase volume. 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, where can be quarter to quarter revenue lumpiness.
In this category.
So the income statement.
Gross profit for the fourth quarter of 2023 was $1 3 million compared to $2 1 million.
In the fourth quarter of 2022.
And $10 3 million for the full year 2023, compared to $17 5 million for the full year of 2022.
Gross margin was 17.0% in the fourth quarter 2023, which is down from 26, 7% in the fourth quarter of 2022.
And 28, 1% for the full year 2023, which is down from 42, 2% all year 2022.
The decrease in gross profit percentage was.
For the fourth quarter 2023 was primarily driven by increased overhead costs that were partially offset by reduced head count.
Matthew C. Lowell: However, gross margin for the fourth quarter of 2023 was similar on a sequential basis from the third quarter of 2023. The decrease in gross profit percentage for the full year 2023 was primarily driven by the decrease in revenue and the associated lower absorption of fixed manufacturing costs, and to a lesser extent, by increased overhead costs that were partially offset by reduced headcount. Operating expenses for the fourth quarter of 2023 were $12.2 million compared to $16.3 million for the fourth quarter of 2022. Excluding the non-recurring charges of $0.3 million related to a lost contingency accrual, the non-cash trade name impairment charge of $2.2 million in the fourth quarter of 2023, and the non-cash long-lived asset impairment charge of $4.2 million recorded in the fourth quarter of 2022, operating expenses The decrease was driven primarily by reduced headcount and spending, in particular professional fees.
However, our gross margin for the fourth quarter 2023 was similar on a sequential basis from the third quarter of 2023.
The decrease in gross profit percentage for the full year 2023 was primarily driven by the decrease in revenue and the associated lower absorption of fixed manufacturing costs.
To a lesser extent by increased overhead costs that were partially offset by reduced head count.
Operating expenses for the fourth quarter of 2023 were $12 2 million compared to $16 3 million for the fourth quarter of 2022.
Excluding the nonrecurring charges of <unk> 3 million related to our loss contingency accrual the noncash trade name impairment charge of $2 2 million in the fourth quarter of 2023, and the noncash long lived long lived asset impairment charge of $4 2 million recorded in the fourth quarter of 2020.
<unk> operating expenses were down $2 4 million.
The decrease was driven primarily by reduced head count and spending in particular in professional fees.
Matthew C. Lowell: Operating expenses for 2023 were $45.9 million compared to $67.1 million in 2022. The decrease was primarily related to a one-time $16.6 million non-cash goodwill impairment charge coupled with reduced headcount and spending, in particular professional services. Net loss for the fourth quarter 2023 was $10.7 million or $0.26 per diluted share compared to a net loss of $13.3 million or $0.47 per diluted share for the fourth quarter 2022. Net loss for the full year 2023 was $36.8 million or $1.16 per diluted share compared to a net loss of $47.5 million or $1.69 per diluted share for the full year 2022. Adjusted EBITDA, a non-gap measure, was negative $5.4 million for the fourth quarter of 2023, compared to negative $8.1 million for the fourth quarter of 2022.
Operating expenses for 2023 were $45 9 million compared to $67 1 million in 2022. The decrease was primarily related to a onetime $16 6 million noncash goodwill impairment charge, coupled with reduced head count and spending in particular.
Professional fees.
Net loss for the fourth quarter of 2023 was $10 7 million.
For 26 per diluted share compared to a net loss of $13 3 million or <unk> 47.
Per diluted share for the fourth quarter 2022.
Net loss for the full year 2023 was $36 8 million or $1 16 per diluted share compared to a net loss of $47 5 million.
Or $1 69 per diluted share for the full year 2022.
Okay.
Adjusted EBITDA, a non-GAAP measure was negative $5 4 million for the fourth quarter of 2020 compared to negative $8 1 million for the fourth quarter of 2022.
Matthew C. Lowell: Adjusted EBITDA for the full year 2023 was negative $19.2 million compared to negative $21.9 million for the full year 2022. Now onto cash flow and balance. Capital expenditures for the fourth quarter of 2023 were $0.3 million compared to $4.7 million for the fourth quarter of 2022. Capital expenditures for the full year 2023 were $7.9 million compared to $28.1 million for the full year 2022. This marks the sixth straight quarter of sequential decreases in capital expenditures, and we have now completed the initial capital investment necessary to utilize our new manufacturing facility. Free cash flow, a non-gap measure which we define as cash provided by or used in operating activities, less purchases of property, plant, and equipment, was negative 3.1 million for the fourth quarter 2023 compared to negative 12.8 million for the fourth quarter 2022. Free cash flow for the full year 2023 was negative $26.6 million, compared to $55.5 million for the full year 2022. This decrease compared to prior periods for both the quarter and the full year was due to lower cash used in operating activities and a decrease in capital expenditure.
Adjusted EBITDA for the full year 2023 was negative $19 2 million.
Compared to negative $21 9 million for the full year 2022.
Okay.
On to cash flow and balance sheet.
Capital expenditures for the fourth quarter of 2023 were zero point $3 million compared to $4 7 million.
For the fourth quarter of 2022.
Capital expenditures for the full year 2023 were $7 9 million compared to $28 1 million for all year 2022.
This marks the sixth straight quarter of sequential decreases in capital expenditures that we have now completed the initial capital investment necessary to utilize 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 $3 1 million for the fourth quarter 2023 compared to negative $12 eight.
First quarter 2022.
Free cash flow for the full year 2023 was negative $26 6 million compared to $55 5 million for the full year 2022, this decrease compared to prior periods for both the quarter and full year was due to lower cash used in operating activities and a decrease in capital expenditures.
Matthew C. Lowell: Turning to the balance sheet, as of December 31st, 2023, we had $28.6 million in cash and cash equivalents, and $12.1 million in gross debt. Turning to our 2024 guidance and outline, we are providing 2024 total revenue guidance of $35 million to $38 million. At the midpoint, this implies a revenue forecast that is approximately flat compared to 2023.
Turning to the balance sheet as of December 31, 2023, we had $28 6 million in cash and cash equivalents.
And $12 1 million in gross debt.
For the outlook.
Turning to our 2020 for guidance and outlook.
We are providing 2024 total revenue guidance of.
A 35 million to $38 million.
At the midpoint this implies a revenue forecast of approximately flat compared to 2023.
Matthew C. Lowell: We are currently expecting approximately 10% growth in lab essentials revenue, with the difference coming from clinical solutions revenue. While we are encouraged by improvements in the sales funnel, our order book, and the quality of ongoing discussions with customers, the underlying market environment remains challenging, in particular with constrained spending by our early stage biopharma customer sector. As Steven explained, in January of this year, we decided to pare back certain investments and carried out a reduction in the workforce, including management roles. The one-time cost of severance from related benefits associated with this RIF is approximately $1.2 million, which will be recognized in the first quarter of 2024. We do not believe these changes will affect our ability to grow revenue and meet our financial and strategic goals. The company posted operating expenses, excluding non-recurring charges, below $10 million for the third quarter in a row.
We are currently expecting approximately 10% growth in lab essentials revenue with the difference coming from clinical solutions revenue.
While we are encouraged by improvements in the sales funnel, our order book and the quality of ongoing discussions with customers the underlying market environment remains challenging in particular with constrained spending by our early stage Biopharma customer segment.
Yeah.
As Stephen explained in January of this year, we decided to pair back certain investments we carried out a reduction in workforce, including management roles.
The onetime cost of severance and related benefits associated with this risk is approximately $1 2 million.
Which will be recognized in the first quarter of 2024.
We do not believe these changes will affect our ability to grow revenue and meet our financial and strategic goals.
The company posted operating expenses, excluding nonrecurring charges below $10 million in the third quarter in a row that reflect steps. We took during 2023 aimed at reducing operating expenses, which.
Matthew C. Lowell: That reflects steps we took during 2023 aimed at reducing operating expenses, which resulted in total annualized cost savings of more than $9 million compared to the fourth quarter of 2022, excluding non-recurring charges. In total, the savings generated by the most recent RIF and other associated cost-saving measures are expected to reach approximately $8 million on an annualized basis, which builds upon the savings realized in 2023. Similarly, the company saw a reduction in free cash outflow during the fourth quarter of 2023.
Which resulted in total annualized cost savings of more than $9 million compared to the fourth quarter of 2022, excluding nonrecurring charges.
In total the savings generated by the most recent risks and other associated cost saving measures are expected to reach approximately $8 million on an annualized basis, which builds upon the savings realized in 2023.
Similarly, the company saw a reduction in free cash outflow during the fourth quarter of 2023. This marks the sixth straight quarter of lower cash outflow. In fact, the company is pleased to report that free cash outflow for the full year 2023.
Matthew C. Lowell: This marks the sixth straight quarter of lower cash outflow. In fact, the company is pleased to report that free cash outflow for the full year 2023, of 26.6 million, was significantly below our initial guidance of approximately 30 million. As we turn to 2024, the company expects a free cash outflow of less than $18 million. Depending on our top line growth in 2025, we may be able to achieve positive adjusted EBITDA and free cash flow during that year by continuing to manage our costs and with access to a modest amount of additional capital if necessary. We are pleased to announce a new amendment to our credit facility. The update primarily reflects changes to our minimum net revenue covenant. Minimum Cash Covenant, and restrictions on access to our revolvers.
Of $26 6 million was significantly below our initial guidance of approximately $30 million.
As we turn to 2024, the company expects free cash outflow of less than 18 model.
Depending on our topline growth in 2025, we may be able to achieve positive adjusted EBITDA and free cash flow during that year by continuing to manage our costs and with access to a modest amount of additional capital if necessary.
We are pleased to announce a new amendment to our credit facility.
Update primarily reflects changes to our minimum net revenue covenants minimum cash covenants and restrictions on access to our revolver.
Matthew C. Lowell: The new lower minimum net revenue covenants, including a year-end level of $34.0 million for 2024, should give us improved operating flexibility. Additionally, our minimum cash covenant is increasing marginally from $9 million to $10 million. Lastly, we will now be able to utilize our revolver as soon as trailing 12-month revenue exceeds $38 million, down from a trigger of $45 million previously. We believe that we have already made the step-up investments needed to execute our growth strategy, including our new GMP production facility. We believe there is significant... Margin Expansion Potential and Top Line Growth Resumption. Due to the high percentage of fixed costs associated with our business in both COGS and OPEC, we estimate that each additional dollar of revenue drops through at a marginal rate of profitability of at least 70%. In short, we are excited about the future and the company's competitive positioning in a market with attractive fundamentals. With that, I'll turn the call back to Steven. Thanks, Matt.
The new lower minimum net revenue covenants, including a year end level of 34.0 million for 2024 should give us improved operating flexibility.
Our minimum cash covenant is increasing marginally from 9 million to $10 million.
Lastly, we will now be able to utilize our revolver as soon as trailing 12 month revenue exceeds $38 million down from a trigger of $45 million previously.
Yeah.
We believe that we have already made the step up investments needed to execute our growth strategy, including our new GMP production facility. We believe there are significant.
Margin expansion potential in topline growth resumes.
Due to the high percentage of fixed costs associated with our business in both Cogs and Opex, we estimate that each additional dollar of revenue drops through at a marginal rate of profitability of at least 70%.
In short we are excited about the future and the company's competitive positioning and our market with attractive fundamentals.
With that I'll turn the call back to Steven.
Thanks, Matt.
Stephen Gunstream: Overall, we were pleased with our fourth quarter and full year 2023 performance and the progress we made against our strategic priorities. We believe the long-term outlook for our end markets remains positive, and we are committed to executing on our strategy to help customers accelerate the introduction of novel therapies, diagnostics, and other products that improve human health. We will now take your questions. Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 1, then 11 on your telephone and then wait to hear your name announced. To withdraw your question, press star 11 again.
Overall, we were pleased with our fourth quarter and full year 2023 performance and the progress we've made against our strategic priorities.
We believe the long term outlook for our end markets remains positive and we are committed to executing on our strategy to help customers accelerate the introduction of novel therapies.
<unk> and other products that improve human health.
We will now take your questions.
Thank you ladies.
Ladies and gentlemen, as a reminder to ask a question. Please press star one.
One one on your telephone and then wait to hear your name will now.
To withdraw your question Chris Star one again.
Operator: Please stand by while we compile the Q&A raft. Thank you. Bye.
Please standby, while we compile the Q&A roster.
Yes.
Yeah.
Okay.
Mark Anthony Massaro: Our first question comes from the line of Mark Massaro with BCIG. Your line is open. Hey guys, thank you very much for taking the questions. Steven, I think unfortunately, you might have cut out after you provided the guidance. I was just hoping that you could provide perhaps even a repeat of what you talked about how you expect improvements in sales conditions, but constrained spending by perhaps some of your earlier stage clients. Can you just, you know, because when I look at the guidance, obviously, it's a, you know, minus five to plus four type of year, flattish at the midpoint, but it would be helpful to kind of better understand what you're seeing in the end markets and, you know, what could happen to potentially get you above 38 million and what do you think could potentially happen to get you below 35? Great. Sorry about that, Mark. Can you hear me okay?
Our first question comes from the line of Mark Massaro with BTG. Your line is open.
Hey, guys. Thank you very much for taking the questions.
Steven I think unfortunately, you might have cut out.
After you provided the guidance.
I was just hoping that you could provide perhaps even a repeat of.
I believe you talked about how.
You expect improvements in sales conditions, however, constrained spending by perhaps some of your earlier stage.
Clients can you just because.
Because when I look at the guidance obviously it's.
Minus five to plus four type of year.
Flattish at the midpoint, but it would be helpful to kind of better understand.
What youre seeing in the end markets.
What could happen to potentially get you above.
$38 million, what do you think could potentially happen to get you below 35.
Great sorry about that Mark can you hear me okay.
Stephen Gunstream: Yeah, I can hear you much better now. Thanks. Okay. All right. So let me just talk a little bit about how I see the market and what we're hearing. So, first of all, I would say that we are beginning to see improvements in the overall sector. And just a couple of examples of this, right; some of the customers we had in 2022 that did not have substantial orders in 2023 are now reaching back out to us. Some of them have actually already ordered, and some are planning to order this year.
Yes, I can hear you much better now okay, alright, So let me ill just talk a little bit about how I see the market and what we're hearing so first of all I would say that we are beginning to see improvements in the overall sector.
And just a couple of examples of this right. The some of the customers. We had in 2022 that did not have substantial orders in 2023 are now reaching back out to us some of them have actually already ordered.
Some are planning to order this year.
Stephen Gunstream: And we do have a book to bill ratio of over one right now, so that's very positive from that regard. And then, as you know, right, biotech does seem to be coming back. All that said, one of the things that we look at very closely in the sector, that funding, and how it relates to our sales. Now, for the last two or three years, we've had the opportunity, obviously, to see that biotech funding go up and then come back down. And you can actually segment out our customers and look at their spend. And you see, there's typically about a four-quarter lag from the time that the funding goes up until we actually see it from revenue. And so, you know, while, you know, while we're seeing some encouraging things now, right, I think that the reality of that impact in the very near term is not that realistic, given the sales cycle and then just the time it takes for this first half funding. So I think if we do see an improvement And that could potentially get us above 38. But it's hard to determine right now.
And we do have a book to bill ratio over one right now so that's very positive.
From that regard and then as you know right biotech funding does seem to be coming back.
All of that said one of the things that we look at very closely is in this sector that funded and how it relates to our sales over the last two or three years, we've had the opportunity obviously to see that biotech funding go up and then come back down and you can actually segment out of our customers and look at their spend and you'll see there is typically about a four quarter lag from the time.
Funding goes up until we actually see from a revenue standpoint.
And so.
While we're seeing some encouraging things now right I think that the reality of that impacting our very near term.
Is that realistic given the sales cycle and then just the time it takes to.
As first half funding. So I think if we do see an improvement it'll be towards the back half of this year, probably close towards the end of the year.
And that could potentially get us above the 38.
But it's hard to determine right now and we've seen some obviously some ups and downs in the last couple of years on the other side, obviously, if theres a change in the funding environment or an additional question.
Stephen Gunstream: We've seen some, obviously, some ups and downs over the last couple of years. On the other hand, obviously, if there's a change in the funding environment for an additional push to conserve capital, we could be on that lower side of the guidance. But I think it's fair to say that, you know, we are starting to see some changes in the sector and some customer feedback. Okay, that's very helpful.
<unk> capital, we think beyond that lower side of the guidance, but I think fair to say that we are starting to see some changes in the sector and some of the customer behaviors.
Okay.
Stephen Gunstream: Maybe on the competitive front, can you just speak to the demand that you're seeing and any changes to, you know, companies perhaps doing this themselves, potentially taking things in house versus sending them out to you? And then relative to some of the other send-out providers, are you seeing any, any change in dynamics on the competition front? So I think to answer the first part of that question, no, we have not seen an inclination to keep some of the products we make. So that hasn't changed.
That's very helpful. Maybe on the competitive front can.
Can you just speak to the demand that youre seeing and any changes to.
Companies, perhaps doing this themselves potentially taking things in house versus sending them out to you and then relative to some of the other.
Send out providers are you seeing any any change in dynamics on the competition front.
So I think to answer the first part of that question no. We have not seen inclination to keep some of the products we make in house.
Stephen Gunstream: I think the big challenge in the last couple of years has really just been access to capital and then rationalization of pipelines, particularly in this early stage. And so, you know, we mentioned that, you know, in 2020, we have 13 customers; in 2023, we have 34 that are buying clinical products. Obviously, those are, most of those are in the early stage, although I did mention that we have three now going into phase three, which is great news for us. From a competitive standpoint, I would say the answer is no; we haven't seen a change there.
So that Hasnt changed I think the big.
Big Challenge last couple of years is really just an access to capital and then rationalization of pipelines, particularly in this early stage and so we mentioned that 2020, we had 13 customers in 2023 and now we have 34 that are buying clinical products. Obviously those are most of those in the early stages, though I did mentioned that we have three now going into phase III, which is great.
For us.
On the on the competitive standpoint, I would say the answer is no. We haven't seen a change there we have worked hard to convert some of these customers. We've been successful at taking some share of critical customers from.
Stephen Gunstream: We have worked hard to convert some of these customers, and we've been successful at taking some share of critical customers from some of the other players in the space. And it really just comes down to the fact that we can deliver these custom products in a handful of weeks versus many months. And so we're seeing some great responses there. And we're moving our focus to be much more obviously on the conversion side and on finding new opportunities, primarily because we have a lot of those customers actually already buying from us. And it's a matter of timing and when. Okay, great.
Some of the other players in the space and it really just comes down to the fact that we can deliver these customer products and a handful of weeks versus many months and so we're seeing some great responses there in Europe.
We're moving our focus to be a much more obviously on the conversion side in finding new opportunities.
Sure.
Primarily because we have a lot of those customers actually already buying from us and it's a matter of timing and when they happen.
Okay, Great and then if I could sneak one more in.
Stephen Gunstream: And then, if I could sneak one more in, you know, your business touches a lot of other sectors that we track or follow. You know, you talked about how 18 out of 28 biopharmaceuticals are coming from cell and gene therapy. So maybe, can you give us a perspective, given that you have such a diversified business, what some of the growth areas are, you know, if we think about the high end of your guidance, where do you think the biggest sources of demand might come from? And then, on the other hand, where do you think some of the sources of more soft spending might come from?
Our business touches a lot of other sectors that we track or follow.
You talked about how 18 out of 28.
<unk> are coming from cell and gene therapy.
So maybe can you give us a perspective.
Given that you have such a diversified business.
Some of the growth areas are.
If we think about the high end of your guidance, where do you where do you think the the biggest sources of demand might come from and then on the other hand, where do you think some of the sources of more soft spending might come from.
Stephen Gunstream: Yeah, so if you think about across all of the life sciences, right, so we do serve a lot of the tools players as well. So those areas that I know are pretty hot right now, whether it's spatial or liquid biopsy, single cell, that whole segment is doing quite well, as well as sort of the new sequencing technologies out there. We are suppliers to many of those companies, and as those continue to grow, we'll see some benefits from that, you know, from the rest of the sector. Right. Early stage pharma is still, I think, having challenges raising capital. I think there are some outcomes that people are waiting for. I think the late stage has been easier as of late.
Yeah. So if you think about across all of the life Sciences right. So.
Do we do serve a lot of the tools players as well so those areas. I know you know are pretty hot right now, whether it's facial or liquid biopsy.
So that whole segment is doing quite well as well as sort of a new sequencing.
Knowledge is out there, we our suppliers too many of those companies and as those continue to grow we'll see some benefits from that.
From a from the rest of the sector the early stage pharma.
Still I think is having challenges raising capital I think there are some outcomes that are people waiting for I think the late stage has been.
Stephen Gunstream: And so hopefully, you know, that goes down towards the early stage when you get the rest of these things going into the pipeline. Awesome. That's helpful. Thanks, guys. Thanks, Mark. Please stand by for our next question. Our next question comes from the line of... Jacob Johnson with Stevens.
As of late so hopefully that trickles down towards those early stage, we can get the rest of these things go into the pipeline.
Awesome that's helpful. Thanks, guys.
Thanks Mark.
Please standby for our next question.
Yes.
Our next question comes from the line of.
Jacob Johnson with Stephens Your line is open.
Jacob K. Johnson: Your line is open. Hey, good afternoon guys. Steven, maybe going back on these three cell and gene therapy customers in phase three, I know there's probably, I don't want to say too much about individual customers, but obviously that's something that could be an opportunity for you all as the volumes get larger. So I'm just kind of curious, can you give me an idea of what the size of a phase three customer looks like, or maybe, on the other side of it, the guidance you're I know it's a tough comp, but it's kind of a muted outlook.
Hey, good afternoon guys.
Steven maybe gone back on these three cell and gene therapy customers in phase III.
I want to say too much about individual customers, but but obviously.
That's something that can be an opportunity for you all as the volumes get larger so I'm just kind of curious if can you frame up maybe what the size of the phase III customer it looks like or are maybe on.
The other side of the guidance Youre, giving for clinical solutions I know, it's a tough comp, but it is kind of a muted outlook why aren't we seeing more of a benefit from those three customers in cell and gene therapy.
Stephen Gunstream: Why aren't we seeing more of a benefit from those three customers in cell and gene therapy? Yeah, I'll just give you this. First of all, not all of them are ordered yet, so I don't know the exact amount.
Yes ill just give you well first of all.
Sure.
Not all of them ordered yet so I don't know the exact amount there is conversations about when they'll order and if maybe towards the back half of this year. So there is of course, a lot of timing aspects to this jay to upgrade if they order in Q4 than it may not be delivered a Q1, depending on their needs and so I'm hesitant to commit on an annual basis, the things that have yet to come in.
Stephen Gunstream: There are conversations about when they'll order, and it's moving towards the back half of this year. So there are a lot, of course, a lot of timing aspects to this, Jacob, right? If they order in the Q4, then it may not be delivered in Q1, depending on their needs. And so I'm hesitant to commit on an annual basis to things that have yet to come in. I would expect, you know, these to range. There are certainly hundreds of thousands of dollars, maybe mid-, mid-hundreds of thousands for some of these orders for a bill.
I would expect.
These to range there certainly hundreds of thousand dollars, maybe mid <unk>.
Mid hundreds of thousands.
Stephen Gunstream: It really depends on the size of their clinical trial. We tend to do very well and collect in all of the downstream processing regions that go with these products. So, yeah, we're excited about it, but there's obviously still more work to do both on our end to get these things into the order book for this year. And then from the guidance perspective, you're absolutely right. We do have a clinical solutions customer for 2023, the same one we referred to in Q2 last year. That was a large part of the clinical solutions business in 2023. And so we do need to make that up going into 2024, and that customer is not gone. We're still doing some products for them, but it's just not nearly as hard, and we hope that, you know, they're successful in their clinical trials. And then, and if they are, we'll actually be a significant revenue opportunity for them in 2025. Got it.
For some of these orders for a built it really depends on the size of the clinical trial.
We tend to do very well.
And all of the downstream processing reagents that go with it.
These products so.
Yes, we're excited about it but there is obviously still more work to do both on there on our end to get.
Into the order book for this year.
And then from the guidance perspective, you're absolutely right. We do have a clinical solutions customer from 2023 same when we referred to about Q2 last year that was.
A large part of the clinical solutions in 2023.
So we do need to make that up and going into 2024 and that customer has not gone and we're still doing some product for them, but it's just not nearly as large and we hope that they're successful in their clinical trials.
They are will be actually significantly.
Revenue opportunity for them in 2025.
Matthew C. Lowell: Thanks for that, Steven. And then maybe for the follow up, Matt, just on the $8 million of cost savings, can you, is that all, I guess, one, OPEX, and two, just any thoughts around the timing of realizing those savings throughout the year as we're thinking about our models? Sure, Jacob.
Okay.
Got it thanks for that Steven and then.
Thank you for the follow up Matt just on the Dash.
The $8 million of cost savings can you is that I guess, one is that all up opex into just any thoughts around the timing of realizing those savings throughout the year as we're thinking about our models.
Matthew C. Lowell: Yes. I would say that the vast majority of that eight million is OPEX, so we kind of summarize it as OPEX savings. Of course, we're continuing to look through the cost of goods sold and looking for and achieving cost savings there as well. That sort of factored into the, you know, margin expectations. But And we did disclose in January that the savings specifically from the headcount reductions were six point four million.
Sure Jacob Yes.
I would say that the vast majority of that $8 million as opex to kind of summarize it as opex savings courseware.
<unk> to look through.
Cost of goods sold and looking for and achieving cost savings there as well that sort of factored into the into the.
Margin expectations, but.
And we did disclose in January.
The savings specifically from the head count reductions was $6 4 million. So there are some additional things on top of that that gets you to the $8 million annualized and.
Matthew C. Lowell: So there are some additional things on top of that that gets you to the eight million annualized. And because of the payouts and timing of everything, we're really expecting to see that in Q2 results, a full quarter of that in Q2 results at this point. Got it. Thanks, Matt.
Because of the payouts and timing of everything we're really expecting to see that in Q2 results.
A full quarter of that in Q2 results.
At this point.
Okay.
Matthew C. Lowell: I'll leave it there. Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Steven Mah with TV and Coleman. The line is open.
Got it thanks, Matt I'll leave it there.
Thank you.
Please standby for our next question.
Our next question comes from the line of Steven Mah with Cowen Your line is open.
Steven Mah: Great, thanks for the questions. On gross margins, you know, how should we think about gross margin recovery? Is Q4 the low point at 70%? and, you know, maybe then give us a sense of when we should expect gross margins to level out and maybe inflect upward, or maybe to ask a little differently, how should we think about gross margins in 2024? Yeah, good question, Steve. Yeah, I mean, I think that this Q, first of all, Q4 was very similar to Q3, the revenue was similar, the gross margin outcome was similar, and the type of costs we had were similar. So it was not an unexpected result there.
Oh, great. Thanks for the questions.
On the gross margins.
How should we think about the gross margin recovery in Q4, the low point again at 17%.
And maybe then give us a sense so.
When we should expect gross margins to level out and maybe inflect up.
Or maybe to ask a little differently, how should we think about gross margins in 2024 versus 2023.
Yes, good question Steve.
Yes, I think thats the.
First of all Q2 was Q4 was very similar to Q3 revenue was similar to the gross margin outcome with similar types of costs we had.
Were similar so not an unexpected result there.
Matthew C. Lowell: And I do believe that as we start to see revenue come back, we will start seeing the margins improve. And, in fact, I do believe over time, there's significant potential given the high fixed cost nature of our manufacturing operation, in particular as a result of the new facility being brought online fully from a cost perspective in the second half of last year. So I think the revenue, excuse me, the gross margin will track pretty closely to the revenues. As we see increases in revenue, we'll see that margin go up. I think, you know, It's hard to say exactly where the overall 2024 will land. I do that because 2023 itself was quite a mixed bag. You know, we had these margins of 17, 18 percent, and then we had one quarter of 44. In the end, the full year wound up at 28 percent.
I do believe that as we start to see.
Revenue come back.
We will start seeing the margins improve and in fact I do believe over time, there is significant potential given the high fixed cost nature of our manufacturing operation in particular as a result of the new facility being brought online fully from a cost perspective in the second half of last year.
So I think the revenue excuse me the gross margin will track pretty closely to the revenues as we see increases in revenue, we'll see that margin go up.
<unk>.
It's it's hard to say exactly where the overall 2024 will land I do that because 2023 itself was quite a mixed bag we had.
Margins of 17%, 18% and then we had one quarter of <unk> 44 in the full year wound up at 28% and I do think there is some potential for growth.
Matthew C. Lowell: And I do think there is some potential for volatility on that gross margin line. But I do expect an overall improvement from that 28 percent for the year going into 2024. I don't think it'll be dramatic yet as we're still overcoming some of the headwinds, but I do see it improving year on year and generally improving as quarterly revenue improves. That's all.
Volatility on that gross margin line, but I do expect that overall free rent in that 28% for the year going into 'twenty 'twenty four I don't think it will be dramatic yet as we're still overcoming some of.
The headwinds, but I do see it improving year on year and generally improving as the quarterly revenue improves.
Steven Mah: Yeah, that's very helpful. Appreciate that. And then a question on the total revenue guide. Is that conservative given, you know, your prior comments on, you know, you're seeing maybe some green shoots?
That's helpful.
Yes, yes, that's very helpful. I appreciate that and then a question on the on the total revenue guide.
Is that conservative given your prior comments on Youre seeing maybe some green shoots in.
Steven Mah: potential recovery and R&D spend. And then similarly, on the clinical guide, if I'm doing my math right, there is a fairly significant step down. And, you know, I appreciate it.
A potential recovery in R&D spend and then similarly on the clinical guide if I'm doing my math right.
There is a fairly significant step down and I. Appreciate it yes, it's from smaller orders from from newer customers, but maybe give us a sense on.
Matthew C. Lowell: Yeah, it's from smaller orders from newer customers, but maybe it gives us a sense of, you know, maybe how long it takes for a customer to typically ramp up on the clinical. Yeah, so I'll, I think I'll just sort of harken back to what Steven said a moment ago, one of the challenges that we're facing on the clinical solutions side is the fact that we had, you know, a pretty significant order in in Q2 of last year. So when you normalize for that, it may not be as, you know, bad as the guidance would suggest because we do have to make that up.
Maybe how long it takes for a customer to typically ramp on the clinical side.
Yeah.
Yes, so I think other sort of harken back to what Steven said, a moment ago on one of the one of the challenges that we're facing on the clinical solution side is the fact that we had.
A pretty significant order in Q2 of last year. So when you when you normalize for that it may not be as.
That is the guidance would suggest because we do have to make that up we are being conservative in terms of what we think.
Matthew C. Lowell: We are being conservative in terms of what we think the market recovery will be on the clinical side specifically. There is a fairly long lead time for getting those cuts even though we have increased the number of customers substantially. Because of the, you know, I guess the regulatory process and the quality process, those those that business doesn't it takes a good 12 12 months or so for that to ramp up. So we feel like that's a reasonable place to start. And again, depending on how the market evolves and how fast these customers move through their processes. You know, we could see some upside to that. But right now, I think we feel like this is the right place to land.
The market recovery will be on the clinical side, specifically there is a fairly long lead time for getting those even though that we have increased the number of customers substantially.
Because of the.
<unk>.
I guess, the regulatory process and the quality process those those that business doesn't it takes a good 12 12 months or so for that to ramp up.
So we feel like that that's a reasonable place to start and again, depending on how the market evolves how fast these customers move through their process.
Could see some because see some upside to that but right now I think we feel like this is the right place to land and just just to add in there Steve on that.
Stephen Gunstream: Yeah. And just, just to add in there, Steve, on the, on the sales cycle here, it's a combination of getting them in and on board, right, which is what we've been focused on and actually very successful to look at it, you know, 34 customers in 2023, but then the time that once you have them on board when they ramp is very driven by their clinical trials and then how many of the trials are you in right so you know we've noticed that while getting acquiring the customers they're now we're the primary vendor it does take another you know 6 to 12 months to ramp up into significant revenue with them so we are we are doing that on a daily basis here it just takes more time than I think all of us want it to take but I think that's the positive of that it's actually very hard very sticky it's a very sticky business once you have it so we're feeling pretty good about where we sit towards you know from a customer acquisition standpoint and think that this will play out over the next you know 18 months. Okay, great. That's super helpful. If I can just sneak one last one in.
On the sales cycle here, it's a combination of getting them in and onboard right, which is what we've been focused on and actually very successful. So you look at it in a 34 customers in 2023.
<unk>.
But then the time that once you have them on board when they ramp is very driven by their clinical trials and then how many of the trials are you in alright. So.
Noticed that while getting acquiring the customers that are now where the primary vendor. It does take another six to 12 months to ramp up into significant revenue with them. So we are we are doing that on a daily basis here. It just takes more time than I think all of us on it to take but I think thats the positive of that extra very hard.
Very sticky its very.
Sticky business once you have it so.
Feeling pretty good about where we sit towards from a customer acquisition standpoint, and think that this will play out over the next 18 months.
Okay, Great. That's super helpful. If I can just sneak one last one in.
Stephen Gunstream: On the GMP facility, you know, can you give us a sense of your audit schedule and the calendar backlog? Yeah, so you know, fortunately, we don't have a backlog. We've got the facility up and running. It is generating revenue on a daily basis right now, which is great to see. We continue to host customers for supplier qualifications, what I would call it. They come out here, they tour the facility, they, you know, audit our quality systems and meet the team, and then give us the green light, the internal team there, to start ordering from us.
On the GMP facility.
Can you give us a sense of your.
Your audit schedule in the calendar backlog.
Thank you.
Yes. So unfortunately, we don't have a backlog.
<unk> got the facility up and running.
Revenue generating on a daily basis, right now, which is great to see.
We continue to host customers for supplier qualifications, what I would call it they come out here intuitive facility.
Audit our quality system to meet the team and then give us the green light of the internal team the green light to start ordering from us.
Stephen Gunstream: And so we still have a number of those lined up already for Q1 that we're finishing up, and we expect to fill up Q2 as well. So there is no backlog at the facility or even that schedule because we get them in as fast as we can. You know, that's a critical bridge to cross in order to generate additional revenue. Thank you. Please stand by for our next question, which comes from the line of Matt LaRue with Wim Blair. Your line is open. Hi, this is Madeline Mollman on behalf of Matt.
And so we still have a number of those lined up already for Q1 that we're finishing up in unexpected filling up Q2 as well so.
There is no backlog on the facility.
Or even that schedule, because we get them in as fast as we can and that's a critical bridge to cross in order to generate additional revenue.
Okay. Thank you.
Thank you.
Please standby for all next question.
Our next question comes from the line of Matt <unk> with William Blair. Your line is open.
Hi, This is model enrollment on for Matt.
Madeline Kendall Mollman: I was wondering if we could touch on the decline in lab essentials customers. I know you mentioned that there are a couple of SKU rationalizations, things like that, but I was wondering if you could provide any more color on what you think might be driving that. Yeah, absolutely. So there are two things really driving this. First is the skew rationalization.
Wondering if we could touch on the decline in lab essentials customers. I know you mentioned that there were a couple of SKU rationalization things like that but I was wondering if you could provide any more color on what you think might be driving that.
Yes, absolutely. So there are two things really driving this.
Stephen Gunstream: We took a look at the beginning of last year and realized that, you know, the business has been around for a long time; there are a number of products that we made, sporadically, in very small batches, very costly to make, that were really for, you know, a handful of customers, if not only one customer, and generated very little revenue. And so we made the decision then to rationalize SKUs and migrate customers to some of our other catalog products. And, of course, there are handfuls of customers, as you can see from the change there, that aren't going to order again. What you can see, though, is that revenue did not shift dramatically.
First is the SKU rationalization.
Look at the beginning of last year recognize that the business has been around for a long time, there are a number of products that we make.
Sporadically very small batch is very costly to me that were really for a handful of customers if not only one customer and generating very little revenue. So.
The decision then to rationalize skus and migrate customers to some of our other catalog products.
And of course, they are handfuls of customers and you can see from the change there that arent going to order again, but you can see though is that the revenue did not shift dramatically and that is exactly.
Stephen Gunstream: And that is exactly what we were intending to do there. So we're a much more efficient organization. I think we'll see that as we scale up in revenue, you'll start to see that, like Matt talked about the contribution margin dropping by about 70% as we go forward. So that's one piece of two that is causing this.
What we are intending there so we're a much more.
Patient organization and I think we'll see that as we scale up and revenue Youll start to see that Matt talked about the contribution.
Margin dropping about 70% that's been cohort. So that's one piece of two that is causing this the other the other part.
Stephen Gunstream: The other part, which we did a lot of what I would call account hygiene management, where we cleaned up the way we count unique customers and made sure that, you know, many companies may have multiple accounts; we made sure we're not double counting and things like that. And not that we were double counting before, but just the way that we set up our system now to have 10 organizations and truly treat everyone at the same address as a single account. So you'll see on our supplementary slides that we've actually restated history as well, so you can see the trends and growth and things like that. Great, thank you. And then continuing on the theme of customers, I think something we've heard a lot these last couple of months is an effort by companies to get a little bit closer to their customers, whether that be through surveys, or working more closely with their customers. I was wondering if there were any tools or processes that you added internally to kind of better get an insight into what your customers were thinking when it comes to forecasting.
As we did a lot of what I would call.
Account hygiene management, where we cleaned up the way, we count unique customers in nature.
Many companies May have multiple accounts, we mentioned, we're not double counting and things like that.
We are double counted before but just the way that we set up our system now.
Organizations for the Street.
Everyone at the same address as a single account so youll see in our supplementary slides that we've actually restated history as well. So you can see the trends in growth and things like that.
Great. Thank you and then continuing on the theme of customers I think something we've heard a lot. This.
Last couple of months is an effort by companies to get a little bit closer to their customers whether that be through surveys through working more closely with their customers. I was wondering if there were any tools or.
Or processes that you added internally to kind of better.
Insight into what your customers were thinking when it comes to forecasting.
Stephen Gunstream: Okay, well, we've added, we have a number of tools. Number one, but when it comes to forecasting, those typically come in the form of quality agreements and supply agreements with these larger customers. For the rest of the customers there, I think the most important thing for a business like us, you know, in the pure consumable play, repeat order type of business, is to make sure that our customers are happy with our service levels. And so for the past couple years, we've actually been tracking our net promoter score from a customer perspective. We do it a couple of times a year, and we've seen that go up pretty dramatically.
Okay.
We have a number of tools number one but when it comes to forecasting I mean, those typically come in the form of quality agreements and supply agreements with these larger customers.
For the so the rest of the customers there I think the most important thing for a business like us.
And the pure consumable play.
Repeat order type of business is to make sure that our customers are happy with our service.
And so for the past couple of years, we've actually been tracking our net promoter score from a customer perspective, we do a couple of times a year and we've seen that go up pretty dramatically I believe I said.
Stephen Gunstream: I believe I said industry-leading numbers, but I can't remember the number off the top of my head, but it's in the 60s now. And that really comes back to our ability to deliver on time and our customer service levels. And so we do feel like we have a very good relationship with these customers and kind of have a feel for how things are going across the board.
The industry, leading numbers, but I can't remember the number of come ahead between 60 days now.
And that really comes back to our ability to deliver on time.
Customer service levels and so we do feel like we have a very good relationship with these customers and kind of have a feel for how things are going across the board and the rest is from this.
Stephen Gunstream: And this is from the $50 catalog items up to the $100,000 order. Great, thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Paul Knight with KeyBank. Your line is open.
$50 catalog items up today $100000 orders.
Okay.
Great. Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Paul Knight with Keybanc. Your line is open.
Paul Richard Knight: Hi Steve, we've had maybe up to four approvals here in 4Q1 for cell and gene therapy. Will you benefit from these, or do you know what you are seeing here in Q1? I think we'll benefit insofar as that will help demonstrate the value of these products that are going out there and help other companies raise money and invest in the space. We are not, as I said, we have three entering phase three this year. The ones that were not approved were not part of that particular manufacturing process.
But we've had maybe up to four approvals here in for Q1 in the cell and gene therapy.
Will you benefit from.
These or what are you seeing here in Q1.
I think it will benefit Enzo far as that will help demonstrate the value of these products that are going out there and help other companies raise money.
And the space we are not.
As I said, we have three entering phase III this year.
The ones that were not approved or not.
Part of that particular manufacturing process.
Stephen Gunstream: So, you know, from a general market perspective, I think we're going to have a record year from a cell and gene perspective. And that helps us. And as I said, we're very much tied to that biotech funding in the space. And so anything that drives that forward, you will see, I believe you'll see an impact on our revenue standpoint from us in the sort of the four quarter lag. We've seen clinical trials in cell and gene therapy increase in the latter part of a 24. Are you seeing that, and are you seeing that really from the more well-funded larger biopharmaceuticals? What are your thoughts there? Yeah, I think, Paul. I think you mean that half of 23, right?
No.
From a general market perspective, I think we're going to have a record year from a cell and gene perspective, and that helps us and as I said, we're very much tied to that biotech funding.
In the space and so anything that drive that forward and you will see I believe you'll see an impact on our revenue Stanford claim from us.
Sort of a four quarter last year.
We've seen a clinical trials in cell and gene therapy increase.
Later part of about 24.
Or are you seeing that but are you seeing that really from the more the well funded larger biopharma is.
What are your thoughts there yes.
Yes, I think Paul I think in the back half of 'twenty three rate increases.
Stephen Gunstream: Yeah, right. And I do think there's still, you know, right now from a capital perspective, the smaller midsize biotech companies are in the early stage; they have a harder time raising money than the larger players or the ones that are in the later stage of real clinical trial data at this point in time. So I still think we're seeing that pain point. I'm, you know, obviously hoping that we can get that improved over the course of this year. At the same time, we focused our efforts and are now actually looking at these larger players, as well as some in the later stage.
Yeah.
And I do think there is still.
Right now from a capital perspective, the smaller mid sized biotech companies are in early stages, we have a harder time raising money and then the larger players or the ones that are in the later stage clinical.
Clinical trial data at this point in time, so I still think we're seeing that endpoint.
Obviously, hoping that we get that.
Improved over the course of this year at the same time, we focused our efforts are now actually looking at these larger players as well as some of the later stage and Thats kind of whats filling up our pipeline.
Stephen Gunstream: And that's kind of what's filling up our pipeline. Okay, and then Matt, what's the size of your credit line? Did you say that earlier?
Okay, and then Matt what's the size of your credit line did you say on that earlier.
Matthew C. Lowell: So we have $12 million in a term loan outstanding. We have a revolver, but I mentioned that we will get availability to that once our trailing 12 revenue hits $38 million. That is up to $5 million. It's based on the borrowing base of accounts receivable.
So we have $12 million and a term loan outstanding we have a revolver that I mentioned.
We will get availability two once our trailing 12 revenue it's $38 million that is up to $5 million is based on borrowing base of accounts receivables. So it depends on what our receivable levels are but it's up to $5 million.
Matthew C. Lowell: So it sort of depends on what our receivable levels are, but it's up to $5 million. OK. Thank you. Thanks, Bob. Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. That concludes today's conference call. Thank you for your participation. You may now disconnect. Thank you. Thank you.
Okay.
Thanks, Paul.
Thank you.
Ladies and gentlemen, im showing no further questions in the queue.
That's okay that concludes today's conference call. Thank you for your participation you may now disconnect.
Thank you.
Sure.
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Okay.
Okay.
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