Welcome to Twist Bioscience Fiscal 2021 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference call over to Jim Thorburn, Chief Financial Officer.

Thank you, operator. Good afternoon, everyone. I'd like to thank all of you for joining us today for Twist Bioscience conference call to review our fiscal 2021 second quarter financial results and business progress. We did issue our financial results earlier this afternoon, which is available at our website at www.twistbioscience.com.

Thank you, Jim, and good afternoon, everyone. During the second quarter of fiscal 2021, we reported strong revenue and robust order growth with progress across all four areas of our business, synbio, NGS, biopharma and data storage. While we remain in the middle of a pandemic and the landscape evolving, we see customers returning to the lab after receiving vaccination an incredible excitement around new applications of synbio and genomic technologies, including drug discovery, gene editing, liquid biopsy and minimal residual disease, or MRD. We grew revenue to $31.2 million for the quarter, an increase of 62% over the second quarter of 2020, with trends coming from both synbio and NGS across multiple industries. Of note, no single customer accounted for a significant percentage of our revenue, indicating broad and diversified strength. In addition, we reported $41.7 million in orders, an increase of 69% over the second quarter of fiscal 2020, a strong signal for the remainder of fiscal 2021. Now I'd like to dive into the details of our four business segments. Beginning with synthetic biology, we reported $12.9 million in revenue with orders coming in very strong at over $20 million for the quarter as we continue to expand our footprint in the market.

All right. Thank you, Emily. As Emily noted, we continue to prove out the power platform and had another very robust quarter. Revenue for the quarter was $31.2 million up sequentially 11% and year-over-year 62%. Orders were $41.7 million up sequentially by 24% and year-over-year, 69%. Gross margin for the second quarter was 39%. And we shipped to approximately 1,700 customers in the quarter and 2,100 customers year-to-date. And we concluded the quarter with cash and short-term investments of approximately $555 million. Now I'll provide more details on orders for the second quarter. NGS orders for the second quarter were $18.6 million as compared to $16.7 million in our quarter ended December 31, 2020, with a 90% year-on-year growth, which reflects the increased adoption and increasing number of NGS applications. During the quarter, we also received orders from approximately 700 NGS customers and customers with the top 10 accounts placed orders of approximately $8 million.

Thank you, Jim. In conclusion, in the first half of our fiscal year, we reported almost $60 million in revenue with strong momentum heading into the second half of the year. Looking forward, for synbio, we expect continued growth and diversification of our revenue stream, continued commercial ramp for clonal ready gene friends and DNA prep as well as production ramp for IgG. We also expect a rollout of our B2B solutions to allow us to capture specific multi-sized institutions and an ongoing preparation of the infrastructure and software platform for our factory of the future to enable strong growth in 2022 and beyond. For NGS, we expect continued revenue growth and customer ramping production. The technical addition of near mine and continued conversion of impact queries to Twist sequencing. For biopharma, we intend to find additional partnerships and add programs with the majority generating milestones and royalties. In addition, we will continue to advance our internal pipeline of antibodies and pursue out-licensing opportunities targeting our first out-licensing program that need 2022. For ease, we will continue to drive our engineering road map to our third maturization execute on the IARPA contract and paved the way for market adoption of this new storage medium. With that, let's open up the call for questions. Operator?

And our first question is coming from the line of Doug Schenkel with Cowen. Your line is open.

This is Eleni for Doug. I have one and competitive landscape, and then I will ask a follow-up question. There are a number of companies that seem to be emerging into the market was the concept of taking a more distributed model for oligos and gene synthesis. What is your view on that? And specifically, are they competitive be complementary or not of the above at a higher level, is the distributed model attractive? And how are you positioning for it?

Thank you. That's a great question. Right now, the distributed model is for markets that are adjacent to us because the quality is just not there enough to be in the market that we serve of gene synthesis and synbio. So for instance, as a comparison, you can buy an oligo for $0.03 on our website, while the distributed model already goes at $50 per oligo so it kind of very different product offering. And then the quite that we have, we have extremely high equity, we can make arrivals up to 300 base sales, so at this point with what we see is that we don't have a demand from our custom. We don't hear demand from our customers to make D&A in the lands. What we hear is people want they want high equity, they want the low price, and they want in, and we think we're very well site to deliver that. But at the same time, we're to the market. And our platform is agnostic to the chemistry. And if there was a better chemistry, we'll be very happy to deploy it on our platforms.

That's very helpful. And for my follow-up, I've a question on the guidance. The increase in gross margin, is that due to a higher share of NGS markets like Q2? Or is there something else driving the upside there?

Yes. No, the increase in gross margin guidance is a higher share of NGS plus. We've drawn -- we've increased our overall guidance from $110 million to $118 million up to $121 million to $129 million. So we're leveraging our fixed cost. So it's a combination of increased revenue plus the higher NGS.

Our next question is coming from the line of Catherine Schulte with Bard. Your line is open.

This is Tom on for Catherine. First one to touch on the core academic customer. It seems like from order trends rather than activity levels have improved. But just wanted to get a sense for what you saw in the quarter. And then specifically, if there's any geographic dynamics to call out here, given we've heard U.S. has sort of lagged from a recovery standpoint here?

So good question. The dynamics in the quarter were interesting. January started off a little bit weaker. I mean, if we go back to January with the vaccine roll, I was just starting. As the quarter progressed, we saw increasing orders, so academic sector recover significantly from previous trends. We had a good quarter in Asia. Revenue was up by $2.7 million, so almost 3x or 2x we saw last year. Europe is very strong. So we're doing well in all regions. The products are obviously being well received by customers. So a number of customers actually increased to 1,700. So over the last year, customer base has grown. We've seen steady increase in bookings, in bookings were over $41 million which just highlights the strength of the portfolio. Health care was up. Industrial biotech was doing extremely well. And it was noticeable, we're doing well, excluding our Ginkgo business. So we continue to broaden out the platform.

Great. And as a follow-up. I appreciate the color on expectations around some additional biopharma partnership seems like the funnel is strong. Just want to get a sense for expectations as to kind of development time lines and budgets. Just wondering If those are fairly consistent to any sort of COVID uncertainty at this point if biopharma is sort of operating in a new normal, and you would expect those budgets to be fairly locked in at this point?

You're asking in terms of how spending budget or budget for our customers?

Yes. The customer spending budgets as well as sort of their development time lines.

Yes. So in biopharma, we made a big push in that area the last few quarters, both with the biopharma team that is covering antibody and optimizing them for partners. You can see that the number of partners been growing, the number of program is growing so that's going well. And then we also made a push on synbio by launching our IgG product. So I said we're doing really well in pharma. COVID has been useful to us, whether it's in pretty bad for society, it's been useful because we did our own discovery program against COVID. And we were able to show that not only we can cover this against hard to drug targets, but so we can do it very fast. And so basically, the only that we now for biopharma is really strong, and they must in line with what they need. And so we can say the funnel is very strong. And our response to it actually is very more of a tailwind than the headwind.

Our next question is coming from the line of Tycho Peterson with JP Morgan. Your line is open.

This is Casey on for Tycho. Can you elaborate a little bit on the academic markets rebound given commentary? And then maybe how that can serve as upside to NGS numbers? I know you guys raised your NGS guidance for -- during the full year guidance, but is there any upside there from academic recovery?

Yes. The academic sector is up by, I would say, roughly 20% in terms of orders which is good in terms of positioning us well for a second half, not significant in terms of impact on NGS. Most of the academic pickup relates to -- although we don't break it out as synbio. The good news is it did pick up. We didn't see a significant drop off in academic over the last year, but it's a good early indicator of recovery there. And in terms of NGS, with very strong first half in NGS. And We've upped our guidance even though we have one supplier that's we're working with his constrained in terms of providing as a product in the short term. But we feel good in terms of where we're at, strong orders, broad customer base adoption. And we believe that the product -- I mean, the increasing number of large accounts working with us increased again. And we continue to be very optimistic and bullish in terms of where we can take the business. We are -- as you probably saw, we increased our investment in Portland, and that's an anticipation of positioning us for strong growth in '22, '23.

Got you. And then maybe just -- you've talked previously about how COVID isn't really material to the business. So I'm just wondering if things changed their regarding the new variance research into variance spread and so forth?

Yes. Thank you. So We're of the variants. As you may remember, we now a year ago, in March, we launched our first COVID test for NGS in order to enable scientists to read the entire virus sequence in order to detect variants and like to understand the edges. So we had also anticipated a year ago that the variants will be important. As variants have emerged, we have launched new positive controls against -- and I think now we have more than 15 variants available on our website. And then on the entirety side, we've tested the potency of our ability against different variants. Significantly, variant is top of mind. And we're offering the tools to our customers to help in the depiction and study of those items.

Our next question is coming from the line of Vijay Kumar with Evercore. Your line is open.

Congrats on a good print, here. I had three questions. Jim, the supply headwind that you mentioned, is that baked in to the guidance? I guess, asking the question another way, without the supply headwind would the revenue guide being higher?

Vijay, I love your questions. Yes, the supply headwind is baked into the guidance. We're working with the supplier. We have a really good relationship with a supplier We're working this week to week, and we'll give an update on our next earnings call. And we had a very strong first half. So I mean, when we're growing as rapidly as we are, we've been anticipating supply issues. We did increase our inventory over the last year. It's just -- we're seeing significant increase in demand, and we'll work it out. And we did bake it into the guidance. And as we work in resolving it, we'll give an update on the next earnings call.

Any, I guess, any way to quantify, Jim, I'm looking at your end US guidance. You guys did about 120% growth for first half. The annual guide at the high end. I think it's taking a 50% growth. So perhaps, is that where it's hitting you guys on the NGS side in anybody to point of fire?

Yes. I mean on the NGS side, it is impacting on the NGS side. And although we did increase guidance, it's -- we wanted to note that we do have a headwind there. We will give an update on the next earnings call, I mean we're obviously working to resolve it. And we'll keep you posted.

Got you. And then Emily, one for you. I missed the part. I think you made some comments on data storage, having reached an important milestone. Maybe if you could just simplify it in terms of where we are towards the end goal. I think you guys had to get to certain cost metrics to where we are in the journey and what was this update? If you could flesh that out, that would be helpful.

Yes. Yes, happy to do it, Vijay. So as you remember the goal is to get to a price point of $100 per terabit. And so to do that, we need to be able to make DNA at the 150-micron dimension of the silicon. And so we started our platform at 50 micron. Last year, we proved that we were able to shrink down to 10 microns. And right now, we are working on the 1 micron chip. And let me rephrase just one thing I misspoke. The goal is to get to 150-nanometer. So we want to go to 150-nanometer. So right now, we've gone from 50-micron to 10-micron. We have the 1-micron chip in hand. And the milestones we achieved this quarter is that we were able to synthesize 200 base pair oligos on that chip. And so maybe a few words on what that ship looks like. The features are 1 micron away from each other to the pitch is 1 micron. And the dimension of the features is 300 nanometers. So we are -- and so it was quite an achievement to get there. We believe that is the longer DNA made on the smaller feature of silicon ever. So it's definitely a leading edge. So we are not finished with our 1 micron chip with a few more experiments we have to do, a few more milestone we need to reach around speed of synthesis, quality and cost. But definitely a huge step for us to be able to make 200 base pair oligos and there are mixed base. Once we are done with the 1 micron ship, Next would be to design and build the next chip that is going to get us to 150 microns. So we are not at the goal yet for 100 but it's definitely a very -- another very strong step forward.

Our next question is coming from the line of Puneet Souda with SVB Leerink. Your line is open.

First question, maybe this was covered briefly a little bit. In terms of the guidance raise. Can you just provide contribution that was -- is that NGS largely driven? And anything you can provide there on the type of the customer despite the the headwind that you have here, just trying to get a sense of is that in liquid biopsy or in other NGS application?

So just trying to summarize the question here. So in terms of -- compared to guidance, last quarter's guidance, we'll increase 110 -- so let me frame it $110 million to $118 million, up to $121 million to $129 million. We increased NGS from approximately $54 million to $58 million up to $63 million to $67 million. So In terms of the headwind, we are seeing or experiencing working through that. We've included that in the guidance recognizing that we have been impacted. We're working on resolving that. And it's a week-to-week issue. We're working on with our partner, and we'll give an update on the next earnings call. But we've had very strong growth. We don't break it out into liquid biopsy, but I would just highlight the number of large customers we're dealing with, Puneet, has increased again. And we're now at 170 with 65 having adopted So seeing really good, strong trends in terms of NGS . We're seeing strong trends across all our businesses. And it's nice to see the academic segment rebound, which is up roughly about 20% in orders. And we believe we're really well positioned for the second half of this year. In addition to that, you probably saw we increased our CapEx for the year. That's in anticipation of ramping up Portland next year. And we did increase our footprint in Portland, we saw that as a very cost option for expansion in the future.

Okay. That's very helpful. In terms of the assays that are used in liquid biopsy. Just wanted to get -- in terms of getting specked into those assays, any early indications as to sort of where you think those initial trials are headed? How confident are you that you will get -- be getting effect into these assays as they reach into larger trials and potentially commercialized. And then if I could ask also on the biopharma front, Obviously, generally, the outsourcing trend is increasing here in discovery, what's your expectation here sort of longer term in order to get involved in a larger number of trials? And also, if there is any In the near term, do you expect any trial enrolled essentially getting into a Phase I trial? Any updates there, that would be super helpful.

Yes. Thank you, Puneet. So maybe starting by the last question on biopharma. Yes. Our funnel is very strong around biopharma is simply -- it's clear that there is big interest in what we offer on this cover an optimization because our antibodies are for human and even derived on day one. As far as when will the first swift antibody go into clinic? We don't have a clear timing on that because our partner filing to do that. And we mentioned on the call that we have main programs that are out of our hands, meaning that that now the partners is in charge of the timing. And so it's just a question of time until a this antibody is exciting. But to be clear, our partners will be doing the work. In terms of the liquid biopsy question, we were definitely in the number of liquid biopsy products. We can only talk publicly about GRAIL because they mentioned using Twist exclusively. We can't discuss other customers that have not mentioned with. But we are -- in the past, we have won more than our fair share of bake-offs. And we can see in the revenues that keep coming quarter-over-quarter after quarter that those liquid companies are burning source billing DNA to do their work of validating product evaluating their assay in anticipation of a commercial launch. So that's why we're quite bullish on the long-term prospect of LT NGS pipeline because as those products go commercial, that should enable us to get continued revenue ramp.

I'm not showing any further questions at this time. I would now like to turn the call back over to Emily Leproust for any closing remarks.

Thank you very much, operator. So we've had a very strong first half of our fiscal year with momentum moving into the remainder of the year. We see that our products we relate with our customers. Our addressable markets continue to expand. We have the team in place to drive innovation, and we hold ourselves accountable to execute aggressively. We move forward to sharing with you our progress in the months ahead. And I'd like to thank you very much for your time today.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.