Thank you for holding, and welcome, everyone, to the Rapid Micro Biosystems' Third Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be question-and-answer session. [Operator Instructions] Thank you. I'll now turn the call over to Mike Beaulieu. Investor Relations. Mr. Beaulieu, go ahead.

Good morning, and thank you for joining the Rapid Micro Biosystems' Third 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 third 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 securities -- 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 and planned activities related to the company's business development and growth, customer interest and adoption of the Growth Direct System, expectations for RMBNucleus Mold Alarm and Rapid Sterility and the potential impact of macroeconomic uncertainty 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 risk factors 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, November 3, 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 third quarter 2023 results. I will begin this morning's call with an overview of our third quarter performance, followed by a review of the progress we have made in advancing 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 $6.1 million, representing a 30% increase compared to Q3 last year and above our guidance for the third consecutive quarter. The strength was broad-based with growth of approximately 30% in both product and service revenue for the second consecutive quarter. Based on our solid year-to-date results, and supported by a strong balance sheet, we are reaffirming our guidance of at least $22 million in revenue, representing approximately 30% in growth for the full year. During the third quarter, we placed five Growth Direct systems, including at least one in each of North America, Europe and Asia. This included the placement of a system with a new top five global pharma customer. As a result, our customer base now includes two-third of the global top 20 pharmaceutical manufacturers. We also completed four validations in the quarter. With all three sales regions staffed, our funnel has expanded meaningfully since the start of the year and is well balanced geographically. Biologics and cell and gene therapy customers remain our largest opportunity, as Growth Direct is ideally suited for the high-volume testing, full automation, robust data integrity and fast turnaround time required in these segments. That being said, we also have meaningful opportunities in segments such as small molecule and sterile injectable manufacturing where our global commercial presence is providing insight and access to new opportunities. As many of you are aware, there…

Thanks, Rob, and good morning, everyone. I'll start with a recap of our third quarter 2023 results, followed by our updated outlook. Q3 revenue increased 30% to $6.1 million compared to $4.7 million in Q3 2022. We placed 5 Growth Direct Systems in the third quarter of this year compared to 3 in Q3 last year. Product revenue, which is comprised of systems and consumables increased 31% to $4.2 million in Q3 compared to $3.2 million last year. The growth in revenue was primarily driven by two additional system placements in the quarter. Consumable revenue increased on a year-over-year basis but was down slightly on a sequential basis following a record second quarter due mainly to the timing of customer shipments between Q2 and Q3, both this year and last year. Service revenue increased 27% to $1.9 million in the third quarter compared to $1.5 million last year. The increase was largely driven by higher recurring service contract revenue, which grew almost 40% in the quarter. Third quarter recurring revenue increased 17% to $3.4 million compared to $2.9 million last year, driven by the growth in both consumables and service contract revenue. Nonrecurring revenue was $2.7 million in Q3 compared to $1.8 million in the prior year quarter. Turning to gross margins. Product margins were negative $1.5 million in Q3 compared to negative $2.4 million in the third quarter last year. The improvement was mainly due to higher placements in production volumes and systems and favorable consumables product mix in Q3 this year as well as the onetime write-off of expired materials and consumables in Q3 last year. This improvement was partially offset by the impact of planned downtime on our automated consumables manufacturing line to implement enhancements that will benefit future margins as we discussed on our last earnings…

Certainly. [Operator Instructions] Tejas Savant with Morgan Stanley. Your line is open.

Good morning, guys. This is Edmond on for Tejas. Thank you for taking my questions. Just to start, with five systems placed in the quarter, your guidance implies [indiscernible] the remainder in 4Q. Just wondering what underlies your confidence in being able to deliver that in 4Q? And what do you currently have baked into your guidance in terms of year-end budget flush?

Yes. So this is Rob Spignesi. Thanks for the question, Edmund. Really, our confidence in delivering the full -- delivering our guidance comes from a couple of different areas, first of which we've got a full team staffed as I discussed in the remarks. Globally, we've got good penetration into the top customers to global top 20. We've got increasing senior access into the senior leadership of the top 20. And notably, the conversations that we're having given us confidence and insight into the purchasing approaches and timing within these large customers. The funnel, notably and importantly, looks the way we want it to look to give us confidence in our outlook. And another strong leading indicator we look at is customer experience which we measure closely and is quite high. So the combination of these elements is what gives us confidence in our outlook. Now with regard to Q4 budget flush, we're not -- a, we're not seeing it, and b, we don't expect a traditional, if you will, budget flush, nor are we seeing what I would call a budget freeze. So it's been fairly consistent with what we've seen in previous quarters that we've mentioned. So it really is a customer-by-customer situation. And in some cases, not all, in some cases, the Growth Direct has been prioritized as a corporate-level initiative. So it's a bit more resilient to the current budget environment. Although in some cases, we've seen customers push projects to the right end in 2024. So the combined elements of all of the above is what gives us confidence in our outlook for Q4.

Great, Rob. Thank you for the detail. That's super helpful. And then in terms of Project Rapid for short validation [indiscernible] platform. I was wondering if you could help us benchmark how the project is performing? And are you seeing the same magnitude of impact between both existing customers and new customers and finally, if you could remind us, aside from dedicated project managers, what are some of the other areas of opportunities that you guys are leveraging shorten the [RAP] (ph) fund?

Yes. So we are seeing broad-based performance with new and existing. And for those that are listening that aren't aware of it. I'll just back up. Project Rapid is a project designation for an umbrella set of activities that we have to accelerate our validation processes. There's multiple elements that we need to work through with our customers under good manufacturing principles to go from an installation to this system of record through various validation processes to ensure the system is validated for use in a manufacturing environment. So over time, we've improved our capability in this regard. We have over 100 systems validated globally in GMP environments. And we've learned with our customers not only to accelerate the process but also to harmonize the process. And we've worked hand in glove. One of the most exciting things we've done as a company is harmonized our global validation processes with our large customers. And both our existing customers as I touched on, and our new customers benefit from that. So some of the activities that help to accelerate our validation on our Project Rapid. As I have touched on, we've got project management in place. So this is dedicated global product management. And this is effectively a project management process to get from an installation to validation. So we've got dedicated product managers. We have very experienced validation personnel who go in on-site with customers. We've improved our documentation and our data. So we're able to bring data to bear and to accelerate the process versus generating data on site. And we just -- we're down the learning curve. We understand where validation processes can be accelerated, where they typically slow down, where customer challenges are. So we're able to come in with a deep experience base in order to accelerate the process. And we do this globally across all the sites that we interact with. I view it as one of our fulcrum capabilities, and it's one of the areas that customers strongly appreciate our capabilities in.

Great, Rob. Thank you for the answers and the time today.

Dan Arias with Stifel. Your line is open.

Good morning, guys. Thanks for the question. So Rob, maybe just a follow-up on your new versus existing customer comment there. When you think about the sales funnel that will translate to orders and revenue next year, how does the mix look when it comes to placement at those new accounts versus repeat purchases? And then as a follow-up to that, on the cell and gene therapy side, you sound kind of positive there. Can you just talk about how those conversations are going? Obviously, there are some ups and downs with some of those companies and the things that they're experiencing these days and just the spending level that you might expect there. So how does visibility compare there to the other parts of the market?

Yes, Dan, thanks for the question. So with regard to new versus existing, it's balanced. We -- it's weighted towards existing customers, as you may imagine, and you heard we brought a new one on. So as we continue to chip away at some of the larger customers out there, our funnel, our outlook and our funnel is weighted in that direction given our land and expand strategy. That being said, again, as with the full team out there across North America, Europe and Asia, we are generating new opportunities kind of across our segments that include both new and existing. So we like the way our funnel looks with regard to both new and existing. And as I mentioned, from the -- excited about what we're hearing and seeing with some of our larger customers and getting better insight into their rollout plans and budgets against those. On the cell therapy front, I think you heard with regard to CAR-T in particular, or cell and gene generally in CAR-T in particular, we've done well there. Our value proposition resonates quite well. So I think it's a situation where our particular technology fits their manufacturing needs quite well, and it's really the -- and in our view, the only real fully automated system that can serve their needs. More broadly in cell and gene therapy, we are active with CDMOs who operate in that space that the CMO business is healthy as well as, obviously, the broader ecosystem with [indiscernible] manufacturers and other who continue to be healthy as well. So we're obviously watching it. We're strong in the space broadly. And -- but as I mentioned on the call as well, we've got a good footprint in biologics manufacturing, which is our largest segment and small molecule as well. So we watch our segment mix carefully. And while we're strong in cell and gene therapy, it certainly isn't the only segment that we're focused on. And again, it's important to note that biologics is our largest segment.

Yes. Got you. Okay. And then Sean, on consumables how do you think pull-through tracks on an annualized per system base meant into year-end? And then can you just touch on why consumables will be down next quarter, I think that's actually two sequential down quarters. It seems like you feel pretty good about momentum. So maybe just touch on how consumables [indiscernible] over the next one to two quarters.

Sure. Yes. So I didn’t break it down, we still expect to grow single digits in year-over-year pull-through effectively when we look at the full year. I think -- do we get to high single digits. We may -- we have a few headwinds that may keep us from getting quite to where we thought we'd get to a couple of quarters ago, but it's mainly due to timing. So if you kind of break down Q3 and Q4, Q3 a couple of things working against us in terms of year-over-year growth. One is that we had some -- a couple of hundred thousand dollars-worth of shipments pushed from Q2 to Q3 last year. And with our record quarter last quarter, we pulled probably a somewhat similar amount from Q3 this year into Q2 this year. So that comp is challenged both directions as a result of that. Thinking about Q4, Q4 is actually kind of the opposite of systems in the sense that most of our customers tend to shut down mid-December in terms of receiving new material. So it tends to be a little bit of a lighter quarter on a relative basis. So I'd say that and some kind of more transient timing issues in terms of shipments are really driving what we expect to see in Q4. I think as we go forward from there, it's really -- we do continue to expect to see that pull-through number move up. We're working very hard and Rob talked about Project Rapid, kind of move-in customers not only through validation but also in the routine use of those systems and pulling through the consumables. And we've got kind of a full court press on that front, and that gives us confidence that we'll see that sequential growth pick up again in 2024.

Okay. Okay. If I could sneak one more in here just on gross margins. Do you think the improvement that you see over the next couple of quarters, I think it's something you're looking for? Is that going to be driven more by the product side or the services side. And then on gross margin positivity for next year, is the latest thought that you sort of -- you cross over to positivity at the end of the year to exit 2024? Or could that happen sooner?

Yes. So I expect improvement to be both product and services. We talked a little bit about productivity and service, there was an improvement -- pretty good improvement this quarter in service. And I think as I think everything kind of comes from system placements. And as we're getting back on a trajectory now where placements are stepping up, it's going to drive more validation opportunities for us. And the other one that I never lose sight of is service contracts, almost every month now we have new customers moving into a situation where they need to start buying service contracts from us. So that -- we expect those two things to drive growth in services. And then I talked in the call a bit about products across both systems and consumables, but consumables, in particular, is an area where we're investing a lot of time and energy. As you know, we did some things on the line over the past couple of quarters that we expect to yield benefits starting this quarter. So I'd expect that to come -- the improvement to come from both areas within the business. I think as you look at what I expect to happen over the coming quarters on margin, I mean, thinking about Q4 we improved 11 percentage points from Q2 to Q3. That's probably not a bad way to think about what we expect to happen based on our outlook at this point. We've also talked about the fact that a couple more system placements getting us up into high single digits could get us to positivity, and I think that's still true. So give you a couple of points to triangulate on there relative to Q4 margin expectations. And then if we assume just for argument's sake, our typical kind of quarterly trend within a year, we typically step down in placements from Q4 to Q1. So that obviously put some negative pressure on margins. So we'll talk about guidance when we announce Q4. But I would expect that we'll see revenue step down placements typically step down in Q1, unless we see some other things happening, and we'll talk more about that when we give guidance. But if we assume the normal trend, I'd expect that you'd be -- you'd probably be negative in Q1. From there on out, it really depends on the ramp on placements and business activity. So latter part of the year is more likely. I think could we get there kind of middle of the year possibly. But we'll give you more color on that when we're ready to give you guidance for next year.

Yes. Okay. I can work with that. Thanks so much guys.

Steven Mah with TD Cowen. Your line is open.

Great. Thanks for taking the questions. Can you give us an update on the time lines on the rapid sterility offering? It's been in beta testing for some time now. And then also have you been getting any early inbounds on the rapid sterility offering from either new or existing customers? And can you discuss the impact on how you think about your sales funnel in 2024.

Yes, Steve, thanks for the question. It's Rob. So we have not given a time line on rapid sterility. We have mentioned in the past couple of calls that we're increasing our focus on commercialization. So we'll let -- that should be a bit of an indicator of kind of how we're tracking through the development process. Development has gone well. We're incredibly encouraged in what we're seeing as far as our internally generated data, feedback from our beta customer and it's given us the confidence to focus increasingly on commercialization activities. As I mentioned, we'll have a more significant and robust update for everyone next quarter. And we'll be excited for that discussion. With regard to inbounds, we're not commercially -- it's not being commercially marketed currently. So clearly, there is interest in a rapid sterility offering. We've done meaningful voice of customer work and believe we have the right features and benefits and value proposition that this market is looking for all under the umbrella and ages of our Growth Direct System with data integrity and full automation. So we're very excited about the commercial potential for the system. But again, we haven't been marketing it, and we're not in that mode right now, but more to follow as we move through time here.

Okay. Yes. Great. Thanks for the color. A question actually for Sean now. On the ASPs, it looks like they've normalized in Q3 versus Q2. Maybe you can discuss some of the trends there. And then a question maybe for Rob. Do you expect to have to give multi -- some -- either promotions or discounts. Is that going to be part of your sales and marketing strategy?

Yes. Hi, Steve, it's Sean. Are you talking about systems specifically?

Yes.

Yes. So I think -- and this may lead to Rob's question, so he'll have comments, too. Yes. So I think we -- I wouldn't necessarily tie it directly to multisystem deals, but we obviously look at strategic customers. There are times that we will do certain things for specific customers from a pricing standpoint to either get them on board, kind of get them on the team. That happens with some variability, so that can impact how ASPs move from quarter-to-quarter. So I would say that's clearly not the norm. We're happy overall with where we are in ASPs this year. And our expectation is we're going to continue to look at opportunities to move them up as we go forward.

Yes, Steve. So I think as in many markets with the higher the volume opportunity, the price will be an area of focus. And one of the elements of our business is moving through as we become a larger and larger piece of enterprise discussions and enterprise rollouts especially in big pharma. We will engage with the procurement teams and have those discussions about price and volume. So that's in the ordinary course. As Sean touched on, we're -- we watch ASPs carefully, and we're happy with where we are and where we're trending with them. And we always endeavor to make sure we're getting paid for the value that we provide. But certainly with larger enterprise rollouts, the pricing is going to be a bit different than a smaller one-off sale for sure.

Okay. Great. Thanks. That's helpful. And if I can sneak one last question. You guys talked a lot about your marketing activities with your demo labs in Germany and in Massachusetts. When I look at the -- your sales and marketing spend, it looks to be relatively flat from 2022. How should we think about sales and marketing OpEx going forward? Is it going to be sort of a steady state? Or is that going to be increasing? Thank you.

Yes. I think year-over-year comparison, Steve, last -- Q3 last year was a bit of an anomaly. We had a restructuring that we executed on then. A number of things came out of that, that were kind of onetime. So I'd say where we are now fully staffed, as Rob mentioned, is more where I'd expect to be. So I think if the comp was impacted by that we've increased spend kind of on the base organization and activities. Since last year. And I would think about that as us being fully staffed, and we'll continue to invest in that area, but I wouldn't expect to see large increases in that spend in the near term at this point.

Okay. Great. Thank you.

Thanks for the questions, Steve. And thank you all for your time. We're going to wrap up the live call now.

This concludes today's call. We thank you for your participation. You may now disconnect.