Alpha Teknova, Inc. (TKNO) Q3 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Teknova Third Quarter 2021 Financial Results conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Sarah Mitchell. Thank you. Please go ahead.

Thank you, operator, welcome to Teknova’s third quarter 2021 earnings conference call. On today's call Stephen Gunstream, Teknova’s, Chief Executive Officer will provide business highlights and updates followed by Matt Lowell, Teknova’s, Chief Financial Officer who will review financial results. After we conclude the prepared remarks, we will be happy to 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 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 these 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 should 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, for 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 be advised, the company has posted a supplemental slide deck to accompany today's prepared remarks on its website, and that can be accessed through the investor relations section of Teknova’s website, and on today's webcast. And with that, I will turn the call over to Stephen.

Thank you, Sarah. Good afternoon, and thank you everyone for joining us for a third quarter earnings call. Teknova is a leading provider of critical reagents that supports the discovery, development and production of drug therapies, novel vaccines, and molecular diagnostics. We manufacture high quality customer agents with short turnaround times and are able to scale with our customers from discovery to commercialization. To give you an example, in cell and gene therapy, there is significant need for custom made reagents in buying smaller than 1000 liters are short turnaround of custom clinical grade bioprocessing solutions enabled our cell and gene therapy customers to reduce the time from drug discovery to clinical impact. Over the last several months, I and other members of our team have participated in various industry conferences and events and met with a number of customers and high potential prospects. I have been energized by these interactions, particularly in the cell and gene therapy space. We believe there is market demand for high quality custom solutions. Our discussions have validated our thinking and strongly reinforced to meet that our capabilities, including our quick turnaround, meet the critical needs in the industry supply chain. We are well-positioned to benefit overtime; one, as our customers advance their products or therapies through their clinical development pipelines, and two from growth in the broader market segment. We have the infrastructure in place today to support our near-term outlook. Our balance sheet is strong and we are making good progress in positioning the company for long-term growth by investing in capacity expansion, commercial excellence and R&D. Lastly, we have the team in place to execute on our vision. I want to thank all of our 215 plus associates, whose dedication has been and will continue to be critical to our success. Moving to our business updates. I'm pleased to report that in the third quarter, we performed well commercially and made meaningful progress on our investment priorities. First, our total Q3 revenue excluding sample transport media was $9.3 million, up 26% as compared to $7.4 million in the third quarter of 2020. Second, we advanced construction on our new state-of-the-art GMP manufacturing facility in Hollister, California, which when operational at the end of 2022, will increase production capacity by five fold. We also made efficiency and capacity improvements at our existing facilities. Third, we continue to invest in talented areas that are critical to our near and long-term success. For example, in the third quarter, we expanded our R&D process engineering and automation change to support the new manufacturing facility build out. Finally, today, we announced that, we expanded our leadership team with two key hires in our commercial organization. I want to formally welcome Ken Gelhaus, who will serve as Chief Commercial Officers and Jenn Henry, who is joining the Company as our Senior Vice President of Marketing. Ken will lead sales, product management, commercial operations, and customer service at Teknova. Ken has significant experience in the commercial roles at life science companies, most recently at Becton Dickinson where he was responsible for the global clinical solutions business unit of BD Biociences. Ken and I worked together at BD and his background in building commercial organizations and leading complex businesses makes him an ideal fit for the role. Jenn comes to Teknova from the technology industry with past roles in marketing at eBay, Facebook, Google, and Apple. Hiring outside of the Life Sciences for this role was intentional on our part. We wanted a top marketing talent, of course, but also someone who would bring fresh perspective and creative thinking to our customers. Jenn is a brand specialist of the highest order has led some of the biggest launches in the tech industry, including the original iPhone and has proven to be adept at adjusting to new environments and building teams. I'm thrilled to have both Ken and Jenn join the Teknova team, and I look forward to them contributing to our future success. Overall, we are encouraged by our third quarter performance and excited with the progress we have made against our strategic plan. Looking through the remainder of the year, our priorities remain consistent and we will continue to be laser-focused on execution and laying the foundation to support our long-term growth opportunities. I will now hand the call over to Matt for discussion of the financials.

Thanks, Stephen and good afternoon, everyone. We delivered strong results in the third quarter of 2021. Let's start with revenue. Total revenue for the quarter was $9.4 million, a 5% increase from $9.0 million in the third quarter of 2020. As Steven mentioned, excluding simple transport media revenue for the third quarter of 2021 was $9.3 million, a 26% increase from $7.4 million in the third quarter of 2020. As a reminder, Teknova launched a transport media product in the latter part of the second quarter of 2020 to address the urgent need for COVID-19 tests. While we consider revenue from transport media sales to be non-recurring and the product is not part of our ongoing strategy. Lab Essentials products are targeted at the Research Use Only or RUL market and include both catalog and custom products. Lab Essentials revenue in the quarter was 7.2 million, a 24% increase from 5.8 million in the third quarter of 2020. Revenue growth was driven by higher average revenue per customer. And we are seeing that both year-over-year and sequentially. Clinical solutions products are made under Good Manufacturing Practices or GMP quality standards and are targeted for use by customers in the clinical and commercial phases of a products or therapies development. Our Clinical Solutions revenue in the quarter was 1.7 million, a 25% increase from 1.4 million in the third quarter of 2020. As a reminder, due to the larger average orders and Clinical Solutions, there can be quarter to quarter revenue lumpiness in this category. We are pleased with our 25% underlying Clinical Solutions growth performance this quarter particularly in light of tough comparisons to the prior year quarter, which benefited from tailwinds associated with an increase in COVID-19 testing kit and vaccine production. We are pleased to report that in Q3, we grew our Clinical Solutions revenue by adding new active customers defined as a customer that ordered within the previous 12-months. We expect revenue attributable to these new clinical solutions customers will grow over time even as their initial buying activity contributed to lower average revenue per customer in the same periods. Turning to the income statement, gross profit for the quarter was 4.3 million compared to 5.1 million in the third quarter of 2020. The decrease in gross profit was primarily driven by an increase in manufacturing overhead and higher labor expenses. Gross margin was 45.4% in the quarter which is down from 56.6% in the third quarter of 2020, reflecting higher costs associated with planned investments that the company is making in its current manufacturing capacity and capabilities to support long-term growth. Operating expenses for the quarter were 8.2 million compared to 2.9 million in the third quarter 2020. Operating expenses in the quarter increased as we continued to invest in talent critical to our near and long-term success. We are pleased to have added bench strength to the Company’s corporate, commercial and R&D teams. We continue to make good progress on hiring generally and on other internal initiatives to increase our operational capabilities. Also, we have substantial new costs associated with operating as a public company and meeting applicable requirements. As of quarter end, the company had over 215 associates, up 33% from the third quarter of 2020. The net loss attributable to common stockholders for the quarter was 3.3 million or $0.12 per share, compared to net income attributable to common stockholders of 0.3 million or $0.07 per share for the third quarter 2020. Adjusted EBITDA, a non-GAAP measure was negative 2.7 million for the quarter compared to positive 2.7 million for the third quarter of 2020. Now a few notes about the balance sheet and cash flow. Capital expenditure in the quarter was 3.9 million compared to 1.0 million in the same quarter prior year, as in previous quarters the majority of spend in the third quarter of 2021 was investments in our new GMP manufacturing facility, our current production facilities, and our R&D lab. We are committed to building our manufacturing capacity and related infrastructure in front of anticipated increases and future demand to ensure our customers are able to receive their custom products in weeks instead of months. Adjusted free cash flow, on non-GAAP measure was negative 6.6 million for the quarter compared to positive 1.7 million for the third quarter of 2020. This decrease compared to the prior year period was due to lower adjusted EBITDA and the significant increase in capital expenditures I mentioned previously. Turning to the balance sheet, as of September 30, 2021 we had 98 million in cash and cash equivalents, and 12 million in gross debt. Our net cash balance of 86 million puts us in a strong position, as we continue to invest for the long-term growth of our business. I wanted to make a few comments about our revenue outlook through the end of the year, given our strong revenue performance in Q3, we are confident in our ability to achieve our core revenue growth target of 25% for fiscal year 2021. We continue to experience strong customer interest in our products and good order flow. And at this point in the quarter, we are comfortable with the current consensus revenue expectations for the fourth quarter. In the fourth quarter, we intend to continue our aggressive investments in capacity expansion, marketing, sales and R&D. We believe investment is necessary to serve our customers as their order volume scale and will further solidify our competitive advantage in short turnaround times on custom products. With that, I will turn the call back to Stephen.

Thanks, Matt. We are very happy with the progress we have made this year in delivering on our commitment to our shareholders. We are executing on all phases of our strategic plan and are in good position to finish the year strong. I’m confident that the investments we are making today to support our near and long-term growth will strengthen our competitive advantage in the market even further. Lastly, we have the team we need to execute on our strategic vision and enable our customers to develop and commercialize novel vaccines and therapies. I will now open up the call for questions. Operator.

[Operator Instructions] Our first question comes from the line of Matt Larew of William Blair. Your line is now open.

Hey guys. It is actually [Max] (Ph) on for Matt. Congrats on another strong quarter, and thanks for taking our questions. So I appreciate that you aren't quite ready to give guidance on the fourth quarter, just due to the size of your customer base and clinical solutions, but can you give us an update around the number of customers you have in the pipeline there, that you think could potentially be ordering G&P grade products over the next year or two. And then more broadly at the time of your IPO, you talked about how you are working with 65 leading cell and gene therapy companies, 29% of which were ordering custom formulations. Just wondering, is there any way we can get an update around those figures? And then Stephen, just based on your comments around the demand you are seeing from cell and gene therapy customers, is it fair to assume that the clinical solutions customers that you added in the quarter fall in that bucket.

Okay. Great, thanks. So, we are not at this point disclosing the number of customers in the pipeline, that is something you can consider for future. But at this point in time, I will say that we have seen a very strong trend of growth over the past quarters, and we see a good order flow coming in, both as order volume as well as number of new accounts. And at this point in time, we can say that, of those new accounts, yes, we are seeing additional cell and gene therapy customers joining our clinical solutions business. Yes. And maybe just, just to follow up on the other question that you had Max around the percentage of our business coming from customers ordering custom products, I think that is also inline generally with the trends that we expected to see, and that is evidence of that. We have increased an average revenue per customer in the Lab Essentials business. So, we are very happy with the progress that the lab essentially business is also making.

Yes, certainly. I don't want that. Another focus on the clinical solutions business, but I don't want the Lab Essentials business to go. I appreciate that commentary. Just as a follow-up, at a high level, I mean, supply chains that have been a big theme this quarter. So, just wanted to ask and see if you are experiencing any supply chain pressure. And if so, what impact did that pressure have on results in the quarter? And then I know obviously, you have new facility coming online in 2022, and you have talked in the past about some of the levers that you can pull to increase capacity in the near-term. But it seems like most, are those levers are directly related to adding more employees and given that tightness in the labor market. I mean, is there any concern there in terms of switching to a seven day work week or expanding production overnight that, just given the tight labor market that those levers might not be as achievable as maybe you thought a couple of months ago?

Sure. No problem. So on the supply chain side certainly it is a challenge at the moment. We have been working very closely with both our internal teams, as well as our customers, to move them to secondary options for some of the raw materials where there is a challenge. And I think, we have been very successful in doing that. So, I'm happy with our performance there and managing that difficult situation. I don't know exactly from an impact perspective, but I can say that, we have managed it very, very well and impressed with what were able to do both with our customers and internally to make sure we can deliver for them. On the facility piece, right, so we will be operational with our new facilities by the end 2022. We are also investing in our current facilities, that is in labor hours, as you mentioned. We have found benefits from probably the awareness of us being a public company, and able to recruit talent into the organization is of course a challenge and it is very competitive. But, given the vision of the company, our ability to execute and the culture we have set up here, I think we are making significant progress there. And then the other part about that from a capacity perspective, it is not just labor hours. We have invested in, as I said, in process engineering, as well as automation, both of which will apply to the new facility as well to drive increases in output from a production perspective.

Got it, great. Thanks again and congrats on the quarter.

Thanks.

Thanks.

Our next question comes from the line of Sung Ji Nam of BTIG. Your line is now open.

Hi thanks for taking the questions and congrats on the quarter. Just a couple of quick ones. For me, I was just curious about kind of what you are seeing. It sounds like there is a lot of interest a lot of demand coming from both the biopharma market, the cell and gene therapy market, as well as just the overall end markets and was curious about just given the recent environment, Max asked about supply chain issues, but also with the Delta variants and others. And we are starting to hear kind of maybe even the rates going up again, in certain regions and around the country and potentially globally, and so was kind of curious what you were seeing, if you are seeing kind of activity levels normalizing for your customer base, and access to, your Salesforce access to your customers are also normalizing and just kind of curious what the kind of the near-term outlook might look like?

I will leave the financial outlook to Matt. But I can say that the Delta variants from the supply chain challenges we do not believe has affected our business from Q3. And we are able to deliver as planned and I foresee similar outcome in Q4. And I will also say that some of these supply chain challenges are also we consider some opportunities, where we are able to adjust our manufacturing processes, our raw materials, changing packaging for customers to allow them to get their products sooner. And so I believe that we are actually in a great position to deliver during this time, we are particularly challenging from a supply chain perspective.

And I will just add to that, just from a financial impact perspective, I mean, we are really not seeing any material impact from the Delta variant, certainly not like we saw last year when there was a lockdown across the country. And this is really already been impacted from the sample transport product line that we have. We have already mentioned that and as you can see, in this quarter, there was also fairly low level of revenue for that product line. But other than that, in terms of the rest of our business, nothing is impacting us at the moment and it stays that way obviously.

Great. And then just my follow-up is for Matt. In terms of gross margins, you saw that decline year-over-year, and you guys mentioned the incremental investments that you have talked about before, but it actually went up sequentially. And I was wondering, just in terms of going forward, is this the level to kind of carry forward? I'm just trying to figure out if there are additional investments that are in your plans if you will?

Yes. Good question Sung Ji. Well first of all, I would just point out that remind folks that in Q2, we did have a fairly significant impairment inventory reserved, rather taken with the, for the sample transport business that did have a significant impact on our reporting gross margin. So if you adjust for that in Q2, and compare it to Q3, it was sequentially down. And we are still making those investments as I pointed out in our remarks, we are very keen on making sure that we have the best capabilities and ample capacity to be able to serve our customers with a fast turnaround time they have come to expect from us. So I would expect gross margin to continue to be at these levels. As we continue to make those investments and build for the future basically.

Great. Thank you so much.

Thank you.

Our next question comes from the line of Jacob Johnson of Stephen. Your line is now open.

Hey, guys. This is [Mack] on for Jacob. My congrats on the quarter as well, but just a quick question from some of your recent presentations at industry conferences, they seem to focus on chromatography step and viral vector manufacturing. Can you talk about the demand for your chromatography buffer and viral vectoring manufacturing processes, and how much can you help optimize this process and where can you try the efficiency?

Sure. So I will touch on it. Generally speaking, we are seeing what we believe is significant inefficiencies in viral vector production processes and part of that comes from the purification process, which is the chromatography as well as the final formulation process. And we believe based on our own work internally, that there is a lot of need there for custom reagents for making a highly pier AABs, and it is not similar to maybe a monoclonal antibody therapeutic where you are having a very similar about the same process for purification, that every one of these viral vector purifications does require some optimization. And so we see that as an opportunity for us from our custom manufacturing perspective or building scientific expertise in that a way to help our customers through that process development phase. But there are multiple steps within that entire bioproduction process that we are focused on and believe that all need faster on time a custom product in that scale of less than 1000 liters. And so our vision there is really how do we accelerate that process development so we can get them into clinical trials sooner?

Great. Thank you. Also on the Chief Commercial Officer hiring this morning, also congrats on that news as well. Can you talk about what Ken will initially be focused on?

Absolutely. So first obviously very excited about, Ken and Jenn joining Teknova. These are two leaders without a doubt in their respective areas. And of course I have worked with Ken at BD. Well, Ken will continue to execute on the vision that we have laid out of building out this commercial team. He has done this and in his past, both with Danaher and Becton Dickinson, and really driving the science first focus on the field, and then leveraging our entire customer base to drive same accounts revenue growth. And so Ken will be focused on making sure we are executing on a commercial perspective and operating to continue to deliver our customers the highest quality products quickly.

Great. Thank you, guys.

Thank you.

There are no further questions at this time, and this concludes today's conference call. Thank you for participating. You may now disconnect.