Alpha Teknova, Inc. (NASDAQ:TKNO) Q4 2023 Earnings Call Transcript
Alpha Teknova, Inc. (NASDAQ:TKNO) Q4 2023 Earnings Call Transcript March 12, 2024
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Operator: Hello, and thank you for standing by. Welcome to Teknova Fourth Quarter 2023 Financial Results Conference Call. Operator Instructions] I would now like to hand the conference over to Jennifer Henry. You may begin.
Jennifer Henry: Thank you, operator. Welcome to Teknova's Fourth Quarter and Full Year 2023 Earnings Conference Call. With me on today's call are Stephen Gunstream, Teknova's President and Chief Executive Officer; and Matt Lowell, Teknova's Chief Financial Officer, who will make prepared remarks and then take your questions. As a reminder, the forward-looking statements that we make during this call, including those regarding business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning these risk factors is included in the press release the company issued earlier today, and they are more fully described in the company's various filings with the SEC.
Today's comments reflect the company's current views, which could change as a result of new information, future events or other factors, and the company does not obligate or commit itself to update its forward-looking statements, except as required by law. The company's management believes that in addition to GAAP results, non-GAAP financial measures can provide meaningful insight when evaluating the company's financial performance and the effectiveness of its business strategies. We will therefore use non-GAAP financial measures of certain of our results during this call. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this afternoon, which is posted to Teknova's website and at www.sec.gov/ edgar.
Non-GAAP financial measures should always be considered only as a supplement to and not as a substitute for or as superior to financial measures prepared in accordance with GAAP. The non-GAAP financial measures in this presentation may differ from similarly named non-GAAP financial measures used by other companies. Please also be advised that the company has posted a supplemental slide deck to accompany today's prepared remarks. It can be accessed on the Investor Relations section of Teknova's website and on today's webcast. And now I will turn the call over to Stephen.
Stephen Gunstream: Thank you, Jen. Good afternoon, and thank you, everyone, for joining us for our fourth quarter and full year 2023 earnings call. Teknova is a leading producer of critical reagents for the life sciences industry that accelerate the introduction of novel therapy, vaccines and molecular diagnostics that will help people live longer, healthier lives. We manufacture high-quality customer agents with short turnaround times and are able to scale with our customers as they advance their products from discovery to commercialization. In 2021, we presented a strategy to position the company for long-term growth by attracting and on-boarding custom RUO and GMP customers developing novel therapies, vaccines and diagnostics.
I'm pleased to say that now, despite a persistently adverse market environment since early 2022, we have executed on that vision and see early indicators of return on our investments. Most notably, we have grown our clinical customer base with annual Clinical Solutions revenue greater than $5,000 from 13 in 2020 to 34 in 2023. 28 of our clinical customers are biopharma-related, 18 of which operate in the cell and gene therapy market segment. In fact, we believe three of our cell and gene therapy customers intend to purchase from us for Phase III clinical trials in 2024. While executing our growth strategy, we also took care to nurture our diversified picks and shovels business that supports the broader life sciences industry. Our base of over 2,500 customers not only creates additional revenue opportunities, but also serves as a solid foundation in challenging market environments.
Over the past year, we have improved our customer on-time delivery metrics and raised our customer Net Promoter Score to industry-leading levels. We also enacted measures in early 2023 to increase production efficiency by eliminating low-value SKUs, which resulted in the highest average annual revenue per customer in our Lab Essentials product category in the last three years. In addition, we again demonstrated the stickiness of our business with our customer retention rate, which remained greater than 95% in 2023 for customers spending more than $10,000 annually with us. While we are excited about our progress, we expect 2024 to continue to be challenging with no or modest revenue growth year-over-year. This is in part due to a Clinical Solutions customer shipment in the second quarter of 2023 that was unusually large, making for a difficult comparison.
We also expect that early-stage biotech customers will continue to preserve capital. Considering this backdrop, we made the difficult decision to reduce expenses through personnel and other cost reductions in mid-January of this year, which we believe will deliver approximately $8 million in OpEx savings on an annualized basis beginning in the second quarter of this year. The resulting expense reduction will put us in a stronger cash position and lower our adjusted EBITDA breakeven revenue to between approximately $50 million and $55 million annually. We carried out our January reduction in force, which affected approximately 15% of our associates in a way that preserved our core differentiating ability to produce custom research and clinical grade reagents in weeks instead of months.
Specifically, we removed layers of management, R&D roles associated with novel product introduction and roles supporting custom production automation. I want to take a moment here to thank all of those individuals affected directly or indirectly by our RIF. Many of these talented associates were critical to building the infrastructure and foundation we have today and positioning Teknova for long-term success. We remain optimistic about our long-term prospects and expect 2025 will be the year in which many of our investments will produce even greater financial returns. In the near term, we will continue to onboard new target customers to advance our core strategy, while continuing to manage expenses aggressively. I will now hand the call over to Matt to talk through the financials.
Matthew Lowell: Thanks, Stephen, and good afternoon, everyone. Results for the fourth quarter of 2023 from a revenue perspective were similar to prior year as anticipated given ongoing challenges in our markets over the past year. Overall, we delivered solid financial results for the full year of 2023. On to revenue. Total revenue for the fourth quarter of both 2023 and 2022 was flat at $7.9 million and $36.7 million for the full year 2023, an 11% decrease from $41.4 million for the full year 2022. Lab Essentials products are targeted at the research use only or RUO market and include both catalog and custom products. Lab Essentials revenue was $6.7 million in the fourth quarter of 2023, a 4% decrease from $6.9 million in the fourth quarter of 2022.
For the full year, Lab Essentials revenue was $28.8 million in 2023, a 9% decrease from $31.8 million in 2022. The decrease in Lab Essentials' revenue for the full year was driven by a 13% decrease in the number of customers, 2,822, primarily resulting from an SKU rationalization program that was somewhat offset by a 5% increase in the average revenue per customer to $10,206. As a reminder, we also had a large customer migrate from Lab Essentials in 2022 to Clinical Solutions in 2023, which lowered the reported Lab Essentials growth rate. Clinical Solutions products are made according to good manufacturing practices, or GMP, quality standards and are primarily used by our customers as components or inputs in the development and manufacture of diagnostic and therapeutic products.
Clinical Solutions revenue was $0.9 million in the fourth quarter of 2023, a 14% increase from $0.8 million in the fourth quarter of 2022. For the full year, Clinical Solutions revenue was $6.7 million in 2023, a 20% decrease from $8.4 million in 2022. We added Clinical Solutions customers in 2023, growing from 25 customers in 2022 to 34 that spend more than $5,000 annually. Average revenue per customer in 2023 decreased 41% to $198,000. We expect revenue per customer to increase over time as customers ramp up their purchase volumes. However, this metric can be affected by the mix of newer clinical customers who typically order less. Just as a reminder, due to the larger average orders in Clinical Solutions compared to Lab Essentials, there can be quarter-to-quarter revenue lumpiness in this category.
To the income statement. Gross profit for the fourth quarter of 2023 was $1.3 million compared to $2.1 million in the fourth quarter of 2022 and $10.3 million for the full year 2023 compared to $17.5 million for the full year of 2022. Gross margin was 17.0% in the fourth quarter of 2023, which is down from 26.7% in the fourth quarter of 2022 and 28.1% for the full year 2023, which is down from 42.2% for the full year 2022. The decrease in gross profit percentage for the fourth quarter 2023 was primarily driven by increased overhead costs that were partially offset by reduced headcount. However, gross margin for the fourth quarter 2023 was similar on a sequential basis from the third quarter of 2023. The decrease in gross profit percentage for the full year 2023 was primarily driven by the decrease in revenue and the associated lower absorption of fixed manufacturing costs and to a lesser extent, by increased overhead costs that were partially offset by reduced headcount.
Operating expenses for the fourth quarter of 2023 were $12.2 million compared to $16.3 million for the fourth quarter of 2022. Excluding the nonrecurring charges of $0.3 million related to a loss contingency accrual, the noncash trade name impairment charge of $2.2 million in the fourth quarter 2023 and the noncash long-lived asset impairment charge of $4.2 million recorded in the fourth quarter of 2022, operating expenses were down $2.4 million. The decrease was driven primarily by reduced headcount and spending, in particular in professional fees. Operating expenses for 2023 were $45.9 million compared to $67.1 million in 2022. The decrease was primarily related to a onetime $16.6 million noncash goodwill impairment charge, coupled with reduced headcount and spending in particular, professional fees.
Net loss for the fourth quarter 2023 was $10.7 million or $0.26 per diluted share compared to a net loss of $13.3 million or $0.47 per diluted share for the fourth quarter 2022. Net loss for the full year 2023 was $36.8 million or $1.16 per diluted share compared to a net loss of $47.5 million or $1.69 per diluted share for the full year 2022. Adjusted EBITDA, a non-GAAP measure, was negative $5.4 million for the fourth quarter 2023 compared to negative $8.1 million for the fourth quarter 2022. Adjusted EBITDA for the full year 2023 was negative $19.2 million compared to negative $21.9 million for the full year 2022. On to cash flow and balance sheet. Capital expenditures for the fourth quarter of 2023 were $0.3 million compared to $4.7 million for the fourth quarter of 2022.
Capital expenditures for the full year 2023 were $7.9 million compared to $28.1 million for the full year 2022. This marks the sixth straight quarter of sequential decreases in capital expenditures and we have now completed the initial capital investment necessary to utilize our new manufacturing facility. Free cash flow, a non-GAAP measure, which we define as cash provided by or used in operating activities less purchases of property, plant and equipment, was negative $3.1 million for the fourth quarter 2023 compared to negative $12.8 million from the fourth quarter 2022. Free cash flow for the full year 2023 was negative $26.6 million compared to $55.5 million for the full year 2022. This decrease compared to prior periods for both the quarter and full year was due to lower cash used in operating activities and a decrease in capital expenditures.
Turning to the balance sheet, as of December 31, 2023, we had $28.6 million in cash and cash equivalents and $12.1 million in gross debt. For the outlook, turning to our 2024 guidance and outlook, we are providing 2024 total revenue guidance of $35 million to $38 million. At the midpoint, this implies a revenue forecast that is approximately flat compared to 2023. We are currently expecting approximately 10% growth in Lab Essentials revenue with the difference coming from Clinical Solutions revenue. While we are encouraged by improvements in the sales funnel, our order book and the quality of ongoing discussions with customers, the underlying market environment remains challenging, in particular, with constrained spending by our early-stage biopharma customer segment.
As Stephen explained, in January of this year, we decided to pare back certain investments and carried out a reduction in workforce, including management roles. The onetime cost of severance and related benefits associated with this RIF was approximately $1.2 million, which will be recognized in the first quarter of 2024. We do not believe these changes will affect our ability to grow revenue and meet our financial and strategic goals. The company posted operating expenses, excluding nonrecurring charges, below $10 million for the third quarter in a row. That reflects steps we took during 2023 aimed at reducing operating expenses, which resulted in total annualized cost savings of more than $9 million compared to the fourth quarter of 2022, excluding nonrecurring charges.
In total, the savings generated by the most recent RIF and other associated cost saving measures are expected to reach approximately $8 million on an annualized basis, which builds upon the savings realized in 2023. Similarly, the company saw a reduction in free cash outflow during the fourth quarter of 2023. This marks the sixth straight quarter of lower cash outflow. In fact, the company is pleased to report that free cash outflow for the full year 2023 of $26.6 million was significantly below our initial guidance of approximately $30 million. As we turn to 2024, the company expects free cash outflow of less than $18 million. Depending on our top line growth in 2025, we may be able to achieve positive adjusted EBITDA and free cash flow during that year by continuing to manage our costs and with access to a modest amount of additional capital, if necessary.
We are pleased to announce a new amendment to our credit facility. The update primarily reflects changes to our minimum net revenue covenants, minimum cash covenants and restrictions on access to our revolver. The new lower minimum net revenue covenants, including a year-end level of $34.0 million for 2024 should give us improved operating flexibility. Our minimum cash covenant is increasing marginally from $9 million to $10 million. Lastly, we will now be able to utilize our revolver as soon as trailing 12-month revenue exceeds $38 million, down from a trigger of $45 million previously. We believe that we have already made the step-up investments needed to execute our growth strategy, including our new GMP production facility. We believe there is significant margin expansion potential when top line growth resumes.
Due to the high percentage of fixed costs associated with our business in both COGS and OpEx, we estimate that each additional dollar of revenue drops through at a marginal rate of profitability of at least 70%. In short, we are excited about the future and the company's competitive positioning in a market with attractive fundamentals. With that, I'll turn the call back to Stephen.
Stephen Gunstream: Thanks, Matt. Overall, we were pleased with our fourth quarter and full year 2023 performance and the progress we made against our strategic priorities. We believe the long-term outlook for our end markets remains positive, and we are committed to executing on our strategy to help customers accelerate the introduction of novel therapies, diagnostics and other products that improve human health. We will now take your questions.
Operator: Operator Instructions] Our first question comes from the line of Mark Massaro with BTIG. Your line is open.
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