Hello, and welcome to today's 908 Devices Second 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, Investor Relations, to begin. Kelly, please go ahead.

Thank you. This morning, 908 Devices released financial results for the second quarter ended June 30, 2023. If you've not received this news release or if you'd like to be added to the company's distribution list, please send an e-mail 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 listing 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 in 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, August 8, 2023. With that, I would like to turn the call over to Kevin.

Thanks, Kelly. Good morning, and thank you for joining our second quarter 2023 earnings call. I'd like to start off by thanking our team for their continued dedication and commitment to serving our customers and for bringing our second quarter to a successful close. At 908, we have a broad technology platform with applications across diverse end markets. Our handheld devices are serving critical forensics market applications, including the devastating rise of counterfeit pharmaceuticals, and our growing portfolio of desktop products is serving life science and biopharma applications, including the emergence of multi omics research and the ascent of Bioprocess 4.0. We view our end market diversity as a key advantage, particularly in the current macro environment, and this was reflected in our financial results. Our second quarter revenue increased 9% year-over-year to $12.1 million. We placed 122 devices, bringing our installed base to more than 2,500 devices globally. Once again, we saw continued strength in recurring revenue, which represented 39% growth over the prior year period and comprised 1/3 of our total revenue. This growth demonstrates that our customers, whether they be in law enforcement, the military, research institutions, or in biopharma value point of need analysis. Overall, I'm really encouraged by these results. We continue to capture opportunities for handheld chemical detection, both in the U.S. and increasingly more internationally. As Bioprocess 4.0 begins to take hold with advanced modalities of therapeutics, there is a demonstrative need for robust analytics to monitor and control critical process parameters. We are building a solid foundation to take advantage of these developing opportunities. At the American Society for Mass Spectrometry or ASMS Conference in June, the need for technology was abundantly clear. Key mass spec vendors launched large frame instruments with significantly faster processing speeds targeted for proteomics and other omics…

Thanks, Kevin. Revenue for the second quarter 2023 was $12.1 million, increasing 9% compared to $11.1 million in the prior year period. Handheld revenue from our MX908 device was $8.8 million, an increase of 27% compared to $6.9 million in the prior year period. During the second quarter, we shipped 107 MX908 handheld devices. The increase in handheld revenue was primarily driven by an increase in device sales as well as service revenue. Desktop revenue, primarily from our REBEL, ZipChip interface and MAVEN products, was $3.1 million, decreasing $0.6 million from $3.7 million in the prior year period and in line with the first quarter 2023 revenue. This year-over-year decline in desktop revenue was primarily due to a decrease in device placements. During the second quarter, we shipped 15 desktop devices, including 5 REBEL, 4 ZipChip interfaces, and 6 MAVEN devices. As a reminder, we will continue to break out placements by device in the near term. However, as our portfolio broadens, we will focus more on overall revenue and combined desktop placements as the key metrics for growth. As Kevin mentioned, we had another strong quarter for recurring revenues, demonstrating the value that our devices bring to our customers. Recurring revenues, which consists of consumables, accessories, and service revenue, increased 39% to $4 million compared to $2.9 million in the prior year period. The increase was primarily driven by a growth in service revenue, mainly from handhelds. Recurring revenue as a percent of total product and service revenue increased again this quarter to 33% in Q2 2023 from 27% in Q2 2022. Notably, the third consecutive quarter, recurring revenue represented at least 1/3 of total revenue. Looking ahead, we expect recurring revenue to be around 30% for the full year. Gross profit was $5.8 million for the second quarter…

Thanks, Joe. We are pleased with the results this quarter as we continued to execute against our strategy. We are revolutionizing chemical detection by bringing it out of the central lab and to the point of need across a diverse set of end markets. We continue to see significant opportunity as we do so for new classes of products. Thus, we remain focused on developing and broadening our product portfolio to address these opportunities with both our handhelds and desktops. We are very much looking forward to launching our new product next month. Following this launch, we are hosting an event at our headquarters in Boston on September 20, where we will provide a deep dive on our bioprocessing product portfolio. Please reach out to ir@908devices.com if you're interested in learning more about the event. It would be great to see you there. With that, we'll now open it up for questions.

[Operator Instructions] Our first question comes from Dan Arias of Stifel.

Kevin, maybe to start on the REBEL, and to Joe's point on just the environment and the remainder of the year looking similar I guess to the first half of the year, I mean I know it's a tough question, but if we were to try and look out to 2024, do you feel like you have some level of visibility into demand next year? And the reason I ask that is because some of what it feels like is taking place in the industry is just related to project and purchase delays. Are you seeing that? Is there a portion of what you thought you might get this year that's maybe falling into next year as maybe somewhat of a relatively high confidence set of orders?

Yes. Thanks, Dan, for the question. I still think, as I said, it's a bit muted here through the remainder of 2023 with the REBEL placements. If you look at Q2, the total number of desktops, because we're starting to think about that broader portfolio beyond the REBEL, there's about 15 devices in Q2 desktop devices. And kind of on par with our Q1, you're right, I mean I think it's clear we're seeing many of the same industry pressures that others have been reporting on and from the capital equipment sales cycle extending. And I think you are right that some of this does go with cycles of funding through our customers and the project pacing of it. We're having really strong conversations with our customers. We're kind of really focused on the value that the products are bringing them. And with that, we do see positivity just over the long term for the whole desktop franchise we're building. And we did raise the bottom of the guidance a bit by $1 million, and that's really on the strength of the handhelds, but that also gives you maybe an indication of where we feel overall. If we start thinking about kind of the top end of the range that we provided today, one of the drivers of that would be the bioprocessing market and some of the return coming maybe before 2024. That could maybe take us to the top end of that range. And we haven't really been assuming a dramatic recovery in 2023. More of alignment with more of a run rate to approach that top end of the guidance. Hopefully, that was helpful as we start to think about future projects in '24 and our run rate coming off the end of this year.

Yes, that was helpful. Thank you for that. Maybe on the handheld side, can you just add some color to new business generation overall? How are you feeling as we head towards the end of the government's fiscal year here and think about a new budget cycle in the U.S.? And then outside the U.S., last call I was reading the transcript, you had highlighted some pretty good international demand in the first quarter. I'm just curious about whether some of that showed up here and whether you think you start to see some ex-U.S. demand be something that you can kind of reliably count on in the quarters going forward?

Yes, for sure. Go handhelds. I mean the handheld has been really strong for us over the year. And as you know, it's really a diversified set by having that same platform, but we can bring it up to the handheld and those forensics customers. Those have been really strong. The forensics team has been doing really well in H1, international definitely a driver of that for sure in the first half. We talked about NATO, we talked about some other opportunities over time, and we do see that international will continue to be a driver over H2. If you think -- you're right, the end of the U.S. government fiscal year is in the end of September. We are tracking a handful of enterprise deals across the U.S. federal, international, some of which those are tied with the end of the fiscal year. I think we've got a meaningful set of opportunities and we're pretty happy with where things stand today and the position we see them in various stages of identification, pipeline approval, and the contracting process as we get closer to the U.S. yearend.

Our next question comes from Steven Mah of TD Cowen.

Maybe just a follow-up question from Dan's line of questionings. Given the color, or given the delays on the purchasing cycles and potential for unclear budget recovery timing, do you guys -- have you guys thought of or been thinking about plans for potential reagent rental or leasing of desktop instruments to get the instruments out there given the slowdown in the capital purchasing cycles?

Yes, Steven, thanks. It's something that we think about, but definitely not changing our focus of selling capital and the opportunity of placements, whether it's on the handheld or the desktop side. But I think specifically on the desktop side, the value over the short and the longer term. I think to the extent that we see an opportunity to secure some operating funds, we'll look at that with some customers, but it's definitely not a focus of driving the growth. It's the longer-term placement and broadening the portfolio across multiple products to be able to tap into the budgets. It's different price points, everything from the REBEL at the high end to the MAVEN at the low end of our U.S. selling prices.

And then one more for me. Could you give us some color on the market for REBEL for biologics manufacturing? Given the press release you had given, National Resilience got very good results using REBEL. Has there been any kind of pull-through from the marketing side on that? And can you give us some color on how emerging BD opportunities from that National Resilience opportunity?

Yes, sure thing. We're really pleased that we were able to showcase that work. And we really have a key account strategy across our desktop devices and with a big focus on REBEL really to drive such success. Some we can talk about in the public, some we can't. We certainly are working very closely with customers as they kind of evaluate, look how they could put this into their routine workflows, look how they can kind of change what they're doing by having this point of need analysis and now being able to run a full panel assay right next to the bioreactor. We've got customers using it for things like media fingerprinting, which is really just a check before they start timepoint 0 in a bioreactor. And then we have more advanced customers like you pointed out with National Resilience that are looking to actually change on how they feed and what they do in the bioreactor. Which ultimately is a lot of the value we see with our PAT offerings as we build them out. So yes, we're always trying to get out there and be vocal about successes with customers, and we do have a bioprocessing summit coming up here next week in Boston and then we have BPI in September, which we'll be launching a new product in that PAT space. So yes, we're trying to, like ASMS that we highlighted in the script, really get a lot of collaborators and speaking about the values and virtues of the tech.

Our next question comes from Matt Larew of William Blair.

In light of the MAVEN last year and this year and the upcoming launch of your new product next month, just one, curious how you are thinking about balancing commercial resources. Obviously, all of the products in the bioprocessing portfolio are still underpenetrated relative to the potential TAM. And particularly given customers are having longer capital purchase cycles, just kind of -- you now have 5 different products with your salesforce, so how do you think about kind of managing driving penetration of the legacy, not to use that word, products like REBEL or ZipChip versus educating, evangelizing the newer product set?

Yes. We're excited that we now can have a growing salesforce that has more than one thing to be engaging and talking to the customers about that span a set of ASPs on the low end, our MAVEN, and then our REBEL on the higher end of that and with the new product on its way. I think it's all around having the conversation with the customer and enable to keep that continued engagement and figure out what they need. And these products are all very complementary so that they're not overlapping in that sense. It enables us to really speak to the customers about their process, where they're going. And there are some customers that maybe MAVEN is a better jumping off point than REBEL. Because if they haven't been doing much online monitoring or haven't been doing much at line monitoring, something like MAVEN could be a lower lift of adoption and could be a feeder as we see it into REBEL. Certainly, seeing some examples of that. And we've also seen some examples where REBEL customers now are engaging on MAVEN. I think it's a really positive thing, and we don't have a focus issue really because we're really just addressing what the customers' needs are at this point, and it's a very synergistic portfolio we're developing.

Okay. And then last quarter you gave us some datapoints around material transfer agreement that's sort of a leading indicator. And just curious, as the bioprocessing market has remained kind of stagnant, hasn't bounced back yet, if there are any other kind of leading indicator data you can share with us just to get a sense of what that funnel looks like in the back half of the year?

Yes, for sure. I think we remain convinced that these PAT tools are needed and growing importance. And it's really just fundamental if you look at that pipeline of therapeutics getting more advanced. And the conversations are all very positive and just thinking of where customers are going. But as you noted, things are just drawn out. But you're right, last quarter we did highlight that we saw a measurable kind of uptick on those material transfer agreements and we saw that starting to pick up in Q2 when we had this call at the beginning of the quarter. And yes, we're happy to report that that really continued throughout the quarter. If you look at the total number of material transfer agreements we did in Q2, that was 2x what we did in Q1. There's definitely engagement there. There's definitely opportunity. Obviously, that isn't a direct corollary into what closes in fiscal year 2023, because this is often part of the process where someone will put in a demo sample as we've discussed before and look to evaluate the technology, but it is a sign of positive engagement.

Our next question comes from Jacob Johnson of Stephens.

This is Hannah on for Jacob. Thanks for the question. To start, how has the initial customer reception of MX908 Beacon been? Is this driving additional MX908 sales? And is this an add-on offering or can customers buy these standalone?

Yes. Thanks, Hannah, for the question. Yes, Beacon is another great launch for us connected to our handheld product line. It can be bought by itself to an existing MX customer. It's about a $9,000, $9,900 add-in for it, a little bit more like an accessory, a little bit more like our Arrow. We really see that there's an opportunity to take this Beacon to the 2,000 MX908s that are out there and really kind of leverage that installed base and give those customers more capability. But on the flip side, we also see that they could drive additional MX908 placements over time as well because this is really set up as an area monitoring solution. These are done different nodes to cover a particular geography and area. As we can get people successful with their Beacon, they may then want to have 2 or 3 more, so that they can have a wider area of coverage. Initial feedback has been good. It's very early days for us on that, and it's a very practical solution that we have high hopes for here. And it probably will start out in the U.S., given that about 80% of our sales there are in the U.S. for that product and probably more on the state and local side as well as the first adopters for it across local towns, municipalities, events, monitoring and things. Yes, we're excited for where that stands today.

Great. And does the potential for bringing REBEL online next year impact current REBEL sales? If you buy the REBEL now, can they upgrade it to the online version once that's available?

Yes. I think -- I don't think it's disrupting anything that we're working on today. And in fact, the development is probably actually helping us a bit. Absolutely, the REBEL and the roadmap of REBEL is incredibly important. And as we've been trying to articulate, it's really the strategy of a complete portfolio of products rather than just a single product. Really, with that ultimate vision that we've articulated in the past, of can we take -- make a tri-quarter that's just connected to each and every bioreactor that just streams off process and product analytics? We're already on that journey with our TRACE technology in MAVEN, which is our online device, absolutely a precursor to REBEL online. Because that technology we anticipate to be incorporated within our REBEL. But as we've also said in the past, we really don't see the REBEL online as a discrete event gating our progress or customer adoption. We're really working hard constantly to just make everything easier and easier with our current REBEL offering and releasing improvements, enhancements, make everything more robust, easier to consume the data. Just really trying to knock down any barrier to routine workflow and usage. REBEL online is important. We're going to update as we enter 2024 and evaluate where everything stands in our stage gate process at that moment. We'll have a nice clear picture then. But what I can say is that we're really not waiting. There are things that are moving from that development into the current generation REBEL. Again, just to break down any barriers to routine use. That could be software enhancements, hardware enhancements, so those really are kind of more continuously flowing out there into the market. But yes, lots of innovation underway. I don't think the new technologies that are in the roadmap are hindering our sales at this moment.

Our next question comes from Puneet Souda of Leerink Partners.

This is Philip on for Puneet. Maybe just a quick question. Can you remind us of your exposure to China and if you're seeing anything there and kind of what your expectations are there for the rest of the year?

On the China front, in APAC, it's not a big piece of the pie today as you look at our geographic sales. We're 80% or thereabout in the Americas, followed by EMEA, so I think China is less than 5% of our sales. We have some folks there working through the opportunity. But really, Americas and Europe focused, not only on our handhelds but also on our desktop side, so limited exposure.

That makes sense. And then maybe a question on MX908. You kind of talked about previously kind of these large enterprise opportunities in the sales funnel. I guess I'm wondering, how is that kind of tracking? And is there any risk there? And do you have any updated thoughts on kind of where you see the total for handhelds ultimately getting to this year?

Yes. We don't necessarily give guidance based upon our placements for the year. But coming into the year, we had the headwind around the U.S. Army, and we've had some nice traction in the progress of our LDOs as we progress the year to help offset that. You saw that in the strength of our year-to-date Q2 and year-to-date here in the first half performance. We expect that to continue in the back half. There are opportunities, and we need to execute on the government yearend here at 9/30 and the pipeline of opportunities to deliver on our updated full year guide, which is relying on handheld. Still a few that we need to secure to deliver on the unit growth, but excited about how that has progressed throughout the year, both on the U.S. side but also international enterprise-wide accounts. Good momentum, and we do kind of once a year around our 10-K give a status on the overall pipeline as we update. Probably in March will be the next formal update.

With that, we have no further questions on the line, so I'll hand back to the team for any closing remarks.

Okay. Thank you. Thank you, everyone, for tuning into this and for the thoughtful questions, and have a great day.

This concludes today's call. Thank you for joining. You may now disconnect your lines.