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.

Operator: Thank you. One moment for our next question. And that will come from the line of Matt Larew with William. Blair. Your line is open.

Matt Larew: Hey, good afternoon. First wanted to ask about OpEx. And so, obviously you talked about it meaning sort of flat year-over-year excluding the impairment charges. Volumes starting to stay on that next year, particularly in new facility and remind about – think about the hop back there. The capacity and – right now that you’ll be able to as there is [Indiscernible]

Stephen Gunstream : Hey Matt, you are a little bit quiet. Did you get that? I didn’t you were saying flat year-on-year excluding impairment charges? Are you asking that how those scale over time? The OpEx?

Matt Larew: Yes, yes. Sorry I was just – as the new facility will start to come online next year you kind of think about OpEx trends grow 2024 if they’re going to fly year-over-year implying ‘23?

Matthew Lowell: Yeah, I think – thanks for the question Matt. Yeah, first of all, I mean, I think we’ve obviously been very happy with the way we’ve been able to manage OpEx cost down here during the course of this year. And expecting those to stay at or certainly down from these levels. So we’re demonstrating that we’ve been able to manage costs. In terms of what that means for the future, as we said a little bit in the remarks I mean, when we say we feel like we’ve made the investments necessary to be able to scale the business, with limited additional investments. Of course, we’re not providing any specific FY ‘24 guidance at this point. But I think you can assume that as we start to grow back, which we expect to do in FY ‘24 that we would not need to increase those expenses or substantially in any way.

So we haven’t gotten to all the detailed preparation of our budget or anything. But in principle, we believe that we can grow this business with withholding those up operating expenses. Does that help answer your question?

Matt Larew: Yes, it does. Thank you. The second question, Matt. You reclassified some long-term debt into current portion this period. And noticed that I think there’s a covenant related to PTM revenues as of December 31st. So, is the reclassification related to the guidance reduction? And I guess, just maybe help us get comfortable with that amount of debt standing relative to your cash position and obviously outflow this year?

Matthew Lowell: Yes. Good, good bbservation Matt. We did reclassify our debt from long-term to short-term for this quarter. Just to be open, we did have a covenant. We’re out of compliance with the covenants following the quarter, actually in July period here and we have notified our lender of this situation and are in discussions with them on a preliminary basis so far. They have not issued any kind of notice to us at this point and don’t plan to until after the quarter statement is filed here. So, that is the reason why the debt has been reclassified from long-term to short-term, until we’re able to resolve the situation with them.

Operator: Thank you. One moment for our next question. And that will come from the line of Paul Knight with KeyBanc. Your line is open.

Paul Knight : Matt, I guess it’s fair to say the ATM, no, action on that.

Matthew Lowell: Right. We have – but we have – we will of course, be filing the 10-Q tomorrow and at this point, there has been no use of the ATM.

Paul Knight : And staying that, I guess regarding the macro. It does look like if arm data is correct, we have had overall trials start to grow a little bit in the first half of the year. Are you seeing that?

Stephen Gunstream: It’s a hard one to measure at the moment, because we have a multiple competing factors here, right. We’ve scaled up our commercial organization. We do see our funnel increasing, which would indicate that that’s true. But also we’re putting our efforts towards attracting those customers. But I will say that the cycles are longer and the size of the trials still seem to be smaller than they used to be. But I’m in agreement with you. It does feel like when you talk to customers that they are starting to think about how to move these things forward. That said, we still have the conversations with customers that they’re really stuck in trying to maintain their capital and the timing of when those actually builds happens is still undetermined.

Paul Knight : Would it be fair to say that the kind of the components of the XBI or larger more medium-sized, biotechs are not really deteriorating? Would that be fair? And then, kind of the last follow-on would be, what portion of revenue is emerging biotech right now do you think?

Stephen Gunstream: Yeah, I’m not sure I can comment that. We have had we mentioned our new facility opening. We’ve probably had four or five customers come through there now and they’ve been both large and small. And so we have not necessarily seen a specific trend on this side. But I will say that, wherever you’re engaging with customers is very early on that given the fact that the facility is just now coming online.

Paul Knight : Okay. Thanks.

Operator: Thank you. One moment for our next question. And that will come from the line of Mark Massaro with BTIG. Your line is open.

Mark Massaro: Hey guys. Thanks for taking the questions. Stephen, obviously, you’ve called out some soft climate in biotech and cell and gene therapy that’s very much consistent with what all of your peers have said. There’s really no surprise there. But I’d be curious to hear your thoughts on, other areas of your business, which are Diversified in areas like diagnostics, food, agriculture, I guess, what are you seeing across those other segments of your end-markets?

Stephen Gunstream: Yeah, great question, Mark. And so, outside of the sort of, biopharma early-stage biotechs, we do serve across all those segments from everything from academic to tools, diagnostics to food, and Ag. And I would say, generally speaking, the majority of those are kind of within line of expectations historically. We are coming over a tough year-on-year comparison as you can see. If you look at the first half of last year, the end of ‘21 and early part of 2022, we had a lot of larger biotech builds being made for clinical trials, then those were put on hold. So our year-on-year comparison is not exactly fair from a financial perspective, but when you look take a step down, we do see hot spots within spatial genomics, which I’m sure you’re aware of.

That group is growing quite nicely. And then, some of the more novel diagnostic sites like liquid biopsy and other genomic type of diagnostics were seeing some pick up there that is probably favorable or equal to what has been previously like in the ‘21 time period excluding COVID-related diagnostics. So we do benefit from that and being a diverse business that can support all these customers.

Mark Massaro: Yes. That makes sense. And congrats on the ribbon cutting of the GMP-grade facility. Maybe can you just remind us what the new facility is likely to enable? Whether it’s from new customers, size of customers, maybe just walk us through sort of how you see the business changing in the next couple of years?

Stephen Gunstream: Yeah, yeah. This is some we are really proud of. We spent the last two years building out this facility. It really takes the company to a position where we can bring customers in and they’re not concerned about the long-term ability for us to deliver for them. And like I said, we’ve had a number of customers that are ready. And every one of them said, this is where we want our stuff made. This is perfect. And what we’re looking forward to moving towards over time. So, that’s all very positive from those from the capability of the facility, combined with our existing other facilities, we can get to about $200 million in total revenue from a capacity standpoint. But probably more relevant here is the fact that we have built a facility that specializes in these sort of less than 1,000 leader batch sizes.

All the way down we can we can do, one liter bags or even smaller in this facility and is extremely flexible and how we operate with a number of redundancies, as well. So, what we’re finding and we bring some of these customers in, it’s not just the sort of the fact that we have this capacity. But we’ve built a purpose-built facility that can do this custom manufacturing at these small scales and then scale with them all the way up through commercialization. And they’re and they’re excited and we are to this. So I think, the early indicators on us is that, this is the right type of capability for them for the long term. And we’re how kind of working them through the audit schedules and bring them in. We will do the pile up and then over the course of the next couple of years, hopefully get in become one of few suppliers as they go into clinical trials.

Mark Massaro: Okay. Thanks for the color.

Operator: Thank you. One moment for our next question. And that will come from the line of Jacob Johnson with Stephens. Your line is open.

Jacob John : Yeah. Thanks for taking the questions. Good afternoon. Maybe just another one on guidance as relates to Clinical Solutions kind of the implied back half number there. I understand you had a lumpy order at 2Q, but it’s still at the midpoint implies something kind of lighter than, than 1Q and that, I understand the macro environment. But could you just speak to why such a step down in the back half? And maybe related in that the sausage you’re seeing is the customers ordering less than you thought they would previously or some of these orders are getting pushed into 2024?

Matthew Lowell: Yeah, I’ll take it first and then Stephen can comment if you want. So, yeah I think from your observation, it’s fair Jacob, the back half guidance for our implied guidance for the Clinical Solutions business is certainly a step down from what we’ve seen here in Q2. In general, what we’re seeing is the environment that is essentially unchanged what we’ve been seeing earlier in the year and of course, in Q2, we did have this particularly large order from one customer go through during the quarter. So we’ve gotten the nice boost during Q2. So, Q3 and Q4 we’d expect it to go back to more normal from what we’re seeing in this environment, although of course, we are expecting that to come back as the environment improves. But in terms of smaller orders are fewer customer, I’ll let Stephen can maybe?

Stephen Gunstream: Yeah, yeah, I don’t think there are fewer customers. I think we’re getting smaller orders or delays mostly and it’s a combination of both. I mean some customers that use to order seven figures last year are still dedicated to using Teknova for their builds. But they’re talking about small six figures now for this year, instead, of 70 figure type of things. So, that is that is the primary piece and we do have some customers that have planned that originally, they would be like a Q3 order, Q4 delivery or Q2 order Q3 delivery that have gone out one or two quarters, right? And I think, even, they are not sure about the timing of when they are going to exactly need those based on their own capital constraints. So, that’s what we’re seeing. I mean, the excitement is there. And it’s not like we’re losing customers. It’s really very much a market dynamic.

Jacob John : Got it. Then that’s really helpful. Thanks for Stephen. And then, we haven’t talked about AAV tech in the Q&A. So maybe a question on that. Just one, how has the initial reception been? and then two, can you talk about initial launches from here? It sounds like two more this year. But how many more potentially beyond that? And then also, if you just remind us kind of how we should think about the revenue contribution from this? And I’ll leave it there. Thank you.

Stephen Gunstream: Yeah. Great, I’ll start with the revenue contribution. I mean, obviously the products we’re selling now I mean, this AAV tech buffer screening kits is relatively insignificant to the overall business, because the whole point of the screening kit is get customers to try out a set of buffers that we know are going to work for them to help on that polishing step where they separate empty from full capsids. And then, get them into the right reagent that then they can scale up through the process, development and into the clinical trial. So, this is a long-term strategy here that will then play out over overtime. And allows us to kind of engage with them and get them into these trials faster than they would otherwise be able to do so.

So, the revenue kind of reason there is, is relatively small, but the portfolio itself is important to make as broad as possible, right? So we want to support all of their production for AAV from end-to-end and across many serotypes. So, yes, we have two out now. We plan to have two out again by the end of the year, two more and we will continue to go through, I think there’s probably 10 or 11 serotypes, but of which four or five of the most popular, which we’re kind of knocking out at the moment. And then, we launched this other suite of reagents that are going to make it. So, and so, people are making their own standard reagent for lysis or purification or PFF, they can just buy our off-the-shelf reagents. And we will continue to build out that portfolio throughout the rest of the year.

So that they can be kind of a – it can be kind of a One Stop Shop for them as they start going down that process development, piece and capture more dollar share as they move into the clinical trials. So, again, altogether, maybe over time they will add up to be a decent amount of revenue in the early stages. But certainly as these go into clinical trials, that’s where we’ll see the biggest uptick.

Jacob John : Got it. Thanks for taking the questions.

Operator: Thank you, as I’m showing no further questions in the queue at this time, this concludes today’s program. Thank you all for participating. You may now disconnect