Alpha Teknova Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 11, 2024

There are 9 speakers on the call.

Operator

Hello, and thank you for standing by. Welcome to Technova 4th Quarter 2023 Financial

Speaker 1

I

Operator

would now like to hand the conference over to Jennifer Henry. You may begin.

Speaker 2

Thank you, operator. Welcome to Technova's 4th quarter and full year 2023 earnings conference call. With me on today's call are Stephen Gunstream, Technova's President and Chief Executive Officer and Matt Lowell, Technova's Chief Financial Officer, who will make prepared remarks and then take your questions. As a reminder, the forward looking statements that we make during this call, including those regarding business goals and expectations for the financial performance of the company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning these risk factors is included in the press release the company issued earlier today, and they are more fully described in the company's various filings with the SEC.

Speaker 2

Today's comments reflect the company's current views, which could change as a result of new information, future events or other factors, and the company does not obligate or commit itself to update its forward looking statements except as required by law. The company's management believes that in addition to GAAP results, non GAAP financial measures can provide meaningful insight when evaluating the company's financial performance and the effectiveness of its business strategies. We will therefore use non GAAP financial measures of certain of our results during this call. Reconciliations of GAAP to non GAAP financial measures are included in the press release that we issued this afternoon, which is posted to Technova's website and at www.sec.gov/adgar. Non GAAP financial measures should always be considered only as a supplement to and not as a substitute for or as superior to financial measures prepared in accordance with GAAP.

Speaker 2

The non GAAP financial measures in this presentation may differ from similarly named non GAAP financial measures used by other companies. Please also be advised that the company has posted a supplemental slide deck to accompany today's prepared remarks. It can be accessed on the Investor Relations section of Technova's website and on today's webcast. And now, I will turn the call over to Stephen.

Speaker 3

Thank you, Jen. Good afternoon and thank you everyone for joining us for our Q4 and full year 2023 earnings call. Technova is a leading producer of critical reagents for the life sciences industry that accelerates the introduction of novel therapies, vaccines and molecular diagnostics that will help people live longer, healthier lives. We manufacture high quality customer agents with short turnaround time and are able to scale with our customers as they advance their products from discovery to commercialization. In 2021, we presented a strategy to position the company for long term growth by attracting and onboarding custom RUO and GMP customers developing novel therapies, vaccines and diagnostics.

Speaker 3

I'm pleased to say that now despite a persistently adverse market environment since early 2022, we have executed on that vision and see early indicators of return on our investments. Most notably, we have grown our clinical customer base with annual clinical solutions revenue greater than $5,000 from $13,000 in 2020 to $34,000 in 2023. 28 of our clinical customers are biopharma related, 18 of which operate in the cell and gene therapy market segment. In fact, we believe 3 of our cell and gene therapy customers intend to purchase from us for Phase 3 clinical trials in 2024. While executing our growth strategy, we also took care to nurture our diversified picks and shovels business that supports the broader life sciences industry.

Speaker 3

Our base of over 2,500 customers not only creates additional revenue opportunities, but also serves as a solid foundation in challenging market environments. Over the past year, we have improved our customer on time delivery metrics and raised our customer Net Promoter Score to industry leading levels. We also enacted measures in early 2023 to increase production efficiency by eliminating low value SKUs, which resulted in the highest average annual revenue per customer in our Lab Essentials product category in the last 3 years. In addition, we again demonstrated the stickiness of our business with our customer retention rate, which remained greater than 95% in 2023 for customers spending more than $10,000 annually with us. While we are excited about our progress, we expect 2024 to continue to be challenging with no or modest revenue growth year over year.

Speaker 3

This is in part due to a clinical solutions customer shipment in the Q2 of 2023 that was unusually large making for a difficult comparison. We also expect that early stage biotech customers will continue to preserve capital. Considering this backdrop, we made the difficult decision to reduce expenses through personnel and other cost reductions in mid January of this year, which we believe will deliver approximately $8,000,000 in OpEx savings on an annualized basis beginning in the Q2 of this year. The resulting expense reduction will put us in a stronger cash position and lower our adjusted EBITDA breakeven revenue to between approximately $50,000,000 $55,000,000 annually. We carried out our January reduction in force, which affected approximately 15% of our associates in a way that preserved our core differentiating ability to produce custom research and clinical grade reagents in weeks instead of months.

Speaker 3

Specifically, we removed layers of management, R and D roles associated with novel product introduction and roles supporting custom production automation. I want to take a moment here to thank all of those individuals affected directly or indirectly by our risk. Many of these talented associates were critical to building the infrastructure and foundation we have today and positioning Technova for long term success. We remain optimistic about our long term prospects and expect 2025 will be the year in which many of our investments will produce even greater financial returns. In the near term, we will continue to onboard new target customers to advance our core strategy, while continuing to manage expenses aggressively.

Speaker 3

I will now hand the call over to Matt to talk through the financials.

Speaker 1

Thanks, Stephen, and good afternoon, everyone. Results for the Q4 of 2023 from a revenue perspective were similar to prior year as anticipated given ongoing challenges in our markets over the past year. Overall, we delivered solid financial results for the full year of 2023. On to revenue. Total revenue for the Q4 of both 2023 and 2022 was flat at $7,900,000 $36,700,000 for the full year 2023, an 11% decrease from $41,400,000 for the full year 2022.

Speaker 1

Lab Essentials products are targeted at the research use only or RUO market and include both catalog and custom products. Lab Essentials revenue was $6,700,000 in the Q4 of 2023, a 4% decrease from $6,900,000 in Q4 of 2022. For the full year, Lab Essentials revenue was $28,800,000 in 2023, a 9% decrease from $31,800,000 in 2022. The decrease in Lab Essentials revenue for the full year was driven by a 13% decrease in the number of customers, 2822, primarily resulting from an SKU rationalization program that was somewhat offset by a 5% increase in the average revenue per customer to $10,206 As a reminder, we also had a large customer migrate from Lab Essentials in 2022 to Clinical Solutions in 2023, which lowered the reported Lab Essentials growth rate. Clinical Solutions products are made according to good manufacturing practices or GMP quality standards and are primarily used by our customers as components or inputs in the development and manufacture of diagnostic and therapeutic products.

Speaker 1

Clinical Solutions revenue was $900,000 in the Q4 of 2023, a 14% increase from $800,000 in the Q4 of 2022. For the full year, Clinical Solutions revenue $6,700,000 in 2023, a 20% decrease from $8,400,000 in 2022. We added clinical solutions customers in 2023 growing from 25 customers in 2022 to 34 that spend more than $5,000 annually. Average revenue per customer in 2023 decreased 41% to $198,000 We expect revenue per customer to increase over time as customers ramp up their purchase volumes. However, this metric can be affected by the mix of newer clinical customers who typically order less.

Speaker 1

Just as a reminder, due to the larger average orders Solutions compared to Lab Essentials, there can be quarter to quarter revenue lumpiness in this category. To the income statement, gross profit for the Q4 of 2023 was $1,300,000 compared to $2,100,000 in the Q4 of 2022 and $10,300,000 for the full year 2023 compared to $17,500,000 for the full year 2022. Gross margin was 17.0% in the Q4 of 2023, which is down from 26.7 percent in the Q4 of 2022 and 28.1% for the full year 2023, which is down from 42.2% for the full year 2022. The decrease in gross profit percentage for the Q4 2023 was primarily driven by increased overhead costs that were partially offset by reduced headcount. However, gross margin for the Q4 of 2023 was similar on a sequential basis from the Q3 of 2023.

Speaker 1

The decrease in gross profit percentage for the full year 2023 was primarily driven by the decrease in revenue and the associated lower absorption of fixed manufacturing costs and to a lesser extent by increased overhead costs that were partially offset by reduced headcount. Operating expenses for the Q4 of 2023 were $12,200,000 compared to $16,300,000 for the Q4 of 2022. Excluding the non recurring charges of $300,000 related to a loss contingency accrual, the non cash tradename impairment charge of $2,200,000 in the Q4 of 2023 and the non cash long lived asset impairment charge of $4,200,000 recorded in the Q4 of 2022, operating expenses were down $2,400,000 The decrease was driven primarily by reduced headcount and spending, in particular in professional fees. Operating expenses for 2023 were $45,900,000 compared to $67,100,000 in 2022. The decrease was primarily related to a one time $16,600,000 non cash goodwill impairment charge coupled with reduced headcount and spending in particular professional fees.

Speaker 1

Net loss for the Q4 of 2023 was $10,700,000 or $0.26 per diluted share compared to a net loss of $13,300,000 or $0.47 per diluted share for the Q4 2022. Net loss for the full year 2023 was $36,800,000 or $1.16 per diluted share compared to a net loss of $47,500,000 or $1.69 per diluted share for the full year 2022. Adjusted EBITDA, a non GAAP measure was negative $5,400,000 for the Q4 2020 3, compared to negative $8,100,000 for the Q4 2022. Adjusted EBITDA for the full year 2023 was negative 19 point $2,000,000 compared to negative $21,900,000 for the full year 2022. On to cash flow and balance sheet.

Speaker 1

Capital expenditures for the Q4 of 2023 were 300,000 dollars compared to $4,700,000 for the Q4 of 2022. Capital expenditures for the full year 2023 were $7,900,000 dollars compared to $28,100,000 for the full year 2022. This marks the 6th straight quarter of sequential decreases in capital expenditures that we have now completed the initial capital investment necessary to utilize our new manufacturing facility. Free cash flow, a non GAAP measure, which we define as cash provided by or used in operating activities less purchases of property, plant and equipment was negative $3,100,000 for the Q4 2023 compared to negative 12,800,000 dollars for the Q4 2022. Free cash flow for the full year 2023 was negative $26,600,000 compared to $55,500,000 for the full year 2022.

Speaker 1

This decrease compared to prior periods for both the quarter and full year was due to lower cash used in operating activities and a decrease in capital expenditures. Turning to the balance sheet. As of December 31, 2023, we had $28,600,000 in cash and cash equivalents and $12,100,000 in gross debt. For the outlook, Turning to our 2024 guidance and outlook. We are providing 2024 total revenue guidance of $35,000,000 to $38,000,000 At the midpoint, this implies a revenue forecast that is approximately flat compared to 2023.

Speaker 1

We are currently expecting approximately 10% growth in Lab Essentials revenue with the difference coming from Clinical Solutions revenue. While we are encouraged by improvements in the sales funnel, our order book and the quality of ongoing discussions customers, the underlying market environment remains challenging, in particular with constrained spending by our early stage biopharma customer segment. As Stephen explained, in January of this year, we decided to pare back certain investments and carried out a reduction in workforce, including management roles. The one time cost of severance and related benefits associated with this RIF is approximately 1,200,000 dollars which will be recognized in the Q1 of 2024. We do not believe these changes will affect our ability to grow revenue and meet our financial and strategic goals.

Speaker 1

The company posted operating expenses excluding non recurring charges below $10,000,000

Speaker 4

for the

Speaker 3

Q3 in a row.

Speaker 1

That reflects steps we took during 2023 aimed at reducing operating expenses, which resulted in total annualized cost savings of more than $9,000,000 compared to the Q4 of 2022 excluding non recurring charges. In total, the savings generated by the most recent RIF and other associated cost saving measures are expected

Speaker 3

to reach

Speaker 1

approximately 8,000,000 dollars on an annualized basis, which builds upon the savings realized in 2023. Similarly, the company saw a reduction in free cash outflow during the Q4 of 2023. This marks the 6th straight quarter of lower cash outflow. In fact, the company is pleased to report that free cash outflow for the full year 2023 of $26,600,000 was significantly below our initial guidance of approximately $30,000,000 As we turn to 2024, the company expects free cash outflow of less than $18,000,000 Depending on our top line growth in 2025, we may be able to achieve positive adjusted EBITDA and free cash flow during that year by continuing to manage our costs and with access to a modest amount of additional capital if necessary. We are pleased to announce a new amendment to our credit facility.

Speaker 1

The update primarily reflects changes to our minimum net revenue covenants, minimum cash covenant and restrictions on access to our revolver. The new lower minimum net revenue covenants including a year end level of $34,000,000 for 2024 should give us improved operating flexibility. Our minimum cash covenant is increasing marginally from $9,000,000 to $10,000,000 Lastly, we will now be able to utilize our revolver as soon as trailing 12 month revenue exceeds $38,000,000 down from a trigger of $45,000,000 previously. We believe that we have already made the step up investments needed to execute our growth strategy, including our new GMP production facility. We believe there is significant margin expansion potential when top line growth resumes.

Speaker 1

Due to the high percentage of fixed costs associated with our business in both COGS and OpEx, we estimate that each additional dollar of revenue drops through at a marginal rate of profitability of at least 70%. In short, we are excited about the future and the company's competitive positioning in a market with attractive fundamentals. With that, I'll turn the call back to Stephen.

Speaker 3

Thanks, Matt. Overall, we were pleased with our Q4 and full year 2023 performance and the progress we made against our strategic priorities. We believe the long term outlook for our end markets remains positive and we are committed to executing on our strategy to help customers accelerate the introduction of novel therapies, diagnostics and other products that improve human health. We will now take your questions.

Operator

Thank you. Our first question comes from the line of Mark Massaro with BTIG. Your line is open.

Speaker 5

Hey guys, thank you very much for taking the questions. Stephen, I think unfortunately you might have cut out after you provided the guidance. I was just hoping that you could provide perhaps even a repeat of I believe you talked about how you expect improvements in sales conditions. However, constrained spending by perhaps some of your earlier stage clients. Can you just because when I look at the guidance, obviously, it's a minus 5 to plus 4 type of year, flattish at the midpoint.

Speaker 5

But it would be helpful to kind of better understand what you're seeing in the end markets and what could happen to potentially get you above $38,000,000 and what do you think could potentially happen to get you below 35

Speaker 3

dollars? Great. Sorry about that, Mark. Can you hear me okay?

Speaker 5

Yes, I can hear you much better now. Thanks.

Speaker 3

Okay. All right. So let me I'll just talk a little bit about how I see the market and what we're hearing. So first of all, I would say that we are beginning to see improvements in the overall sector. And just a couple of examples of this, right.

Speaker 3

Some of the customers we had in 2022 that did not have substantial orders in 2020 3 are now reaching back out to us. Some of them have actually already ordered and some are planning to order this year. And we do have a book to bill ratio over 1 right now. So that's very positive from that regard. And then as you know, right, biotech timing does seem to be coming back.

Speaker 3

All that said, one of the things that we look at very closely is in the sector that funding and how it relates to our sales. Over the last 2 or 3 years, we've had the opportunity obviously to see that biotech funding go up and then come back down. And you can actually segment out our customers and look at their spend. And you see there's typically about a 4 quarter lag from the time that the funding goes up until we actually see it from a revenue standpoint. And so while we're seeing some encouraging things now, right, I think that the reality of that impacting our very near term is not that realistic given the sales cycle and then just the time it takes to disperse that funding.

Speaker 3

So I think if we do see an improvement, it will be towards the back half of this year, very close towards the end of the year. And that could potentially get us above the 38, but it's hard to determine right now. And we've seen some obviously some ups and downs over the last couple of years. On the other side, obviously, if there's a change in the funding environment or an additional push to conserve capital, we could be on that lower side of the guidance. But I think fair to say that we are starting to see some changes in the sector and some of the customer behaviors.

Speaker 5

Okay. That's very helpful. Maybe on the competitive front, can you just speak to the demand that you're seeing and any changes to companies perhaps doing this themselves, potentially taking things in house versus sending them out to you? And then relative to some of the other send out providers, are you seeing any change in dynamics on the competition front?

Speaker 3

So I think to answer the first part of that question, no, we have not seen inclination to keep some of the products we make in house. So that hasn't changed. I think the big challenge last couple of years has really just been access to capital and then rationalization of pipelines, particularly in this early stage. And so we mentioned that 2020 we have 13 customers, 2020 3 now we have 34 that are buying clinical products. Obviously those are most of those are in early stages, although I did mention that we have 3 now going into Phase 3, which is great news for us.

Speaker 3

On the competitive standpoint, I would say the answer is no, we haven't seen a change there. We have worked hard to convert some of these customers. We've been successful at taking some share of critical customers from some of the other players in the space. And it really just comes down to the fact that we can deliver these custom products in a handful of weeks versus many months. And so we're seeing some great responses there and removing our focus to be much more obviously on the conversion side and on finding new opportunities.

Speaker 3

So primarily

Speaker 4

because we

Speaker 3

have a lot of those customers actually already buying from us and it's a matter of timing and when they spend that one.

Speaker 5

Okay, great. And then if I could sneak one more in. Your business touches a lot of other sectors that we track or follow. You talked about how 18 out of 28 biopharma are coming from cell and gene therapy. So maybe can you give us a perspective, given that you have such a diversified business, what some of the growth areas are if we think about the high end of your guidance, where do you think the biggest sources of demand might come from?

Speaker 5

And then on the other hand, where do you think some of the sources of more soft spending might come from?

Speaker 3

Yes. So if we think about across all of the life sciences, right? So we do serve a lot of the tools players as well. So those areas that I know you know are pretty hot right now whether it's spatial or liquid biopsy, single cell that whole segment is doing quite well as well as sort of the new sequencing technologies out there. We are suppliers to many of those companies.

Speaker 3

And as those continue to grow, we'll see some benefits from that. From the rest of the sector, right, the early stage pharma still I think is having challenges raising capital. I think there's some outcomes that are people waiting for. I think the late stage has been easier as of late. And so hopefully that trickles down towards this early stage when you get the rest of these things going through the pipeline.

Speaker 3

Awesome. That's helpful. Thanks guys. Thanks Mark.

Operator

Please stand by for our next question. Our next question comes from the line of Jacob Johnson with Stephens. Your line is open.

Speaker 6

Hey, good afternoon guys. Stephen, maybe going back on these 3 cell and gene therapy customers in Phase 3, I know there's right, I don't want to say too much about individual customers, but obviously, that's something that can be an opportunity for you all as the volumes get larger. So I'm just kind of curious, can you frame up maybe what the size of a Phase 3 customer looks like or maybe on the other side of it, the guidance you're giving for clinical solutions, I know it's a tough comp, but it was kind of a muted outlook. Why aren't we seeing more of a benefit from those 3 customers in cell and gene therapy?

Speaker 3

Yes. I'll just give you, well, first of all, not all of them were ordered yet. So I don't know the exact amount. There's conversations about when they'll order and it's moving towards the back half of this year. So there's a lot of course a lot of timing aspects to this Jacob, right, if they order in Q4 then it may not be delivered to Q1 depending on their needs.

Speaker 3

And so I'm hesitant to commit on an annual basis the things that have yet to come in. I would expect these to range. There's certainly 100 of $1,000 maybe mid 100 of 1,000 for some of these orders for a build. It really depends on the size of their clinical trial. We tend to do very well in collecting all of the downstream processing reagents that go with these products.

Speaker 3

So yes, we're excited about it, but there's obviously still more work to do both on there and our end to get these things into the order book for this year. And then from the guidance perspective, you're absolutely right. We do have a clinical solutions customer from 2023, same one we referred to about Q2 last year. That was a large part of the clinical solutions in 2023. And so we do need to make that up going into 2024.

Speaker 3

And that customer is not gone. We're still doing some product for them, but it's just not nearly as large. And we hope that they're successful in their clinical trials. And then if they are, we'll be actually a significant revenue opportunity for them in 2025.

Speaker 6

Got it. Thanks for that, Stephen. And then maybe for the follow-up. Matt, just on the $8,000,000 of cost savings, can you is that all I guess, 1, is that all OpEx? And 2, just any thoughts around the timing of realizing those savings throughout the year as we're thinking about our models?

Speaker 1

Sure, Jacob. Yes. I would say that the vast majority of that $8,000,000 is OpEx. Thus, we kind of summarize it as OpEx savings. Of course, we're continuing to look through cost of goods sold and looking for and achieving cost savings there as well.

Speaker 1

That's sort of factored into the margin expectations. But and we did disclose in January that the savings specifically from the headcount reductions $6,400,000 So there are some additional things on top of that, that gets you to the $8,000,000 annualized. And because of the payouts and timing of everything, we're really expecting to see that in Q2 results a full quarter of that in Q2 results at this point.

Speaker 6

Got it. Thanks, Matt. I'll leave it there.

Speaker 3

Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Steven Ma with TD Coleman. Your line is open.

Speaker 4

Great. Thanks for the questions.

Speaker 1

On the gross margins,

Speaker 4

how should we think about the gross margin recovery? Is Q4 the low point at 17%? And maybe then give us a sense of when we should expect gross margins to level out and maybe inflect up and or maybe to ask a little differently, how should we think about gross margins in 2024 versus 2023?

Speaker 1

Yes, good question, Steve. Yes, I mean, I think that Q first of all, Q4 was Q4 was very similar to Q3. The revenue was similar. The gross margin and outcome was similar. The type of costs we had were similar.

Speaker 1

So not an unexpected result there. And I do believe that as we start to see revenue come back that we will start seeing the margins improve. And in fact, I do believe over time there is significant potential given the high fixed cost nature of our manufacturing operation, in particular as a result of the new facility being brought online fully from a cost perspective in the second half of last year. So I think the revenue excuse me, the gross margins will track pretty closely to the revenues. As we see increases in revenue, we'll see that margin go up.

Speaker 1

I think it's hard to say exactly where the overall 2024 will land. I do that because 2023 itself was quite a mixed bag. We had these margins of 17%, 18% and then we had 1 quarter of 44%. In the end, the full year wound up at 28%. And I do think there is some potential for growth volatility on that gross margin line.

Speaker 1

But I do expect an overall improvement from that 28% for the year. Going into 2024, I don't think it will be dramatic yet as we're still overcoming some of the headwinds, but I do see it improving year on year and generally improving as the quarterly revenue improves. That's helpful.

Speaker 4

Yes. That's very helpful. Appreciate that. And then a question on the total revenue guide. Is that conservative given your prior comments on you're seeing maybe some green shoots and a potential recovery in R and D spend?

Speaker 4

And then similarly on the clinical guide, if I'm doing my math right, there is a fairly significant step down and I appreciate it from smaller orders from newer customers, but maybe give us a sense on maybe how long it takes for a customer to typically ramp on the clinical side?

Speaker 1

Yes. So I think I'll just sort of harking back to what Steven said a moment ago. One of the challenges that we're facing on the clinical solution side is the fact that we had a pretty significant order in Q2 of last year. So when you normalize for that, it may not be as bad as the guidance would suggest because we do have to make that up. We are being conservative in terms of what we think the market recovery will be on the clinical side specifically.

Speaker 1

There is a fairly long lead time for getting those even though that we have increased the number of customers substantially because of the I guess the regulatory process and the quality process those that business doesn't it takes a good 12 months or so for that to ramp up. So we feel like that's a reasonable place to start. And again, depending on how the market evolves and how fast these customers move through their process, we could see some upside to that. But right now, I think we feel like this is the right place

Speaker 3

to land. Yes. And just to add in there, Steve, on the sales cycle here, it's a combination of getting them in and on board, right, which is what we've been focused on and actually very successful if you look at it, 34 customers in 2023. But then the time that once you have them on board when they ramp is very driven by their clinical trials and then how many of the trials are you in, right? So we've noticed that while getting acquiring the customers, they're now we're the primary vendor.

Speaker 3

It does take another 6 to 12 months to ramp up into significant revenue with them. So we are doing that on a daily basis here. It just takes more time than I think all of us wanted to take, but I think that's the positive of that. It's actually very hard and very sticky. It's a very sticky business once you have it.

Speaker 3

So we're feeling pretty good about where we sit towards from a customer acquisition standpoint and think that this will play out over the next 18 months.

Speaker 4

Okay, great. That's super helpful. If I can just sneak one last one in. On the GMP facility, can you give us a sense of your audit schedule and the calendar backlog? Thank you.

Speaker 3

Yes. So fortunately, we don't have a backlog. We've got the facility up and running. It is revenue generating on a daily basis right now, which is great to see. We continue to host customers for supplier qualifications, what I would call it.

Speaker 3

They come out here, they tour the facility, they audit our quality systems and meet the team and then give us the green light, the internal team there the green light to start ordering from us. And so we still have a number of those lined up already for Q1 that we're finishing up and expect filling up Q2 as well. So there is no backlog on the facility or even that schedule because we get them in as fast as we can. That's a critical bridge to cross in order to generate additional revenue. Okay.

Speaker 3

Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Matt Laveau with Raymond Blair. Your line is open.

Speaker 7

Hi, this is Madelyn Mollman on for Matt. I was wondering if we could touch on the decline in Lab Essentials customers. I know you mentioned that there are a couple of SKU rationalizations, things like that. But I was wondering if you could provide any more color on what you think might be driving that?

Speaker 3

Yes, absolutely. So there are 2 things really driving this. First is the SKU rationalization. We took a look at the beginning of last year, recognized that the business has been around for a long time. There are a number of products that we made sporadically, very small batches, very costly to make that were really for a handful of customers, if not only one customer and generating very little revenue.

Speaker 3

And so we made the decision then to rationalize SKUs migrate customers to some of our other catalog products. And of course, there are handfuls of customers, as you can see from the change there, that aren't going to order again. What you can see though is that the revenue did not shift dramatically and that is exactly what we were intending there. So we're a much more efficient organization. I think we'll see that as we scale up in revenue, you'll start to see that, like Matt talked about the contribution margin dropping of about 70% as we go forward.

Speaker 3

So that's one piece of 2 that is causing this. The other part as we did a lot of what I would call account hygiene management, where we cleaned up the way we count unique customers and made sure that many companies may have multiple accounts. We made sure we're not double counting and things like that. And not that we were double counting before, but just the way that we set up our system now to have 10 organizations and truly treat everyone at the same address as a single account. So you'll see in our supplementary slides that we've actually restated history as well, so you can see the trends and growth and things like that.

Speaker 7

Great. Thank you. And then continuing on the theme of customers, I think something we've heard a lot this last couple of months is an effort by companies to get a little bit closer to their customers, whether that be through surveys, through working more closely with their customers. I was wondering if there were any tools or processes that you added internally to kind of better get an insight into what your customers were thinking when it comes to forecasting?

Speaker 3

Okay. Well, we've added we have a number of tools, number 1. But when it comes to forecasting, I mean, those typically come in the form of quality agreements and supply agreements with these larger customers. For the rest of the customers there, I think the most important thing for a business like us in the pure consumable play, repeat order type of business is to make sure that our customers are happy with our service levels. And so for the past couple of years, we've actually been tracking our Net Promoter Score from a customer perspective.

Speaker 3

We do a couple of times a year and we've seen that go up pretty dramatically. I believe I said to sort of industry leading numbers, but I can't remember the number off the top of my head, but it's in the 60s now. And that really comes back to our ability to deliver on time, our customer service levels. And so we do feel like we have a very good relationship with these customers and kind of have a feel for how things are going across the board. And this is from the $50 catalog items up to the $100,000 orders.

Speaker 7

Great. Thank you.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Paul Knight with KeyBanc. Your line is open.

Speaker 8

Hi, Steve. We've had maybe up to 4 approvals here in 4Q1 in the cell and gene therapy. Will you benefit from these or what are you seeing here in Q1?

Speaker 3

I think we'll benefit in so far as that will help demonstrate the value of these products that are going out there and help other companies raise money and invest in the space. We are not as I said, we have 3 entering Phase 3 this year. The ones that were not approved were not part of that particular manufacturing process. So I think from a general market perspective, I think we're going to have a record year from a cell and gene perspective and that helps us. And as I said, we're very much tied to that biotech funding in the space.

Speaker 3

And so anything that drives that forward, you will see I believe you'll see an impact on a revenue standpoint from us in the sort of the 4 quarter lag period.

Speaker 8

We've seen clinical trials in cell and gene therapy increase latter part of 'twenty four. Are you seeing that and are you seeing that really from the more the well funded larger biopharmas? What are your thoughts there?

Speaker 3

Yes. I think Paul, I think I mean the back half of 'twenty three, right? Yes. And I do think it's there's still right now from a capital perspective, the smaller midsize biotech companies are in early stage, they have a harder time raising money than the larger players or the ones that are in the later stage of real clinical trial data at this point in time. So I still think we're seeing that pain point.

Speaker 3

I obviously hoping that we get that improved over the course of this year. At the same time, we focus our efforts and now actually looking at these larger players as well as some in the later stage and that's kind of what's filling up our pipeline.

Speaker 8

Okay. And then Matt, what's the size of your credit line did you say on that earlier?

Speaker 1

So we have $12,000,000 in a term loan outstanding. We have a revolver that I mentioned that we will get availability to once our trailing 12 revenue hits $38,000,000 That is up to $5,000,000 It's based on borrowing base of accounts receivable. So it sort of depends on what our receivable levels are, but it's up to 5,000,000 dollars

Speaker 3

Okay. Thank you. Thanks, Paul.

Operator

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. That concludes today's conference call. Thank you for your participation. You may now disconnect.

Speaker 3

Thank you. Thank you.

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Earnings Conference Call
Alpha Teknova Q4 2023
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