Welcome to Twist Bioscience's Fiscal 2023 First Quarter Financial Results Conference Call. [Operator Instructions]. I would now like to turn the call over to Angela Bitting, Senior Vice President of Corporate Affairs and Chief ESG Officer..

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 2023 first quarter 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 Leproust, 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. (Operator Instructions) 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 2 weeks.

During today's presentation, we will be making forward-looking statements within the meaning of the U.S. Federal Securities Laws. Forward-looking statements generally relate to future events 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 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 will now turn the call over to our Chief Executive Officer and Co-Founder, Dr. Emily Leproust..

Thank you, Angela, and good morning, everyone. For the first quarter of fiscal '23, we reported revenues of $54.2 million, consistent with our guidance shared on our fiscal year-end call in November, and we posted strong orders of $64.7 million.

When we turned the first quarter across SynBio and NGS is a story of an expanding customer base, making it for a larger percentage of our revenue, meaning that we are lending more customers with an increasing potential to extend within existing accounts. Beginning with SynBio, we reported revenues of $21.7 million, above our guidance of $21 million.

In addition, we reported orders of $26.6 million. We continue to ship our clonal genes starting at 10 business days. Gene Fragments and Oligo Pools in ex U.S. 5 days, and we see this consistent around time benefiting our expanding share of the DNA buyers market.

We shipped our first revenue [indiscernible] products out of the Factory of the Future last week, which, as we said previously, means that we are now delivering the same products with turnaround time equivalent to our South San Francisco site.

We shipped Oligo Pools and Gene Fragments from our Wilsonville site and leveraged our low balancing software to send orders to the right location. And we expect to be shipping clonal genes next month.

In addition, we'll be focused on decreasing turnaround time for clonal genes significantly with the launch of our fast genes offering expected this fall, which will enable us to tap into new markets, specifically with DNA makers market.

We shared our competitive advantage across all platforms during our Factory of the Future visit at the end of November. Virtually every product we make build out of our silicon platform to manufacture synthetic DNA at scale.

This front-end proprietary advantage enables a significantly different variable cost profile for Twist Oligo synthesis, which then feeds into all of our product lines.

Speaking specifically to the cost of making a gene, today, our variable cost for oligo synthesis is less than $1 for clonal genes, with total viable cost of approximately $35 to $40 per gene.

This cost profile enables us to continue to serve our customers as the low-cost, high-quality provider, while still achieving a contribution margin of 65% to 70% for SynBio products. In addition, a key component of our cost advantage is the scale we have built and continue to drive.

Moving forward, we expect to continue to leverage this advantage to pursue the customers who currently make their own DNA because they need it faster, the group we call the DNA maker. We believe we'll be able to command premium pricing for these genes.

To provide a bit more context around who makes the makers market, these are medical and academic research scientists who make their own DNA rather than buying. We know from the Bureau of Labor Statistics field research that as of 2019, there were 270,000 of these scientists in the United States alone. These are all potential customers.

We believe the maker market is the right for disruption with wrapping DNA synthesis and within reasonable price offering. While the process of price discovery to analyze the way to maximize margins for this particular product.

Genes are available today from competitors at a fast turnaround time but their capacity is limited and the cost can be up to $1 per day, which is cost primitive for most researchers. The analogy of a market that has been disrupted in a similar way, they use engineers to purify DNA.

It was a complicated process that requires making it better and many time-consuming steps. This market was disrupted by offering a kit that contain a ready-to-use components to make the process simple and seamless. Initially, some scientists exited it, it's whether based on price, but today, these kits are used globally due to.

We see a direct parallel here in commencing DNA makers into DNA buyers by applying similarly appealing products to convert behavior. Beyond 5 genes, we believe we have an opportunity to launch additional products out of our Wilsonville facility, including RNA, long fragments, and GMP DNA. Moving to NGS.

We reported revenue of $24.4 million, just short of our guidance and orders of $31.2 million for the quarter. As we shared last quarter, we see another back-half loaded here, with larger customers ordering in the last 2 quarters of our fiscal year. As expected, we saw a few key customers move orders out from December into the first calendar quarter.

We remain confident in our fiscal year guidance that NGS will continue to grow substantially year-over-year. We see this business continue to expand with new sequencing offerings and game-changing clinical application. Our targeted solution leverage, the higher degree of shipment [indiscernible] from our oligos.

Therefore, our solution decreases the cost percent for our customers, and we are essentially selling a gross margin improvement. We continue to work with the various existing and new sequencing companies, and we are sequencer agnostic.

As this cost of sequencing comes down, we believe volumes will continue to increase as we have seen over the last 2 decades. Importantly, we believe that for indications like oncology, where clinical applications, including liquid biopsy and minimal residual disease require deep sequencing, panel and exome sequencing will continue to be the mainstay.

And we see the reduction of sequencing costs driving reimbursement across key areas, encouraging access by a broader group of patients, which will create subsequent volume increases. In addition, we continue to expand our COVID control offering in new disease areas as well as cancer with our latest COVID control release during the quarter.

While we see consistent ordering, it is not material due to evolving nature of the pandemic. As a royalty note, we do not plan to file a 510(k) application for our SARS-CoV-2 panel that received emergency use authorization from the FDA in 2021, as revenue was not material for this product.

We believe the opportunity across cancer continues to grow while COVID products are decelerating. For Biopharma, we recorded $8.2 million in revenue, a bit ahead of our guidance and $6.9 million of orders. Of note, we signed a multi-target agreement with Astellas that was announced in January.

We are now focused on enabling our sales team to sell the integrated offering between our South San Francisco and Boston offices. In the one roof, we offer in vitro synthetic library, in vivo discovery and screening, and in silico lead optimization, candidate selection and optimization with AI and machine learning.

We believe this offers a fully integrated antibody discovery engine with a guarantee deliverable. As we are now operating as an integrated team, our total partners active and completed programs will include the historical average business.

As of December 31, 2022, we have served 278 partners, with 95 active programs and 63 of our programs have milestones and/or royalties associated with the project.

In addition, we continue to advance many internal candidates through the early discovery stage and we have several antibodies that have reached the preclinical stage and are closer to potential out licensing by biotech-Biopharma partners. Turning to data storage.

We continue development work on our first data storage system, which combines our proof-of-concept chip with the recently assembled proof-of-concept writer. We have engineered a scalable end-to-end system to store data and DNA and are now writing software to coordinate all the steps required to code, write, to sequence and decode digital data.

Once completed, we will begin to run the system in pilot production. All of this work is in support of the release of early access to our first product, the Century archive, which we expect to be available towards the end of calendar year. With that, I'd like to turn the call over to Jim to talk through our financials.

Jim?.

All right. Thank you, Emily. We had another strong quarter of execution at Twist despite a volatile macroeconomic environment. Revenue for quarter 1 was $54.2 million, which is year-over-year growth of 29% and a sequential decline of 5%, which is in line with our guidance of $54 million.

Orders were $64.7 million for the quarter, a sequential increase of 4% and 30% growth year-over-year. Gross margin for the quarter was 45.7% and we shipped approximately 2,100 customers, and that's up from approximately 1,800 customers in quarter 1 fiscal '22 and we ended quarter 1 with cash and investments of approximately $439 million.

For NGS revenue for quarter 1 was 24.4%, slightly below our guidance and 27% year-over-year growth.

As we noted in our previous earnings call, we had a strong fourth quarter and a couple of our larger customers pushed shipments from December quarter into January and were negatively impacted by the COVID pandemic in China, which continues to impact our China revenue in the current quarter.

Our first quarter orders were $31.2 million, which is a record. It represents sequential growth of 10% and 43% growth year-over-year. And this growth reflects the strength of our product portfolio with the top 10 customers accounted for approximately 40% of our NGS revenue and we served approximately 600 NGS customers in fiscal quarter 1.

Our pipeline for larger opportunities continues to scale, and we're now tracking 264 accounts, and that's up from 257 noted in our last earnings call and 130 are now adopted to Twist and that's an increase from 131 last quarter. Now turning to SynBio, which includes genes, DNA preps, IgG, libraries and Oligo Pools.

SynBio revenue for the quarter was $21.7 million, and that's exceeding our guidance and representing a year-over-year increase of approximately 21%. Orders for the quarter were $26.6 million which represents 20% growth year-over-year.

Some of the highlights include shipping to approximately 1,600 SynBio customers, which has grown from approximately 1,270 in quarter 1 fiscal '22. The customer base, as Emily noted previously, includes biotech and large pharma companies.

Genes revenue increased to $16.2 million, and that's up from $13.5 million in the first quarter of fiscal '22 and last year-over-year growth of approximately 20%, and we shipped 134,000 genes in the quarter, and that's an increase of 7% year-over-year.

Oligo Pools were in our strong quarter with revenue of $3.7 million and demand came primarily from the health care segments. Now to Biopharma, we continue to scale our antibody discovery business. Biopharma revenue for fiscal first quarter '23 was $8.2 million, and that's year-over-year growth of 70% and is consistent with our prior guidance.

Orders for the quarter were $6.9 million, down sequentially from $9.4 million in the fourth quarter. Biopharma orders have been impacted by an overall weaker environment, and we did not see the Pharma Christmas in the quarter as we've seen in past years.

That said, we added four more milestone and royalty agreements, which brings the total up to $63 million, and that's up from the $59 million we noted in the previous earnings call.

While Emily reported total Biopharma metrics, including historical adverse agreements, solely for the first quarter of fiscal '23, we had 95 active programs for the combined Twist and various antibody services. I'll give a quick update in terms of breakdown by industry and a quick update on our regional progress.

Health care for the first quarter was $30 million as compared to $21.1 million in the same period of fiscal '22.

Industrial Chemical revenue was $13.6 million in the first quarter of '23 as compared to $12.5 million in the first quarter of '22 and academic revenue was $10 million in the first quarter of '23 compared to approximately $8 million in the same period of fiscal '22.

On a regional basis, EMEA revenue rose to $16.3 million in the first quarter of fiscal '23 compared to $15.4 million in Q1 fiscal '22. As we noted earlier, APAC was negatively impacted by the COVID pandemic in China, but had a slight increase in revenue to $4.3 million as compared to $4 million for the same period of fiscal '22.

U.S., including Americas revenue increased to $33.6 million in the first quarter as compared to $22.6 million for the same period of '22. Now moving down the P&L. Our gross margin for quarter 1 was 45.7% with cost of revenue for the quarter of $29.4 million.

Cost of revenue does include $1.1 million of stock-based compensation expenses and $3 million depreciation.

Net to operating expenses, our operating expenses for the fiscal quarter, including R&D, SG&A and change in fair value and mark-to-market adjustments of acquisitions were approximately $69.4 million as compared to $78.9 million in Q1 fiscal '22.

To break it down, R&D for the fiscal quarter was $31.2 million, and that's an increase from $22.6 million in the same period of fiscal '22. This does include DNA story spend of $6.1 million and Biopharma spend of $7.7 million in the first quarter of fiscal '23.

The major contributors to the increased R&D spend were primarily increased compensation costs of $5 million associated with increased number of employees, which does include adding additional 12 [indiscernible] DNA data storage. Depreciation for R&D in quarter 1 was approximately $1 million.

SG&A in Q1 includes approximately $18 million credit due to a combination of stock forfeitures associated with departing employees and the release of annual hold back as we determine that various [indiscernible] revenue hurdle.

The Abveris team came very close to achieving the earning, and we look forward to fully integrating the Boston team into Twist organization. We remain very enthusiastic with the team and the potential opportunity for the combined Abveris and Twist organization.

Factory of the Future pre-commercialization costs include Included in SG&A were $12.5 million in the first quarter, which includes compensation costs of $4.3 million; material expenses of $4.7 million associated with pre-commercialization trading activities; facilities and depreciation costs of $1.8 million as well as services of $1.2 million.

Stock-based compensation for the quarter was a credit of $2 million due to the aforementioned credits primarily associated with the Abveris acquisition. Depreciation and amortization for the quarter was $5.8 million and CapEx spend in the quarter was approximately $12 million. We will now cover our outlook for fiscal year '23.

We continue to project fiscal '23 revenue in the range of $261 million to $269 million, including SynBio revenue of $104 million to $106 million; NGS revenue, $120 million to $123 million; and Biopharma revenue was $37 million to $40 million. And there has been no change to our revenue projections from our previous guidance during November.

For the second quarter of fiscal '23, we anticipate revenue of approximately $56.5 million, which breaks down as follows. SynBio revenue of $24 million, a sequential increase reflecting the higher orders NGS revenue of $25 million. Although orders were strong at approximately $31 million in quarter 1.

We see the beneficial impact of those orders translating into revenue in the second half of our fiscal year. Biopharma revenue of approximately $7.5 million, and this reflects the lower orders we saw in quarter 1.

We anticipate gross margin for the quarter 2 approximately 30% as we bring on the costs associated with the Wilsonville manufacturing facility. As we scale our revenue in the second half of fiscal '23, we're projecting our gross margin to be 39% to 40% for the year, which is in line with the guidance provided in our previous earnings calls.

We decreased our operating expense guidance for the year to approximately $330 million as compared to previous guidance of $365 million primarily to reflect the expected reduction of stock-based compensation. We're now projecting R&D expense of $130 million as compared to $138 million in our previous guidance.

We expect SG&A expense of $204 million, and that's a decrease from our previous guidance of $227 million, primarily due to the impact of lower stock-based compensation. Mark-to-market is projected to be a credit of $4 million for the year.

Depreciation and amortization is projected to be approximately $29 million and our projection for stock-based compensation that declined from $83 million to $50 million for fiscal '23 due to the combination of the aforementioned credits.

And in addition, we reduced a number of projected shares granted to our executives, employees to approximately 1 million stock awards at a lower share price than originally projected. Net loss for the year is projected to be approximately $225 million, and that's a decrease from $260 million.

With CapEx projected to be $50 million and our ending cash is projected to be approximately $300 million. In addition, there is no change to our fiscal '24 guidance we provided in November. In summary, we had a robust start to our fiscal year with record orders in quarter 1.

We shipped our initial commercial products from the Factory of the Future in January, and we're focused on scaling our business to achieve adjusted EBITDA breakeven in our core and our pharma businesses. And with that, I'll turn the call back to Emily..

Thank you, Jim. In November, we outlined our 3-year plan to adjusted EBITDA breakeven for our core business, and this remains our focus. When we see our shareholders' feedback that achieving profitability is top of mind. This fits with our operating plan that we have been executing in the past few years.

Working toward that objective in SynBio, we will ramp our manufacturing capabilities in Wilsonville, Oregon to increase revenue out of our Factory of the Future, building on our first shipment at the end of January.

Looking to on the full-time frame, we expect to bring down our current time and offer fast gene products for all of our customers and expand our commercialization efforts into the maker market. For NGS, we expect continued expansion of our customer base as well as a few large customers generating revenue in the back half of the fiscal year.

In addition, we are looking towards RNA workflows to augment our DNA workflows with a consistent focus on owning the workflow between the sample and the sequencer.

In Biopharma, we are beginning to offer an integrated portfolio of antibody discovery and optimization services, capitalizing on efficiencies between our in vitro, in vivo and in silico approaches. In data storage, we're making good progress to bring up the chip and our new pilot production DNA data storage writer.

We plan to launch our Century Archive solution as an early access offering in late Canada 2023. In parallel, we will continue to seek to partner with leaders to set the stage for commercial success while preparing the market for DNA data storage.

We remain extremely excited about our opportunities ahead and look forward to keeping you appraised of our progress. With that, let's open the call for questions.

Operator?.

[Operator Instructions]. And our first question comes from Steve Mah with Cowen..

My first question is on the DNA makers, there's analogy with in this prep. This thing that people started branching out into. But given the 270,000 commercial, I think a part of them are going to be [indiscernible] which have cheaper like grads flavor.

Can you give us a sense of how you're going to track this market to try to find the price to get the adoption in this academic market? And give us a sense of how long it will take for this discovery?.

Steve. Your line was a very bit choppy, but thank you, You're asking, for the 270,000 gene makers, those that are in academia, will do the price discovery. So -- and now we'll convert them. It's going to be -- 2 things that I'll share.

One, in the past, we had a uniform pricing at Twist for academia and industry, meaning that we didn't differentiate pricing between those 2 groups. We've recently started to differentiate a little bit.

And I expect that for fast gene, there probably would be a different price -- there possibly could be a different price for academia versus industry just to account for the value of the product to those 2 different groups. That's number one.

Number two, what we've been doing for multiple years now is we've been supporting items, [indiscernible] group every year, there is a competition with thousands of students where they apply synthetic biology. And in the past, iGEM team had to do their own cloning. They'll get part from the Gibson assembly and mutagenesis.

And we've given, I think, 20,000 bases to every iGEM team for the last few years, and our goal is to get the best and brightest student early on, get them used to not clone any more. And it will take some time, but we think that similarly right now in academia, nobody does their own prep reasons. They'll use kits.

I think over time, we can drive this transformation. So we'll be focused on price. And we've been already working in changing the frame of mind that you just don't close just so much easier to and faster to get the clone from companies like us..

Okay. Got it. Really appreciate that. And next question, on gross margins, it's a question for Jim. So yes, the gross margins in the quarter was maybe a bit lower than we expected. Can you give us some color on that? And then also some color on the gross margin recovery in fiscal year '24 back up to 49%..

Yes. So Steve, if I picked up your question correctly. You said gross margin is a little lower. Gross margin in Q1 was 45.7%. We are projecting that to decline to 30% this quarter as we bring on the costs associated with the Factory of the Future.

As we scale the business, and we've touched on the makers market, I mean it's a huge opportunity for us, $1.4 billion. We're already seeing strong SynBio growth over this last year. The orders were used in the first half -- in the first quarter records. So we feel good about the growth in the second half.

First half revenue is about 40-odd percent of the business, which is in line with previous years. So we can see growth in the second half driven by continued growth in SynBio, NGS, pharma, pharma picking up. We feel good about the $261 million to $269 million.

As we continue to scale, we see gross margins this year, consistent with our previous forecast of 39% to 40% in next year as we continue to scale the business. We see gross margins in the range of 49% as we highlighted below.

And that's driven by executing and scaling the Factory of the Future, leveraging our fixed costs and continue to do well in terms of expanding our customer base..

Our next question comes from Matt Sykes with Goldman Sachs..

This is on for Matt. I realize that you just sort of shipping commercially from Factory of the Future, and you've talked about fast gene being launched in the fall of this year.

Could you talk about how you've been able to break into the gene makers market prior to that launch? Or will the launch be an inflection point for getting into that market?.

Great question. We've been getting into the maker market a little bit over the last few years with our long (technical difficulty). So what we know is that some customers buy short genes then they assemble themselves with short genes to long genes. So they buy short genes, but they are makers of long genes.

And when we offer our long gene offering, it is very far, very cost effective and some of our revenue growth comes from us converting some long genes makers. So we are a little bit in the markets -- in the DNA makers market.

But we do need the speed, which means that from -- as you pointed out, when we are hedging, that's when we should see an inflection point..

Okay. Great. That's helpful.

And then what do you think the potential of gross margin uplift is for fast gene this year? Will it ramp enough for us to see it come through in '23 or roll that mostly come in next year?.

Overall, we see our gross margins. The gross margins in Q1 are just under 46%. This quarter, we see gross margins 30%. We're launching our fast genes in fall of this year. So overall, this year, gross margins are in the range of 39% to 40%.

And as fast genes pick up next year, we continue to scale our manufacturing operations, we'll leverage fixed costs, and that's primarily going to be driven by volume and success of fast genes. So that kicks in FY '24..

Our next question comes from Sung Ji Nam with Scotiabank..

Just to have a couple of high-level end market trend questions. Maybe starting with Biopharma was wondering, obviously, solid growth there, kind of expecting a bit more muted, I think growth for the next quarter.

And I was wondering if you might be able to call out kind of the trends you're seeing in the near term, if you -- if there are any kind of differentiated trends across different segments within Biopharma.

And also, if you expect the weakness to be prolonged throughout the year? Any kind of color you could provide there? And then the second question is in terms of ex-U.S. markets like China, Europe -- as well as Europe in terms of whether you kind of called out China continuing to see headwinds from the COVID situation.

And if you might be able to kind of compare whether that has materially worsened in the current quarter versus what you were seeing last quarter? Just also any additional color there would be very helpful..

Thank you, Sung Ji. Maybe I'll answer the first question and Jim will cover the second question on the global markets. So in terms of Biopharma, some of the trends we are seeing is definitely some of our customers have some funding headwinds, some others are very big companies and maybe lesser for the companies that have funding headwinds.

I think it is an opportunity for us. It may take time to add them, but what we offer is more short-term goal, and so we basically extend their budget. So I think our offering is very well fit for them. The other trend we see is that people maybe spend a little bit in the balance of the budget.

Maybe there is a bit less for upfront discovery and maybe they're balancing more towards later stage work, which means that maybe they will do 10 discovery projects a year and maybe they're shrinking to 8 or less. We're barely penetrated into the market.

And so if we just get one project or two projects, it's a win for us, so it's not necessarily a big issue, but something that we are seeing. And so I think in general, we are stepping back and relying on the strength of our platform. And our platform is really best-in-class. We have in vitro, in vivo, in silico.

And last year, we were playing a little bit with [indiscernible] back because we are trying to led the Abveris team being as intend as possible to make their earnout. But now we can integrate. We can have one1 team, we can have 1 product offering.

I think the integration of those 3, in vitro, in vivo, in silico is a very powerful -- very powerful offering that will enable us to get more than our fair share in the market, even though the market in general is experiencing some headwinds in Biopharma.

Jim, do you want to take the second question?.

Yes. So in terms of China, I actually met with the China team last couple of weeks. So, it was interesting. China is impacted in the first quarter, i.e., December quarter, October, November impacted by the lockdowns. Then obviously, China opened up and then the companies were impacted by COVID. That's extended into January, February.

So China sales in Q1 declined to approximately just over $1 million, $1.4 million. We see modest pick up in the second quarter. Our second quarter, which is March. And then we see significant pickup if things normalize in the last half of the year. And if you look at our revenue, you see our first half revenue is about 40%, 42%, 43% of the overall year.

You see China having a modest impact from the cost overall. We're seeing some large NGS customers coming in, in the second half of the year. So overall, we're doing well in China.

We've added increased -- we've increased our leadership in China, enhanced our leadership and we continue to win good accounts in China, and we're well positioned as the economy starts to normalize there and open up as they're dealing with COVID. In terms of Europe, we actually had -- Europe was up year-over-year.

I mean, the December quarter is always a tricky one because of the vacations but continues to be strong in Europe, and we see good opportunity -- see good opportunities in Biopharma. We continue to make inroads with our SynBio portfolio in Europe. NGS is looking good. You've seen some announcements there.

And back to why we're winning, it's strengthened portfolio and we're excited about launching the Factory of the Future. I think that gives us great opportunities to engage with some of our larger customers and positions us well for next year..

Our next question comes from Luke Sergott with Barclays..

So a couple here for me. Jim, can you just talk about the strength -- or Emily, the strength that you guys had on gross margin in the first quarter. It is usually expected like some type of seasonal step down, but this came in well above, I think, everybody what they were looking for..

Yes. So back to the strength of gross margin in the first quarter came in just under 46%, which is a great start to the year. That was driven by -- we've been working in terms of product mix and focusing in terms of continuing to manage our contribution margins. So we saw a strong -- actually contribution margins in both SynBio and in NGS.

So it was driven by a richer mix of products. We're excited about that. It continues to reaffirm that we're going in the right direction. Step down in Q2 down to 30% is purely driven by the impact to bring on the fixed costs associated with the Factory of the Future..

Yes, okay. And then on the second quarter guide from a revenue perspective, is this mostly being relatively flat. Is this mostly due to a capacity constraint on the Factory of the Future. So I guess what I'm trying to get at is you have a really strong 1Q gross margin, assuming that that's full capacity utilization that you guys are running there.

And then as you're bringing the Factory of the Future, you're not really going to be selling a lot out of the factory of the future in the second quarter, and that's why you're taking on all those fixed costs, so your GM steps down massively and your revs kind of stay tight with that first factory going at full capacity? Am I thinking about that right?.

Yes. So what's interesting is if you look at Q1, South San Francisco was actually at full capacity. The genes revenue, genes volume did pick up. And you're right in terms of the step down is driven by bringing the fixed calls on.

What's interesting is we continue to build our customers, we saw SynBio pick up, and we continue to see good marginal improvement in the SynBio and consistent margins in NGS. So part of this is driven by the growth, part of its driven by mix and this focus on expanding our SynBio footprints as well.

You're absolutely right, bring fixed cost line in Q2, margin dipped down to 30%. And then as we scale in Q3 and Q4, we see the gross margin for the year in the range of 39% to 40%..

Okay. Great. And then lastly, on the bookings, you guys had a really big step up there. Can you talk about what you're seeing from -- is that a lot of the Biopharma because I saw your active program step up really meaningfully.

I'm just trying to get the sense of the cadence of the different segments and how they're going to roll on through the rest of the year..

Yes. I mean, what's interesting is we had record bookings in NGS. The question is going to be, okay, why isn't Q2 NGS number higher than revenue, much higher than we're projecting. The answer is because those orders impact the second half. We saw good strong.

We continue to do well in SynBio, continues to do well in genes, beginning to see some impact on IgG's. I mean, across the SynBio portfolio, we're doing well. And what's driving that is performance, turnaround time, customer experience, the ability to scale and deliver a great value.

So if you look at the value proposition, NGS gives our customers a significant reduction in sequencing. A number of larger customers continue to scale. We keep getting adopted into new assays in terms of the SynBio portfolio, particularly in genes, we've brought the turnaround time down. We offer terrific pricing in terms of the market.

And because of that, we're winning customers. Because of that, we're seeing a number of small customers come in. That gives us a good platform or springboard for going after the makers market. So I would say we're executing according to [indiscernible].

Great. Yes. It's going to be interesting to watch..

Our next question comes from Matt Larew with William Blair..

Your price per gene has increased meaningfully here over the last 4 quarters, even more so than what's been a nice trend line over the last few years. Can you just walk through what the key drivers of that increase has been.

I think Jim just mentioned IgG had a nice quarter, but what maybe some of the key drivers are ahead of fast genes, which I assume will push that trend line even higher?.

Yes. Maybe I'll start. Thanks, Matt, for your question. I really like looking at price per gene, but sometimes we have to be a little bit careful -- can be a little bit -- you can have a good story either way. So what happens is our short genes are priced at $0.09 per base. Our long genes are priced at $0.15 per base.

And so when we penetrate more into the makers market where they buy long genes instead of buying short genes then the ASP goes up because now it's $0.15 per base. And it's a long gene so the ASP per gene goes up. So from that point of view, that's a great story, that's good.

At the same time, when we're doing really well in Biopharma, the average gene size goes down because antibody genes are small. And so from that point of view, the ASP goes down a little bit. And so -- it is a little bit of a mix of -- is the strength in the long gene business that is the strength in the human size genes that are done.

And then in addition to that, we have been pushing price increases a little bit. And so on NGS, we did our second annual price increase in January. And then in SynBio, we've increased prices started last summer. So there's a little bit of benefit from that as well..

Okay. And then as you look towards fast gene in the back half, just remind us what else is required on your end to get those on the market? I think particularly, you mentioned software and training on that software, but just kind of get us from here to there..

No, no, great question. So yes, there's a couple of things. So first of all, we need to be able to make fast genes. And so we developed design the Factory of the Future to be able to do it. And so we have the instruments in place.

We are -- and so the instruments in place and the current software enable us to make genes about the same speed as what we do in South San Francisco. And then there is a few more software components we need to deliver and training of the team to have the factory be able to make genes faster. So that's step one.

And step 2, we need to have an e-commerce that is adapted to be able to price and book orders for slow versus fast gene, and there's a big effort on the customer experience. If people can't afford fast genes, we don't want them to feel bad.

At the same time, if we want to make it like the Apple website where you don't know why, but there is money coming out of your wallet and people are incentivized to choose the fast genes. So there's quite a bit of e-commerce. Software design that needs to happen, so it's beautiful frictionless and intuitive.

And then the last piece is continue to develop and enhance our digital marketing engine. A lot of the fast gene gives us another 270,000 customers. We are not going to send an account manager to the lab in the University is just not cost effective.

And so we need to reach those customers through a digital approach and there's multiple ways to do that, being at conferences, being part of iGEM so Twist is already part of the mindset.

But the other goal is through digital teams, get people on the Twist website, get them on to the e-commerce, have a touchless order where no human interaction and then have it shipped to them in a way that's again, frictionless. So those are the components that we are still refining, a lot of software basically..

Our next question comes from Vijay Kumar with Evercore..

Emily, maybe my first question is on the set guidance and revenue assumptions. When I look at your order growth here 30% in Q1. In your second quarter revenue guidance at 17%.

Is there something going on in on the macro front and apologies if you've commented on this -- was there any China impact or -- and I know in the past, you've spoken about share gains in gene [indiscernible].

Is that still going on? And when I look at the quarter number of $65 million, that annualizes to about $260 million, which is roughly your revenue guidance.

Is there some capacity issues here that you're facing as you bring Factory of the Future on line?.

Well, maybe I'll start and Jim can add as needed. But yes, as you pointed out, the order number trends towards our guidance. The first quarter is 30% above our Q1 last year, which 30% is about the growth that we anticipate delivering this year. And we've mentioned that it would be a back half loaded story.

And if we look at the ratio of first half, second half, the ratio for this year the -- as last year or the year before and the year before, it's somewhere between 40%, 45% of first half to second half. So that's what we -- that's the business we've been living in. And the market is there. We have a great technology.

We have a sales team that is extremely aggressive and great products. So I think the bases are loaded, but we have to execute and deliver what we said we would.

And then Jim, I don't know there's anything else you want to add?.

I think -- so Vijay, I mean, your correct overall, strong orders in the first quarter, I mean particularly in NGS, we've done a number of large customers come in, place larger orders, getting us well positioned for the second half. I did mention China earlier on the call. So I'll give you the [indiscernible] Notes in China.

October and November impacted by lockdown. China was down sequentially from our September quarter then to December. As economy opened up with COVID, people get COVID, and some of our -- some of the weeks in their offices about 8% to staffer out. That's obviously impacted in January, February. So we see a little pickup this quarter in China.

And as the pandemic works its way through, we see pickup in the second half. In China last year, put in perspective was about $7 million, even with the first half impact on COVID. We still see a pickup in China to about $9 million this year.

And overall, happy with the bookings, and there's more opportunity for us, as Emily highlighted, the commercial organization. I've got tough quarters to meet this year and are aggressively going after that. And we keep building our number of customers. We're getting a lot of interest in terms of the Factory of the Future.

Our focus to execute and continue to deliver in terms of our top line and focus on getting to the core business to adjust EBITDA breakeven at $300 million and then continue to focus and grow pharma and get back to adjusted EBITDA breakeven as well..

And just maybe one more, Jim, for you on the second half cadence, both on revenues and gross margins, right? I think from a revenue perspective, looking at perhaps sub 25% in the first half that would imply well north of 30%, right, above your annual guidance.

Like what is -- like your comps get harder in the second half? What is driving that acceleration. And the same goes for gross margins, right? I think your first half implied is around 37%, 38%. You need to hit about 40% in the back half.

Like what is driving this back half strength both from a revenue growth perspective and gross margins?.

Yes. So I touched on it a little bit with the question. I mean that our bookings in the first quarter, our orders for the first quarter were approximately $65 million. You saw the pickup in terms of NGS. So NGS is driving the overall growth in the second half. If you look at NGS first half, it's about $50 million in terms of revenue.

So the growth in the second half has a say, roughly $120 million is $70 million. So what's driving that. You can see there that the orders in Q1 for NGS were in excess of $30 million.

We see -- continue to see the SynBio where you see a sequential pickup in SynBio, what's driving that number of customers continue to deliver from a performance point of view. The team in San Francisco has done a fantastic job in terms of aggressively reducing turnaround time, and that's been well received in the market, so it's the execution.

In terms of your question around gross margin improvement in the second half, that's about growing the top line, leveraging our fixed costs, we do bring the Factory of the Future costs online less this quarter as the facility is now commercially operational. It is exciting that we actually shipped our first product, and the focus is execution.

It's going after the makers market, $1.4 billion opportunity. And the pipeline for NGS continues to scale the number of wins and as this continues to scale. So it's more of execution obviously some new products impacting us as well, has continued to gain share in a growing market..

Our next question comes from Puneet Souda with SVB Securities..

Emily and Jim. So just following up on the NGS side, obviously, book-to-bill, higher. But could you elaborate is this more on the pickup -- in the second half pickup on the NGS is more, are you all driven or more of the liquid biopsy customer demand, sort of just elaborate a bit on that.

And then how much of that is volume versus pricing? I mean you're expecting a meaningful pickup here in both growth and as well as, obviously, gross margins, too. So just trying to understand how much of that is pricing and volume in the context of NGS.

And given the sort of the fixed cost that you have now and the 30% gross margin that you have for the next quarter?.

I can start, Emily. So let me just address the 30% gross margin this quarter, Puneet, so appreciate the question. That's primarily driven by the fixed costs coming online in the Factory of the Future. I mean, we're scaling the Factory of the Future this quarter.

So -- so we'll give an update in terms of the volumes and in terms of products being through the Factory of the Future in the next earnings call. But we're commercially bringing time fixed cost combined, so we're got under recovery. And that then the consequence of that is our gross margin dips to 30%.

And then as we scale the volume in the second Q3, Q4, we'll see our gross margins improve. In terms of NGS, I mean, we've been working at this for a number of years. We've been providing metrics in terms of the larger NGS customers that we continue to service.

We define the larger NGS customers as those customers that are -- provide revenue in excess of $250,000 a year. That's continued to scale. We're now tracking approximately 264 of them. And that scale from less than 100, 18 months ago, and we continue to run in terms of assets.

And as we continue to win in terms of assets, we see that impact in terms of bookings, placing orders, we continue to gain share, and that's what's picking up. We see the pickup in the second half of this year. So we're well positioned for a strong second half in NGS. And as NGS picks up, revenue picks up and gross margins improve..

Okay. Got it. That's helpful. And then just wondering some -- are your reagents peers have talked about softness from the smaller biotechs. Wondering if you're seeing any of that. And then lastly, I appreciate the comments on the makers market, maybe Emily.

Just wanted to understand academic customers show a large number of them out there, but more price sensitive. So wondering what's your expectation on both the sort of pricing of the product there and the sort of the quality of product -- liquid biopsy customers.

Could you maybe elaborate a bit on that, too?.

You get [indiscernible] second here. Yes, I think we don't have different quality. It's one grade for academia and it's the same product for academia and companies.

And we break the revenues for academia and companies for the entire companies, but not for NGS, but I think we've seen in the past that the majority for our NGS revenues are around clinical product..

And on the smaller biotechs, are you seeing any of that in the quarter? And currently, are you seeing any impact? Some of your peers had commented around weakness in the segment for reagents..

Yes. No, I don't think we have any specific comment around our ReO versus clinical..

Our next question comes from Rachel Vatnsdal with JPM..

This is Noah for Rachel. First, if I could just potentially get a little additional clarity here. Just as it relates to NGS, you mentioned that there is an annual price increase that you pushed through in January. So could we get a little commentary regarding the pricing strategy here.

How did you see orders trend in NGS pre-price increase versus post-price increase? And then I have one more..

Yes. I think we tried to price on value. And I think there's an understanding that costs are going up and so we were able to -- based on the quality of our product, based on the strength of our product we are going to put in a price increase, which has been quite well received..

Awesome. And then just regarding the data storage offering, you partnered with some big tech giants to bring DNA data storage into existence.

Can you talk about conversations you've had with these partners in recent weeks as we've seen some of the tech industry starting to tighten their belts around investments relating to non-core businesses and do some layoffs.

So like how do you expect to push the adoption curve of DNA storage? Or what have you been hearing from your customers regarding time lines for adoption there?.

Yes. That's a very, very good question. I think the data storage, over the last several years, we've made a concerted efforts in creating an industry, and so it's not just us, but we've created DNA data storage alliance, that alliance got into stand. Now you have data storage conference where on their own, they are putting a DNA to the storage track.

And so in the industry. It used to be when I would talk to data storage customers, they will say, never heard of storing a DNA and then it moves to -- I heard a lot about storing DNA but I don't believe it. And now it's, oh, I've heard about DNA storage in DNA where can I buy it.

And so there's definitely storing in DNA taking mind shift because there's such a need for deep archive, where paper and hard drive are just not well suited.

And so I think it's becoming, in my view, an inevitability just because there is such a strong need on the archiving market to get something that is better than paper and hard drive because people just don't know like it..

There are no further questions. I'd like to turn the call back over to Emily Leproust for closing remarks..

Thank you very much for joining us today. I apologize following a few minutes late, and we are looking forward to seeing you at AGBT next week and at the Cowen Healthcare and Barclays Conference in March. Thank you..

Thank you. This does conclude the program. You may now disconnect. Everyone, have a great day..