Science 37 Holdings Inc (SNCE) 2022 Q4 法說會逐字稿

Greetings. Welcome to the Science 37 fourth quarter and full year 2022 earnings conference call. (Operator Instructions) Please note this conference is being recorded. I'll now turn the conference over to Steven Halper with LifeSci Advisors. Steven, you may now begin.

Thank you, Rob, and thank you all for participating in today's call. Joining me are David Coman, Chief Executive Officer; and Mike Zaranek, Chief Financial Officer. Earlier today, Science 37 released financial results for the quarter ended December 31, 2022. A copy of the press release is available on the company's website.

Before we begin, I'd like to remind you that management will make statements during this call that include 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.

These forward-looking statements are based upon our current estimates of various assumptions and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements.

We encourage you to review our filings made with the Securities and Exchange Commission for a discussion of these risk factors, including in the Risk Factors section of the company's most recently filed periodic reports on Form 10-K and Form 10-Q and subsequent filings.

You are cautioned not to place undue reliance on these forward-looking statements, which we speak only as of today and the company disclaims any obligations to update such statements for new information. We believe that certain non-GAAP metrics are useful in evaluating our operational performance. We use these non-GAAP measures to evaluate our ongoing operations and for internal planning and forecasting purposes.

Information about non-GAAP financial measures referenced, including a reconciliation of those measures to the most comparable GAAP measures can be found in our SEC filings and in earnings materials available on the Investor Relations portion of our website at investors.science37.com. I would now like to turn the call over to David Coman. David?

Thanks, Steve. Good morning, everyone, and thank you for joining us. We're pleased to report fourth quarter results that exceeded our most recent guidance and represent significant improvements quarter over quarter. Fourth quarter revenue was $15.9 million, finishing the year at $70.1 million, which was ahead of our expectations.

Fourth quarter adjusted EBITDA was also ahead of expectations and marked an improvement of more than 20% quarter over quarter from negative $14.6 million to negative $11.6 million finishing the year at negative $62.5 million. We also saw a healthy rebound in bookings in the fourth quarter with gross bookings of $33 million, which included a sizable new project win from a repeat customer.

Our net bookings in the fourth quarter were just under $19 million, which includes the impact from the large scope reduction that we discussed on the third quarter call. As we look forward to 2023, given the previously reported industry challenges, including longer decision-making time, more cost consciousness, and drug funding challenges, the 2022 booking shortfalls, particularly in the third quarter, and project cancellations that we reported throughout the year, we are providing 2023 revenue guidance of $55 million to $60 million for the year.

In response to these challenges, I'd like to take a few moments to highlight the steps we've taken to increase revenue growth and execute on our path to profitability. With the addition of our new Chief Commercial Officer, Michael Shipton, who joined us late in the third quarter, we're starting to gain measured optimism for top-line growth acceleration. As you may have seen in our recent website update, we have prioritized our Metasite offering as it is the greatest area of customer demand and provides us with the greatest differentiation for our company.

Michael has also hired a new head of inside sales and growth accounts to generate additional demand amongst new customers, in addition to a Head of Real-World Evidence to promote the unique value of our Metasite for long-term follow-up. We also expanded our CRO network with the most recent addition of WuXi from China and is deepening our relationships in our strategic accounts.

We believe all these additions will generate a material return to bookings growth as we progress throughout 2023. We are excited about the continued maturation of our technology infrastructure at the hands of our Chief Technology Officer, Troy Bryenton.

We're particularly excited about the recent purchase of the Vault Health Life Sciences platform, which will allow us to accelerate development plans we had underway for workflow features, such as advanced scheduling, investigational product tracking, and data exchange with electronic data capture and electronic medical records system.

These enhanced capabilities will help us to reduce some of the manual efforts required to execute centralized clinical trials and drive operational efficiencies. With cost containment efforts like these and the previously reported headcount reductions we announced last quarter, we expect to achieve 2023 EBITDA of negative $48 million to negative $50 million. And we continue to progress toward our objective to reach EBITDA positive and cash flow neutral by the end of 2024 without having to raise additional capital.

With that, I'll now turn the call over to Mike Zaranek, our Chief Financial Officer, to provide additional detail regarding our financial performance.

Thank you, David, and good morning, everyone. I will discuss the fourth quarter results for the period ended December 31, 2022, and then affirm our outlook for the full year 2023. In the fourth quarter, we reported revenues of $15.9 million, which represents a 22% decrease from the same period of the prior year.

However, it's important to note that if you exclude COVID-related studies from both the fourth quarter 2021 and 2022 periods, our underlying business continued to expand with fourth quarter revenue growth up 19% year over year. As we noted in our fourth quarter earnings release, full year 2022 revenues increased 18% year over year.

Again, if COVID-related studies were excluded from both the full year '21 and '22 numbers, our revenue growth was up 65% year over year. Consistent with our comments on the quarterly 2022 earnings calls, COVID-related studies represented a much smaller percentage of our revenue for full year 2022 and accounted for a very small percentage of our year end 2022 backlog.

We finished the fourth quarter with $33 million of gross bookings and just under $19 million of net bookings, which represents a significant increase compared to the third quarter. The majority of the difference between the gross and net bookings was related to a final project reconciliation, which occurred in the fourth quarter.

You may recall we mentioned on the third quarter earnings release call, we had one study wrap up early due to a customer being able to utilize the lower patient count to prove the trial endpoints. The final project reconciliation associated with this project was completed in the fourth quarter, at which point we took the project realization reduction to backlog.

Excluding this final reconciliation, actual cancellations during the quarter were insignificant. Adjusted gross margin was 24.5% for the fourth quarter compared to 23.2% for the same period last year. Adjusted gross profit for the fourth quarter was $3.9 million, compared to $4.7 million in the same period of the prior year.

Now I wanted to provide an update on the cost actions we announced on the third quarter earnings call. We remained on track for the cost reduction plan and realized approximately one month of savings of that annual plan in the fourth quarter.

Selling, general and administrative expenses, excluding $5.1 million of stock-based compensation, was $15.5 million in the fourth quarter, a decrease of $3.7 million versus the third quarter of 2022 due to the restructuring program that we implemented as well as lower variable expenses. Additionally, selling, general and administrative expenses, excluding stock-based compensation, declined nearly 41% in the fourth quarter of 2022 versus the fourth quarter of 2021.

Adjusted EBITDA, which we calculate by adding back depreciation, amortization, taxes, interest, other income, stock-based compensation, and other non-cash charges was a loss of $11.6 million in the quarter, representing a $3 million sequential improvement compared to the third quarter of 2022 and a $9.9 million improvement versus the fourth quarter of 2021.

On a full-year basis, our adjusted EBITDA was negative $62.5 million, which exceeded the 2022 adjusted EBITDA guidance we originally provided during the first quarter 2022 earnings call. In the fourth quarter, we also took a non-cash impairment of $44 million related to our long-lived assets. Given our operating model is in the early stages of scale and the market capitalization of the company was for a sustained period less than cash and book value, under US GAAP we were required to perform an analysis regarding the recoverability of long-lived asset carrying values as of the balance sheet date.

Under US GAAP accounting standards, this analysis we performed included an impairment of our long-lived assets was appropriate during the fourth quarter. Again, this was a non-cash charge. We do not view the impairment necessarily as a reflection of the long-term business benefits of our software-related projects, the life of our platform, both of which remain robust on our ability to deliver for our customers.

To be clear, we remain confident and laser-focused on the future returns on our investments in our unified technology stack, which is further enhanced by the bulk purchase, which we announced in the first quarter of 2023. In large part due to the $44 million non-cash impairment, US GAAP net loss was $66.5 million versus a GAAP net loss of $65.1 million in the fourth quarter a year ago.

The adjusted net loss for the fourth quarter was $16.9 million, which compared to a net loss -- adjusted net loss of $23.4 million in the same period last year. Additionally, we ended 2022 with $254 million in federal cumulative net operating loss carry-forwards.

Now turning to cash, we ended the quarter with $108.1 million of cash and cash equivalents. In the fourth quarter, our cash burn was approximately $22 million, which included some one-time costs from restructuring and other items of approximately $3 million. Excluding these one-time items, our cash burn improved sequentially quarter over quarter.

And as a reminder, from a modeling standpoint, annual bonuses are paid to qualifying employees in the first quarter, which will impact our first quarter cash burn this year. Additionally, concurrent with our earnings release, we filed with the SEC a post-effective amendment and a shelf registration statement. The former was required by the registration rights agreement that we entered into as part of the merger agreement from when we went public. And we view the shelf registration as a prudent financial management tool.

Many public companies have an effective shelf registration for this purpose. We became S-3-eligible in November of last year and filed a shelf registration this morning. As a reminder, if we were to conduct an offering pursuant to this registration statement, we would be required to file a prospectus supplement for that transaction.

So let's turn to the outlook for 2023. In light of the challenging business conditions that we continue to experience, we expect 2023 revenues to be in the range of $55 million to $60 million for the full year. Additionally, we expect adjusted EBITDA for 2023 to be between negative $50 million to negative $48 million.

As of December 31, we had approximately 116.1 million shares outstanding. As we currently anticipate having a net loss in the upcoming quarter and year, any converted options would be deemed anti-dilutive. And therefore, on a GAAP basis, we expect basic and diluted share counts to be the same.

In summary, we continue to execute for our customers. We delivered underlying growth in the business, if you exclude the COVID study-related revenues, and exceeded our most recent guidance for the fourth quarter. We remain committed to delivering long-term profitability to create value for shareholders. And at this point, I'd like to turn the call back over to David for closing comments.

Thank you, Mike. While the environment remains challenging, I'm proud of the focus and resiliency we see across our employees and overall stakeholders. We will continue to execute on our strategy and deliver value to our customers by driving iterative improvements in our technology and solutions. With that, I will now turn the call over to the operator and open it up for questions.

(Operator Instructions) Frank Takkinen, Lake Street Capital Markets.

Hey, thanks for taking my questions. I wanted to start with one on bookings first. I know on previous calls you've talked about your intentional shift towards pursuing larger contract business. Was curious if any of that was the reason for the strong bookings? And if you could also just provide a broader update on the intentional switch to larger contract business that'd be great too.

Sure. Thanks for calling in, and thanks for the question. Yes, we're seeing larger deals in the pipeline as a result of our intentional move toward Metasite. We continue to push into that direction. And so we continue to see very large deals. We did close a very large deal in the fourth quarter amongst an existing customer, which is terrific. And so we're going to continue to see that.

I can say we are also seeing more traction in what we had announced, I think, two earnings calls ago. But it was the Metasite life solution where we're acting as a rescue or a risk mitigation strategy, starting small and growing on a performance basis. So that's also getting traction for us. And with greater intention, we expect to build -- continue to build a high-quality pipeline. And we expect these efforts to pay off in the long run.

Okay. That's helpful. And then help me bridge I think I've got the backlog calculation at about $173 million, incorporating in that bookings in this quarter. Help bridge us to the guide from $173 million in backlog. And how should we be thinking about the recognition of this over the next couple of years? And maybe talk to net cancellations, if you're thinking about that throughout 2023.

Yes, sure, Frank. Thanks for the question. You're absolutely correct $173 million in total backlog as of 12-31-22. Obviously, we expect that to burn over the life of the projects. Most of them, almost all of them are exclusive, almost entirely multi-year contracts. Some are some long-term follow-up studies, which may extend greater than five to seven years. If you look at the portion of the backlog that we expect to be converted in 2023, we're starting off the year with about $49 million of [phased] backlog for '23, which implies the coverage of 82% to 89% as of the beginning of the year.

Max Smock, William Blair.

Hi. It's Christine on for Max Smock. Just the first one for me, can you give a breakdown in recurring sales mix in terms of delivery models, so Tech Plus, Metasite, and then full DCT? And is there any notable shift you're seeing one way or another in terms of certain offerings? Thanks.

Yes, I would say that we're being very intentional in our push towards Metasite as we believe that it offers the greatest level of differentiation for the company. And we're seeing the greatest amount of demand for it. As we continue to move forward, we expect that to continue to be the primary vehicle for both pipeline bookings and ultimately backlog.

Great. That's really helpful. And then just a couple of short ones. What is the implied cadence on the top and bottom line for your 2023 guide? And then if you've disclosed, can you talk about your renewal rate from existing customers and how this has been trending over the last couple of quarters? Thanks.

Yes. So in terms of the revenue guide, in our current plan, we're expecting more revenues in the second half of '23 versus the first half. And just to put some context around that, that's in excess of 25% higher in the second half versus the first half from a revenue perspective.

Charles Rhyee, TD Cowen.

Yes, thanks for taking the question. David and Mike, you mentioned, David, in the prepared comments about some new hires to help kickstart the sales efforts more. Can you just go over those again? I missed a little bit, but also below that what's the mandate for additional hires in the sales force?

Yes. So the new hires on the commercial front, we brought in a new Head of Inside Sales and Growth Accounts and a new Head of Real-World Evidence. Inside sales and growth accounts that's being really intentional to identify, generate leads, and close deals amongst customers that we don't have a relationship with today.

The kind of real-world evidence we brought in -- I mentioned in the earnings call last quarter that I thought that that recognized or that was a good opportunity for us and somewhat untouched. And so with the new Head of Real-World Evidence, I think that opens up the door for us for long-term follow-up studies. And we think we can close more holes.

In regards to existing customers, he's shifted the business development organization to be very specific around mining the current relationships that we have. And so that's both amongst pharma and CRO partners for which we continue to build relationships with.

And beyond that, are we -- or what's the plans for adding to the biz dev team, like how many biz dev reps do you have currently? I remember at one point, I think you were in the teens. If you could just remind me of like where we're at and what's in the guide. Obviously you're taking cost down but what are your assumptions for adding to that team as you move through the year now that you have two new heads of groups?

We don't expect to expand that team dramatically as the year goes on. I think that we've got a solid team in place. It's really more about taking the people that we do have and organizing them in the right way so that we can be very intentional with demand generation, identifying new opportunities, mining those opportunities, and solutioning those opportunities ultimately to improve the win rates that we bring in. And I think that's the key for us is to ensure that we are solutioning properly to make it clear what we're offering, why Science 37 is differentiated and better and closing more deals.

And maybe last question for Mike. You mentioned to remember that in the first quarter, bonuses go out for qualified employees. Obviously, you're indicating if we're going to model EBITDA loss, there's an extra amount in the first quarter. But from a revenue perspective, any kind of directional guidance you can provide in terms of how we should think about rev rec? I know that's to an earlier question, but maybe to the cadence that we should think about as we go through at least the first part of the year.

Sure, sure. And just a point of clarification. The bonus payout is more a cash burn item as opposed to necessarily an EBITDA impact. In terms of the revenue phasing throughout the year, as I mentioned earlier, we do expect to have a more skewing of revenue towards second half of this year with second half of this year being more than 25% higher than the first half. That's embedded in the guidance. We also expect to see year-over-year growth in the second half of this year.

Matt Hewitt, Craig-Hallum.

Good morning. Thank you for taking the questions. Maybe first up, as you look at the current pharma biotech landscape, I think there's been a lot of news talking about kind of rationalization of pipelines, reprioritization that happened maybe spring of last year and obviously happened again in the fall of last year, which impacted your Q3 results.

But as you talk to your pharma customers, partners now, do you get the sense that we're through that now and it's really about just driving trials, getting that remaining pipeline going? And what does that imply for I guess this year and, more importantly, for next year for your business?

I get a sense that we continue to see from an industry standpoint longer decision-making timelines because they're being a lot more intentional with their spend, a lot more cost pressure that they're feeling is, I think, being translated into their discovery efforts. And then we are seeing funding issues within the biotech space still. So I don't see that changing in the short term.

Got it. And then maybe one modeling question. Regarding gross margins, how should we be thinking about those from a cadence perspective? Or is there another step down here in Q1 and then we start to see those grow over the course of the year? Just any color there would be helpful. Thanks.

Sure. Yes. I mean, I think gross margin, obviously, we've taken some actions around the cost to pull some excess capacity out of the organization in Q4. Gross margins will be impacted by revenue. And so from that standpoint, I think that as we have that skewing towards more revenue in the second half of 2023, you should see some improvement on the gross margin side. But up until that point from our modeling perspective, probably not a material change versus where we've been.

Yes, so flat out of the gate. And then sequentially, moving up as the year progresses.

Correct.

Got it. Thank you very much.

Thanks, Matt.

Hey, sorry, I want to come back to one question from Christine that we were asked earlier we did not address regarding the mix between new and existing clients. I think we've said this previously, but want to reemphasize this at the current size and scale, one or two projects can make material difference in terms of the bookings in a particular quarter.

And for example, to David's earlier point, we did win a very large project from a top 10 pharma that was a repeat customer in the fourth quarter of 2022. But if you look at overall throughout the course of 2022, we were able to increase gross bookings from new customers by more than 40%.

And fair to say that if you look at the mix between new and existing customers for the full-year 2022, it was skewed roughly about two-thirds to the new customer front and about a third from existing customers. So a good mix between the two can vary by quarter. But for the full year, those were the stats.

Evan Stover, Baird.

Hey, I've got a few. You've had some big RIFs recently. At the same time you're trying to invest in your sales and your tech headcount as well. I mean, obviously a big change in the stock price, a big change in dynamics the last 12 months. Can you talk about retention, employee retention, and satisfaction, and the areas that that are really key and strategic for you and what you're seeing there?

I think the key to in employee engagement and retention goes back to the fundamental business idea of Science 37. There really isn't a company in the clinical trial space that can -- is as innovative and can provide employees closer access or proximity to the patients themselves. And so many people come to Science 37 because of those two reasons. And we continue to see that as the primary driver for retention for the company.

We have had a few risks that we announced at the end of the year. And I think that that always puts some stress, I think, on the organization. And so we're being really intentional about putting warm blankets on the employees that are still there. And we think very highly of them and want to make sure that they understand that they're highly appreciated. And so we do things every day to make sure that that's understood.

Okay. Fair enough. I mean, it's early on a Monday. I don't know if I missed this but you guys had been reiterating kind of the long range runway on EBITDA and cash flow breakevens by the end of '24. I didn't hear that. Is that something that we're -- you're stepping away from now? Just curious there.

No, not at all that. That's still part of our plan. And we still intend to deliver on that.

Fair enough. And final question for me, CRO channel partnerships. Obviously you've got several of them, some more important than others. But can you talk to any major shifts either positively or negatively amongst those channel partnerships in the last 90, 120 days? And I think specifically there was Syneos out there with a Medable partnership renewal, and curious if that's specifically had or going to have any impact on Science 37.

No, we continue to maintain the relationships that we have announced. One of the great things about Michael Shipton as the new Head of the Commercial Organization is that he comes from the CRO space and believes in that channel tremendously; and so has invested quite a bit in terms of re-energizing that channel for us because he believes that that's a great area of expansion and opportunity for us.

All right. That's it for me. Thank you.

Thank you.

Thank you. At this time, I will turn the floor back over to Steven Halper for closing remarks.

Thank you, Rob, and thank you, everyone. We look forward to speaking with you next quarter.

Thank you to everyone joining us today. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.