Welcome to Twist Biosciences Fiscal 2024 Second Quarter Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Angela Bitting, SVP of Corporate Affairs. Please go ahead.

Thank you, operator. Good afternoon, everyone. I would like to thank all of you for joining us today for Twist Biosciences conference call to review our fiscal 2024 second quarter financial results and business progress. We issued our financial results release after the market and the release is available at our website at www.twistbioscience.com. With me on today's call are Dr. Emily Leproust, CEO and Co-Founder of Twist; and Adam Laponis, CFO of Twist. Emily will begin with a review of our recent progress on Twist business, Adam will report on our financial and operational performance. Emily will come back to discuss our upcoming milestones and direction. We'll then open the call for questions. We would ask that you limit your questions to only one, and then requeue as a courtesy to others on the call. As a reminder, this call is being recorded. The audio portion will be archived in the Investors section of our website and will be available for 2 weeks. During today's presentation, we will make forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements generally relate to future events or future financial or operating performance. Our expectations and beliefs regarding these matters may not materialize, and actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include those set forth in our press release we issued earlier today as well as those more fully described in our filings with the SEC. The forward-looking statements in this presentation are based on information available to us as of the date hereof, and we disclaim any obligation to update any forward-looking statements, except as required by law. We'll also discuss adjusted EBITDA, which is a financial measure that does not perform are generally accepted accounting principles. Information may be calculated differently than similar non-GAAP data presented by other companies. We reported a reconciliation between GAAP and non-GAAP financial measures will be included in our earnings [ press release ], which can be found on our Investor Relations website at www.twistbioscience.com. With that, I will now turn the call over to our Chief Executive Officer and Co-Founder, Dr. Emily Leproust.

Thank you, Angela, and good afternoon, everyone. I am thrilled to be here today to share the remarkable achievements and outstanding performance our company has delivered over the past quarter. Our strong results validate the hard work, dedication and innovative spirit that define our team at Twist. We've made significant strides in executing our growth strategy, increasing our customer base and driving to our profitability for the business. Our [indiscernible] platform for making cfDNA remains at the core of our product portfolio, defines our competitive advantage in all markets and enables our flyway for growth and the strong financials we share today. Over the course of the second quarter, we continued our robust growth trajectory, increasing revenue 25% year-over-year to $75.3 million. Orders for the quarter reached a record level of over $93 million. The strong quarter was driven by growth in our [ synthetic ] biology product line, including Express Genes and bolstered by consistent strength in NGS. We reported a 49% gross margin for the quarter, an increase of 10 margin points versus the same period last year. We do see put and takes in the margin quarter-to-quarter, which Adam will discuss in his remarks. That said, over the next several periods, we expect the initiatives we are thinking will drive us to a gross margin above 50% by the end of fiscal 2025. To that deeper for SynBio, revenue increased to $29.8 million, with very strong orders of $44.9 million. SynBio revenue grew 24% year-over-year and 11% sequentially. Other than SynBio included significant blanket purchase orders where customer placed a single blanket order for a large channel and then orders against that PO over the course of the next several quarters. Twist receives blanket POs routinely, primarily in the first quarter of the calendar year as budget…

Thank you, Emily. Revenue for the second quarter increased to $75.3 million, growth of 25% year-over-year and approximately 5% sequentially. Orders increased substantially to $93.2 million as strong orders driven by a significant blanket purchase orders expected to be used over the next 3 quarters. This includes approximately $21 million for SynBio and $9 million for NGS. As Emily said, gross margin came in higher than expected at 41% for the second quarter of fiscal 2024. During the second quarter, we shipped to 2,253 customers. We ended the quarter with cash, cash equivalents and short-term investments of approximately $293 million. Taking a deeper dive into revenue. SynBio revenue increased to $29.8 million, growth of 24% year-over-year with orders increasing to $44.9 million. We shipped 193,000 genes in the quarter. Synthetic genes revenue, which includes both colonal genes, gene fragments and IgG increased to approximately $22.4 million, growth of approximately 24% year-over-year. Approximately $15.6 million or 52% of our SynBio revenue was from colonal genes with $2.2 million in revenue coming from Express Genes. Within the SynBio umbrella, overall pool revenue increased to $3.9 million and DNA libraries revenue increased to $3.5 million, year-over-year growth of 19% and 25%, respectively. NGS revenue for the second quarter grew to approximately $40.8 million compared to $29 million in the second quarter of fiscal 2023, an increase of 40% year-over-year. For the quarter, revenue from our top 10 NGS customers accounted for approximately 36% of revenue. Orders increased to $42.5 million, which we anticipate sets the stage for further NGS growth. We served 558 NGS customers in the quarter with 138 having adopted our products. For Biopharma, revenue was $4.7 million, with orders increasing to $5.8 million. We had 67 active programs at the end of March 2024, and we started 34 new programs…

Thank you, Adam. In closing, we are very confident in the continued impact and growth opportunities generated from our proprietary DNA sensitive platform our growing customer base, our increasing revenue profile, our defining credit portfolio and of course, our exceptional employees, positively move the needle for our customers across multiple industries. I also had the privilege of talking to our customers, listening to how they drive ground-breaking scientific investments in wide-ranging fields from health care to chemicals to academia, AgBio and more. I'm very proud that Twist plays an important role in facilitating this work, and we are only getting started. While enabling our customers to produce proteins to target and destroy cancer cells, to create new diagnostic tools that detect diseases early and accurately, to make compounds that are more sustainable and also less expensive to name only a few applications. We manufacture our DNA in 2 locations, 1 in California and 1 in Oregon with a global commercial and support team to deliver superior service to all of our customers. As we look ahead, we are more excited than ever over the best potential that lies for us. With our cutting-edge technology, world-class team and laser-focus strategy, we are poised to capitalize on the immense opportunities that lay ahead in synthetic biology, NGS, Biopharma and data storage. I am incredibly proud of what we've accomplished, and I'm confident that our best days are yet to come. Let's open up the call for questions. Operator?

[Operator Instructions] Our first question today is coming from Matt Sykes of Goldman Sachs.

Congrats on the quarter. Maybe I could just start out on margins. You obviously beat gross margins this quarter. It looked like on the back of NGS, but a small contribution from Express Genes is like $2.2 million. So I expect most of that beat was from NGS. But as the year progresses and Express Genes continue to grow, could you give us a sense for the contribution of margin expansion from Express Genes, maybe either providing some expectations for expressing revenue growth or volumes for the balance of the year and what contribution to margin expansion is already in the guide from Express Genes specifically?

Matt, thanks for the question. This is Adam. I'm happy to give you some of the quantitative on this, and then we can jump in with color as well. First, we are very excited about the Express Genes launch this quarter. And then remember when we launched it here in late January with a full offering when it was still only a partial quarter, so we expect and in the Q3 here that we're currently in the end in the end of June will be our first quarter of full Express Genes. We have not broken out the exact Express Genes volume in the guide. We do see that contributing to the gross margin sequential improvements we have in our guide, and it did help with the movement we saw this quarter. But we're still early days, and we continue to use the -- some of the testing we're doing day-to-day in terms of the pricing, and we're monitoring and watching it, but we have not broken that out in our guidance at this point.

Got it. And then just on the NGS Tools business, just hearing from some of your competitors in that space that are having some challenges. It seems as if given your results you're continuing to take share there. Could you maybe just help us understand for context sort of what the market share opportunity is in the NGS Tools business for you? And what is sort of the runway that you have for accelerating growth, either given the market structure, your current penetration and share and what it could be?

Yes. Thank you, Matt. This is Emily. You are correct that we are definitely taking market share, and it's not an accident. It's based on the innovation that we have built into the product from the quality of our panel that reduces the cost of sequencing to expanding to other applications to RNA and [indiscernible]. Also the fact that we now offer a full workflow solution from the sample to the sequencer. And finally, and very importantly, us being a supply chain partner to our customers as they grow. So far, the vast majority of our -- the majority of our revenue come from liquid biopsy applications. In terms of the market potential for liquid biopsy, it's really big. We are only at the beginning of liquid biopsy adoption. And as the adoption of those test ramps, as liquid biopsy, the [indiscernible] market as a whole growth. Our goal is to be able to capture about 10% of the COGS of our customers. So we believe that there's a lot of room to grow in liquid biopsy. For the other markets, mRNA, it's very early days. The pilots and the initial tests are encouraging. And then for us, for the capture of the AgBio market that is currently being done on microarrays and where we want to move it to Twist sequencing, we think that, that market alone could be $500 million. So a lot of opportunity for us. And again, it's not an excellent base on the differentiation of the product and the commercial violence that we deploy.

And our next question will be coming from Vijay Kumar of Evercore.

Congrats on really good print here, Emily. Maybe my first one here on the orders here, that's a big, big number, up 45%. Were there any one-timers, was there any pull forward or maybe just characterize the order trends as the quarter progressed?

Yes. Great question. Thank you. So there are 2 types of orders, orders that are actionable. Today, meaning it's the order, the PO comes with the sequence. And in SynBio it gets made in 5 days. In NGS, it gets made in a few weeks, get shipped. We booked the revenue. And one thing that was a bit particular this quarter is we got a bigger number of the second kind of orders, which are blanket PO orders. So those are -- they come from customers where they kind of have a budget, and they decide -- typically, at the beginning of the year, they decide where they're going to spend that budget with, which company. And so the blanket PO gets provided, gives us a sense of volume that's coming. And then as the researcher design the sequence that they want, this under the sequence, the order is already there, we produce, again ship and book revenue. And so what happened this quarter is we had more blanket PO orders that we typically have had in the first quarter of the calendar year. And I think that's a reflection of the fact that in our first quarter, so in calendar Q4, some customers have tested Express Genes in our Q2, calendar Q1. More customers have tested Express Genes. And as they have received those genes on time, basically our Express Genes do what it says on the label. I think we have earned the confidence of those companies, and they've been willing to give us their blanket PO order, meaning they are giving us their confidence that they will order from us in the rest of the year. So I think there's a dynamic that we say -- that we see. It's a reflection of the strength of our offering.

That's fantastic. And then, Adam, maybe just back to the question. So you don't think there was anything one-off, these are underlying trends? And is that what's driving the sequential gross margins in the 3Q and the 4Q? That's a pretty meaningful step-up in gross margin for Q4.

This is Adam. It's a great question. I think the -- it's fair to say that this is not -- there was not a onetime, but it also just break from our historical behavior that -- oftentimes, some of our larger customers do put in blanket purchase orders at the beginning of the year. We're seeing a larger volume of that this year. So I think there's -- it's a vote of confidence, but it's not something I'd expect sequentially to occur every quarter, because of the nature of the calendar year, we'll focus that. In terms of us moving forward, both in terms of the growth in the business, the increase in the guidance of about $12 million in the midpoint from where we were before for the year as well as the expansion on gross margin both full year and sequentially. This does play as a tailwind. I think we talk a lot about Express Genes and we talk a lot about NGS mix driving the margin, but the #1 driver for margin for us is the continued growth in volume revenue.

And our next question will be coming from Steve Mah of TD Cowen.

Great. Congrats on the quarter. I've got a 3-part question on Express Genes. So first, so now that you have another quarter of experience, can you give us a sense for the customer feedback on the dynamic pricing? And I know on the last call, you also talked about there is a push by larger accounts. We need to trade the dynamic pricing for a sort of like a fixed subscription like pricing model. And then second, can you give us a sense on how the increased marketing effort on Express Genes, how that's going? And then third, on the 100 net new accounts ordering Express Genes, what's the profile of that customer? Is it academia, pharma, biotech or mixed?

Thank you. Steve, great question. In terms of the customer feedback, we haven't had any negative feedback from the premium pricing. I think people understand that we've made a significant investment. The product differentiation is very, very strong. Again, the performance is such that it does what it says on the label. So that's all positive. And at the same time, several customers would like to have predictability. And so they've been there winning to provide a volume commitment in action for fixed premium pricing. And some of that was reflected in the strong blanket POs that we have gotten. So I think that's the answer on your first question. Second question, a sense on the margin. So we're not -- as Adam mentioned earlier, we're not breaking out margin for Express Genes at this time. And the one thing that I'll reiterate is whatever is that average premium pricing increase, 100% of that increase drops to the gross margin line. So we anticipate that it will be a component of gross margin improvement over time. And then last question on the 100 net new accounts. It's a mix, which was really great to see a very good mix, of course, big pharma customers as well as small pharma customers, and not surprising, but very good to see, there's a lot of academic group have been testing and ordering and reordering. And obviously, when we look at the average size of an order from a pharma company, it is bigger than from an academic group, but I think I'd say that the majority of the net new accounts were academic groups. And so it's great to see that we are penetrating not only the industrial campaigns, which would have been more productive, but also academic groups.

Okay. Great. Maybe just a quick follow-up on that. Did you mention that you had a different pricing structure for academic versus industry?

So yes, in the middle of the quarter. So at the beginning, it was the same premium pricing for academic industry. And then in the middle of the quarter, we started to have a dislocation where the premium for academic was not as strong as for industry, which is a standard practice. So I'll say that we are more now in the standard practice than we used to be.

And the next question will be coming from Matt Larew of William Blair.

This is Madeline Mollman on for Matt Larew. I wanted to touch a little bit on Biopharma. I noticed the Biopharma is still was an area that the guide came down. And I know you mentioned previously that you were in the process of onboarding your new BD hires. It takes about 6 months to get fully ramped. Can you talk a little bit about where the BD hires are in the process? And how much of that ramping contributed to the change in Biopharma guidance?

Yes. Thank you for the question. We have a full team at this point. In terms of headcount, maybe not fully ramped yet, but we have a full team. I travel quite a bit with that team, and it's very clear that the market is there. There is no market headwinds at all. The technology, the product and service offering that we have is extremely strong with in vivo, in vitro, in silicon. So in my mind, victory is certain, but the timing, we are still working on it. So we were just doing all the right things. Now we're focusing on activity, building the funnel. The orders for this quarter at $5.8 million were encouraging. And so now we just have to do it again and grow this business. It is the smallest business of the company. It is right now the business that has the lowest growth, but it has all the characteristic of a very strong business of a very strong Twist business, which is high differentiation of the services. And as we connect with more customers, convert more customers, I'm very confident that we can do really well.

Great. And then I think you said that Express Genes were 15% of colonal genes revenue for the quarter. Can you give any color on sort of on a monthly basis, how Express Genes as a proportion of colonal genes has trended, and that includes, if you can, into this quarter -- current quarter as well?

Sure. This is Adam, and I'm happy to talk about it. I think what we're seeing since launch, we've seen sequential increases in the Express Genes business pretty much consistently month-over-month partly due to the fact that we did the full commercial launch in late January this year. So you'd expect that natural step-up. There is also the behavior. As Emily mentioned earlier in the call, some of the larger institutional customers when they order they were high volumes. So a couple of orders can have an impact, especially early on, but we are seeing a sequential step-up around [ different market ].

And our next question will be coming from Tom Peterson of Baird.

Congrats on the quarter. I just want to first start on Express Genes and some of the metrics that you provided here, whether it be percentage of colonal genes or some of these customer conversions or new account wins. How are you defining what medium-term success looks like for the Express Genes offering? And if you could share any sort of targets that you're looking for over the medium term, I think that would be helpful.

Yes. I think in general, for us, success is the 3 numbers of revenue, gross margin, and so we do have internal targets for all of the product lines [indiscernible] is one of the strengths of the deal is the fact that we have a very differentiated -- I'm sorry, very diverse type of customers, thousands of them working on these diverse types of applications. And so really, it's all of the above product lines that contribute to the great results. And I can be sure that we are pushing the team to leverage not only Express Genes, but all of the high differentiated products that we have.

Great. That's helpful. And then maybe just one on the gross margin outlook, specifically kind of that 50% plus exit rate by 2025. Given the quarterly guide for fiscal '24, how can we think about the cadence to get to that target in fiscal '25, given the '24 guidance?

No, I think that it's a great question, and it's one we're we internally are absolutely excited about the progress we've seen. I think we go back and you look at 4 quarters ago, we were at a 31% gross margin to see that grow to 41% over the last 4 quarters is aggressive. And you'll notice, it did happen over time, but it's not always perfectly linear. But I think the idea here is we do expect to see those sequential gains continue as we go into 2025. And we do expect also there will be some -- it won't be perfectly linear with revenue growth every quarter, because some of the initiatives, and I'll use a big example, some of the things we're dealing on process improvements. You spend the energy to make the process improvement in a given period, but then you may have inventory you need to burn through before you get the advantage of the cost savings and the impact on the P&L. So some of these things will take time, but we are encouraged by both the continued growth of the business as well as the progress on the process improvements we see across the business so that we expect the sequential increase throughout 2025.

And our next question will be coming from Puneet Souda of Leerink.

You've got Michael on for Puneet. My first question has to do with the regulated diagnostics products you're launching. We saw the FDA published their final rules for LDT. I was kind of curious if any of the changes affect any of your plans for how Twist is approaching their diagnostic products, and if anything, incremental needs to be done?

Thank you. That's a great question. We are a great students of those rules. I think in general, we are quite encouraged with the new rules, the [ grandfather ] in a number of LDTs. Regulation in general, I think will probably benefit larger players, maybe reduce fragmentation in the market. And to the extent that we are very well penetrated in those largest players, that's good for us. The new test or the work to validate the test will probably require more validation, and so that will probably be a tailwind for us. Then finally, over time, as diagnostic test needs to be modified, it just will be a little bit harder to modify and one of the things we provide is -- we make it easier to do modification. And so all in all, I think that's probably -- those rules are probably benefiting -- in the grand scheme of things probably beneficial to us. And as you mentioned, we launched CE-marked products in Europe in the recent past. And while those exact products cannot be ported into the U.S., going through the exercise of launching those products helped us build a muscle inside a company that we'll be able to use and leverage in the U.S. with the new regulation.

Great. And then, my second question has to do with Biopharma funding. So we've seen a bit of an uptick in the first quarter. I was curious if you have any views on where that might flow through, maybe some lag time? And if you've seen differences in buying activity between large and small pharma?

I'm not sure we're seeing big, big differences. I think for us, we are very focused on gaining market share. And the last few years have been kind of -- our customers broadly have been in the mode of tightness around funding and budget. And because of the high differentiation of our products, we've been able to gain more than our fair share in market shares. So as we see now that, yes, the budgets get a little bit easier, will we be able to keep doing this, taking more of our fair share? I think I'm encouraged by the performance of the Express Genes in particular, where again, it does what it says on the label and it's highly differentiated. And we also have a number of products that we are planning on launching in the near term, which should enable us to take more of those budgets. And I think the order volume that we had in Q2, which is Canada, Q1, those large blanket orders it's a good first step in making sure that as the biopharma budget loosen up that will be in propositions to take advantage of them.

Thank you. This does conclude, the Q&A session for today. And I would now like to turn the call over to Emily Leproust for closing remarks. Please go ahead.

Thank you for your time and attention today. Our unwavering commitment to pushing the boundaries of innovation has allowed us to unlock new opportunities and drive value for our customers, shareholders and the broader [ sensitivity ] community and we will continue on our path towards profitability. We look forward to keeping you apprised of our progress. Thank you.

This concludes today's conference call. You may all disconnect.