908 Devices Inc. (NASDAQ:MASS) Q3 2023 Earnings Call Transcript

908 Devices Inc. (NASDAQ:MASS) Q3 2023 Earnings Call Transcript November 7, 2023

908 Devices Inc. beats earnings expectations. Reported EPS is $-0.22, expectations were $-0.3.

Operator: Hello and welcome to today’s 908 Devices Third Quarter 2023 Financial Results Conference Call. My name is Jordan and I’ll be coordinating your call today. [Operator Instructions] I’m now going to hand over to Kelly Gura of Investor Relations to begin. Kelly, please go ahead.

Kelly Gura: Thank you. This morning, 908 Devices released financial results for the third quarter ended September 30, 2023. If you have not received this news release or if you’d like to be added to the company’s distribution list, please send an email to ir@908devices.com. Joining me today from 908 is Kevin Knopp, Chief Executive Officer and Co-Founder; and Joe Griffith, Chief Financial Officer. Before we begin, I’d like to remind you that management will make statements during this call that are forward-looking statements within the meaning of Federal Securities Laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled Forward-Looking Statements in the Press Release 908 Devices issued today.

For a more complete list and description, please see the Risk Factors section of the company’s annual report on Form 10-K for the year ended December 31, 2022, and its other filings with the Securities and Exchange Commission. Except as required by law, 908 Devices disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast, November 7th, 2023. With that, I would like to turn the call over to Kevin.

Kevin Knopp: Thanks, Kelly. Good morning, and thank you for joining our third quarter 2023 earnings call. We delivered solid execution during the third quarter, and I’d like to thank our committed team for their efforts in progressing our goals as we continue to navigate the headwinds of the life sciences instrumentation and bioprocessing market. Looking back on the first nine months of 2023, challenges in the bioprocessing space were even more pronounced than we anticipated at the outset of the year. However, this impact has been significantly offset by the growth of our handheld devices serving the forensics market. Over the first nine months of 2023, our top line revenue increased 2% year-over-year to $35.9 million, buoyed by the strength in our handheld devices which have increased 19% year-over-year.

We expect our handhelds to continue to contribute meaningfully and drive our overall growth into the mid to high single digits for the year. For the third quarter, revenue was $14.3 million. Revenue was again primarily driven by our handhelds, which increased 7% year-over-year. With rising geopolitical uncertainties, the ongoing fentanyl crisis in counterfeit pharmaceuticals, there has been continued demand for handheld trace analysis in forensics applications at the point of need. We continue to deliver on our commitment to provide a full portfolio of complementary desktop devices for bioprocessing. And in September, we launched MAVERICK, our first in-line [Raman] (ph) based device. During the launch week, we hosted members of the investor community at our bioprocessing day in our Boston headquarters.

It was great to see many of you in person, provide an update on our roadmap and show you our MAVERICK device along with our new bioprocessing lab where we did live demos of how all our process analytical technology, PAT, devices are used in concert. Innovation is a core component of our mission at 908. I’m pleased to share that 908 Devices was named Analytical Solutions Provider of the Year for the introduction of our MAVEN and MAVERICK devices in the third annual Biotech Breakthrough Awards, which recognizes disruptive innovation in the global life sciences and biotechnology industry. This is a great validation of the uniqueness of our technology and the ultimate impact it can have as the industry progresses to BioPharma 4.0. Now I’d like to provide a brief update on the progress we’ve made across our three focus areas for 2023.

Starting with our first objective, penetrate and radiate across key accounts. Our focus is to penetrate new accounts to create a foothold and then radiate across these accounts to drive broader enterprise adoption. At the start of the year, we said we were committed to making significant progress on enterprise adoption. During the third quarter, we made some important advancements on that front. First, we recently announced an award from the U.S. Air Force and Air National Guard Fire and Emergency Services totaling $10.4 million. We were pleased to see the continued expansion of this enterprise account. Our MX908 device has been deployed within the Air National Guard for hazardous chemical response and approximately a third of these orders represent aero module upgrades along with training and support for their existing devices.

Our aero module adds capability to the MX908, enabling response teams to quickly detect and identify aerosolized chemical hazards. With this award, the active reserve and Air National Guard components of the U.S. Air Force will now utilize the MX908 device and the aero module at more than 130 installations around the world for hazardous materials operations and for emergency medical response. Joe will provide more details on this order and its revenue recognition in a moment. We are extremely proud that the U.S. Air Force has chosen our MX908 device and aero module as their standard, paving the way for enhanced emergency medical response and hazardous material operations. In September, we announced exciting news on the next phase of a multi-year project with the U.S. Department of Defense.

In conjunction with our partner on the project, Smiths Detection, we were selected to provide initial production of 122 portable aerosol and vapor chemical agent detectors, otherwise known as AVCAD. Our high-pressure mass spectrometry technology enables these next generation chemical detector systems which are designed to detect, identify, alarm, and report the presence of traditional and advanced threat vapors and aerosols. The AVCAD, which can be mounted or portable, includes a wireless remote alarm capability, will support missions for the U.S. Military. Our project partner, Smith Detection, has provided the DoD with more than 91,000 joint chemical agent detector, JCAD units, over 16 years in the predecessor program to AVCAD. We believe that being selected for the next generation AVCAD validates our technology as a new standard for chemical detection.

This next phase of the program will include production verification and multiple service operation testing. A successful transition to full-rate production could having a meaningful impact on our revenue in later years. We’re pleased to be working with Smith Detection, a global leader in threat detection, and we are truly honored to help protect U.S. Military personnel in their worldwide mission. Turning to our desktops, we recently announced a collaboration with Terumo Blood and Cell Technologies to integrate our MAVEN online analyzer with their Quantum Flex cell expansion system for real-time monitoring and control of glucose and lactate without the risk of manual sampling and with less labor. Terumo BCT’s Quantum Flex cell expansion systems are used throughout the cell therapy process from process development through clinical manufacturing.

The addition of online analytics enhances process understanding critical in autologous applications such as CAR-T cell therapies, where patient-to-patient variability increases the difficulty of implementing robust and reproducible processes. For example, lactate concentrations must be carefully monitored during the manufacturing process as they can inhibit cell growth and induce toxicity. Manufacturing failure rates reported in CAR-T’s clinical trials can be significant without a spec cell viability being one of the failure causes. With MAVEN, lactate concentrations, which are a highly correlated indicator of cell viability, can be continuously monitored and feeding strategies can be adjusted to control cell growth. MAVEN, with its novel aseptic sampling probe, also enables cell therapy developers to reduce contamination risk and save operator time as scientists no longer need to enter the clean room to perform manual sampling.

We are excited to collaborate with Terumo BCT to enable cell therapy developers to gain valuable process insights that importantly help them reduce costs of goods and accelerate progress for these personalized lifesaving treatments. Turning to our second objective, advancing and broadening our product portfolio. Our product strategy is to develop devices that are simple to use and connected for improved process understanding in order to provide customers with robust answers at the point of need. We were thrilled to launch our second game-changing device this year for bioprocessing at the Bioprocessing International Conference and Exhibition in September. MAVERICK utilizes Raman spectroscopy for real-time in-line monitoring of multiple bioprocess parameters.

Multivariate optical sensing technologies such as Raman spectroscopy are well suited for inline continuous monitoring of a range of parameters. Yet many Raman-based systems require experts in chemometric modeling for setup which can take months at substantial expense. MAVERICK can be set up in minutes. The device utilizes purpose-built de novo models that automatically process Raman spectra from a wide variety of cell culture media types and cell lines, thereby delivering actionable process parameters. We are also providing open access to the raw spectral data that enables AI and machine learning experts to extend MAVERICK’s capability for more advanced predictive control of critical process parameters or quality attributes. Importantly, as a spectroscopic-based device, MAVERICK is extensible to other analytes and parameters through software updates.

One of our beta placements was at the University of Massachusetts in Lowell, where Dr. [Song-Q Yun] (ph) is the ward endowed professor in biomedical sciences. Dr. Yun previously held senior positions in manufacturing sciences at Biogen and Multivariate Data Analysis and Design at Sartorius. He noted that with MAVERICK all the hurdles of traditional Ramen have been overcome. Dr. Yun further noted that our device provides very good measurements independently of cell line, media, and scale. We’re also continuing to foster our pharma and academic analytical lab customer base. Our team recently facilitated successful early access evaluations for our improved ZipChip charge variance analysis kit with three key pharma accounts and one academic account.

Our mass-spec-based charge-variant analysis complements ICIEF workflows from our collaborator Biotech ME by providing more in-depth protein characterization. We’re pleased to report that the new kit demonstrated a two to 20-fold improvement in sensitivity and additional robustness. As the pharmaceutical industry continues to adopt process analytical technologies to drive the advancements of BioPharma 4.0, scientists need an array of simple tools that provide robust analytics to enable them to monitor and control their processes in real time. We are addressing this need with a full portfolio of devices centered around Rebel with our mass spec platform and complemented by MAVEN and MAVERICK for monitoring and control of critical process parameters plus ZipChip for the measurement of critical quality attributes.

We believe we are well positioned with this suite of devices to take advantage of the impending recovery in the bioprocessing market. And finally, turning to our third objective, laying an omics foundation, we see a clear and emerging need for accelerating mass spec-based workflows to address proteomics and metabolomics opportunities. In the area of multiomics, our collaborator, Professor Matthew Foster at Duke University, recently presented his NIH-funded research on multiomics analysis of sepsis at the U.S. Human Proteome 2023 and the American Thoracic Society 2023 meetings. In his presentation, Professor Foster noted how our ZipChip device enabled the analysis of metabolites and native peptides from the same extract, preserving precious sample, cutting sample preparation time in half, and speeding time to results.

We further expanded our collaborations in the area of multiomics with Dr. Luca Fornelli, assistant professor at biology at the University of Oklahoma. He is extending the boundaries of top-down proteoform sequencing and pursuing a tenfold improved throughput analysis using our ZipChip device. We are excited to see the outcome of Dr. Fornelli’s work. Overall I’m pleased with our progress this quarter as we broaden our bioprocessing portfolio with an exciting new product and progress penetration of our handhelds in enterprise accounts. With that, I will now turn the call over to Joe for more details on our financials.

Joseph Griffith: Thanks, Kevin. Revenue for the third quarter 2023 was $14.3 million, decreasing 9% compared to $15.8 million in the prior year period. Handheld revenue from our MX908 device was $11.7 million, an increase of 7% compared to $11 million in the prior year period. During the third quarter, we shipped 117 MX908 handheld devices. The increase in handheld revenue was primarily driven by $4.2 million in revenue from initial device shipments for the recently announced U.S. Air Force purchase orders, as well as revenue related to component shipments with our initial production phase under the U.S. Department of Defense AVCAD program. Desktop revenue from our products serving the life sciences, instrumentation, and bioprocessing markets was $2.5 million, decreasing from $4.4 million in the prior year period.

This year-over-year decline in desktop revenue was primarily due to a decrease in device placements as we continued to navigate a challenging funding environment. During the third quarter, we shipped seven desktop devices, including three Rebel and four ZipChip interfaces. As a reminder, we will continue to break out placements by device for the remainder of the year. Starting in 2024, we will focus more on overall revenue and combine desktop placements as the key metrics for growth for our broadened desktop portfolio. Recurring revenues, which consists of consumables, accessories, and service revenue, decreased 21% to $3.6 million compared to $4.5 million in the prior year period and represented 25% of total revenue in the quarter. The decrease was primarily driven by a decline in accessory and consumable revenue for our handheld devices, offset in part by growth in service revenue.

Regarding desktop recurring revenue, we continue to be running at about half a kit per month for our active Rebel customers. Looking ahead, we continue to expect recurring revenue to be around 30% for the full year 2023. Gross profit was $7.9 million for the third quarter of 2023, compared to $9.3 million for the prior year period. Gross margin was 55% for the third quarter 2023, as compared to 59% for the prior year period. The decline in gross margin year-over-year was due to several factors, including lower revenue, higher service costs with training obligations, charges for excess and obsolete inventory, and to a lesser extent, higher noncash charges for intangible amortization and stock compensation. We continue to expect our full year gross margin to be in the lower end of our target range of mid-50s when excluding noncash charges for intangible amortization and stock compensation.

Total operating expenses for the third quarter of 2023 were $17 million compared to $16.5 million in the prior year period. This was driven by an increase of $0.6 million in non-cash stock-based compensation. We’re committed to being very thoughtful on our cash spend, and we’ll continue to tightly manage our headcount throughout the remainder of the year and as we think about 2024 investments. Net loss for the third quarter of 2023 was $7.1 million compared to $6.3 million in the prior year period. We ended the third quarter of 2023 with approximately $148 million in cash, cash equivalents, and marketable securities and had no debt outstanding. Importantly, we efficiently managed the consumption of cash, cash equivalents, and marketable securities over the quarter to less than $5 million.

We expect to end the year with a strong cash balance to support our ongoing operations. Looking ahead to the remainder of 2023, we have narrowed our range. We now expect full year revenues to be in the range of $49 million to $51 million, representing growth of 4% to 9% over full year 2022. This compares to our previous range of $49 million to $52 million for the full year 2023. This guidance range contemplates two key factors. First, our progress with our handheld enterprise accounts. This includes the recently announced US Air Force purchase orders, which were anticipated and are supportive of our current guidance. We recognize $4.2 million in the third quarter and expect to recognize approximately $1 million in Q4 with the remainder of the revenue upon fulfillment of our training, upgrade, and support obligations.

We are making great progress expanding our enterprise accounts, but have more work to do. We have a handful of U.S. and international deals that we are working to deliver here in the fourth quarter. Second, we are expecting that ongoing pressures in the bioprocessing space will persist and have adjusted our expectations around availability of year-end funding. Overall, we have maintained positive growth during the first nine months of the year due to the strength and overperformance of our handhelds in the forensics market. As we look to 2024, we believe that our diversified and broad technology platform will continue to be an asset and a unique differentiator. At this point, I would like to turn the call back to Kevin for closing comments.

Kevin Knopp: Thanks, Joe. Overall, we made important progress this quarter across our core growth areas. Despite the macro climate impacting the life sciences instrumentation and bioprocessing markets for our desktops, our handheld revenues have grown 19% over the first nine months and further acceleration is expected in the fourth quarter. As the headwinds on our desktop subside, we believe we will be well positioned to capitalize on the opportunity with a full set of differentiated products in the bioprocessing [PAT] (ph) space to drive strong top-line growth. In the interim, as we’ve demonstrated this quarter, we remain good stewards of our cash and ensure we retain a healthy balance through a focus on strong operational execution. With that, we’ll now open it up for questions.

Operator: [Operator Instructions] Our first question comes from Steven Mah of TD Cowen. Steven, the line is yours.

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Q&A Session

Steven Mah: Oh, great. Thanks for taking the questions. So how should we think about the U.S. Air Force ordering cadence of the remaining $5 million or so orders beyond what you announced here in 2023.

Kevin Knopp: Yes, Steven, so on the U.S. Air Force purchase orders, these were contemplated as part of our guidance that we set earlier this year. Large purchase orders like this do take some time in nurturing with our team to come to fruition and become official. We’re really excited about this expansion within an existing enterprise account. I mentioned these purchase orders have multiple elements. There were new MX908 device placements, upgrades of previously deployed devices, which include the latest hardware and Arrow modules, some training for the new and existing users of the MX908, extended service for five years from shipment. For timing, we did recognize $4.2 million in the third quarter and expect to recognize approximately $1 million in the fourth quarter, which will account for all the new device placements under these purchase orders.

And think about the remainder of the revenue. It will be recognized as we fulfill the service obligations, specifically when the upgrades are completed and delivered, the trainings are completed, and the extent of service revenue will be over a five-year time frame. It’s really a reminder of — we sell a good portion of our handouts with an extended service arrangement up front and a great way to secure commitment and investment in technologies with our customers. We think about U.S. Air Force and U.S. Army even before that, both saw good uptick from this. And as we end our third quarter, we did have $20 million in deferred revenue. The majority related to service revenue like this, and we like this as it really helps us get cash upfront and predictably a recurring revenue over time and a great measure of customer commitment.

So net-net about $5 million here in 2023 and the rest over time.

Steven Mah: Yes. Okay. I appreciate the color. Maybe pivoting over to the MAVERICK and congrats on the launch in September. Can you give us a little color on the early MAVERICK traction with customers and how we should think about potential sales this quarter and next year?

Kevin Knopp: Yes. Sure, Steven, happy to do it. Yes we’re super excited that we got this launched at the bioprocessing show here recently and it adds to what we’re trying to do, right? We’re trying to build out a complimentary set of products in this PAT space. There’s certainly near-term challenges in that space, but we’re confident that we’ve got the right products to position there. So with any new product, it takes a bit of time to ramp up. There may be some contribution this year and we’re seeing some movement there, but really it’s about getting in people’s budgets right now and this was a good time to launch in September so that over this before you’re getting in people’s capital budgets and you’re really looking for it as a 2024 growth driver for it.

We think it, again, it really compliments what we’re doing with Rebel and MAVEN and super excited, I would say that we’ve been having a lot of strong conversations with it. And internally here, we talk about the we’re 30 for 30, meaning we’ve created a pipeline of 30 plus opportunities in the first 30 days. So we’re thrilled by that response. Obviously it takes time. There’s some conversion of it, but there’s some good global pharma groups that we’re having conversations with and we think we’re setting ourselves up well into 2024. So if MAVERICK is an overall barometer of 2024, I think it’s a good sign and we have some concrete measurement points there, but definitely early days.

Steven Mah: Okay. Appreciate the color. Thanks for taking the questions.

Operator: Our next question comes from Matt Larew of William Blair. Matt, please go ahead.