Twist Bioscience Corporation

The conference will begin shortly. Good day, and thank you for standing by. Welcome to the Twist Bio Fiscal 2022 Fourth Quarter and Year-End Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker today, Angela Bitting, Senior Vice President of Corporate Affairs and Chief ESG Officer. Please begin.

Thank you, Operator. Good morning, everyone. I would like to thank all of you for joining us today for the TWIST Bioscience Conference call to review our fiscal 2022 fourth quarter and year-end financial results and business progress. We issued our financial results release this morning, which is available at our website at www.twistbioscience.com. With me on today's call are Dr. Emily Leprous, CEO and co-founder of Twist, and Jim Thorburn, CFO of Twist. Emily will begin with a review of our recent progress on Twist businesses. Jim will report on our financial and operational performance. Emily will come back to discuss our upcoming milestones and direction, and then we'll open the call for questions. We would ask that you limit your questions to a maximum of two and then re-queue as a courtesy to others on the call. As a reminder, this call is being recorded. The audio portion will be archived in the investor relations section of our website and will be available for two weeks. During today's presentation, we will make forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize and actual results in financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in the press release we issued earlier today, as well as those more fully described in our filings with the Securities and Exchange Commission. The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements, except as required by law. With that, I'll now turn the call over to our Chief Executive Officer and Co-Founder, Dr. Emily LaProost.

Thank you, Angela, and good morning, everyone. This morning, we reported record revenue of $203.6 million for fiscal 2022 and $57.3 million for the fourth quarter. We continue to take market shares in both SynBio and NGS by expanding our customer base, delivering differentiated, high-quality products, and anticipating market needs. In addition, our biopharma business continues to sign an increasing number of partnerships with biotechnology and pharmaceutical companies to conduct discovery and optimization projects. Fiscal 2022 has been one of macroeconomic contraction, COVID shutdowns, geopolitical instability, and more, and yet, We deliver 64% revenue growth year-over-year, and we grew our customer base to over 3,000. In the slide deck for this annual call, we have included a list of some of our customers who have published, conducted webinars, case studies, or have notes using Twist products. You will see that the list is broad and deep, and just a small fraction of our total customer base. Our Twist team continues to demonstrate exceptional resilience in the face of challenges, Our silicon platform for DNA synthesis enables us to compete in multiple markets that each experience different market dynamics, hence reducing risk through diversified revenue and customer base. Taking a minute to highlight our technology, for those of you who may not have had the opportunity to visit our FAB, we have miniaturized the process of making DNA using traditional DNA synthesis chemistry by making DNA using our proprietary silicon chip platform, we have been able to reduce the amount of reagents used by 99.8% compared to a plastic plate platform. These reagents are a material driver of COGs, so leveraging this dramatic reduction enables us to achieve significantly lower COGs than our competition. The way it works, on each chip, we make short pieces of DNA called oligonucleotides or oligos, The oligos are built base by base, like stacking Lego blocks on top of one another, and then can grow up to 300 bases in length. As a reminder, each base being one of the four building blocks of DNA, A, C, G, or T. This type of oligosynthesis on silicon chips is common for all of our products. We call it the front end, and it is where half of the magic happens. By magic, I mean where the technological differentiation originates. The vast majority of our cells are custom products, meaning that the sequences of DNA are defined by the customers. However, we have designed our technology such that on each chip, on every chip, we can group orders for many customers and multiple projects. Indeed, the oligos for all of these orders are synthesized in parallel on the chip, and because each chip can synthesize up to one million oligos, we can leverage the silicon platform to achieve differentiated scale. Once we've made the oligos, We extract them from the silicon chip and they are then sent to the appropriate backend workflow. This might be engine production, NGS target enrichment panels, oligopools, AGG proteins, synthetic controls, and so on. Each of these backend processes is unique based on the skews and flavor of DNA produced, but typically operators work 24-7 to run batch processes for multiple orders on commercial automation. Because the front end provides scales, low cost and quality, The back-end processes are remarkable by how unremarkable they are. The second half of the magic lies in the overall complex, highly automated processes of capturing an order, of designing the oligos, of synthesizing multiple orders, multiple customers on a single chip, of sending them to the correct back-end lab for further processing, quality control, packaging, and shipping. This in-house developed software we use to track and direct These complex production processes in an automated manner enable us to rapidly go from order placement to shipping at scale and low cost, which is another true differentiator. This workflow speed and efficiency continues to provide the foundation for our revenue growth. Specifically, for Finbio, we reported revenue of $18 million for 2022, an increase of more than 50% year-over-year, and $21.6 million for the fourth quarter. The strength in SynBio came in across the board, with genes and oligopools experiencing significant growth. An important point to make is that our products that generate revenue in our SynBio verticals are used by pharmaceuticals, biotech, industrial chemicals, and agricultural companies, as well as academic labs. We ship approximately 558,000 genes in fiscal 2022, compared to 372,000 jeans in fiscal 21. To support our continued growth, we are ramping our factor of the future in Portland, Oregon, with the 24-7 manufacturing team currently training and producing test products today. Of note, we have about 40 employees from South San Francisco that have moved to Portland, bringing with them experience in our manufacturing processes and intricate knowledge of the Swiss culture. These employees are now training our new employees. With 177 employees in Portland as of today, we remain on track to begin shipping products out of Portland in January 2023. Initial manufacturing in Portland will focus on jeans, jeans fragments, and oligopools, targeting a turnaround time of approximately 10 to 12 days for jeans, the same as our current average turnaround time for jeans in 2017. As we run production in Portland, we expect to introduce fast jeans, which we believe will offer a significantly faster turnaround time. enabling us to tap into the DNA maker's market with premium pricing while maintaining our position as the most cost-effective gene synthesis provider. We expect to introduce fast genes in the fall of Canada 2023. I'd like to personally invite you to tour our Portland manufacturing facility. On Tuesday, November 29th, we will be arranging tours for investors and analysts who wish to visit. Please contact Angela if you'd like to schedule a tour. Turning to NGF, We continued our strong back half of the year with $29.2 million in revenue for the quarter, bringing our NGS revenue for fiscal 2022 to just shy of $100 million, coming in above our guidance. For the year, NGS revenue grew approximately 37%, faster than the market is growing. Others came in at $28.2 million for the quarter, and we expect fiscal 23 to again be back half loaded, similar to 22. I'd like to point out that recently we shifted the incentive structure to our core business sales force. As we built our business, we moved from equal compensation for orders and revenue to one where sales commission is now 90% tied to revenue. Both orders and revenue continue to be important metrics for us to track, but the incentive for sales team has shifted and along with it, the significance of order numbers going forward. Of note, For the remainder of the organization, our burden structure is based on both revenue and gross margin. On the market side, many of you are aware that the sequencing landscape continues to evolve with less expensive whole genome sequencing options now available and several new and exciting players introducing solutions for longer read offerings. For TWIST, these technical advances offer opportunities. Indeed, we are sequencer agnostic and an enabler across platforms. We recently announced an agreement with Illumina, whereby we will manufacture and they will sell an Exome target arrangement kit. We believe that by leveraging their robust self-force and integrative install base, we will reach a differentiated customer set. In addition, we're working with PacBio on a robust solution for their newly announced sequencers. For Exome sequencing today, we offer a complete workflow solution, including target arrangement, library prep buffer bits, bees, blockers, adapters, EDI, etc. As the cost of sequencing comes down, we expect that over time, some applications and groups will move from exome sequencing to whole genome sequencing. When that happens, meaning when applications like germline sequencing or government-funded initiatives to sequence populations move from exome to whole genome sequencing, we will have an opportunity to continue participating through our LabrioPREP offering. For the very large market opportunities like cancer screening, the dynamic will be different. Indeed, they will still require deep sequencing, and panel and exome sequencing will continue to be the mainstay. For instance, customers pursuing liquid biopsy or minimal residual disease need deep coverage of specific genetic sequences, sometimes 5,000x coverage or more, in order to ensure capture of the disease-driving mutations at low allelic frequency with high sensitivity. For these applications, we expect it to be cost prohibitive to conduct whole-genome sequencing, even as the cost of sequencing decreases significantly beyond what we see today. Additionally, we believe that the reduction in sequencing costs will encourage adoption of liquid biopsy and MRD assays as overall test costs will decrease and make them increasingly palatable for reimbursement and routine adoption by customers. Of note, in these applications, product pricing is expected to remain constant, even as the cost of sequencing drops. When we introduced our NGS offering in 2018, we anticipated this sequencing price reduction, and our product portfolio evolved over time. In fiscal 2021 and 2022, we introduced several new products in the NGS space, with the vast majority targeting Kanto. We have launched our metadata solution, the Human Meso panel, CFDNA controls for liquid biopsy tests, and a rapid cost-effective patient-specific MRD panel targeting up to 500 mutations. And we've added oncology focus alliance panels developed by key opinion leaders at leading institutions like the Broad and Baylor. These products support our effort to enable our customers and dominate the workflow between the sample and the sequencer. Moving forward, We see growth in NGS coming from clinical advancement of liquid biopsy testing as well as taking market share in research applications. Recall that it is a long cycle for customers to adopt our target enrichment panels as they need to undergo pilot testing, verification, validation, rigorous re-clearance, and clinical testing before broad-based commercialization. But once we're including a test that reaches the market, it is very sticky as they will need to be validated through regulatory agencies for any changes. Today, we have about 50% market share for packet enrichment and library prep. We have a lot of market share to gain, so in addition to escalating volumes for customers who enter the commercial phase, we continue to win pilots which bodes well for future growth. In biopharma, we reported $24.2 million in revenue for the fiscal year, tremendous growth over fiscal 2021, and yet still just short of our guidance. Revenue for 2022 first quarter was $6.5 million, almost all of which came in September. Importantly, orders for the fourth quarter remain strong at $9.4 million, and we fully expect strength in Biopharma's return in fiscal 23, given that in the conversations we are having, our positioning as the high quality local leader resonates with our partners now more than ever. For Swiss Biopharma team based in San Francisco, We currently have 59 partners in Bayou Pharma with 83 completed and 50 active programs. 59 of the 133 programs have milestones and royalties associated with the projects. The Twist Boston team has 62 active programs ongoing as of September 30, 2022. As we look ahead, we expect continued growth across the portfolio as we are moving towards a combined product and service offering together with the Twist Boston team. targeted for launch in the second quarter of 2023. Working together for a little over a year, we have incredible synergies that we believe will enable us to expand our reach and market share in the biopharma segment. With reference to Revela, we did not see the outcome we were hoping for. We invested a small amount of capital to take a long shot, did not exceed our original commitment, and showed it off quickly when the opportunity did not materialize. This illustrates our discipline when it comes to investment decisions. Moving to data storage, we now have 37 employees working on the team, including 31 engineers and scientists. We continue to bring up our proof-of-concept chip, which we expect will enable us to move from writing one megabyte of data to one gigabyte of data in a single synthesis run. We are also working to integrate the chip into our prototype electrochemistry DNA writer system. This system will enable us to launch our Century Archive pilot to early access customers. Importantly, the Century Archive is expected to set a new standard for archive data retention longevity. In late October, we announced the appointment of Paddy Finn to our newly created position of President and CEO. Paddy has been with the company for eight years, taking greater standard controls, and he demonstrated success. We conducted an external search for the position and found that Paddy was the right person to lead our next phase of growth and fiscal responsibility. I look forward to partnering with Paddy and the executive team to achieve our aggressive objectives. With that, I'd like to turn over the call to Jim to talk us through our financials.

Jim? All right. Thank you, Emily. We have another great quarter and terrific year of growth that twists despite a volatile macroeconomic environment. Revenue for quarter four was $57.3 million, which brings our revenue for fiscal 22 to $203.6 million, with year-over-year growth of 54%. Orders were $62.1 million for the quarter, which brings orders for the fiscal year to approximately $226 million, and that's an increase from $160 million last fiscal year, and 42% growth year-over-year. Gross margin for the quarter was 44.9%, And gross margin for the year was 41%, and that's up from 39% last fiscal year, reflecting improved leverage. We shipped to approximately 3,300 customers, and that's another record for Twist. And we closed the year with cash investments of approximately $505 million. Our NGS business had another strong year, and revenue was $99.3 million, which is 37% growth year over year. Our fourth quarter revenue is $29.2 million, and that's an increase of 36% year-over-year. This growth reflects the strength of our product portfolio, with the top 10 customers accounting for approximately one-third of our NGS revenue, and we served approximately 1,200 NGS customers in fiscal 22. Our pipeline for large opportunities continues to scale. We're now tracking 257 accounts, up from 249 noted on our last earnings call, 121 have adopted Twist, an increase from 114 last quarter. Now turning to SynBio, which includes genes, DNA preps, IgG, libraries, and oligopoles. SynBio revenue for the year rose to $80 million compared to $52.7 million in fiscal 21, and that's an increase of 52%. Some of the highlights include shipping to approximately 2,300 SynBio customers, This includes a diverse customer base, including biotech and large pharma companies. Genes revenue increased to $61.5 million, and that's up from $39 million, and we shipped approximately 558,000 genes in fiscal 22, a significant increase from 372,000 in the previous fiscal year. OligoPulse had a strong year with revenue of $12.4 million, up from $8 million in fiscal 21, with increased demand primarily from the healthcare segment. We continued to scale our antibody discovery business, and revenue for fiscal 22 was $24.2 million, up from $7 million in fiscal 21. Error was below the low end of our range of 26. As Emily noted earlier, orders of $9.4 million were back-end loaded in the quarter, and consequently our quarter four revenue was $6.5 million, which was flat with third quarter. For a twist, Biopharma antibody platform, we now have 59 partners, up sequentially from 53, and have 50 active programs, with 83 programs completed and back in the hands of our customers. Of our total programs, 59 include milestone and royalty agreements. Our Averis, our Twist Boston business, is doing well with 62 customer service in the quarter, including 36 projects on the Beacon platform. I'll now quickly cover our regional progress. EMEA revenue rose to $62.1 million in fiscal 2022 versus $44.1 million in fiscal 2021. APAC continues to deliver robust growth with revenue increasing to $19 million in fiscal 2022 from $10.3 million in fiscal 2021. And the U.S. revenue was $122.5 million in fiscal 2022 versus $77.9 million in fiscal 2021. Moving down to P&L. Our gross margin for the quarter is 44.9%, and this brings our overall gross margin to 41.4% for fiscal 2 for fiscal 22. Note the gross margin includes stock-based comp, 4.5 million, depreciation 6.5 million. Our operating expenses for the fiscal year, including R&D and SG&A, change in fair value, and mark-to-market adjustments of acquisitions was approximately 319, as compared to 204, $44 million in fiscal 21. To break it down, R&D for the fiscal year was $120 million, an increase from $69 million in fiscal 21. Core business R&D for fiscal 22 increased to $56 million compared to $37 million as we continue to invest in new products and process development. Antibody R&D was $25 million in fiscal 22, up from $15 million, reflecting our continued investment in our antibody discovery business. Revel R spend was $14 million in fiscal 22. Data storage spend was $25 million, up from $15 million in the previous year. We had previously given guidance that the original data storage spend would be $40 million. However, as the year unfolded, we managed that spend and managed that burn in data storage. SG&A for the fiscal year was $212.9 million, an increase from $135.9 million in fiscal 21. And this includes compensation costs of $136 million, which includes stock-based comp of $55 million. Start-up costs in SG&E for Portland were $16 million in fiscal 22, including approximately $6 million in compensation costs. Change in fair value of contingent considerations and indemnity holdbacks for the fiscal year resulted in a gain of $14 million versus a gain of $0.5 million in fiscal 21. Stock-based compensation for the year was approximately $80 million as compared to $37 million in fiscal 21. Our net loss before taxes was $234.8 million for fiscal 22 as compared to $152.7 million for fiscal 21, primarily due to higher OPEX costs we highlighted earlier. CapEx for the fiscal year was $102 million. Portland CapEx for fiscal 21. And fiscal 2022, i.e., cumulative, is a total now of $87 million, which includes $46 million for tenant improvements, $54 million for lab equipment, and $7 million for capitalized software. We exit the fiscal year with $39 million in inventory, and cash investments are approximately $505 million as of September 30, 2022. I'd like to note that the report in conformance with accounting standards is published under U.S. GAAP. and there have been no material adjustments proposed by our independent auditors. I'll now provide guidance for fiscal 23. We enjoyed strong bookings in quarter four and another record year of growth. However, due to the macroeconomic environment and as more SARS-CoV-2 variants continue to emerge, along with seasonal vacations this quarter, we're projecting our Q1 revenue to be approximately $54 million, And our fiscal 23 guidance for the year is in the range of $261 to $269 million. We estimate Q1 SIN biorevenue to be approximately $21 million and for the year to be $104 to $106 million. We estimate Q1 NGS to be approximately $25 and for the year $120 to $123 million. Note NGS is down sequentially. The reason is a couple of our large customers are taking shipments in the first quarter due to the seasonal impact of vacations. We estimate antibody discovery revenue for the first quarter will be approximately $8 million and for the year $37 to $40 million. Our fiscal 23 gross margin is projected to be 39% to 40% and our operating expense is projected to be approximately $365 million for the year, which includes $138 million R&D. and $227 million SG&E. Our net loss guidance before taxes for the year is expected to be approximately $260 million, which includes stock-based comp of approximately $83 million, depreciation and amortization of approximately $26 million, and data storage expense of approximately $46 million. CapEx fiscal 23 is projected to be approximately $50 million, with another $20 million expected to be deployed in Wilsonville. And cash balance projected year-end of fiscal 23 is expected to be $300 million. For fiscal 24, we're projecting revenue to be approximately $350 million, and that includes $50 million for antibody discovery. Cross-margin of approximately 49%. OPEX to be approximately $386 million. Operating loss to be approximately $215 million, which includes stock-based comp, or approximately $90 million. Depreciation and amortization. of approximately $35 million, and data storage OPEX of approximately $57 million. CAPEX, we're anticipating to be $40 million, and the year-end cash balance, the end of 2024, is predicted to be $170 million. In summary, we had a record year and continue to build our capabilities, expanding our position as a provider of choice of high-quality, affordable synthetic DNA to our customers across multiple industries. We're now a leading supplier of NGS sample prep, and we have scaled our antibody discovery capabilities and continue to deliver on our DNA data storage strategy. Although there is macroeconomic volatility, we're excited about the opportunities ahead and are focused on executing on the financial projections outlined in today's call. With that, I'll turn the call back to Emily.

Thank you, Jim. As Cisco 2023 is now well underway, our focus remains on driving to our profitability in our core business. We've laid out the two-year guidance with a path to adjusted EBITDA and break-even for the core business, and we are targeting $18 million revenue to reach adjusted EBITDA break-even for biopharma. In SynBio, we expect to generate initial revenue out of the Factor of the Future outside of Portland, Oregon in January 2023. As we qualify our production processes in this new facility, we will begin to add new products for SynBio that benefit from the larger square footage of the site, including fast genes, long fragments, impossible genes, and RNA-based products. For NGS, we expect another back-high flow to deal with larger customer-producing liquid biopsy tests as they continue to run their commercial efforts. With sequencing curves coming down, we remain focused on expanding our reach in cancer and owning the workflow between the sample and the sequencer. In Biopharma, we are planning an integrated portfolio of antibody discovery and optimization offerings, capitalizing on efficiencies between our synthetic laboratory approach paired with in vivo discovery from our Boston team, both complemented by our machine learning and AI collaborations. In data storage, we have our first real integrative seamless chip with data training controls in-house, and are making good progress to bring up the chip and our new pilot production DNA data storage writer. We plan to launch our central archive solution as an early access offering in late Canada 2023. In parallel, We will continue to partner with LEADER to set the stage for commercial success across the century and accessible archive solutions while preparing the market for DNA data storage. Overall, I'm reminded of a speech I gave when we went public a little over four years ago, a twist, it hasn't always been easy. In fact, it has never been easy, but we're always tested to overcome the challenges we face. We have embodied resilience and financial discipline throughout the organization, to report another strong year of growth. And each day, we have the opportunity to go again. I can't wait. With that, let's open up the call for questions. Operator?

Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from Stephen Ma with Cowan. Your line is now open.

Oh, great. Can you guys hear me? Yes.

Yes.

Okay. Great. Thanks for taking the questions. A question on the gross margins. I know they're dropping in fiscal year 2023 as factor of the future scales. And then, Jim, you mentioned it grows to 49% in fiscal year 24. Would you expect the utilization percentage of the factory of the future in fiscal year 2024 to achieve that 49% gross margin guide? And then also, are you reiterating the 50% to 52% gross margins at $300 million in core revenues?

Yeah, so in terms of actually the future utilization, we haven't disclosed what the utilization rate looks like. The 49% gross margin reflects the growth in top-line revenue and does reflect improved utilization. And in terms of as we continue to scale the business, we still see line of sight in terms of achieving the longer-term gross margin of 55% to 60% for the business.

Okay, great. Thanks for that. And then my second question. On MRD, Emily, you noted that the business is doing well. People are validating the MRD assays. Did you mean that the users are validating your product for lab-developed tests? And then the second part of that is, could you give us a sense of your mix of your MRD customers? Are these reference labs, academic hospitals, or basic R&D? Thank you.

That's a great question. Thank you, Steve. So as a reminder, we provide the reagents to enable customers to run MRD tests. So we're not sending our own MRD tests, just to be clear. And so, therefore, the majority of our liquid valve CNMRI customers are diagnostic companies that are developing and validating their own tests.

Okay, that's helpful. I'll hop back into the queue.

Thank you. One moment for our next question. And our next question comes from Catherine Schulte with RW Baird. Your line is open.

Hi, thanks for the questions. I guess first, maybe the step down in NGS orders sequentially. Can you just talk to the drivers there that were going on?

Yeah, I think a couple of issues. We had some large orders come in the previous quarter. And as we noted in the call, a couple of our customers are actually – asking us to ship in the first quarter of the calendar year. So that's just a step down and orders is just a one-time event as these customers are pushing their orders out into Q1. We get a very strong backlog in terms of the number of customers. Our pipeline continues to grow. So we're feeling good about where we're at. We're just dealing with, I think, the year-end vacations. We see some impact of lockdown in China, and at the same time, our customers are signaling strong outlook for us on our NGS products, and we anticipate that the quarter one of fiscal next year is going to be strong.

Okay, got it. And then I think probably, you know, given the events of this week, you highlighted that no material adjustments have been proposed by your auditors. Can you, you've had a material weakness that's been highlighted in your filings for a while now. Can you just talk to how those remediation efforts are progressing and any other comments you can make regarding the short report from earlier this week?

Yeah. So, thanks, Catherine. So, we've actually had three material weaknesses. One on order entry, other on journal entries, and other on ITGCs. We've remediated the order entry weakness. We remediated the journal entry weakness on ITCs. The ITGC issue, that remains, and that's purely due to user access issues. There's no impact on our financials. And in terms of the short report, you know, a couple of things that we brought up in the short report, you know, we in the business, I mean, we've worked with both PWC and Ernst & Young. PWC is a great firm. We moved to Ernst & Young because if you look at our business, we've significantly grown our healthcare business. Ernst & Young has a strong healthcare practice. We collaborate well with our auditors and as highlights, we get no material weaknesses. And in terms of some of the personal references against me, I actually helped out in an organization. You know, we've got 230,000 ladies in prison in this country. I helped build careers, helped them get trained, they get development, and a lot of them moved on to be executives in companies. And I think it's... is a great social impact. And I had actually no share ownership. I was offered shares, but I declined that. I would have preferred the latest shares, so the statements in the report are totally wrong.

And Catherine, just so you know, we won't comment further on the short report. We're very happy to take questions on the but our statement on Mondays and the great transparency that we strive to always provide as the management team speaks for itself.

All right. Thank you. Thank you. One moment for our next question. And our next question comes from Matthew Sykes with Goldman Sachs. Your line is now open.

Hi, good morning. Thanks for taking my question. Emily, maybe the first one for you just on the gene maker market as it relates to factory-to-future capacity. I know you've mentioned in the past it's like a $1.4 billion market and what a characteristic that's important to them is turnaround time. Could you maybe just talk a little bit more about the improvement in turnaround time that factory-to-future will bring and just kind of talk a little bit more about Because I think originally you thought that price was going to be a defining factor for that market, but it's really turnaround time. Could you just talk about what that market is really looking for? I'm sure it's turnaround time, but in addition, what else, and how you can unlock that market to solve for the capacity that you're building with Fact of the Future to make sure that there is a significant enough market out there for what you're building?

Absolutely. Thanks for the question, Matt. Now that we've been in the marketplace for a number of years, we We've shipped more than half a million individual tubes and engines this year alone. So we have a really good grasp of what customers want. And what we see in the makers' market is two groups. There are the big companies that insource the work, as well as academic labs postdocs and grad students that need DNA. What we find from those groups is speed is very important for them. And even if the DNA was free, they would not get it from us at the speed that we have now, which is industry average. And so that's why we made an effort to lay a plan to offer them genes synthesis that is the same or faster than if they did it themselves. And the reason why we can do that is when we analyze the process that we use in South San Francisco, the 20-step back-end process of gene synthesis is not a linear production process today. It's 20 steps, but we have 10 machines, and so basically the same order as to go to a machine twice, and that creates conflict. And when we analyze the data, everything is logged in our databases. We found that DNA is spending half of its time in freezers waiting for the next machine to be available. And so we know that intrinsically the process can be half as fast if we can remove those production bottlenecks where the the plate is waiting for the next machine. And so that's what we've done in Portland. In the Portland facility, we now have 20 machines, such that is a true linear production chain. And the plates go into one machine, and when it's finished, it goes directly to the next one, to the next one, and there is no wait time. And so that's why we think it's a, we feel it's a low risk on the process side, because we're not changing any chemistry, we're not changing any instrument, It's the same process, it's just there's no wait times between steps. So the combination of that market understanding with the different layout of the backend production in Portland will enable us to offer fast genes and that will unlock the maker's market. There's a slow, in addition, a commercialization strategy to leverage e-commerce and digital marketing. And so we've been making great effort on our e-commerce in our B2B solutions to make sure that when we have fast genes, the transactability that the customer has to go through to work with us is intuitive, frictionless, and beautiful.

Got it. Thanks, Emily. And then, Jim, one for you. Just looking at the fiscal 24 guidance on the OPEX, the 386, I know that there is 57 million of that is DNA storage. Can you talk a little bit about your expectations for R&D versus SG&A split within that 386 and where the flexibility is within those two segments, the SG&A versus R&D, for that 386 to maybe come down a little bit as you start moving closer to that time period?

Yeah, so in terms of the three stakes, we haven't broken out the R&D portion. The flexibility we see is in terms of SG&A as we tend to continue to grow and leverage our investment in infrastructure. You know, we've been clearly, as you can see, the flow down the rate of growth of OPEX. We've been investing heavily over the last few years, building out organization infrastructure. And as we continue to scale the top line, we've highlighted in previous calls that OPEX will grow at a slower rate than top line growth. And as we continue to manage our data storage investment, continue to manage our SG&A, in particular our back-end office infrastructure, we'll continue to manage that cost base going forward which will then support us getting to just even to break even and getting to positive income. So we're very close to that end of 24. And as you can see, we get plenty of cash runway as we get close to that, just even to break even, and we have the opportunity to manage our data storage spend.

Got it. Thank you.

Thank you. One moment for our next question. And our next question comes from Luke Sergat with Barclays. Your line is open.

Great. Good morning, everybody. One cleanup here. So can you give us the FX assumption for next year and kind of give us a sense of how that trended throughout this year as well?

Yeah, so look, it's Jim. Good morning. So in terms of FX, most of our business is actually in dollars. And most of our costs are actually in dollars. So although there's a maybe 10% impact, it's not as a huge impact in our business so far. In terms of the pricing on a go-forward basis, we're actually, with a lot of our MGS particularly, some of our larger customers are already locked in the prices. So in terms of FX, yes, we see some impact around the fringes, but it's not a significant headwind for us.

All right, cool. Thank you. That's fine. Excuse me. On the rest of the business, so you talked about the NGS pushouts. So what are customers saying on why they push those orders out to 1Q, and is this related to anything to all the new technologies out there?

I'm not aware of the new technologies. It's just in terms of timing. The couple of customers that I'm aware of, it's just a matter of timing. If I was thinking in December, it's going to be shipped in January. And that's based on their end customer demand. So I haven't heard anything on the technology side, Emily.

I think it's purely pre-timing of their business. We have experience and the last weeks of December are always awkward in shipping. This year is especially awkward. We think that most of our customers will be shut down the last week of December. We're planning for that.

All right, and then one last one for me is, you know, you gave the 24 guide and, you know, the growth assumption here of roughly flat growth and, you know, 30% is very impressive in itself. So just wondering why, you know, what's the assumption here, no acceleration from factory of the future coming online? Is it something like that the growth is really satisfying the printers coming online and then you guys are going to bring more on on 24? as you continue to scale the business, and then any of the mixed dynamics as it goes to Symbio or NGS as the factory-to-future ramps, because there's a margin implication here.

Yeah, so in terms of factory-to-future ramp, we're seeing roughly 50-50% in terms of the Symbio-NGS mix. In terms of outlook, the macroeconomic environment is still volatile, so we're projecting a couple of years here, so we're always prudent in terms of our forecasting. In terms of capacity, we've made the investment. I think in terms of overall, in terms of facts of the future, we've made about $87 million investment. We've got another $20 million to go. And that's consistent with the previous guidance we've given, and that's going to be ample capacity to support us getting to at least 350 and beyond. So we don't see any headwinds from a capacity point of view. It's all down to, as Emily's highlighted, down to execution and then executing on the maker's market.

Great, thanks.

Thank you. One moment for our next question. And our next question comes from Vijay Kumar with Evercore ISI. Your line is now open.

Hey, guys. Thanks for taking my question. Jim, I had one on accounting here. I think one of the points raised by the short order was COGS being classified as CapEx. Can you comment on that? And when I looked at the last uh, you know, the third quarter, 10 Q, uh, some of the costs, the operating lease costs associated with factories, the future when it impacts, is that a change, uh, from how expenses were being recorded in the past or, or is this because you moved into a lease facility and it's just how the accounting works, maybe address those two issues.

Yeah. So in terms of, uh, COGS being moved onto the balance sheet, that is an interesting observation. I have no idea where that comes from. If you look at the growth or the investment in CapEx, we laid out on one of the slides today, for Portland, we've invested about $46 million in tenant improvements. We took over essentially building that needs 100,000 square feet, that kind of improvement. If anybody is interested, I can show you the invoices. It's all building out the structure for the labs, installing all the offices, all the piping, etc. The items that are associated with the investment in Portland are sitting on our balance sheet. In terms of What was the other part of your question, P.J.?

The operating expense, some of the lease expenses related to a factory of the future that's going under OPEX, is that a change versus prior?

No, the lease expenses related to the factory of the future is part of startup, and that's prior to factory qualification. that is sitting in SG&A, and that was $16 million for this year, and we call that out every quarter. So there's been no change in how we account for that.

Thank you. And maybe one on this gross margin cadence here. What's the confidence here that the gross margins are going up by 900 basis points from now? fiscal 23 to 24. That seems like a very steep ramp, Jim. And when I look at Q1, is there any first half versus second half cadence issues here on gross margins when I look at fiscal 23?

Yeah, so if you look at last quarter, gross margin is 45%. As we scale through the fact of the future and improve our utilization, And we are successful in terms of growing in the maker's market. We've got a number of levers there. You get the impact of reducing underutilized capacity. Second is in terms of the maker's market, as Emily's highlighted, the faster genes. We get higher price. We get good leverage there. In terms of investment, in terms of R&D, if you look at our R&D, that was another point made in the short report that our R&D increased from $70 million to $120 million. We increased the investment in SynBio NGS from $37 million to $56 million. I put a slide in this just to give transparency. So we hired additional scientists. We're increasing our investment in NGS and SynBio. What does that mean? We keep refining our processes and keep launching new products. So you're going to have a combination of scaling the factory in the future, seeing growth in revenue, improving our position in the maker's market in terms of growth in the maker's market, and launching new products. All those elements contribute to improving our gross margin. And just while I'm on the comment, you know, the Overall R&D increased from 70 million, roughly 70 million, 21 to 120 million. DNA storage was up by 9 million. Revolar, this is a one-time event. We spent 14 million in Revolar R&D in 22. That will not happen in 23. And then in terms of antibodies, we stepped up our investment antibodies. So we'll actually see growth in biopharma business as well. and that contributes to our gross margin improvement.

Understood. If I may, one last one. Revenues are up. I think when I look at the 24 guide versus 23, the initial expectations of revenues up 30%. The OPEX up, I think, 6%. I think a cash OPEX, ex-FTC, is low singles. Is that level of SG&A spend... R&D spent, is that enough to sustain the growth here?

Yeah, I mean, if you look back over the last couple of years, we have increased, back to my point there in terms of R&D, for SynBio and NGS, we have to expand from $37 million in R&D, SynBio and NGS, in 2021 to $56 million. So what's that about 50% growth? So the advantage of the factory in the future is fast turnaround time and fast change, which allows us access to the maker's market. So it's a combination of historical investment and the impact of the factory in the future and our investment in antibodies that allows us to deliver the growth. that we're projecting.

Understood. Thanks, guys. Yes.

Thank you. One moment for our next question. And our next question comes from Puneet Suda with SVB Securities. Your line is open.

Yeah. Hi, guys. Thanks for taking the question. So first one, what are you hearing from European customers in terms of the order book and wondering if there was any NGS order book impact from that. Could you just elaborate, just given the market conditions in Europe, we've been getting questions on that.

So I can, so in terms of order book, you know, the Q3, Q4, the sequential step down, however, what we are hearing from our customers is It's kind of selective. The outlook looks good. Some orders are being pushed out from Q4 into Q1. The conversations on liquid biopsy are good. Conversations on MRD are good. Europe, we actually had a strong quarter in Europe, which kind of surprised us. September, we anticipated that Europe would have been a little bit weaker. And, you know, September was strong. And we're encouraged by what we're hearing. On the China side, we have seen a little bit of impact of lockdowns. That will impact us sequentially from Q4 to Q1. Talking about our fiscal Q4. So September to December quarter, we'll see Asia being down. But that's the impact of lockdowns in China. Overall, the feedback from the customer base is strong. Why is that? It's because of the quality of the product. We are a low-cost quality provider, and this environment suits to us.

Okay. That's helpful. Emily, if I could ask on the liquid biopsy customers, I don't know if you provided that number. I think you had about 20 or so liquid biopsy customers. and past, you know, could you quantify, just given all the questions lately being asked, could you quantify how large of a book of business is liquid biopsy today? And, you know, are these early validation versus any commercial products where your probes are being utilized? And what are your expectations for contribution in 2023 from these liquid biopsy customers? Because that's obviously an important driver. even with the Novastick X Plus launch, which is targeted more towards, you know, whole genome shift.

Yeah, maybe I'll start, and Jim can fill in. Yeah, we are starting to see revenue from customers that are likely in the commercial phase. You know, we see probes that are always easy to know, how they are used with customers, if it's in validation or pilot. But in the past, most of our revenue was for the R&D, the development of the test. But as we find bigger contracts and get bigger orders, now we're starting to see slow orders in the commercialization phase.

Jim, I don't know if there's anything more we can say. No, there's not.

Not more I can really add. But our large accounts continue to grow. We feel well-positioned with Liquid Biopsy and the other applications. And we discussed some of the feedback from customers. Some of it was timing. We continue to make inroads in the market. And it's all about execution over the next year. We have a great cash organization.

We get great products. Anything you can elaborate in terms of sort of how should we think about in your guide for 2023, 2024? Obviously, by 2024, these would be a larger customer. So just wondering in terms of overall contribution that you could see from Liquid Biopsy?

No, we don't bring that out. And the reason for that is we have agreements with our customers. So the only... The only customer, I think, that's gone public is Grail.

Okay. I think the one thing we can comment, what we shared before, is liquidity is a big strategy. It's a big part of our strategy for revenue growth, and that's why we have good confidence in our ability to deliver this as a goal commercially.

Okay, that's helpful. And, you know, if I could ask a more broader question, just given the sort of the questions that have been asked lately in terms of pricing, what is your philosophy here in terms of pricing versus the market? Obviously, you've been competitive in past, and as you scale into factory of future, could you sort of elaborate about your pricing expectations? Because I think the question is, this is a higher inflationary environment. and you are getting some benefits from the COGS at the factory in the future, but just could you elaborate a little bit on how are you thinking about pricing in 2023 and within the guide that you have laid out? Thank you.

Yes. So, actually, in a fractional environment, it can be a little bit useful for us, actually, in production, because since we use so much lead reagents than anybody else, If the reagents go up 5%, 10%, 20% in prices, the impact to us is a lot less significant than on the competition. Also, we were quite smart. I think when we signed the lease in Portland, it's a very long-term lease, and we basically capped the rate of increase on the rent for a long time. we have rent at lower than inflation. So that's another great benefit to us. So that's on the cost side. And then on the price side, our fees are to be value priced. And so when we launch our fast jeans, we expect that the ASP for fast jeans is going to be higher. However, it will be the exact same production facilities. And so, therefore, we anticipate that margins will increase. Similarly, when we've launched the IGG product line, that is a great opportunity for us. IGG require two genes to make one IGG, and the ESP is somewhere between $500 to $800, depending on the flavors of IGG that customers want. And so again, that's an opportunity for us to boost our margins. So we're always looking for opportunities. And as we go up the value chain, either in fast genes or long genes or impossible genes or IGG and RNA products, you can see that those are more differentiated, harder to make products. They're still all... help us dominate because of the silicon chip. They come from the silicon chip, but because they are other and higher value products, we'll be able to charge a premium for it and improve our margins. Got it. Okay. Thanks, guys.

Thank you. One moment for our next question. And our next question comes from Rachel Vasta with JMP Chase. Your line is open.

Hi, thanks for taking the questions and fitting me in. So first up on DNA data storage, you mentioned that you're launching that offering for early access customers late next calendar year. So can you just talk about how much of a contributor you expect that DNA data storage offering to be towards the $350 million revenue guide in fiscal year 24? And then can you remind us, what is the gross margin profile for that DNA data storage offering expected to be? Thanks.

So we don't break out the data storage revenue contribution in the 350. Long-term gross margins for data storage could be quite compelling. Initial models indicate anything from 60% to 65% gross margins. Why is that? One is because of the technology. We do have a leading position in the marketplace. Our expectation is we're going to leverage our investment and our IP, and that will be reflected in our gross margins.

Great, and then as a follow-up.

Okay. Sorry, Rachel.

Yeah, you answered both of them. And then just as a follow-up on that, you had previously mentioned that you were developing an enzymatic approach to support a full commercial launch for that DNA data storage. So can you just give us the latest update on your enzymatic offering and what milestones do you have left before you can have that enterprise chip fully developed? Thanks.

Yeah, thank you. It's a great question. So we're not giving an update at this point on enzymatic synthesis except to say that we are incorporating the chip, the CMOS chip that we have, with the enzymatic synthesis to help drive our DNA data storage process. So we are re-emphasizing that enzymatic synthesis is going to be a key strategy of our data storage products offering, but we are not giving any technical update at this point. However, what we're looking for is developing the process to be able to add bases, to do it at high quality, to do it at high speed, and most importantly, is to do it at low COGS. Jim just mentioned our margin profile, and it cannot be done with standard enzymatic synthesis where where the NTP is not tethered to the enzyme. The only way to get low COGS and high margin is to tether that NTP to the enzyme. So I think we think our approach is a winning approach. We'll pick the most appropriate time for us to get the biggest bang for our buck in terms of releasing technical details. We like what's happening and we like our progress, but we still

um details for another day that sounds great that's it for me thank you thank you thank you one moment for our next question and our next question comes from matt larue with uh william blair your line is now open hi thank you um this is actually madeline moment on for matt larue

Just wanted to do one quick one from us. Within biopharma, you've talked about it taking between 18 and 24 months for partners to go from working with you to filing an IND application. Since you've now been doing this program for over two years, could you talk a little bit about when you are expecting to start to see some downstream milestones and royalties?

Yes. Thank you so much, Activity. a robust effort internally to track the progress of those assets. And we have our own model on our view of the value. And at this point, we're not quite ready to announce any of those milestones of royalty, but as we've said in the past, those would be upside to our plan. So stay tuned. It's definitely something that we track with our partners because we definitely are looking forward to both the normalization as well as the scientific validation. One last point I'll make, that being said, Again, we are not in the business of subsidizing our partners. And so as a reminder, we do make about 50% to 60% gross margin on the upfront fee that we charge. So the maximum that we get would be upside and additional monetization on top of the gross margin that we made on the work that we did.

Great. Thank you.

Thank you. Thank you for your questions. At this time, I'd like to hand the conference back over to Emily Leprous for closing comments.

Thank you very much for joining us today. I'd like to wish you all a wonderful Thanksgiving holiday next week, and hopefully we'll see some of you live in Portland following the holidays, and others virtually at the Evercore Healthcare Conference in December. With that, thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.