Ladies and gentlemen, thank you for standing by, and welcome to Rapid Micro Biosystems' Q2 2023 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mike Beaulieu. Please go ahead.

Good morning, and thank you for joining the Rapid Micro Biosystems' Second Quarter 2023 Earnings Call. Joining me on the call are Rob Spignesi, President and Chief Executive Officer; and Sean Wirtjes, Chief Financial Officer. Earlier today, we issued a press release announcing our second quarter 2023 financial results. A copy of the release is available on the company's website at rapidmicrobio.com under Investors in the News & Events section. Before we begin, I'd like to remind you that many statements made during this call may be considered forward-looking statements within the meaning of federal securities laws which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements, including, but not limited to, statements relating to Rapid Micro's financial condition, anticipated year-end cash balance, cash runway, future revenue and system placements, expectations for business development and growth, customer interest and adoption of the Growth Direct system, expectations for our new RMBNucleus Mold Alarm and the potential impact of macroeconomic uncertainty and the public health crisis on Rapid Micro's business. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. For a list and description of the risks and uncertainties associated with Rapid Micro's business, please refer to the Risk Factors section of our annual report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2023 as amended, as such risks are updated in our subsequent filings with the SEC. We urge you to consider these factors and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 4, 2023. Rapid Micro disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I'll turn the call over to Rob.

Thank you, Mike. Good morning, everyone, and thank you for joining us to review our second quarter 2023 results. I will begin this morning's call with a summary of our second quarter performance, followed by an update on the progress of our execution related to our growth strategy. I will then turn the call over to Sean for a more detailed review of our financial results and outlook. Total revenue was $5 million, representing a 30% increase compared to Q2 last year and above the guidance we provided in May. We placed 2 systems in the second quarter and completed 3 validations. Based on our strong performance in the first half of the year, we are reaffirming our full year 2023 total revenue guidance of at least $22 million, representing growth of at least 30%. Despite macroeconomic uncertainty leading to cautious customer spending, our teams are navigating these conditions and staying focused on strong execution to deliver our full year guidance. We were pleased once again with our execution across both products and services during the second quarter. I'd like to especially highlight the strong recurring revenue in the quarter, which increased over 40% compared to the second quarter last year. We had a record quarter in consumables revenue, which is driven by both higher pull-through per validated system and more validated Growth Directs in the field. Service revenue was also strong during the quarter, driven by annual contract renewals. While Sean will provide additional P&L details, I want to emphasize the importance of recurring revenue which drives predictability and demonstrates the durability of our business model. It is also a strong indicator of the value we are providing to our customers as evidenced by their increasing use of our Growth Direct systems in their worldwide manufacturing operations. With the…

Thanks, Rob, and good morning, everyone. Second quarter 2023 revenue increased 30% to $5.0 million compared to $3.9 million in Q2 2022. We placed 2 Growth Direct systems in the second quarter, the same number we placed in Q2 last year. Product revenue, which is comprised of systems and consumables also increased 30% to $3.2 million in Q2 compared to $2.4 million last year. This performance was driven by consumables, which increased by almost 50% compared to Q2 last year and accounted for the majority of the year-over-year growth. As Rob discussed, we had a record quarter in consumables, which was led by both new systems coming online and strong pull-through per average validated system which was over $90,000 on an annualized basis. This compares to the $80,000 per average validated system we generated in 2022. We are making good progress in this area and are on track to achieve our goal of high single-digit percentage growth in this metric for the full year. Service revenue increased 29% to $1.8 million in the quarter compared to $1.4 million last year, with solid growth in both validations and service contract revenue. We completed the validation of 3 systems in the second quarter, the same number as last year. As of June 30, we had a total of 108 validated systems, which contributed to a 36% increase in service contract revenue compared to the second quarter last year. Second quarter recurring revenue increased 44% to $3.6 million compared to $2.5 million last year, driven by the strong growth in both consumables and service contract revenue. Nonrecurring revenue was $1.4 million in Q2, which was flat with the prior year quarter. Turning to gross margins. Product margins were negative $1.5 million in Q2 compared to negative $0.8 million in the second quarter last…

[Operator Instructions] Your first question comes from the line of Tejas Savant with Morgan Stanley.

Yuko on the call for Tejas. With the challenging macro persisting here, could you share what you're seeing from customer related to budget screening? And how has the customers' time to make purchase decisions trended since last quarter?

Yes, so this is Rob. So what we're seeing is consistent with what we reported in Q1, there's not a -- hasn't been a material difference. We're still seeing increased budget scrutinies, basically just a tighter filter thematically. That being said, some customers are certainly moving faster than others. So it hasn't been dramatically changed. In some cases, we have seen budgets push to the right throughout Q2. But our countermeasures against that, we believe, are effective and are working, and that's why we're reaffirming guidance. I think increasingly, we're also encouraged with the interactions we're having with customers at the senior level and ensuring that our Growth Direct projects and rollouts are being prioritized. This further gives us confidence in our outlook. So again, some but so no major change throughout the year-to-date here, just a continuation of the theme of general budget tightening and increased scrutiny.

Got it. That's helpful color. And then with backup consumable manufacturing facility in Lexington now up and running, are there any financial impact or incremental costs that we should be contemplating as that facility begins to ramp?

No, Yuko, it's Sean. It's a backup facility. It will not be active, but it is ready to go. So if we need it, we will use it. It will not be -- we will not be operating 2 separate consumer manufacturing facilities at the same time.

Our next question comes from the line of Dan Arias with Stifel.

Rob, maybe just a version of the first question there. I mean obviously, the forecast for the year is intact. And I know you're not guiding or talking about 2024 right now but just given the time line that you guys work with, do you feel good about the tenor of the conversation today in a way that would set you up for, say, the beginning of 2024 to be intact because it feels like a lot of the business that you're booking today and you're realizing today with stuff that's been in the funnel and doesn't -- is nicely not falling out. So the question is like, are you set up okay for the next 6 to 12 months, just based on the environment that we're in right now?

Yes, Dan, we like the outlook. Yes, maybe a little more color from the first question. Now clearly, over the past year, our focus on commercial execution is ensuring we have the full team intact up and trained, which we essentially do at this point, incredibly encouraged with the calibre of talent that we have in our commercial team. As I touched in Yuko's question, we're also probably best as ever been in Rapid Micro's history, access to senior decision-makers inside customers. And increasingly, we're getting exposed to better visibility and insight into global rollout plans, which we believe will help us stay prioritized. Certainly no guarantees in that, but it's certainly a great leading indicator. Our funnel is healthy again with the 3 regions up, a number of -- the right number of reps in the field, generating leads and enhanced marketing. We feel good about our funnel of the composition of cluster geographies, cell and gene, biologics, et cetera. I would also say it's important to note our consumables business. I think you heard quite a bit about that in the comments. But that is -- I look at that as a very, very important leading indicator as existing customers continue to increase usage of our systems through consumables and services consumption, that is typically a good leading indicator to great customer experience and it could be a good leading indicator and many times can be for future purchase decisions across global networks, which also helps us to stay prioritized and it's helping us withstand some of these -- some of the budget scrutiny. So those are the thematic, I would say, longer range. And clearly, in the short term here, as Sean touched on, we already have 2 placements in Q3, which is helpful because Q3 can be a tricky quarter with holidays and vacations and customer access. So with all of the above, it's a long way of saying we're optimistic about the future and the outlook.

Okay. Well, that's good. And yes, you did sound pretty pleased with the recurring revenue in the quarter. So I guess, Sean, how do we think about that tracking into next year? You mentioned that double digits are sustainable, do you think you can -- and march that item up to that lineup upward as the installed base continues to grow here?

Yes, Dan, I think that's clearly the expectation. We'll say recurring was 70% of revenue in Q2, that's probably not where we're going to be going forward as we get system placements ramping. But we clearly expect that we're going to see good growth in recurring both pieces of it, as we get more systems validated and customers sign up for contracts as well as just building growth in consumables through not just new systems coming online, but existing systems increasing utilization and us bringing more and more customers in who are using systems at higher volumes like cell and gene therapy. So we expect those are trends that we see now and are going to continue as we go forward that are going to help us to continue to have good growth in recurring.

Okay. Are you -- within the model, is the idea that the cell and gene guys are the more intense users, is that still holding up now? Would that be demonstratable if we looked under the hood at the consumables number today? Because obviously, within that set of customers, is -- there's a lot going on there. So just curious whether the way that we have thought about things traditionally is holding true today?

I think at the -- Dan it's Rob. I think at the site level, that's generally true. The cell and gene customers tend to be high consumers of our environmental monitoring application. It's typically quite high volume, but the Biologics segment is larger and it has a sizable pull-through and use as well. And in the biologics segments and other segments also are heavier users of our water and bioburden products. So it's sort of a mixed review depending on the segment.

Got it.

Yes. But I would say that within biologics, we have plenty of runway just in that space to get this metric to increase meaningfully over time and get us into kind of the expected range that we expect the business to get to over time that we've talked about in the past. And I think high-volume cell and gene can just accelerate that potentially. So that customer mix is going to be -- it really will just kind of go with how fast we grow. But clearly, the expectation is that we are going to grow this metric meaningfully over time.

Right.

Okay. Okay. Last one for me and then I'll hop off. Sean, on the downtime for the production lines, did the comment that you made there suggest that by 4Q, you really aren't dealing with a gross margin headwind as it relates to the starts and the stops there?

Yes. I mean we always have downtime, Dan. This was a case where we have some things that we're doing right now and we started in Q2, some of them are still going on now where it's making a short-term investment and that downtime's part of that investment to drive positivity going forward. So we're doing some things. One example I'd give you is, we have historically manufactured our water and bioburden consumables manually. And we are working right now to get that moved over onto the automated process, which will have a lot of benefits, including lower cost of product. So I'd call this kind of more of a onetime thing. We will likely have things like this in the future. I wouldn't expect it to be every quarter by any means. So I think as we march forward through the year, I think the guidance is we expect margins to get better sequentially each quarter in Q3 and Q4. We are not guiding to positive gross margins in Q4. I think the possibility still exists there if we can drive some system upsides and we get things done that we need to get done from a cost reduction standpoint over the second half. So I think this is something that was a conscious decision. We think it's the right thing to do, and we expect it to benefit us as we get late in the year and move into '24. Thanks, Dan.

Well, thanks, Dan, and Yuko. We are going to wrap up the live call now. Thank you for everyone for joining us today.