Q2 2025 Alpha Teknova Inc Earnings Call

Speaker #1: After the speakers' presentation, there will be a estion-and-answer session. To ask a question during the session, you will need to press star one-one on your telephone.

Speaker #1: You I would now like to hand the conference over to your first speaker today, Jennifer Henry, senior vice president of marketing. Please go head.

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Speaker #2: Thank ou, operator. Welcome to TechNova's second quarter 2025 earnings conference call. With me on today's call are Stephen Gunstream, TechNova's president and chief executive officer, and Matt Lowell, TechNova's chief financial officer, who will make prepared remarks and then take your questions.

Speaker #2: As a inder, 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.

Speaker #2: Additional information concerning these risk factors is included in the press release in company-issued earlier today, and they are more fully described in the company's various filings with the SEC.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: We will therefore use non-gap financial measures of certain of our results during this call. Reconciliations of gaps to non-gap financial measures are included in the press release that we issued this afternoon.

Speaker #2: Which is posted on both TechNova's and the SEC's website. Non-gap 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 gaps.

Speaker #2: The non-gap financial measures in this presentation may differ from similarly named non-gap 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.

Speaker #2: It can be accessed on the investor relations section of TechNova's website. And now, I will turn the call over to Stephen.

Speaker #3: Thank you, Jen. Good afternoon, and thank you, yone, for joining us for our second quarter 2025 earnings call. This is our 16th quarterly earnings call since our initial public offering in June 2021, and I want to kick off by discussing the progress we've made in preparing TechNova for long-term sustainable above-market growth.

Speaker #3: First, we designed, built, and validated a state-of-the-art facility for the manufacture of custom clinical reagents in batch sizes smaller than 2,000 liters. This purpose-built facility has enabled us to grow the number of clinical customers we support from 13 in 2020 to 48 in 2024.

Speaker #3: With this new facility, we can not only generate more than 200 million dollars in annualized revenue without significant additional capital investment, but also deliver custom clinical-grade reagents in weeks instead of months.

Speaker #3: Second, we developed and validated automated manufacturing processes, integrating new IT infrastructure, and implemented lean production methods to drive operational efficiencies. These new capabilities will scale with the business, generating significant leverage in the P&L as revenue increases.

Speaker #3: Third, we established TechNova as a recognized leader in custom research and clinical reagents through our commercial investments, which included rebranding and repositioning the company, website enablement, lead generation, and establishing an efficient and effective commercial organization.

Speaker #3: These investments have allowed us to attract and onboard customers developing new therapies across multiple modalities, including cell therapy, gene therapy, mRNA, and monoclonal antibodies.

Speaker #3: Much like our operational infrastructure, our commercial infrastructure is set up to scale with minimal additional investment. Finally, we have achieved all of that while reducing our headcount by about 40% from its peak.

Speaker #3: Cutting our annual operating expenses by approximately $18 million over the past three years, and exceeding consensus revenue estimates 15 out of 16 reported quarters during one of the most tumultuous periods in our industry's history.

Speaker #3: So I'm very confident about what we've built here at TechNova and about the value we're positioned to deliver for our customers and shareholders in the long term.

Speaker #3: Now, let's talk about the second quarter. We delivered strong results across both top and bottom line. Revenue increased by 7% compared to the same period last year, making the fourth marking the fourth consecutive quarter of year-over-year growth.

Speaker #3: The growth was driven by strength in sales of our catalog products, revenue from which, in, grew in the low double digits. We also executed extremely well operationally, achieving an adjusted EBITDA of negative 0.8 million dollars which is our best quarterly result since we began reporting as a public company in mid-2021.

Speaker #3: Matt is going talk about the outlook for the year, but before I turn it to him, I would like provide my perspective on the progress we're making with our growth strategy and an update on the current end markets we serve.

Speaker #3: Our strategy is built on two fundamental beliefs: first, we will continue to be a leader in essential research reagents by providing a diverse portfolio of catalog products that are critical to the life science community.

Speaker #3: And second, our ability to manufacture custom research and linical-grade reagents will enable us to acquire and support emerging therapeutic and diagnostic developers as they advance their products to commercialization.

Speaker #3: Revenue from sales of our catalog products, which contributes approximately 60% of our annual revenue from more than 3,000 accounts, increased the low double digits from the same period last year and has grown in the high single digits on a trailing 12-month basis.

Speaker #3: The revenue growth from the first half of 2025 is now in line with our average historical growth rate from 2009 to 2019 of 12% for this portion of our business.

Speaker #3: While we serve nearly every end market with these reagents, the past quarter's growth was driven by key accounts in large pharma, and life science tools.

Speaker #3: We do believe this growth is above market rates, and we attribute that to the investments we've made in past couple of years into portfolio optimization and integration with third-party purchasing systems targeting marketing campaigns and channel management.

Speaker #3: With respect to custom products, our strategy is to engage with early-stage developers and support them as they move through clinical trials to commercialization. As a reminder, our market research suggests that the average spend by a TechNova customer buying custom products increases approximately 30-fold between phase one and the therapy's commercialization.

Speaker #3: Of course, this increase in spend plays out over years not quarters, because clinical trials typically take 5 to 10 years to complete. We therefore view the number of clinical customers as a leading indicator of our success.

Speaker #3: Recent market conditions have been challenging for our small to mid-sized biotech customers with early-stage therapy, and unfortunately, we expect that to remain the case for the remainder of 2025.

Speaker #3: Under the circumstances, we find it promising that the number of clinical customers we support continues to grow. Including several with therapies and later stages, and that we are also attracting clinical customers in adjacent markets ike monoclonal antibody therapeutics and diagnostics.

Speaker #3: With the strong foundation in our catalog products, we therefore believe TechNova is well positioned for high-value creation as the more than 60 therapies we already support move closer to commercialization.

Speaker #3: Lastly, we believe we can drive additional scale and profitability by executing on inorganic opportunities we pursuing that leverage our operational and commercial infrastructure. These opportunities include both closely with early-stage companies to bring products into our portfolio to build out robust bioprocessing workflows, and M&A, where we identify and integrate token acquisitions.

Speaker #3: We are excited about the progress of our pipeline and expect to have further announcements in the coming quarters. Taken all together, we feel good about both our 2025 guidance and about how the company is positioned for long term.

Speaker #3: Growth. I will now hand the call over to Matt to k through the financials.

Speaker #4: Thanks, Stephen, and good afternoon, everyone. Revenue was up 7% for the second quarter 2025 compared to the same quarter of prior year. I'm also pleased with our progress on key profitability measures and cash usage.

Speaker #4: Overall, we delivered great financial results for the second quarter of 2025. Total revenue for the second quarter of 2025 was $10.3 million, a 7% increase from $9.6 million in the second quarter of 2024.

Speaker #4: We have essentials products, our targeted at the research use only, or RUO market, and include both catalog and custom products. We have essentials revenue was $7.8 million in quarter of second quarter of 2025, and a 2% increase from $7.6 million in the second quarter of 2024.

Speaker #4: The increase in lab essentials revenue was attributable to an increased number of customers partially offset by slightly lower average revenue per customer. Clinical solutions products are made according to good manufacturing practices or GMP.

Speaker #4: Quality standards and are primarily used by our customers as components or inputs in the development and manufacture of diagnostic and therapeutic products. Clinical solutions revenue was $2.1 million in the second quarter of 2025, a 32% increase from $1.6 million in the second quarter of 2024.

Speaker #4: The increase in clinical solutions revenue was attributable to an increased number of customers partially offset by lower average revenue per customer. We expect revenue per customer to increase over time as a subset of these customers ramp up their purchase volumes as they move through clinical trial phases.

Speaker #4: However, this metric can be affected by the addition of newer clinical or catalog customers who typically order less. Just as a inder, due to the larger average order size and linical solutions compared to lab essentials, there can be more quarter-to-quarter revenue lumpiness in this category.

Speaker #4: To the income statement now, gross profit for the second quarter of 2025 was $4.0 million compared to $2.8 million. In the second quarter 2024, gross margin was $38.7% in the second quarter of 2025, which is up from $29.2% in the second quarter of 2024.

Speaker #4: The increase in gross profit was driven by manufacturing efficiency gains and higher revenue. Operating expenses for the second quarter of 2025 were $7.4 million compared to $7.9 million.

Speaker #4: For the second quarter of 2024, excluding the non-returning charge of $0.1 million recorded in the second quarter of 2024, related to the loss contingency operating expenses were down $0.5 million.

Speaker #4: The decrease was driven primarily by reduced spending primarily on insurance and facility costs. At the end of the second quarter of 2025, we had $171 total associates compared to $169 a year prior.

Speaker #4: Net loss for the second quarter of 2025 was $3.6 million, or negative 7 cents per diluted share. Compared to a net loss of $5.4 million, or negative 13 cents per diluted share for the second quarter of 2024.

Speaker #4: Adjusted EBITDA, a non-gap measure, was negative 0.8 million for the second quarter of 2025, compared to negative 2.6 million for the second quarter of 2024.

Speaker #4: To cash flow and balance sheet, capital expenditures for the second quarter of 2025 were $0.2 million, compared to $0.1 million for the second quarter 2024.

Speaker #4: Free cash flow, a non-gap measure, which we report as cash used in operating activities, plus purchases of property, plant, and equipment, was negative 2.3 million for the second quarter of 2025, compared to the negative 3.0 million for the second quarter of 2024.

Speaker #4: As planned, this quarter included a one-time use of $0.4 million of cash to settle our previously accrued loss contingency. Turning to the balance sheet, as of June 30th, 2025, we had $24.0 million in cash and cash equivalents and short-term investments.

Speaker #4: And $13.2 million in total borrowings. Now, onto our 2025 guidance and outlook. We are reiterating 2025 total revenue guidance of $39 million to $42 million.

Speaker #4: At the midpoint, this implies 7% revenue growth compared to 2024. As mentioned in previous calls, given our limited exposure to NIH funding and limited business outside of the United States, we experience very little direct impact from the geopolitical environment.

Speaker #4: Revenue from sales of our catalog products, which represent a very broad customer base, was up low double digits again and higher than expected in the second quarter, as spending on discovery work continues to be robust in certain pockets of the market.

Speaker #4: On the hand, growth is lower than expected from custom products, as the macro environment remains unfavorable for early-stage small to mid-sized biopharma customers and for their clinical work in .

Speaker #4: With current trends persist for the year, we would expect higher growth in catalog products and lower growth in custom products than anticipated. Our overall revenue guidance remains between 39 and 42 million for 2025.

Speaker #4: As mentioned before, second quarter gross margin performance was driven by manufacturing efficiency gains and higher revenue compared to last year. We're particularly proud of the improvements in efficiency as the team has worked hard to capitalize on identified opportunities.

Speaker #4: While gross profit improved more than our previously communicated expectations of about 70% of incremental revenue, we still believe this is the best estimate over longer periods of time.

Speaker #4: We expect some of these efficiency gains to continue into the second half, but with less impact. Therefore, we are now increasing our gross margin target to the low 30s for fiscal year 2025.

Speaker #4: Although we ended the second quarter below target spending levels, partly due to timing considerations, we continue to expect operating expenses of at least $8 million per quarter in the second half.

Speaker #4: Allowing us to moderately increase our investment in sales and marketing compared to last year, positioning ourselves for the market's broader recovery. At these spending levels, we continue to believe it would become adjusted EBITDA positive in the range of 50 to 55 million in annualized revenue.

Speaker #4: The company continues to expect free cash outflow of less than $12 million for the full year 2025. As we have communicated previously, based on reasonable assumptions about future growth and spending, plus current liquidity, we believe that we do not need to raise additional capital to execute on our organic growth strategy.

Speaker #4: With that, I will turn the call back to Stephen.

Speaker #3: Thanks, Matt. We believe the long-term outlook for our end markets remains positive, and we are committed to helping our customers accelerate the introduction of novel therapies, diagnostics, and other products that improve human health.

Speaker #3: We will now take your questions.

Speaker #1: Thank you. At this time, we will conduct the question and answer session. As a inder, to ask a question, you will need to press star one-one on your telephone and wait for your name to be announced.

Speaker #1: To withdraw your question, please press star one-one again. Please stand by while we compile the Q&A roster. Our first question comes from Mark Massaro, of BTIG, your line is now open.

Speaker #5: Hey, guys. This is Vivian from Mark. Thanks for taking the questions and congrats on the good print. I'm just curious, biotech funding landscape has been more of a mixed bag.

Speaker #5: So I'm curious if you could lay out what you believe has helped you manage through these headwinds over some of your peers? I think you've previously discussed minimal exposure to NIH funding, tariffs, as well as less price sensitivity from your customers.

Speaker #5: So just curious if I have those variables right.

Speaker #3: Yeah, thanks, Vivian. I would say, ou know, biotech funding probably directly well, direct or indirectly impacts our custom biopharma segment of our business, represents about 25% of the total revenue the most.

Speaker #3: And what we're seeing there is very similar to Q1, which is that the early-stage small and mid-sized biotech companies are struggling the most there.

Speaker #3: And unfortunately, we started the strategy five years ago, and now we're supporting over 48 customers in over 60 therapies. And some of which are later stage.

Speaker #3: So we're able to balance some of those losses out with some expected spend from the larger companies or the later-stage therapies and, you know, we continue to add.

Speaker #3: we are finding new customers in the segment, often they're not just selling gene therapy, as I mentioned, we're finding some monoclonal antibodies and some other opportunities there.

Speaker #3: That still is a pretty challenged group, though, right? So the fact that we're able to not be so far down in that segment is a pretty big positive for us.

Speaker #3: But the other side of the business, really, this broad-based essential reagents for the life science community is where we kind buoy the entire foundation here.

Speaker #3: And that's what we're seeing some nice double-digit growth, and that is really along the execution internally on the marketing side, on the channel management, the portfolio optimization, as well as the fact that we serve all those diverse end markets.

Speaker #3: And again, like you said, we do not face the headwinds directly from the geopolitical environment. So, you know, taken together, that's why we feel pretty good about where we sit right .

Speaker #5: Okay, perfect. Thanks for the caller. And just one follow-up. I think you've ussed in your prepared marks that you see inorganic opportunities and potential tokens.

Speaker #5: Just curious if you could expand a little bit on where you holes in your product portfolio today. Thanks.

Speaker #3: Yeah, particularly on the therapeutic side, we'll talk about first, right? From an inorganic opportunity, we've kind put it in two buckets. One is collaborations.

Speaker #3: Similar to what we've done with Quoristix, where we're looking at smaller companies with great technologies that need either commercial or operational scale. We can bring those in, and they can fill out some gaps there.

Speaker #3: And then on the M&A side, it's a lot more around things we can

Speaker #3: manufacture in-house or leverage our commercial organization and get some pretty good cost synergies think you see out. From a portfolio hole perspective, we tend to do a lot of the downstream.

Speaker #3: So a lot of the GMP custom buffers for pure clients and antibodies or for gene therapies or whatever you in that downstream side. On the upstream side, the cell culture media, obviously transaction reagents, scribe preservation reagents, those types of ings, would be really nice, and their formulations that we can make internally.

Speaker #3: So those we're working to build out, you ow, obviously cell therapy one, maybe some gene therapy, maybe monoclonal antibodies, but we can go all the way through even life sciences there.

Speaker #5: Okay, great. Thanks so much for taking the estions.

Speaker #1: Thank ou. Our next question is from Mac Etoch of Stevens Inc. your line is now open.

Speaker #6: Hey, good afternoon. And I appreciate y'all taking my questions. Maybe to start, just on the RUO plus initiative, I know it's been a handful of quarters since you all launched that, but any updated thoughts on how these efforts are trending now?

Speaker #3: Yeah, I would say that they're trending as anticipated for us. I an, I think from an RUO plus GMP as the three different essentially quality opportunities for customers to select into, you know, introducing RUO plus was a really nice solution for us because we had many customers that were bridging towards clinical, didn't want to finalize their formulations, wanted to try it maybe some smaller batches.

Speaker #3: But really wanted it made in our new facility at an animal origin-free environment. And with the same equipment and processes that we would do under GMP, so it's quicker to scale, but given the flexibility there.

Speaker #3: So we have a number of customers actually purchasing in that, which is really nice for us because it gives them, you ow, into our processes, maybe a little bit stickier, but then when want to go to GMP, it'll be a pretty, pretty quick.

Speaker #3: So a lot of our preclinical customers choose that as an option. And of course, you know, we do more there, so we can we can charge a little bit more for that rather than just the RUO side.

Speaker #3: So I think that's playing out really well for us. And it helps us see that pipeline coming through.

Speaker #6: Appreciate it. And apologies, I've been jumping between calls this afternoon, but and so if you've addressed this in the pared remarks, my apologies. But is there any timing or abnormal order patterns to call out within clinical solutions?

Speaker #3: Yeah, I'll e that one, Stephen. Yeah, I would say that, I mean, that's still a phenomenon for us, Mac, right? We have larger order sizes in that part of the business and relatively fewer customers compared to the lab essentials.

Speaker #3: So you know last quarter, the the the clinical part of our business was was lower than the previous few quarters. This time it's up a little bit.

Speaker #3: So, I mean, I think overall we're seeing general long-term improvement in that area. But, you know, sometimes there are just timing issues related to when customers want products or when they're conducting internal activities that require the product at a certain time.

Speaker #3: So, I would say that's the case here. We're kind of right in range where we would expect to be, and it's a bit higher than where we were a year ago.

Speaker #3: And even more so compared to the previous quarter. But all more or less within the normal fluctuations.

Speaker #6: Appreciate the color.

Speaker #3: Thanks.

Speaker #1: Thank ou. Our next question is from Brendan Smith of TD Cohen, your line is now open.

Speaker #7: Hey, guys. Thanks for taking the questions. Congrats on the quarter. It's really good to see. You know I wanted actually ask, maybe more qualitatively, you know I think just given recent trends kind of across biopharma spending and priorities in general, kind of talk slowing down certain programs and focusing more on others.

Speaker #7: I'm kind of just wondering if there's thing you're noticing in conversations with those guys that maybe you call out as especially notable in driving some of those decisions?

Speaker #7: Fully appreciate it's maybe the first thing that's coming up when you get talk to them, but really just trying to understand how we should think about to what extent any of those shifting priorities could potentially push orders towards certain segments versus others.

Speaker #7: Thanks.

Speaker #3: Yeah, thanks, Brendan. You know there's nothing specific that they call out. I ink almost every customer we talk to has a different view of which modality is going to be the best.

Speaker #3: And I think the reality there is that there's a different modality that's the best depending on the target disease that you're . But I will say there's obviously a trend here, which is you know whether or not they can raise money.

Speaker #3: And there are certain areas where it's very difficult for some of these small ones to raise money. And right now, and I think you can see the shift towards less risky modalities whether it's some of the sort of the newer monoclonal antibodies like ADCs and multi-specifics or just proven other vehicles that are out there.

Speaker #3: But you know at this point in time, it's very much around the early stage. I think the positive side of this is that if you're in later-stage therapy, for the most part, not entirely across the board, but for the most part, those are continuing on.

Speaker #3: And they are able to get funding and go. And so those customers that we had in that in those sort of the later stage are executing to the plan they laid out at the beginning of the year.

Speaker #7: Got it. Okay. Makes sense. Thanks, guys.

Speaker #1: Thank you. Our next question is from Matt Leroux of William Blair, your line is now open.

Speaker #8: And good noon. You know your customers perhaps aren't affected by NIH, and you 't really sell in China, but they obviously are affected by maybe this set of clouds overhanging the space.

Speaker #8: You know concerns around MFN, pharma tariffs, obviously the ability to raise money in part tied to interest rates and risk appetite. As you're talking to customers and Stephen, in our comments, you referenced end market conditions, tough for all small customers.

Speaker #8: What are you hearing from those customers who might be hesitant or waiting on orders about how that spend is going to be unlocked and maybe a kind of a mosaic, all those things, but as you kind of stack rank what you're hearing the most and what's most important, what do you hear customers?

Speaker #3: Yeah, it's a pretty pretty broad answer across the board. I ink in many cases, I would say it's just predictability and stability, which we haven't had yet this year.

Speaker #3: So I think when we get some of these moments where things feel like they're about settled, you can start to feel things pick up.

Speaker #3: And would say that even the last two or three weeks, we've en some positive engagement from customers. And if that continues for a couple of ths, I would say that could be potentially upside that things recovering.

Speaker #3: But I'm hesitant to even think about it that way at the moment. The rest are very much around, okay, when do we want to pull the trigger to actually start executing this?

Speaker #3: At some point, we had a couple of conversations with customers when it was just kind in the mode of, well, we're going to have to do something this year.

Speaker #3: We got to get going. So at some point, they decide to either 're going to spend or we're not going to end. And I think we're in that mode now where maybe the first half of the year or the first quarter or third of the year was very much around, let's wait and see.

Speaker #3: And I think now people are making decisions. And you can see it coming through in terms of either massive cost cuts in some of these customers or cost cuts in an action.

Speaker #3: And we're starting to get less of the we're just going to wait and see. Hopefully, that helps a little bit there.

Speaker #7: That helps. You referenced also in your comments your belief that you're taking share and part evidence by your growth. In both of your segments, the dollar per customer was down year over year.

Speaker #7: And 'm sure, again, some of that may be macro in nature. And obviously, clinical solutions is a lumpy so it sounds like a lot of this is new account growth.

Speaker #7: So, I would just be curious, you know, a couple of years ago when you came public, you didn't have much in the way of a sales force.

Speaker #7: Online presence, you've done, as you lived through quite a bit of there. Maybe just give a ense for what kind of the account growth has looked like and maybe the inbound versus outbound.

Speaker #7: Work and how that's changed based on some of the investments you've e.

Speaker #3: Yeah, I think there is some product mix in there in terms of spend, right? So you say average spend per customer. I think, like you said, we are gaining customers.

Speaker #3: And I mentioned that both on the clinical side, but also the research side where we're racting new customers. I ink that's a directly related to the efforts we put on the commercial side, right?

Speaker #3: Whereas I think 're a lot more reactive four or five years ago. We're proactive. The brand is out there. People are recognizing us before people knew us for agar plates.

Speaker #3: And now we're getting people proactively finding us as a solution provider on these types of things. And so I ink that's helped quite a bit.

Speaker #3: So those efforts are helping us attract these new customers. And I think if we didn't have those customers, we wouldn't be growing as fast.

Speaker #3: I ink in the driving the spend per customer down is just the macro environment, right? The limited funding, you know, while we have little exposure to the government, NIH, we can definitely see some impact there.

Speaker #3: There's other areas like the small, mid-sized biotech in the discovery side that you can see some impact there as well. So you know I think the commercial efforts that we put in and the estment is paying off.

Speaker #3: It's just hard to see because it's masked a little bit by the general macro vironment.

Speaker #7: And the last one for Matt, just printed a gross margin quarter almost at 39%. 31% last quarter. You know I think to get to the midpoint of your guidance, or you ow in that range, low 30s, you know gross margins would step down pretty decently in back half of the ar.

Speaker #7: Not that maybe there's some mix from catalog versus custom, but you know that also sounds like there wasn't a big pull for in the second quarter.

Speaker #7: So just as you're thinking about gross margin drop through in the back half, and then I guess into '26 and beyond, do ou feel like there's an opportunity to continue to expand gross margins you know pretty sequentially or, or again, as we're thinking Q2 to Q3 in the back half, what are maybe the seasonal or other pieces that might you ow might push it down?

Speaker #3: Yeah, sure, Matt. And yeah, I mean, really excited about the performance that we had this quarter. Of course, and that was for a very good reasons.

Speaker #3: Of course, the biggest reason is the one we talked about, which is we've got these high fixed cost base incremental revenue drops through, and that's definitely happening, right?

Speaker #3: And we did have year-on-year venue growth, so definitely a significant portion was due to that. We also had some other things in this quarter and a little last quarter as well where we had, you know, there are always these favorable and unfavorable items at the lower levels, and sometimes a few of those shine through more than others.

Speaker #3: In this case, we had we had a few more of the favorables than the unfavorables. Which great. And I think it's it's really the culmination of work that our team has been doing, not just in this quarter, but over the last several quarters to be kind of a very effective manufacturing organization compared to where we used to be.

Speaker #3: And and that's been paying off. So we've got things like where you ow we've had some lower scrap rates. And you know better management of inventory than less less reserving required there.

Speaker #3: We've had looked at some of our processes and and made improvements where we're we're able to use you know fewer supplies or use make you know run fewer tests, for example, things that don't affect the product quality.

Speaker #3: So there's been a lot of little stuff as it happens for people that know manufacturing companies that have been adding up and you ow I think what we're saying is we don't want to bet on all those ings continuing to go the right way for the rest of the year.

Speaker #3: There could be some still good good things left that skew towards that direction. So I would characterize it as saying there could be some upside in the in the second half gross margin compared to what I've said, but I ink given that a few of these are not as easy to predict where we're saying that at this point we're not ecting it to go as well as it did in this quarter, but still you know making those improvements and heading towards higher gross margins with that 70% drop through in the long term as you think about '26 and beyond.

Speaker #3: So we have a great opportunity there. And we're seeing you know a peak here early, but it's it's I think it's going to keep going.

Speaker #7: Great to hear. Thanks.

Speaker #3: Thank you.

Speaker #1: Thank you. Our next question is from Matthew Parisi of Key Bank, your line is now open.

Speaker #9: Hi, yeah, this is Matthew Parisi. On for Paul Knight at Key Bank. Congrats again on the great quarter. Started off, I just wanted to ask about your catalog business.

Speaker #9: You had mentioned on the first quarter call that you expect mid-single digits growth. And for the 2025, however, you saw low double digits growth in that quarter.

Speaker #9: And then you said again today that you saw low double-digit growth in that quarter. Can we still assume mid-single-digit growth for the catalog business for the remainder of the year?

Speaker #3: No, I think I'll take go ahead, Matt.

Speaker #9: Yeah, I'll go ahead and say that, yeah, yeah, it did make some reference to this in my remarks. And you know we've been really pleased, obviously, with the performance in the catalog business, that low double digits.

Speaker #9: We did start off the year saying that we were expecting more in the mid-single digits. So you know at this point, it looks like we're going to be doing better than mid-single digits for the year.

Speaker #9: You know, depending on how the back half turns out, it could be it could be a high single digits. It could be double digits throughout the year.

Speaker #9: So I think we're not not pinning it exactly because the environment is very fluid. But you ow if we were to continue, obviously, we've had two quarters of double digits.

Speaker #9: And so we're ecting something above the mid-single digits either high or low doubles as we continue throughout the year. Awesome. Thank you so much.

Speaker #9: And then a quick question about the clinical solutions segment. So I know you had a 30% increase this quarter. And that's following a 30% decline in Q1.

Speaker #9: On the Q1 call, you referenced that this 30% decline was due to a large order delivered to a single customer in 2024. And it was attributable to customer timing.

Speaker #9: So it wasn't it did not take place in one Q25. I'm wondering, is this customer order what took place in two Qs to cause the 30% increase?

Speaker #3: Yeah, I would say that this I was just going to chalk this up to that general trend of lumpiness. Now, there wasn't one particularly large order in this quarter.

Speaker #3: I mean, we have orders of all sizes, of course. So it wasn't one particular customer driving this. But in any case, in any quarter, there are things that come in and out.

Speaker #3: And when you have a large one, you ow it's notable. And we called it out last quarter when we had one in the year-on-year comparison.

Sounds great. Um, thanks again for asking my questions. Uh, incorrect. Congrats again on the great quarter. Thank you.

Thank you.

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