Berkeley Lights, Inc.
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Berkeley Lights Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. . I would now like to hand the conference over to your first speaker today to Carrie Mendivil, Investor Relations. Thank you. Please go ahead.

[Carrie Mendivil:]

Thank you. Joining me today from Berkeley Lights is Eric Hobbs, Chief Executive Officer; and Shaun Holt, Chief Financial Officer. Earlier today, Berkeley Lights released financial results for the quarter ended September 30, 2020. If you've not received this news release, or if you'd like to be added to the company's distribution list, please send an email to [e-mail].

[Eric Hobbs:]

Thanks, Carrie, and thank you everyone for joining us this afternoon. I'm very pleased to welcome you to Berkeley Lights first earnings call to review our results for the third quarter of 2020. I'd like to start today's call by thanking the amazing team we have at Berkeley Lights. As many of you know, we completed our initial public offering in July, raising approximately $188 million in net proceeds. This achievement is a testament to our teams collected dedication and passion. Of course, I would also like to thank our founders; Igor Khandros, Bill Davidow and Ming Wu for their vision. And finally, I would like to thank our longstanding investors for their continued support, and welcome all new investors. On today's call, I will start with a brief overview of Berkeley Lights for those who are new to the company. Next, I will provide an overview of our progress during the third quarter, including some new workflow products we released. I'll then close with some thoughts on how we are approaching the future and where we are investing before turning the call over to Shaun for a more detailed look at the financials. Starting with our top line performance, revenue for the third quarter totaled $18.2 million, up $7.6 million or 72% for the second quarter 2020 and up 16% year-over-year. Now before we dive deeper into specifics on the quarter, I'd like to remind you of our vision here at Berkeley Lights.

[Shaun Holt:]

Thanks, Eric. Total revenue for the third quarter of 2020 was $18.2 million, with $14.1 million in product revenue and $4.1 million in service revenue. Total revenue was up $7.6 million or 72% from the second quarter of 2020 and up 16% year-over-year. Looking at our three revenue streams, direct platform sales were $12.4 million in the quarter, increasing $4.9 million or 65% from the second quarter of 2020, and were in line with the prior year period. We placed eight new platforms during the third quarter of 2020. Recurring revenue was $3.7 million or 20% of total revenues during the third quarter of 2020. This represents an increase of $700,000 or 26% over the prior quarter, and an increase of $1.8 million or 92% over the prior year period. During the third quarter, in addition to the new platform placements, we saw resumption in campaign activity at certain customers over the prior quarter when some activities were paused. The year-over-year increase can be attributed to the growth of our installed base.

[Eric Hobbs:]

Thank you, Shaun. We're living in a fascinating time where biology, technology and information sciences have evolved to a point where we can edit cells at an unprecedented rate. Today, we can rapidly sequence cells and capture the program that controls life. We have the data and information infrastructure to process the large amounts of data that are being created. And through advances in gene editing, we can edit cells with high levels of specificity to insert new instructions into the cells program in an attempt to change the function of the cell. But because cells express genomic information in a variety of ways that we can't accurately predict, we have little certainty that our edits will result in the function we intend. The constraint that our customers face today is that they have to functionally cut large numbers of single cells at scale to find those single cells that have the function they need to make the products they desire. But at Berkeley Lights, we're solving that problem by increasing our understanding of the behaviors of cells so that we can improve and accelerate this design, build, test, learn process as we move into the future. Furthermore, because we offer standardized workflows, the same workflow can be executed at multiple sites around the globe. And because the data was created with the same workflow, the data can be amassed in a large cloud-based storage system. When this data is combined with machine learning and artificial intelligence, we will have the best chance in human history of programming the cell to do what we want it to do. This is the power of distributed biological processing. This is the power of digital cell biology. This is the power of the Berkeley Lights platform. We believe there's a great future in digital cell biology, and we're just in the beginning. With that, we will now open it up to questions. Operator?

[Operator:]

Thank you, sir. . Our first question comes from the line of Tycho Peterson from JPMorgan. Please go ahead.

[Tycho Peterson:]

Hi. Good afternoon. Eric, you mentioned in the press release cell therapy drove about a third of the placements in the quarter. Can you just talk a little bit more about traction in that market and how you think about it going forward?

[Eric Hobbs:]

Yes, we believe there's a significant opportunity to build on customers to enable attractive modality across many diseases. We do believe efficient way. We do envision an automated integrated cell therapy development and manufacturing platform with embedded quality control to control the function process from incoming materials, providing a clear digital record for each therapeutics manufacturer. And as we're moving in that space right now, the discussions are ongoing. How do you include that detail .

[Tycho Peterson:]

Great. And then thinking a little bit about just the portfolio, a couple of questions. I'm wondering if you could comment on Lightning, how you're feeling about the rollout and any thoughts about just whether you could start to penetrate the academic market there?

[Eric Hobbs:]

Yes, certainly. For those who are new to Berkeley Lights in the call, Lightning is our lower capacity, less automated access – for our customers to access our technology. And really the key, Tycho, to the ramp in Lightning is our – some of the unique workflows that we have on the system. In Q3, we completed at least four application notes or kind of like sub workflows that allow our customers to leverage the Lightning in the cell therapy space. And so we'll continue to focus the Lighting placement into this segment to build a that’s driven by a secular demand and functional characterization of functional therapies.

[Tycho Peterson:]

And then what's the interest on the subscription uptake for Beacon? And are you looking to kind of push that a little bit more aggressively, given where we are with the pandemic?

[Eric Hobbs:]

Yes, it's a great question. So I'm going to – I'll hand it over to Shaun, so Shaun can talk about the subscription. Shaun?

[Shaun Holt:]

Yes. Thanks, Eric. Hi, Tycho. Thanks for the questions. I think – the way to think about subscription, it's really just one way. Our customers can access our technology. And the benefits here to our customers are obviously more tailored access to capacity, more predictable and stable budgets and spend patterns and a lower entry fee for access. I think it's important to remember here subscription for our type of product offering today is relatively new in the market. So it will have a certain adoption cycle that carries with it. As we engage with customers, we continue to evolve the subscription product offering. I think the answer is, we're still at the early stages of this, but we continue to believe this model offers compelling advantages to our customers. But I think it will take a little bit more time to gather more meaningful statistics here. But we do see the pipeline developing and we continue to push this offering. And we'll continue to update on these causes as we go forward.

[Tycho Peterson:]

Okay. And then before I hop off, Shaun, I know you don't want to give 4Q guidance, but is there anything in your view that has changed materially since the IPO as you think about kind of the setup for the rest of this year?

[Shaun Holt:]

Yes, I think it's a great question. As we said, I think in our prepared remarks as well, just given the uncertainty that's out there, we're not really commenting today on 2020 full year guidance. But what I can say though to that point is there really have been no changes in our view of the business since we spoke during the IPO.

[Tycho Peterson:]

Perfect. Thanks, again. Take care.

[Shaun Holt:]

Sure thing.

[Operator:]

Thank you. Our next question comes from the line of Tejas Savant from Morgan Stanley. Please go ahead.

[Tejas Savant:]

Hi, guys. Good evening. So just to follow-up on Tycho's question there sort of on the forward-looking commentary here. Can you tell us a little bit about just the momentum in the order book as well as on the consumer book exiting the second quarter as well as in October? And then are you seeing any impact at all around your ability to install or service your customers following the pickup in infections or related shutdowns or not really?

[Eric Hobbs:]

Hi, Tejas. It’s Eric. Good to talk to you again. In the market, we continue to see two key answer the first part of your question, right? Those may include an increasing demand for some of these products and also an increasing complexity of the cell-based products. We have path capacity expansion, which provides the functional assessment which our customers need to find themselves to make the complex of these products. So we feel like they're really well positioned there on the first couple of questions. And related to COVID infections, the shutdowns experienced in the first half of 2020 impacted many businesses, including ours. And although we can't predict the future of this pandemic and how governments are going to react, right, we have seen that our industry has shown a decent degree of resilience. We haven't seen any cancellations, but we have seen that uncertainty between quarters. So what we've done is we’ve taken a few steps. First, our customers how they can reduce the number of people in their labs using our advanced automation platform. So they can safely continue to move their therapeutic pipelines towards a benefit to our customers. Additionally, to guard ourselves against any issues with installations and training, we’ve hired additional resources in regions to minimize that risk. We also which is an online learning platform which we can send our customers and also as we scale our new staff, we can do that training remotely. Shaun, do you want to make any comments on against the COVID – if there was any COVID issues in the ongoing quarters?

[Shaun Holt:]

Yes, sure. Just a reminder, Tejas, as we exited Q2, we updated our revenue recognition policy to enable revenue recognition on either shipment or delivery, depending on the nature of the deals and the terms. So that's helped in terms of the issue around COVID and preventing us from actually installing and training. That's also actually a benefit for our customers as well. We're not out there being forced to install or train. We’re really doing that on our customers’ timeline. So it's actually a benefit to our customers as well.

[Tejas Savant:]

Got it. That's helpful, Shaun. And just following up on that, was there a delta in between orders and units on which you recognized revenue in the third quarter? Some of the platform players in the life sciences space have spoken about that dynamic where there's a pretty meaningful delta here between the orders being placed and obviously shipments or potentially the delivery. So maybe you can share some color on that?

[Eric Hobbs:]

It’s a great question – sorry, go ahead, Shaun.

[Shaun Holt:]

Yes, Tejas, great question. I think here, our business is really a terms business, right. With that, we actually see rapid order fulfillment as a sort of competitive advantage of ours. And I think from that perspective, backlog for us is really just a function of orders placed in the last days of a given quarter, like you just talked about, and therefore, it's subject to some fluctuation. We talked about our revenue recognition policy helping in that regard. But we're really a terms business and that dynamic we see is going to continue, and backlog as such will flux.

[Tejas Savant:]

Got it. That's helpful. And then, Eric, in the past you've spoken about some of your Asian customers leapfrogging to your platform versus some of the legacy approaches. Is that essentially a dynamic that you see sort of sustaining through sort of the next couple of years here as those customers sort of directly upgrade to the Beacon? And is that what is essentially driving the strength in placements you saw in the third quarter here?

[Eric Hobbs:]

So we continue to see very strong demand in Asia Pacific region for antibody discovery. And so we do see that our customers are deciding not to install some of these legacy platforms. I do anticipate that that will continue to grow in that region for the next several quarters. I'm not sure – it's not clear to me that that will go on for years, but certainly into the future.

[Tejas Savant:]

Got it. That's helpful. And then final one for me. In terms of just your commercial expansion plans, can you just give us a quick update on where things stand today? And how much work that has to be done on that front heading into 2021? And are you sort of focusing on specific deals, perhaps given the strength you're seeing in Asia to sort of staff a quicker cadence over there?

[Eric Hobbs:]

Yes. Over the past quarter and earlier this year, we've made some really nice adds to our commercial organization, in particular, in the sales – on the sales team. We brought on Mark Lasinski to lead our global sales who has – to expand our efforts with you and Asia Pacific. So we now have our wholly foreign-owned enterprises now up and running in the Asia Pacific region. Additionally, we just brought on Gareth Jones who will lead our European region. So we continue to make investments. We have more work to do there, but really, really strong progress in that space. Additionally, we've made some pretty big changes to our business development organization to continue to bolster that activity as we move forward, which is critical as it sits at the tip of the spear. And in any case, Shaun, do you have any additional items you want to add to kind of the investments we’re making in the commercial organization?

[Shaun Holt:]

Yes, definitely. I was just going to say, this is going to be a continuing theme, Tejas, as we go into 2021 expanding the sales force globally, like Eric just mentioned, supporting our key markets and released products, particularly in Europe and in Asia, which we've seen as our higher growing region here. Dovetailing on the spend and looking forward into 2021, we're going to continue to invest in BD as well to drive adoption of new products and existing capabilities in new markets through the type of partnership, joint development deals that we've talked about in the past. And also on top of that, we expect a bigger ramp in R&D, supporting the business development and the new deals they're going to bring to the table but also our new product development efforts and new market penetration next year.

[Tejas Savant:]

Got it. Thanks very much for the time this evening, guys.

[Shaun Holt:]

Thanks for the question, Tejas.

[Operator:]

Thank you. Our next question comes from the line of Doug Schenkel from Cowen. Please go ahead.

[Doug Schenkel:]

Hi. Good afternoon, guys. Thanks for taking my question. Sorry if you covered any of this. The phone quality kind of went in and out for a little while there. It hasn't been perfect at least for me. So I do apologize in advance if you covered any of what I'm about to ask, just tell me and we can move to the next one if that is the case. So just starting on placements, looks like placements roughly doubled sequentially relative to Q2. Could you could you just break down in a little more detail subscriptions versus direct? And I know you got the question on backlog heading into year end. I am just wondering if the Q3 placement number was at all a function of catching up from earlier parts of the year when maybe it was harder for customers to accept capital in the midst of the pandemic or if you think this is a normalized number?

[Eric Hobbs:]

Hi, Doug. We certainly believe that we are in a normalized condition. And in the quarter we placed the eight platforms and three were placed into cell line development, two were placed into cell line antibody discovery and three into cell therapy. And regionally, that looks like we placed three into Asia Pacific, three into Europe and two into United States. In regard to subscription breakdown, I'll hand that off to Shaun. But I do think we see returning back to kind of a normal style of business as the world is coming back online. Shun, anything to add?

[Shaun Holt:]

No. I think you hit it on all the key topics there.

[Doug Schenkel:]

And did I miss the subscription versus direct mix? Sorry, if you gave that in your prepared remarks or if I just missed that earlier?

[Eric Hobbs:]

No, you didn't miss it, Doug. The placements in Q3 were all direct sales.

[Doug Schenkel:]

All direct sales, okay. And then just – I think I know the answer to this based on just what you guys just described, but I kind of felt like pharma was already holding up pretty well for you as your key end market for the first couple of quarters of the year in the midst of the pandemic, which I think we all appreciate was pretty impressive given what we saw from some others in the space in terms of capital equipment demand. Heading into year end, would you say things are fine and you feel like you have some momentum given you just described this kind of being a normalized Q3 and I would suspect Q4 potentially could be better just given typical year-end budget flushes?

[Eric Hobbs:]

Yes, we continue to see the capacity expansion happening in the market. And there is a copious amount of cell development. And we are – operationally, we've organized ourselves to be able to rapidly respond to our customers request to provide that fastest path to capacity expansion possible. And so, again, due to the COVID wave, we haven't seen cancellations. We have seen things move in and out and we've also seen that our customers are able to continue to accelerate and move their pipelines forward using our advanced automation system. So I do believe we are moving back towards into a normalized kind of business cycle.

[Doug Schenkel:]

Okay. And then kind of asking the same question, but just flipping from capital over to consumables, with a few logical leaps it seems like consumable revenue per box seem to increase by about 35% to 40% relative to Q2. Again, those are our numbers not yours, but I'm guessing we're in the right neighborhood. Of course, just correct me if we're not. But again, is that just a normalized run rate or do you think there was some catch up or inventory builds given what's going on in the world, or is this – as you guys have answered a couple times already, this is just the norm?

[Eric Hobbs:]

There's definitely a considerable increase. And so I'll let Shaun speak to the exact numbers. I’ll let Shaun check them out there. But we did see increase in and we believe we saw an increase in utilization associated with our customers coming back online in the quarter. And so I think we're – like I said, we're ramping back up to the normal or standard business environment.

[Shaun Holt:]

Yes, Doug, just to add to that. We did see a bit of the pull through in Q3 come from some late in the quarter Q2 order flow. But the majority of the recurring revenue growth was due to the increase in the install base.

[Doug Schenkel:]

Okay. Last one for me. In your prepared remarks, you referenced the collaboration with Ginkgo. At what point do you think that those SynBio applications that you're in joint development with might be available more broadly for other commercial customers? If I remember correctly, going back to Q2, there was a revenue impact associated with essentially I think putting yourself in a position where you could accelerate those timelines. I'm just wondering if there's any update on that.

[Eric Hobbs:]

Yes, certainly. The opportunities in SynBio, Doug that we've spoken before, right, are substantial, but they also require clear market segmentation. And in Q3, we released some pretty compelling data in the advancement of those workflows in the space. First, we showed that the measurements made in the NanoPen correlated up to half liter fermenters. This was data that we published at the SynBioBeta conference. And as everybody's aware of this market scale has been a big challenge in this space, and this capability would help our customers lock in their production economics early in the process. And second, we showed that we can perform enzyme kinetic measurements in the NanoPen. The significance here is that we are moving to measurements that are happening inside of the cell to help our customers accelerate not only enzyme engineering, but the manufacturer of the proteins that those enzymes can create inside of the cells. And so these two capabilities, as you understand, are broadly applicable not only in SynBio but particularly back into our biopharma market. So our strategy in this market continues to be to segment the market and focus on high value-add products and/or other applications which drive high frequency gene editing validation via the design, build, test, learn iteration cycle driving high consumable consumption. And so as we continue to make great progress on SynBio Discovery 1.0 Workflow and SynBio Development 1.0 Workflow, we're going to plan to – our plan is to announce those in 2021.

[Doug Schenkel:]

Okay, that's great. Thank you, guys. I really appreciate all the detail on all those questions.

[Eric Hobbs:]

Thank you, Doug.

[Operator:]

Thank you. Our next question comes from the line of Brian Weinstein from William Blair. Please go ahead.

[Brian Weinstein:]

Hi, guys. Thanks for taking the questions. Just to go back to your comment on the business development team that you guys added in the quarter, can you give us a little bit more about what that team looks like now? But more broadly, can you talk about kind of relationships, partnerships, JV opportunities, both inside and outside of the traditional markets that you're in and what we can expect from the organization and sort of the pace of these opportunities coming through, and how you're thinking about these things as you evaluate them?

[Eric Hobbs:]

Yes. Hi, Brian. It was clear to us that there are opportunities beyond the scope of our current market segments. And to make sure that we can access those opportunities, we made some significant changes to our business development organization, since the IPO. And the goal of making these changes was to enable new and existing customers access to some of the new emerging Berkeley Lights capabilities. And we realized that to do that, we needed to create a best-in-class BD organization, which we have now done. So the team that we've assembled is making great progress on developing those high-value partnerships that you referenced, which will enable Berkeley Lights to develop in concert with great market leading partners enable new capabilities to current and future customers in existing and adjacent markets. So I'm really excited about the potential of the team. Things are moving forward in a great direction and hope to be able to report out on some of that activity within the next several earnings calls.

[Brian Weinstein:]

Great. Thanks for that. And then on the funnel, and to use that term here, as we think about the willingness and opportunity that you have with your customers. How do you see that funnel build right now and the visibility that you have? How would you characterize that? And is it corollary to that? What do you expect to see as far as the sales cycle across end markets? Is there an opportunity for that to accelerate?

[Eric Hobbs:]

Yes. In regards to the funnel, right, we continue to – Berkeley Lights continues to provide our highest probability of success and getting through their products. And we're operating in these very large markets and antibody therapeutics and bio and cell therapy. And as I mentioned previously, we do see those two increasing demand for cell-based products and the increasing complexity of those cell-based products. And because we address both of those, by being the fastest path to capacity expansion and also providing the functional assessment they need, we continue to see things build in the way that is in line with our expectations for the business.

[Brian Weinstein:]

Okay. Thanks, guys.

[Eric Hobbs:]

Thanks a lot, Brian.

[Operator:]

Thank you. And our last question comes from the line of Paul Knight from KeyBanc Capital Markets. Please go ahead.

[Unidentified Analyst:]

Hi, guys. This is Mike on for Paul. Thanks for taking my questions.

[Eric Hobbs:]

Hi, Mike. Welcome.

[Unidentified Analyst:]

In the prepared remarks, you mentioned about 50% of Beacon were placed with CROs and CMOs. Can you provide some more color around the strength in that end market? And then do you think this kind of provides another avenue to expand awareness to some of maybe your smaller biopharma, biotech customers? Thanks.

[Eric Hobbs:]

That's spot on. A large majority of the new biopharmaceuticals that are coming out, right, are really created by these smaller biotechs and startups. And so enabling CROs with access to our technology enabled access to these smaller entities, and we believe that it is in line with the CRO markets business model to bring up that capacity rapidly. And so the higher levels of demand for cell-based products that we're seeing an increasing complexity really falls in line with their need to bring on this capacity as a function of time.

[Unidentified Analyst:]

Great. Thanks. And then my last one is just regarding where you guys are investing for growth, specifically around your proprietary workflow offerings, kind of what's the cadence there? And how's the trend with some of the workflows that you've added with customers?

[Eric Hobbs:]

Yes. So since we've started, we’ve released seven – we have seven commercialized workflows. And so the first workflow we released was in late 2016, early 2017. That was our cell line development workflow. And we released our antibody discovery workflow, the first of our antibody discovery workflows in mid 2018. And we released five workflows so far this year. And the wonderful thing about our platform-based technology is that you can reuse the components of these workflows to create new workflow solutions either within a market or in an adjacent market. So we continue to release more workflows and we do see uptake. The cell line development work – sorry, cell therapy development 1.0 workflow which we released earlier this year is really at the nexus for kind of the activity in cell therapy that we saw in Q3. So we continue to see a higher cadence release of workflows as we move forward into the future.

[Unidentified Analyst:]

Great. Thanks, guys.

[Eric Hobbs:]

Thanks a lot, Michael.

[Operator:]

Thank you. This concludes our Q&A session and today's conference call. Ladies and gentlemen, thank you for attending. You may all disconnect. Everyone, have a good day.

[Eric Hobbs:]

Thanks.