RPID - NASDAQ

Thank you for standing by. My name is Novi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rapid Micro Biosystems Third Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. I would now like to turn the call over to Mike Beaulieu with Investor Relations. Please go ahead.

Good morning and thank you for joining the Rapid Micro Biosystems Q3 2024 earnings call. Joining me on the call are Rob Spignesi, President and Chief Executive Officer and Sean Wirtjes, Chief Financial Officer. Earlier today, we issued a press release announcing our Q3 2024 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, assumptions regarding future financial performance, anticipated future cash usage and cash runway, guidance for 2024, including revenue, expenses, gross margins, system placements and validation activities, Rapid Micro's goal of achieving positive cash flow without additional financing and the timing thereof, expectations for and planned activities related to Rapid Micro's business development and growth, customer interest and adoption of the growth direct system and statements regarding Rapid sterility. 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 quarterly report on Form 10-Q 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 financial future performance. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 1st, 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.

Thank you, Mike. Good morning, everyone, and thank you for joining us. I'll begin this morning's call with an overview of our third quarter performance and highlights, including a review of our progress in advancing our 2024 priorities. I will then turn the call over to Sean, who will provide a more detailed review of our financial results as well as our full-year guidance. Third quarter total revenue increased 24% to $7.6 million compared to Q3 last year. This marked a quarterly revenue record for the company in our eighth consecutive quarter of exceeding our guidance. Based on this strong performance, we are reaffirming our full year 2024 revenue outlook of at least $27 million. We placed seven growth direct systems across North America, Europe and Asia Pacific, marking our strongest placement quarter since Q3, 2021. Through September we have now placed a total of 15 growth direct systems in 2024, bringing our total to 156 placed systems. On recent earnings calls, we have discussed our progress with customers deploying growth direct systems across our global manufacturing networks. This morning we reported third quarter results that included a multi-system order from one of our existing top 20 pharma customers that is part of an ongoing global rollout. This placement is a clear example of our land and expand commercial strategy and is typical of how customers execute growth direct global rollouts. I like to provide additional context on this commercial win. Our partnership with this customer began a few years ago with a multi-system order at a single site in North America. This customer is a global leader in the development of biologics and cell and gene therapies. They're focused on automating manufacturing processes, including quality control to accelerate turnaround times and to ensure patients receive life-saving therapies. As a customer recognized the benefits of the growth direct, such as full automation, fast turnaround times, reduce labor costs and increased accuracy, they placed a second order for another US site. This past quarter, they expanded to a third site within their network through another multi-system growth direct order including software, services and consumables. We anticipate continued growth with this customer in the near term including further expansion across our global network. Importantly, we remain actively engaged with several other customers planning to expand their growth direct footprint across our manufacturing networks. We believe this momentum together with our existing base of nearly 160 place systems, our strong presence among the Top 20 global pharma companies and our 100% position in FDA-approved CAR-T therapy manufacturers establishes the Growth Direct platform as a clear industry standard in automating pharmaceutical microbial quality control. Later this month, we will attend our annual Growth Direct Day. Last quarter, we announced that Lonza, one of the world's largest CDMOs will host this event near one of their manufacturing sites in the Netherlands. As a reminder, this unique 2-day event will bring current and prospective customers together to share best practices, gain firsthand experience and increase their understanding of the value proposition of using the Growth Direct. We expect up to 100 attendees and look forward to this exciting event. Turning to gross margins, the guidance we provided earlier this year included a positive inflection beginning in Q3. I am pleased to report that we achieved a 35-percentage point improvement year over year resulting in positive 8% gross margins. To expand on this point, the total cost of revenue in the Q3 declined 10% year over year, while total revenue increased by 24%. The improvement in our cost structure reflects our ongoing efforts to reduce product costs, enhance manufacturing efficiencies and improve service productivity. This positive inflection in our gross margin marks a significant milestone for the company. Looking ahead, we anticipate further improvements to our cost structure which will enable us to capitalize on the operating leverage in our business model. Now, I'd like to shift to a brief update on the commercial launch of Growth Direct's Rapid Sterility. We continue to expand customer engagement through conferences such as last month's PEA microbiology conference, sterility-focused webinars and on-site demonstrations at our Lexington and European customer labs. Our commercial teams are receiving positive feedback on the RAVIS Realty value proposition and these efforts continue to drive growth in our sales funnel. So, wrapping up my prepared remarks, I'd like to summarize our key messages and takeaways from the Q3. We are pleased to report record quarterly revenue, marking our strongest quarter for system placements in the past 3 years and clearly demonstrating our strong business momentum. We continue to make significant progress with multiple customers who are planning global deployments of growth direct systems. Our focused efforts on cost and efficiencies have resulted in a positive inflection in gross margins, which we expect to continue to expand. We remain disciplined with respect to cash management with a focused goal of achieving positive cash flow by the end of 2027 without additional financing. These strong fundamentals are underpinned by a business model that includes the highly differentiated GoThra system that is clearly the industry standard and is the only fully automated high capacity high throughput data secure platform. A demonstrated customer value proposition that can address all pharmaceutical manufacturing modalities and becomes embedded in manufacturing workflows and a robust business model with multiple revenue streams, including a growing base of durable recurring revenue. We are confident that collectively these fundamentals and business drivers combined with our consistent performance position us to create substantial shareholder value. And with that, I'll turn the call over to Sean to discuss our third quarter performance and outlook in more detail. Sean?

Thanks, Rob. Good morning, everyone. Consistent with our previous calls I'll begin my comments this morning with a review of our third quarter results followed by our current outlook for the full year 2024. We will then open the call up for questions. Third quarter revenue increased 24% to $7.6 million compared to $6.1 million in Q3 2023. During the third quarter, we placed seven growth direct systems compared to five in the third quarter last year. We also completed four validations in the quarter, which was consistent with Q3 last year. Product revenue, which is comprised of systems and consumables, increased 25% to $5.3 million compared to $4.2 million in Q3 2023. Systems revenue increased almost 50% due mainly to the higher number of system placements in the quarter while consumable revenue grew in the mid-single digits compared to Q3 last year. Service revenue increased 21% to $2.3 million compared to $1.9 million in Q3 2023. This growth was driven by higher revenue from both validation services and service contracts. The third quarter recurring revenue, which consists of consumables and service contracts increased 8% to $3.7 million. Non-recurring revenue, which is comprised mainly of systems and validation revenue increased 44% to $3.9 million. Turning to gross margins, product margins were near breakeven at negative 1%. This represents a $1.5 million or 34 percentage point improvement compared to Q3 last year. Once again, this demonstrates the consistent and meaningful progress we are making on our initiatives to reduce product costs and increase manufacturing efficiency to drive continued improvement in our product margins. The higher volume of growth direct systems placed also positively impacted product margins in the quarter. Service margins were positive $0.7 million or positive 29% in the third quarter compared to negative $0.1 million or negative 7% in Q3 last year. The 36-percentage point margin improvement was driven by higher revenue and productivity, as well as lower headcount and other service-related costs. On a combined basis our third quarter gross margin was positive $0.6 million or positive 8% compared to negative $1.6 million or negative 27% in Q3 last year. This represents a 35-percentage point improvement. We are pleased to have delivered on our commitment to reach positive gross margins in Q3 and remain laser-focused on building upon this milestone to drive continued and significant year-over-year gross margin expansion moving forward. Moving down the P&L total operating expenses were $12.7 million in the quarter. While this was essentially flat with Q3 last year, it's important to note that this quarter's OpEx included $0.6 million in one-time severance and other expenses related to the operational efficiency program we announced in August. Operating expenses were down approximately 7% in the quarter excluding these expenses. Within OpEx, R&D expenses were $3.6 million, representing an increase of approximately 16%. This increase was mainly associated with new product development activities, including the commercialization of our new Rapid sterility application. Sales and marketing expenses were $3.4 million or down approximately 3% and G&A expenses were $5.7 million or down approximately 9% due mainly to lower headcount related costs. Net loss was $11.3 million in Q3. This compares to a net loss of $13.4 million in Q3 last year. Net loss per share was $0.26 in Q3 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 expenses were $0.9 million stock compensation expense was $0.9 million and capital expenditures were $0.2 million in the Q3. We ended the quarter with approximately $61 million in cash and investments. Now I'll turn to our full year 2024 outlook. We continue to expect total revenue of 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%. Looking at Consumables, we expect Q4 revenue to be relatively consistent with Q3 due mainly to the timing of customer orders and shipments. With respect to service, we expect revenue to be between $2.5 million and $3 million in Q4 with variability primarily driven by the timing of validation activities. We are reaffirming our guidance of at least 16 validations in 2024. Turning to margins. We expect gross margins to increase sequentially in Q4 with product margins relatively consistent with Q3 and service margins higher primarily due to increased service revenue. We now expect operating expenses to be between $50 million and $51 million for the full year with savings from the operational efficiency program we announced in August largely offset by related severance and other one-time costs. We expect depreciation and amortization expense of approximately $3 million stock compensation expense of approximately $4 million. CapEx of approximately $2 million and other income, which is comprised primarily of interest income of approximately $3 million. Finally, we continue to expect to burn roughly $40 million in cash for the full year 2024. Looking ahead, we continue to expect to meaningfully reduce cash burn over each of the next several years through a combination of revenue growth, margin improvement and tight management of OpEx, CapEx and working capital with a goal of achieving positive cash flow by the end of 2027 without additional financing. That concludes my comments. So, at this point, we'll open the call up for questions. Operator?

Your first question comes from Brendan Smith with TD Cowen on a moment, please. Please go ahead.

All right. Thanks for taking the questions and thanks for all the color on the call. Maybe just a quick one from us. I know you just touched on it a little bit there at the end, but I guess in the context of solid Q3 and keeping 2024 guidance in place, I mean how should we think maybe specifically about placements in Q4? Are you still kind of expecting top line growth into the end of the year? Or are there potentially some lumpy placements, seasonal trends we should keep in mind? Kind of really also curious like what you're kind of seeing that could kind of be driving some of the trends heading into next year too. Thanks very much.

Yeah. Hey, Brendan. Thanks for the question. So, I think the guide is kind of where it is. I think as we've talked about before and we're continuing with this approach, the guide is, I think, for us is prudent and we want to make sure it's achievable. There is still some headwinds out there in the market that I think we're hopeful that what we're seeing and what others are seeing are some glimmers of positivity in terms of what's happening out there with trends. But we're still seeing, you know, elongated kind of in some cases purchasing cycles. We're seeing, you know, more scrutiny of the purchasing process with some customers. So, we want to be prudent in terms of what we put out there in terms of the guide for Q4. But clearly that also allows us some room for upside if we're able to execute on things in the fourth quarter that we're not currently contemplating. So, I think you know that that's where I'd guide you for the fourth quarter right now.

And Brendan, it's Rob, thanks to the question. Maybe a little more color. The trends that we're seeing I think are consistent with generally with what, other life science tools companies have been reporting and it's been consistent for, the bulk of the year here. Some tight budgets, scrutiny on capital equipment purchasing. That being said, what we have seen, and I think what we've clearly demonstrated in our business is that compelling high ROI projects are being prioritized and funded. We think that's clear in our business. And our view has been a beneficiary of that. So, you asked about kind of, running into 2025 and that's what we, you know, likely anticipate more of that. And it's also what underpins our confidence for a. the balance of the year and going into 2025.

Got it. Alright. Makes sense. Thanks guys.

Your next question comes from Dan Arias with Stifel. Please go ahead.

Morning guys. Thanks for the questions. Rob, what are your expectations for accounts that are focused on new modalities? I mean, we've talked about usage there being more intensive than in other areas, but some of those customers still seem to be a bit shaky, but less on the large biopharma side. So, if you kind of net all that out, do you think those applications over the next 12 months are accretive, dilutive, kind of in line with everybody else? Just curious about the pace of uptake amongst some of your higher end users.

And when you say we, you say higher end users, you mean the biologics and cell gene therapies?

Yeah, exactly. Exactly.

Yeah, I mean, again, the bulk of our business is in that space and the multisystem order ongoing order with a growing customer, a large one that we mentioned this quarter is in that biologics and cell and gene space. So, generally we're performing, quite well and uptake continues to be strong. And I think as importantly, the outlook in our funnel with the multi-system orders that we've spoken about are largely driven around the larger I would say large primarily, but also mid-size of biopharma pharmaceutical companies as well as CDMOs. As I mentioned in the last call, sterility is reinforcing that, that funnel bill, but also allowing us, I would say better access and funnel build in areas that we've been, I would say relatively less represented in such as sterile injectables, sterile generics, things of that nature. I don’t know if that answered the question or not, but that's how we see it right now.

Yeah, it does. I mean, I guess I'm just trying to ask about, the area of the end market mix where, that when things really ramp up, they can be accretive to the overall average consumable’s usage. Just knowing that it's kind of fits and starts in some of those corners of the market depending on who you talk to.

Yeah. So, on consumables, we, the good news is in the biologics and cell and gene categories in that order, they tend to be the higher volume categories. So those systems, especially our EM application, but also the water and bio burden applications tend to be high yielding systems for us. So, the way I look at the funnel right now, it's largely the global pharma companies, but we have again a nontrivial amount of other segments in it and a lot of many of those slash majority of those will be and should be high yielding consumables. So certainly, accretive from a consistent with or potentially accretive to our current set.

Yes, okay. And then since you mentioned sterility, I know it's early days. I'm sure you're not trying to get ahead of yourself on expectations. But does what you're seeing in terms of adoption lead you to believe that when it comes to the model for 2025 sterility can be something that shows up as an accretive or an incremental positive at the revenue line for you guys? Is it going to be enough to move the needle next year?

Yes. So, I can give you the qualitative now and we'll reserve sort of the quantitative for later. But from a qualitative early day in the launch, the value proposition is hitting high notes with customers. So, we're hitting the interest level is high. As we touched on in our prepared remarks, we're actively engaged with customers across a multitude of areas. The feedback is quite positive. Now clearly, our job is to translate that into business and revenue that will show up in our business in 2025. But the leading indicators to include the funnel build are currently where we want them to be.

Okay. Last one for me. Sean, on gross margins for products, do you feel like you've crossed the Rubicon here such that you can be positive on a quarterly basis going forward barring some big change to the picture?

Yes, I wouldn't guide to that, Dan, but I think we're definitely on the right trajectory for that to happen in the near term. Mix is important for that. As you know, systems are at a much higher gross margin rate right now than consumables are. So, depending on volume and mix within product, that can bounce still bounce around a little bit. But the trajectory is similar to what we're kind of reporting overall within the categories within that. So, I think we're definitely on the right track there. We're close now. Did we get there in Q4? Now I think there's a chance to get there in Q4. And as volumes go up from there, I think we're we should be able to push it up and continue to drive up beyond well into positive territory as we continue to drive the growth. So, it will be driven by volume obviously, but also by the continued progress that we're making on the cost downs and the efficiency programs that we have going on within the operations team here.

Yes. Okay. Thank you, guys.

Okay. Well, thank you all. I'll speak for your time and attention this morning and thank you Dan and Brendan for your questions. With that, we are going to wrap the call up and we look forward to speaking with many of you soon. Thank you.