Alpha Teknova, Inc. (TKNO) Q1 2023 Earnings Call Transcript


Good day, and welcome to the Teknova First Quarter 2023 Financial Results Call. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker, Senior Vice President of Marketing at Teknova, Jennifer Henry. Please go ahead.

Jennifer Henry

Thank you, operator. Welcome to Teknova’s First Quarter of 2023 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 included in the press release the company issued earlier today and they are more fully described in the company’s various filings with the SEC.

Today’s comments reflect the company’s current views, which could change as a result of new information, future events or other factors, and the company does not obligate or commit itself to update its forward-looking statements, except as required by law.

The company’s management believes that, in addition to GAAP results, non-GAAP financial measures can provide meaningful insight when evaluating the company’s financial performance and the effectiveness of its business strategies. We will therefore use non-GAAP financial measures of certain of our results during this call.

Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this afternoon, which is posted to Teknova’s website and at Non-GAAP financial measures should always be considered only as a supplement to and not as a substitute for or as superior to financial measures prepared in accordance with GAAP.

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 will turn the call over to Stephen.

Stephen Gunstream

Thank you, Jen. Good afternoon, and thank you, everyone, for joining us for our first quarter of 2023 earnings call.

Teknova is a leading producer of critical reagents for the life sciences industry to accelerate the introduction of novel therapies, vaccines and molecular diagnostics that will help people live longer, healthier lives. We manufacture high-quality custom reagents with short turnaround times and are positioned to scale with our customers as they advance their products from discovery to commercialization.

We had a good start to the year. Our team continued to manage in a dynamic environment by delivering results in line with our plan, including increasing revenue sequentially by 16%. We are particularly pleased that we are not only tracking well to our expected financial metrics for the year, but we are also executing on our key initiatives on or ahead to plan to position the company for sustainable accelerated growth.

First, we saw an increase in Clinical Solutions customers in the first quarter and believe the growth demonstrates the stabilization in overall demand from our customers, and we remain optimistic about the long-term potential of our target markets. We also continue to see strength in our commercial funnel and remain confident in our top line guidance for the full year.

Second, our new state-of-the-art modular manufacturing facility is on track for GMP-grade production by mid-2023. In addition, we are encouraged by early indications of interest from certain of our customers who have begun to schedule audits for early in the third quarter. We believe this new facility plus our existing operating infrastructure will give us the capacity to deliver approximately $200 million in annual product revenue when fully utilized.

Third, on the R&D front, I am pleased to say our new product pipeline is progressing ahead of schedule. In March, we announced a collaboration with Sartorius BIA separations to help our customers improve AAV purification processes. Building on this news, last week, we launched our first ever set of proprietary reagents, which we believe can save months of development time for gene therapy customers as they develop their AAV bioprocessing workflows. As customers incorporate these proprietary reagents into their clinical production processes, we expect to become an even more critical supplier as they advance their therapies towards commercialization.

Lastly, we are tracking well to our cost reduction plans. Operational expenses were down sequentially when excluding onetime costs. And while cash outflow in the quarter was approximately $12 million, the corresponding expenses were planned and primarily related to the completion and qualification of our new facility. Thus, we are tracking towards our previously communicated total cash outflow target of approximately $30 million for fiscal 2023.

I will now hand the call over to Matt for a discussion of the financials.

Matthew Lowell

Thanks, Stephen, and good afternoon, everyone.

Total revenue was $9.1 million for the first quarter of 2023, an 18% decline from $11.1 million in the first quarter of 2022, reflecting the continued headwinds associated with lower demand from early-stage biopharma customers, which we first observed in the third quarter of 2022.

Lab Essentials products are targeted at the research use only or RUO market and include both catalog and custom products. Lab Essentials revenue was $7.3 million in the first quarter of 2023, a 4% increase from $7.0 million in the first quarter of 2022. Growth for the first quarter was primarily driven by higher average revenue per customer, partially offset by a decreased number of customers.

Clinical Solutions products are made according to good manufacturing practices, or GMP, quality standards primarily used by our customers as components or inputs in the development and manufacture of diagnostic and therapeutic products. Clinical Solutions revenue was $1.6 million in the first quarter, a 58% decrease from $3.8 million in the first quarter of 2022.

The decrease in Clinical Solutions revenue was attributable to lower average revenue per customer, partially offset by an increased number of customers. We expect revenue per customer to increase over time as they ramp up their purchase volumes. However, this metric can be affected by the mix of newer clinical customers who typically order less.

Just as a reminder, due to the large average order sizes in clinical solutions compared to Lab Essentials, there can be quarter-to-quarter revenue lumpiness in this category.

Gross profit for the first quarter of 2023 was $2.4 million compared to $5.3 million in the first quarter of 2022. Gross margin was 26.6% of revenue in the first quarter of 2023, which is down from 48% of revenue in the first quarter of 2022. The lower gross margin for the first quarter of 2023 compared to the first quarter of 2022 was primarily driven by a decrease in revenue and the associated lower absorption of fixed manufacturing labor and overhead costs, including depreciation from our new facility.

Operating expenses for the first quarter of 2023 were $11.4 million compared to $11.2 million for the first quarter of 2022. Excluding the onetime nonrecurring charge related to the reduction of workforce of $0.7 million incurred during the first quarter of 2023, operating expenses decreased compared to the first quarter of 2022.

The decrease was driven by reduced spending, primarily in professional fees and occupancy costs, partially offset by higher wages and stock-based compensation expense. The reduction in workforce of approximately 40 positions is expected to generate annualized savings of approximately $4 million.

Net loss for the first quarter of 2023 was $8.8 million or $0.31 per diluted share compared to a net loss of $5.5 million or $0.20 per diluted share for the first quarter of 2022. The company recorded minimal tax benefit this quarter against its pretax losses as it is currently recording valuation allowances against incremental net operating loss carryforwards.

Adjusted EBITDA, a non-GAAP measure, was negative $6.1 million for the first quarter of 2023 compared to negative $4.3 million for the first quarter of 2022. However, adjusted EBITDA increased by more than $2 million sequentially.

Capital expenditures for the first quarter of 2023 were $4.3 million compared to $5.9 million for the first quarter of 2022. This marks the third straight quarter of declining capital expenditures. Most of the spending in the first quarter of 2023 went towards the completion and qualification of our new GMP production facility.

Free cash flow, a non-GAAP measure which we define as cash provided by or used in operating activities, less purchases of property, plant and equipment, was negative $12.0 million for the first quarter of 2023 compared to negative $11.1 million for the first quarter of 2022. This decrease compared to the prior year period was primarily due to higher cash used in operating activities, partially offset by a decrease in capital expenditures.

Turning to the balance sheet. As of March 31, 2023, we had $30.2 million in cash and cash equivalents and $22.1 million in gross debt.

Now on to our 2023 guidance and outlook. We are reiterating 2023 total revenue guidance of $42 million to $46 million. At the midpoint, this assumes revenue growth of approximately 6% compared to 2022. With respect to product categories, we continue to expect Lab Essentials revenue to be roughly flat compared to 2022 and Clinical Solutions revenue to grow between 20% to 50% compared to 2022. This product category growth guidance includes the assumption that a significant customer shifts from Lab Essentials to Clinical Solutions products in 2023.

The company continues to aggressively manage expenses. At the end of March, the company had 251 associates, down from 290 at the end of 2022. Excluding nonrecurring charges, the company posted operating expenses below $11 million for the first time since 2021, which did not reflect the full benefit of the reduction in force completed in February.

Similarly, the company saw a reduction in free cash outflow during the first quarter of 2023. This marks the third straight quarter of lower cash outflow and is consistent with the company’s expectations for the year as we anticipate operating losses and capital expenditures to continue to trend downward over the course of the year.

In addition to cash on hand, we have access to our revolver up to $5 million and ATM facility up to $14.5 million. Further, we believe we have already made the step-up investments needed to execute our growth strategy and can scale without significant additional investment.

With that, I will turn the call back to Stephen.

Stephen Gunstream

Thanks, Matt.

Overall, we’re pleased with our performance in the first quarter of 2023. The long-term outlook for our end markets remains positive. We are committed to executing on our strategy to help our customers accelerate the introduction of novel therapies, diagnostics and other products that improve human health.

We will now take your questions.

Question-and-Answer Session


[Operator Instructions] One moment for our first question. That will come from the line of Jacob Johnson with Stephens.

Jacob Johnson

Congrats on this quarter. Maybe just to kick it off with the lazy macro question, just because there’s been a lot of mixed commentary this quarter about the cell and gene therapy space. I’d just be curious kind of if you’re seeing any kind of hesitation from customers due to the macro. Certainly doesn’t seem like it given the result you put up or at least maybe versus your prior expectations, but — and the year seems to be tracking ahead of plan, so maybe just start there on the macro.

Stephen Gunstream

Yes. Great. We have not seen a decrease from what we called out after our Q2 earnings in 2022. And I think that we are a little bit different than some of the other players in the space in that our reagents aren’t stocked, right? We have a unique ability to custom manufacture these things and get them there quickly and so are not prone to some sort of destocking piece.

But we are tied, obviously, to some of the biotech funding. So when we saw the biotech funding shift and the impact that had in the back half of the year, what we saw was what we’ve reiterated before, which is a slowdown in the number of clinical trials happening or reduce in size of those clinical trials.

And as I said in the last earnings call, we kind of believe we’re in a kind of a new normal operating environment where the customers we’re talking to now have their budget for the year and they’re building that up. And you can see from what we just said in the script here that we have seen an increase in clinical customers in the first quarter. And we see that as a very positive sign that the funnel is building and our commercial strategy is working, and that should be paying off in the back half of this year as we’ve indicated.

Jacob Johnson

Got it. And then I guess the follow-up, just on the AAV-Tek launch. That seems to be kind of the formal commercial launch of that product, but I think you’ve been testing with customers so I’m curious about reception, especially given some of the disclosures today about the difficulties of the downstream chromatography [ capsids ].

Stephen Gunstream

Yes. And I think it is a major pain point from the time it started here in 2020. The first time we talked with some of these AAV gene therapy developers was really separating these empty and full capsids, and the team has done an awesome job of putting together a complete solution for those customers.

We launched the AAV2 serotype kit a couple of weeks ago and in what marks really the first time Teknova’s launched some proprietary products. The customer response has been very favorable, really excited. We’re excited. The product is actually in stock, ready to go. And it’s going to help us onboard a lot more of these customers and then get them into our reagents. And as they go downstream, they become bigger and more reliant on us as they go through commercialization.

But probably most importantly for them, this is a lot of work in that step to identify which is the right set of buffers to do that last polishing step, and we can save them months of time of work to get them into clinic faster.


One moment for our next question. And that will come from the line of Matt Larew with William Blair.

Madeline Mollman

This is actually Madeline Mollman on for Matt. Thinking about the Clinical Solutions’ step-down year-over-year. I know you said that part of that was due to driven mix towards newer customers. Can you talk a little bit about how you see that trending over the year? And what is kind of incorporated in your guidance for the year from Clinical Solutions?

Stephen Gunstream

Yes, I’ll start. Matt, feel free to jump in. I mean, we’ve talked about the changes in the biotech funding space and the particular impact on early and mid-stage biotech. Particularly for us, we have a number of customers in cell and gene therapy that were affected by that, and they reduced their overall size of clinical trial, and the number of clinical trials are the number of different therapies working through the pipeline.

And so we pulled that obviously out and it’s built into the forecast for the year. And so not surprising, I mean, these are right in line with what we’d expect to be, if not ahead, after first quarter.

For the remainder of the year, though, we do have a commercial organization up and going, and we’re excited to see that we increased the number of clinical customers. On a year-on-year, yes, the average spending’s down, but that is expected. And we do think that the back half of this year is lining up to do really well as we look at our funnel and then obviously into 2024.

Then you combine that with their new facility opening. And the facility will allow obviously a lot of capacity expansion, but also allows us to onboard some of these customers that now can look at our facility and realize that we can be with them all the way through commercialization and beyond. So I mean, the combination of those two things, I think, sets us up really well for a strong back half of the year in 2024.

Madeline Mollman

Great. And so just thinking from a margin perspective, I think in the past, you said that you were expecting full year margins to be around 30%. Does this change — the Clinical Solutions piece changed anything about how you’re thinking about margins for the year?

Stephen Gunstream

Yes. I would just say from a margin perspective — I mean, for the full year, we’ve certainly mentioned about the 30% range. We certainly considered the amount of clinical revenue contribution for the year in that into the margins. That’s not really changing here, again, as we’ve kind of reiterated our guidance on revenue for the year.

So I think we will see at times when the revenue from Clinical is a bigger contributor in the quarter. It could be a help to margins. But generally speaking, the biggest help to gross margins is just overall revenue volume.

So we’re still seeing this — the current margins where they are similar to last quarter at this revenue level and with the new facility coming into play. But for the full year, we’re still looking for the same type of result you mentioned, Maddy.


One moment for our next question. That will come from the line of Steven Mah with TD Cowen.

Steven Mah

Congrats on the quarter. A couple of follow-up ones on the AAV-Tek Solutions kit. Did you guys do any voice of customer, other market research to identify this pain point in the AAV bioprocessing? And if you did, do you guys have a sense on how big the market opportunity is for this product given that it’s so new?

Stephen Gunstream

Yes. I mean, it certainly is a new product, and it’s a product that solves a problem for a number of our customers. So yes, we did do market research, obviously, talking to customers directly, but also additional market research on the product.

Again, the value driver of this is really over the long term, right? Instead of coming to us with this very specific formulation, if they’ve done months of work to figure out what the right buffer combination to use to get their virus purified and polished, they can come right into our proprietary reagents and find a solution in a couple of weeks.

And so once they do that, then they’re kind of using our reagents and they’ve become bigger, larger trials, as they move down the pipeline and ultimately commercialization. We think that the expansion in that time frame from beginning to end is about a thirtyfold increase. And this was actually some of the research we did even before we took the company public was in this area and feel pretty good about not only the size, I mean, if you look at the size of the number of therapies going through AAV, that’s one way to look at it, but also of one of the most critical pain points.

I don’t think we’ve yet disclosed the size of that market. I think it obviously depends on the number of trials that you assume that go through and then on the spend, but maybe that’s something we could do at a later date.

Steven Mah

Okay. Got it. And then could you just give me a sense for the kit, like how many assays it would go through?

Stephen Gunstream

The kit itself is built out of a number of what we call design experiments done here internally. So we ran hundreds of different buffer combinations to basically set this down to a size of about seven combination buffers, so 14 total, in 1-liter bottles for customers to evaluate.

So depending on the serotype they’re using, the sort of the resin or the platform they’re using for purification as well as their transgene, you may end up choosing one of these seven buffers. So the idea is you dip this whole kit in, you try all seven and then identify which of those combinations will work for you.

And then the customers can do a couple of things. Obviously, they can continue to order one of those going forward, we sell those individually. They can order them in larger scale. They can order them in GMP formats. They can also come back to us. We can do some work with them and find out if there’s a combination between a couple of them that will even give them better results. It’s really up to them to define, which is kind of what makes us unique. And then we can get these into production then for them and then scale with them through clinical trials.

Steven Mah

Okay. That’s really helpful. And then a question for Matt about the gross margin. So how should we think about the gross margin impact as your new facility comes online, as the facility scales and you can spread out overhead and fixed costs? When do you expect the gross margin to sort of bottom out and then begin to recover?

Matthew Lowell

Yes. I think, overall, the long-term story for gross margin is that we’re targeting 60% to 65%, right? That’s quite a bit above where we are today, but we expect to see some pretty good acceleration in that gross margin as we grow the top line as we’re expecting here over the next several years. So we do have that potential going forward.

In the short run, there is going to be pressure on gross margins, as you pointed out, with a new facility in particular. Depreciation is one of the major costs that we have that are impacting the P&L. We started some depreciation on a portion of the facility at the very end of last year. We have a full quarter of that in Q1 results, and we’ll be bringing more parts of the facility online later this year, which will further increase the depreciation load.

But it’s — I think this year, FY ’23, will be the low point because of these added costs coming in. And as we grow the top line, we’ll start to see some material improvement going forward.


I’m showing no further questions in the queue at this time. This concludes today’s program. Thank you all for participating. You may now disconnect.