Alpha Teknova, Inc. (TKNO) Q4 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by. And welcome to the Alpha Teknova Fourth 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 speaker for today, Sarah. You may begin.

Great. Thank you, operator. And welcome everyone to Teknova’s fourth quarter 2021 earnings conference call. On today's call Stephen Gunstream, Teknova’s, President and Chief Executive Officer will provide business highlights and updates; followed by Matt Lowell, Teknova’s, Chief Financial Officer who will review financial results and provide commentary on the company’s 2022 outlook. After we conclude the prepared remarks, we will be happy to take your questions. Before we begin, 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 also posted to Teknova’s website. 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 also be advised that the company has posted a supplemental slide deck to accompany today's prepared remarks which 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.

Thank you, Sarah. Good afternoon. And thank you everyone for joining us for our fourth quarter and year-end earnings call. Teknova is a leading provider of critical reagents that accelerate the introduction of drug therapies, novel vaccines, and molecular diagnostics. We manufacture high quality customer agents with short turnaround times and are positioned to scale with our customers as they advance their products from discovery to commercialization. This is best exemplified in selling gene therapy where there is a significant need for custom-made reagents in volumes, less than 1000 liters. Our ability to rapidly manufacture custom clinical grade bioprocessing solutions enables our cell and gene therapy customers to reduce the time from drug discovery to clinical impact. Our interaction and with current and potential customers, continues to validate the growing need for high quality, custom research and clinical grade solutions across the industry. And we are investing aggressively to meet the demand. As part of this investment we are building the depth and breadth of our leadership team, including our customer facing functions, where we recently brought on board, a Chief Commercial Officer and a Senior Vice President of Marketing. Bringing new talent to Teknova remains a priority in 2022 as we execute on our long-term strategic initiatives. Our organization has grown significantly over the past year, and I want to thank all of our associates whose dedication has been and will continue to be critical to our success. Q4 capped off a year of great accomplishments at Teknova. We drove significant growth in our business, made meaningful progress against our strategic priorities and exceeded the 2021 goals we communicated to investors at the time of our June IPO. We had a strong commercial year in 2021 posting full year revenue growth of 31% year-over-year, excluding Sample Transport. We saw robust growth in both Lab Essentials and Clinical Solutions. Lab Essentials revenue grew 28% year-on-year due to an 18% increase in average revenue per active customer and an increase in the total number of active customers. Clinical Solutions revenue grew 41% year-on-year driven by a near doubling of active clinical customers from 12 in 2020 to 22 in 2021. Over the past 12 months, we transitioned a number of accounts that in previously years solely purchased catalog reagents to accounts that now also purchase custom research or GMP reagents. We expect these accounts to continue to grow as their product advanced through the clinical pipeline. This was particularly notable in our cell and gene therapy customer base, which now stands at approximately 80 accounts up from 65 and 2020. In 2021, 46 of these accounts purchased custom or GMP reagents up from 25 the previous year. Importantly, we exited 2021 with significant momentum and started 2022 with the largest order book in the company's history. I will now discuss the progress made against our stated investment priorities in 2021. First, we made meaningful investments to enhance our existing capacity and advanced construction on our new state-of-the-art GMP manufacturing facility in Hollister, California. We continue to expect that our new facility will be operational by the end of 2022 and will have an annual production capacity of $150 million in revenue. Second, we continue to build our organization by bringing a new talent across the company that will help ensure our near and long-term success. This included building out R&D, sales, marketing, finance, and operations. Lastly, we secured significant capital to our fuel our growth plan, including a $27 million credit facility last March and proceeds from our $110 million IPO in June. We exited the year with a solid balance sheet and are putting our capital to work. We are now fully focused on the year ahead. 2022 is the second year of an aggressive invest plan for the company that will solidify the foundation for our future growth. Specifically, we are focused on the following priorities. First, deliver revenue between $44 million and $48 million, a growth rate of 30% at the midpoint excluding Sample Transport. Second, increase our current production capacity and bring on our new manufacturing facility by year end. Third, build out our commercial and marketing teams and associated capabilities to drive demand in advance of our new facility opening. And lastly, develop new products and enhance our process engineering capabilities. Overall, we are pleased with our performance and the progress we've made against our long-term strategic plan. I will now hand the call over to Matt for a discussion of the financials.

Thanks, Stephen. And good afternoon, everyone. We delivered strong results for the fourth quarter and full year of 2021. Total revenue was $10.1 million for the fourth quarter of 2021 and $36.9 million for the full year. Excluding Sample Transport revenue for the fourth quarter of 2021 was $9.6 million, a 26% increase from $7.6 million in the fourth quarter of 2020 and $35.4 million for the full year 2021, a 31% increase from the $27 million for the full year 2020. By way of reminder, Teknova launched the Sample Transport product in the latter part of 2020 to address the urgent need for COVID-19 tests. During Q4 2021 we shipped the remaining Sample Transport inventory on hand and will not recognize additional sample transport revenue in the future. Lab Essentials products are targeted at the Research Use Only or RUO market and includes both catalog and custom products. Lab Essentials revenue with $6.7 million in the fourth order, a 17% increase from $5.7 million in the fourth quarter of 2020. For the full year Lab Essentials revenue was $27.2 million, a 28% increase from $21.2 million for the full year 2020. Growth was driven by an 18% increase in the average revenue per active customer to $7,485 and an increase in the number of active Lab Essentials customers. Clinical Solutions products are made under Good Manufacturing Practices or GMP, quality standards and are primarily used by customers in the clinical development or commercial release phase of a therapy or diagnostic. Our clinical solutions revenue was $2.4 million in the fourth quarter, a 46% increase from $1.7 million in the fourth quarter of 2020 and $6.8 million for the full year 2021, a 41% increase from $4.8 million with a full year 2020. We grew our clinical solutions revenue by adding new active customers growing from 12 active clinical customers in 2020 to 2022, active clinical customers in 2021. The addition of these new clinical solutions customers contributed to a lower average revenue per active customer in 2021, but we expect revenue per customer to increase over time as they ramp up their purchase volumes. Just as a reminder, due to the larger average orders in clinical solutions, there can be quarter-to-quarter revenue lumpiness in this category. To the income statement, gross profit for the fourth quarter of 2021 was $5.0 million compared to $5.6 million in the fourth quarter of 2020 and $17.6 million for the full year 2021 compared to $17.8 million for the full year 2020. Gross margin was $49.2% of revenue in the fourth quarter, which is down from 54.8% of revenue in the fourth quarter of 2020, and 47.8% for the full year, which is down from 56.7% in 2020. Excluding the impact of a $0.2 million benefit from reversing a portion of the reserve related to excess Sample Transport inventory gross margin was 47.0% in the fourth quarter of 2021. For the full year of 2021, excluding the impact of a $0.4 million net reserve related to excess Sample Transport inventory, gross margin was 48.9%. The lower gross margin reflects higher costs associated with expected investments that company is making in its current manufacturing capacity and capabilities to support long-term growth. Operating expenses for the fourth quarter of 2021 were $9.7 million compared to $4.8 million in the fourth quarter of 2020 and $29.6 million for the full year 2021, compared to $13.1 million for the full year 2020. Operating expenses increased as we continue to invest in the people critical to our near and long-term success, including the addition of key members to the R&D, sales and marketing, finance and operations teams. As of December 31, 2021 the company had 237 associates, up 27% from December 31, 2020. We also had substantial new costs in 2021 associated with operating as a public company and meeting applicable requirements. Net loss attributable to common stockholders for the fourth quarter 2021 was $3.6 million or $0.13 per diluted share compared to net income attributable to common stockholders of $0.1 million or $0.03 per diluted share for the fourth quarter 2020. Net loss attributable to common stockholders for the full year 2021 was $9.8 million or $0.61 per diluted share compared to net income attributable to common stockholders of $0.6 million or $0.16 per diluted share for the full year 2020. Adjusted EBITDA, a non-GAAP measure was negative $3.4 million for the fourth quarter 2021 compared to positive $1.6 million for the fourth quarter 2020. Adjusted EBITDA for the full year 2021 was negative $7.6 million for the full year compared to positive $7.0 million in 2020. Capital expenditure in the fourth quarter was $7.4 million compared to $3.5 million in the fourth quarter 2020 and $19.9 million for the full year compared to $5.5 million for the full year 2020. The majority spend in the fourth quarter and full year 2021 was towards our new GMP manufacturing facility. We also continued to make investments in our current production facilities and R&D lab. We are committed to building capacity ahead of the demand curve to ensure our customer are able to receive their custom products in weeks instead of months. Cash flow and balance sheet, 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, and the fourth quarter was negative $10.5 million compared to negative $1.1 million in the fourth quarter 2020 and negative $28.9 million for the full year 2021 compared to negative $3.0 million for the full year 2020. This decrease compared to the prior year period was primarily due to lower adjusted EBITDA and a significant increase in capital expenditures. As a side note, we have historically reported adjusted free cash flow but are moving to free cash flow going forward as we believe it's a better metric for our cash use. As of December 31, 2021 we had $87.5 million in cash and cash equivalence and $12.0 million in gross debt. Our net cash position of 75.5 million as of December 31, 2021 positions us to execute on our domestic organic growth plan. Turning to our 2022 revenue guidance and outlook. We are providing 2022 total revenue guidance of $44 million to $48 million. At the midpoint this assumes a revenue growth forecast of approximately 30% as compared to 2021 excluding Sample Transport. With respect to product categories we expect Lab Essentials revenue growth of approximately 25% compared to 2021 and clinical solutions revenue growth of approximately 60% compared to 2021. While we are not giving specific guidance on our expected spend, I will make a few high level comments. 2022 will be another year of aggressive investment as we solidify the foundation for our future growth plans, we will continue to invest in capacity expansion and across marketing, sales, G&A and R&D. This will also be another year of significant capital investment in fixed assets as we expect to fund the balance of the cost of our new GMP facility in 2022, as well as make other investments in current facilities. With that, I'll turn the call back over to Stephen.

Thanks Matt. Overall, we are pleased with our 2021 performance and the progress we have made against our strategic priorities. We are now fully focused on 2022 and excited for the year ahead. We will now take your questions.

Thank you. [Operator Instructions] Our first question comes from line of Sung Ji Nam with BTIG. Your line is open.

Hi. Thanks for taking the questions and congratulations on the quarter and the year. Just a few questions on guidance, how should we think about revenue cadence? Is there a seasonality to your business? I'm trying to look at last year's cadence and there was sample transport factored into there. So as we look at – as we think about the first quarter, just the current environment we're in the Omicron and things like that, any anything we could kind of – any color you could provide us in terms of the potential revenue cadence for the year?

Yes. Hi. Sung Ji, its Matt. I would say relative to 2022 cadence, there's not a particular seasonality to our business as we know. In general I would say we would expect a ramp throughout the year from the first quarter to the end. There could be some lumpiness based upon the clinical solutions business, as we've indicated depending on when customer orders come in and the acceleration of those customers through their pipelines. But I would say in general a growth throughout the year.

Got it. Great. And then in terms of your gross margins for the fourth quarter, realize it's down you year-over-year, but increased significantly on a sequential basis. And I know it's currently pretty lumpy there, but was wondering what the drivers are. And as we think about again, gross margins for this year, I'm assuming could we anticipate further declines given the significant investments you're planning on?

Right. Yes, the Q4 gross margin did come in higher than anticipated. But I will also point to that when adjusted the margin was 47% which is still up from Q3, but I think given the higher revenue performance that we achieved in the sale of the additional sample transport product in Q4 helped with utilization of our costs as we talked about before, the biggest driver for us in gross margin over the long-term is increased volume in the business. So we did see a little bit of that in Q4, but going forward into 2022, as you rightly pointed out as we are getting ready for the opening of the new facility in particular, going into the end of the year. We would expect margins to, I guess continue to decrease for the rest of the year, as we start to ramp-up that facility ahead of the – ahead of the revenue growth that will come from it. So I think that's the – I think that's the right way to look at it.

Got it. And then lastly from me 80 accounts focused on cell and gene therapy, which is great. Just kind of curious what percentage of revenue does that represent for 2021?

So Sung Ji, we are not giving that number out right now, but I think reference is from 2020 about 20%. I can say that obviously the entire business, whether it's Lab Essentials and Clinical Solutions grew pretty significant as you can see in 2021. But yes, we are not flowing out that particular segment at the moment.

Got it. Thank you so much.

Thank you. Our next question comes from the line of Jacob Johnson with Stephen. Your line is open.

Hey good afternoon, everybody and congrats on next quarter. Maybe just first on the clinical solution segment you're guiding to 60% growth, which is pretty impressive and a nice uptick versus kind of 2021 growth. And obviously a lot of good customer additions there. Can you just elaborate on your visibility into that that clinical solutions demand? What are you hearing from these new customers that gives you the confidence to guide that 60%?

Yes. Great. Thanks Jacob. Like we said, when we bring these new customers on, it takes some time to ramp up. And so we are pretty confident in terms of the volume of products they'll need based on discussions with them as well as the timing of which – in which they on-boarded as a GMP customer of ours. And so I think we have as we've said before, good visibility for annual but given the size and the lumpiness of the business that quarter-to-quarter variability does exist.

Got it. That makes sense.

And I would just point out also just in addition, the – as we just highlighted in the remarks going from 12 active customers up to 22 customers as of the end of last year or through last year that also gives us some further confidence that that we'd be growing that business significantly in 2022.

Thanks for that, Matt and Stephen. And then just as a follow up on Lab Essentials, you talked about 18% revenue growth per user in that segment. Again that's pretty impressive, but it also implies 10% growth in that customer base and given that the size of that customer base, I guess that's a large – I would've expected. So can you just speak to the customer additions in Lab Essentials?

Yes, absolutely. And it is important to note that we also did have growth from bringing on additional customers. We believe that a little bit of that has to do with the COVID pandemic. We did see some reduction in the number of customers during the pandemic for obvious reasons and believe that we are seeing that starting to come back. And in addition, of course, we have our commercial team that is starting to ramp up and the IPO and other things that are bringing visibility to Teknova. So, I think all those things are generating an overall positive. And it's not that we don't want to attract new customers and lab essentials that's certainly part of our strategy too. And you can see it in the numbers here that that's in fact what we're doing in addition to growing their average revenue per account.

No, that's helpful. A lot easier to go from 12 to 22 than 3,000 higher. So, I'll leave it there. Thanks for taking the questions.

Yes. Thanks.

Thank you. Our next question comes from the line of Max Masucci with Cowen. Your line is open.

Hi, thanks for taking the questions. In Q4 was there any boost from GMP grade reagents used in COVID testing? And then just curious if we should expect any sort of COVID boost in Q1? Just trying to get the pacing, right.

I'll go ahead and address the question about Q4 there. Obviously, we did have the additional revenue from the GMP Sample Transport product. So, I think that also contributed to the higher gross margin in the quarter. Although, as we've said before, the primary driver is volume overall. But a secondary factor is the GMP versus RUO. So, I would say there was a contributing factor there, not the key driver, but definitely a contributor.

Yes. I think if you're asking Max about outside of Sample Transport, I think, we would say that's not material for Q4 or things for COVID-related testing outside of Sample Transport.

Right.

Okay. Got it. And then how are you thinking about the pathway to adjusted EBITDA breakeven with the capacity coming on board, you now have three earnings reports, under your belt in the public arena. So, if you look at how the mix of Lab Essentials and Clinical Solutions might evolve over the next few years and the growth trends you're seeing, how are you thinking about that pathway to adjusted EBITDA breakeven?

Yes, I mean, I think, as we highlighted here right now in 2022, we are in the second year of our aggressive investment plan. So, we'll continue to be EBITDA negative this year, obviously. And I think we see the turning point coming by the early 2024 timeframe from an EBITDA perspective, as we will start to see the benefits to our revenue growth with the new factory and all the other investments that we're making to drive top line come into play. So, I do think it's in that type of outlook Max.

Great. Well, congrats on a strong finish to 2021.

Thank you.

Thank you. Our next question comes from the line of Matt Larew of William Blair. Your line is open.

Hi, good afternoon. Obviously, you've been investing in building out the sales and marketing function and assembling the Scientific Affairs team, and R&D resources. Just curious, Stephen, if there's anything you can point to from the back half the year in terms of return on the sales team? I know in the IPO process, you decided that most of your sales opportunities were inbound or sort of customer referrals. I'm curious if you are starting to see more success from the sales team that you're building out? And then on the R&D side, if there is anything in particular, your team is excited about bringing to market in 2022?

Great, thanks, Matt. So, from a sales and market perspective, I think, what you can see is some traction, right? We've gone from 12 to 22 customers on the clinical side. Just the engagement we're having with these customers is at a different scientific level than we've had in the past. And I believe that's starting to have an impact on the business. Obviously, those play out over time, right? As these customers on board ramp up and then their products move down, the clinical pipeline, we should see the fruits of our labor. And I think the other part of that is we are just beginning, right? So, we created, we brought in Jennifer Henry and Ken Gelhaus, they are building out their teams. Right now, we expect that to be execution ready to go by the end of this calendar year to fill out the new facility that will come online in 2023. So, we're excited about that. I think we're seeing some impact to that, but I do not think we're yet obviously up fully running in where we will be at the end of this year. Secondly, on your R&D we are internally very excited. We are not disclosing much about exactly what we're doing, but I think it's fair to say that 2020 year is still a development year for us and taking these products through a pipeline, a product development pipeline to commercialize in the out years. But we are excited in our internal capabilities we've built out in the progress we've made in the last six to nine months on that front.

Okay. And on the capacity front, so Hollister coming online by the end of the year but can you just remind us additional capacity you can bring on the current facility? I know in the past you've added shifts, but I believe you do have some flex if you start to run into capacity constraints with current facility as well.

Absolutely. And so yes, we have moved to a seven-day work week on the manufacturing. And you will see it in the spend as well in Q4 investing our current process engineering and automation to increase capacity further and drive efficiency. In addition, we are yet to switch to a 24-hour day. And so, we do have capacity that we will be expanding into, should something happen with the build out of a new facility, whether it's a supply chain related or something else we have ample capacity continuing to meet demand until we're ready to turn our next facility on.

Okay. And the final one is just from a supply chain and raw material inflation standpoint; I guess part of obviously what you are delivering is the rapid turnaround time. And so have you had any issues with either sourcing or logistics getting things to customers would be part one. And then the second piece to the extent that you've had inflation in some of your inputs, are those things, especially on the catalog side that are built into contracts to pass on price increases to customers?

So first, from a supply chain perspective, it is a challenging environment. There are certain raw materials or containers, like single-use bags that have very long lead times and customers are very specific products or raw materials or containers they like to work with. One of the benefits that we have is the flexibility in our manufacturing to swap them out to different raw materials or different containers, should they need that product sooner. So, some customers have chosen to wait. Some other customers have chosen to swap out so they can continue the production. We really see obviously the supply chain piece we see ourselves as part of that solution where we can actually help mitigate some of those issues that some of these key manufacturers are running into at the moment. From a passing on inflation perspective, we believe we are able to do that. Contracts is not necessarily how we do that, but I think that it's expected and that we are not so price sensitive that we cannot move those through the products we offer.

Okay. Thanks a lot, Stephen.

Yes, thanks, Matt.

Thank you. I'm showing no further questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.