Twist Bioscience Corp (TWST) 2022 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Twist Bio Fiscal 2022 Fourth Quarter and Year-end Financial Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker today, Angela Bitting, Senior Vice President of Corporate Affairs and Chief ESG Officer. Please begin.

Thank you, operator. Good morning, everyone. I would like to thank all of you for joining us today for the Twist Bioscience conference call to review our fiscal 2022 fourth quarter and year-end financial results and business progress. We issued our financial results released this morning, which 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 Jim Thorburn, CFO of Twist. Emily will begin with a review of our recent progress on Twist businesses. Jim will report on our financial and operational performance. Emily will come back to discuss our upcoming milestones in direction, and then we'll open the call to questions. We would ask that you limit your questions to a maximum of 2 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 Investor Relations 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 in 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 the press release we issued today as well as those more fully described in our filings with the Securities and Exchange Commission.

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.

With that, I'll now turn the call over to our Chief Executive Officer and Co-Founder, Dr. Emily Leproust.

Thank you, Angela, and good morning, everyone. This morning, we reported record revenue of $203.6 million for fiscal 2022 and $57.3 million for the fourth quarter. We continue to take market shares in both SynBio and NGS by expanding our customer base, delivering differentiated high-quality products and [encasing] market needs. In addition, our biopharma business continues to sign an increasing number of partnerships with biotechnology and pharmaceutical companies to conduct discovery and optimization projects.

Fiscal 2022 has been 1 of macroeconomic contraction COVID shutdowns, geopolitical instability and more. And yet, we delivered 54% revenue growth year-over-year, and we grew our customer base to about 3,000. In the slide deck for this earnings call, we have included a list of some of our customers who have published productive webinars, case studies or [at notes] using Twist products. You will see that the list is broad and deep and just a contraction of our total customer base.

Our Twist team continues to demonstrate exceptional resilience in the face of challenges. Our silicon platform for DNA synthesis enables us to compete in multiple markets that each experienced different market dynamics, hence, reducing risk through diversified revenue and customer base.

Taking a minute to highlight our technology. For those of you who may not have had the opportunity to visit our fab, we have miniaturized the process of making DNA using traditional DNA synthesis chemistry by making DNA using our proprietary silicon chip platform, where we are going to reduce the amount of reagents used by 99.8% compared to a plastic [class] plate platform. These agents are a natural driver of COGS so leveraging this dramatic reduction enables us to achieve significantly lower [COGS] than our competition.

The (inaudible) on each chip, we make [synthesis] of DNA called oligonucleotides or oligos. The oligos are built day by day like stacking LEGO blocks on top of one another and then it can go up to 300 bases in length. As a reminder, each base being 1 of the 4 building blocks of DNA, ACG RT. This step of oligo synthesis on silicon chip is common for all of our products. We call it the front end, and it is where half of the magic happens by magic and mean where the technological differentiation originates. The vast majority of our sales are customer products, meaning that the sequences of DNA are defined by (inaudible). However, we have designed our technology such that on each shift on every chip, we can group orders for many customers and multiple projects. Indeed, the oligo for all of these orders are synthesized in parallel on the chip and because each chip can synthesize up to 1 million oligos, we can leverage the silicon platform to achieve differentiated scale.

Once we made the oligos, we extract them from the silicon chip, and they are then sent to the appropriate back-end workflow. This might be in NGS production, NGS target enrichment power, oligo pools, IgG protein, synthetic controls and so on. Each of these back-end processes is unique phase on the SKU and flavor of DNA produced. But typically, operators were to (inaudible) to run batch processes for multiple orders on commercial automation. Because the front-end provides scale, low cost and quality, the back-end processes are remarkable by (inaudible) they are.

The second half is the magic lies in the overall complex highly automated processes of capturing an order of designing the oligos of synthesizing multiple orders of multiple customers on a single chip of sending them to the correct back-end lab for further processing, quality control, packaging and shipping. This in-house developed software, we use to track and direct these complex production processes in an automated manner enable us to rapidly go from order placement to shipping at scale and low cost, which is another true differentiator.

This workflow speed and efficiency continues to provide the foundation for our revenue growth specifically for SynBio, we reported revenue of (inaudible) for '22, an increase of more than 50% year-over-year and [$21.6 million] for the fourth quarter. The strength in SynBio came in across the board with genes and oligo pools extend significant growth. An important point to make is that our products that generate revenue in our SynBio verticals are used by pharmaceutical, biotech, industrial chemicals and agricultural companies as well as academic labs. We shipped approximately 558,000 genes in fiscal '22 compared to 372,000 genes in fiscal '21.

To support our continued growth, we are ramping our Factory of the Future in Portland, Oregon with a 24x7 manufacturing team currently training and producing test products today. Of note, -- we have about 40 employees from San Francisco that have moved to Portland, bringing with them experience in our manufacturing processes and intricate knowledge of the Twist culture. These employees are now training our new employees. With 177 employees in Portland as of today, we remain on track to begin to bring products out of Portland in January 2023. Initial manufacturing in Portland will focus on genes and genes fragments and oligo pools targeting a turnaround time of approximately 10 to 12 days for genes, the same as our current average downtime for genes in San Francisco.

As we ramp production in Poland, we expect to introduce fast genes, which we believe will offer significantly faster turnaround time, enabling us to tap into the DNA makers market with premium pricing while maintaining our position as the most cost-effective gene synthesis provider. We expect to reduce fast genes in the fall of calendar '23. I'd like to personally invite you to our Portland manufacturing facility. On Tuesday, November 29, we will be arranging tools for investors and analysts who wish to visit. Please contact Angela, if you'd like to schedule a tour.

Turning to NGS. We continued our strong back half of the year with [$29.2 million] in revenue for the quarter, bringing our NGS revenue for fiscal 2022 to just shy of $100 million, [coming] above our guidance. For the year, NGS revenue grew approximately [37%] faster than the market is growing. [Orders] coming at $28.2 million for the quarter, and we expect fiscal '23 to again be back half loaded, similar to '22. I'd like to point out that recently, we shifted in service structure to our core business sales force. As we build our business, we moved from equal compensation for orders and revenue to 1 where sales commission is now 90% tied to revenue.

Both orders and revenues continue to be important metrics for us to track but the incentive for our sales team has shifted and along with it, the significance of order numbers going forward. Of note, for the remainder of the organization, our bonus structure is based on both revenue and gross margin.

On the market side, many of you are aware that the sequencing landscape continues to evolve with less expensive whole genome sequencing options now available and several new and exciting players introducing solutions for longer read offerings. For Twist, these technical [advances] offer opportunities. Indeed, we are sequencer-agnostic and an enabler across platforms. We recently announced an agreement with Illumina, whereby we will manufacture and they will sell (inaudible) target enrichment kit. We believe that by leveraging their robust sales force and integrated installed base, we will reach a differentiated customer set.

In addition, we're working with PacBio on the robust solutions for their [newly announced] sequences. For exome sequencing today we offer a complete workflow solution, including target arrangement, library prep, beads, blockers, adapters, [EGI], et cetera. As the cost of sequencing comes down, we expect that over time, some applications and groups will move from exome sequencing sequence to whole genome sequencing. When that happens, meaning when applications like germline sequencing, our government-funded initiatives to sequence populations move from exome to whole genome sequencing. We will have an opportunity to continue participating through our library prep offering. For the very large market opportunities like cancer screening, the dynamic will be different. Indeed, they will still require deep sequencing and panel and exome sequencing will continue to be the mainstay.

For instance, customers pursuing liquid biopsy or minimal residual disease need deep coverage of specific genetic sequences, sometimes 5,000x coverage or more in order to ensure capture of the disease driving mutations at low allele frequency with high sensitivity. For these applications, we expect it to be cost per inhibitive to contract all genome sequencing, even as the cost of sequencing decreases significantly beyond what we see today.

Additionally, we believe that the reduction in sequencing costs will encourage adoption of liquid biopsy and MRD assay as overall test costs will decrease and make them increasingly palatable for reimbursement and routine adoption by customers. Of note, in these applications, Twist product pricing is expected to remain constant even as the cost of sequencing drop.

When we introduced NGS offering in 2018, we anticipated this sequencing price reduction and our product portfolio evolved over time. In fiscal '21 and 2022, we introduced several new products in the NGS space with the vast majority targeting cancer. We have launched our methylation solution, (inaudible) panel, cfDNA controls for liquid biopsy test and a rapid cost-effective patient-specific MRD panel targeting up to [500 mutations.] And we have added Oncology Focus Alliance Panels developed by key opinion leaders at leading institutions like the [Broad and Belo]. These products support our efforts to enable our customers and dominate the workflow between the sample and the sequencer.

Moving forward, we see growth in NGS coming from clinical investments of liquid biopsy testing as well as taking market share in research applications. Because that is a long sale cycle for customers to add up our target enrichment panels as they need to undergo pilot testing, verification, validation, regulatory clearance and clinical testing before broad-based commercialization plan. Once we're including in a test that reaches the market, it is very sticky as they will need to validate through the regulatory agencies for any changes.

Today, we have about 60% market share for Target enrichment and library prep. We have a lot of market share to gain. So in addition to escalating volumes for customers who enter the commercial phase, we continue to win pilots, which bodes well for future growth.

In biopharma, we reported [$24.2 million] in revenue for the fiscal year, tremendous growth over fiscal 2021 and we yet feel just short of our guidance. Revenue for '22 fourth quarter was $6.5 million almost all of which came in September. Importantly, orders for the fourth quarter remained strong at $9.4 million, and we fully expect strengthened biopharma return in fiscal '23, given that in the conversations we are having, our positioning as the high-quality local feeder with a net (inaudible) of partners now more than ever.

For Twist Biopharma team based in San Francisco, we currently have 59 partners in biopharma with 83 completed and 50 active programs. 59 of the [132] programs are at milestones and royalties associated with the projects. The Twist Boston team at 62 active programs ongoing as of September 30, 2022. As we look ahead, we expect continued growth across the portfolio as we are moving towards the combined product and service offering together with the Twist Boston team targeted for launch in the second quarter of 2023. Working together for a little over a year, we have incredible synergies that we believe will enable us to expand our reach and market share in the biopharma segment.

With reference to Revelar, we did not see the outcome we are hoping for. We invested a small amount of capital to take a long shot did not exceed our commit -- our original commitment and [show it] up quickly when the opportunity did not materialize. This illustrates our discipline when it comes to investment decisions.

Moving to data storage. We now have 37 employees working on the team, including [31 engineered incentives.] We continue to bring up our proof-of-concept chip, which we expect will enable us to move from writing 1 megabase -- 1 megabite of data to 1 gigabyte of data in a single (inaudible). We are also working to integrate the chip into our prototype electrochemistry DNA writer system. This system will enable us to launch our Century Archive as a pilot to early access system. Importantly, the Century Archive is expected to set a new standard for archive data retention and (inaudible).

In late October, we announced the appointment of Patrick Finn to our newly equipped position of President and CEO. Patrick has been -- with the company for 8 years, taking greater [plant] of controls and he demonstrated success. We conducted an external search for the position and found Patrick was the right person to lead our next phase of growth and fiscal responsibility. I look forward to partnering with Patrick and the executive team to achieve our aggressive objectives.

With that, I'd like to turn over the call to Jim to talk us through our financials. Jim?

All right. Thank you, Emily. We had another great quarter and a terrific year of growth at Twist despite a volatile macroeconomic environment. Revenue for quarter 4 was $57.3 million which brings our revenue for fiscal '22 to $203.6 million with year-over-year growth of 54%. Orders were $62.1 million for the quarter, which brings orders for the fiscal year to approximately $226 million and that's an increase from $160 million last fiscal year and 42% growth year-over-year. Gross margin for the quarter was 44.9% and gross margin for the year was 41%, and that's up from 39% last fiscal year, reflecting improved leverage.

We shipped to approximately 3,300 customers, and that's another record for Twist, and we closed the year with cash and investments of approximately $505 million. Our NGS business has another strong year and revenue was $99.3 million, which is 37% growth year-over-year. Our fourth quarter revenue was $29.2 million, and that's an increase of 36% year-over-year. This growth reflects the strength of our product portfolio with the top 10 customers accounting for approximately 1/3 of our NGS revenue and we served approximately 1,200 NGS customers in fiscal '22.

Our pipeline for large opportunities continues to scale. We're now tracking 257 accounts, up from 249 noted on our last earnings call, [121] of adopted Twist, an increase from [114%] last quarter.

Now turning to SynBio, which includes genes, DNA preps, IgG, libraries and oligo pools. SynBio revenue for the year rose to $80 million compared to $52.7 million in fiscal '21, and that's an increase of 52%. Some of the highlights include shipping to approximately 2,300 SynBio customers. This includes a diverse customer base, including biotech and large pharma companies. Genes revenue increased to $61.5 million, and that's up from $39 million, and we shipped approximately 558,000 genes in fiscal '22 and a significant increase from 372,000 in the previous fiscal year. Oligo Pools had a strong year with revenue of $12.4 million, up from $8 million in fiscal '21 with increased demand primarily from the Healthcare segment.

We continue to scale our antibody discovery business and revenue for fiscal '22 was $24.2 million, up from $7 million in fiscal '21. (inaudible) was below the low end of our range of $26 million. As Emily noted earlier, orders of $9.4 million were back-end loaded in the quarter. And consequently, our quarter 4 revenue was $6.5 million, which was flat to the third quarter.

For Twist Biopharma antibody platform, we now have 59 partners, up sequentially from 53 under 50 active programs with 83 programs completed then back in the hands of our customers. Of our total programs 59 include milestone and royalty agreements. Abveris of Twist Boston business is doing well with 62 customers serviced in the quarter, including 36 projects on the Beacon platform.

I'll now quickly cover our regional progress. EMEA revenue rose to $62 million -- $62.1 million in fiscal '22 versus $44.1 million in fiscal '21. APAC continues to deliver robust growth for revenue increasing to $19 million in fiscal '22 from $10.3 million in fiscal '21, and the U.S. revenue was $122.5 million in fiscal '22 versus $77.9 million in fiscal '21.

Now moving down the P&L. Our gross margin for the quarter was 44.9%, and this brings our overall gross margin to 41.4% for fiscal '22. Note, the gross margin includes stock-based comp, $4.5 million, depreciation of $6.5 million. Our operating expenses for the fiscal year, including R&D and SG&A change in fair value and mark-to-market adjustments of acquisitions was approximately $319 million as compared to [$204.4 million] in fiscal '21. To break it down, R&D for the fiscal year was [$120 million], an increase from $69 million in fiscal '21. Core business R&D for fiscal '22 increased to $56 million compared to $37 million as we continue to invest in new products and process development. Antibody R&D was $25 million in fiscal '22 and up from $15 million, reflecting our continued investment in our antibody discovery business.

Revelar spend was $14 million in fiscal '22. Data storage spend was $25 million, up from $15 million in the previous year. We have previously given guidance that the original data storage spend would be [$40 million]. However, as the year unfolded, we managed that spend and manage that burden on data storage.

SG&A for the fiscal year was $212.9 million, an increase of $135.9 million in fiscal '21, and this includes compensation costs of $136 million, which includes stock-based comp of $55 million. Start-up costs in SG&A for Portland were $16 million in fiscal '22, including approximately $6 million in compensation costs. Change in fair value of contingent considerations and indemnity holdback for the fiscal year resulted in a gain of $14 million versus a gain of $0.5 million in fiscal '21. Stock-based compensation for the year was approximately [$18 million] as compared to $37 million in fiscal '21.

Our net loss before taxes was $234.8 million for fiscal '22 as compared to $152.7 million for fiscal '21, primarily due to higher OpEx costs we highlighted earlier. CapEx for the fiscal year was $102 million. Portland CapEx for fiscal '21 and fiscal '22, accumulative is a total [NAV] $87 million , which includes $46 million for tenant improvements, $34 million for lab equipment and $7 million for capitalized software. We exited the fiscal year $39 million in inventory and cash and investments of approximately $505 million as of September 30, '22. I'd like to note the report in conformance with accounting standards is published under U.S. GAAP, and there have been no material adjustments proposed by our independent auditors.

I'll now provide guidance for fiscal '23. We enjoyed strong bookings in quarter 4 and another record year of growth, however, due to the macroeconomic environment and as more SARS-CoV-2 variants continue to emerge along with seasonal vacations this quarter, we're projecting our Q1 revenue to be approximately $54 million. And our fiscal '23 guidance for the year is in the range of $261 million to $269 million. We estimate Q1 SynBio revenue to be approximately $21 million and for the year to be $104 million to $106 million. We estimate Q1 NGS to be approximately $25 million and for the year, $120 million to $123 million. Note, NGS down sequentially. The reason is a couple of our large customers are taking shipments in the first quarter due to a seasonal impact of vacations. We estimate antibody discovery revenue for the first quarter will be approximately $8 million and for the year of $37 million to $40 million.

Our fiscal '23 gross margin is projected to be 39% to 40%, and our operating expense projected to be approximately $365 million for the year, which includes $138 million in R&D and $227 million in SG&A. Our net loss guidance before taxes for the year is expected to be approximately $260 million, which includes stock-based comp of approximately $83 million, depreciation and amortization of approximately $26 million and data storage expense of approximately $46 million. CapEx for fiscal '23 is projected to be approximately $50 million, with another $20 million expected to be deployed in Wilsonville, and cash balance projected at year-end of fiscal '23 is expected to be $300 million.

For fiscal '24, we're projecting revenue to be approximately $350 million, and that includes $50 million for antibody discovery. Gross margin of approximately 49%, OpEx to be approximately $386 million operating loss to be approximately $215 million, which includes stock-based comp of approximately $90 million, depreciation and amortization of approximately $35 million and data storage OpEx of approximately $57 million. CapEx, we're anticipating to be $40 million, and the year-end cash balance at the end of '24 is projected to be $170 million.

In summary, we had a record year and continue to build our capabilities, expanding our position as a provider of choice of high-quality, affordable synthetic DNA to customers across multiple industries. We're now a leading supplier of NGS sample prep and we have scaled our antibody discovery capabilities and continuing to deliver on our DNA data storage strategy. Although there is macroeconomic volatility, we're excited about the opportunities ahead and are focused on executing on the financial projections outlined in today's call.

With that, I'll turn the call back to Emily.

Thank you, Jim. As fiscal 2023 is now well underway, our focus remains on driving to our profitability in our core business. We've laid out the 3-year guidance with the path to adjusted EBITDA and breakeven for the core business and we are targeting [$8 million] revenue to reach adjusted EBITDA breakeven for biopharma. In SynBio, we expect to generate initial revenue out of the fact of the future outside of Portland, Oregon in January 2023. As we qualify our production processes in this new facility, we will begin to add new products soften by other benefits from the larger square footage of the site, including fast genes, long fragment, [impossible] genes and R&D-based products.

For NGS, we expect another back half-loaded deal with larger customer policy liquid biopsy tests as they continue to run their commercial efforts. With sequencing costs coming down, we remain focused on expanding our reach in cancer and owning the workflow between the central and the sequencer. In biopharma, we are planning an integrated portfolio of antibody discovery and optimization offering, capitalizing on efficiencies between our synthetic library approach paired with in vivo discovery from our Boston team, both complemented by our machine learning and AI collaborations.

In data storage, we have our first integrative seamless chip with HNA controls in-house, and are making good progress to bringing up the chip and our new pilot production in the DNA data storage writer. We plan to launch our Century Archive solution as an early access offering in late calendar 2023. In parallel, we will continue to partner with leaders to set the stage for commercial success across the Century and accessible archive solutions while preparing the market for DNA data storage.

Overall, I'm reminded of the speech I gave when we went public a little over 4 years ago. At Twist, it hasn't always been easy. In fact, it has never been easy, but we always contribute to overcome the challenges we face. We have embodied the resilience and financial discipline throughout the organization to report another strong year of growth. And each day, we have the opportunity to go again at confident.

With that, let's open the call for questions. Operator?

(Operator Instructions)

Our first question comes from Steven Mah with Cowen.

Okay. Great. A question on the gross margins. I know they're dropping in fiscal year 2023 as factory of the future scales and then Jim, you mentioned it grows to 49% in fiscal year '24. Would you expect the utilization percentage of the factory of the future in fiscal year 2024 to achieve that 49% gross margin guide? And then also, are you reiterating the 50% to 52% gross margins at $300 million in core revenues?

Yes. So in terms of factory of future utilization, where we haven't disclosed what the utilization rate looks like. The 49% gross margin reflects the growth in top line revenue and does reflect improved utilization. And in terms of as we continue to scale the business, we're still -- we still see a line of sight in terms of achieving the longer-term gross margin of 55% to 60% for the business.

And then my second question, on MRD, Emily, you noted that the business is doing well. People are validating the MRD assays. Did you mean that the users are validating lab-developed -- your product for lab developed tests? And then the second part of that is could you give us a sense of your mix of your MRD customers? Are these reference labs, academic hospitals or basic R&D?

Yes, that's a great question. Steve. So as a reminder, we provide the regions to enable customers to run MRD test. So we are not selling our own MRD test, just to be clear. And so therefore, the majority of our liquid biopsy and MRD customers are diagnostic companies that are developing and validating their own test.

And our next question comes from Catherine Schulte with RW Baird.

I guess first, maybe the step down in NGS orders sequentially. Can you just talk to the drivers there that were going on?

Yes. I think a couple of issues. We had some large orders come in the previous quarter. And as we noted in the call, a couple of our customers are actually seeing -- asking us to ship in the first quarter of calendar year. So that's just step down and orders is just a onetime event as these customers are pushing their orders out in Q1. We got a very strong backlog in terms of the number of customers. Our pipeline continues to grow. So we're feeling good about where we're at. We're just dealing with, I think, the year-end vacations. We see some impact of lockdown in China. And at the same time, our customers are signaling strong outlook for us on our NGS products and we anticipate that the quarter 1 of fiscal next year is going to be strong.

Okay. Got it. And then I think probably given the events of this week, you highlighted that no material adjustments have been proposed by your auditors. Can you -- you've had a material weakness that's been highlighted in your filings for a while now. Can you just talk to how those remediation efforts are progressing? And any other comments you can make regarding the short report from earlier this week?

Yes. So Thanks, Catherine. So eventually 3 material weaknesses, 1 on order entry, other on journal entries and other on ITGCs. We've remediated the order entry weakness, we remedies on journal entry weakness on ITCs -- the ITGC issue that remains, and that's purely due to user access issues. There was no impact on our financials.

And in terms of the short report, a couple of things that brought up in the short report. We in the business, mainly we worked with both PwC and Ernst & Young. PwC is a great firm. We moved to Ernst & Young because if you look at our business, we've significantly grown our health care business. Ernst & Young is a strong health care practice. We collaborate well with our auditors. And as highlights, we get no material weaknesses.

And in terms of some of the personal references against me, I actually helped out an organization. We have got 230,000 ladies in prisons in this country to build careers, help they get trained, they get development and a lot of them moved on to be executives in companies and I think is a great social impact. And I had actually new share ownership. I was offered shares, but I decided to -- I decline that I would prefer to believe (inaudible) the statements in the report are totally wrong.

And then Catherine, just as you know, we won't comment further on the short report. We're very happy to take questions on the business, but our statement on [Mondays] and the great transparency that we strive to always provide as a management team speaks for itself.

And our next question comes from Matthew Sykes with Goldman Sachs.

Emily, maybe the first 1 for you, just on the gene maker market as it relates to factory of the future capacity? I know you've mentioned in the past, it's like a $1.4 billion market. And what characteristic that's important to them is turnaround time. Could you maybe just talk a little bit more about the improvement in turnaround time that factory of future will bring and just kind of talk a little bit more about -- because I think originally, you thought that price was going to be a defining factor for that market, but it's really turnaround time. Could you just talk about what that market is really looking for?

I'm sure it's turnaround time, but in addition, what else and how you can unlock that solve for the capacity that you're building with factory of future to make sure that there's a significant enough market out there for what you're building?

For the question, Matt, now that we've been in the marketplace for a number of years, we shipped more than 0.5 million individual [tube] and genes this year alone. And so we have a really good grasp of what customers want and what we see in the makers market is the 2 groups. There's the big companies that in-source, the work as well as academic labs that (inaudible) that need DNA. What we find from those groups is speed is very important for them. And even if the DNA was free, they would not get it from us at the speed that we have now, which is industry average.

And so that's why we made an effort to lay a plan to offer them gene synthesis that is the same or faster than if they did it themselves. And the reason why we can do that is when we analyze the process that we use in South San Francisco, the 20-step back-end process of gene synthesis. It is not a linear production process today. It's 20 steps, but we have 10 machines. And so basically, the same order has to go to a machine twice, and that creates conflict. And when we analyze the data, everything is logged in our databases. We found that DNA is spending half of its time in freezers waiting for the next machine to be available. So we know that intrinsically, the fact the process can be half as fast if we can remove those production bottlenecks, where the plate is waiting for the next machine.

And so that's what we've done in Portland. In the Portland facility, we now have 20 machines such that it's a true linear production chain. And the plates go into 1 machine and when it finish it goes directly to the next 1 to the next 1 and there is no wait time. And so that's why we think it's -- we feel it's a low risk on the process side because we are not changing any chemistry. We're not changing any instrument. It's the same process. It just -- there's no wait times between steps. So the combination of that market understanding with the different layout of the back-end production in Portland will enable us to offer fast genes. And that will unlock the makers market.

There's a slow in addition, a commercialization strategy to leverage e-commerce and digital marketing. And so we will be making great effort on our e-commerce in our B2B solutions to make sure that when we have fast genes, the transactability that the customer has to go through to work with intuitive, frictionless and beautiful.

Got it. And then, Jim, 1 for you. Just looking at the fiscal '24 guidance on the OpEx is $386 million, I know that there's $57 million of that is DNA storage. Could you talk a little bit about your expectations for R&D versus SG&A split within that $386 million and where the flexibility is within those 2 segments, the SG&A versus R&D for that $386 million to maybe come down a little bit as you start moving closer to that time period.

Yes. So in terms of the 3 specs, and we haven't broken out the R&D portion. The flexibility we see is in terms of SG&A as we intend to continue to grow and leverage our investment in infrastructure. We've been clearly -- as you can see, the slowed down the rate of growth of OpEx, we've been investing heavily over the last few years, building out our organization infrastructure. And as we continue to scale the top line, we've highlighted in previous calls that OpEx will grow at a slower rate than top line growth.

And as we continue to manage our data storage investment, continue to manage our SG&A, in particular, our back-end office infrastructure, we'll continue to see -- to manage that cost base going forward, which will then support us getting to adjusted EBITDA to breakeven and getting to positive income. So we're very close to that at end of '24. As you can see, we've got plenty of cash runway as we get to close to that adjusted EBITDA to breakeven, and we have the opportunity to manage our data storage spend.

And our next question comes from Luke Sergott with Barclays.

A couple of cleanup 1 cleanup here. So can you give us the FX assumption for next year? And kind of give us a sense of how that trended throughout this year as well?

Yes. So look, it's Jim. So in terms of FX, most of our business is actually in dollars and most of our costs are actually in dollars. So although there's a maybe 10% impact is not as a huge impact in our business so far. In terms of the pricing on a go-forward basis, we're actually with a lot of our NGS particularly some of our larger customers who already locked in the prices. So in terms of FX, yes, we see some impact around the fringes, but it's not a significant headwind for us.

All right. Cool. That's fine. On the rest of the business, so you talked about the NGS pushouts. So what are customers saying on why they push those orders out to 1Q? And is this related to anything to all the new technologies out there?

I'm not aware of the -- it's not where it's new technologies. It's just in terms of timing. The couple of customers that I'm aware of, it's just a matter of timing of (inaudible) in December, it's going to be shipped in January. And that's based on their end customer demand. So I haven't have anything on the technology side Emily, if any?

Yes. No, I think it purely -- pure timing of their business. So we have experience and the last weeks of December are always awkward in shipping, and this year is especially awkward and so we think that most of our customers will be shut down the last week of December. And so we are planning for that.

All right. And then 1 last 1 for me is, you gave the '24 guide and the growth assumption here of roughly flat growth and by 30% is very impressive in itself. So just wondering why -- what's the assumption here, no acceleration from factory of the future coming online? Is it something like that your -- that the growth is really satisfying the printers coming online and then you guys are going to bring more on '24 as you continue to scale the business and then any of the mix dynamics as it goes to SynBio or NGS as the factory of future ramps because there's a margin implication here.

Yes. So in terms of factory of future ramp, we're seeing roughly -- I mean, it's early days, yes, we've seen roughly 50%, 50% in terms of the SynBio, NGS mix. In terms of outlook, the macroeconomic environment is still volatile. So we're protecting a couple of years here. So we're always prudent in terms of our forecasting. In terms of capacity. We've made the investments. I think in terms of overall, in terms of factory of the future, we've made about [$87 million] investment, we give another [$20 million] to go, and that's consistent with the previous guidance we've given.

And that's going to be ample capacity for just getting to the [$350 million] and beyond. So we don't see any headwinds from a capacity point of view as all that into as [Emily's] highlight the execution and then executing on the makers market.

And our next question comes from Vijay Kumar with Evercore ISI.

Jim, I had 1 on accounting here. I think 1 of the points raised by the short orders, COGS being classified as CapEx. Can you comment on that? And when I looked at the last the third quarter 10-Q, some of the cost, the operating lease costs associated with factory of the future went into OpEx, is that a change from how expenses were being recorded in the past? Or is this because you moved into a lease facility and it's just how the accounting works, maybe address those 2 issues?

Yes. So in terms of COGS being moved onto the balance sheet, that -- it's an interesting observation. I have no idea where that comes from. If you look at the growth and the investment in CapEx we laid out on 1 of the slides today for Portland, we've invested about $46 million in tenant improvements. We took over essentially building the need this 100,000 square feet that tenants improvement. (inaudible) interest and shows invoices. It's all building out the structure for the labs, installing all the offices, all the piping, et cetera. So the items that are associated with the investment in Portland are sitting on our balance sheet.

In terms of -- what was the other part of your question, Vijay?

The operating expense, some of the lease expenses related to factory of the future that's going under OpEx. Is that a change versus prior...

The lease expense is related to the factory of the future is part of start-up and that prior to factory qualification that is sitting in SG&A, and that was $16 million for this year, and we call that out every quarter. So there's been no change in how we account for that.

And maybe 1 on the gross margin cadence here. What's the confidence here that the gross margins are going up by 900 basis points from fiscal '23 to '24, that seems like a very steep ramp, Jim. And when I look at Q1, is there any first half versus second half cadence issues here on gross margins when I look at fiscal '23?

Yes. So if you look at last quarter, our gross margin was 45%. As we scale through the factory of the future and improve our utilization and we are successful in terms of growing in the makers market. We've got a number of levers there. You get the impact of reduced under impact of reducing underutilized capacity.

Second is in terms of the makers market, Emily has highlighted, the faster genes, we get a higher price. We get good leverage there. In terms of investments in terms of R&D, if you look at our R&D, that was another point made in the short report that our R&D increased from $70 million to $120 million, where we increased the investment in SynBio, NGS from [$37 million to $56 million] slide in this just to give transparency. I mean so we hired additional scientists. We're increasing our investment in NGS and SynBio.

What does that mean? We keep refining our processes and keep launching new products. So you're going to have a combination of scaling the factory of the future, seeing growth in the revenue, improving our position in the makers market in terms of growth in makers market and launching new products. All those elements contribute to improving our gross margin.

And just while I'm on the comment, the overall R&D increased from $70 million -- roughly [$70 million, '21 to $120 million]. DNA storage was up by $9 million. Revelar's a onetime event. We spent $14 million in Revelar R&D in '22 that will not happen in '23, and then in terms of antibodies, we've stepped up our investment in antibodies. So we'll actually see growth in biopharma business as well, and that contributes to our gross margin improvement.

Understood. And if I may, 1 last one. Revenues are up. I think when I look at the '24 guide versus '23, the initial expectations of revenue is up 30%, the OpEx up, I think, 6% and I think our cash OpEx ex [FDC] is low singles. Is that level of SG&A spend R&D spend, is that enough to sustain the growth here?

Yes. I mean, we look back over the last couple of years. We have increased back to my point there in terms of R&D for SynBio and NGS, we after spend from $37 million in R&D, SynBio and NGS in '21 to $56 million. So what's that about 50% growth. So the advantage of the factory of the future is fast turnaround time and fast genes, which allows us access to the makers market. So it's a combination of historical investment and the impact of the factory of the future and our investment in antibodies that allows us to deliver the growth that we're projecting.

And the next question comes from Puneet Souda with SVB Securities.

So first one, what are you hearing from European customers in terms of the order book? And wondering if there was any NGS order book impact from that. Could you just elaborate just given the market conditions in Europe, we've been getting questions on that.

So I can -- so in terms of order book, the Q3, Q4, a sequential step down. However, what we are hearing from our customers is kind of selective. The outlook looks good. Some orders are being pushed out from -- as a little bit pushed from Q4 into Q1. The conversations of liquid biopsy are good. Conversations with MRD are good. Europe, we actually had a strong quarter in Europe, which kind of surprised us, September. We anticipated that year it would have been a little bit weaker. And September was strong. And we're encouraged by what we're hearing on the China side.

We have seen a little bit of impact of lockdowns. And that will impact us sequentially from Q4 to Q1 talking about our fiscal Q4. So September to December quarter, we will see China -- Asia being down, but that's the impact of lockdowns in China. Overall, the feedback from customer base is strong by that is because of the quality of the product. We have a low-cost quality provider. And this environment suits Twist.

Okay. That's helpful. Emily, if I could ask on the liquid biopsy customers. I don't know if you provided that number, I think you had about 20 or so liquid biopsy customers in the past. Could you quantify, just given all the questions lately being asked, could you quantify how large of a book of business is liquid biopsy today? And are these early validation versus any commercial products where your probes are being utilized and what are your expectations for contribution in 2023 from these liquid biopsy customers because that's obviously an important driver even with the NovaSeq X plus launch, which is targeted more towards whole genome shift.

Yes. Maybe I'll start and Jim can fill in. Yes, we're actually are starting to see revenue from customers that are likely in the commercial phase. We ship probably not always easy to know how they are used with customers if it's in validation or pilot. But in the past, most of our revenue was for the R&D, the development of the test but as we find bigger contracts and get bigger orders, now we're going to see a slow orders in the commercialization phase. It's what we can say, but...

No, there's not more I can really add but on our large accounts continue to grow. We feel well-positioned with liquid biopsy and the other applications. And we discussed some of the feedback from customers. Some of its timing. We continue to make inroads in the market. And it's all about execution over the next year. We have a great cash flow organization. We've got great products. So...

Anything you can elaborate in terms of sort of how should we think about in your guide for 2023 and 2024, obviously, by 2024, these would be a larger customer. So just wondering in terms of overall contribution that you could see from liquid biopsy?

No, we don't bring that out. And the reason for that is we have agreements with our customers. So the only customer, I think that's gone public is (inaudible).

I think the 1 time we can comment is what we shared before is liquid biopsy is a big strategy, a big part of our strategy for revenue growth and that's why we have good confidence in our abilities to deliver this as assay go commercial.

Okay. That's helpful. And if I could ask a more broader question. Just given the sort of the questions that have been asked lately in terms of pricing, what is your philosophy here in terms of pricing versus the market? Obviously, you've been competitive in the past. And as we -- as you scale in the factory of future, could you sort of elaborate about your pricing expectations? Because I think the question is, this is a higher inflationary environment, and you are getting some benefits from the COGS at the factory of future, but just could you elaborate a little bit on -- how are you thinking about pricing in '23 and within the guide that you've laid out?

So -- basically inflationary environment can be a little bit useful for us actually in production because since we use so much less regions than anybody else, in the regions go up 5%, 10%, 20% in prices, or the impact to us is a lot less significant than on the competition, so we were quite small. I think when we signed the lease in Portland, it's a very long-term lease and when we basically cap the rate of increase on the rent for a long time. And so basically, we have rent at lower than inflation. So that's another great benefit to us. So that's on the cost side.

And then on the on the price side our figure seems to be value priced. And so when we launch our fast genes. And we expect that the ASP for fast genes going to be higher. However, it will be the exact production facilities. And so therefore, we anticipate that margins will increase. Similarly, when we've launched the IgG product line, that is a great opportunity for us. IgG require 2 genes to make 1 IgG and the [ASP] is somewhere between $500 to $800 depending on the flavors of IgG that customers want. And so again, that's an opportunity for us to boost our margins. So we're always looking for opportunities.

And as we go up the value chain, either in fast genes or long gene or impossible genes or IgG, RNA product, you can see that those are more differentiated, harder to make products, but still all help us dominate because of the silicon chip. They come from the silicon chip but because there are other and higher-value product, we'll be able to charge a premium for it and improve our margins.

And our next question comes from Rachel Vatnsdal with JMP Chase.

So first up, on DNA data storage, you mentioned that you're launching that offering for early access customers late next calendar year. So can you just talk about how much of a contributor do you expect that DNA data storage (inaudible) towards the $350 million revenue guide in fiscal year '24. And then can you remind us what is the gross margin profile for that DNA data storage offering expected to be?

So we don't break out the data storage revenue contribution in the $350 million. Long-term gross margins for data storage could be quite compelling. Initial models indicate a 60% to 65% gross margins. Why is that? One is because of the technology. We do have a leading position in the marketplace. And our expectation is we're going to leverage our investment under IP and that will be reflected in our gross margins.

What was the...

And then there's a follow-up.

Okay. Sorry, Rachel.

Yes. Yes, you answered both of them. And then just as a follow-up on that. You had previously mentioned that you were developing enzymatic approach to support a full commercial launch for that DNA data storage. So can you just give us the latest update on your enzymatic offering? And what milestones do you have last before you can -- how that enterprise chip fully developed.

It's a great question. So we're not giving an update at this point on enzymatic synthesis, except to say that we are incorporating the chip, the CMOs that we have with the enzymatic synthesis to help drive our DNA data storage process. So we are reemphasizing that enzymatic synthesis is going to be a key strategy of our better storage product offering, but we are not giving any technical update at this point.

However, what we are looking for is developing the process and to be able to add basis to do it at high quality to do it at high speed. And most importantly is to do it as low COGS. Jim just mentioned our margin profile and it cannot be done with [10,000] enzymatic synthesis where the NTP is not tethered to the enzyme. The only way to get low COGS and high margin is to tether that NTP tool to the enzyme. So I think -- we think our approach is a winning approach. We will pick the most appropriate time for us to get the biggest bang for our buck in terms of releasing technical details. We like what's happening and we like our progress. But we will reveal details for another day.

One moment for our next question. And the next question comes from Matt Larew with William Blair.

This is actually [Madelin Wolman] on for Matt Larew. Just want 1 quick 1 from us. Within biopharma, you've talked about it taking between 18 and 24 months for partners to go from working with you to filing an IND application. Since you've now been doing this program for over 2 years, could you talk a little about when you start -- are expecting to start to see some downstream milestones and royalties?

Yes. Thank you so much, actually. We have a robust effort internally to track the progress of those assets, and we have our own model on our views of the value. And at this point, we're not quite ready to announce any of those margins of royalty. But as we've said in the past, those will be upside to our plan. So stay tuned. It's definitely something that we track with our partners because we definitely are looking forward to both the (inaudible) as well as the sensitive validation.

One last point I'll make. That being said, again, we are not in the business of subsidizing our partners. And so as a reminder, we do make about 50% to 60% gross margin on the upfront fee that we charge. So the margin-related triggers will be upside and additional monetization on top of the gross margin that we made on the work that we did.

Thank you for your questions. At this time, I'd like to hand the conference back over to Emily Leproust for closing comments.

Thank you very much for joining us today. I'd like to wish you all a wonderful transiting holiday this week. And hopefully, we see some of you live in Portland following the holidays and others virtually at the Evercore Health Care Conference in December. With that, thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.