Twist Bioscience Corporation (TWST) Earnings Call Transcript & Summary

Hi, everyone. My name is Jaden Rismay from the Life Science Tools & Diagnostics team here at JPMorgan. Thank you so much for joining us today. It's my pleasure to introduce Twist Biosciences. Today's session will be 40 minutes with roughly 20 minutes of presentation followed by 20 minutes of Q&A. If any of you in the room do have questions, feel free to either submit them via the portal or you can ping them to me directly. And with that, I'll turn it over to Twist, management team. Here you go.

Thank you very much for the invitation and the introduction. I am grateful to be here. I'll start by saying that I will be making some forward-looking statements. So for those of you who are unfamiliar with Twist, we are a company that writes DNA on the silicon chip. So the silicon chip is really the differentiated technology that enables us to miniaturize the chemistry and increase the scale, the throughput, lower the cost of making DNA. And even though we started with DNA, we have expanded to leveraging that technology to make RNA and protein. And the customer never sees the silicon. What we do is we combine all the products that serves all the application, all the customers at the same time on the same chip. So really, the chip is the key differentiation. In addition to that, we've layered on advantages on top of that silicon chip such as a real deep understanding of the market, a culture of innovation at Twist where we want to be #1 in the world where there is no #2. Now a technology that is proven at scale, products that are highly differentiation, and we are deploying commercial violence such that we are on our way to get to $1 billion revenue. Revenue and growth is very important. We are a growth engine. However, what we want is profitable growth. And so we are very close to our proximal goal of being adjusted EBITDA breakeven and we'll keep growing after breaking even. If I look at the financial performance over the last few years on the left, over the last 4 quarters on the right. What you can see, of course, we have had great growth, 28% growth last year with $330 million. I'll note that our fiscal year end in September. And as we grow the revenue, because of our business model, we have been able to increase our gross margin and over the last several -- four quarters or more, 75% to 80% of revenue growth drops to the gross margin line. And so we had a gross margin that starts with a 4. Of course, we're not happy with that. And we've guided that we'll pass Q4 of this year, over 50% gross margin. In addition, if you look at the OpEx line in the last 3 years, we've had very flat OpEx. So we are demonstrating financial discipline. And that's how we get to adjusted EBITDA breakeven around the revenue, keep fixed costs fixed dropped 75% to 80% to the gross margin line, disciplined OpEx and that's how we go forward. If we double click, over the last quarter since our IPO, you can see, again, strong revenue growth. initially mostly in SynBio and NGS and later on, I'll share some detail around those product groups. And we've added over the last few years, a biopharma service group as well. So when we think about growth at Twist, there's two kind of growth that we are focusing on. The first one is the short-term growth. And so we've launched product and we're leveraging our channels, digital and not. There is some political tailwind that we could benefit from since 100% products are made in the U.S.A. and our competitions are mostly based in China. And we have launched an express portfolio of product that has been a great driver of short-term growth. Now that's great but at the same time, short-term growth is the easy growth. The hard growth is what we call our long-game strategy. We have been very disciplined and, in a sense, courageous in making investment that we know will pay several years down the line. And from our Liquid Biopsy investment in 2017 to our portfolio for pharma companies in 2018 to our Factory of the Future that we opened in 2022. And those are investments that have paid off. And we have investment for MRD and Macroarray conversion that are in the growing stage. And so we have the vision, the grit, the commitment to make long-term investment and play that long-term strategy. Another differentiation that we have with our -- maybe our peers is that we have multiple product groups. And I'll spend a little bit of time on each of those. But all of those four product groups, they actually stand on the same strong condition of both proven technology, which is a silicon chip and a commercial execution that has been exceptional as we can see from the numbers. And we've executed our innovation road map extremely well. Here, I'm showing for each of the product group. Some of the innovation and products that we have launched on the top. And then that's not over. At the bottom, you can see that we have a very robust road map for future products. And those represent only a fraction of the products that are coming, but that is how we keep delivering growth quarter after quarter, year after year, is by launching highly innovative and highly differentiated products. So so far, I've talked about DNA and the -- our innovation DNA is driving growth. But in addition to that, very recently, we've added one more layer of innovation, and that is around enzymology. And at the start, I'll mention that it's not a huge investment. We've only invested about 2 FDAs. And our goal is not to be a company that sells enzyme. Our goal is to leverage our ability to make a very large amount of DNA sequences and leverage that ability and our knowledge in high throughput screening, high speed screening to develop our enzyme and is developing our own enzyme in the context of a workflow. And by doing that, we'll be able to deliver enzyme to the SynBio product line, NGS product line, biopharma product line, DNA data storage product line in a way that enhances the performance of the products and the performance of the applications. In addition to increase performance, we'll also use this disability to lower our cost and be a positive driver of gross margin. So really, to kind of summarize how often I am asked the question, what is the one thing about Twist that makes Twist special, that makes Twist do better than most of its peers and just not one, there's 9 on the screen. I'll just touch first -- a few ones. The first one is that we start with a really deep understanding of the customer needs. We make DNA. I'm a DNA chemist. Our CEO is a DNA chemist, our CTO is a DNA chemist where we really understand very deeply the chemistry and biology. The third and fourth is that we have really industrialized and digitized what we are doing. And for our customers, what that means is that if they have a scientific ideas, we can, in a way, the digital through e-commerce, we can transform that idea into another. And then we can use automation to produce the flavor of DNA or protein or RNA that they need to deliver it in their lab quickly and cost effectively. And number 6 is that we are playing for growth. As I mentioned, last year, we had $330 million revenue but we are building the $1 billion infrastructure that we'll need in a few years. And we're doing this with the relentless innovation in mind. We are doing hard things, and it's great because if it was easy, every competitors will be doing it. And so that focus on innovation is really what's helping us. But at the end of the day, last but not least, #9, it's really the culture that we've built at Twist that is sometimes overlooked, that's really driving value creation. So I've mentioned growth. So we will grow. And we find the question of what kind of capacity do we have? And so today, we are on track to having about $700 million plus of capacity. And so we are using less than half of our capacity. However, we are growing fast through ourselves. And so we are making sustainable level in investment in CapEx to add more machines, more automation so that we can grow that capacity without negatively impacting our gross margin. And by holding our fixed cost fixed, over the last few quarters, which we will continue, we have been able to, again, drop 75% to 80% of every incremental growth to the gross margin line. So that's really key to Twist. Looking ahead, on the next few slides, I'll talk very briefly of each of those four product lines. The first one is SynBio, where we mostly sell pharma companies. and academia, there's a lot of application, but it's mostly around drug discovery, around enzyme engineering, around CRISPR, the differentiation that we have on the right is all of the above in terms of speed, cost, scale, quality, customer experience, innovation. And then in addition to that, we also make out DNA in a way that's more sustainable, thanks to our minaturization. On the left, you can see that making a gene the regular way is equivalent to driving a car for 59 miles and driving a car -- making a gene the Twist way is equivalent to driving a car for 0.092 miles. So if you buy 1 gene a day, you save your commute away. In terms of how do we grow within SynBio, of course, we add more customers. But once we are in one -- once we are with one customer, we see a common pattern, whether it's for biopharma, industrial, chemical, academic, what we see is that we provide product at different level and value chains. We have genes, clonal genes, prep, IgG, we can even characterize the IgG. And we meet customers where they are. If they want a clonal gene, that's fine. But usually, they buy something and then they make something else. And so we have many cases where people used to buy clonal genes, but they will make IgG. And so we've been able to upsell them to IgG so that now they are IgG buyers. Moving to NGS. There, we mostly sell diagnostic companies. There is a wide range of tests that are diagnostic -- that our customers do, it can be a rare disease. It can be cancer detection, early cancer detection, therapy selection, it can be NIPT, can be MRD and we sell all the reagents from the sample through the sequencer. And so from a supply chain point of view, if there is something wrong, there is only one neck to choke, and that's mine. And it's a really great selling point. In terms of differentiation on the right with SynBio, our differentiation will lead with quality. The way we make DNA the way we make the tens of thousands, hundreds of thousands, millions of DNA probes that are needed to do the diagnostic test, the way we synthesize it, it's more uniform and that lowers the cost of sequencing. And typically, when customers switch from Twist, sorry, from a competitor to Twist, their sequencing build gets cut in half. And we also offer customization and comprehensive workflow. And on the left, we also have a very sustainable way of making DNA. And in blue, those are -- you need 6,000-plus tanker truck of gasoline to make our probes the old-fashioned way. But using the Twist approach, you only need 2.4 tanker truck and the 2.4 dots of -- the green dots are so tiny, you almost missed them. In terms of growth, the way it works with our NGS customers regardless of the application at the bottom from liquid biopsy to NIPT to MRD. It always starts with an R&D pilot. We go head to head with our competition, and usually, we win. And then the customers go through verification, validation, clinical studies. And then once they go to commercial ramp, every time their sales team sells a test, a patient gets tested and some Twist DNA gets used. And so we ramp our revenue with our customers. In biopharma. It's a slightly different dynamic there. We sell a service. And you -- for our customers, you give us a target. We will use the Twist products and we'll give you a drug. We'll give you a preclinical antibody lead. And to do that, we use in-house in vivo, in vitro AI. It's a very unique offering. It's very rare to have all three under one roof. And for us, the benefit is, when we talk to a customer, they could do the work themselves, but if they do the work themselves, they will buy $100 gene. Maybe they buy an IgG, in which case it's $300, $400, maybe they'll do a characterization, then it would be a $1,000. But if we can sell them a discovery service, then it's much bigger project and usually start at $250,000. And so this biopharma service is a great opportunity for us to ramp our revenue. And at this point, we are absolutely focused on the execution. There's a lot more growth we can deliver there. And so the product is great, the customers are happy, we just need to talk to more customers, find more customers and ramp sales. And I'll say it's also very strategic with SynBio because we talk to the same customer, pharma customer, either we sell them a product where they do the work themselves. Or we sell them a service where we do the work for them. And then last but not least, the fourth product group that we have is storing data in DNA. It's not commercial at this point. Right now, we are working on building a terabyte century archive. And so that -- what that means is that you'll be able to archive data for 100 years in DNA instead of on tape or hard drive. And the benefit is that it's super dense, it lasts forever. And what we are working on is making sure that the price point is competitive against tape or hard drive. So stepping back before I conclude over the next few slides, what we do at Twist, all come from the silicon chip. That is the original differentiation that we have. And on the silicon chip, we write oligos, we sell those oligos, we can assemble into genes, assemble in clonal genes, assemble them into IgG. We can assemble them in Variant libraries, that the SynBio product. From those libraries, from the IgG in the biopharma solution, we are able to make antibodies either through AI, in vivo or in vitro we can characterize it. And then in the green box, for NGS, we can amplify those oligos to make panel and then complement them with library prep. So as you can see, everything starts from the silicon chip. And when I come back next year, there will be more products that are being launched, and there'll be more arrows on the chart. So it may look complex, but it's really, what I really like about this approach is that it's very resilient. We have thousands of customers against hundreds of products and applications. And so what that means is that we can be very responsive to a customer's need. From a financial point of view, looking back at FY 2024. Top right, $330 million revenue -- in Q4, our gross margin was 45%, which was a great improvement over the previous year. And we ended the year with $276 million in the bank. Looking ahead, in terms of our guidance, we've guided $367 million to $377 million of revenue for the year. And then very importantly, as I mentioned, we have a great focus on driving improvement in gross margin, and we've guided that we'll have 50% gross margin, no later than Q4. And we will continue to shrink our losses all the way through adjusted EBITDA breakeven and beyond. So last slide, looking ahead, again, we start from understanding the market, leveraging innovation, our technology, strong differentiation in our product line and the infrastructure that we have built that is scalable and are commercial, really violent to deliver growing revenue, growing market share through adjusted EBITDA breakeven and beyond. Our goal is to be a growth engine and a profitable one. So with that, I think we are just on time. And thank you for your attention. We look forward to the Q&A. Thank you.

Thank you so much. So just starting off, '24 was a busy year for Twist from an operational standpoint. As you launched express genes and saw Factory of the Future become fully operational. So as we look to '25, what milestone should we expect? And what are you most excited about?

Well, I'll start the milestone is more of the above, right? So we want to grow revenue from the products that have been launched. So take advantage of the differentiation. Our R&D is extremely productive. And the products that they have launched last year is going to enable growth this year. So having a product is only one thing. You need to be good at everything. We need to be great at marketing. We have to be great at sales execution. Once you have the sales, you have to absolutely deliver on time and in full. And so what we want is we want to continue that, that's just amazing execution day in, day out in all the functions. And then with a look at the future. frankly, we can make our numbers in 2025 without R&D. We have all the products we need for 2025. But the R&D that we are doing now is we are planting the seeds for future growth in 2026 and beyond and doing all that with in mind absolute financial discipline, right? It's something that's very important to us. The fact that we've been able to keep OpEx flattish for the last 3 years shows our commitment to financial discipline. And so there is, the north star for us is getting to adjusted EBITDA breakeven without raising any equity.

All right. And just touching on that. In your presentation, you mentioned approaching the threshold for profitability and the factors contributing to reaching that adjusted EBITDA breakeven target. Could you provide some insight into the time line for achieving that target? And any color you have on those targets?

I'm happy to take that one. Thanks for the question. So when we provided guidance for 2025 and our last earnings release, we talked about getting to an exit point of 50% gross margin. and a continued sequential improvement in revenue every quarter and a full year of $367 million to $377 million in revenue. We're really confident in our guidance. and we see what is driving the path to profitability is that concept that Emily hit on as well already at about 75% to 85% -- 75% to 80% of the dollars from revenue growth dropped to the growth profit line. And so continuing what we've been doing for the last number of quarters since the launch of Factory of the Future up in Wilsonville, we expect to see that gross margin improvement with the revenue growth in the coming quarters.

All right. Perfect. And then just on some housekeeping. Last quarter, you said that you no longer be disclosing orders. Can you just provide some color on that -- what drove that decision? I believe you noted recently that shortening turnaround times was a contributing factor. Can you shed some more detail on that?

No, absolutely. And it's -- so when you look back in time in the history of Twist, when we first went out in an IPO, it was a fairly long time between the time we booked in order to actually shipping the product. It could be 30 or 60 days even. With all the improvements we see in the last couple of years, particularly with the express genes, we're now looking at that book-to-bill time lag of about 5 days. So really, the whole book-to-bill ratio concept is less of a valuable indicator of our performance. And so all of us at Twist are focused on the revenue, the gross profit and the path to profitability. With our North Star being we're not going to go back to the equity markets to raise capital, in advance of getting to the -- that path of profitability. I think in terms of why make the change now, I think it was that continued improvement in just on the express genes and knowing that we are past that point where we have a pretty solid book-to-bill ratio. We will still continue to disclose orders for the biopharma business, which has about a 90 to 2 quarter -- 90-day to 2-quarter lag in terms of rev rec.

All right. Thank you. And then just shifting on to like some new administration questions. Considering the concerns around NIH funding, what are your thoughts on academic funding? And what has the feedback been you've been receiving from customers so far?

Yes. Thanks for that. So we're -- we've really got very limited exposure to NIH, about low single-digit percentage of our business. But frankly, we think, obviously, we can execute into that opportunity a bit more effectively, either way in terms of funding, we were excited about the opportunity. And if the market is strong, and we now focus and drive into the opportunity, I think numbers come out. But the other side of that, if budgets tighten, Twist value proposition resonates stronger than ever before. It's more shots on goal for your budget. Your cost of your sequencing experiment comes down if you're on the platform. So we're bullish either way and really quite independent of that environment.

And then similarly, just considering the recent Bio Secure Act was included in the National Defense Act or the continuing resolution. And given the potential upside for you if it were to pass, has there been any changes in how customers risk are managing risk in their supply chains now that the bills consideration has been delayed.

Yes. Thank you for the question. And so I'll always start by saying that we'll win by winning. So our products compared to our competitors. -- they are better, they're faster, they're cheaper. To the extent that -- and the first thing I'd say is that biosecurity does not apply to the DNA synthesis. It's about biomanufacturing, it's about genetic analysis. And so even if it pass or it doesn't pass, it does not impact the DNA synthesis. However, the talk around BIOSECURE has really raised the awareness of our customers around their supply chain and where they procure their DNA. And when BIOSECURE was first introduced, no, there were some thought and discussion about it, but I'll say that now the majority of our large customer are really thoughtful about, if not switching at least thinking about their supply chain for DNA. And so it's hard to quantify exactly what part of the growth came from that, but it is definitely a tailwind for us. And to the extent that there is tariffs that are applied when the new administration comes in, that Oslo will be another tailwind for Twist. But to be clear, our products are better. We're going to win by winning.

And then just shifting over to SynBio. Can you walk us through the traction you've seen with Express Genes launch and the associated gross margin lift? How much of the market is looking for an Express product?