Alpha Teknova, Inc. (NASDAQ:TKNO) Q2 2023 Earnings Call Transcript

Alpha Teknova, Inc. (NASDAQ:TKNO) Q2 2023 Earnings Call Transcript August 13, 2023

Operator: Good day, and welcome to Teknova’s Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Ms. Sara Michelmore with Investor Relations. The floor is yours. Sara Michelmore Great. Thank you, operator. Welcome to Teknova’s Second Quarter of 2023 Earnings Conference Call. With me on today’s call ,are Stephen 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. 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 GAAP results, non-GAAP financial measures can provide meaningful insight when evaluating the company’s financial performance and the effectiveness of its business strategies.

We will therefore use non-GAAP financial measures of certain of our results during this call. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this afternoon, which is also posted to Teknova’s website and available on the SEC website. Non-GAAP financial measures should always be considered only as a supplement to and not as a substitute for or as superior to financial measures prepared in accordance with GAAP. The non-GAAP financial measures in this presentation may differ from similarly named non-GAAP financial measures used by other companies. Please also be advised that the company has posted a supplemental slide deck to accompany today’s prepared remarks. It can also be accessed on the Investor Relations section of Teknova’s website and on today’s webcast.

And now, I will turn the call over to Stephen.

Stephen Gunstream: Thank you, Sara. Good afternoon, and thank you, everyone, for joining us for our second quarter of 2023 earnings call. Tecknova is a leading producer of critical reagents for the life sciences industry to accelerate the introduction of novel therapies, vaccine, and molecular diagnostics that will help people live longer, healthier lives. We manufacture high-quality custom reagents with short turnaround times and are positioned to scale with our customers, as they advance their products from discovery to commercialization. We had an excellent second quarter, both financially and operationally against a difficult market backdrop. Our ability to deliver in these challenging conditions is a testament to the dedication of our very talented team and the diversity of our market segments.

We increased revenue sequentially by 26% and continued to execute on our key initiatives to position the company for sustainable, long-term growth. Our sales in the second quarter were $11.5 million, the second highest quarterly revenue in the company’s history. We had a notable uptick in clinical solutions, benefiting from the migration of a large customer from lab essentials as it prepares to enter clinical trials. In addition, we have actively and effectively managed our operating expenses reducing our free cash outflow in the second quarter to $6.2 million, giving us confidence that we will achieve our free cash outflow target of $30 million for the year, despite a lowered near-term revenue outlook. We remain optimistic about the long-term potential of our target markets and are excited about the progress we’ve made in the second quarter to execute our long-term growth strategy.

Photo by National Cancer Institute on Unsplash

First, our new, state-of-the-art modular manufacturing facility is now certified for GMP grade production. We are enthusiastic about the potential this multi-year investment will unlock for the business. We have already hosted a number of high-profile customers and have been very encouraged by the reaction to the facility and the company’s transformation. Our customer audit schedule is nearly full for the remainder of 2023, increasing our confidence that this investment will begin to bear fruit in mid-to-late 2024. As a reminder, we believe this new facility, plus our existing operating infrastructure will give us the capacity to deliver approximately $200 million in annual product revenue when fully utilized. Next, on the R&D front, I am pleased to say our new product pipeline is progressing ahead of schedule.

In July, we built upon the recent launch of our AAV2 buffer screening kit by extending the portfolio to include the AAV8 serotype. We expect to launch AAV6 and AAV9 by the end of the year. Early feedback on the product line has been very positive with some customers already in discussions about scaling up with our proprietary buffer formulations. We believe this buffer kit can save our gene therapy customers months as they develop their production workflows. In addition, we launched more than 20 reagents to streamline and simplify the entire AAV bio production process. We expect to become an even more valued supplier to these customers as they advance their therapies towards commercialization. Lastly, I want to take a moment to discuss our view of the current market environment.

In the near term, we continue to see emerging biotech, historically, one of our larger growth segments focused on conserving capital by delaying, reducing or canceling clinical trials. We still believe this to be temporary, particularly against the backdrop of the total number of trials underway in encouraging recent clinical outcomes. We are particularly encouraged by the advancements in gene therapy. We saw a notable approval for an AAV gene therapy for duchenne muscular dystrophy. We believe this approval demonstrates the potential value of AAV gene therapies, an area in which we have recently developed and will continue to develop a number of proprietary product offerings. The combination of our new products with our operational capabilities positions us well to participate in the segment as the market evolves.

As we turn to our revenue outlook for the remainder of 2023, we now expect a mid-single digit percentage year-on-year decline in top-line revenue with a return to year-on-year growth in the fourth quarter of 2023. Even with this change in guidance, we continue to track towards our previously, communicated free cash outflow target of approximately $30 million for fiscal 2023. I will now hand the call over to Matt for a discussion of the financials.

Matthew Lowell: Thanks, Steven and good afternoon, everyone. Total revenue was $11.5 million for the second quarter of 2023, a slight decline from $11.7 million in the second quarter of 2022, reflecting the continued headwinds associated with lower demand from early-stage bio pharma customers, but partially offset by delivery of a large order to a significant customer during the quarter. Lab Essentials products are targeted at the Research Use Only or RUO market and included both catalog and custom products. Lab Essentials’ revenue was $7.6 million in the second quarter of 2023, a 10% decrease from $8.4 million in the second quarter of 2012. The decline was attributable to a decreased number of customers, partially offset by higher average revenue per customer.

Clinical Solutions products are made according to Good Manufacturing Practices or GM P quality standards and are used by our customers, primarily as components or inputs in the development and manufacture of diagnostic and therapeutic products. Clinical Solutions revenue was $3.7 million in the second quarter, a 24% increase from $2.9 million in the second quarter of 2022. The growth in Clinical Solutions revenue was attributable to an increased number of customers, partially offset by lower average revenue per customer. We expect revenue per customer to increase over time as they ramp up their purchase volumes. However, this metric can be affected by the mix of newer clinical customers who typically order less. Just as a reminder due to the larger average orders in Clinical Solutions, compared to LAB ESSENTIALS, there can be quarter-to-quarter revenue lumpiness in this category.

As the case in point, during the second quarter of 2023, we delivered a large GMP order to a diagnostics customer who had previously purchased Lab Essentials products in 2022. Turning to the income statement, gross profit for the second quarter of 2023 was $5.1 million, compared to $5.2 million in the second quarter of 2022. Gross margin was 43.9% of revenue in the second quarter of 2023, which is down from 44.9% of revenue in the second quarter of 2022. Despite increased overhead costs, including depreciation from our new manufacturing facility, our gross margins were down only slightly, compared to the second quarter of 2022 as higher margin Clinical Solutions revenue represented a larger percentage of our total revenue in the second quarter of 2023, compared to the second quarter of 2022.

Sequentially, gross margins were up significantly, due to lower labor costs and also a favorable Clinical Solutions revenue mix. Operating expenses for the second quarter of 2023 were $12.1 million, compared to $11.9 million for the second quarter of 2022. Excluding a non-cash impairment charge related to certain fixed assets of $2.2 million in the second quarter of 2023, operating expenses were down $2 million, compared to the second quarter of 2022. The decrease was driven by reduced spending primarily in professional fees and occupancy costs. In the second quarter of 2023, the company decided to cease further use and development of certain manufacturing machinery, and equipment, as we completed qualification of our new manufacturing facility prepared for our ISO recertification audit and also consolidated facilities.

Additionally, changes in the market price of previously impaired assets were identified. The company reviewed the recover ability of the carrying value of these assets. And as a result, recorded a non-cash impairment charge of $2.2 million related to these long-lived assets. Net loss for the second quarter of 2023 was $7.2 million or $0.25 per diluted, share compared to a net loss of $6.2 million or $0.22 per diluted share for the second quarter of 2022. The company recorded minimal non-current tax expense this quarter against its pre-tax loss losses due to increases in our valuation allowances against incremental net operating loss carry forwards. Adjusted EBITDA, a non-GAAP measure was negative $2.3 million for the second quarter of 2023, compared to negative $4.9 million for the second quarter of 2022.

The decrease was primarily driven by lower net loss after adding back the $2.2 million non-cash impairment charge recorded in the second quarter of 2023, compared to the second quarter of 2022. Turning to the cash flow and balance sheet. Capital expenditures for the second quarter of 2023 were $2.3 million, compared to $10.9 million for the second quarter of 2022. This marks the fourth straight quarter of sequential decreases in capital expenditures. We have now substantially completed the capital investment in our new manufacturing facility. Free cash flow a non-GAAP measure, which we define as cash provided by are used in operating activities, less purchases of property, plant and equipment was negative $6.2 million for the second quarter of 2023, compared to negative $16 .8 million for the second quarter of 2022.

This decrease compared to the prior year period was due to both lower cash used in operating activities and a decrease in capital expenditures. Turning to the balance sheet. As of June 30th 2023, we had $23.7 million in cash and cash equivalents, and $22.1 million in gross debt. For 2023 outlook, we are lowering our 2023 total revenue guidance to a range of $37 million to $40 million. At the midpoint, this assumes revenue decrease of approximately 7%, compared to 2022. With respect to product categories we now expect Lab Essentials revenue to be down 9% to down 5%, compared to 2022 and Clinical Solutions revenue to be down 15% to up 5%, compared to 2022. The company continues to manage expenses aggressively. At the end of June, the company had 232 associates, down from 251 at the end of the first quarter of 2023 and 290 at the end of 2022.

The company posted operating expenses, excluding non-recurring charges below $10 million, the first quarter we have done so since 2021. Similarly, the company saw a reduction in free cash outflow during the second quarter of 2023. This marks the fourth straight quarter of lower cash outflow and is consistent with the company’s expectations for the year, despite our lower revenue outlook as we anticipate operating expenses and capital expenditures to continue to trend downward over the course of the year. In addition to cash on hand, we have access to our revolver, up to $5 million and ATM facility. Based on our guidance, we expect approximately $11.8 million in free cash outflow in the second half of 2023. We believe that we have already made the step-up Investments needed to execute on our growth strategy and can scale without significant additional investments.

With that, I’ll turn the call back to Stephen.

Stephen Gunstream: Thanks, Matt. Overall, we were pleased with our performance in the second quarter of 2023. The long term outlook for end-markets remains positive. We are committed to executing on our strategies to help our customers accelerate the introduction of novel therapies, diagnostics and other products that improve human health. We will now take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line Steven Mah with Cowen. Your line is open.

Steven Mah: Great. Thanks for taking the questions. Appreciate the color you gave on the macro landscape and how it’s impacting Tecknova. Just looking at some of the recent guide down by your peers, some of them have guided down more significantly than you. And I appreciate the color you gave on the growth drivers, the new products that are coming online, the new GMP facility. But is there anything else that gives you confidence on the new guide?

Stephen Gunstream : Sure. Thanks, Stephen. I would have to – just kind of go back to when we lowered guidance last year, we started seeing the impact of the early-stage biopharma customer. I think we’re pretty early in the shoot there compared to others. The combination of being pretty closely tied to the spending patterns and not having a lot of our revenue tied up in stock – destocking allows us to get a closer view towards the end of this, the back half of this year. And I would also say that, we are pretty diverse in our offering, while a lot of the growth drivers of the business in the last two or three years have been these that are early-stage biopharma. We serve really all the way from research through commercialization and not solely biopharma, but also cover the life science tools and diagnostics.

So I think we’re a little bit more diverse. That said, obviously, you know, we do believe the long-term strategy in the business will be to migrate these customers from research to clinical and we have seen a slow down and that slowdown has continued throughout the back half of this year. Hence the reason we are lowering guidance.

Steven Mah: That’s helpful color. And appreciate that the color you also gave on the increased customer interest on your GMP facility. Can you give us a sense of what you think the sales cycle is to convert these people that are doing the facility audits to customers? Thank you.

Stephen Gunstream : Sure. Yeah, it takes a while. I mean, this is a long-term strategy to engage it with customers in those preclinical development and then scale with them as they go down that pipeline. We did talk about a large customer here that might be a great example for us to use – although it’s not on the therapeutics side. It does follow very similar patterns. We engage with this customer in 2021. We started discussion in 2022 and the back half of 2022. We deliver a research-grade product for their verification preclinical trial work. But basically to demonstrate that we can manufacture the product that their product works, as they would like to work before going on to make a GMP-grade version of product. After delivering that, order came in, in the first half of 2023, actually the first quarter of 2023 for GMP-grade for validation.

So they can use those products to go into clinical trials. And so we delivered that in Q2 and you can see the revenue there. And of course, you can see, as well as the financial impact that has when we do shift towards more clinical solutions, as well as the type and size of those orders. And so, that’s just getting them into the clinical trials. Now it’s probably another year and for this one in this particular diagnostic. So it’s probably a different timeline in some of these others. But just from the onboarding process, even you can see that, we’re talking anywhere between 12 and 24 months of these customers with the scale up. But that is essentially the strategy. The more we get in that early-stage funnel. What we believe that not only the tail up, they’ll become extremely safety as they are manufacturing for the clients going forward.

Steven Mah: Great. Thank you.