Twist Bioscience - Q1 2024

Transcript

Moderator (participant)

Welcome to Twist Bioscience's fiscal 2024 Q1 financial results conference call. At this time, all participants are on listen-only mode. After the speaker's presentation, there'll be a question and answer session. Instructions will be given at that time. I would now like to turn the conference over to Angela Bitting, Senior Vice President of Corporate Affairs.

Angela Bitting (SVP of Corporate Affairs)

Thank you, operator. Good morning, everyone. I'd like to thank all of you for joining us today for Twist Bioscience's conference call to review our fiscal 2024 Q1 financial results and business progress. We issued our financial results release this morning, which is available at our website at www.twistbioscience.com. With me on today's call are Dr. Emily Leproust, CEO and Co-founder of Twist, and Adam Laponis, CFO of Twist. Emily will begin with a review of our recent progress on Twist businesses. Adam will report on our financial and operational performance. Emily will come back to discuss upcoming milestones and direction. We will then open the call for questions. We would ask that you limit your questions to only one and then requeue as a courtesy to others on the call. As a reminder, this call is being recorded.

The audio portion will be archived in the investor section of our website and will be available for two weeks. During today's presentation, we will make forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize, and actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release we issued earlier today, as well as those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements except as required by law.

With that, I'll now turn the call over to our CEO and Co-Founder, Dr. Emily Leproust.

Emily Leproust (CEO and Co-Founder)

Thank you, Angela, and good morning, everyone. It is a very exciting time for Twist, with revenue, margin, and market share increasing, new products introduced recently with more to come, and growing markets for our products, which enable a diversified customer base. Today, as we report our financial results for the Q1 of fiscal 2024, we will focus on three important items that drive our business: revenue growth, margin expansion, and financial discipline to track to our path to profitability. Our entire team at Twist is laser-focused on these initiatives while simultaneously bringing exceptional products to our customers. We continue to deliver record revenue and consistent robust growth year-over-year, with expanded market share in both SynBio and NGS, with strong commercial and operational execution across our teams.

We are building a resilient and diversified business with a portfolio of solutions that stem from our innovative DNA synthesis platform. This allows us to pursue multiple market opportunities simultaneously while mitigating risk. Several years ago, we established a plan to achieve profitability for the business. We continue to execute against the plan we laid out for ourselves, and we are firing on all cylinders. Diving into the specifics, revenue for the Q1 increased significantly to $71.5 million, with orders growing to more than $77 million and margin increasing to 40.5%. Moving to the products area, revenue for SynBio increased to $26.8 million, with strong orders of $29.2 million.

SynBio revenue grew 25% year-over-year, excluding, in both periods, GAAP revenues from a key account that was affected by timing of the quarter and expected to return in the current quarter. In November, we began a limited launch of our Express Genes product, which is our clonal genes delivered faster in five to seven days. I am pleased to report that as for Q1, 98% of Express Genes ordered have been delivered in the quoted timeframe. Delivering clonally perfect genes in this timeline at scale is an exceptional feat. This performance is driven by our platform, our site in Oregon, and our operations team that implements orders successfully. We are the only Express offering that can deliver at scale. If you need one gene or thousands of genes, we can deliver clonally perfect genes in as few as five days.

Importantly, our differentiated Express offering allows us to charge a premium price over our standard clonal genes in exchange for the speed. Customer can choose to order standard genes with a turnaround time of 10 days or Express Genes with a turnaround time beginning at five days. The premium price for the Express offering varies daily and by the capacity available in our manufacturing facility in Wilsonville, Oregon. To date, we have tested premiums from 20% to as high as 200%. As a reminder, we use the same manufacturing line for both Express and standard genes, so all increased pricing applies directly to margin expansion. Because the manufacturing line is the same, it also means that our capacity has increased whether we sell genes standard or Express. When we launched in November, half of our clonal gene volume qualified for Express service.

Last week, we announced that virtually all clonal genes at all prep scales now qualify for Express service. With this expansion, we began a full marketing launch around the Express portfolio, largely using digital marketing tactics to keep the cost of customer acquisition low. We are pleased with the early days of the launch, particularly the balance of uptake between pharma, industrial chemical, and academic customers. Early feedback indicates that this product resonates. We monitor orders daily, and we are seeing the early stage of a revenue ramp. We consistently observe varying degrees of customer willingness to pay a premium, and daily we gain valuable insight into pricing sensitivity, geographic nuances, industry-specific trends, and account-level patterns.

Moving forward, this allows the sales team the potential to proactively secure contract pricing for key accounts in exchange for terms such as volume commitments and fixed pay premiums, which enables extended margin as well as predictability for manufacturing. As of January 30, we have received confirmed interest from several pharma companies, reflecting a positive trajectory. Up until we turned on our marketing machine last week, our focus was on existing customers. Today, we are targeting new customers who use other providers, and we plan to use our differentiated express product portfolio to take shares from incumbent suppliers. We are also targeting customers who currently make their own DNA because they need it quickly. We call the little group of potential customers DNA makers, and we know that to convert DNA makers to DNA buyers, it will take time to change behavior.

We assume that we have the product, the channel, and the operational capacity to drive a generational change, where ordering genes rather than making genes becomes the standard operating procedures across the globe. Moving to NGS, our revenue increased to $39.4 million. Revenue for a quarter included several large customers reorders, primary diagnostic customers running clinical trials, and ramping commercial volumes. For these larger customers, we invest time and energy into the relationship, and we are now included in their workflow. While the sales cycle for NGS is quite long, we are now seeing the benefit of this long-term investment of our time as their tests advance to the clinical and commercial stages.

As a reminder, diagnostic customers, including those pursuing or selling liquid biopsy and Minimal Residual Disease assays, choose Twist for their target enrichment solution within their testing workflow, as we save our customers about half of their downstream sequencing cost. Each sample run by our customers uses some Twist DNA, so the larger the volume, the more they buy from Twist. In a constrained macroeconomic environment, our offering provides margin expansion for our customers, and in some cases, our workflow makes a substantive difference in our customers' business viability. Over the last two quarters, we have seen customers streamlining tests, selecting the tests within their portfolio that includes a Twist workflow to save downstream sequencing costs and improve their overall costs. In addition to larger customers in advanced stages of development and commercial scale-up, we see NGS workflow components as an increasing percentage of our NGS revenue.

For example, a customer who ordered a custom Target Enrichment panel previously may now also order a Library Prep, buffers, beads, blockers, dUTP, UMIs, and more from Twist as their supplier, expanding our share of wallet within existing accounts. Our customers appreciate reducing their number of suppliers and benefit from our exceptional and responsive customer service and supply chain teams, allowing them to focus on expanding their business. This focus on enabling the workflow between the sample and the sequencer will continue next week during the AGBT conference, when we will introduce several products, bringing truly differentiated solutions for key workflows within specific applications. Moving forward, we expect revenue growth in NGS to come from increasing commercial adoption of our customers' assays, workflow expansion in existing customer accounts, and the acquisition of smaller accounts, as well as penetration of the research market through RNA-Seq.

Moving to Biopharma, revenue increased to $5.2 million, with orders coming in at $4.9 million. We were fully staffed on our commercial team as of November, and we do see green shoots for this business, including 41 new program starts in the quarter. We know that the process of ramping up a sales representative to full capacity typically takes about six months, and we are cautiously optimistic that revenue from biopharma services will increase steadily in the back half of the year. In addition to providing antibody discovery services for our partners, this area of our business builds off of our silicon platform, which enables the ability to create antibody discovery libraries that we can then pair with our in vivo and AI/ML capabilities.

There is a strategic fit here as we sell pharma and biotech customers through both our SynBio offering and Biopharma Solutions, providing a full and complementary spectrum of offering to our customers and partners. For data storage, we completed the end-to-end demonstration of the gigabyte Century Archive workflow. This was an internal demonstration designed to refine and validate our workflow, and we succeeded. We are encouraged by our engineering advancements, and we remain on track to deliver on early access terabyte Century Archive solutions in 2025. We continue to believe that the market for data storage provides a large opportunity, and we see this area of our business as a valuable asset with optionality at multiple points of development. In early January, we welcomed Adam Laponis to the team as our CFO.

Adam brings a wide range of experience in finance and operations from large and smaller companies and is ideally positioned to support our next phase of growth. With that introduction, I'll turn it over to Adam to discuss our financials.

Adam Laponis (CFO)

Thank you, Emily. Revenue for the Q1 increased to $71.5 million, growth of 32% year-over-year and approximately 7% sequentially. Orders increased to $77.5 million, and gross margin was 40.5% for the Q1 of fiscal 2024. We served a total of 2,140 customers during the Q1 and ended the quarter with cash, cash equivalents, and short-term investments of approximately $311.1 million. When we talk about cash moving forward, we'll be talking about cash, cash equivalents, and short-term investments. Taking a deeper dive into revenue. SynBio revenue increased to $26.8 million, growth of 24% year-over-year, with orders increasing to $29.2 million.

Synthetic genes revenue, a primary growth driver for SynBio, increased to $19.7 million, growth of 22% year-over-year. We shipped approximately 171,000 genes during the quarter. Within the SynBio umbrella, Oligo Pool revenue increased to $4.2 million, and libraries revenue increased to $2.9 million, year-over-year growth of 13% and 60% respectively. Growth in SynBio across all product lines was driven primarily by healthcare customers. NGS revenue for the Q1 grew to approximately $39.4 million, compared to $24.4 million in the Q1 of fiscal 2023, an increase of 62% year-over-year. For the quarter, revenue from our top 10 customers accounted for approximately 44% of revenue. Orders increased to $43.3 million, setting the stage for further NGS growth.

We served 538 NGS customers in the quarter, with 135 having adopted our products. For biopharma, revenue increased to $5.2 million, with orders coming in at $4.9 million. We had 69 active programs as of the end of December 2023, and we started 41 new programs during the quarter. The total number of completed programs as of December 31 was 843, with 69 including milestones and/or royalties. Looking at revenue through another lens. Healthcare revenue rose to $40.9 million for the Q1 of 2024, compared to $30 million for the same period in fiscal 2023, reflecting the increased uptake of our products by pharma, biotech, and diagnostic companies.

Industrial chemical revenue rose to $16.3 million in the Q1, up from $16.3 million in the same period of fiscal 2023. Steady growth year-over-year. Academic revenue was $13.8 million for the Q1 of 2024, up from $10 million in fiscal 2023, with growth coming from both SynBio and NGS customers. Looking geographically. Americas revenue increased to approximately $44 million in the Q1, compared to $33.6 million in the same period of fiscal 2023. Growth of 31% year-over-year. EMEA revenue rose to $21.2 million in the Q1 versus $16.3 million in the same period of 2023. Growth of 30% year-over-year.

APAC revenue increased to $6.3 million in the Q1, compared to $4.3 million in the same period for fiscal 2023. Growth of 48% year-over-year. Our gross margin for the Q1 increased to 40.5%, driven by large NGS orders in the quarter, higher mix of NGS, and some pricing lifts for SynBio from Express Genes. In total, operating expenses for the Q1 were $118.5 million, compared with $98.9 million in the same period for 2023. Breaking this down. Cost of revenues increased to $42.5 million in the Q1 of 2024, compared with $29.4 million in the same period of fiscal 2023, primarily due to higher product volume and personnel costs, as well as increased depreciation and amortization expenses.

R&D decreased to $23.1 million, compared with $31.2 million in fiscal 2023, primarily due to the reduction in headcount as well as lab supplies. SG&A was $52.8 million for the Q1, compared with $42.3 million. The increase was driven largely by the increase in stock-based compensation, as the comp for Q1 FY 2023 included a significant reversal of stock-based compensation, resulting from employee stock forfeitures related to the Abveris acquisition, offset by pre-commercialization costs included in the Q1 fiscal 2023, but not in Q1 fiscal 2024, as we have launched the Oregon manufacturing site. Operating expenses included approximately $8 million for data storage. Stock-based compensation for the quarter was approximately $11 million.

Depreciation and amortization were $8.2 million for the quarter, compared with $5.3 million for the same period of 2023. Net loss attributable to stockholders was $43 million, or $0.75 per share for the Q1 of 2024, compared to a net loss of $41.8 million, or $0.74 per share for the same period of fiscal 2023. Turning to guidance. We are updating specific metrics that we intend to use moving forward. For fiscal 2024, we now expect total revenue to increase by $3 million across the range to approximately $288 million-$293 million. Anticipated growth of 18%-20% year-over-year.

SynBio revenue of $114 million-$117 million, an increase of $1 million across the entire range, and year-over-year growth anticipated to be 16%-19%. NGS revenue of $150 million-$152 million, an increase of $3 million in the range, and anticipated growth of 21%-23% year-over-year. Biopharma revenue of approximately $24 million, a decrease of $1 million from the prior guidance, and growth of approximately 3% year-over-year. We are increasing our expected gross margin to approximately 40%-41% for the year. Loss from operations guidance before taxes of approximately $189 million-$194 million, compared with prior guidance of $180 million-$188 million, as we invest in G&A capabilities to continue to scale our business.

CapEx is projected to decrease by $5 million to approximately $15 million for fiscal 2024. No change in our projected ending cash of approximately $245 million at the end of fiscal 2024. For the Q2 of fiscal 2024, we expect overall revenue of approximately $70-$71 million. SynBio revenue increasing to approximately $28.5 million, with the full launch of Express Genes portfolio. NGS revenue of $37-$38 million, as we see larger accounts reordering in the second half of the year, on track with our increased annual guidance. Biopharma revenue of $4.5 million, gross margin of 39%, primarily due to mix shift. In summary, we continue to maintain financial discipline throughout the organization and make progress on our path to profitability.

I joined Twist about a month ago, and I couldn't be more excited about where we are going. This is a talented and determined, mission-driven team that understands the value we bring to our customers. Our focus on driving revenue growth, margin expansion, and maintaining financial discipline will continue as we leverage our capabilities of supply chain management, manufacturing excellence, and of course, delighting our customers. With that, I'll turn the call back to Emily.

Emily Leproust (CEO and Co-Founder)

Thank you, Adam. One quarter into our fiscal year, we continue to see momentum in our SynBio and NGS groups. With a diversified customer base, a robust product portfolio that provides significant differentiation from competitors, growing market opportunities, and committed employees, we are executing on the plan we laid out to drive to profitability for the business. Coming back to the three initiatives at Twist. First, we expect to grow revenue through Express Genes in SynBio and grow revenue in NGS with customers expansion as well as new product introductions. Keep your eye out for launches next week during the AGBT conference. For biopharma solutions, we will focus on increasing the number of active programs and program staff, as well as signing new and repeat customers. Second, to expand our margin, we plan to continue dynamic pricing for Express Genes in SynBio.

As we increase the number of genes shipped, our margin also increases, given the factory is fully functional and staffed. We will also focus on leveraging our increased volume with our supply chain to drive efficiencies at scale. On a corporate side, in addition to driving revenue growth and increasing contribution margin for our products, we identified key initiatives that we expect to pursue over the course of the next 18 months that we believe will have a meaningful impact on COGS saving. This includes insourcing opportunities, products and packaging, alternative workflows, and many more. We are excited about these opportunities to increase our gross margin further. And third, we remain diligent in our commitment to financial discipline, renewing our commitment to end fiscal 2024 with $245 million in cash, cash equivalents, and short-term investments.

Overall, we're executing on an aggressive objective to become a profitable company. We continue to execute effectively on our path to profitability and look forward to keeping you apprised of our progress. With that, let's approach the call for questions. Operator?

Moderator (participant)

Thank you. If you'd like to ask a question, please press star one, one. If your question has been answered and you'd like to remove yourself from the queue, please press star one, one again. Our first question comes from Matt Sykes with Goldman Sachs. Your line is open.

Matt Sykes (Managing Director and Senior Equity Research Analyst)

Good morning. Thanks for taking my questions. Congrats on the quarter. Could you talk about the volume and mix of Express Genes in the quarter? Just given the mid-November launch and limited marketing for a period during the quarter, how do you see Express Genes contributing to margin expansion for the full year?

Emily Leproust (CEO and Co-Founder)

Thank you, Mike, Matt. Maybe I'll start. So, there's really two phases. The phase I is the mid-November launch till the launch last week, and then the phase II is now. So in the phase I, the volume was basically fully focused on existing customers, and we've seen really good pickup by actually both biopharma and academic customers. So that, that's quite exciting to see that both of our target markets have been testing the products and experiencing the great performance of the product and reordering. So that was the mix then. It's a bit too soon to say, but the phase II, the

As you know, the phase II, the goal is to continue having existing customers test use the product, which deliver great value for them and improve growth margin for us. But the big drive for us now is to bring net new customer onto the platform and deliver revenue growth and margin growth. So, Q2, sorry, Q3, will be the first clean quarter, where it will have the full marketing launch for the entire quarter. We are already into Q2. And so therefore, Q3 would be the first clean quarter where we'll have the full quarter expense of Express Genes.

And what we expect is, as the year progresses, we'll have more penetration into those net new customers, and then we'll start to see the benefit of Express Genes on gross margin.

Matt Sykes (Managing Director and Senior Equity Research Analyst)

Got it. And then just two quick follow-ups. Could you just talk about this, I know you're focused on existing customers, but could you just talk about the split in the quarter of gene buyers versus gene makers for Express Genes? And then just do you think the digital marketing will be enough to drive growth, or do you plan on augmenting that with additional marketing efforts over the course of the year? Thank you.

Emily Leproust (CEO and Co-Founder)

Yeah. So, I think we basically have one week and a half of trying to convert buyer into maker. So I would say that right now, for all intents and purposes, all of the volume so far has been DNA buyers. So it's very early innings for DNA makers. We now added tool. And in terms of digital marketing, it is our strategy to reach smaller customers, so tier three, tier four customers. However, in addition to that, we have our sales team that has been engaged for years now with top accounts. They are also working on converting big accounts toward Express Genes.

And as mentioned in my remarks, we've had some initial success in getting a level of interest to convert to Express Genes, both for big accounts as well. So it's going to be all hands on deck, and we want to see growth in both the tier one, tier two customers, as well as tier three, tier four.

Matt Sykes (Managing Director and Senior Equity Research Analyst)

Thank you.

Moderator (participant)

Thank you. Our next question comes from Steven Mah with Cowen. Your line is open.

Steven Mah (Senior Analyst Equity Research of Life Science and Diagnostic Tools)

Oh, great. Thanks for taking the questions, and, congrats on the quarter. Maybe just a follow-up to Matt's questions. You know, on the gross margin in the quarter, it's much higher than we had modeled. Was there any impact at all from Express Genes in the quarter, or was it driven entirely by the scale up of the Factory of the Future? Or if not, you know, what kind of drove the gross margin beat? And then, could you also then provide your thoughts around the full year guide of 40%-41%, given you're already at 40.5% in Q1? Thanks.

Emily Leproust (CEO and Co-Founder)

Yep. You want to take that question, Adam, those questions?

Adam Laponis (CFO)

Sure. Happy to. So, you know, Steven, I mean, I am very encouraged by the record quarter we had on both, on the growth and the revenue front, as well as the progress we saw in gross margin expansion. I'm also encouraged by the alignment we have across the executive team to focus on gross margin expansion as a key priority, not just as a business priority, but even in our personal performance goals. So in terms of where we were in Q1, really the biggest driver for the gross margin expansion was some of the large orders we had in NGS, particularly as calendar year-end, we saw a big step up in those orders.

We're seeing that, and if you look at our guidance, you can see that we're gonna see that pull back a bit in Q2, and that drove some of the expansion or the most of the expansion in the Q1 numbers. You had also asked how we're thinking about the full year guide, and look, I am confident in the business performance, and we raised the guidance on both the revenue and the gross margin side. But I also recognize I've been in the role now for less than a month.

I don't wanna get over my skis with overly aggressive guidance, so yes, there's some conservatism in there, but we have included the effects that we're seeing already today on the expansion from both SynBio and Express Genes, as well as the Factory of the Future now being fully operational.

Steven Mah (Senior Analyst Equity Research of Life Science and Diagnostic Tools)

Okay, great. That's helpful. Sorry, if I can just sneak one more in. I know you haven't done the full launch of Express Genes yet, but you know, you know, could you tell us what the average premium you guys are getting? I know Emily threw out a range of 20%-200%, but I'm just wondering if you could give us a sense of the average you're getting right now. Thank you.

Emily Leproust (CEO and Co-Founder)

Yeah. So we're not able to give a range. As a reminder, the daily pricing is strongly based on the capacity in the fab at the time, on that day. So we get a lot of benefits beyond that, but the one thing that you can check is that that pricing daily is public, right? It's on the website. And so anybody can look at what is the pricing right now, again, based on the capacities.

Steven Mah (Senior Analyst Equity Research of Life Science and Diagnostic Tools)

Okay. Thank you.

Emily Leproust (CEO and Co-Founder)

Thank you.

Moderator (participant)

Thank you. Our next question comes from Vijay Kumar with Evercore ISI. Your line is open.

Vijay Kumar (Senior Managing Director of Equity Research)

Hey, guys. Thanks for taking my question, and congratulations on a nice sprint here. Maybe my first one here is on the guidance. You guys beat revenues by $3 million. The annual was raised by $3 million and it looks like more of that came from, NGS, but also SynBio is raised. I'm just curious, the beat was just carried through, and you know why, you know, despite comps getting easier, perhaps we shouldn't see a more robust growth in Q2 and back half?

Adam Laponis (CFO)

Vijay, great, great question, and I'm happy to give a bit more color on it. In terms of where we are right now, we had a great quarter, so I think I mentioned that in the previous question, that we do expect that NGS pull back, particularly in Q2. And I think when you look at the early phases of the SynBio Express Genes, it is going positively, but it's really early days. And again, me being brand new in the chair, I didn't want to get ahead of my skis on that in the full year guide. We'll keep you posted on progress as the year continues on both fronts.

But, yeah, there is, you know, I feel pretty good that, you know, the full year guide is raised both on the top and the margin side.

Vijay Kumar (Senior Managing Director of Equity Research)

Fantastic. And then my follow-up is on the gross margin guidance here. When I look at the sequential ramp, what is the primary driver from the Q1 to the Q2 step down of 39%? And I think the annual guidance implies your back half needs to again step back to 41% from Q2. So is there anything specific that's going on in Q2? Maybe just walk us through the cadence.

Adam Laponis (CFO)

No, no, it's a great question. And so it's really more of a fact that in Q1, we got the, you know, a pretty substantial sequential lift from the, the higher NGS mix. We are actually expecting that to pull back slightly in Q2 as the mix shifts more towards SynBio. And so we'll, we'll see that, but I think as the year progresses, and we see more of the customers switching to full quarter of Express Genes and the NGS business continuing to expand, we feel pretty confident in the back half guide as well.

Vijay Kumar (Senior Managing Director of Equity Research)

Fantastic. Thanks, guys.

Moderator (participant)

Thank you. Our next question comes from Luke Sergott with Barclays. Your line is open.

Luke Sergott (Director of Healthcare Equity Research)

Good morning, everybody. So I want to start talking first about the increase in the OpEx spend. You know, I know that you've always talked about growing that slower than your revenue growth, but just the incremental step up through here throughout the year, like, where is that investment going? And, is it just to fuel more commercialization on the Express Genes? Can you just give us some color?

Adam Laponis (CFO)

No, I, I'm happy to step in on that one. And actually, it's in the G&A line, specifically. It's not driving the incremental, and this is on infrastructure, particularly around some of our IT and financial capabilities, as we're really focused on building out those capabilities, as right now. So we've made some choices around how we're going to invest in that to scale, not only for the current year, but future years to come as well.

Luke Sergott (Director of Healthcare Equity Research)

Okay, it's helpful. And then you talked about, like, some of the early learnings from the elasticity that, from the dynamic pricing. Talk about any trends that you're seeing there from types of orders or customers or, you know, and how that's kind of pacing out. And, you know, where the dynamic pricing is really starting to contribute to the margin, if it's going to create any lumpiness or anything throughout the year.

Emily Leproust (CEO and Co-Founder)

Yes, thank you. Thank you. That's a great question. So, we have been, now that we have a good number of data sets, we've been deeply looking into the price sensitivity response scale. So looking at on the x-axis, what is the capacity of the day, and what is the premium of the day? And on the y-axis, what is the percentage of customers that chose to purchase Express? And, you know, we actually see quite of a, what you will expect as a response curve. So at very low or very high percentage of premium, you see a saturation, and then you see kind of a linear response in between.

So, you know, it's an incredible view into the price sensitivity that our customers have. And we are also able to see by geography and by industry type. So for instance, by pharma versus academia, what kind of price sensitivity they have. So obviously, we are working to refine our model over time, but yeah, it's quite encouraging to see that, you know, the outcome is what you would expect, and then we'll build from there.

Luke Sergott (Director of Healthcare Equity Research)

Great. Thanks.

Moderator (participant)

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

Matt Larew (Research Analyst of Healthcare)

Hi, good morning. First question here is for Adam, and just going back to Luke's question on the SG&A investments, you referenced sort of on, on the IT and financial capability side. Are these, you know, what you view as kind of, the only set of meaningful investments, Adam, that need to be made, or are there multiple layers over the, you know, course of a couple of years? And sort of within that context, how do these investments or future investments affect the goal to get to adjusted EBITDA break even on the core business, by the end of fiscal 2024?

Adam Laponis (CFO)

No, Matt, I think the, great question. And I think the—a couple of comments here. In terms of the focus of the business and the priorities, it's very clear to me, and it's been clear for, and hopefully in our commentary as well, that the priority is around revenue growth, margin expansion, and that cash management. So we're never in a place where we need to go back to the markets for an equity raise in the future. And so that path to profitability is very much a key part of everything we're doing and how I'm thinking about it. I haven't provided the exact timing, and I'm not giving guidance on when we'll get to profitability, but I am saying that confidence in we won't be coming back to the markets.

In terms of the investments, again, I'm gonna lean on the fact that it is week three. I'm still getting my bearings, and I think about it pretty carefully right now. I don't wanna make any major changes in investment strategy, and that's not what we're looking to do here. I wanna make sure we continue to see progress. And if you think about areas like supply chain, for example, where the team is sort of laser-focused on driving out costs throughout the system, you know, supplier consolidation, insourcing, inventory optimization, all of these things are getting easier as we continue to scale and we gain leverage, so that the focus and momentum is on that. And I wanna make sure we're balancing that, any investment with those savings over time.

So my goal is very much still to keep a cap on any expansion in the SG&A investment by making sure we're pacing any incremental investments with the savings we're driving in other areas of the business. Hopefully, that provides some clarity, Matt.

Matt Larew (Research Analyst of Healthcare)

Yep, yep, that's helpful. And then, you know, Emily, you referenced some potential new products being launched next week. And so the question would be, you know, you obviously have quite a bit of knowledge about what purchasers of DNA want and increasingly, sort of what they're willing to pay for. As you think about moving into areas like RNA synthesis, maybe even to express RNA, you know, what do you know about what RNA customers might value differently than DNA customers? How are you sort of assessing, you know, sort of the key attributes of what those products would need to look like relative to DNA? And maybe if you could extend that to even things like proteins, IgG, et cetera.

Emily Leproust (CEO and Co-Founder)

Yes, thank you, Matt. So I spend a lot of time with customers, and I think there are two primary questions and then a bunch of secondary ones. The primary questions with customer, you know, are always when and how much, right? It's always when will I get it, and how much will it cost? And then after that, there's a number of secondary questions around quality and support and, you know, packaging. And so there are some product features that you need to have, you know, for instance, quality, in order to be in business. But assuming that those are met, it's always about speed and cost.

You know, that fits really well with the Twist brand that we're making. We've always been really good at cost, and that comes from the silicon chip that gives us an advantage. By using less reagents, we're able to have a lower cost base than our competitors. And so we've always been really good on the cost side. Historically, I would say up until late 2022, we are not great on speed. We are probably on par with others. But now that we've made that the investment, you know, speed is really becoming the second strength that we have. And we'll keep leveraging that brand.

So when you think Twist, it's very high-quality product, very great customer experience, and we can customize any packaging, delivery, schedule that you want. And, that's all great, but most importantly, it's gonna be fast. It's gonna be a great price to enable your science. You're gonna get more shots on goal. And that means that we'll get all your budget because you'll choose us exclusively.

Matt Larew (Research Analyst of Healthcare)

Okay, thank you.

Moderator (participant)

Thank you. Our next question comes from Catherine Schulte with Baird. Your line is open.

Catherine Schulte (Senior Research Analyst of Life Sciences and Diagnostics)

Hi, thanks for the questions. Maybe first on NGS, I guess, what's driving the sequential decline in your Q2 guidance? Are there any one-timers in the Q1? I think you mentioned some large orders, so is there just any way to quantify those?

Emily Leproust (CEO and Co-Founder)

Yeah, maybe I'll jump in. So as you know, one of the numbers we report is the percentage of revenue in NGS that comes from the top 10 customers, and as you can see, it is a very meaningful number. And so, when you have a number of big customers, it can be a little bit lumpy quarter-over-quarter. Year-over-year, you know, it's fine, but quarter-over-quarter, it can be lumpy. As you remember, Q1 of last year was kind of the opposite situation, where some big customers had a delayed taking shipment. And so, the solution for us is, let's go find more lumps, right?

So we are going to—we are pushing on adding more and more of those top accounts, and over time, things will smooth over. So we have great confidence for our view for the year. And at the same time, we are there to serve our customers, and if some of those customers want shipment early or later, we always accommodate their needs to make sure that customer satisfaction is as high as possible.

Catherine Schulte (Senior Research Analyst of Life Sciences and Diagnostics)

Okay, and then maybe on CapEx, there's a pretty decent step down versus your prior guide on a percentage basis. Can you just talk through what projects are either being pushed out or just where those savings are coming from?

Adam Laponis (CFO)

This is Adam, and I'm happy to take that one, Emily. If I look at it, just as we went through, you know, after one quarter in our budget, we were seeing some favorable stability in that. We haven't stopped any of the projects we were initially starting. It's just purely a reality of, you know, as you refine the numbers, we're seeing a lower need for CapEx. I think the key message here is, you know, Wilsonville came online really fully for the first time in Q1 of this fiscal year. So, you know, even the depreciation for that, we still have a small step up as we get into Q2 on that.

But we're really excited about the capacity that brings, and I'm sure there will be minor things to continue to expand the capabilities and efficiency of the site, but we're really focused on optimizing where we are this year.

Catherine Schulte (Senior Research Analyst of Life Sciences and Diagnostics)

Okay, great. Thank you.

Moderator (participant)

Thank you. Our next question comes from Puneet Souda with Leerink Partners. Your line is open.

Puneet Souda (Senior Managing Director of Life Science Tools and Diagnostics)

Sorry if I missed that. This is Puneet from Leerink. First question, maybe for Adam. I mean, your orders increased by almost $6.5 million sequentially, but your guide is only up by the beat. Maybe just could you talk a little bit about you know, where these orders are coming from, sort of, you know, in terms of customer type, NGS and bio, maybe just talk to us about that. And then, the level of conservatism you have that you talked about, maybe Adam, just help us understand the level of conservatism that you have versus the you know, the step down that we're seeing in NGS in the second half. And then I have a follow-up for Emily.

Adam Laponis (CFO)

No, Puneet, I'm happy to help, happy to help provide additional color, and thank you for the question. I mean, if I look at the first part of it, you know, there's always gonna be a dynamic as I'm learning this business, that the orders don't always translate in the same period to revenue. There's a natural delay, particularly on both large NGS customers who put in large POs for multi-period, as well as we have on the biopharm side, customers who have multi-period POs over many quarters. So typically, the revenue comes in over the next three to six months after we get the order.

From that perspective, I don't expect all the Q1 orders to turn into revenue in Q2, but I do expect them to convert as we progress throughout the year and potentially even in the 25, given some of the nature of the type of orders. In terms of where we are and then what's driving the guide, I will be really clear, and I have a lot of confidence in the progress we're seeing. I mean, you don't come out of a record quarter in revenue without confidence. I see the team firing on all cylinders, whether it be from, you know, the Express Genes in SynBio or beyond the progress we're making on the NGS front with new customers.

I'm very confident in the guide we're giving, but I'm also, you know, I said it before, it's early days for me, so I don't wanna get over my skis in any element of it. Hopefully that clarifies.

Moderator (participant)

Thank you. Our next question comes from Sung Ji Nam with Scotiabank. Your line is open.

Sung Ji Nam (Managing Director and Senior Equity Research Analyst of Life Science Tools and Diagnostics)

Hi, thank you, and congrats on the quarter. Just one question, on the NGS segment, great to see obviously continued strength there, especially from the top customers. But as you look at the sales funnel, just kind of curious, you know, is it pretty much the usual suspects, or are you seeing kind of more new, you know, diversified customer leads, especially with the, you know, product launches like RNA-Seq?

Emily Leproust (CEO and Co-Founder)

Yeah, thank you. Great question. So definitely, that has been the focus of our new product introduction. We launched RNA-Seq last summer, and the purpose is to expand into the research market. You'll see at AGBT next week that, you know, we'll have products focused on strengthening our position in liquid biopsy. But as well, we are very interested in converting the microarray market to NGS and that has not gone as fast as we've wanted. And so, there'll be more product introduction squarely focused on going after that market with really best-in-class tools.

So I would expect in terms of market expansion, continuation of our efforts around academia and ag bio. I think those are two additional growth opportunity for us, in addition to, I think the great performance we've been having in liquid biopsy and MRD. So over time, right now, a lot of our success in NGS is riding the, or enabling, I'll say, the liquid biopsy market. But I'm quite, we are quite focused on expanding to other markets such as ag bio and academia.

Sung Ji Nam (Managing Director and Senior Equity Research Analyst of Life Science Tools and Diagnostics)

Thank you. We'll get back in the queue.

Moderator (participant)

Thank you. Our next question comes from Rachel Vatnsdal with JPMorgan. Your line is open.

Rachel Vatnsdal (Executive Director of Equity Research)

Perfect. Good morning, and thank you for taking the questions. First up, I just wanted to ask on Biopharma. You mentioned that you're in discussions for anybody out licensing. Can you spend a minute talking about that opportunity and how meaningful these licensing deals could potentially be? Also just what's the timeline in terms of when can we expect to see any headlines related to those deals?

Emily Leproust (CEO and Co-Founder)

Yes, thank you, that, Rachel, that's a good question. So, for context, just, as a quick reminder, the main effort of our Biopharma business is to sell a service where customers give us a target, and we use our AI, in vivo, in vitro tools to deliver a preclinical asset for them. So that's the main thrust of our effort. In the past, we'd also spent some internal R&D dollars to choose our own assets. And we now have, you know, maybe a dozen assets that we think are available. We've stopped spending internal R&D dollars to advance them, and now we're in discussion with partners to license those out.

As you know, Biopharma licensing deals can be lengthy. And at the same time, the, I think the bottom line for me is we are not expanding significant cash to pursue those licensing deals, and those licensing deals are not in the forecast, so they will be nice upsides when they happen.

Rachel Vatnsdal (Executive Director of Equity Research)

Great, thank you. Oh, yeah, sorry, go ahead.

Emily Leproust (CEO and Co-Founder)

No, no, go ahead.

Rachel Vatnsdal (Executive Director of Equity Research)

Great.

Emily Leproust (CEO and Co-Founder)

Go ahead.

Rachel Vatnsdal (Executive Director of Equity Research)

Oh, sorry, I thought one of you were saying something. Then just as my follow-up, you mentioned some of these cost actions to impact COGS over the next 18 months. So can you just walk us through the levers that you're pulling from that cost action perspective, and then how much of that is already contemplated within guidance right now for those cost actions for the year? Thanks.

Emily Leproust (CEO and Co-Founder)

No, thank you. And so, great question. So we're really taking advantage of the upleveling of the management team that we've done over the last few quarters. We have a great new VP of ops, so a great VP of supply chain. And now as a company that is growing in a market that is not, we have a nice profile with our suppliers. We have an opportunity to, we also have a choice of insourcing some of the products.

We have the opportunity to consolidate vendors, and so we're really exercising our muscle with our supplier to make sure that we get the best target costing over time to benefit our gross margin. In addition, when we launched our Express Genes, we really turn over a lot of stones in our processes, and we've seen a lot of opportunities where we can swap out reagents, we can shorten or skip steps. That has given us opportunities in the future to also lean on the processes that we have and tweak some of the reagents to take cost out. That takes time to realize.

But at the same time, we see the opportunity and we'll do the work to get the best gross margin outcome. And I'd say it's a natural evolution of our maturation as a company. The first step was always, let's have the best product possible, and we had a natural advantage with the silicon chip, where we always had the cost advantage. But now that we have the best product out there, we can focus maybe a little bit less on new product introduction and a bit more on continuous process improvement to start taking costs out and get better and better at gross margins. So for me that helps.

Moderator (participant)

Thank you. Our next question comes from Puneet Souda with Leerink Partners. Your line is open.

Puneet Souda (Senior Managing Director of Life Science Tools and Diagnostics)

Yeah, thank you again, Emily. Just wanted to follow up, you know, on a broader question around Express Genes. What's your expectation for a competitive response on Express Genes or these fast genes? I mean, it's a great strategy to manufacture it all at once and deliver it right away or later and modulate your pricing accordingly. But just thinking about the industry overall for oligos, how do you think about the, you know, sort of the competitive response would be from the competitors and the sort of the defensibility you have to that competitive response? Appreciate that.

Emily Leproust (CEO and Co-Founder)

.Yeah, no, so thank you. So the way I think about it is, you know, our competitors have been in business way longer than we have, right? And so they really have optimized all of their processes using the 96-well plate. And now there's not much more they can do. What we have is really the advantage of the silicon chip that gives us a tremendous advantage. And then we've built the back end around it to make at scale Express Genes. And so at this point, we're the only company that can make all of their genes fast.

And, I think it's gonna be a very, very difficult-- it will be a very difficult task for our competitors to try to match it. So, yeah, we'll see what the response is, but we are ready. You know, we think we have an absolute great, great product in terms of its great quality, its customer experience, speed, and actually even great pricing. And so we provide tremendous value to our customers. And, yeah, we look forward, we'll see anybody on the playground, any site, anytime. Indeed, a playground. Okay, thanks, Emily.

Moderator (participant)

Thank you. There are no further questions. I'd like to turn the call back over to Emily for any closing remarks.

Emily Leproust (CEO and Co-Founder)

Thank you very much. In closing, we reported a record quarter, and our product portfolio continues to resonate with our customers. We introduced the full Express Genes portfolio last week, and we have more product launches planned for the next week at AGBT. As we move forward, we'll continue to focus on revenue growth, margin expansion, and financial disciplines to drive our path to profitability. We look forward to seeing some of you at AGBT, our conferences in the March timeframe. Thank you very much.

Moderator (participant)

Thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day!