Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

Great. Good afternoon, everyone. Thank you for joining us. My name is Matt Sykes, life science tools and diagnostics analyst at Goldman Sachs. I have the pleasure of welcoming the management team from Twist Bioscience today, Emily Leproust, the CEO and Co-Founder; and Jim Thorburn, the CFO. Emily, Jim, thank you very much for joining us today.

Thank you.

Maybe I think it would be helpful to maybe for you to set the stage first, talk about the most recent results and kind of what sort of trends you're seeing for the business over the course of the second half of this year.

Yes. So in terms of recent results, we actually announced in early May, record revenues, very strong orders. We are really well positioned from an overall business point of view because we launched the Factory of the Future in early part of this year. We also announced in May that we took a significant risk as we leverage the Factory of the Future. So well positioned in terms of our cost structure, well positioned in terms of having the capacity and being able to support the launch of new products such as fast genes, we got the RNA products. All this does support our continued position of increasing market share in our business. Overall, we see that the customer base continues to expand. Even though we're hearing a lot of comments about the market being weak, we are actually gaining share against the competition, which gets back to the value of our product.

Great. Maybe just digging a little bit deeper on the recent headcount reduction, maybe talk us through the dynamic of what led to the layoffs, why now? And how do you think this impacts Twist moving forward?

Yes. So we made a very significant investment in our Factory of the Future. So that was a multiyear, $100 million investment, which we executed through COVID when supply chain was hard, and that was done on time and budget. So that was a great achievement. We saw that the gene production was doing well in the Factory of the Future. And so in early April, we decided to stress test the Portland facility. And so we sent 100% of the gene volume and the vast majority of the oligo pool volume to Portland. We actually put the gene production team in San Francisco on paid leave, and that stress test was very successful. And the Factory of the Future was able to handle all of the volume, and we couldn't see the difference in performance between San Francisco and Portland. And so that gave us the opportunity to say, well, we don't need 2 production sites, and the Factory of the Future enables us to launch in the near future a fast gene, which we could not do in San Francisco. And so it became a very obvious choice to pick Portland as our gene and synbio product -- or production site going forward. And so therefore, the decision was to de-duplicate that production capacity. And so we laid off all of the gene production site from San Francisco. Since we were doing a RIF, we always said, if we do a RIF, it has to be only one. We have to just do the cut deep enough that it's only one time just because we really need the remaining team to be highly focused, excited and committed to the vision that we have for the company. And so we looked at -- because we don't want to do a drip, drip, drip of kits, so we looked comprehensively throughout the company. And we thought that we're able to remove 25% of the workforce, that 60% of that dollar cost reduction came from the COGS line, 40% came from the OpEx line. And that enabled to -- that enabled us to do a few things. One is to get to adjusted EBITDA breakeven with less revenue. So for Synbio and NGS, which what we call our core business, that brings that adjusted EBITDA breakeven from $300 million revenue down to $284 million revenue per year. And then for biopharma, it brings the adjusted EBITDA breakeven from $80 million a year down to $40 million a year. So combined, it's a run rate of $81.5 million per quarter. That's the adjusted EBITDA breakeven. So that's less than it used to be. So that's number one, first benefit. Second benefit is we can achieve that earlier. We've guided that we can achieve that in September next year, so 6 quarters from when we announced it. And then third, we get there with more cash in the bank, $220 million instead of $170 million. And so it, frankly, derisks the commercial execution, and it ensures that we don't have to raise money again. And that enables us -- and in addition to the cost reduction we've done, we've also reduced the investment in our DNA data storage business. And so all combined, while it's very difficult to let people go, those were great, great employees, just it makes for a business that gets to adjusted EBITDA breakeven sooner with less revenue and more cash in the bank. So at the end of the day, it's just -- it makes us a better company.

Got it. And then just talking about sort of the guidance changes for this year. In terms of my view, they seem very conservative, particularly given the quarter that you had just reported. Can you talk about your approach to the current guidance? What kind of factors, other macro industry, are you actually baking into that guidance? And is there some element of under-promising and over-delivering, which I think is probably necessary in this environment given sort of the expectations of the market?

Yes. So in terms of the guidance, there's sort of 2 key factors, 3 key factors. One is we -- on the Biopharma business, we dropped our guidance this year from $37 million to $40 million, it was the original guidance down to $26 million. The question is why do we do that? Well, last year, we acquired a company called Abveris. We had an earn-in. We couldn't integrate the organization and consequently had a commercial issue with that, i.e., it impacted our orders; the team at Abveris [ missed their earning ]; they're demotivated; and we couldn't integrate the Abveris team into the Twist team, and we saw the business impacted by that. So we reset the business, reset the guidance based on that own internal dynamic. In terms of the other businesses, NGS and Synbio, we dropped the year guidance by roughly 6% -- 6%, 7%. And the question is, well, if orders are so strong, why do you do that? So 2 factors. On the NGS side, we have a kits business. NGS business, essentially kits and panels. On the kits business, we had a subcontractor, and we had part of the kits assembled in South San Francisco. We're consolidating that in the Factory of the Future in Portland, and there will be additional qualification required. So we were prudent in terms of our guidance there. In terms of the Synbio business, we're moving -- we moved genes operation, and we've got other Synbio operations we're moving to the Factory of the Future between now and September. And as you build these restructuring activities, there's only a certain number of people within the organization that are aware of it. So you can imagine if you're a manager and suddenly, one day, you're told you're losing 25%, 30% of your organization, we're anticipating disruption there. So based on that disruption in our core business, we thought it's prudent to take the revenue down. I've done this in a number of different companies previously, and there is always unanticipated consequences. So you got to factor that in. However, if you just step back, we are gaining share. Orders were strong, and we feel good about the actions and feel good about where we are with the Factory of the Future.

Yes. Maybe just expanding on the Factory of the Future, recently came online, and maybe talk about some of the dynamics of getting that facility up and running. You've already addressed some of them, but what do you think Factory of the Future brings to Twist that people are not quite appreciating at this stage?

Yes. So pre-Factory of the Future, when we only had the South San Francisco facility with about $200 million of revenue capacity, and we could see our revenue go up into the right, and so -- and we -- from experience, we know that it takes at least 18 months from deciding that you needed a new site and signing a lease to having a site that is operational. And so we knew that we had to make the decision ahead of time to go for it. Actually, I think we decided in, I think, in December or before COVID that we needed that extra capacity. And so we had to look for a site. We decided to be outside of the San Francisco Bay Area in order to be able to access a different talent pool. And then by the same time, we want it to be just a day trip for our engineers to go and do whatever tweaking, maintaining that had to be done on our own machines on our own custom process. And so it left us with Seattle, Portland, Reno, Phoenix type, San Diego area. And Portland was the right choice for a number of parameters, but mostly access to a great pool of talent, a cost structure that was quite competitive. And so we decided on Portland, and the next step is to find a site. So we found the site, but we had to take it down to the steps and then build the facility, so do all the TI, all the tenant improvements. Other -- the CapEx at the time, so I think we had about 35 -- the day we -- the work -- the day the construction was finished, the day we got the certificate of occupancy, I think we had $35 million of CapEx that were ready to be deployed the next day. So we are to stage all that. And again, remember, that was happening all during COVID when supply chain was stressed. And we installed the equipment. We started the hiring of the talent. About, I think, 75 of the employees moved from San Francisco to Portland. So that was great to have a base of employees that were very experienced in our process and our culture. So that was very useful as a start-up of the business. And then we had to do IQ/OQ/PQ. So IQ, installation qualification, is the machine bolted to the floor? Are they plugged in? Then the OQ, operational qualification, do the robots move the way we want? And then PQ, performance qualification, are we making genes the way we want? So again, it's something that we've done multiple times. So we are quite experienced, but it's a very disciplined, very thorough process of bringing up operations. And then once we had that, we started pricing making genes. And so that happened in the fall last year. And in January, we were ready to go live in production where we will direct some of the orders away from South San Francisco into the Portland facility. As I mentioned earlier, that ramp-up worked really well as planned. And we're so confident that in April, we were able to completely move 100% of that volume away from South San Francisco. And so what that means in terms of the future of Twist, that means that now the capacity that we have for the company went from $200 million to $500 million revenue capacity. So we've made a very significant investment in our fixed cost, but now we can leverage. And we target our variable contribution to be 75%, 78%. So that means that once we've added all the fixed costs, every $10 million of orders in addition, that brings $7.5 million to $7.8 million down to the margin line. So it's very significant. So the first thing it brings us is that extra capacity. And as we run the business, we know that we needed it. And if we didn't have that extra capacity, right now, we'll be in trouble. So that was the right decision. And then the second thing that Portland gives us is the ability to launch new products that we could not in San Francisco, we were just too space constrained. And so we've been very clear about fast gene being one of those new products that are going to be important to our growth in the future. Again, we could not have done fast gene in San Francisco. We've also said that we'll launch -- or we are being -- actually, we are being drived by the market into RNA synthesis. Now that RNA is safe because billions of people have had RNA with a large number of companies that are seeing mRNA as a new drug modality. And so those companies for the discovery optimization, development of those mRNA drug, they need access to large numbers of different RNA sequences. And once we've made the DNA, you're basically 3 steps away from RNA in-vitro transcription, capping, purification. Boom, so we -- with the Factory of the Future, with the infrastructure we have, now we'll be able to launch new products where we'll be able to add more value to the DNA we have, make RNA, make fast gene that enables us to access the market, ramp revenue, ramp gross margin. And again, it's something that we could not have done in South San Francisco.

I mean I just wanted to touch on the comment you made on RNA, which is something relatively new in terms of what you've been talking about. But in terms of like helping us understand that opportunity, obviously, there's pretty robust mRNA pipelines going on. But maybe, do you have an idea of what that RNA market could mean to Twist?

And again, as a -- just to make sure there's no confusion, we will not make RNA that are used as a drug in production. We are -- we can make RNA to help in the R&D in the discovery development optimization of RNA sequences. I think it's still early days. So the market is probably not very big right now, but it's also not very big because the access to the variety of RNA sequences that are needed are not there. Nobody can make 10,000 RNA sequences routinely, quickly. And so there's a little bit of a chicken and an egg where the market is not yet big just because the supply is not there. But we see it as an opportunity for us. And again, it's not a massive investment of new CapEx. It's not. We can leverage the fixed cost investment that we've already made. And so that -- those are the kind of product line extensions that we like. And so it started with genes that were fragments and then clonal genes and then we did Maxiprep and then we had added IgG and now we're going to add RNA. But -- so again, it's an opportunity for us to get more wallet share of the customers. We -- again, leveraging our fixed cost investment, so it's directly accretive to the bottom line.

Got it. And then maybe talking a little bit more about Synbio. Last quarter, you highlighted and you just talked about the launch of fast genes in order to target that maker market, which I think you sized at like $1.4 billion, roughly. What do you see as your sort of go-to-market strategy and differentiating factors that Twist will be offering versus any kind of competitors? And by competitors, I mean essentially in-house production of that. What can you offer them that's differentiated? Do you think we're breaking in that market? And I guess the second part of the question is, once fast gene is launched, like how can we kind of measure your penetration into the gene maker market?

Yes, so a great question. So fast gene, so maybe to set the stage, right now, if you want to buy a bio gene, you can buy from someone like Twist. And we have competitors, but basically, you get DNA in 10 to 14 days. And our current differentiation is that we are $0.09 a base, and the competition is about $0.20 to $0.30 a base. So we're 2 to 3x cheaper for clonal perfect genes delivered in 10 to 14 days. The other differentiation that we have today is scale. If you have 5, 10, 20 genes, you can choose from a number of companies, again, we'll be cheaper. If you want 1,000 genes, we may be the only game in town because we are the only one with the high throughput to be able to make 1,000 genes in one shot. And then the DNA makers market, that $1.4 billion opportunity, those people, they don't buy gene because they can't wait 10 to 14 days. And there's 2 types of -- 2 categories of customers. One customer is our biopharma companies that maybe half of the volume comes to us and then the other half, they do themselves. They make the DNA themselves, they make the IgG themselves just because they need that DNA faster, and that speed is about 5 to 7 days. And if you have a number of scientists that are waiting for the material, it's more expensive to have those scientists wait than making them yourself. So that's the first category of customer. And then the second category are the academic customers, the post-doc and the grad student that have to go through the design, build, test cycle multiple times before they get to the publication and an extra 5 days for buying genes from us. Now if you have to do that 5, 10 times, that just elongates the time to get your answer. And so they go and they will clone this a night to not have to -- they clone this a night. And even if we gave them the DNA for free, they will not want it because, again, it's too slow. So those are the 2 customers that we can go after with fast gene. And that's what we'll offer in the fall where we'll make DNA in 5 to 7 days, which is the same time as if you clone it yourself. There is one more competition to consider, but it's not very compelling. If you want to buy DNA that is 5 to 7 days, you can. But right now, it's extremely expensive. It's a dollar base, and so it's a tiny -- the market of people that will pay a dollar base is tiny. And so that's not really the competition we're going to go after. I think, yes, we'll take that business, but we really want to go after the DNA makers that cannot wait 1 more day, 5 more days to get that DNA because their experiment is so urgent.

And the other approach would be, instead of outsourcing, is the gene makers buying technology that allows them to more efficiently produce their own DNA in-house. And I know there's a number of private companies that are doing this. To me, it doesn't seem like the scalability is there for what they need. So maybe talk about sort of the decision point for the gene makers to either buy-in technology to improve the process and still do it themselves versus outsourcing to Twist.

Yes. I mean, so there are a few companies that are either selling now a desktop or that are saying that they will sell a desktop in the future. And so it's a decentralized model. And I think when we talk to our customers, the only 2 things they care about when they buy DNA is, when do I get it and how much, right? If it were -- if desktop was faster and cheaper, they'll do desktop. If decentralized is faster and cheaper, they'll do decentralized. And yes, the desktop, they have a huge set of limitations. The first limitation is actually it's not faster. It's actually faster to buy from us. Second, like you said, the scale is not really scalable. If they are set up for making 32 genes, you get 32 genes. You want 320 genes, now you need 10 machines or you need to do 10 runs that's even longer. If you want one gene, well, too bad, you have to pay for 32 genes. So that scalability up or down is not there. The cost is also more expensive than if you buy from us. And then last, you get a gene that is non-clonal. So you -- and making a fragment is the easy part. The hard part is to clone that into a perfect gene. And so it's more expensive, it's slower, it doesn't scale and it's non-clonal. I mean, what's not to like?

So there, I mean you get one check to note -- one neck to choke with Twist. I mean, within 5 days, you get what you want. And if you don't get it, we'll deliver -- still deliver what you need. And the issue is if you were sitting there with a decentralized model, you've got a footprint to support their box and you've got all the surrounding labor, you've got all the chemicals associated with it, so it's -- it may be appealing in the short term. But as you scale, you're going to have to figure out how you outsource.

Got it. Maybe shifting to the NGS tools segment. A lot of this is tied to sort of the commercial ramp of your customer base, which at times can be lumpy and there's some transactional nature, too. But at the same time, I think Twist has done a really good job of creating a recurring revenue stream and attaching yourself to things like liquid biopsy and other areas where there's really good growth dynamics. Maybe talk a little bit about what you see as differentiating from the competition in the NGS tools market. It's a very good market with good margins, but there are competitors. Unlike synthetic biology where you kind of dominate that market and there's clear differentiation, on the NGS tools, there are other competitors. Maybe talk about how you've either gained share or some level of differentiation with your business that you think is setting you apart.

Yes. No, great question. So on the Synbio side, what we've talked about is mostly a price differentiation so far. And with fast gene, we'll add a speed differentiation. So that's the differentiation on Synbio. On NGS, it's a different positioning. It's a quality positioning. If you buy a kit from us or from our competition, IDT, Agilent, it's very clear, same price. However, the quality of the DNA is such that there is less noise in the sequencing. And so you have to sequence half as much when you use our chemistry than if you use the competition. And so what we sell to our customers in NGS is a COGS reduction of half, 50% of the sequencing costs going down. And so that's what we sell. And so that means that when they switch to us, either they keep the difference as margin or they lower the price of their test to be more easily reimbursed or get better commercial traction. So that's the base commercialization is the quality play. And it's not missing, it's -- now it's our customers. We have a YouTube video where the Broad Institute, they show the curve. And with Twist, it's half of the sequencing that you need. And so it's very well documented by now. The second differentiator -- so that's in production. Like every day, there is patients coming in. We have a -- we provide cost savings of 50% of sequencing cost per patient. Then even before that, as you're developing the test, what we provide is an extreme level of customization of what is the content of my assay. And with the competition, the way they make the DNA is a 1990s DNA synthesis technology. They have to -- they have a very hard time to make panels of small amount of patient testing, right? Because some customers who are doing the development, they just want to test 24 samples, 100 samples. And we can do that very quickly, very cost effectively. And so not only we have a quality advantage as you run the test in the end, but during the development of the test, we also have a very fast inexpensive customization. Then the last value proposition that we bring, back to the one neck to choke that Jim mentioned, because we come in with the probes, but we sell the full set of reagents from the sample to the sequencer. We sell the library prep, we sell the enzymes, be it the buffer or the adapter, the UDI, UMIs and the base. And so all the reagents you need from the sample to the sequencer comes from us. And so if there's something wrong that happens, again, you only have one neck to choke and that's mine. And that is a strong value proposition because if something goes wrong, there's no finger-pointing, and the customer really appreciates that.

One thing I wanted to ask you about that business specifically is we've seen some mixed results. From one of the competitors you mentioned, they've been having a more challenging time in the genomics business. And a lot of it has to do with sort of specific customer exposure in terms of the funding environment for certain diagnostic companies, yet you showed pretty strong results in the last quarter. Is this a share opportunity? Or is this a customer exposure difference? Maybe just talk about the trends that you're seeing within the NGS business relative to what might be out there in the market?

Well, across the board, we are just taking market share. So you mentioned in NGS, our competition, they seem to be struggling, but we are doing well, and that's because we are taking market share. In our Q1, we mentioned that we had a very significant win. So that's a customer that used to be with IDT, and now it moved to us. And so it's a plus one for us, it's a minus one for them. And it's very significant for us on the upside. The same thing is happening with -- on the Synbio side. On the gene side, one of our competitors mentioned that year-over-year, their gene business went down 12%, ours was up 30%. And so I'm sure for them, it looks like the market is bad, but I think it's -- we are taking market share. So in an environment where focus is on cash burn, getting to adjusted EBITDA breakeven, what we sell, again, in Synbio is more shots on goal for a fixed budget. In NGS, we sell a margin expansion. And so I think those are value propositions that resonate even more strongly in a funding environment that is difficult.

Yes, we continue to see a pipeline of large customers continue to scale and increase. And if you look at the cost of sequencing coming down, you're seeing more and more applications. And really, if you just go back to our basic value proposition where we save 50% in sequencing and from sample to sequence within a day, we have a very compelling solution. And as we continue to build on the platform, we're seeing our cost advantage continues to improve because we see our overall COGS per unit declining. So there's a self-fulfilling circle here. And particularly when we scale the Factory of the Future with fast genes, we'll get a leg up again.

And Jim, maybe with this transition to margins, you guys have given pretty specific margin guidance on sort of a per-segment basis. And I think some of the questions regarding the stock recently has been sort of the margin compression that we've seen. When does it trough? When does it start to recover? And what are sort of the normalized margins we should be expecting for each of these segments? Maybe help us just sort of define what you see the margin trajectory being and what sort of -- in the case that you can disclose it, though, you can talk about it, like what do you think the normalized margins are for each of these businesses we should be thinking about longer term?

Yes. So we saw our margins this last quarter, quarter 2, dropped about 30% from approximately 45% previous quarter. So why did the margins drop? We are bringing on the Factory of the Future, you're increasing your fixed COGS. This quarter, which is our June quarter, we're projecting gross margin to be approximately 30%. So what's happening in this quarter is we're starting to ramp the Factory of the Future. We still got the cost of San Francisco for part of the quarter. And as we continue to scale the business, our gross margin we're projecting for Q4, which is September quarter, is about 36%. So you're seeing 45% down to approximately 30%, 30% then up to 36%. And as we continue to scale the Factory of the Future, San Francisco costs have come down. We're really leveraging the Factory of the Future Portland footprint. And with the launch of fast genes, we're going to see higher contribution margin. And as we continue to scale the business for Q4 next year, we're going to get to adjusted EBITDA breakeven revenue for the core businesses of Synbio and NGS, it's annualized $285 million. And for Biopharma, we're targeting adjusted EBITDA breakeven at revenue of $40 million a year. As we continue to scale the business, our long-term targeted gross margin range of 55% to 60%. And that's driven from -- we have a platform, we get fixed cost, we continue to launch new products. And if you've been watching the sort of announcements, the new products we're launching have higher contribution margins than the current base business. So it's continuing to scale and continuing to launch value-added products into the marketplace.

Got it. Maybe in the minute we have left, there's a lot of other things that we didn't get to that I want to talk about. But maybe, Emily, you can kind of talk a little bit about what do you think is misunderstood about Twist. At this point, what do you think the market is missing?

And maybe one thing that maybe is a bit misunderstood is when we look at the market that we are serving, almost no customers want the same thing. So it's not the silver bullet that there's one product, everybody gets the same. It's not. People want different flavors of DNA. They want different fragments, different genes, they have different vectors. They want it dry, they want it wet, they want it re-suspended, they want it normalized, they want it with a glycerol stock in a special plate. And so that's really what we've built is a digital platform where we can [ like toggle it in ] any different combinations of products that you want. Not only we can book the order in our e-commerce, but we can produce it, ship that right perfect flavor of DNA to the right address at scale, low cost and with amazing differentiation. And so I think sometimes that's lost, and that really is the reason why we've been able to grow revenue very quickly is because we have this amazing technology that enables us to do that.

Perfect. Why don't we leave it there? Emily, Jim, thank you very much.

Okay. Appreciate it.

Thank you. Bye-bye.