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Twist Bioscience Grows Q3 Revenue 108%, but Losses Pile Up

Maxx Chatsko, The Motley Fool

Among the trends sweeping Silicon Valley in recent years has been an appetite for propping up money-losing businesses in the name of returns. Of course, venture capitalists calculate returns much differently than individual investors, and it often goes unsaid that companies can be a start-up success and a commercial failure. 

Twist Bioscience (NASDAQ: TWST) is one newly public company that still operates as a start-up. That is, the business is pouring money (raised from public markets through dilutive stock offerings) into growth and delaying its arrival at profitable operations. The company, which synthesizes custom sequences of DNA for research applications in living technologies, reported year-over-year revenue growth of 108% in fiscal 2019. It also reported that the $7 million increase in sales in that period was accompanied by a $13.8 million increase in operating expenses excluding cost of goods sold.

Can the newly public business manage to lean on growth and close the gap to break-even operations? Here's what investors need to know about the latest operating results.

A teaching model of DNA and a scientist standing in the background.

Image source: Getty Images.

By the numbers

Twist Bioscience wields the current industry-leading technology for DNA synthesis -- and it's not even close. It pools the building blocks of the genetic code into tiny wells carved into silicon chips, then combines them into the specific sequences ordered by customers. The approach can reduce the volume of expensive chemical reagents needed by a factor of one million and increase the output of genetic material synthesized by a factor of up to 9,600 compared to traditional methods used in molecular biology labs.

But technical strength doesn't always translate into business strength. The market for synthetic DNA is severely limited by demand. Most customers simply don't require large volumes of genetic material, can't handle it, or are constrained by data processing steps further downstream in the R&D workflow. That's kept the company from achieving economies of scale for its platform. In fact, Twist Bioscience has seen the number of genes shipped decline for three consecutive quarters. 

That hasn't stopped the business from delivering revenue growth in fiscal 2019, but it has proven expensive. Consider the operating results achieved through the fiscal third quarter ended June 2019 compared to the year-ago period: 

Metric

First 9 Months Fiscal 2019

First 9 Months Fiscal 2018

Change

Revenue

$38.7 million

$17.0 million

127%

Gross profit

$3.6 million

($6.1 million)

N/A

Operating expenses

$80.9 million

$44.8 million

81%

Operating income

($77.3 million)

($50.8 million)

N/A

Operating cash flow

($64.6 million)

($49.5 million)

N/A

Data source: SEC filing.

As the table above shows, Twist Bioscience increased revenue by $21.6 million and operating expenses by $36.1 million in the year-over-year period examined. The surge in operating expenses could pay off if the business maintains its current growth trajectory, but a closer look at the numbers suggests that could prove difficult.

While synthetic DNA revenue is still growing at a healthy clip, most of the growth delivered in fiscal 2019 has come from next-generation sequencing (NGS) tools that had minimal contributions in fiscal 2018. 

Product Revenue Category

First 9 Months Fiscal 2019

First 9 Months Fiscal 2018

Change (%)

Change ($)

Synthetic genes

$18.8 million

$11.9 million

58%

$6.9 million

NGS tools

$14.9 million

$1.7 million

743%

$13.1 million

Other

$4.9 million

$3.4 million

47%

$1.5 million

Data source: SEC filing.

Revenue diversification certainly isn't a bad thing. Twist Bioscience has proved that it can play in the NGS tools market with target enrichment probes, which work by highlighting the presence of a specific genetic sequence in a sample. The results are only as accurate as the starting sequence of the probe, and since the company can write highly accurate sequences of DNA for the foundation of target enrichment, it's an obvious application to invest in. 

But revenue from NGS tools has flattened out in recent quarters. The portfolio generated sales of $3.8 million in the fiscal first quarter, $5.54 million in the fiscal second quarter, and $5.57 million in fiscal Q3. Twist Bioscience expects total revenue in the fiscal fourth quarter of $13.85 million, compared to $13.6 million in the most recent quarter, suggesting that the flatlining sequential growth trajectory may not be easily dismissed by investors.

Looking ahead

Twist Bioscience updated its fiscal full-year 2019 guidance and now expects $53 million in revenue and a net loss of $103 million. On the one hand, the company is making progress in key areas. Revenue is more diverse than ever thanks to the introduction of NGS tools. Similarly, only about $9 million in revenue this fiscal year is expected to come from Ginkgo Bioworks, which previously dominated the company's customer mix.

On the other hand, the business is far from sustainable. Twist Bioscience is on pace to burn more than $85 million in cash from operations and report an operating loss of over $100 million in fiscal 2019. While the business exited June with $162 million in cash, quarterly losses have increased over time as the company has chased growth.

Investors are currently betting that future products, such as DNA data storage, and an antibody discovery and optimization platform for biopharma collaborations, will pay off handsomely. That future could still pan out, but investors need to see improving financials and more commercial progress of those futuristic platforms before getting too excited. Simply put, Twist Bioscience stock remains a risky investment at current levels. 


Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com