Thank you for standing by, and welcome to Teknova's Fourth Quarter and Full Year 2022 Financial Results Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Senior Vice President of Marketing, Jen Henry. Please go ahead.

Thank you, operator. Welcome to Teknova's fourth quarter and full year 2022 earnings conference call. With me on today's call are Stephen Gunstream, Teknova's President and Chief Executive Officer; and Matt Lowell, Teknova's Chief Financial Officer, who will make prepared remarks and then take your questions. As a reminder, the forward-looking statements that we make during this call, including those regarding business goals and the expectations for the financial performance of the Company, are subject to risks and uncertainties that may cause actual events or results to differ. Additional information concerning these risk factors is included in the press release the Company issued earlier today, and they are more fully described in the Company's various filings with the SEC. Today's comments reflect the Company's current views, which could change as a result of new information, future events or other factors, and the Company does not obligate or commit itself to update its forward-looking statements, except as required by law. The Company's management believes that in addition to GAAP results, non-GAAP financial measures can provide meaningful insight when evaluating the Company's financial performance and the effectiveness of its business strategies. During this call, we will therefore use non-GAAP financial measures of certain of our results. Reconciliations of GAAP to non-GAAP financial measures are included in the press release that we issued this afternoon, which is posted to Teknova's website and at www.sec.gov/edgar. Non-GAAP financial measures should always be considered only as a supplement to and not as a substitute for or as superior to financial measures prepared in accordance with GAAP. These non-GAAP financial measures in this presentation may differ from similarly named non-GAAP financial measures used by other companies. Please also be advised that the Company has posted a supplemental slide deck to accompany today's prepared remarks. It can be accessed on the Investor Relations section of Teknova's website and on today's webcast. And now I will turn the call over to Stephen.

Thank you, Jen. Good afternoon, and thank you, everyone, for joining us for our fourth quarter and full year 2022 earnings call. Teknova is a leading producer of critical reagents for the life sciences industry to accelerate the introduction of novel therapies, vaccines and molecular diagnostics that will help people live longer, healthier lives. We manufacture high-quality custom reagents with short turnaround times and are positioned to scale with our customers as they advance their products from discovery to commercialization. In 2021, we presented a strategy to position the Company for sustainable, accelerated growth through investments in capacity expansion, commercial excellence, and scientific innovation. I'm pleased to report that we are effectively executing to that plan. First, our new state-of-the-art modular manufacturing facility became operational at the end of 2022 for research-grade production and is on track for GMP production by mid-2023. In addition, we've modernized our supporting infrastructure to scale the business for years to come, including a new ERP system, an updated quality system and the introduction of highly automated reagent manufacturing equipment. We believe these investments plus our existing infrastructure will give us the capacity to deliver approximately $200 million in annual product revenue when fully utilized. Second, in 2020, I hired the first two dedicated field sales representatives at Teknova and what was the beginning of our commercial investment. I'm pleased to report we are now fully operational from a commercial and marketing perspective, including implementation of back-end systems and processes such as Salesforce.com, automated marketing and an e-commerce engine. Sales and marketing associates have been onboarded and are already driving demand for custom and GMP-grade reagents. Early indicators demonstrate our ability to move our catalog customers into our custom and clinical solutions products. Today, more than 76% of our annual revenue is generated from customers…

Thanks, Stephen, and good afternoon, everyone. Results for the fourth quarter of 2022 were lower than prior year as anticipated given challenges in the markets. However, we delivered solid results for the full year of 2022. Total revenue was $7.9 million for the fourth quarter of 2022 and $41.4 million for the full year. Revenue for the fourth quarter of 2022 was $7.9 million, an 18% decline from $9.6 million in the fourth quarter of 2021 and $41.4 million for the full year 2022, a 17% increase from $35.4 million for the year 2021, excluding Sample Transport. A way of reminder, Teknova launched the Sample Transport product in the latter part of 2020 to address the urgent need for COVID-19 tests, and we no longer market or manufacture the product. Lab Essentials products are targeted at the research use only, or RUO market, and include both catalog and custom products. Lab Essentials revenue was $7.0 million in the fourth quarter, a 3% increase from $6.7 million in the fourth quarter of 2021. For the full year, Lab Essentials revenue was $31.8 million, a 17% increase from $27.2 million for the full year 2021. Growth for the full year was driven by a 3% increase in the average revenue per active customer to $7,714 and a 13% increase in the number of active customers to 4,121. Clinical Solutions products are made according to Good Manufacturing Practices, or GMP, quality standards and are primarily used by our customers as components or inputs in the development and manufacture of diagnostic and therapeutic products. Clinical Solutions revenue was $0.8 million in the fourth quarter, a 68% decrease from $2.4 million in the fourth quarter of 2021. For the full year, Clinical Solutions revenue was $8.4 million, a 24% increase from $6.8 million for the…

Thanks, Matt. Overall, we were pleased with our fourth quarter and full year 2022 performance and the progress we made against our strategic priorities. The long-term outlook for our end markets remains positive, and we are committed to executing on our strategy to help our customers accelerate the introduction of novel therapies, diagnostics and other products that improve human health. We will now take your questions.

[Operator Instructions] Our first question comes from the line of Joseph Flanagan of Cowen. Your question please, Joseph.

This is Joe on for Max. Thank for taking the question. Just first on Clinical Solutions, the quarter came down a decent amount year-over-year, but it was similar to what you saw in Q3. And that 20% to 50% growth guidance is really encouraging ahead of our model, but it's a pretty wide range. So I guess, first -- or is in fact is giving you confidence in the return to growth here in 2023? And what are some of the puts and takes that get us from the low to the high end of this range.

Thanks, Joe. I'll start and, Matt, make sure to jump in. From a confidence perspective, I think there's really three different aspects here. The first is, I think when we talk to our customers, we're operating in a new normal funding, where there has been acceptance of the amount of funding out there in people and customers such as they are now working with the funds they have and moving forward. The second piece there is that as we said in our comments a moment ago, we have now a full commercial marketing organization, and we are a very small part of a large opportunity in the space, and we're getting that up and going. And with that, there's about a 12-month cycle from the time that we see customers engage with us and then start migrating and scaling up in terms of their purchases. And so when we look at our funnel, we feel like the back half is where we see that return back to that, as we said, the 25% plus for the entire business.

And I'll just add to that comment, which all are very valid, is that we have this -- I mentioned in my remarks, a significant customer that is moving from purchasing Lab Essentials products to Clinical Solutions. So we do have that transition happening, which is good for our Clinical Solutions business and consistent with our strategy of moving customers from catalog accustomed to the clinical part of our business, the Clinical Solutions. And I would say further to what Stephen said, of course, there is some dependency on timing of when these clinical orders that we're anticipating coming in that will sort of give us in the back half of the year, in particular, some variation of what we might expect due to those lumpy larger orders. So that's some reasoning behind the range that we provided. But we do feel good about that business going into 2023.

Great. And great to hear about the funding environment picking up. I was just curious if you could quantify or maybe roughly quantify the amount of the larger deferrals you've seen in the last two quarters. And like how much of that could really trickle into the back half versus more of a 2024 thing?

Yes. We aren't going to pull out the exact numbers and things like that. But what I can say is that if you remember our Q3 call, we had a very strong first half of 2022. And then we guided down for the back half as far as seeing some of these deferrals and push-outs of some of these customers. And I do think that many of those were actually reducing the number of therapies in type 1 as well as size of those. I think that has primarily now been, like I said, is really kind of the new norm for funding for many of these customers. But the cell and gene therapy space, in particular, continues to be a very exciting area in the area of investment. And so at the moment right now, I think that it's not so much deferrals as this is the new norm, and we're going to build from here.

Thank you. Our next question comes from the line of Matt Larew of William Blair. Your line is open, Matt.

Could you give us a sense for maybe what you would be seeing for Lab Essentials growth excluding the customer shifting? And then with that outlook, are there any sort of first half or second half dynamics? You referenced sort of conservative customers is that embedded in your outlook because it seems to be a bit lighter than both, obviously, historicals, but even what others in the space have characterized.

And you're referring specifically to the Lab Essentials piece, Matt?

That's right, Matt. Yes.

Yes. Good. Yes. Thanks for the question. Yes, this -- I think with respect to what the growth rate would look like for the Lab Essentials without that customer, we're not giving exact numbers related to that specific customer, obviously. But I think you would see a more normalized growth rate in the Lab Essentials with that. Of course, I would just say, in general, in 2023, we are having some more tough comparisons compared to 2022 given the level of activity that we saw in particular in the first half of the year. So I think on a kind of adjusted basis for that difficult comp, the Lab Essentials would look fairly in line with historical norms on that basis.

And just to add a little color here, Matt. Many of those customers, they migrate from catalog to custom clinical. And so some of those custom lumpiness is in that historical number.

Okay. And then just thinking about you referenced the OpEx, obviously, I mean, flat year-over-year. On the gross margin side, I think sort of competing factors given increased weighting towards clinical solutions, which should help. But obviously, you're now moving capacity and volume into the new facility that you brought online. So fourth quarter, I think was like we would have thought it would be. So can you just maybe give us some sense for how you expect gross margin to evolve throughout the year?

Yes, sure. I'll be happy to take that one. For sure, as you mentioned, Matt, gross margin is going to be significantly impacted by the result of opening the new facility now. As a reminder, we spent close to $40 million on that facility over the last two years, and we are starting to roll those costs out through depreciation into the P&L. Some of those costs started in the fourth quarter of last year. Others will be coming on during the course of this year. So based on that fact and the updated outlook that we're providing here today for 2023 revenue, I would say -- I would expect our gross margins to be in the low 30s for the year, in that kind of range. And as you might expect, seeing improvement in the second half of the year versus the first half of the year and particularly as the revenue picture improves in the second part of the year.

Thank you. Our next question comes from Jacob Johnson of Stephens. Your question please, Jacob.

This is Hannah on for Jacob. Could you just talk about how you'll balance taking costs out of the business and with continuing to invest in growth in the business?

Yes, sure, Hannah. Obviously, as we look at this, we managed our costs to make sure that we have our path that we need forward to drive the growth long term. And so everything here is a balance. And so what we've done is we've reduced our costs to make sure that we manage our capital, but at the same time, we're not sacrificing any of the long-term growth aspects. And you can see through what we did in 2022 and what our strategy is for 2023 to scale the business, we're not cutting back in those areas to make sure we put ourselves in a position for high growth going forward.

I'd just add since I made some comments about the reduction in force that we had in February last month that as we went through that process, we were very careful to look at where we have invested and where we expect the returns on those investments to be naturally affecting as little as possible those areas that will be providing the return, like in sales and marketing and research and development. So, we did take actions there to cut costs generally across the board. But in those areas, we've made minimal changes and look where we could afford to cut back in other areas to achieve exactly what you said there, Hannah, which is the balance of maintaining future growth and investment to do that versus cost savings.

Right. And can you just talk about how customer interest has been in the new facility now that it's up and running? Are there any leading indicators to point to in terms of demand there?

So, the new facilities just so you -- everyone understands is the new facility is up for production for research-grade material. And then our efforts right now are really around doing it certified to manufacture GMP product. And that is actually a significant effort. And many of these larger clinical solutions customers would want their product to manufacturing in this new facility. So, for us, the timing of getting that done is when they start coming in to do their audits with that facility. That said, I do think that there is definite interest and part of our commercial strategy is to be engaging with these customers, letting them know that, that's coming, and when necessary or desire to have them on site. And I think the handful of customers that have been on site and have seen the facility are extremely encouraged and they recognize that this is a company that they can look at to go all the way through the clinical trials through commercialization.

At this time, I'd like to turn the call back over to Stephen Gunstream for closing remarks. Sir?

Great. Thank you and thank you for joining us for our 2022 full year earnings call. We look forward to connecting with you at the next investor conference.

This concludes today's conference call. Thank you for participating. You may now disconnect.