Twist Bioscience - Q3 2023

Transcript

Operator (participant)

Welcome to the Twist Bioscience Fiscal 2023 Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during this session, you'll need to press star one, one on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press one star one, one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Angela Bitting, SVP of Corporate Affairs and Chief ESG Officer. Please go ahead.

Angela Bitting (SVP of Corporate Affairs and Chief ESG Officer)

Thank you, operator. Good morning, everyone. I would like to thank all of you for joining us today for Twist Bioscience's conference call to review our fiscal 2023 third quarter 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 Jim Thorburn, CFO of Twist. Emily will begin with a review of our recent progress on Twist businesses. Jim will report on our financial and operational performance. Emily will come back to discuss our upcoming milestones and directions, and then we'll open the call for questions. We would ask that you limit your questions to a maximum of two and then re-queue 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 2 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.

We'll also discuss financial measures that do not conform with GAAP, including adjusted EBITDA. Information may be calculated different than similar non-GAAP data presented by other companies. When reported, a reconciliation between these GAAP and non-GAAP financial measures will be included in our earnings documents, which can be found on our investor relations website at www.twistbioscience.com. With that, I will now turn the call over to our Chief Executive Officer and Co-founder, Dr. Emily Leproust.

Emily Leproust (CEO and Co Founder)

Thank you, Angela, and good morning, everyone. The third quarter of fiscal 2023 highlights continued management of our business with a particularly strong quarter for the core business. We reported record revenue of $63.7 million, exceeding our guidance of $60 million-$61 million, and with orders of $63.8 million, setting the stage for future growth. Beginning April 1, we shipped the vast majority of SynBio products out of the Factory of the Future as we shifted production for this business line, and today we are celebrating record revenue driven in significant part from our manufacturing at this new site. Taking a step back, in December 2020, we signed a 10-year lease agreement for the space in the height of the pandemic.

We made a $100 million investment to build out the site, which we knew would be instrumental in our next set of goals for SynBio product line, specifically Clonal Genes and Gene Fragments. Our team completed the Factory of the Future on time and on budget, even amid global supply chain challenges, significant disruptions of the pandemic, and macroeconomic pressures. The successful completion and now operation of our second manufacturing site demonstrates the ability of our team to plan and execute on difficult projects and lay the groundwork for future growth. We shipped about 159,000 genes out of Wilsonville this quarter. That number will continue to expand.

By point of comparison, we shipped less than 12,000 genes out of San Francisco in the same period. These were genes that had started production before we began pressure testing the Factory of the Future in April. For the core business, we continue to expand our customer base and take market share. In SynBio, our consistent turnaround time of 10-14 business days for Clonal Genes and three to five days for Gene Fragments resonates with our customers. In addition to scale, in the past, price was our primary differentiating feature, but today we see almost every customer review highlight fast turnaround time as a key benefit. We will continue to drive speed as we move towards the planned introduction of Fast Genes in the fall timeframe. Between today and the launch in the fall, we are working on four key activities.

First, releasing the software module of the internal Manufacturing Execution System to minimize the time that genes are idle and then testing the implementation of that software. Second, refining the molecular biology processes to reduce processing time where it can safely be done. Third, retraining the manufacturing associates to readjust to the new cadence of this streamlined production process. Fourth, finalizing our e-commerce platform to be able to transact with dynamic pricing. In addition, we're working on the marketing side to prepare a robust launch targeting current and future customers. I'd like to note that when we launch, we believe this will be a disruptive product, and we also believe there will still be efficiencies to gain in the future, further improving our turnaround time for genes and fragments.

While the Factory of the Future is producing the vast majority of our SynBio products, our San Francisco site continues to manufacture all of our NGS panels, delivering excellent results for the quarter. We continue to receive positive feedback from customers. Some highlight that using our chemistry for target enrichment saves them approximately 60% of downstream sequencing costs, reducing the customer COGS overall. In this macroeconomic environment, that value proposition resonates. We continue to win pilots in head-to-head trials against our competitors. In addition, we were pleased to see several positive proof points for the liquid biopsy field over the last quarter. We are substantially tied to the commercial success of our customers in this field, and we believe these important tests will continue to demonstrate their value in detecting cancer and recurrences early, as well as guiding treatment decisions.

Expanding our market opportunity during the quarter, we launched a robust RNA-Seq portfolio, and the initial feedback is very positive. We have many customers trialing the products and have received initial orders. As we believe this product portfolio opens up the RNA research markets with workflows, we are particularly excited about this launch. Like all of our products, it takes time to drive revenue growth. Products we introduce today do not produce immediate revenue, but grow over the next one to four years. Through the introduction of innovative products that meet industry needs, we have carved out a niche for the core business that we expect will continue to radiate and extend within the markets we serve. Overall, the core business continues on its growth trajectory, and we have delivered very good results again this quarter. Turning to biopharma, revenue and orders both came in below our expectations.

We shared in May that we were experiencing internal integration challenges, and those issues have resulted in the lower numbers for the quarter. Our lagging indicators, or those that we see today, underscore our headwinds, which includes deal timing, open headcounts for the sales team, and internal integration challenges. We have seen some market impact from the restricted biotech funding environment, though we also see strong interest from top pharma companies throughout the world, particularly in APAC and EMEA. These relationships take time to foster and close, impacting deal timing, particularly for the quarter. In addition, we have key open headcounts for biopharma business development managers, which have been open longer than we anticipated. On a positive side, we know that where we have commercial talent, we secure deals. We are looking to roughly double our current sales team from biopharma from five to 10.

It does take time to onboard and ramp up, so this is not an immediate fix for revenue, but we play the long game. We continue to see interest in our robust biopharma services, particularly the newly launched Twist Gold Standard offering, which combines in vivo and vitro and in silico discovery approaches. We continue to make progress on internal processes that we believe will set us up for operational success as the deals increase. Moving from our biopharma service offering to our internal asset monetizations, we have focused our efforts and prioritized five programs, and we are in discussions around all five. As Jim will cover next, we expect to fall short of our previous guidance for biopharma for the year, but I want to reiterate that we will continue to evaluate, analyze, and manage the business to ensure value creations over the short, medium, and long term.

For data storage, we expect to demonstrate an end-to-end gigabyte century archive workflow by the end of calendar 2023. Following on this, in calendar 2025, we expect to launch a terabyte century archive solution. Moving to corporate developments, we are now three months beyond our substantive action to accelerate our path to profitability through the shift in manufacturing and resizing the company. While the full cost saving will not be realized until the fiscal first quarter of 2024, the organization has adapted to the changes. With the reductions we have made across the business, we wanted to ensure that we also had the ability to hire key positions. Rob Warners joined us as our Chief Accounting Officer in late May, bringing a wealth of technical accounting expertise and global accounting experience.

Chad Gandy joined us in late June as our Chief Information Officer, bringing expertise in a range of areas, including application and solution architecture, as well as data analytics. We are looking forward to how both executives will accelerate our transition into the next phase of scaled, profitable growth. With that, I'll turn it over to Jim.

Jim Thorburn (CFO)

All right, thanks, Emily. We had a truly outstanding quarter with a record number of customers served despite a more difficult macroeconomic environment. Revenue for quarter three was $63.7 million, which is year-over-year growth of approximately 14% and a sequential increase of 6% and ahead of our guidance of $60 million-$61 million. Orders were $63.8 million for the quarter, an increase of approximately 7% year-over-year, and declined sequentially by 1%. Gross margin for the quarter was 34.3%. Our customer base continues to grow, and we shipped to approximately 2,200 customers as compared to 1,900 in the third quarter of fiscal 2022. We achieved this growth in a quarter when we transitioned to the Factory of the Future, and we're truly proud of the organization's ability to execute this major transition.

We concluded quarters three with cash and investments of $357 million. Now turning to NGS. Our NGS revenue for quarter three was a record $33.2 million, representing 14% sequential and 19% year-over-year growth. Our third quarter orders were $33.2 million, a sequential increase of 19%. Our NGS orders year-to-date grew to approximately $92 million, about 22% growth over the same period in fiscal 2022, with the revenue for the top 10 customers accounting for approximately 39% of our NGS revenue, and we served approximately 560 NGS customers in fiscal quarter three.

Our pipeline for larger opportunities continues to scale, and we're now tracking 279 accounts, up from 270, and which is in our last earnings call, 134 have adopted Twist, as compared to 131 last quarter. Now let me turn to SynBio, which includes genes, DNA preps, IgG, libraries, and Oligo Pools. Revenue goes to $25.9 million, another record, representing sequential growth of 7% and year-over-year increase of approximately 17%. Orders for the quarter were $27 million, and that's a sequential decline from $30.9 million, and is consistent with annual trends where SynBio customers place blanket purchase orders in the March quarter as they set out their new budgets.

Our SynBio orders year-to-date have grown to approximately $85 million, up from $66 million in the same period in fiscal 2022, which is 28% growth as we continue to take market share. In Q3, we shipped to approximately 1,800 SynBio customers, which has grown from approximately 1,500 in the third quarter of fiscal 2022. Of note, our customer base for SynBio includes large pharma and biotech companies, as well as academia. Our genes revenue increased to $19.3 million, as compared to $17.4 million in the third quarter of fiscal 2022, which is year-over-year growth of approximately 11%.

As we highlighted, we transitioned our gene production to the Factory of the Future this quarter, shipped approximately 171,000 genes in fiscal quarter three, an increase of approximately 5% year-over-year, and we want to recognize our operations team for terrific execution. Our oligo pools and library business continues to do well. Now moving to Biopharma. Biopharma revenue for the third quarter of fiscal 2023 was $4.6 million, down sequentially from $7 million. Orders for the quarter were $3.5 million, down sequentially from $5.3 million in the second quarter. This decline is primarily due to challenges Emily described, is also reflected in the number of active programs, which declined from 93 to 78. We're addressing these short-term challenges, are actively rebuilding the commercial team. I'll now cover our revenue breakdown by industry.

Healthcare revenue for the third quarter of fiscal 2023 was $34 million, as compared to $29.4 million in the same period of fiscal 2022. Industrial chemical revenue was $16.8 million in the third quarter of fiscal 2023, as compared to $16.7 million in the third quarter of fiscal 2022. Academic revenue was $12.4 million in the third quarter of fiscal 2023, compared to $9.5 million in the same period of fiscal 2022. Moving to our regional progress for Q3 fiscal 2023. EMEA revenue rose to $19.1 million in Q3 fiscal 2023 versus $15.5 million in Q3 fiscal 2022.

For APAC, overall revenue increased to $5.7 million, compared to $4.8 million for the same period of 2022, and U.S. revenue increased to $39 million in the third quarter versus $35.8 million for the same period of fiscal 2022. Moving down to P&L. Our gross margin for quarter three was 34.3%, as compared to 30.8% in quarter two, which reflects the sequential revenue growth, leveraging our fixed COGS and the initial impact of our cost reduction announced in early May. Our cost of revenue for the third quarter was $41.8 million, as compared to $41.7 million in the previous quarter.

As we continue to transition some of our operations from San Francisco to the Factory of the Future in the current quarter, we expect to see the full benefit of our cost management in the first quarter of fiscal 2024. Our operating expenses for the fiscal quarter, including R&D, SG&A, change in fair value, mark-to-market, and restructuring costs, was approximately $82.7 million, as compared to $86.3 million in quarter three, fiscal 2022. To break it down, R&D for the fiscal quarter was $24.5 million, a decline from $36.8 million in the same period of fiscal 2022, primarily due to a decrease in Revelar spending, as Revelar was deconsolidated as of September 30th, 2022.

Excluding the impact of Revelar, the decrease was driven by $3.8 million in cost reduction activities, as well as decrease of $2.3 million in stock-based compensation expense. R&D does include DNA storage. R&D spend was $6 million, and biopharma R&D spend of $6 million in the third quarter of fiscal 2023. SG&A in Q3 was approximately $46.1 million, as compared to $53.7 million in Q3 of FY 2022. This decline is primarily due to a reduction in stock-based comp of $7 million. Factory of the Future pre-commercialization costs, including SG&A, were approximately $1.1 million, associated with a number of labs that are in pre-commercialization phase, and we anticipate they will be operational by the end of fiscal year. Restructuring costs for the quarter were approximately $13 million, including $9 million for employee severance.

In addition, we incurred non-cash restructuring costs of approximately $4 million for asset and leasehold impairment associated with the transition of our SynBio activities from San Francisco to the Factory of the Future. Stock-based compensation for the third quarter was approximately $10.8 million. Depreciation and amortization for the quarter was $8.3 million, associated with the commercialization of the Factory of the Future, an increase from $7.1 million in the previous quarter. CapEx investments in quarter three was approximately $4 million, which brings our total CapEx cash spend for the first nine months of fiscal year to $25 million. I will now cover our outlook for the year. As we've highlighted, the launch of the Factory of the Future is going well, with a strong quarter of operation performance.

Our SynBio and NGS businesses are doing well, and we're addressing the challenges with our biopharma antibody business. For FY 2023, our year-to-date revenue as of the end of the third quarter was approximately $178 million. For the fourth quarter, we're increasing our guidance to the revenue in the range of $63 million-$64 million, and that's up from the previous guidance of $62 million-$63 million, and therefore, increasing our fiscal year 2023 guidance to $241 million-$242 million range, and that's up from $235 million-$238 million. For FY 2023, we are projecting SynBio revenue approximately $98 million at the top end of our previous guidance range of $96 million-$98 million.

We are projecting NGS revenue for FY 2023 to be approximately $120 million, which is an increase from $113 million-$114 million in our previous guidance range and reflects the stronger orders we discussed earlier. We expect biopharma revenue of $23 million-$24 million, and that's a downward revision from $26 million, reflecting our previous comments on biopharma challenges. For Q4, cross margin, we're projecting approximately 36%, which includes costs in San Francisco associated with operations that we are migrating to Portland. Normalizing out these costs, we were projecting 2% margin increase from 36%-38% for the fourth quarter. On the expense side, we're projecting R&D expense of approximately $26 million, SG&A expense of approximately $47 million for the quarter, and restructure expense of approximately $1 million.

For full fiscal 2023, for gross margin, we expect approximately 36% for fiscal 2023. Our operating expense guidance for the year is approximately $308 million, as compared to the previous guidance, $313 million-$319 million. We're now projecting R&D expense of approximately $109 million, as compared to $112 million-$114 million in our previous guidance. We expect SG&A of $189 million, as compared to the previous guidance of $197 million-$200 million, primarily due to the impact of lower stock-based compensation. Mark-to-market is projected to be a credit of $6 million, one-time restructuring costs of $14 million, including both severance and non-cash. Other income and expense for the year is projected to be approximately $12 million.

Depreciation and amortization is projected to be approximately $29 million, and that's unchanged from our previous guidance. Our projection for stock-based compensation declined to $32 million from $43 million. Operating expense for DNA storage is expected to be approximately $40 million, and that's consistent with our previous guidance. For fiscal 2024, we also expect $40 million operating expense for data storage. Net operating loss for the year is projected to be approximately $220 million, inclusive of one-time charges of approximately $14 million for restructuring. CapEx for the year is now projected to be $35 million, and that's a decrease from $40 million previously, and ending cash is projected to be approximately $325 million, compared to previous guidance, $320 million. Before concluding, I want to briefly recap the impact of the restructuring activities we announced in May.

We estimate the overall annual savings to be approximately $40 million, including $23 million from operations to the transition of our SynBio operations to the Factory of the Future, and approximately $17 million in R&D. We've built these savings into the guidance we've provided. In summary, we're commercially shipping from the Factory of the Future. We're continuing to gain market share, add to our customer base, and are focused on managing our cost structure as we scale. We anticipate exiting the fourth quarter of fiscal 2024 at adjusted EBITDA break even for the core business, with adjusted EBITDA breakeven for biopharma now delayed. We continue to manage all our business areas actively. We define adjusted EBITDA as EBITDA, excluding stock-based compensation. As I finish my remarks today, I'm sure that many of you read our 8-K file concurrent with these earnings.

I want to say that after five years as CFO at Twist, I'm excited to apply my operating and semiconductor background in a new way to facilitate our next phase of growth. I'm a big believer in the opportunities that lay ahead for Twist and look forward to continuing to contribute to our success. With that, I'll turn the call back to Emily.

Emily Leproust (CEO and Co Founder)

Thank you, Jim. As many of you know, Jim joined us when our revenue was approximately $5 million per quarter, and his strategic financial acuity has been integral to get us to where we are today, having reported over $63 million in revenue for the fiscal third quarter. Having spent the last five years in the CFO role, I am pleased that Jim will continue to provide guidance for our commercial scaling and operational leverage efforts, as well as using his semiconductor background as we advance development for data storage. I'd like to personally thank Jim for all he has done to date and look forward to his contributions to other areas of the business. We will conduct a search for the CFO position, and as soon as this is filled, Jim will transition into the new role.

In closing, the core business is ripping with growth opportunity for profitable and scalable growth ahead. We have made good progress towards the launch of Fast Genes, which will be available to customers in the fall of this year. For this important growth driver, we are targeting the $1.4 billion DNA makers market. This is a market made up of scientists and researchers in large pharmaceutical companies and academia that currently make their own DNA. They make DNA instead of buying it, as they need it faster and more cost effectively than we believe it can be delivered from virtually any source today. In return for delivering Fast Genes, we will charge a premium price.

Optimizing our current Clonal Genes and fragments workflow through software and operational efficiencies, we will be able to make all of our Fast Genes at the same cost as standard speed genes, with the incremental price power from Fast Genes dropping directly to the bottom line. We expect to be seeing revenue for Fast Genes in the first quarter of fiscal 2024, and it will be a gradual build as we leverage our digital marketing infrastructures and tools to reach the long tail of the DNA makers. For NGS, our workflows continue to be included in more and more assays, and we believe the growth of our NGS opportunity will be sustainable for the foreseeable future. We launched a robust RNA workflow for research scientists, an area where we have a significantly smaller footprint today, but believe we can grow and expand.

By pharma, we have work to do to turn the business around. We have interest in the offerings, both for our services and our out-licensing opportunities. We're working to scale the commercial team. For data storage, we're working towards delivering an end-to-end gigabyte century archive workflow and subsequently a terabyte data storage solution with early release to key customers in calendar 2025. With that, let's open up the call for questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question will come from Vijay Kumar with Evercore ISI. Your line is open.

Vijay Kumar (Senior Managing Director and Equity Research Analyst)

Hey, guys. Thanks for taking my question, and congrats on good gross margin execution here. You know, Emily or Jim, maybe my first question on orders here, down sequentially on a dollar basis, looks like biopharma down, NGS slowed down. When you look at those orders, can you maybe talk of what customer conversations you're having across SynBio, biopharma, diagnostic end markets? You know, as you are exiting fiscal 3Q, how, how are those conversations progressing? Given, given, you know, high single sort of trajectory here in orders, is that an indication for how we should be thinking of revenues for fiscal 2024?

Jim Thorburn (CFO)

Yeah. Vijay, it's Jim. Thanks for the question. You know, as you stand back and look at the business in terms of orders, on SynBio, the, your, your point is correct. You know, orders did decline sequentially, we saw that pattern last year and the previous year. We saw a decline from the March to June quarter. There's a couple of reasons for that. One is we're making progress in terms of penetrating large pharma. What, what we see with a number of customers is they have their budgets allocated for the year and they, they secure blanket purchase orders with us to give us an indication of their, their business for the year.

I think if you step back and you look at our growth and you look at where we are quarter to date orders versus the same situation last year, we're up in roughly about 20% odd. We are, you know, seeing a strong customer growth. The Factory of the Future is going well, and we're continuing to gain market share. As, as we look forward for next year, we see the launch of the Fast Genes, we see the growth in terms of NGS. NGS, this year, is going to be about $120 million, which is in line with original November projections that we issued at the end of last year. Overall, business is really, as, as Emily highlighted, business is ripping.

Yes, we have a short-term issue in biopharma, which we're addressing. We've got a great integrated offering. Overall, feel good about the business, feel good about where we're positioned with Fast Genes, and we continue to gain share.

Vijay Kumar (Senior Managing Director and Equity Research Analyst)

Understood. You know, I did see you had a slide on fiscal 2024 assumptions, Jim. Looks like your cash burn projector for fiscal 2023 is about $180 million. You know, that's stepping down close to $100 million-$105 million for next year. When you think about that step down in cash burn, how much of this is being driven by your assumptions on revenue growth versus gross margin improvements versus, you know, OpEx coming down for fiscal 2024? Some qualitative comments I think will be helpful.

Jim Thorburn (CFO)

Yeah. You got a combination of three, three areas. One is we're, we're managing our, our costs. You know, as, as you look at the, the numbers in terms of exiting this year, in terms of R&D and SG&A, we brought that down. You know, originally for the year, we were anticipating R&D of $130 million. We're, we're now down significantly below that. SG&A, we're, we're managing. In terms of overall cost, we announced actions in May this year. We estimate that's going to save us about $40 million a year. As we exit this year, we've got about $325 million cash.

In terms of next year, our key focus, and this is why I'm transitioning to my, to my new role, is we're gonna manage our cost structure as we go forward. We're gonna drive top-line growth, and we're gonna get to adjusted EBITDA break even for the, for the core business in Q4 next year. We feel good about the opportunities, and feel good about executing to that plan.

Vijay Kumar (Senior Managing Director and Equity Research Analyst)

Jim, are, are you seeing OpEx on a dollar basis will be down next year versus fiscal 2024? Is that the assumption?

Jim Thorburn (CFO)

What the assumption is, we're gonna be managing OpEx as we go forward. We're gonna be leveraging our cost structure. The goal is as we increase our revenue next year, we're gonna see improvement in terms of our gross margin, and we're gonna get to adjusted EBITDA to break even at the for the core business at the annualized revenue of $285 by quarter four next year. Essentially, the takeaway is, you know, you can take a look at our Q4 cost structure. We're gonna manage roughly to a number that gets us to that adjusted EBITDA to break even. For DNA storage, we're gonna be managing DNA storage to $40 million OpEx next year, which is the same as this year.

Operator (participant)

Thank you. One moment for our next question. We have a question from Matt Sykes with Goldman Sachs. Your line is open.

Matt Sykes (Managing Director and Research Analyst)

Hey, good morning. Thanks for taking my questions. Maybe just first, Emily, on, on the biopharma business. I know you took some, restructuring actions last quarter. Jim referenced, you know, some sequential slowdown in orders. And I think you pushed out the EBITDA break even, for the guide next year. Just how are you thinking about that business today? I know we're dealing with a lot of cyclical pressures, but from a structural standpoint, from a competitor position standpoint, how are you feeling that business, and, and what are you looking to in terms of commit investment to that business over, over the next year or two?

Emily Leproust (CEO and Co Founder)

Yeah. Thank you. Thank you, Matt. As you know, we, we serve the biopharma industry in, in, in two ways. One, we sell products in the that we record in our SynBio segment, and then we sell service that we record in our biopharma solution. The in the SynBio side, we install products. It's going fine, so our, our view of the market is, is that, is that it's all going well. We have a particular issue in our biopharma services, when we analyze and, and look at particular territories, if we have commercial talent in a territory, we win business.

It's not a surprise, because to your point around competition, and we have a very competitive offering, the combination of our in vivo, in vitro, in silico solution is extremely competitive when we have commercial talent. The execution issue that we have in biopharma solution right now is that we do not have enough commercial talent to cover all our territories. We have 5 currently, and the most important thing for me, the one that I'm focusing on the most, is making sure that we hire talent in all the territories. If we can replicate what's happening in the successful territories, I'm quite confident that the business will grow the way we expect it.

In terms of milestones, I'm looking for is first hiring of the talent, training them, then getting orders, then getting revenue. That's the sequence of event in which we're going to turn the business around. As Jim mentioned it, we are managing it very actively, and we continue to do so.

Matt Sykes (Managing Director and Research Analyst)

Great. Thanks for that. Just for my follow-up, just on the, for Emily and Jim, just on the, on the transition, and Jim, your transition, maybe just talk about the timing. Why now? In terms of, I know you hired a search firm, but are there thoughts on internal versus external? Are you exploring all possibilities? Just kinda wanna get a sense for, one, timing, why today? And then kind of what your thoughts are in terms of replacement.

Jim Thorburn (CFO)

Yeah, in terms of timing, business is in good shape. I mean, the key, key issue we challenged over the last year was bringing up actually the future. That's going well. We're seeing a lot of interest, and we have line of sight to get to adjusted EBITDA to break even, Q4 next year. The timing from an overall commercial and business point of view is, is good in terms of, you know, that line of sight. Emily, maybe you can answer the, the rest of the question.

Emily Leproust (CEO and Co Founder)

Yeah, yeah. I think in terms of the search, it would be an external recruit at this point. We are just starting the process. I haven't talked to anybody yet, but it would be external.

Matt Sykes (Managing Director and Research Analyst)

Thank you.

Operator (participant)

Thank you. Our next question will come from Puneet Souda from Leerink Partners. Your line is open.

Puneet Souda (Senior Managing Director and Senior Research Analyst)

Yeah, hi, guys. Thanks here. First of all, Jim, good luck in the new role. Couple of questions, I would say. First one on biopharma. You know, Emily, if you could step back a little bit on, about this business and, and talk about... I mean, look, you had meaningful, you know, cuts here. You're re-platforming. You are not reaching break even in that business in 2024 as you expected. You're lowering your guide again. The biopharma discovery, CDMO peers are, you know, calling out benefit from rationalizing of trials that's ongoing out there. It appears at a high level that you're losing share as well. You know, wondering when you look at the business overall, you know, how does this fit into the Twist growth profile and outlook in the longer run?

You're obviously doing well in the NGS core business of serving, customers on the research side and, and, and the growth side. Just trying to understand how, you know, biopharma fits into the overall, strategy, and, and picture for the company longer term.

Emily Leproust (CEO and Co Founder)

Yeah, no, thanks-thanks for the question. As a reminder, in our biopharma services, what we sell are discovery services. Discovery of antibodies, bispecific HS, ADCs, some TCR, some cell engineering. We are, we are selling services for the early stage of the, of, of the drug pipeline, so drug discovery, some, some optimization, some developments. We typically, we stopped at the preclinical stage. Actually on the SynBio side, when we sell our fragments, our genes, our Oligo Pools, to those same customer, we are also selling to those customers for that the, the, the, the discovery development, optimization.

The, the benefit to Twist of having both the product and the service is that when we get in front of a, of a pharma customer, small biotech, large biotech, pharma, we're able to sell the full menu. We're able to sell, tell our, our, our customers, "If you're going to do the work yourself, by using our Gene Fragments, IgG from SynBio, you're going to be more effective, more productive in, in your effort for, to discover antibodies and drugs." That is working. That message resonates well.

What we are saying at the same time is, "By the way, if you have a target for which you are not able on your own to find a therapy, or if you have too many targets and you're not able to prosecute all of those internally, outsource those targets to us. We'll discover the antibodies for you as a service," and then go into the biopharma service business. So we are serving the same customer. I think both menu of product and services is synergistic. Right now, it's benefiting more the SynBio side. As I mentioned, we have some commercial execution issues in some territories on the biopharma service.

Having the two together, we see it as a, as a net, net positive. Again, we are... I'm, I'm quite optimistic as I see the, the territories where we have commercial talents, it works. If it works once, do it again. Of course, we'll monitor very, very actively, but, we're quite optimistic for, for the future.

Puneet Souda (Senior Managing Director and Senior Research Analyst)

Okay. Got it. Just a brief one on the DNA writers. Can you just remind us how many DNA writers you have currently operational in Wilsonville? What do you expect that number to be by year-end?

Emily Leproust (CEO and Co Founder)

Right now, right now, we have four writers in San Francisco, as well as four writers in Wilsonville. They're all operational. In Wilsonville, we have space for 12 additional writers. At this point, we do not have, we don't have writers on order. For the foreseeable future, those four plus four are going to serve our needs.

Puneet Souda (Senior Managing Director and Senior Research Analyst)

Got it. Thanks.

Operator (participant)

Thank you. We have a question from Luke Sergott with Barclays. Your line is open.

Luke Sergott (Director and Healthcare Equity Research Analyst)

All right. Good morning, everybody. Thank you for the questions. Jim, it's no luck is needed, man. I mean, you're gonna be missed. On the quickly here on the liquid biopsy partnerships, can you tell us how to think about where, you know, when we should start seeing, you know, if you guys are on the MRD? As that MRD ramps across that space, how do you think about the growth in the NGS side? Can you just remind us, or give us some type of directionality on the economics that you guys achieve per sample?

Emily Leproust (CEO and Co Founder)

You want to take that, Jim, or you want me to take it?

Jim Thorburn (CFO)

You can take it, Emily.

Emily Leproust (CEO and Co Founder)

Yeah. Cool. Yeah, thank you, Luke, for, for, for the question. As a reminder, as you know, we get baked in into liquid biopsy MRD assays. As we win those pilot, as the customers get validated and as they go commercial, we are tied into their commercial success. The way I see it is, they use our reagents in their production as, and so every time they analyze a patient. They use some reagents from Twist. We participate as a function of their revenue, rent.

In terms of the dollar amount that we, we, we try to, to get, typically, we, we think that around 10% of their COGS, is a fair, is a fair value. Sometimes we, we, we get more. It also depends on the extent of the chemistry they use for us. Some, some customers, they only use the DNA, and for the capture. That's how we win based on the quality of our DNA. In many cases, we're able to extend to the other components of the chemistry. And sometimes we sell the full solution, all the reagents, from the sample to the sequencer, so the barcodes, the beads, the adapters, the enzymes, the buffer, everything. At that point, we're able to expand the % of the COGS that we can, we can command.

Luke Sergott (Director and Healthcare Equity Research Analyst)

That's fine. Then as, you know, as Factory of the Future starts coming online, when, when can we expect you guys to start taking orders there? Is that next quarter? Then as, as the initial demand and interest is coming online there, how are you guys... You know, are you seeing more interest for the genes, the pools? Like, which, which, you know, other products are you guys getting most initial interest on right now?

Emily Leproust (CEO and Co Founder)

Well, all the segments are going well. Libraries, and some oligos in many cases, libraries are going really well. At fragments, as we have, we've started to accelerate the speed at which we can ship fragments. Right now, fragments are also doing really well. What my expectation is as we launch Fast Genes in the fall, that also should be a great driver, of course. I'll say, depending on the customers we touch, there's something for everybody to like.

That's a testament to the quality, the product, how priced right, they are, and you know, the user experience that they get from Twist. I often say that the, the DNA is free, people pay for the user experience, and from the time they get on the website to the time they get the invoice, it is very, frictionless, beautiful, and intuitive experience. That is a key element that is often missed of our success.

Luke Sergott (Director and Healthcare Equity Research Analyst)

On the Fast Genes, just a quick, quick one. Are you guys starting to take orders next, next quarter for the Fast Genes?

Emily Leproust (CEO and Co Founder)

You're getting me in trouble because it's only two questions per call. As soon as it's, as soon as it's launched, we'll talk. Thank you.

Luke Sergott (Director and Healthcare Equity Research Analyst)

All right. Thank you. Thanks.

Operator (participant)

Thank you. One moment for our next question. It comes from Steven Mah with TD Cowen. Your line is open.

Steven Mah (Senior Equity Research Analyst)

Hi. Great, thanks for the questions. Just a follow-up question on the biopharma business. I think you guys said that the number of active programs have dropped. Are those dropped programs, are they mostly from emerging biotech partners, or was the program lost, you know, across the board from your partners? Just trying to get a sense of, you know, where we're seeing most of the weakness in your biopharma business.

Emily Leproust (CEO and Co Founder)

Awesome. Maybe, maybe, maybe we should clarify that, as we finish a program, we, you know, we are done, and so we drop, we drop it from the list of active programs. Then we, we, we get paid, we send the invoices. So the fact that the active program dropped means that we finish more programs than we started, and that is the, that is a reflection of our order being, our orders right now decelerating. So the revenues are, will decelerate following those orders. As I mentioned, we're highly focused on hiring commercial talents, because where we have talent, we, we win deals.

Steven Mah (Senior Equity Research Analyst)

Okay. Yeah, thanks for the clarification. Yeah, and maybe then on, like, the new partnership front, and, yeah, I appreciate that you're not fully resourced, but have you seen a push for more partnerships with, with less upfront and more back-end economics? You know, is that impacting, you know, like your calculus on, on, on new partners and program adds?

Emily Leproust (CEO and Co Founder)

Yeah, that's a, that's a great question. As a guiding principle, we, we are not subsidizing the research of our, of, of our customers. We always want to have the, the, the fee for service to pay for our work with a, with a, a, a, a good margin. If we can get a tail end with milestones or royalties, that, that's a great benefit. We are highly focused on making sure that the upfront payment is, is a fair exchange for the value that-... that we provide. I, I'm not hearing of a pressure on, on that, on that up front, up front fee.

I think it's once we're able to have the, the commercial talent be able to articulate the value of what we bring, I think the, the, the, the fee for service is, is very much in line with the value that, that our customers perceive we, we provide. Thank you, Steve.

Operator (participant)

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

Catherine Schulte (Director and Senior Research Analyst)

Hi, thanks for the questions. I guess first, going back to Fast Genes, I think you said you talked about, you know, seeing revenue from those in the fiscal first quarter of 2024. Just based on your conversations with customers, what kind of premium do you think they'll be willing to pay for a faster turnaround time?

Emily Leproust (CEO and Co Founder)

Yeah. Thank you, Catherine Schulte. It's a, it's a great question. What we have, what we have seen is, definitely, the, the perceived value of the Fast Genes, is going to be different for academic customers, compared to industrial customers. Probably actually, I think for the first time in, in Twist history, there'll be a different price for academia as there will be for, for industry. Just because industries is willing to, to pay more, for those Fast Genes.

Then in terms of what that premium is going to be, we have set up a what we call dynamic pricing, which will enable us to do price discovery with those customers to be able to get the optimal price that maximizes the volume and the gross margin that we can extract. We are not quite willing to guide it yet, but we've put in place the commercial mechanics to be able to make sure that we do not leave money on the table for either of those markets. That's what the dynamic pricing is gonna bring us.

Catherine Schulte (Director and Senior Research Analyst)

Okay, great. Thanks. Then you had a nice step up in gross margin this quarter. Are you still confident in a 49% gross margin for fiscal 2024?

Jim Thorburn (CFO)

Good question in terms of step-up in gross margin. That, that reflects a couple of things. One is the initial impact of cost reductions. Second is, as we leverage the our cost structure, as you saw the sequential revenue growth. In terms of outlook for fiscal 2024, we are focused on getting to adjusted EBITDA to break even. You know, I mean, it's a good question in terms of Fast Genes. I mean, I, I'm particularly excited about Fast Genes launching. A, it demonstrates the capability of the Factory of the Future. B, we get premium pricing, and as we get premium pricing, that's gonna reach our, our margins.

Our long-term focus, I mean, we've got over $500 million of potential annualized revenue based on our, our capacity at both San Francisco and Factory of the Future. I mean, as we approach the, the $500 million, we're targeting gross margins in the range of 55%-60%.

Operator (participant)

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

Rachel Vatnsdal (VP and Equity Research Analyst)

Perfect. Hi, you guys. Thanks for taking the questions. Just one from me today. I wanted to follow up on APAC and China. Last quarter, you guys had flagged that, that you were starting to see a rebound in the region, but then it looks like revenue stepped down sequentially there this quarter. We've heard some concerning updates across the industry out of China, so I was wondering if you could just walk us through what are you seeing in China and broader APAC, and then how did those orders really trend this quarter? Thank you.

Jim Thorburn (CFO)

Yeah, good question. Overall, in terms of, I mean, year-over-year, we're growing in, in APAC. In China, revenue did step down from our September quarter last year to... our December quarter, went down to $1.4 million. We saw a pickup in revenue to approximately $2 million in the March quarter. We saw revenue about $2 million. Clear there are, there are issues in China, in terms of demand. However, overall, we're predicting about $7 million for China this year, which is flat with last year. That's coming in slightly below what we had estimated. Overall, we had anticipated targeting roughly $9 million this year.

We have seen pickup from Q1, and we are, we are seeing opportunities, and that's driven by the, the value of our portfolio. I mean, the major, major products we're shipping in China are NGS and Oligo Pools, and we're also seeing some other opportunities emerging. We have a great facility there, and we've got a great sales team and, you know, although other people are seeing a sequential decline, our revenue is approximately flat from March quarter to June quarter.

Operator (participant)

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

Matt Larew (Equity Research Analyst)

Hi, good morning. The first question would just be a follow-up to Luke's around preparation for Fast Genes launch. Emily, you walked through four key activities that are in play here to, to get ready for the launch. Maybe as you think about, you know, progress to launch and potential, you know, upside or key factors to ramp in Q4, maybe stack rank, like, confidence level of progress on those items that, that you're targeting. And, and should we expect contribution in, in the fourth quarter here, given a fall launch, which I think, according to my Google search, starts September 23rd?

Emily Leproust (CEO and Co Founder)

Thank, thank you. Thank you. Great, great question. September 23rd. Even if, even if we launch on, on the first day of fall, and, you know, it ships in five days, it is possible that there could be some contribution in September, but that's not, not what we are looking for. I think the, the, the main contribution will, will start in, in Q1. In terms of the, the, the, the, the stacked effort that we, we still have to continue, what we've told the team is that, we do not want the e-commerce to be the long pole in the tent.

So, to the extent that the work in the lab gets done sooner, the e-commerce is going to be ready before that. So it's purely what happens in the lab that will drive the timing of the launch. We've launched, you know, product, many, many products. That's one of the strengths of Twist is, is we have many different flavors of DNA, and we have a good sense of what needs to be done. We're on track, very optimistic with the way things are going. It will be driven by actions in the lab, not, not by e-commerce.

Matt Larew (Equity Research Analyst)

You know, obviously, Fast Genes is sort of the next new product, but in May, you launched an RNA portfolio, and last May you launched IgG. Just, just curious, what kind of traction you maybe have been seeing with this IgG and perhaps initial feedback or opportunities that you're seeing with the RNA portfolio?

Emily Leproust (CEO and Co Founder)

Yeah. So, the initial feedback from RNA portfolio is has been positive. We are seeing orders for, for people to test, and then from there, we will expect reorder and ramp. Stepping back to the IgG launch, it's been, frankly, it's been average. The, the product for IgG is not quite highly differentiated. So, we expect that the differentiation from Fast Genes is going to be greatly influencing the ramp. As, as you know, the, the more differentiated you are, the, the, the faster you, you ramp. So, within Fast Genes, we, we ramp faster. As we make genes fast, we'll be able to bring that benefit to IgG. We think that we, we could get the double benefit of not only having Fast Genes, but also being able to improve the differentiation of all the products that are derived from genes. Our IgG are also going to accelerate in, in speed.

Operator (participant)

Thank you. Our last question will come from Sung Ji Nam with Scotiabank. Your line is open.

Sung Ji Nam (Managing Director and Senior Equity Research Analyst)

Hi. Thanks for taking the questions, congrats on the quarter and to Jim on the next chapter. Maybe on another question on the RNA sequencing portfolio, congratulations on launching that. Could you talk about kind of what the market potential there is relative to the DNA sequencing market and kind of what the current competitive landscape looks like?

Emily Leproust (CEO and Co Founder)

Yeah, great question. Within the market, it's probably about as similar size. Very different customers. On the DNA side, we are targeting diagnostic companies that are using our DNA to analyze samples and provide a clinical report. On the RNA, we are mostly going after academic customers. Although over time, I think RNA-Seq could go into the clinic, but right now it's mostly academic that we are targeting. The differentiation that we bring with our product on RNA-Seq is, one, a much faster workflow. You can go from sample to sequencer, significantly faster with less hands-on time. In academia, that is very useful.

In a setting where maybe, if it's, if it's an automated setup, you know, it doesn't really matter or it matters less, but in academia, hands-on time is key. Then we also, with our RNA Exome, we're able to enable customers to significantly reduce the number of reads that are wasted on part of the, part of the RNA sequence space that is not interesting, like housekeeping genes and tRNAs and so on. Therefore, it lowers the cost per sample. Again, that's a, that's a strong resonance with academia for, to lower the cost per sample. Those are the, the two differentiation. We are a very late entrant in RNA-Seq. Like, we're, we're probably number 12, I guess, on, in the market. In true Twist fashion, we came in with some differentiation and, and, I think that's going to enable us to, to take market share.

Sung Ji Nam (Managing Director and Senior Equity Research Analyst)

Great, that's super helpful. Thank you for all the color on the biopharma end market. Just curious, for your liquid biopsy and MRD customers, are you seeing relative stability, from the funding or spending perspective for that segment of the market?

Emily Leproust (CEO and Co Founder)

You want to take that?

Jim Thorburn (CFO)

Yeah, yeah. Yeah, I mean, NGS is going well. You know, we keep building the pipeline NGS customers. You know, in terms of overall positioning, you know, our customers save in terms of sequencing cost significantly. We continue to win and gain share. Overall, I mean, we, we give our customers. I mean, we've got a great value proposition, and we haven't seen, we haven't seen any, any significant issues. We continue to look forward to growth in that business, driven by increasing test volume and increasing adoption of liquid biopsy. You know, the number of customers that adopt this continues to increase. I mean, I'm bullish on, on where we are with, you know, NGS.

You know, when, I mean, just reflecting on my role as CFO, you know, first year in NGS, our revenue is $3 million, and now we're $120 million, and there's more and more applications emerging. As cost of sequencing comes down, I, I, it is, it's gonna end up to be, I mean, a huge, huge opportunity for Twist and benefits the world as well. Yeah, I'm excited about where we're gonna go.

Operator (participant)

Thank you. I'm showing no further questions in the queue. I'd like to turn it back to Emily Leproust for closing remarks.

Emily Leproust (CEO and Co Founder)

Thank you very much for joining us today. We are driving towards adjusted EBITDA breakeven for the core business and see significant opportunities ahead. It's a very exciting time at Twist, and I look forward to reporting our progress in the months ahead. Thank you very much for joining.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.