Alpha Teknova, Inc. (TKNO) Q2 2022 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Teknova Second Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to the first speaker, Ms. Sara Michelmore.

Great. Thank you, operator. Welcome to Teknova's Second Quarter 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 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 including 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 these forward-looking statements, except as required by law. This company's management believes that in addition to GAAP results, non-GAAP financial measures can provide meaningful insight on 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 was issued this afternoon, which is posted to Teknova's website and at the www.sec.gov/edgar. Non-GAAP financial measures should always be considered only as a supplement to and not a substitute for or as superior to financial measures prepared in accordance with GAAP. The non-GAAP financial measures in this presentation may differ from similarly named non-GAAP financial measures used by other companies. Please also be advised that the company has posted a supplemental slide deck to accompany today's prepared remarks, it can be accessed on the Investor Relations section of Teknova's website and on today's webcast. And now, I'll turn the call over to Stephen.

Thank you, Sara. Good afternoon, and thank you, everyone for joining us for our second quarter 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 cell and gene therapy, where there is a significant need for custom-made reagents and volumes less than 1,000 liters. Our ability to manufacture custom clinical-grade bioprocessing solutions which short turnaround time enables our cell and gene therapy customers to reduce the time from discovery to clinical impact. Our interactions with current and potential customers continue to validate the growing need for high-quality custom research and clinical grade solutions across the industry, and we are investing to meet the demand. Already, approximately, 80 cell and gene therapy customers regularly use Teknova’s products with over 45 of those purchasing custom and/or clinical grid reagents. We believe this provides us with a strong foundation for growth as their therapies advance through the development pipeline and into commercial production. The outlook for cell gene therapy remains promising, and there is a significant market for us to target today with over 1,900 therapies in early stages of clinical development. During Q2, we increased our existing manufacturing capacity in advance of the construction of our new state-of-the-art facility in Hollister, California. This facility remains on track to be operational by the end of 2022 and will give us the capacity to manufacture approximately an additional $150 million in product revenue annually. We expect to complete the initial phase of our build-out by the end of Q3 and to begin qualification activities later this fall. We continue to build our organization have made nearly all the critical hires we required to execute our growth plan. Teknova 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. During Q2, we also achieved record revenue and are pleased to have finished the first half of 2022 with strong revenue performances in both our Lab Essentials and Clinical Solutions portfolios. While we continue to see healthy demand across our broader customer base, we now expect lower-than-anticipated revenue in the second half of 2022. We believe this is due in a large part to certain of our early-stage biopharma customers deferring large purchases in both our Lab Essentials and Clinical Solutions portfolios. Specifically, these customers report that they are actively managing their near-term orders for products. We believe this may reflect company-specific efforts to extend cash runway in response to perceived challenges in the capital markets funding environment. Early-stage biopharma customers, including cell and gene therapy customers do represent an important and faster end market for our customer clinical grade products. Our exposure to this customer segment is greater than some of our bioprocessing peers, but also positions us well to participate in what we believe to be a significant growth opportunity ahead. We are engaged with our customers, including those who have deferred orders and they have expressed their intention to order from us in the future. We continue to expect to support them as they advance the development programs critical to their future success. While we have revised our 2022 revenue outlook, I want to reiterate our belief that the fundamental growth opportunity for Teknova remains unchanged, and we are confident in our ability to help our customers accelerate the introduction of novel therapies through our unique ability to manufacture custom-made reagents in volume less than 1,000 liters and with short turnaround times. Lastly, our balance sheet remains strong, and we have access to greater than $100 million in liquidity that will enable us to execute our growth strategy and achieve positive cash flow without the need to raise additional capital. I will now hand the call over to Matt for a discussion of financials.

Thanks, Stephen, and good afternoon, everyone. We delivered strong results for the second quarter of 2022. Starting with revenue highlights. Total revenue was $11.7 million for the second quarter of 2022, a 41% increase from $8.3 million in the second quarter of 2021. On a trailing 12-month basis, excluding sample transport revenue, total revenue increased 33%. Given our small overall revenue base and the potential for large orders to drive some variability in our growth rates, we believe trailing 12 months revenue growth is a useful additional metric to track our growth. 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 and we are no longer -- 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 Essential's revenue was $8.4 million in the second quarter, a 30% increase from $6.5 million in the second quarter of 2021 and an 18% increase on a trailing 12-month basis. It was a strong quarter for Lab Essentials, reflecting an increase in both the number of active customers and average revenue per active customer. Our custom order business also continues to grow on a trailing 12-month basis. Clinical Solutions products are made according to 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 $2.9 million in the second quarter, an 85% increase from $1.6 million in the second quarter of 2021 and a 91% increase on a trailing 12-month basis. Revenue growth was strong in the quarter, primarily attributable to higher average revenue per active customer. We also observed an increase in the number of active customers. Turning to the income statement. Gross profit for the second quarter of 2022 was $5.2 million, compared to $3.4 million in the second quarter of 2021. Gross margin was 44.9% in the second quarter, which is up from 40.3% in the second quarter of 2021. Excluding the impact of a $0.7 million charge from recording an inventory reserve related to excess sample transport inventory, gross margin was 48.7% in the second quarter of 2021. Higher labor and overhead costs impacted gross margin in the second quarter of 2022. Operating expenses for the second quarter of 2022 were $11.9 million, compared to $5.9 million in the second quarter of 2021. Operating expenses increased primarily related to additional headcount, marketing costs and stock-based compensation expenses. 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, people and IT teams. As of June 30, 2022, the company had 295 associates, up 24% from December 31, 2021. Net loss for the second quarter of 2022 was $6.2 million or $0.22 per diluted share, compared to a net loss of $2.3 million or $0.52 per diluted share for the second quarter of 2021. Adjusted EBITDA, a non-GAAP measure, was negative $4.9 million for the second quarter of 2022, compared to negative $1.5 million for the second quarter of 2021. Now for cash flow and balance sheet highlights. Capital expenditure in the second quarter was $10.9 million, compared to $4.7 million in the second quarter of 2021. The large majority of spend in the second quarter went towards our new facility. We also continued to make investments in our current production facilities. We are building capacity ahead of the demand curve to ensure our customers are able to receive their custom products in weeks instead of months. 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, in the second quarter was negative $16.8 million compared to negative $8.2 million in the second quarter of 2021. This decrease, compared to the prior year period, was primarily due to lower adjusted EBITDA and a significant increase in capital expenditure. Turning to the balance sheet. As of June 30, 2022, we had $64.7 million in cash and cash equivalents, and $17.1 million in gross debt. As I shared on our first quarter call, in May, we amended our existing credit facility to increase the amount available under it by $30 million to $57 million. We took an additional draw of $5.1 million at closing in May, and we'll be drawing a planned $5.0 million at the end of October. This new financing was a strategic priority to help ensure we will have the capital to execute our domestic organic growth plan. Turning to our 2022 revenue guidance and outlook. Our new revenue guidance is $38 million to $42 million. At the midpoint, this guidance assumes revenue growth of approximately 13% as compared to 2021, excluding sample transport. With respect to product categories, we now expect year-over-year Lab Essentials revenue growth of approximately 10% and Clinical Solutions revenue growth of at least 45%. Concurrent with the change in revenue outlook, we are actively slowing the pace of hiring relative to our prior forecast, while we continue to invest in priority areas that will drive future demand, support the opening of our new facility and strengthen our GMP capabilities. Our balance sheet is strong and coupled with the capital available to us under our credit facility, we are well positioned to execute our growth plan and achieve positive cash flow without needing to raise additional capital. With that, I'll turn the call back to Stephen.

Thanks, Matt. Overall, we were pleased with our second quarter 2022 performance and the progress we made against our strategic priorities. The fundamental growth opportunity for Teknova remains unchanged, and we are confident in our ability to help our customers accelerate the introduction of novel therapies through our unique ability to manufacture custom-made reagents and volumes smaller than 1,000 liters with short turnaround times. Our balance sheet remains strong, and we have access to the capital we need to execute our growth strategy. We will now take your questions.

[Operator instructions] And our first question comes from the line of Max Masucci with Cowen. Your line is now open.

Hi. This is Stephanie on for Max. Thanks for taking the question and congrats on a great quarter. So Stephen, my first question is on your guide. So you lowered your guidance range due to early stage biopharma customers supporting launch purchases. Can you just provide us some more details on how to bridge the low to high-end of your guidance and what assumptions you're taking into both ends of the range?

Yes. I'm happy to talk to that, Stephanie. Yes. As you've heard from the comments we just made, we changed and lowered the guidance range to $38 million to $42 million. Looking at the order book today, we feel that that's a reasonable range for performance in 2022. I would say things that could affect the -- whether we move towards the lower end or the higher end of the range depends really on the external environment here. As we said in our comments, we believe a lot of this is due to the uncertainty in the capital markets environment. So, there is some dependency on how that gets resolved over the coming quarters. But I guess, what I would say is, if we have some larger orders, more than expected come in here in the next several months. We would be expecting to come out towards the higher end of that range. And if for any reason, there would be a worsening in the environment that might push us towards the lower end, but otherwise, we think the midpoint of the range is a reasonable target based on what we know now.

Understood. That's helpful. And then just a follow-up on that. So it sounds like you're confident that the purchases from your early biopharma customers but only being deferred based on the comments you made earlier in the call. And it sounds like the purchases that they are deferring or coming from both lab essentials and clinical solutions. So I'd be curious to hear, especially with the custom products. Are there products that they are deferring not necessary for running their trials or are seeing deferred product purposes for programs that are being halted for the time being. Any additional color would be great.

No problem, Stephanie. So we believe this is largely transient in nature. We've had conversations with all of these customers. And remember, from a lab essentials perspective, we do quite a bit in that custom side, where we're doing customer agent for them – for the development in the preclinical to clinical phases, where they do not yet need clinical-grade reagents. And so it's a combination of those and our Clinical Solutions customers, which are in that early stage as well, which are basically at a point where they're saying, we're not sure exactly based on timing, which we largely believe is due to the uncertainty in the market. And so both of those, but all of our conversations with them and with the conversation about their belief in our products and their services and are excited to continue to work with us. It's just a matter of timing until those orders are actually pushed through.

Got it. That's helpful. Thank you. And then if I could just squeeze in one more. So your Clinical Solutions, GMP business is progressing nicely and Q2 came in higher than we expected. Are you finding that your existing customers are transitioning from your RUO to GMP offerings better than expected, or are you finding new customers that want your GMP offerings right off the bat?

I’d say, we have both. So we have an increase in the total number of clinical customers, as Matt mentioned in the call, but we also have those customers that have been in that pipeline for some time that are now progressing through. And so we are seeing kind of the benefit of both in this case. And remember that many of these customers are customers that we've been working with for the last six to 12 months to get them set up for the scale they need going forward. So these are kind of all in the works, and migrate to that pipeline over time.

Got it. Understood. Thanks, again for taking all my questions.

Thank you.

Thank you.

Your next question comes from the line of Matt Larew with William Blair. Your line is now open.

Hey, Good afternoon. Just trying to put pieces here together a little bit because obviously, you now beat the last two quarters, many of your larger peers were reported beat in several ways. So the guide down that seem to be pretty out of step with what's going on, both with your business year-to-date and the space. So can you just tell us what your exposure is to early stage biopharma customers, both perhaps by the number of customers – excuse me, percentage of revenue and percentage of your customer base?

We're not going to disclose the exact numbers of these things, but I can talk to you a little bit in general terms, Matt. So we have -- if you remember, the company, we onboard our first GMP customer in 2008. And I believe at the end of 2021, we reported

With that 2018.

Sorry, 2018. And then at the end of 2021, we reported 22 active clinical customers. And so the -- that represents -- you can take a look at our Clinical Solutions revenue is now becoming on a trailing 12-month basis, about 1/4 of our total revenue has been those 22 customers. And if you think about the timing of when those onboarded by their very nature, have to be in the early stage of the -- clinical development pipeline. And so, I think we're -- that's a good way for you to kind of gauge exposure to the capital market environment. I guess said earlier in my -- in the call here, we absolutely believe that in cell and gene therapy in the long run and our growth strategy remains unchanged. We believe these therapies are going to be the next wave of medicine and it's just a timing issue right now that is transient in nature that we believe will resolve itself overtime here as the capital markets become more predictable and there's more clarity there.

Okay. And then on the guidance, look Matt maybe be a little bit more specific. Does anything -- do any of the orders that these customers -- these large orders that customers have indicated you are deferred, does any piece of the guidance assume those coming back during 2022?

No, no. We're not -- our current assumption is that those are deferred out of 2022. Of course, we're continuing with our teams to develop business as we always have. So, there's certainly the possibility that there could be orders coming back or additional new orders that would come in this year. But our guidance right now at the midpoint assumes fairly static situation at this point. And as I mentioned earlier to Stephanie, there is some, obviously, with the range there depending on what exactly we see happening through the end of this quarter, Q3, there could be some, there's some obviously very variable output options, excuse me, for what we might see for the full year. But right now, no, we're not assuming that those are in the pipeline or to be delivered in 2022.

Okay. And then finally, obviously, the big piece of the value prop is the turnaround times and exchange historical customers have been less price sensitive. I'm just curious now that some customers are facing short of cash runway, thinking about deferring expenses. If you're setting from the competition, they may be willing to tolerate longer lead times at an expense for cost. I'm just curious what the conversations look like with those deferred purchases and how you might cut them back?

To be honest, that has not come up at all. I think that we have a very loyal customer base. But I think when you think about the cost of the materials may be buying from us versus the cost of time, it's much more important than their products quickly. So as soon as they have their capital and want to drive that forward. I think that time is going to be of the essence for them and a priority. And every one of them that we've spoken with has indicated that this is just a timing piece. And we will be -- as soon as that gets resolved, they will be placing those orders with us.

Okay. Thank you.

Thanks Matt.

And your next question comes from the line of Jake Johnson from Stephens. Your line is now open.

Thanks, good afternoon. I do have some questions on guidance. Maybe first, you kind of talked about this as more of kind of a delay in orders maybe the timing is pushed out. Is there any element of this where you may lose out on these orders, or could we be looking at a 2023 where you kind of have a catch up, who knows what 2023 going to look like, but you have a catch-up from some of these preferred orders next year plus, kind of general growth, just how we think about kind of deferring these orders versus maybe losing them?

Yeah. So first, we're not yet giving guidance on 2023, obviously, but from a perspective of have we lost customers. And we think we'll do the time, I think the answer is no. Like I said, we have had conversations with all of these customers. And they've indicated over-and-over again, that this is where their priority and we're going to get this through. It's just a matter of at what point in time. So we do think this is a likely transient nature. Now whether or not, there is a backup and then a release and that is an additional growth driver in 2020. We cannot see yet. We do not know. But I will also say that, of course, our efforts here as -- from a market size perspective, we're still, as you know, a small portion of that overall cell and gene therapy market that are in that pipeline yet and we're continuing to build that opportunity funnel. And they take six to 12 to 18 months for a lot of these customers, right? So I think that we still see a lot of validation from our customers that we are in the right spot and providing something that others cannot provide at the moment.

Okay. Thanks for that Stephen. And then, I think you talked about kind of maybe some lumpy orders being impacted on the Clinical Solutions side of things, but you also lowered the lab essentials outlook. Can you just talk about that segment, the impact there? And I apologize if you already spoke to it.

Sure, no problem. On the Lab Essential side, again, we have this underlying growth of the base business and the catalog side of the business, that's historically been at Teknova for a significant period of time. And there's in every major institution -- Life Science institution in the United States. That continues to do exist now if there's some pullback on the discovery side, because the uncertainty that's different than what we're necessarily seen. It's on the larger order side where they start to get into the custom piece where they're in that bridge between, say, a catalog product and a clinical product where those customers are giving there specific reagents and working through to scale up for preclinical. And so that's why that Lab Essential is also in that range where things could be a little bit deferred.

Okay. That makes sense, Stephen. And then, I guess, last question is just kind of thinking ahead and thinking about the current environment we're in. You've seen some of your existing customers pulled back on spend, but in terms of your ability to add new customers, I guess, particularly in Clinical Solutions, kind of any change in the efforts there? Is it harder to get people across the finish line, just kind of thoughts on winning new customers there?

Yeah. So like I said, we've got to talk to customer value proposition remains the same. There is a clear recognition when we talk to them about, what we offer versus what's available on the market. And as Matt indicated in the earnings call, we do see an increase in the total number of clinical customers. We're not releasing those numbers at this moment. But obviously, the timing of that is when those built and those orders actually come through. So at this point in time, we have not seen a change for someone is saying, look, actually, we're going to -- we're not going to be interested in moving to Teknova at all at this point. It's just a matter of time.

Okay. Perfect. Thanks for taking my question Stephen.

Sure. Thanks, Jacob.

As there are no further questions in the queue, this concludes our conference call. Thank you all for participating. You may now disconnect. And have a pleasant day.