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spk01: Ladies and gentlemen, thank you for standing by and welcome to Rapid Microbiosystems Q2 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, Press the star 1. I would now like to turn the conference over to Mike Buley. Please go ahead.
spk02: Good morning, and thank you for joining the Rapid Microbiosystems Second Quarter 2023 Earnings Call. Joining me on the call are Rob Spignesi, President and Chief Executive Officer, and Shawn Werches, Chief Financial Officer. Earlier today, we issued a press release announcing our second quarter 2023 financial results. A copy of the release is available on the company's website at rapidmicrobio.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 Micro's financial condition, anticipated year-end cash balance, cash runway, future revenue, and system placements, expectations for business development and growth, customer interest and adoption of the GrowthRx system, expectations for our new RMB Nucleus Mold Alarm and the potential impact of macroeconomic uncertainty and the public health crises 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 annual report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2023, as amended, as such risks are updated 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. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 4, 2023. 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.
spk05: Thank you, Mike. Good morning, everyone, and thank you for joining us to review our second quarter 2023 results. I will begin this morning's call with a summary of our second quarter performance. followed by an update on the progress of our execution related to our growth strategy. I will then turn the call over to Sean for a more detailed review of our financial results and outlook. Total revenue was $5 million, representing a 30 percent increase compared to Q2 last year and above the guidance we provided in May. We placed two systems in the second quarter and completed three validations. Based on our strong performance in the first half of the year, We are reaffirming our full year 2023 total revenue guidance of at least $22 million, representing growth of at least 30%. Despite macroeconomic uncertainty leading to cautious customer spending, our teams are navigating these conditions and staying focused on strong execution to deliver our full year guidance. We were pleased once again with our execution across both products and services during the second quarter. I'd like to especially highlight the strong recurring revenue in the quarter, which increased over 40% compared to the second quarter last year. We had a record quarter in consumables revenue, which was driven by both higher pull-through per validated system and more validated growth directs in the field. Service revenue was also strong during the quarter, driven by annual contract renewals. While Sean will provide additional P&L details, I wanted to emphasize the importance of recurring revenue, which drives predictability and demonstrates the durability of our business model. It is also a strong indicator of the value we are providing to our customers, as evidenced by their increasing use of our growth direct systems in their worldwide manufacturing operations. With the benefit of two separate revenue streams, we believe solid double-digit recurring revenue growth is sustainable. And while our recurring revenue is subject to some quarterly variability due to order timing or other customer-specific decisions, most of our revenue comes from large, established global customers who are using the Growth Direct on commercially approved products. We continue to execute against our strategy to advance system opportunities through our sales funnel and accelerate Growth Direct placements. As an example, late in the second quarter, we close a multi-system order with one of the world's largest CDMOs based in Asia. As we discussed on our call last quarter, we are excited about the opportunity and demand for our technology in this important region. This was a significant and well-earned win for our commercial team and highlights that our technology continues to resonate with both large global biopharma as well as CDMO customers. With respect to high-impact customer activities, we partnered with the New England PDA, which is a local chapter of the Parental Drug Association, for an educational event in June. This event brought together existing and prospective customers, as well as industry peers, and highlighted quality control challenges in today's pharmaceutical manufacturing environment. These events are important opportunities for our rapid micro team members to facilitate collaborative discussions among local biopharma industry leaders and other professionals in the pharmaceutical quality control ecosystem. The event was hosted in our Lowell, Massachusetts manufacturing facility, and attendees were given a tour, an up-close look at the Growth Direct system, as well as our state-of-the-art automated media production line. The meeting also featured expert presentations and discussions on how the Growth Direct can enhance data integrity, improve quality, and minimize operating risks. As we move through the second half of 2023, we have a number of customer events planned, two of which I will highlight. First, in early October, we will present an exhibit at the PDA Pharmaceutical Microbiology Conference in Washington, D.C., where we will host three poster presentations and have a growth direct available for customer demonstrations. As a reminder, this is the largest annual microbiology conference that we attend and includes global industry professionals, representatives from academia, and regulatory authorities. And then in November, we have planned a combined growth direct day and customer advisory board event in Europe. Building on past successes, This event will feature multi-day sessions focused on customer testimonials, user group discussions, approaches to global adoption of the Growth Direct, and other high-value topics. These and similar events help us build and advance opportunities within our funnel, and importantly, allow us to engage with industry thought leaders, regulators, customers, and prospects to discuss the Growth Direct value proposition of faster time to result, data integrity, cost savings, patient safety, and automation. Now, I'll provide a brief update on our product development efforts. We are pleased to report that the commercial launch of our Mold Alarm software product is progressing on plan. Attachment rates to new systems, sales, and upgrades to existing growth directs are encouraging. Our teams are effectively leveraging onsite and virtual education and training programs to increase awareness. Customer engagement has been positive, and we are confident we are on the right track. While it is still early in the commercial ramp, we are pleased with our progress and expect to continue to build momentum over the balance of the year and into 2024. With respect to rapid sterility, we are on track with our development and are increasing our focus on commercialization. We look forward to sharing additional details on this important product later this year. Turning to a brief update on our manufacturing capabilities, I am pleased to announce this morning that our backup consumable manufacturing line in our Lexington, Massachusetts facility has been completed. This is an important milestone and demonstrates our global customers that we are committed to providing them with world-class service and continuity of consumable supply. In summary, through the first half of 2023, we achieved over $10 million in revenue, representing growth of 25 percent compared to the first half of 2022. This compares to our guidance for full year 2023 total revenue of at least $22 million. We continue to attract many of the best companies in the world to our GrowthDirect platform, and our existing customers continue to benefit from the significant value of our platform as they use more of our systems, consumables, and services in their mission-critical manufacturing operations. In the second quarter, we achieved an all-time high in consumable revenue. This, coupled with our service contract revenue, demonstrates strong customer satisfaction in use and validates our recurring revenue model. And finally, our commercial execution continues to improve as we remain laser focused on our growth strategy and specifically advancing growth direct opportunities through our sales funnel and accelerating system placements. And with that, I'll now turn the call over to Sean to discuss our second quarter performance. Sean?
spk04: Thanks, Rob, and good morning, everyone. Second quarter 2023 revenue increased 30 percent to $5.0 million compared to $3.9 million in Q2 2022. We placed two growth direct systems in the second quarter, the same number we placed in Q2 last year. Product revenue, which is comprised of systems and consumables, also increased 30 percent to $3.2 million in Q2 compared to $2.4 million last year. This performance was driven by consumables, which increased by almost 50% compared to Q2 last year and accounted for the majority of the year-over-year growth. As Rob discussed, we had a record quarter on consumables, which was led by both new systems coming online and strong pull-through per average validated system, which was over $90,000 on an annualized basis. This compares to the $80,000 per average validated system we generated in 2022. We are making good progress in this area and are on track to achieve our goal of high single digit percentage growth in this metric for the full year. Service revenue increased 29% to $1.8 million in the quarter compared to $1.4 million last year, with solid growth in both validations and service contract revenue. We completed the validation of three systems in the second quarter, the same number as last year. As of June 30th, we had a total of 108 validated systems, which contributed to a 36% increase in service contract revenue compared to the second quarter last year. Second quarter recurring revenue increased 44% to $3.6 million compared to $2.5 million last year, driven by the strong growth in both consumables and service contract revenue. Non-recurring revenue was $1.4 million in Q2, which was flat with the prior year quarter. Turning to gross margins, Product margins were negative $1.5 million in Q2 compared to negative $0.8 million in the second quarter last year. The decline was mainly due to lower production volumes and manufacturing efficiency in consumables due to downtime on our automated manufacturing line to implement enhancements that will benefit future margins. While some of these activities have continued into Q3, we expect them to be substantially completed by the end of the quarter, benefiting gross margins in Q4 and beyond. Service margins were negative $0.4 million in Q2, a slight improvement compared to last year. The benefit from higher service contract revenue was partially offset by the cost of investments to expand our capabilities and serve our growing global customer base. On a combined basis, our second quarter gross margin percentage was negative 38%, down slightly compared to last year. Moving down the P&L, total operating expenses were $13.2 million in the second quarter, consisting of $3.2 million in sales and marketing, $3.2 million in R&D, and $6.7 million in G&A. Excluding $0.6 million in retention costs related to the plan we announced last August, total OPEX was $12.6 million in Q2. This compares to total operating expenses of $12.9 million in the second quarter of 2022. Net loss was $14.0 million in Q2. This compares to a net loss of $13.1 million last year. Net loss per share was $0.33 in Q2 compared to net loss per share of $0.31 in the prior year quarter. With respect to non-cash expenses and capital expenditures, depreciation and amortization was $0.8 million, stock compensation expense was $1.2 million, and capital expenditures were $0.2 million in the second quarter. I'll now turn to our 2023 outlook for the full year and the third quarter. We are reaffirming our previous full year 2023 revenue guidance of at least $22 million, which represents growth of at least 30% and assumes we will place at least 15 systems. While our teams have effectively navigated macroeconomic uncertainty in the first half of the year, and our customers are generally large and established companies, we are still operating in a dynamic environment. customers are continuing to scrutinize the timing and scale of purchase decisions, which may result in higher variability in our quarterly revenue. Our guidance continues to reflect this uncertainty, and we are continuously assessing the environment and monitoring customer interactions for changes in purchasing decisions. For the third quarter, we expect commercial revenue of at least $5.5 million, which assumes at least four system placements. This guidance includes two systems that were part of the multi-system order from a new customer in Q2 that Rob mentioned earlier, which were already placed in July. We continue to expect to complete at least 14 validations in 2023, including at least four in the third quarter. With respect to validation revenue, we expect both Q3 and Q4 to be higher than Q2 with strong growth versus the comparable 2022 periods. As a reminder, validations can experience some quarter-to-quarter variability based on the timing of customer validation activities for previously placed systems, as well as the lag between system placements and related validation work for new system placements. Shifting to gross margins, we expect sequential improvement in both Q3 and again in Q4 as we benefit from higher production volumes and cost reduction activities in consumables, increased productivity and service, and leverage from higher sales, particularly in systems and service. Gross margin improvement continues to be a top strategic objective for us. We are focused on driving cost reduction and increasing manufacturing efficiency in products and increasing productivity and efficiency in services. We continue to expect these actions, as well as the benefit of higher sales volumes, to lead us to positive gross margins in 2024 with expansion to 50% to 60% as the business continues to scale over time. With respect to operating expenses, we continue to expect between $12.5 million and $13.5 million per quarter over the balance of 2023, with variability mainly driven by non-recurring retention costs that will impact Q3, as well as the timing of new product development activities. Finally, we had approximately $113 million in cash, cash equivalents, and investments as of June 30th. Cash burn was approximately $9 million in the second quarter. Looking forward to the second half of the year, we expect cash burn in Q3 to be consistent with Q2 and then to decline in Q4 as we realize cash benefits from working capital management. As a result, we continue to expect to end 2023 with cash and investments at or slightly below $100 million. We remain confident that this provides us with cash runway at least into 2026. That concludes my comments on our full year and Q3 outlook. So at this point, we'll open the call up for questions. Operator?
spk01: The floor is now open for your questions. To ask a question this time, please press star and the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Tejas Savant with Morgan Stanley. Your line is open.
spk00: Thank you for taking our questions. With the challenging macro persisting here, could you share what you're seeing from customer related to budget screening and how has the customer's time to make purchase decisions trended since last quarter?
spk05: This is Rob. So what we're seeing is consistent with what we reported in Q1. There hasn't been a material difference. We're still seeing increased budget scrutiny. It's basically just a tighter filter thematically. That being said, some customers are certainly moving faster than others. So it hasn't been dramatically changed. In some cases, we have seen budgets pushed to the right throughout Q2. But our countermeasures against that, you know, we believe are effective and are working, and that's why we're reaffirming guidance. I think increasingly we're also encouraged with the interactions we're having with customers at the senior level and ensuring that our growth direct projects and rollouts are being prioritized. This further gives us confidence in our outlook. So, again, summary, no major change throughout the year to date here. Just a continuation of the theme of general budget tightening and increased scrutiny.
spk00: Got it. That's helpful color. And then with backup consumable manufacturing facility in Lexington now up and running, are there any financial impact or incremental costs that we should be contemplating as that facility begins to ramp?
spk04: Hi, Yuko, it's Sean. It's a backup facility. It will not be active, but it is ready to go. So if we need it, we will use it. We will not be operating two separate consumer manufacturing facilities at the same time.
spk00: Got it. Thank you very much.
spk01: Our next question comes from the line of Dan Arias with Stifel. Your line is now open.
spk03: Good morning, guys. Rob, maybe just a version of the first question there. I mean, obviously, the forecast for the year is intact. And I know you're not guiding or talking about 2024 right now, but just given the timeline that you guys work with, do you feel good about the tenor of the conversation today in a way that would set you up for, say, the beginning of 2024 to be intact? Because it feels like a lot of the business that you're that you're booking today and you're realizing today with stuff that's been in the funnel and doesn't, you know, nicely not falling out. So the question is, like, are you set up okay for the next six to 12 months just based on the environment that we're in right now?
spk05: Yeah, Dan, we like the outlook. Maybe a little more color from the first question. Clearly, over the past year, our focus on commercial execution is ensuring we have the full team intact, up and trained, which we essentially do at this point. Incredibly encouraged with the caliber of talent that we have in our commercial team. As I touched on in Yugo's question, we're also probably the best it's ever been in Rapid Micro's history, access to senior decision makers. inside customers, and increasingly we're getting exposed to better visibility and insight into global rollout plans, which we believe will help us stay prioritized. Certainly no guarantees in that, but it's certainly a great leading indicator. Our funnel is healthy, again, with the three regions up, a number of the right number of reps in the field, generating leads, and enhanced marketing. We feel good about our funnel, the composition, cost of geographies, cell and gene, biologics, et cetera. I would also say it's important to note our consumables business. I think you heard quite a bit about that in the comments. But I look at that as a very, very important leading indicator as existing customers continue to increase usage of our system through consumables and services consumption. you know, that is typically a good leading indicator to great customer experience and, you know, could be a good leading indicator and many times can be for future purchase decisions across global networks, which also helps us to stay prioritized and is helping us withstand some of the budget scrutiny. So those are the, you know, I've said thematic, I would say longer range, and clearly in the short term here, as Sean touched on, we already have, you know, two placements and in Q3, which is helpful because Q3 can be a tricky quarter with holidays and vacations and customer access. So with all the above, it's a long way of saying we're optimistic about the future and the outlook.
spk03: Okay. Well, that's good. And yeah, you did sound pretty pleased with the recurring revenue in the quarter. So I guess, Sean, how do we think about that tracking into next year? You mentioned that double digits are sustainable Do you think you can march that item up to that lineup upward as the installed base continues to grow here?
spk04: Yeah, Dan, I think that's clearly the expectation. I will say recurring with 70% of revenue in Q2, that's probably not where we're going to be going forward as we get system placements ramping. But we clearly expect that we're going to see good growth in recurring both pieces of it as we get more systems validated and customers sign up for contracts as well as just you know, building growth in consumables through, you know, not just new systems coming online, but existing systems increasing utilization and us bringing more and more customers in who are using systems at higher volumes, like cell and gene therapy. So we expect those are trends that we see now and are going to continue as we go forward that are going to help us to continue to have good growth and recurring.
spk03: Okay. Are you... Within the model, is the idea that the cell and gene guys are the more intense users, is that still holding up now? Would that be demonstrable if we looked under the hood at the consumables number today? Because obviously within that set of customers, there's a lot going on there. So I'm just curious whether the way that we have thought about things traditionally is holding true today.
spk05: I think at the site level, that's generally true. The cell and gene customers tend to be high consumers of our environmental monitoring application. It's typically quite high volume, but the biologics segment is larger and has a sizable pull-through and use as well. And the biologics segments and other segments also are heavier uses of our water and bioburden products. So it's sort of a mixed... review depending on the segment.
spk04: Yeah, but I would say that within biologics, we have plenty of runway just in that space to get this metric to increase meaningfully over time and get us into kind of the expected range that we expect the business to get to over time that we talked about in the past. And I think you know, high-volume cell and gene can just accelerate that potentially. So that customer mix is going to be, you know, it really will just kind of govern how fast we grow, but clearly the expectation is that we are going to grow this metric meaningfully over time.
spk03: Okay. Okay. Last one for me, and then I'll hop off. Sean, on the downtime for the production line, do the comments that you made there suggest that by 4Q, you really aren't dealing with a gross margin headwind as it relates to the starts and the stops there?
spk04: Yeah, I mean, we always have downtime, Dan. You know, this was a case where we have some things that we're doing right now. We started in Q2. Some of them are still going on now where, you know, it's making a short-term investment, and that downtime is part of that investment to drive positivity going forward. So we're doing some things. One example I'd give you is, you know, we have historically manufactured our water and bioburden consumables manually. And we are working right now to get that moved over onto the automated process, which will have a lot of benefits, including lower costs of product. So I'd call this kind of more of a one-time thing. We will likely have things like this in the future. I wouldn't expect it to be every quarter by any means. So I think as we march forward through the year, I think the guidance is we expect margins to get better sequentially each quarter in Q3 and Q4. We are not guiding to positive gross margins in Q4. I think the possibility still exists there if we can drive some system upsides and we get things done that we need to get done from a cost reduction standpoint over the second half. So I think this is something that was a conscious decision. We think it's the right thing to do and we expect it to benefit us as we get late in the year and move into 24. Yep. Okay. Very good, guys. Thank you. Thanks, Dan.
spk05: Well, thanks, Dan and Yuko. We are going to wrap up the live call now. Thank you for everyone for joining us today.
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