908 Devices Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 30, 2024

There are 8 speakers on the call.

Operator

I will now hand the floor over to Kelly Gura, Investor Relations to begin the call.

Speaker 1

Thank you. This morning, 908 Devices released financial results for the Q1 ended March 31, 2024. If you've not received this news release or if you'd like to be added to the company's distribution list, please send an e mail to addr908devices.com. Joining me today from 908 is Kevin Tanop, Chief Executive Officer and Co Founder and Joe Griffith, Chief Financial Officer. Today's call includes a slide presentation, which is viewable to those joining via webcast.

Speaker 1

The slides will also be available after the call ends at ir. 908devices.com under the menu header Events and Presentations. Before we begin, I'd like to remind you that management will make statements during this call that are forward looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled Forward Looking Statements in the press release 908 Devices issued today.

Speaker 1

For a more complete list and description, please see the Risk Factors section of the company's annual report on Form 10 ks for the year ended December 31, 2023 and in its other filings with the Securities and Exchange Commission. Except as required by law, 908 Devices disclaims any intention or obligation to update or revise any financial projections or forward looking statements, whether because of new information, future events or otherwise. This conference call contains time sensitive information and is accurate only as of the live broadcast April 30, 2024. With that, I would like to turn the call over to Kevin.

Speaker 2

Thanks, Kelly. Good morning, and thank you for joining our Q1 2024 earnings call. We had a solid start to the year with top line revenue of $10,000,000 for the Q1, representing 8% product and service growth year over year. We continue to see robust demand for our handheld devices in Q1 and anticipate this trend to persist throughout the year as applications for chemical detection and identification at the point of need gained further traction in the U. S.

Speaker 2

And internationally. Over the past several years, our team has built a robust product portfolio that serves the forensics and bioprocessing markets through both our own innovation as well as through a strategic acquisition. On our last earnings call, we outlined 3 clear objectives for 2024. 1st, to expand our market reach 2nd, to leverage our expanded product portfolio and third, to execute under a framework for sustained growth with a path to profitability. This morning, we are excited to announce the acquisition of Red Wave Technology.

Speaker 2

This acquisition is additive to each of our existing initiatives for the year and we believe will be a very strong strategic fit over the near and long term. As you will see momentarily, there is very strong strategic rationale and synergies between the two companies, which makes this a very compelling acquisition. Importantly, our teams have very similar cultures and ethos, which makes me extremely competent of the fit as we welcome the Red Wave team into our organization. 908 Devices has a mission of creating positive impact in people's lives with their efforts to help our customers rid our communities of fentanyl and counterfeit pharmaceuticals and advance life changing personal medicines. Similar to our mission, Red Wave thrives on helping increase the safety of first responders and other frontline workers that must answer the call each day.

Speaker 2

It is a founder led, highly technical organization that we believe matches well culturally with our innovative team at 908 Devices. Further, our Chief Product Officer, our VP of Government Sales and I, along with many others in our management, commercial and technical teams have immense experience with optical spectroscopy from product development to large scale commercial penetration. This is a well understood technology space, set of products and applications for our team, which we believe will significantly lower the execution risk of the acquisition and enable us to focus on the positive financial impacts we expect to materialize. So prior to reviewing our Q1 results, I wanted to walk you through a set of slides that outlines why we are so excited about this acquisition and the positive synergies we expect to see for our business. We believe there are many compelling points that highlight the strong national for this acquisition, which I will summarize into 5 key areas.

Speaker 2

1st, Redwave as a standalone company has an attractive financial profile. It is a profitable, high growth, privately owned business with unaudited 2023 full year revenues of approximately $13,700,000 attractive gross margins of approximately 52% and a positive operating margin of approximately 15%. Last year, they grew revenue 20% plus year over year and operated as a cash flow positive business. 2nd, Redwave expands our toolkit of handheld chemical analysis devices to serve broader forensics workflows spanning unknown solids, liquids, gases and aerosols from initial detection through their identification. With this acquisition, our handheld portfolio goes from 1 to 4 market leading handheld products.

Speaker 2

With the comprehensive capabilities of this expanded handheld portfolio, we expect to accelerate penetration of the addressable forensics market, which we estimate to be more than 1,300,000,000 dollars 3rd, the Red Wave products immediately add to the bags of our 908 direct sales and applications team, enhancing our efficiency and scale while supporting Webway's growth trajectory with our robust commercial platform and global reach. 4th, in addition to the synergies for our forensics customers, Redwave's products also bolster our bioprocessing business. Their technology is based on an infrared optical spectroscopy platform called FTIR that is additive to our newly released ramen product, MAVERICK, that operates on a related scientific principle. Process analytical technology customers in pharma often leverage FTIR, Raman and other related infrared spectroscopy technologies for QC, upstream and downstream applications. Redwave has a small presence already here today, and we see future opportunity to leverage the Redwave technology to further enhance our existing bioprocessing portfolio.

Speaker 2

And finally, 5th, this combination significantly enhances our financial profile. RedWave is profitable and cash flow generating. Immediately, Red Wave is accretive to our gross margins. We have also identified more than $5,000,000 in forecasted annual cost synergies that we expect to be realized in 2026. The contribution of Red Wave revenue, the leverage of 908 sales infrastructure and the identified cost synergies are expected to accelerate our path to reach $100,000,000 in annual revenues and accelerate our crossover to cash flow breakeven with a steeper profitability ramp thereafter.

Speaker 2

And importantly, we continue to expect that we'll be able to reach breakeven with our cash on hand. The upfront transaction value is $53,500,000 which is comprised of $45,000,000 in cash and 1,500,000 shares, representing $8,500,000 using our closing stock price as of April 26. In addition, there is the potential for milestone consideration totaling up to 4,000,000 additional shares, representing $22,700,000 using our closing stock price as of April 26 for accelerated growth over the next 24 months. An annualized approximate 22% growth is required to meet the minimum threshold for these payments. As Redwave's growth then becomes on par with 908 Devices' historic handheld revenue growth levels, additional consideration is earned over the 24 months, achieving the full earn out at an approximate 38% annualized growth rate.

Speaker 2

We believe this structure creates long term value for our shareholders and rewards Red Wave for accelerated growth with stock issuance upon performance. Redwave is a leader of innovation in optical spectroscopy. The company was founded in 2016 by a well known and respected team in the detection space and is headquartered in a modern and cost efficient 38,000 square foot facility in Danbury, Connecticut. They've developed a compact and mobile technology variant of infrared spectroscopy called FTIR. FTIR is renowned for its specific substance identification abilities across a broad range of bulk materials.

Speaker 2

Using this technology, Red Wave products can identify more than 22,000 chemicals in bulk, including visible amounts of drugs, white powder and other unknown solids and liquids. This is a very complementary capability as our mass spec technology is highly regarded for its tremendous sensitivity, providing unparalleled detection identification capabilities at trace and invisible levels for a focused list of chemical species. Given the complementary capabilities of our devices, Red Wave products target the same types of customers as our handheld products, including first responders, law enforcement and other frontline workers, including customs and postal inspection agents globally. There's a long runway of opportunity ahead for growth. WebRave products are well positioned to replace more than the 15,000 legacy FTIR products that are lacking modern conveniences, such as remote connectivity and app integration.

Speaker 2

In addition to the significant opportunity to replace legacy FTI products, there's an opportunity to address an expanded use case for unknown gas identification. RedWave offers products that can identify 5,500 toxic and VOC gases to help track down the source of a leak in industrial and hazardous material situations. They've built 3 innovative handheld products that pair well with our MX-nine zero eight and fortify our MX aero offerings and our roadmap in the air monitoring space. Our sales team is excited to add these complementary Red Wave products to our handheld product offerings immediately. As I mentioned moments ago, our products are highly complementary for analyte detection and identification.

Speaker 2

Forensics customers use both mass spec and FTIR to rapidly assess and monitor their environment for dangerous trace chemicals and possible bulk chemical hazards. In the most general sense, our MX mass spec handheld focuses on the invisible and unseen, targeting fentanyl, its many analogs and hundreds of such highly toxic analytes. Red Wave's FTIR based products expand our detection capability to more than 22,000 and are ideally suited for visible bulk sample identification. Together, the 2 technologies offer a fast and comprehensive field forensics toolkit supporting our customers' broader workflows. By bringing Red Wave's market leading handheld technology to 908 devices, we can leverage our existing scale and platform to serve both new and existing customers more efficiently.

Speaker 2

Strong relations and support through the sales cycle are key to our customers. By bringing their team on to our existing commercial platform, we can better serve customers across the sales cycle from technology and application to offering world class support and service. And we can now offer a combined SITU awareness view through our 20 fourseven reach back service with multiple data modalities available. Additionally, with scale of Redwave's cloud based fleet management offering, we have the potential to offer new value add data services for additional recurring revenue. The existing Red Wave devices already in the field significantly expand our base.

Speaker 2

Collectively, we now have over 3,600 units fielded and more than 18,000 trained users. Over the last few years, we focused on creating a portfolio of desktop devices to serve biopharma and we released 2 products just last year as we believe our desktops will be a significant contributor going forward. With this acquisition, we are adding 3 products to create a like portfolio of handhelds for forensic to gain efficiency and scale in that space as well. For both our desktops and handhelds, we see great benefits by having complete and complementary suites of products to offer our customers. We believe the strategic rationale here is incredibly clear.

Speaker 2

First, we believe this acquisition will meaningfully accelerate our revenue growth in an end market that has been performing well. 2nd, the overlapping customers and call points enable significant sales and marketing synergies. 3rd, it is projected to improve scale and efficiency in a large addressable forensics market, opening access with a broader portfolio of capabilities for our customers. 4th, it expands our tech toolbox and have now created a leading point of need analysis platform, mass spec, Raman and FTRR, 3 lab grade technologies supporting a robust roadmap long term in forensics and bioprocessing. And finally, it is forecasted to be accretive to both the top line and gross margins.

Speaker 2

We are acquiring a profitable cash generating business, which accelerates our path to breakeven. As I touched on earlier, Red Wave offers a compelling financial profile with meaningful revenue and margins, growth rate and earnings above our own corporate averages. Red Wave and 908 devices have an overlapping customer base and call points, supporting improved scale and leverage of sales and marketing efforts. RedWave has just begun to make sales into U. S.

Speaker 2

Federal government accounts and we believe that our success with large enterprise accounts will help to further penetrate this opportunity. Internationally, RedWave and 908 devices share many of the same channel partners. We estimate an 80% overlap, again creating efficiencies of scale. As mentioned, beyond mass spec, pharmapat customers often leverage FTIR, Raman and related infrared spectroscopy technologies for applications in QC, upstream and downstream. 908 Devices desktop portfolio includes our new Raman based maverick device for upstream bioprocessing and RedWave now adds a line of Raman and FTR accessories for PAT and industrial QC with the potential for optionality to extend FTR devices into downstream pharma.

Speaker 2

These accessories represented approximately $2,000,000 of their full year 2023 sale. We are positioning ourselves for accelerated growth through our selective acquisition strategy and new product launches. Red Wave is our 2nd acquisition as an organization following the successful acquisition and technology integration of Trace Analytics GmbH in 2022. Since our IPO in late 2020, we've developed and launched a suite of innovative desktop devices, 2 just last year, to position us for growth as the headwinds for life science instrumentation and bioprocessing subside and advanced therapeutic modalities take hold. Over time, we have grown total top line revenue at a 3 year CAGR of 23%, supported in large part by our flagship handheld device for the detection of fentanyl and related trace applications.

Speaker 2

In 2023, handheld represented 76% of our revenues and grew 28% year over year. We absolutely want to continue to win in that space while we nurture and grow our desktops for bioprocessing. We believe the acquisition of Redwave does just that by solidifying our handheld market position and driving accelerated growth in a market we have seen with durable success. With the contributions from 8 months of Red Wave revenue for 2024, we now expect full year reported revenues to be between 63 dollars to $65,000,000 an increase of 25% to 29% compared to 2023. Joe will address the details of this guidance in a moment.

Speaker 2

We project favorable financial impact from this acquisition, including higher growth, improved margins and a faster path to profitability. In 2024, we expect to add $11,000,000 in revenue, representing 8 months of ownership on top of the revenue guidance we provided for the core 908 business earlier this year. Over time, we expect Redwave to contribute strong gross margins above 908 Devices corporate average. We are absorbing a cash flow positive business and going forward, we have identified more than $5,000,000 in forecasted annual cost synergies to be realized in 2026. The acquisition is fully funded with the cash from our balance sheet and an additional consideration will be paid in stock contingent on Red Wave meeting a minimum annual growth target of approximately 22% over 24 months.

Speaker 2

We continue to believe that our cash on hand is sufficient to reach cash flow breakeven. At 908 Devices, we have always operated our business with the goal to build a solid financial foundation for durable long term profitable growth. This acquisition is squarely in line with that vision and further fortifies the foundation we are building. We now have multiple lab grade analytical platforms at hand to power point of need chemical analysis today and well into the future. We have a consolidated portfolio of handheld and desktop devices to address greater than $6,000,000,000 of forensics, research, QAQC and bioprocessing TAM.

Speaker 2

And we believe we have accelerated our path to reach more than $100,000,000 in annualized revenues with improved U. S. And international scale. Further, we continue to project the ability to reach cash flow breakeven with our current cash on hand. I'm so proud of what our team has been able to accomplish over the last several years and with the addition of Red Wave Technology, I am even more excited for what's next.

Speaker 2

With that, I'll now turn the call over to Joe for more details on our Q1 and on our updated guidance.

Speaker 3

Thanks, Kevin. Revenue for the Q1 2024 was $10,000,000 up 5% from $9,500,000 in the prior year period, primarily driven by an increase in handheld device revenue. Handheld revenue was $7,400,000 for the Q1 2024, up 20% from $6,200,000 for the Q1 2023. This increase was driven primarily by component shipments in support of the initial production phase of the U. S.

Speaker 3

Department of Defense Next Gen Chemical Detector Program, also known as AvCAD, and an increase in service revenue. We shipped 53 MX908 handheld devices in the Q1. Our pipeline remains strong for our handheld devices in the U. S. And internationally.

Speaker 3

The fentanyl crisis and the emergence of new and evolving analogs has been a key driver of handheld adoption in the U. S. And we are now seeing this crisis expand and drive urgency internationally. This was confirmed by U. S.

Speaker 3

Secretary of State, Anthony Blinken, who warned of exactly this in March during a United Nations conference. Now turning to our desktop serving the life science, instrumentation and bioprocessing markets. Revenue from our desktop products for the Q1 2024 was $2,600,000 down 17% from $3,100,000 in the prior year period, primarily related to a decrease in device sales with 8 desktop devices placed in the Q1 comprised of Rebel, Zip Chip and Maven. Despite customers continuing to remain cautious in their first half capital expenditures, we are seeing positive engagement. One of our core objectives has been to launch and leverage an expanded product portfolio to maximize opportunities and strengthen customer engagements.

Speaker 3

Our product portfolio now includes 4 desktop devices in the PAT space, 2 launched just last year and we are seeing quoting activity combination of products now, one product driving another. For instance, in the Q1, we received an order from a top 20 biopharma customer from multiple desktop devices, Rebel and Maven, demonstrating the value of our expanded portfolio and validating the complementary nature of our PAT desktop devices. And over the Q1, our sales engagements reflected this trend with an approximate 2 to 1 weighting toward our newest products, which is also consistent with trends seen in the second half of twenty twenty three. Although it is still early days, we continue to see traction and positive engagement with Maverick. In early April, we hosted a successful webinar with over 250 registrants, highlighting how process control impacts critical quality attributes or CQAs.

Speaker 3

We reviewed how MAVERICK was readily deployed in cell culture monitoring and control without any bioprocess specific model building. We showcased the strategy of continuous dynamic feeding to enhance process performance and improve product quality. Further, we have engaged in a number of qualified evaluations where biopharma customers install a MAVERICK and test across multiple bioreactors. MAVERICK's ability to connect to multiple bioreactors is a key capability and we are encouraged to see customers supporting and prioritizing evaluations for this novel technology. We ended the Q1 2024 with a cumulative handheld and desktop installed base of 2,914 devices, up 18% from 2,468 at the end of the Q1 2023.

Speaker 3

Recurring revenue, which consists of consumables, accessories and service revenue, represented 45% of total revenues this quarter and was $4,500,000 a $400,000 increase over the prior year period, driven by service and rebel consumables. Recurring revenue in the Q1 consisted of $2,800,000 related to handhelds and $1,700,000 related to desktops. Revel utilization remained at approximately 0.5 kip per month for active users, which has been a consistent run rate for 9 quarters. Looking ahead, we continue to expect recurring revenue for our product portfolio to be around a third of product and service revenue for the full year 2024. Gross profit was $5,000,000 for the Q1 of 2024 compared to $4,400,000 for the prior year period.

Speaker 3

Gross margin was 50% for the Q1 2024 compared to 46% for the prior year period. The increase in gross margin was largely due to favorable timing of production, driving higher absorption and lower material costs during the Q1 of 2024. Over the longer term, we expect volume based improvements to our gross margins as we achieve better leverage over fixed costs. Additionally, with the integration of Red Wave, we expect modest benefit in the back half of twenty twenty four and further impact in 2025. Total operating expenses for the Q1 of 2024 were $17,700,000 compared to $17,400,000 in the prior year period.

Speaker 3

This increase was driven by a $400,000 increase in non cash stock based compensation and $300,000 in legal fees related to our acquisition, offset in part by a reduction in third party commissions and salary and related costs. Net loss for the Q1 of 2024 was $10,900,000 compared to $12,500,000 in the prior year period, a 13% improvement. We ended the Q1 of 2024 with $134,200,000 in cash, cash equivalents and marketable securities with no debt outstanding. Subsequent to quarter end, we used an additional $45,000,000 for our acquisition of Red Wave. We anticipate exiting 2024 with multiple years of cash to support our path to cash flow breakeven.

Speaker 3

Looking ahead in 2024, we now expect revenue to be in the range of $63,000,000 to $65,000,000 representing reported growth of 25% to 29% over full year 2023. Our updated revenue guidance includes an expected $11,000,000 of revenue from Redwave, representing 8 months of ownership layered on top of our prior guidance of $52,000,000 to $54,000,000 for the core 908 business. Our updated revenue guidance includes the following assumptions. 1st, we expect $11,000,000 in 2024 reported revenue from Red Wave, which reflects 8 months of ownership. On an annualized basis, this represents approximately 20% growth for 2024 Red Wave revenues, in line with the company's 2023 growth profile.

Speaker 3

We see potential for Redwave's growth to accelerate once the company's products and services gain traction within 908's commercial engine, likely by the end of 2024. Our 2nd quarter results will include 2 months of revenue contribution from Redwave and given similar customer and funding dynamics, we anticipate Red Wave's seasonality to mirror that of our handhelds being back half weighted. 2nd, we are reiterating our $52,000,000 to $54,000,000 revenue guidance for the core 908 business. While we continue to see some indicators positivity for the life science instrumentation and bioprocessing markets, the pressures we experienced in 2023 have, as expected, persisted and likely will continue through at least the first half. The industry is reporting some promising signs related to bioprocessing inventory destocking in Q1.

Speaker 3

However, 908's bioprocessing recovery will be driven by a rebounding CapEx spending for instrumentation in preclinical biopharma, which has remained relatively muted to this point. But we do continue to expect a step up in total desktop device placements during 2024, with sales of newer products building through the year as our sales engagements convert to orders. And lastly, we expect the strength of our handheld devices, serve the forensics market to continue to bolster our overall growth. However, the delay in approval of the U. S.

Speaker 3

Federal government budget may result in some of our enterprise opportunities shifting into the second half of the year. With the timing of the U. S. Federal government budget and the acquisition of Red Wave, we expect a slight shift from our previous assumptions for 2024 revenue split. We now expect revenue to be slightly more back half weighted compared to our prior assumption of a 40% to 60% first half to second half split.

Speaker 3

Touching on gross margins, we continue to expect 2024 to be in the low 50s range due to the impact of pricing, higher material costs and overall product, service and channel mix. We anticipate that Red Wave will have a small positive benefit to second half gross margins with rising contributions expected in 2025. At this point, I would like to turn the call back to Kevin.

Speaker 2

Thanks, Joe. Again, as previously communicated on our Q4 call, we are laser focused on 3 key areas for 2024, including market expansion, leveraging our expanded product portfolios and executing to a framework for sustained growth with a path to profitability. Our acquisition announcement today directly and meaningfully addresses each of these three key areas. Further, we are pleased with our unplanned Q1 results and the new trajectory we have set for 2024 and beyond. I'd like to thank our team for their hard work towards our Q1 achievement.

Speaker 2

Lastly, I'm excited to welcome our new colleagues from Red Wave Technology to the 908 Devices team, and I look forward to our bright future together. With that, we'll now open it up to questions.

Speaker 4

Thank

Operator

Our first question is from Matt Larew of William Blair. Please go ahead.

Speaker 5

Hi, good morning. I wanted to start on Red Wave and two things. One would be, if I think back to the last acquisition Trace, obviously, we just saw the product in MAVERICK that features the aseptic sample technology from Trace. So clearly, incorporating the technology and product development. And you referenced, obviously, the impressive portfolio that the Red Wave has of their own products and how the sales channels overlap.

Speaker 5

But I'm just curious as you look at the deal, what you're thinking about from potential collaboration on the R and D or product development side over time?

Speaker 2

Hi, Matt. Yes, thanks for the question. You're right. I mean, we did the acquisition of Trace Analytics GMVH in 2022 and really a successful one that we're really happy we did. It is fully integrated now.

Speaker 2

As you know, it's become our base of operations in Europe and allowing us to take orders direct across Europe. And then as you mentioned, the technology, we took the sampling technology and released the product Maven and then now that's on the market and it's the basis of the online capabilities for next generations of Rebel when you get to that point. So lots of good there on the R and D side and then plugging it in and having a base of operations in Europe. From the Red Wave perspective, we're super excited that now we have a portfolio of products in the bioprocessing, life science instrumentation space for said products. And we really built a nice foundation for that growth as we move along.

Speaker 2

But if you look at our handhelds, we've had one product in a series of accessories. So with Redwood, that adds 3 additional products that have that high overlap with our customers and sales channel, which we can get immediately into the bags of our team. From a R and D collaboration perspective, we briefly touched on it in the prepared remarks, but we're also excited that Red Wave has approximately $2,000,000 of their sales last year in the pharmapat space, selling accessories and selling Raman probes, FTR probes and the like into industrial QATC and pharmapat applications. So I would imagine as we continue to go and the market justifies that we'll be able to work more together on integrating and looking to offer additional FTIR based products into our desktop portfolio.

Speaker 5

Okay. That's great to hear. And you referenced obviously or Joe did, I suppose, in his comments, CapEx recovery being key obviously to your own bioprocessing recovery. Just curious what you're hearing from customers about budgets for capital equipment, any indicators of shifts in sales cycle or availability of capital? And you referenced obviously some placements at a top 20 biopharma.

Speaker 5

Any patterns or trends that you would call out in terms of customer groups and how they're perhaps viewing their capital purchasing ability this year?

Speaker 2

Yes, sure. I'm happy to give a few comments there. So yes, absolutely. It's really not the destocking dynamic of consumables that impacts 908s. As you know, it's more around the CapEx spending for small scale instrumentation, like 908 does here in the life science instrumentation market and bioprocessing.

Speaker 2

As you know, we're very much in the PD labs, process development labs. So that's in upstream preclinical world. So we've been seeing particularly pause there to adopt novel technologies in that space. I would say 2 things. I mean, 1 from conversations with customers regarding budget, I think there's still uncertainty on the timing of the release of CapEx within the organizations.

Speaker 2

I've been direct conversations with several customers. Hard to draw conclusions by group as you asked for, just because our numbers are fairly modest here. But I have definitely seen larger organizations as well as smaller organizations showing that uncertainty. Last comment on that, in fact, one of the customers talking to of late is very much ready to pull the trigger, but is waiting for their biotech funding to come, so an additional series raise for that organization. So it's directly coupled.

Speaker 2

So we are pleased that the world has been showing some positive signs in the biotech funding arena, as you know, over the Q1. So we're pleased for that. And we'll take some time for that to ripple down, I'm sure, but I think that is a positive thing. And the other thing that we mentioned in our prepared remarks, we are getting a lot of engagement. While that engagement isn't transferring directly to desktop orders, it's fast as we would, of course, all like, lots of engagement.

Speaker 2

Joe called a few things out in his prepared remarks regarding great engagement on a Maverick webinar, great engagement with customers doing evaluations, in some case, funded evaluations. So a little color there for you.

Speaker 5

That's great. I'll jump back in the queue. Congrats on what looks like a really nice fit in terms of the Red Wave deal. Thanks.

Speaker 2

Thanks, Matthew.

Operator

The next question comes from Jacob Johnson from Stephens. Please go ahead.

Speaker 4

Hey, thanks. Good morning and congrats on the deal. I guess I've got a couple on Red Wave. Maybe just first on the Red Wave technology versus the MX-nine zero eight in use applications. Can you just talk about how complementary your products are with theirs?

Speaker 4

And then is there any risk of kind of cannibalization between these two product portfolios?

Speaker 2

Yes, yes, happy to. Thanks, Jacob, for the congratulations there. We're really excited for the Red Wave side. I mean, first from a technology perspective, they are very complementary and it very much expands the toolkit. We mentioned that about 80% of our international distributors represent both, and we would only do that if they were not in a competitive situation and that they were, in fact, complementary.

Speaker 2

So it's a little bit of a proof point there. But in the simplest way, you can think of the MX technology as a new product flash is taking mass spec, so it has immense sensitivity. So, it can measure things at very, very low trace levels. So, invisible amounts, a residue, a minute particulate aerosols in the air. Now if you think of the Red Wave technology, it can measure bulk quantities, but it can measure many, many more chemicals, 22,000 plus chemicals it can measure.

Speaker 2

So the 2 are often used by our customers in concert depending on the situation and where they go. So we really don't see that their competitive nature to those products from their positioning. And then as you know, obviously, we're excited for Red Wave as well due to its financial profile. We had pretty high benchmarks that we've been trying to stay true to, and this acquisition really kind of showcases those in terms of being very synergistic from a cost perspective that we touched on as well as in the complete financial portfolio profile that's a bit accretive in many different ways. And maybe a little bit helpful too is just a little bit more color on the Red Wave products.

Speaker 2

As Ken mentioned, there's 3 today, the Threat ID, Protect IR and Explore IR. And those U. S. List prices of those products range from $45,000 up

Speaker 4

to $75,000 So at the high end, close to

Speaker 2

the MX list price today. And the majority of the runway placements are in the U. S. And industry have come through distribution channels to date. Usually comes with discounting, lower ASPs, kind of discount levels from 5%, maybe up to 30% on the international sales.

Speaker 2

And the Threat ID where the majority of the placements have been today, the first launched product by Red Wave is where the majority of

Speaker 3

the placements are and are at

Speaker 2

the higher end of that ASP range, but a little bit more color on the products themselves.

Speaker 4

Thanks for that, Kevin and Joe. And I guess maybe just kind of following up there, you guys laid out some pretty robust growth outlook potentially for Red Wave at least to get the contingent consideration. It seems to me there's kind of 2 or 3 big opportunities there. 1 and 2 being kind of the bioprocessing industrial applications, and then the other one kind of leveraging, the large enterprise accounts. As we think about that, the growth outlook going forward for this business, could you just kind of talk about the relative size of those opportunities in terms of growth drivers between kind of bioprocessing industrial versus the large enterprise accounts?

Speaker 2

Yes. Absolutely. I'll start and then maybe Joe can add some additional remarks. But yes, you're absolutely right. We think there's a lot of growth potential with this business, and you can see the resolve that the Red Wave team has in this combination based on that structure and earn out consideration that's contingent upon beating growth targets.

Speaker 2

So, 1st and foremost, those growth targets are going to be driven and met through and pursued through plugging into our commercial engine, which we think is pretty robust on our handheld side. So we're working even on day 1 to make sure that it plugs into that channel. And we mentioned very briefly in the slides that they haven't really done too much yet in the larger federal accounts, those larger enterprise accounts. And we feel we have a pretty skilled team there. So we believe we can make good progress getting into those enterprise accounts.

Speaker 2

They take a little bit of time, but they can be quite large as we go. And we think the earnout structure being cumulative over 24 months is helpful in that regard. The areas of bioprocessing, the areas of the PAT accessories that they sell, particularly into pharma and industrial QAQC, I think that's something that we'll be looking to leverage over time, but see the biggest benefit coming from putting into our handheld commercial engine. And maybe provide additional pieces. We did highlight in our prepared remarks that Red Wave's 20% plus year on year growth in 2023.

Speaker 2

And for 2024, our revenue expectation is that $11,000,000 contemplates Red Wave growing at that similar level on an annualized basis. There is certainly potential for Red Wave revenues to accelerate towards the end of 2024 once the products gain traction and it's within our commercial engine, but it won't be measured in our approach. We're excited by the growth potential that Red Wave brings, but we're setting achievable expectations, I believe, that we can plan to revisit once these products have a few quarters of integration within our commercial engine. And in terms of their pacing and seasonality, we're selling it's pricing as similar to our current customers, selling the same customers. We're working through similar budget processes as the MX.

Speaker 2

So I do expect similar pacing, more revenue in the second half as we go.

Speaker 4

Got it. Thanks for taking the questions guys.

Operator

The next question comes from Stephen Maher from TD Cowen. Please go ahead.

Speaker 4

Great. Good morning. Can you hear me?

Speaker 2

Yes. Hi, Stephen. How are you doing?

Speaker 4

Good. Thanks for taking the questions. So maybe to build on what Jacob asked, there does seem to be some overlap with the handheld MX-nine zero eight in terms of like some use cases such as Fentanyl's. Can you give us a little bit more color on and I know you guys said that customers use both FTIR and mass spec, but give us a little bit more color in the marketplace landscape and what percentage of users use both FTIR and mass spec?

Speaker 2

Yes, sure. Happy to. I would say it's a pretty large percentage of customers that have access and use both. And they do it's a toolkit, right? So people will pick what's the right tool for the right job at the right time.

Speaker 2

In the cases of something like Fentanyl, mass spec is just absolutely well positioned there because of its extreme sensitivity and the minute quantities, the invisible quantities that are really required to detect for something like a fentanyl. Now if you think about how it complements in applications like that, if you think of a counterfeit pill, the excipients, the binders, the mix, what you would provide around that fentanyl can be a unique identifier of that counterfeit construction or and so those bulk components being measurable on FTIR is very much complementary even in that one use case here really around fentanyl and counterfeit drugs. There are many, many applications that people employ, peptide RF4 from really unknown materials of all sort from benign to something toxic that they're looking to identify. We spoke that there's about 15,000 as we estimate legacy FTIR instruments that are out there in the field. And if you think about a 5 to 10 year useful life of these, that would imply that there's maybe 1500 to 3000 per year as an opportunity to replace or upgrade.

Speaker 2

And we really see the same that you can look at a lot of opportunities since they only have placed 700 thus far. And we believe just like we've communicated in the past for our MX that as you offer more modern conveniences, size reduction, speed improvements, other modern connectivity options, that it drives upgrade cycles. And we see that the Red Wave team is able to take advantage of that, and we're looking forward to, again, plugging it into our commercial engine to see if we can support that and get its growth trajectory to be meaningful here. But that's the same as we've talked about that as our MX goes to its next generation, we would expect it to spawn upgrade cycles as well. So I really do believe the 2 are absolutely complementary even in the application and use cases like that fentanyl counter drug situation I tried to pick.

Speaker 4

Yes. Okay. Yes. That's really helpful. Thanks for that.

Speaker 4

And I might have misheard, but did you guys say Red Wave just uses distributors? Or do they have an internal sales force?

Speaker 2

That plug into our 70 folks that we have across our combined organization coming into the year. They leverage based upon their size and efficiency, a lot of channel managers channel opportunities here in the U. S, also internationally, which is similar to us internationally for our handhelds. We use distribution channels, so very much known within the market. But yes, they do have a sales force and we're excited to partner with them and get the combined scale to drive the growth of the Red Wave and MX product.

Speaker 4

Okay, got it. So do they have direct sales or is it mostly all distributors or I guess asked a different way, how much of that $13,700,000 in revenues last year were from distributors?

Speaker 2

Yes. From the direct sales perspective, they do have some direct sales, but it's a low percent, right? I don't want to put exact percent on it. It's higher than single digits, but it's low double digit type level. Really just from where they are, 39 people today have focused on leveraging smartly with distributors out of the box.

Speaker 2

We think we have an opportunity to go direct, which is part of our synergies as we think about the opportunity to expand our ASP going forward.

Speaker 4

Yes. Okay. Yes, that's my next question. The potential revenue synergies, yes, it seems like it's very complementary. When do you think you'll start seeing revenue synergies?

Speaker 4

I appreciate you said cost synergies would hit fully by 2026, but when you think revenue synergies will hit? And I appreciate it takes time to cross train the sales forces across the different products.

Speaker 3

It does take time. We're looking to

Speaker 2

hit the ground running today. But maybe to give you a little bit of additional details on both the costs and maybe thoughts on top line. You probably heard that we're forecasting $5,000,000 plus in potential cost synergies in 2026, and we expect roughly $2,000,000 of those synergies to be realized for 2025 kind of in the shorter term. And those $2,000,000 include savings anticipated from prioritization of personnel across organization, mainly selling marketing, R and D leverage. Together, we need to hire less.

Speaker 2

It also contemplates an improvement in channel discounts that we were just talking about related to international distributor alignment and some opportunity for margin improvement in our direct sales. And the remaining $3,000,000 will probably be realized starting in 2026 related to the utilization of the 38,000 square foot Danbury facility that we're acquiring here today and the manufacturing scale up of potential high volume programs that we've talked about like APCAD versus expanding space here in Boston for that. But a big part of the value in the transaction is what you're asking about is the ability to plug regulated products into our 908 sales channel and drive that sustainable exciting growth. And we're working to get going on that, I'd say immediately. We expect there is the ability to drive cross selling, sort of forensics portfolio, these trends will be easier to understand probably in a few quarters, but we see an opportunity to improve our retrying revenue profile as well after the commercialization of possible cloud based enterprise management software and the potential to increase other bread weight of participation in our life science instrumentation and bioprocessing PAT space.

Speaker 2

So we expect near term cost synergies that I mentioned really to show up in OpEx and the longer term synergies to be more balanced between OpEx and COGS. We'll work to get those top line synergies as soon as we can. Yes. And maybe just layering into that for a second, Stephen, I hope it's coming across on the call today, but we've seen so many synergies even beyond what we touched on and you can probably see the dimensions of that from how complementary this is. So we're going to be working on that now that's under our ownership to quantify their timing and impact.

Speaker 2

We really don't want to underestimate it because there is so many here. We've quantified some on the call today, but there's a lot that have been qualified and more qualitative. But yes, we don't want to underestimate the impact and we'll certainly report as we progress.

Speaker 4

Okay, great. Thanks for all the questions.

Operator

Our next question comes from Dan Arias from Stifel. Please go ahead.

Speaker 6

Hi, good morning guys. Thank you. Kevin, maybe on desktops, I know you said last quarter that you wouldn't be breaking out system placements by instrument. But is there anything that you can say about the Revel in order to put it in some context since that's the product that we have a bit of install history with? And then I think you said that the total for desktops was made up of Rebel, Maven and Zip Chip, if I'm not mistaken.

Speaker 6

So no Mavericks. Anything we can use when it just comes to the mix across the year for the different systems? Or is it at the end of the day just sort of up 1 quarter and down another for the various components of that mix?

Speaker 3

Dan, this is Joe. A little bit

Speaker 2

of color on rebel. It continues to tick along, right, where we've been kind of that low single digit range. As you mentioned, we're not specifically breaking it out, 78 placements, but it is continuing to see some of those pressures. And as I did talk to the placements within the specific quarter, our desktops included Revel, Zip Chip and Maven. Kevin, do you want to give a little bit more color on Maverick?

Speaker 2

Excited by that opportunity. Yes, absolutely. I mean, we called out a little bit in the prepared remarks that the sales engagement we're seeing here in Q1 is similar to what we saw in Q4 in terms that it is more weighted or 2:one weighted to our newer products in the pipeline as we're gaining momentum and excitement again just from a sales engagement funnel perspective. I think it's absolutely early days, but lots of engagement on Maverick. We mentioned briefly that in April, we had a webinar with 250 some registrants and that was centered around MAVERICK and how it impacts like pretty quality attributes and how it doesn't take investments in modeling.

Speaker 2

So good engagement on that. And then further, we have a number of qualified evaluations ongoing right now being planned and then ongoing. And this is where a biopharma customer in some cases will be purchasing or consumables and the like to support a demo across multiple bioreactors and kind of testing and qualifying that and the ability to connect across there. So lots of encouraging parts to evaluate it. But as we've talked about, certainly the CapEx spending for Novel Technologies has been muted, but we're really excited that we've seen a lot of this engagement.

Speaker 2

And then obviously, we've got diversified portfolio and the handhelds have been performing to bolster our overall growth of 8% this quarter of products and servers.

Speaker 6

Okay. And Joe, your point was that total desktop system placements, whatever that mix is, should sequentially and march higher across the year, correct?

Speaker 2

Yes. That's our expectation. And ultimately by the end of the year to see an increase in placements driven mainly by Maverick and Maven. It will progress throughout the

Speaker 4

year. Okay.

Speaker 7

And then if I could just ask

Speaker 6

yes, I got you. Thank you for that. Maybe just on the handheld side, you had mentioned last quarter that the budget delays were a factor when you were thinking about the beginning of the year and 1Q. I'm curious if once federal budget was released, you saw some loosening when it comes to spending and deals. Did late March, early April show any pickup in activity in any way?

Speaker 6

And I guess relatedly, is there anything you could say that would help us with the modeling exercise when it comes to MX systems across the year? Thanks.

Speaker 2

Yes. From a timing perspective, it was good to see it finally get over the line. I think it was March 22, the funding was released. Of course, that's in many ways just the start of the process with our customers. So lots of conversations with our sales team to tee up the funding mechanisms and the timing and understand the procurement cycle, which is likely pushing a lot of those Fed government opportunities more into the back half in Q3 versus Q2 opportunities where it really didn't start to free up until March.

Speaker 2

So I would say we're seeing a pickup in the conversations, but the timing is working against us a bit where people are, I'd say, back half, Q3, Q4, even more so than we initially thought back in March.

Speaker 4

Okay. Thank

Operator

you. Our next question is from Puneet Subha from Leerink Partners. Please go

Speaker 7

ahead. Yes. Hi, guys. Thanks for the questions here. So Kevin, it's good to see the acquisition, but on the flip side of it, I'm getting a number of questions here on what brought about this acquisition at this point and sort of why now?

Speaker 7

And can you talk to us about the level of investments that you might have to do in order to drive the Red Wave technology into some of the other cost synergies, but just I think the big question here is given your cash balance and sort of the dilution you're taking on for this deal, how should we be thinking about the overall sort of cash burn this year and next?

Speaker 2

Yes, sir. Absolutely. Great questions. I'll start and then I'll pass to Joe. But, yes, we're super excited about the Redwave acquisition.

Speaker 2

As you know, we have done an acquisition in our past and that helped grow us a nice portfolio of products in the bioprocessing. So we've got really and life science instrumentation. So we've got a really nice foundation there in the portfolio. But looking to drive scale and benefit from our investments in sales and marketing with our handheld devices, which have been durable in their success and their growth and serving the market to point of need chemical analysis. And we absolutely want to keep winning there.

Speaker 2

So when we go out and search from an inorganic perspective and look, this asset was very unique to us. It's profitable. It's highly growing. Many, many synergies that directly plug into our sales channels. So we think it's accretive in many different directions.

Speaker 2

So it's a strong fit for us. And again, it fits well into our drive to win across point of need chemical detection. And that can be in forensics, that can be in bioprocessing. And there's just a lot of opportunity that we see in that space. And maybe they can touch on some of the cash concept and path to cash flow breakeven.

Speaker 2

In 2023, we used approximately $25,000,000 in operating cash flows to support the business. And in Q1, it's typically our largest quarter for cash flows. During Q1, 2024, our cash used for operating purposes was about $10,000,000 but we'd expect to be in the $30,000,000 range on a full year basis here in 2024. We do expect to finish 2024 with multiple years of cash available to support our operations. And the key factor to our cash to profitability is the cash burn is the top line growth.

Speaker 2

And we're continuing to see the path to double digit top line growth for the core 9 way business once the bioprocessing recovery plays out and the structure of our Red Wave acquisition rewards strong 22% plus growth over the 2 year consideration period. So we expect to improve, lowering our earn with scale in 2025 and beyond. And to think about that as it translates over to a possible path to cash flow breakeven, we believe that this acquisition does pull forward our cash flow breakeven timeline given that we're adding scale of Red Wave revenues, bolstering our top line growth profile and adding an accretive gross margin and cash flow positive business. And we previously had indicated it would probably be a low three digit revenue number to cross into profitability, But we're likely that somewhere less than $150,000,000 in revenue we can get there. And with the addition of Red Wave, we can reach this level faster than before.

Speaker 2

So definitely excited about that.

Speaker 7

Got it. That's helpful, Joe. And my follow-up is on what are you seeing from the cell therapy accounts? Those have been some of the early adopters, but obviously impacted during the biotech impact over the last couple of months and the impact last year. Can you talk a little bit about sort of adoption you're seeing in those accounts?

Speaker 7

And wondering, Kevin, how should we think about the closed loops or automated systems? How does how do your products position into bioprocessing applications there? And just lastly, if I could squeeze in one more on is there anything that we ought to think about in terms of BioSecure or impact from BioSecure? Thank you.

Speaker 2

Yes, happy to touch on those. So first on the cell therapy side, our focus has been that ladder, as you mentioned. We do have a dedicated BD professional under our commercial leader that's engaging the innovative hardware equipment companies in the cell therapy space. As you know, we announced a relationship with Terumo and then in February relates to relationship with Solaris. And those efforts, Solaris in particular, is really around creating a fully integrated device that automates the whole process and increases the number of dosage available and lowering the cost of goods while doing so.

Speaker 2

So that efficiency in our mind is very synergistic with our products and very much aligned to our how we're positioning our Maven and Maverick products to actually help control processes, help control and determine when you harvest, help improve yields and other quality attributes along the way. So we do have a focused effort to engage such organizations. We're very pleased to be working with Solaris. You can see in the news they're getting good traction with BMS and others. They announced here recently.

Speaker 2

So we're working to get designed into their to their processes, but we have a number of others that we're working with as well. So we're really working between the innovative hardware providers and also the innovators on the therapeutic side, and then we're bringing the innovation on the analytics. So we're trying to close those loops. So it's again early days, more of an OEM scale relationships we're looking to build, but I can say that we've had good engagements in the quarter with a number of groups in that area. Regarding BioSecure, real quickly, we work with many organizations in the government with our handhelds.

Speaker 2

So those, of course, are going after the small molecule analysis, drug analysis in many faces, counterfeits and the like. So, we work on a variety of additional security applications and are well versed on things like export control and the like. So, I think as biosecurity opportunities develop, we do have a very good dedicated capable government sales channel. We are in some conversations with the U. S.

Speaker 2

Government around some initiatives on the military as well as just for the economy around initiatives to onshore and have a strong vibrant economy here in the United States for biopharma suitable. So, love to see how it has developed. You know as well that we work with groups like National Resilience where this has been a part of their government strategy as well and they've been a strong partner and customer and collaborator with 908. So maybe not an immediate direct impact we see there, but we certainly stand poised to help out where we can on that.

Speaker 4

Okay. Thanks, guys.

Operator

We currently have no further questions on the call. So I will hand the floor back to management.

Speaker 2

All

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Key Takeaways

  • In Q1 2024, 908 Devices reported $10.0 million in revenue, an 8% year-over-year increase driven by robust handheld device demand.
  • The company will acquire Red Wave Technology for $53.5 million (cash and shares), adding a profitable FTIR-based product line that complements 908’s mass-spec handhelds.
  • Red Wave posted approximately $13.7 million in 2023 revenue with 52% gross margins and 15% operating margins, and 908 Devices expects over $5 million in annual cost synergies by 2026.
  • 908 Devices raised its 2024 revenue guidance to $63–65 million (25–29% growth), including an anticipated $11 million contribution from Red Wave.
  • The acquisition is projected to accelerate the path to $100 million in annual revenues and achieve cash-flow breakeven with existing cash on hand.
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Earnings Conference Call
908 Devices Q1 2024
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