Good day, ladies and gentlemen, and welcome to Twist Bioscience Fiscal 2019 Second Quarter Financial Results Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Jim Thorburn, Chief Financial Officer. You may begin, sir..

All right. Thank you, Nicole. Good afternoon, everyone, and thank you for joining us today for Twist Bioscience conference call to review our fiscal 2019 second quarter financial results and business progress. Please review the press release we issued earlier today, which is available at our website at www.twistbioscience.com.

With me on today's call is Dr. Emily Leproust, CEO and Co-Founder of Twist. Emily will begin with a review of overall progress of Twist business and I will report on our financial milestones and operational performance, then Emily will discuss our upcoming milestones and direction. We will then open up the call for questions.

As a reminder, this call is being recorded. The audio portion will be archived in the Investors 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 Federal Securities Law.

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 and 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 SEC.

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 will now turn the call over to our Chief Executive and Co-Founder, Dr. Emily Leproust..

Thank you, Jim, and good afternoon, everyone. We've had another very strong quarter, reporting revenue of $13.6 million, driven by strong growth in both synbio and our genomics product line. In addition, we posted our first quarter with a positive gross margin, a significant achievement for a young company.

We are building on this momentum, continuing to leverage our silicon-based DNA synthesis platform, and expect to see continued growth over the course of the year and are increasing our top line guidance for fiscal 2019.

Beginning with synbio, we continue to deliver consistent revenue growth as we decreased our turnaround time and are now faster than the average 15-day cycle experienced broadly by the market. It used to be that when we talk to customers, we heard that they loved our price and our product but that we were slower than our competition.

Now, we routinely hear that we have the best offering for the affordable price, great quality, and rapid turnaround time. In fact, our average turnaround time this quarter was 13 days for genes up to 1.8 kb and about 14 days for all of the other gene lengths, even 5 kb.

On the strength of these turnaround time numbers, it is no surprise that the number of orders in the second quarter of fiscal 2019 increased by 3.8 times compared to the same quarter a year ago and increased 32% quarter-over-quarter, reflecting our success in continuing to capture the long tail of customers with very strong product differentiation.

As we move forward in synbio, our plan for improvement includes several new products to address the need of the follow-on market. In the fall-to-winter timeframe, we will introduce new products designed to support more of the customer needs in this market, which we believe will drive synbio growth in 2020.

For genomics and targeted NGS, in the second quarter of fiscal 2019, we again shipped our target enrichment products to more than 100 customers, with 24 of these customers now in production.

We see continued revenue growth, with $5.5 million in revenue this quarter coming from this product, which represents growth of over 800% compared to the same quarter one year ago and 45% quarter-over-quarter. Bolstering our first offering, we launched several new products during the AGBT Conference at the end of February.

We introduced FastHyb, a way to accelerate hybridization to as little as 15 minutes compared to 16 hours previously, a potential game changer for the industry. In addition, we introduced several products designed for automation and high-throughput analysis of all types of samples.

As part of AGBT, we had several customers present their experience using our panel. During this forum, the Broad Institute announced that they were converting to Twist for their ongoing need in genomics and reducing their all-in cost of samples from $500 down to $250 per sample, reflecting the significant sequencing cost savings we bring.

Initially, the Broad was using Twist for liquid biopsy, an exciting new area of testing that can provide information about cancer through a blood sample rather than a physical biopsy. From this initial project, they switched to Twist for all of their exome needs.

This conversion is a significant demonstration of the quality, value, and benefit we bring to the industry and we are excited that this thought leader has made the definitive switch. Helix, a second customer who spoke at AGBT, is now in production with our target enrichment panels.

They have switched their exome content to our product and supplemented it with about 300,000 SNP probes. In the past, such SNP analysis would have been done with microwaves but, of course, a SNP analysis with Twist capture plus NovaSeq sequencing is more affordable.

Helix also recently announced a partnership with PerkinElmer to develop and commercialize a targeted sequencing test covering 59 genes. This test will use our genomics products and are a great example of our innovative offering resonating with our customers.

As we have done for synbio, we will leverage e-commerce to scale the genomics business, increasing our reach into the market, and we remain on track to launch our e-commerce platform for several genomics products next week.

Looking ahead at the core synbio and genomics businesses, orders remain strongly ahead of revenue at $16.7 million this quarter and our revenue outlook for the next quarters remains strong.

We are beginning to close the gap between orders and revenue, since a bigger portion of orders now come in with actionable sequences that we can turn into revenues immediately rather than just booking an order with sequences to come later. Moving on to verticals, we've had a very active month for biopharma.

In April, the team presented early technical proof-of-concept data for both our GPCR antibody library and our antibody optimization solution at PEGS in Boston. For GPCR antibody library, we showed that we can readily develop antibodies with affinities in the minimal allowed range.

And we showed that these antibodies exhibited multiple different modes of action modulated to cell activity.

In addition, we presented data demonstrating that our antibody optimization solutions successfully generated anti-PD-1 antibodies with similar or improved binding, affinity, and function when compared to commercial anti-PD-1 antibodies on the market today for cancer therapy. We have signed two agreements for biopharma vertical this April.

The first strategic collaboration is with LakePharma, where we have the ability to appropriate the discovery and optimization platforms to their existing and future customers. In addition, our customers can access LakePharma's later discovery and development services. As you may know, LakePharma has created a robust customer base as the leading CRDMO.

This agreement allows us to leverage the reach of LakePharma's robust customer network while at the same time extending the joint capabilities through the entire development process, from discovery through to IND application.

In addition, we are working with Pandion Therapeutics, a private company focused on autoimmune and inflammatory disease, to optimize the targeting arm of one of their bispecific antibodies. This is an excellent opportunity for us to showcase our antibody optimization solution and demonstrate its benefits.

In parallel with the work we are providing for our partner, we are building a better package to target larger partnerships. While we do expect it to take some time to solidify these partnerships, we believe this is a viable pathway to create long-term value for our shareholders.

Finally, in response to our presentation at PEGS, our official launch of the biopharma vertical was very encouraging, with high levels of interest in our innovative silicon-based DNA writing approach for antibody discovery and optimization.

Turning to data storage, we are pleased to report that we have entered into negotiations for non-directed funding through a government contract on DNA data storage. While there are no guarantees that we will receive funding under this contract, and while we expect negotiations to take about six months, we believe this is a positive next step.

To accommodate our rapid growth, as previously announced, we are moving to a larger manufacturing facility in South San Francisco. For genes, we do not anticipate any interruptions in ordering, manufacturing, shipping, or customer support during this time, as we will be transferring our equipment in phases.

For NGS, we do anticipate a one-week interruption in production which will not materially affect our turnaround time product differentiation.

As part of the physical move to the new facility, we will be expanding our ISO-9001:2015 and ISO-13485:2016 certification and we have already scheduled the audit and expect it to be completed early in the fourth quarter of calendar 2019. In China, we are in the process of building out the space to fit our needs.

We expect the space will be ready in the fall of 2019, with initial shipments beginning from this manufacturing facility this calendar year. We continue to believe that adding a Chinese facility to make DNA in China for China will allow us to rapidly enter this market.

Finally, we added Battelle's ThreatSEQ service to our biosecurity screening protocol, continuing our leadership position in ensuring our synthetic DNA is used for responsible research. With that, I'd like to turn the call over to Jim Thorburn, our CFO, for a review of our financials..

All right. Thank you, Emily. As Emily highlighted, the results this quarter confirm we are aggressively growing our business and executing well. Revenues, as Emily noted, were 13.6 million. Our commercial team continues to deliver and we booked 16.7 million in orders. Our book-to-bill for the quarter was 1.23 to 1.

Our first half orders were almost 32 million. Our gross margin was 13% positive for the quarter and we're now positive gross margin year-to-date. We're expanding our customer base and extending our synbio reach beyond Ginkgo.

For example, we had bookings from approximately 780 customers in the quarter and we're also thrilled to announce that we shipped to over 600 customers in quarter 2. Just note, in 2018, we shipped to 717 customers. And for the first half, we shipped to more than 800 customers. And our Gingko business remains very solid.

Now, let me provide more details on our orders for the quarter. 16.7 million represents year-on-year growth of 96% and sequential, 10%. Our synbio orders, which is defined as genes, libraries, and Oligo pools, were 10.5 million for the quarter, including Gingko.

Excluding Gingko, the synbio orders rose to 8.1 million, resulting in year-on-year growth of 35% and sequential growth of 11%. Our genes business is doing well, with orders of 6.3 million, with strength coming from both EMEA and US markets, and we're seeing good, strong orders on the longer genes.

Our Gingko orders for the quarter were 2.4 million, representing growth of 32% and up from the 0.5 million in quarter one. As we discussed on our last call, Gingko will continue to decline as a percentage of total revenue as we execute to scale our synbio and our genomics business.

Our genomics business, which I will refer to as NGS, continues to perform very well and above our forecast expectations. As Emily stated, our strong competitive advantage and announcements at AGBT are translating into orders. We booked approximately 6.2 million in orders for NGS products in quarter two.

It's worth reminding everybody our NGS bookings of 7.4 million in quarter one included a $3 million order for one customer and this customer did not place an order in Q2, which masked the strength of our orders in sequential growth.

6.2 million of NGS orders in quarter two confirms we're seeing robust demand and we received orders from 137 accounts, which is up from 124 in quarter one, as we continue to scale the business and clients. The pipeline for our larger opportunities continues to build and currently we have a total of 42 accounts in pilot and validation stage.

In addition, six more larger customers have now adopted our NGS tools, bringing the adoption total to 24, up from the 18 we discussed on the previous call. Over the last year, we have increased our investment in sales and operations to scale our NGS business and the data and results highlight this investment is paying off.

We're making great progress supporting the pilots and scaling the business and we're very bullish and optimistic in the future. Quickly, on regions, EMEA continues to do well at a record quarter of 6 million. APAC bookings were about 0.8 million.

Just briefly, I'd like to note that we provide orders not to directly translate into revenue for the following quarter, but more to provide a trend line for each product group. Currently, both synbio and NGS are growing strongly, although we do expect NGS and Gingko orders to be lumpy quarter to quarter as we continue to win large orders.

Now, I'm going to discuss revenues. So, moving from orders to revenue. Quarter two revenue was 13.6 million, sequential growth of 18% and 120% year-on-year growth. We more than doubled the revenue from 6.2 million in quarter two, 2018. This brings our first-half revenue to 25 million compared to 10.5 million in the first half of 2018.

8.5 million of the growth is from NGS products as we scale from 0.8 million in the first half of '18 to 9.3 million in the first half of '19. Synbio revenue rose by 6 million from 9.7 million in the first half of '18 to 15.7 million in the first half of '19.

Note, the Gingko business accounted for 1 million of this growth with the bulk of the growth coming from non-Gingko.

Our second quarter synbio revenue -- just a reminder, that includes genes, Oligo pools, and libraries -- was 8 million compared to 5.5 million in the same period last year, representing a growth of approximately 46% and sequential growth of 4%. As anticipated, Gingko decreased 0.5 million from 2.7 million.

Excluding Gingko, synbio revenue was 5.9 million, which was up year-over-year with sequential growth of 16%. The Gingko share fell to approximately 16% of revenue compared to 39%. So, just to clarify, the synbio revenue of 5.9 million was up by approximately 84%. So, we're seeing really good, strong growth in synbio, non-Gingko.

Our next-generation sequencing products launched in 2018 are doing extremely well, generating 5.5 million in revenue for quarter two as more of our customers adopted. Our first-half NGS revenue was 9.3 million and we are projecting our revenue and customer account will continue to scale.

In summary, we are doing an excellent job in expanding our synbio customers and executing our NGS strategy. Turning to regional commentary, in fiscal quarter two, we continued to see strong growth in the US, with 9.5 million in revenue, which brings US revenue to $18.2 million year-to-date. The US now accounted for 69% of our global revenue.

That's primarily driven by growth in EMEA, which was 3.3 million for the quarter, up from 2.4 million in the previous quarter. APAC revenue was 0.7 million in the quarter compared to 0.4 million in quarter one. In addition to executing our global growth, we see an increase in revenue coming from the healthcare sector.

We reported revenue of 5.1 million in the quarter for healthcare, a sequential increase of approximately 29%, primarily due to NGS.

Now, moving down the P&L, we projected in our last earnings call that our gross margins would be positive in this quarter and we're very excited to announce that we actually delivered 1.8 million positive gross margin of 13% of revenue. And we anticipate we'll sustain mid-teen margins through the second half of fiscal '19.

Our operating costs, excluding the cost of revenues, for the second quarter increased to 28 million, up from 22.5 million in the first quarter, as we continue to invest in our R&D product pipeline and scale our commercial organization, particularly sales and customer support.

R&D increased to 8.9 million compared to 7.3 million from fiscal 2019 first quarter. This reflects increased investments in biopharma, data storage, and NGS development as we continue to accelerate our product development. SG&A increased to 19.1 million in the second quarter, compared to 15.3 million in the first.

Sales and marketing costs increased in Q2, associated with trade shows, including AGBT, as we launched new products, including the FastHyb product Emily mentioned. We have doubled our sales and marketing organization over the last year as we position ourselves for strong growth.

In summary, our net loss for the quarter was 25.9 million, up from a loss of 22.9 million the previous quarter, reflecting increased investments and our continued strong growth. Quickly touching on the balance sheet, we had 104 million in cash and short-term investments.

Moving to guidance for fiscal 2019, as highlighted, we're seeing robust demand for our products and NGS continues to experience strong growth momentum as our customers start to scale to production volumes.

Consequently, we are increasing our revenue guidance to a range of 50 million to 52 million, which compares to 47 million to 49 million we previously highlighted. Gingko is estimated to be approximately 8 million to 9 million, non-Gingko synbio, 23 million to 24 million, and NGS is estimated to be approximately 19 million to 20 million.

Our net loss guidance for the year is 97 million to 99 million, up from the previous guidance of 92 million to 94 million. We are increasing our net loss guidance to reflect accelerated investment in R&D, consistent with our strategy to continually offer improved products and new offerings.

It also reflects increased investments in our commercial organization to support additional sales and technical support in the field, as our confidence in future growth is strengthened.

In addition, we expect incremental costs associated with our China facility buildout and consolidation of our operations and R&D efforts at our South San Francisco facility. In summary, our plant farm is gaining traction and we're executing. We're growing the top line and delivering positive gross margins.

Our customer base is scaling, our NGS products are being adopted, our customers are seeing significant benefit from our products, and we will continue to make investments to ensure we are positioned for continued strong growth in the near term and long term. With that, I will turn the call back over to Emily..

Thank you, Jim. We set aggressive milestones at the end of calendar 2018 and we have achieved several already. As we move into the second half of the fiscal year, we expect continued momentum in our synbio business, as we service our current accounts and take market share in this area.

We're implementing and executing our new product introduction roadmap with a focus on meeting needs in the pharma market moving into 2020.

Similarly, on genomics, although the revenues are increasing and we continue to convert pilot accounts into production, we continue to focus on improving our reach into the market and we expect the launch of our e-commerce solution for several genomic products next week.

Overall, revenue continues to grow both in synbio and in genomics and as Jim noted, we have updated our revenue guidance. We are pleased with the growth in NGS and we were able to convert some relatively sizable orders faster than anticipated in the first half of our fiscal year.

However, we do expect some ongoing lumpiness in the genomics business and we want to maintain some conservatism in our projected full-year revenue going into the second half of the year. For biopharma, we officially launched at PEGS in April and we signed agreements with LakePharma and Pandion.

We're in the process of generating a robust data package that we intend to use to seek revenue-generating partnerships. In data storage, we look forward to continuing the contract negotiation for the non-directed financing and expect it to drive to completion in the next six months. With that, let's open up the call for questions.

Operator?.

[Operator Instructions] And our first question comes from Tycho Peterson from J.P. Morgan..

Hey, thanks. Maybe I'll start with gross margins. Nice improvement there.

Can you maybe just touch on how much of this was just volume leverage versus maybe some manufacturing efficiencies?.

A lot of it is a combination of volume and manufacturing efficiencies. As we've scaled our NGS, we've seen our NGS costs come down, which is driving manufacturing efficiencies.

I think, Tycho, the way we look at the business is that once we consolidate at the new facility in South San Francisco, that will give us the opportunity to provide more efficiencies. And our goal is to grow as -- I mean, our expectation is, as we grow over time, we'll get to 50% gross margins..

And then, Jim, can you maybe disaggregate how much of the incremental spending you're calling out here is R&D versus South San Francisco versus China manufacturing? I'm just trying to figure out how much is operational versus incremental R&D investment..

Well, for China, that's about $1 million we're forecasting for impact in China in the next quarter. In the South San Francisco, we've got a range of about 1 million to 1.5 million, in terms of incremental.

So, in terms of going forward, we're going to see a little bit more investment in the R&D space over the next six months, we're launching some new NGS products and we're also -- we have incremental pharma investments as well. So, the pharma spend for the year is going to be roughly between $9 million and $10 million..

Okay. And then for Emily, I guess, on NGS, good traction with sample prep so far.

Can you maybe talk about what you think it takes to convert -- you talked about, I think, 42 accounts in pilot and validation? What do you think it takes to convert those and what's kind of baked into guidance for NGS going forward?.

So, so far, every pilot goes really well. I think we've launched 80 pilots and so it's really a question of time to move those pilots from the pilot to scale-up and validation. And sometimes customers have to burn reagents that they have on the shelf from previous companies.

And so, for us, the strategy has been to make sure that we have as many of those pilots ongoing, knowing that it takes two to three to four quarters to go to full revenue generation. And the sales team that we have as part of those pilots continue to add, continue to nurture the accounts toward production.

And the addition of this new e-commerce tool should enable us to reach more broader into the market..

Okay. And then last one -- go ahead..

Yeah. I mean, we're forecasting roughly between 19 million and $20 million for NGS this year. And, obviously, our goal is to under-promise and over-deliver but we're seeing very strong pipeline, as Emily highlighted, and once we get through the San Francisco move, we're going to be very well-positioned to offer strong growth in NGS..

Okay. And then just one last one, I guess, on clonal genes. Just a question really on mix.

If we think about 1,800, 3 kb, and 5 kb, how do you see that mix evolving going forward now that you're rolling out 5 kb?.

Yeah. So, total genes this quarter, Tycho, were 6 million. Of that, in terms of the 3 kb and 5 kb, it's roughly going to be about 2.2 million of that 6 million. So, roughly 10% of genes is going to be 5 kb..

Thank you. And our next question comes from Doug Schenkel from Cowen and Company..

Hi, guys. This is Adam Wieschhaus on for Doug. Thanks for taking my questions. You mentioned you expect to launch your e-commerce platform for NGS next week.

How important do you think this will be for driving volumes? And, Emily, I think you touched on this, but could you also help with timelines, in terms of scaling from pilot to production phase at all? Thanks..

That's a great question. Initially, we are looking at it to help us with the number of pilots. It remains to be seen if it will accelerate the conversion from a pilot to production but that's not what we are looking for. What we are looking for is increasing the number of pilots and increasing the number of customers we can touch..

And on the gene fragment side of things, the clonal gene side, has the early adoption of the 5 kb product gone as expected and have you put any initiatives in place to drive awareness and ordering of that extended length?.

Yeah, I think the turnaround time for long genes, the 5 kb, is, as we mentioned, 14 days, which is significantly faster than what other companies can do in the market. On shorter genes, at 13 days, we are a little bit faster than the 15 days in the market, but on 5 kb, we are a lot faster. So, the turnaround time is great. The success rate is high.

So, operationally, we are doing really well on long genes, which has set us up really nicely in the next quarter because customers that are happy with the experience come back and then customers that are happy start to spread the word.

And I don't know if you follow our Twitter account but there's been a few examples of customers, unprompted by us, saying how much they like what they experienced and how they are encouraging others to do the same. So, I think the signs are really positive and encouraging..

[Operator Instructions] And our next question comes from Catherine Schulte from Baird..

Hey, thanks. This is actually Tom Peterson on for Catherine.

I know you guys touched a little bit on interest around the biopharma after the PEGS conference, but I was just wondering, in general, how big is your team in pursuing those opportunities going forward?.

So, the team on the pharma side is 13 people that are highly experienced in drug discovery and drug development and they are led by our CSO, Aaron Sato. And so that team will be doing the scientific work that we sign on with the partnerships we're signing.

And also they're further developing the data package that will enable us to go after even larger partnership opportunities in the future..

Great. Thanks.

And then on the Pandion agreement specifically, just what's your timeline around that project? When might we get some sort of update? And just in general, what are the economics around that type of collaboration?.

So, at this time, for competitive reasons, we are not sharing timeline or economics. And we'll leave you to the partner to provide an update on the project..

Okay. I understand. Well, thanks. But one more maybe. You had noted that you began these contract negotiations on the data storage side. Is this the IARPA grant you guys had pointed out -- I can't remember if it was last quarter -- or is this something different? Thanks..

Yes, you are correct. It is the IARPA grant that we mentioned earlier. That's one that we're very excited about and could bring some substantial non-directed funding to us. So, we are very pleased that we are moving forward. And I misspoke. It's not a grant, it's a contract..

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Emily Leproust, CEO and Co-Founder of Twist Bioscience, for any further remarks..

Thank you very much, Nicole. We will continue to execute on our plans moving forward and believe that our synthetic DNA will, indeed, write the future. Thank you so much..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day..