Alpha Teknova, Inc. (NASDAQ:TKNO) Q4 2022 Earnings Call Transcript

Alpha Teknova, Inc. (NASDAQ:TKNO) Q4 2022 Earnings Call Transcript March 15, 2023

Operator: Thank you for standing by, and welcome to Teknova’s Fourth Quarter and Full Year 2022 Financial Results Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. I would now like to hand the call over to Senior Vice President of Marketing, Jen Henry. Please go ahead.

Jen Henry: Thank you, operator. Welcome to Teknova’s fourth quarter and full year 2022 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 the 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. During this call, we will therefore use non-GAAP financial measures of certain of our results. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this afternoon, which is posted to Teknova’s website and at www.sec.gov/edgar.

Non-GAAP financial measures should always be considered only as a supplement to and not as a substitute for or as superior to financial measures prepared in accordance with GAAP. These non-GAAP financial measures in this presentation may differ from similarly named non-GAAP financial measures used by other companies. Please also be advised that the Company has posted a supplemental slide deck to accompany today’s prepared remarks. It can be accessed on the Investor Relations section of Teknova’s website and on today’s webcast. And now I will turn the call over to Stephen.

Stephen Gunstream: Thank you, Jen. Good afternoon, and thank you, everyone, for joining us for our fourth quarter and full year 2022 earnings call. Teknova is a leading producer of critical reagents for the life sciences industry to accelerate the introduction of novel therapies, vaccines 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. In 2021, we presented a strategy to position the Company for sustainable, accelerated growth through investments in capacity expansion, commercial excellence, and scientific innovation.

I’m pleased to report that we are effectively executing to that plan. First, our new state-of-the-art modular manufacturing facility became operational at the end of 2022 for research-grade production and is on track for GMP production by mid-2023. In addition, we’ve modernized our supporting infrastructure to scale the business for years to come, including a new ERP system, an updated quality system and the introduction of highly automated reagent manufacturing equipment. We believe these investments plus our existing infrastructure will give us the capacity to deliver approximately $200 million in annual product revenue when fully utilized. Second, in 2020, I hired the first two dedicated field sales representatives at Teknova and what was the beginning of our commercial investment.

I’m pleased to report we are now fully operational from a commercial and marketing perspective, including implementation of back-end systems and processes such as Salesforce.com, automated marketing and an e-commerce engine. Sales and marketing associates have been onboarded and are already driving demand for custom and GMP-grade reagents. Early indicators demonstrate our ability to move our catalog customers into our custom and clinical solutions products. Today, more than 76% of our annual revenue is generated from customers who purchased custom and/or GMP-grade reagents compared to 68% in 2020. Of those, 56 of our approximately 100 cell and gene therapy accounts now purchase custom and/or GMP-grade reagents compared to 32 in 2020. These cell and gene therapy customers today represent approximately 25% of our annual revenue.

Lastly, on the R&D front, we have made great progress advancing our new product pipeline. In Q4, we introduced an early access program for two novel products intended to streamline downstream gene therapy process development, and we now have several customers enrolled in that program. On a related note, today, we announced the collaboration arrangement with Sartorius BIA Separations, which is part of the international life science group, Sartorius, to help our customers improve their AAV purification processes with one of our early access products. Matt will provide specific comments on our guidance, but I want to give an update on some of the trends we continue to see in the market and some thoughts on what we are anticipating in 2023. With the certification of our new facility to produce GMP-grade reagents anticipated in the middle of this year and the recent strategic investments we have made to expand our commercial and marketing teams, we believe we are well positioned for future growth.

For the next several quarters, however, we anticipate continued headwinds associated with limited demand from early-stage biopharma customers, which we expect to be partially offset by growth in other markets. Nevertheless, we remain optimistic about the long-term potential of early-stage biopharma. We continue to engage with these customers, including with those who have deferred orders while establishing a strong pipeline of opportunities that we believe may begin to generate additional revenue in mid- to late 2023. I will now hand the call over to Matt for a discussion of the financials.

Photo by National Cancer Institute on Unsplash

Matt Lowell: Thanks, Stephen, and good afternoon, everyone. Results for the fourth quarter of 2022 were lower than prior year as anticipated given challenges in the markets. However, we delivered solid results for the full year of 2022. Total revenue was $7.9 million for the fourth quarter of 2022 and $41.4 million for the full year. Revenue for the fourth quarter of 2022 was $7.9 million, an 18% decline from $9.6 million in the fourth quarter of 2021 and $41.4 million for the full year 2022, a 17% increase from $35.4 million for the year 2021, excluding Sample Transport. A way of reminder, Teknova launched the Sample Transport product in the latter part of 2020 to address the urgent need for COVID-19 tests, and we no longer market or manufacture the product.

Lab Essentials products are targeted at the research use only, or RUO market, and include both catalog and custom products. Lab Essentials revenue was $7.0 million in the fourth quarter, a 3% increase from $6.7 million in the fourth quarter of 2021. For the full year, Lab Essentials revenue was $31.8 million, a 17% increase from $27.2 million for the full year 2021. Growth for the full year was driven by a 3% increase in the average revenue per active customer to $7,714 and a 13% increase in the number of active customers to 4,121. Clinical Solutions products are made according to Good Manufacturing Practices, or GMP, quality standards and are primarily used by our customers as components or inputs in the development and manufacture of diagnostic and therapeutic products.

Clinical Solutions revenue was $0.8 million in the fourth quarter, a 68% decrease from $2.4 million in the fourth quarter of 2021. For the full year, Clinical Solutions revenue was $8.4 million, a 24% increase from $6.8 million for the full year 2021. We grew our Clinical Solutions revenue by adding new active customers, growing from 22 customers in 2021 to 27 in 2022. Average revenue per active customer in 2022 increased 1% to $313,000. 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.

On to the income statement. Gross profit for the fourth quarter of 2022 was $2.1 million compared to $5.0 million in the fourth quarter of 2021 and $17.5 million for the full year 2022 compared to $17.6 million for the full year 2021. Gross margin was 26.7% of revenue in the fourth quarter 2022, which is down from 49.2% of revenue in the fourth quarter of 2021 and 42.2% for the full year 2022, which is down from 47.8% for the full year 2021. Additional headcount resulted in higher labor costs, which primarily drove the decline in gross margin in both the fourth quarter and full year of 2022. Lower revenue also significantly impacted the fourth quarter 2022. Operating expenses for the fourth quarter of 2022 were $16.3 million compared to $9.7 million for the fourth quarter of 2021 and $67.1 million for the full year ’22 compared to $29.6 million for the full year 2021.

Operating expenses for the fourth quarter of 2022 increased primarily due to a $4.2 million onetime noncash impairment charge related to long-lived assets recorded during the fourth quarter of 2022 as well as to additional headcount, stock-based compensation expense and marketing costs. Operating expenses for the full year 2022 increased primarily due to onetime noncash charges, including a $16.6 million goodwill impairment charge recorded during the third quarter of 2022, a $4.2 million impairment charge related to the long-lived assets recorded during the fourth quarter of 2022. Ongoing operating costs were up as well due to additional headcount, stock-based compensation expense and marketing costs. In the fourth quarter 2022, the Company decided to cease further use and development of certain manufacturing machinery and equipment, primarily related to serving a segment of the market we no longer considered attractive as we completed our 2023 budgeting process and finalize the capabilities best suited for our new facility.

The Company, therefore, reviewed the recoverability of the carrying value of these assets and as a result, recorded a onetime noncash impairment charge of $4.2 million related to these long-lived assets. Net loss for the fourth quarter 2022 was $13.3 million or $0.47 per diluted share compared to a net loss of $3.6 million or $0.13 per diluted share for the fourth quarter of 2021. Net loss for the full year 2022 was $47.5 million or $1.69 per diluted share compared to a net loss of $9.8 million or $0.61 per diluted share for the full year 2021. Adjusted EBITDA, a non-GAAP measure, was negative $8.1 million for the fourth quarter of 2022 compared to negative $3.4 million for the fourth quarter of 2021. Adjusted EBITDA for the full year 2022 was negative $21.9 million compared to negative $7.6 million for the full year 2021.

On to cash flow and balance sheet highlights. Capital expenditures for the fourth quarter of 2022 were $4.7 million compared to $7.4 million for the fourth quarter of 2021. Capital expenditures for the full year 2022 were $28.1 million compared to $19.9 million for the full year 2021. The majority of spend in the fourth quarter 2022 went towards completing construction of our new production facility. We do not expect to make the same level of capital expenditure in 2023 now the construction of the new production facility is substantially complete, although there are still some moderate investments associated with qualification of the facility to produce GMP-grade products. Free cash flow, a non-GAAP measure, which we define as cash provided by or used in operating activities, less purchases of property, plant and equipment, was negative $12.8 million for the fourth quarter of 2022 compared to negative $10.5 million for the fourth quarter 2021.

Free cash flow for the full year 2022 was negative $55.5 million compared to $28.9 million for the full year 2021. This decrease compared to the prior year period was primarily due to higher cash used in operating activities for both the fourth quarter and full year 2022 and a significant increase in capital expenditures for the full year 2022. Turning to the balance sheet. As of December 31, 2022, we had $42.2 million in cash and cash equivalents and $22.1 million in gross debt. On to our 2023 outlook. We are providing 2023 total revenue guidance of $42 million to $46 million. At the midpoint, this assumes a revenue growth forecast of approximately 6% as compared to 2022. With respect to product categories, we expect Lab Essentials revenue to be roughly flat compared to 2022, and Clinical Solutions revenue to grow between 20% to 50% compared to 2022.

This product category growth guidance includes the assumption that a significant customer will shift from Lab Essentials to Clinical Solutions products in 2023. We are completing a planned two-year period of strategic investments that we believe has prepared our business to scale commercially and operationally over the next five years. In response to the slowdown in revenue, seen since the third quarter of 2022, we have enacted several measures to contain costs. Notably, in February 2023, we completed a reduction in force that affected approximately 13% of our workforce and resulted in onetime costs in the first quarter 2023 related to severance of approximately $0.8 million. The reduction will generate approximately $4.0 million in annualized savings.

We anticipate significantly lower capital expenditures and flat operating expenses going into 2023 when compared to what we reported for the full year of 2022, excluding nonrecurring charges. We are committed to creating value for shareholders through strategic capital allocation that balances investments for future growth while also ensuring the path to profitability. Therefore, we are targeting free cash flow of approximately negative $30 million for 2023. In addition to cash on hand, we have additional funds available under our credit facility. In sum, we are comfortable that our liquidity position allows us to make investments needed to execute our growth strategy. With that, I will turn the call back to Stephen.

Stephen Gunstream: Thanks, Matt. Overall, we were pleased with our fourth quarter and full year 2022 performance and the progress we made against our strategic priorities. The long-term outlook for our end markets remains positive, and we are committed to executing on our strategy 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: Our first question comes from the line of Joseph Flanagan of Cowen. Your question please, Joseph.

Joseph Flanagan: This is Joe on for Max. Thank for taking the question. Just first on Clinical Solutions, the quarter came down a decent amount year-over-year, but it was similar to what you saw in Q3. And that 20% to 50% growth guidance is really encouraging ahead of our model, but it’s a pretty wide range. So I guess, first — or is in fact is giving you confidence in the return to growth here in 2023? And what are some of the puts and takes that get us from the low to the high end of this range.

Stephen Gunstream: Thanks, Joe. I’ll start and, Matt, make sure to jump in. From a confidence perspective, I think there’s really three different aspects here. The first is, I think when we talk to our customers, we’re operating in a new normal funding, where there has been acceptance of the amount of funding out there in people and customers such as they are now working with the funds they have and moving forward. The second piece there is that as we said in our comments a moment ago, we have now a full commercial marketing organization, and we are a very small part of a large opportunity in the space, and we’re getting that up and going. And with that, there’s about a 12-month cycle from the time that we see customers engage with us and then start migrating and scaling up in terms of their purchases. And so when we look at our funnel, we feel like the back half is where we see that return back to that, as we said, the 25% plus for the entire business.

Matt Lowell: And I’ll just add to that comment, which all are very valid, is that we have this — I mentioned in my remarks, a significant customer that is moving from purchasing Lab Essentials products to Clinical Solutions. So we do have that transition happening, which is good for our Clinical Solutions business and consistent with our strategy of moving customers from catalog accustomed to the clinical part of our business, the Clinical Solutions. And I would say further to what Stephen said, of course, there is some dependency on timing of when these clinical orders that we’re anticipating coming in that will sort of give us in the back half of the year, in particular, some variation of what we might expect due to those lumpy larger orders. So that’s some reasoning behind the range that we provided. But we do feel good about that business going into 2023.

Joseph Flanagan: Great. And great to hear about the funding environment picking up. I was just curious if you could quantify or maybe roughly quantify the amount of the larger deferrals you’ve seen in the last two quarters. And like how much of that could really trickle into the back half versus more of a 2024 thing?

Stephen Gunstream: Yes. We aren’t going to pull out the exact numbers and things like that. But what I can say is that if you remember our Q3 call, we had a very strong first half of 2022. And then we guided down for the back half as far as seeing some of these deferrals and push-outs of some of these customers. And I do think that many of those were actually reducing the number of therapies in type 1 as well as size of those. I think that has primarily now been, like I said, is really kind of the new norm for funding for many of these customers. But the cell and gene therapy space, in particular, continues to be a very exciting area in the area of investment. And so at the moment right now, I think that it’s not so much deferrals as this is the new norm, and we’re going to build from here.