Q4 2023 Rapid Micro Biosystems Inc Earnings Call

Participants

Mike Beaulieu; VP, IR & Corporate Communications; Rapid Micro Biosystems Inc

Robert Spignesi; President, Chief Executive Officer, Director; Rapid Micro Biosystems Inc

Sean Wirtjes; Chief Financial Officer; Rapid Micro Biosystems Inc

Dan Arias; Analyst; Stifel Financial Corp.

Steven Mah; Analyst; Cowen Group, Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by. My name is Natalie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rapid Micro BioSystems Fourth Quarter and Full Year 2020 earnings. (Operator Instructions) I would now like to turn the conference over to Mike Beaulieu, Investor Relations. Please go ahead.

Mike Beaulieu

Good morning and thank you for joining the Rapid Micro BioSystems Fourth Quarter and Full Year 2023 earnings call. Joining me on the call are Rob Cygnus, the President and Chief Executive Officer, and Sean Ortiz, Chief Financial Officer. Earlier today, we issued a press release announcing our fourth quarter and full year 2023 financial results. A copy of the release is available on the Company's website at Rapid Micro bio.com under investors in the News and Events section.
Before we begin, I'd like to remind you that many statements made during this call may be considered forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements, including but not limited to, statements relating to rapid microbiomes financial condition, anticipated future cash usage and cash runway guidance for 2024, including revenues, expenses, gross margin, system placements and validation activities, expectations for and planned activities related to the Company's business development and growth customer interest and adoption of the Growth Direct system statements regarding the planned launch and commercialization of rapid sterility and the potential impact of macroeconomic uncertainty on rapid Micro's business, actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors For a list and description of the risks and uncertainties associated with rapid Micro's business, please refer to the Risk Factors section of our most recent annual report on Form 10 K filed with the Securities and Exchange Commission as updated from time to time in our subsequent filings with the SEC. We urge you to consider these factors, and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance and this conference call contains time-sensitive information and is accurate only as of the live broadcast today, March first, 2024. Rapid Micro disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise.
And with that, I'll turn the call over to Rob.

Robert Spignesi

Thank you, Mike. Good morning, everyone, and thank you for joining us. I will begin this morning's call with an overview of our fourth quarter 2023 performance and highlights followed by a review of our growth strategy for 2024. I'll then turn the call over to Sean for a more detailed review of our financial results and outlook. Total revenue was $6.3 million in the fourth quarter, representing growth of 45% and $22.5 million for the full year 2023, representing growth of 31% compared to the prior quarter and year, respectively.
We placed six Growth Direct systems in Q4 for a total of 16 for the year. These results exceeded our guidance for both the quarter and the year and reflect strong, consistent commercial execution and the robustness of our growth strategy. Also in our fourth quarter results, we were pleased to report that we made significant progress and achieved near breakeven gross margins, which we believe represents a positive inflection in our financial profile.
This performance is a result of the efforts of our manufacturing operations and service teams who have been aggressively focused on reducing costs, enhancing efficiency and productivity. On a cumulative basis, through the end of 2023, we have placed 141 Growth Direct systems globally, including 121 fully validated systems and have shipped nearly 5 million consumables.
Our customer base now includes 70% of the global top 20 pharmaceutical manufacturers and many of the largest global CDMOs, including Samsung Biologics, who recently selected the Growth Direct system to automate their critical microbial quality control testing. We have also placed Growth Direct systems with 100% of the manufacturers of commercially approved CAR T therapies. Manufacturing of these life-saving therapies requires accuracy for automation and fast turnaround, which are hallmarks of the Growth Direct. We are very proud to be the trusted partners with these leading companies for the mission critical microbial quality control processes.
As we turn to 2024. Our priorities remain consistent with 2023. First, accelerating growth. Direct system placements remains our highest priority. Our second priority is improving gross margins and driving towards profitability. Our third priority is developing and commercializing innovative new products, which in the context of 2024 means achieving the successful launch and commercialization of rapid sterility. And finally, we remain focused on prudently managing our cash success in achieving our 20 top24 priority of accelerating system placements is a function of the size and quality of our sales funnel, which remains many multiples of our forecast during 2023, our system placements were a balanced mix of new versus existing customers and single versus multi-system orders.
We also achieve a balanced mix of sales into biologics cell and gene therapies and small molecules, which reflects a global market opportunity. Accelerating system placements is also a function of the coverage and capability of our commercial organization where we have been investing in our global sales and marketing teams as well as critical enablement activities such as sales tools and training. We exited 2023 with solid momentum, including two thirds of 2023 systems being placed in the second half of the year and productivity from all three of our sales regions.
And finally, we continue to leverage our strong relationships and a strong track record with our customers through reference selling as we strive to make it go directly industry standard for MQC. testing, all of this gives us confidence in our ability to execute against this priority and meet or exceed our 2024 targets.
Turning to gross margin improvement, we were pleased with the progress we made during 2023 to take cost out of our product manufacturing processes and operate more efficiently and in the fourth quarter began to see some of the early benefits of these actions dropped down the P&L. In fact, our cost of revenue in Q4 decreased by 7%, while revenue increased by 45% compared to the same period last year driving gross margin to near breakeven. We think this is the start of a positive inflection point and demonstrates a significant leverage in our business model.
Looking ahead to 2024. We expect to achieve positive gross margins for the full year as we further scale our business and continue to execute against our cost reduction, efficiency and productivity programs.
Our third priority is developing and commercializing new products to drive growth and provide additional value to our customers. In early January, we announced the upcoming availability of our rapid sterility applications for the Growth Direct system.
As we highlighted in our January press release, our rapid really application can deliver time to organize and detection as little as 12 hours and final time to result and as little as one to three days. These data represent a significant improvement over widely used traditional test methods, which generally require a 14 day endpoint incubation and provide compelling differentiation when compared to current products on the market. Rapid sterility, as with our environmental monitoring, water and bioburden applications offers a compelling value proposition for our customers that includes faster product release more accurate results, improved data integrity, full automation and consistency across their manufacturing networks. This is a breakthrough technology, and we are excited about expanding the direct platform with this new application later this month, we plan to participate in the PDA annual meeting where we will give a technical presentation on our rapid sterility application and engage with both existing and prospective customers we remain on track for a midyear launch and look forward to providing you with updates in the coming quarters.
Wrapping up my prepared remarks, I wanted to share my latest thoughts on Rapid Micro and the growth direct technology. I spent several weeks in January and February connecting with customers.
Now as reminded of the many strong partnerships we have established, I remain confident in the market opportunity and customer demand for the Growth Direct and our strong service and support offerings. These are truly value partnerships within a critical part of our customers' quality and manufacturing processes as we strive to make the growth around the industry standard. We will continue to expand our offerings with innovative products such as rapid sterility and as our platform expands, we will continue to further embed our products and services within our customers' critical quality and manufacturing processes. Our customers recognize a compelling value proposition to automate their QC labs with a product that supports global regulatory requirements.
Turning back to our strategic outlook, we are excited to build upon our many achievements in 2023. We have a clear set of priorities and are building a track record of strong and consistent execution and innovation. We are confident we have the right strategy and will leverage our successes in 2023 on our path to increasing shareholder value.
And with that, I'll now turn the call over to Sean to discuss our fourth quarter performance and details for our 2024 guidance.
Sean, thanks, Rob.

Sean Wirtjes

Good morning, everyone. I'll start my comments today with a review of our fourth quarter 2023 results and then discuss our 2020 outlook. Q4 revenue increased 45% to $6.3 million compared to $4.4 million in Q4 2022. During the fourth quarter, we placed six Growth Direct systems compared to two in the fourth quarter last year. The six systems this quarter represent the most replaced since Q3 2021. We also completed nine validations in the quarter.
Product revenue, which is comprised of systems and consumables increased 45% to $4.1 million in the quarter, compared to $2.8 million in Q4 last year. The growth in product revenue was primarily driven by the higher number of systems placed in the quarter. Consumable revenue in Q4 increased on a year-over-year basis but was down slightly on a sequential basis due mainly to the timing of customer shipments. Service revenue also increased 45% to $2.2 million in the fourth quarter compared to $1.5 million in Q4 last year. The increase was driven by a higher level of validation activity and higher recurring service contract revenue.
Fourth quarter recurring revenue, which consists of consumables and annual service contracts, increased 13% to $3.3 million compared to $2.9 million in Q4 last year, driven by growth in both consumables and service contract revenue. Nonrecurring revenue was $3.0 million in Q4 compared to $1.5 million in the prior year quarter.
Turning to gross margins, product margins were negative $0.6 million in Q4 compared to negative $2.4 million in the fourth quarter last year. The improvement was attributable to higher product revenue, higher production volumes in both systems and consumables and benefits from actions taken by the company to lower product costs and increased manufacturing efficiency, including enhancements made to our automated consumables manufacturing line earlier in the year.
Service margins were positive at approximately $0.4 million in Q4 compared to negative $0.2 million last year. Higher revenues and increasing productivity drove the improvement in service margins in the quarter. On a combined basis, our fourth quarter gross margin was near breakeven at negative $0.2 million or negative 3% of revenues, representing a 24 percentage point improvement on a sequential basis and a 56 percentage point improvement compared to the fourth quarter last year.
Looking at this margin improvement another way, our total revenue increased 45% in the fourth quarter, while our total cost of revenue decreased 7% over the same period, driving a significant improvement. Looking forward, we expect continued margin improvement in 2024 and beyond as we continue to grow revenues reduce product costs, drive higher manufacturing efficiency control, manufacturing overhead costs, and increased service productivity.
Continuing down the P&L, total operating expenses were $12.0 million in the fourth quarter, consisting of $3.2 million in sales and marketing, $3.3 million in R&D, and $5.5 million in G&A. This compares to total operating expenses of $14.7 million in the fourth quarter of 2022. The decrease was largely due to nonrecurring costs incurred in the fourth quarter last year associated with the strategic review process initiated by our Board of Directors in that period as well as cost savings in Q4 of this year, resulting from the restructuring plan implemented in August 2022.
Net loss was $11.2 million in Q4. This compares to a net loss of $16.4 million in Q4 last year. This improvement was largely due to higher revenue, better gross margins, and lower operating expenses, showing the broad financial benefits of the progress we made against several of our strategic focus areas in 2023.
Net loss per share was $0.26 in Q4 compared to net loss per share of $0.39 in the prior year quarter. With respect to noncash expenses and capital expenditures, depreciation and amortization was $0.8 million. Stock compensation expense was $1.0 million and capital expenditures were $0.4 million in the fourth quarter.
I'll now turn to our 2024 outlook where my comments will primarily be focused on the full year given current market conditions, our outlook reflects some uncertainty related to customer budgets and the timing and scale of customer purchase decisions.
With that context, we expect total revenue to be at least $27 million for the full year 2024, which assumes we will place at least 20 systems. This implies year-over-year revenue growth of at least 20%. Assuming typical seasonality with revenue and placements stepping down from Q4 to Q1 on a sequential basis, we expect total revenue of at least $5.5 million in Q1, which assumes at least three system placements. We then expect revenue placements in Q2 and Q3 to be higher than Q1 and then peak in Q4. While we anticipate launching Growth Direct rapid sterility by midyear, our guidance assumes any contribution from this new offering will be modest in 2024. Given our typical system sales cycle.
Looking at consumables, we expect revenue to increase sequentially in Q1 compared to Q4 and then continue to increase sequentially each quarter over the balance of the year as more systems complete validation and ramp toward routine use. With respect to service, we expect revenues to be between $2.0 million and $2.5 million each quarter with variability primarily driven by the timing of validation activities, we expect to complete at least 16 validations in 2024 with at least three in the first quarter.
Turning to gross margins, we expect Q1 margins to be lower than Q4 due to the seasonality impact I mentioned earlier. Thereafter, based on our revenue outlook, the benefits from ongoing cost reduction and manufacturing efficiency initiatives and products and increasing productivity and service, we expect our gross margin percentage to improve, but still be negative in Q2 and then be single-digit positive in Q3 and Q4 as well as for the full year.
We expect service margins to be positive in all four quarters and for product margins to improve each quarter as the year progresses. We expect operating expenses to be in a range of $48 million to $52 million in 2024, with depreciation and amortization of approximately $3 million, stock compensation of approximately $4.5 million, CapEx of approximately $3 million, and other income, which is comprised primarily of interest income, of approximately $3 million in 2024.
Finally, we expect cash burn of roughly $40 million in 2024, providing cash runway at least into the second half of 2026. This assumes a meaningful benefit from net working capital, including inventory reductions. That concludes my comments. So at this point we'll open the call up for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Dan Arias, Stifel.

Dan Arias

Good morning, guys. Thanks for the questions here. Sean, maybe just to start on the gross margin improvement, how much of what would get you crossed over into positivity this year is so to speak in the bank, all the efficiency improvements that you made last year, the cost work that you did versus things that have yet to be done or that depend on volumes for the year.
And just as a follow-up to that, I think you said down first half of the year and then single digits on up in the back half of the year. Does that get you up for the 1st year? And if you made that comment, I apologize. But just my rough glance at the model doesn't necessarily suggest that that could be the case?

Sean Wirtjes

Yes, start. I'll start with your second question, Dan. So yes, the guidance is margins. We think margins will be a little bit lower in Q1 compared to Q4. It get better, but still be negative in Q2, but then flip positive in Q3 and Q4. And for the full year, we expect it to be positive. So hopefully, that cadence makes sense their volume as a player in that. But there's a lot of other things at play within that cadence as well.
So I think that kind of segues to your first question. So I think we view there are some things like the automation improvements we made that are baked in. Your volume is important and then we there's ongoing work going on around the other things that we talked about, service productivity, cost down in products, other things we're doing around efficiency and the increased throughput in terms of manufacturing. So it's a mix, but there definitely are some components of that are things that we've now got baked in that are going to help support better performance on margins and move us positive in 2024.

Dan Arias

Okay, helpful. And then maybe just on the revenue side, annualized pull-through per systems, two questions there. Obviously, the new systems that are getting installed, alter the calculation a bit. But if you looked at sort of same-store sales, what you had installed at the end of last year, are you confident that the average pull-through level will be up this year.
And then on the consumables growth rate that we should be thinking here, 23% recurring revenue growth in 2023, how doable is a number like that this year, obviously you're growing the installed base. So that should help.

Sean Wirtjes

I think I think the implied growth rate on recurring is going to be a little bit lower, and I'll talk about that a little bit. I mean if we focus on Q4 performance first, we guided that we would be down sequentially mainly due to timing of shipments. And that's what we saw. And I think we it consumables, we are right, we have new systems coming online. The number we track, as we've talked about in the past is validated systems. And really we still have a little bit of work to do typically once we get there to get people in routine use. So we've got to manage that.
Well, I think there's another important factor here, which we view as transient, but it's important to understand kind of where we're going to be because I'd say maybe to answer one of your questions there, I would look at this year as being in terms of pull through per average validated system. Our consumables revenue per average validated system being relatively flat with last year. And it's really there's one primary factor that's driving that. We had a is one of our most significant customers let us and you know, in mid 23 that they were actually selling a site that had multiple high-volume systems in it. So as we made our way through the second half of 23, we started to feel the impact of that as those systems came line, that is a contributor to what we're seeing in most recent quarters, and that is still the case today.
Now the good news for us. And I think a reason for optimism and something we view as upside as the new owner of that site is communicating that they do plan to bring some of those systems, not all of them, but some of them back online later in 2024. So that actually having some of the some of our highest volume systems in the world go from kind of full pull through to offline. It is something that's important to think about as you think about the guidance that I just talked about.

Dan Arias

Okay. Maybe just last quick one since it feels like my time here, just on the validation timelines, do you think as an average 2024 validation timelines will be shorter than they were in 2023? Thanks.

Sean Wirtjes

Yes, I think we've talked about project RAPID in the past and the work we're doing to shorten that process up. But we saw good progress on that in 23. And I would expect we'll see incremental progress on that in 24. So yes.

Operator

Tejas Savant, Morgan Stanley.

Hi, this is Jason on for Tejas. Congratulations on the quarter and thank you for taking my questions. So just some questions related to sterility. Could you elaborate on the competitive landscape of Pirelli versus other competitors in the space? And with the launch, do you anticipate the new offering opening up opportunities with new customers or expanding placements with existing customers.
And I guess on a related note, do you anticipate that you'll be building out a sales force to support us through early sales? Or would you leverage your existing sales force? Thank you.

Robert Spignesi

Thanks for the question. It's Rob. So I think it was three in there. The first one is the competitive landscape of. So as with our other applications, the the top the top competitor is the legacy method and sterility is that being said, there is what I what I would call on increased competitive activity from other suppliers of rapid sterility applications in the market versus our other applications. So it is a it is a market where there are some incumbents offering, I'll call it technology enabled on rapid solutions. That being said, we knew that coming into this market and we specifically developed and designed the system to offer a compelling differentiation clearly against the legacy and traditional method but also against the current, I'll call it technology-enabled message and we like how we compare against the, I'll call it, the other offerings in the market as I mentioned in my prepared remarks.
The second question with regard to new and existing customers, I think the answer is both. I think the exciting thing about sterility is that customers are excited about it first and foremost in our existing customer base. So the majority of our current customers are small molecules. I mean, I'm sorry, large molecules to include biologics and cell and gene, but really will also get us more deeply into small molecule injectable manufacturing as well. So to expand, expand effectively on our our our opportunity and a lot of ways and move our sales team more squarely into into those segments.
And also with regard to sales team specifically, we primarily are planning on leveraging our current our sales team, which we now have up and running in all three regions. That being said, we will have a dedicated sterility, I'll call a group of TBD on the actual head count in that, but the specialists focused on on assisting in enabling our sales team with some of the technical elements and application elements of the three really specific activities.

That's helpful. And then if I could squeeze in a question. And so with the reality development nears final stages, what are the next areas of product or workflow development that could it enhance the customer experience on first direct? Thank you.

Robert Spignesi

Yes. So on from a high level, we view the growth direct as a platform technology. And generally, our product strategy is to continue to influence the workflow and around our platform technology. So we we automate the microbial quality control process. We detect contamination. We enumerate contamination, and we do that now with sterility being launched or to be launched midyear across the primary microbial quality control tests of environmental monitoring, water, bioburden and soon sterility on. We also envision over time going downstream and providing more information to customers with regard to the organisms that they're picking up and detecting in their in their workflows.
I think molds, the more technology we released last year is a really good example of that, and there could be extensions around that. And also data. We feel we're generating enormous amounts of our digital data for customers. And this is the first time that these labs have had access to this kind of data and how can we help customers use manage look into their data and looking at our operations, not only on a site basis. But on a global basis, our goal is to become the new quality control infrastructure. And as we grow our our site network globally, we are on We're basically creating a new microbial quality control infrastructure for our customers.
And with that, what kind of services and insights can we provide just given the enormous amount of data that we're we're generating and now this is a commitment or guidance per se, but it gives you a little bit of insight into how we're thinking about expanding our influence up and down the the quality control workflow with our customers, our manufacturing and quality operations.

Operator

Steven Mah, TD Cowen.

Steven Mah

I'm great, thanks. And congrats on the quarter and thanks for taking the questions of my own. Yes, one on Samsung Biologics. I had them selecting their growth direct platform for their microbial TC. Can you remind us if it was a multi-system placement and was at multiple Samsung sites? And then if you could give us some color on the sense of the magnitude of that, you know, Samsung going forward, you noisy as you kind of expand across the Samsung, no global sites, you know, when can you expect more Samsung placements. Now, obviously, it's a pretty huge entity.

Robert Spignesi

Yes. So that's actually what we're really excited about. The Samsung partnership and the Company selecting us. Samsung as a great company, does their diligence and we think it speaks volumes. They selected the Growth Direct. We did place a multisystem order at a single site last year. And yes, I won't go into the forward looking on expectation, but I can tell you we're looking forward to your point's a large organization and we're very much looking forward to growing with Samsung in the coming quarters and the coming years.

Steven Mah

Okay, great. I appreciate that. And then maybe a follow-up question here on the CRO landscape. Given the current geopolitical sentiment, the proposed bipartisan budget SECURE Act, could you give us a sense of your exposure arm two CROs that were kind of named in that biopsy Care Act?

Robert Spignesi

Yes, it's very low. I think I think specifically around China. So our connectivity and exposures is it is quite low. We have a strong CDMO footprint. I think, as you know, our value prop resonates strongly there. But our current Onyx in our expected customer base would be independent of that bio SECURE Act and the named parties within.

Steven Mah

Okay. Net for appreciate that color. And last one's a follow-up question on Rapid Sterility. Can you just walk through some of the positive early beta testing feedback and the stress testing that you did during that day and launch that that's driving confidence in the expected in a midyear launch and has Rapid Sterility helping drive conversation with new customers?

Robert Spignesi

Yes. So in reverse order on we own, it is helping drive conversations with new customers and existing customers on. So we've been I wouldn't say surprise because we expected a positive response and we're getting it. I think it's important to note that there's we have not assumed a meaningful contribution for sterility in our 2024 guide, just given the mid-year launch and the sales cycle timing. But we're certainly going to preserve the opportunity to have upside with regard to sterility. And there is there is quite a bit of excitement around it. Our confidence comes from a combination of customer feedback as well as rigorous development process we have internally. So that process goes through the system readiness, the it's basically a new consumable that worked with the system and a lot of testing with regard to some of the data that you've seen published with regard to time to detection and time to result.
And then, of course, that that data, we will work with customers to open overtime validate their environments, but were and where we are today, we're quite confident in what we're seeing and that gave us the confidence to it released a press release and all the above kind of feeds into that. Our internal data feedback from the market research we've done and our internally generated data all kind of collude together to give us that that outlook and confidence to move forward.
And and also inbound interest from customers also is feathering into the into the mix now too, which is which is very exciting. So more more to follow up. We'll look forward to update you as we go forward through the quarters here. But I can say just kind of in summary, we're excited about the product and so far, the market also seems quite excited about the product as well.
Well, thanks, Steve, for the question. And thanks, everyone for joining us today. Again, we enter year with strong momentum and a great position to deliver an excellent year in 2024. I will look forward to speaking with many of you over the next few weeks at the TD, Cowen and key and KeyBanc life sciences conferences. Thank you all.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.