908 Devices Inc. Q3 FY2024 earnings call

• The third quarter of 2024 ended with revenue of $16.8 million, an increase of 17% over the prior year period, but financial results fell short of expectations due to compressed spending period from federal budget delay and international contract delays affecting handheld placements, and softness in bioprocessing and life science instrumentation market elongating desktop sales cycle.
• Six months since the acquisition of RedWave Technology, 908 Devices is excited about the integration. Implemented three structural adjustments: move manufacturing out of Boston to lower-cost locations by end of Q3 2025; right-size bioprocessing and life science instrumentation efforts, reducing workforce by 11% to save ~$4.2 million annually; optimize full sales organization for new efficiency, focus, and flexibility, including using RedWave's 'Try Before You Buy' program for handhelds and adjusting international direct sales team for bioprocessing space in Europe.
• Identified five key elements to accelerate growth: increase enterprise adoption of FTIR handhelds; create upgrade cycle with next-generation MX908 handheld; win full rate production award for U.S. Department of Defense AvCat program; return of biopharma CapEx spending for novel instruments; achieve partner integrations reaching scale.

In the third quarter of 2024, revenue was $16.8 million, an increase of 17% over the prior year period. Handheld revenues serving the forensics market: $14 million for the third quarter 2024, up 19% from $11.7 million in the third quarter of 2023, accounting for approximately 83.3% of total revenue. 178 handheld devices were shipped in the third quarter, and the installed base reached 2,796. Desktop products serving the life science, instrumentation, and bioprocessing markets: revenue was $2.8 million for the third quarter of 2024, increasing 8% from $2.5 million in the prior year period, accounting for approximately 16.7% of total revenue. 8 desktop devices were placed in the third quarter. Recurring revenue, consisting of consumables, accessories, and service revenue, represented 36% of total revenues this quarter and was $6.1 million, a 70% or $2.5 million increase over the prior year period, largely driven by service. Recurring revenue in the third quarter consisted of $3.9 million related to handhelds and $2.2 million related to desktops.

• 2024 revenue guidance lowered to $56 million to $58 million, representing 11% to 15% growth. Core 908 business expected to have an 8% to 4% decline over full year 2023 due to budget uncertainty and timing issues. RedWave 2024 revenue expected to be ~$10 million, down from prior expectations. For full year 2024, adjusted gross margins expected in mid-50s range. 2025 expected to be a transformational year with strategic initiatives targeting reacceleration of top-line growth, margin expansion, and cost optimization.

• Risks related to federal budget delay, compressed spending period at end of U.S. Government fiscal year, election-related customer spending pausing and potential environment change. - Softness in bioprocessing and life science instrumentation market causing longer sales cycle for desktop devices. - Uncertainties in international markets such as NATO country investments in new major equipment modernization.

Q: Hello, and welcome to the 908 Devices’ Third Quarter 2024 Financial Results Conference Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to Kelly Gura with the Gilmartin Group. Please go ahead.

A: Thank you. This morning, 908 Devices released financial results for the third quarter ended September 30, 2024. 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 ir@908devices.com. Joining me today from 908 is Kevin Knopp, Chief Executive Officer and Co-Founder, and Joe Griffith, Chief Financial Officer. Before we begin, our commentary today will include the presentation of some non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings press release, which is available in the Investor Relations section of our website. Additionally, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section entitled forward-looking statements in the press release 908 Devices issued today. For a more complete list and description, please see the risk factors section of the company's Annual Report on Form 10-K for the year ended December 31, 2023 and in its other filings with the Securities and Exchange Commission. Except as required by law, 908 Devices disclaims any intention or obligation to update or revise any financial projections or forward looking statements, whether because of new information, future events, or otherwise. This conference call contains time sensitive information and is accurate only as of the live broadcast, November 12, 2024. With that, I would like to turn the call over to Kevin.

Q: Yeah. Hi, everyone. Thanks for the questions here. First one, I understand the challenges of the life sciences end market. We've been seeing that for the last year. But the magnitude of the guide down at this point, even after accounting for AvCat, I mean, it raises a question if there is any structural or competitive issues in the handheld market beyond the agencies that you're selling these products into. So just wanted to understand if the -- is it largely the pushing out of the budgets because of political uncertainty, which is obviously not lost on anyone but just wondering if it is that is the primary driver or if there is any structural competition that you're seeing in the market. And on the desktop side, how should we think about the recovery in first half ‘25? You pointed sequential improvement here. Should we assume that sequential improvement to continue into first half?

A: Yes. Thanks, Puneet. Thanks for your questions there. Yeah, absolutely. The life science is one part that I'll get to in a moment, but the handheld placements did of course come in light in Q3. And as you pointed out, if we strip out the $2.4 million in AvCat revenues from the prior year period, MX908 actually did see a positive 20% growth in the quarter and we did see continued traction with multiple enterprise accounts and U.S. International and we are also pleased today to talk about our largest account win here in APAC with the Vietnam Border Guard. So, yeah, I agree that it is more of a timing with budget uncertainty that really came into play here and so some of the orders we saw really, call it, fall out of the quarter with that end of the U.S. Government fiscal year. Joe mentioned in his prepared remarks, a little bit around the election, some pausing, just some, call it -- rethink there, always some uncertainty that can develop and absolutely, I don't see any structural, any competitive, any other dynamic playing out here. Absolutely, I don't. These customers all have a very clear need for a certain number of devices, and they're working to get budget to do that in a particular period. In some cases, they were able to win and with them and get an order this quarter, and in some cases, that order was a little bit smaller just due to again lack of timing, visibility, and the ability to actually contract purchases in a very compressed government fiscal year. So no structural change there. From a desktop recovery perspective, yes, it's a little bit like we've continued to see here headwinds in the desktop placements, and largely we haven't seen much change to that, sales cycle taking longer for our novel technology in that preclinical instrumentation space. We did mention that we do expect a quarter over quarter step up in desktop device placements in Q3 and that really is being driven around our partnership initiative that we started formally earlier this year, which gives us confidence in that and it's really kind of a call it a force multiplier as those partners win. So that's coming from, call it, some of the initial placements.

Q: Yes. That's helpful. And then just my second question on really kind of priorities across the desktop portfolio and where you're looking to… A: Yeah. Yeah. Absolutely. And -- yeah. On that one -- sorry. I didn't address that, immediately here. So we're really excited that we have a pretty fresh desktop portfolio, right? We've got four products. Two released just last year. These are all PAT tools. They're fundamentally driven by the needs to control the process and better those outcomes. Yeah, we don't really see a change in that or a rationalization of those products. A lot of hard work is going on, as I said, to get through test and evaluations. We mentioned that some of our Maven pipeline now that we're calling it a couple of years into that product is starting to develop. We are talking more about GMP deployments. We are talking more about things on our multi-unit orders and opportunities within our pipeline. So, really, we're heads down there, trying to smartly get through evaluations and engage folks on how it can be deployed across process development and manufacturing.

Q: Hi. This is Hannah Hefley on for Jacob. Thanks for taking the questions. On the CGT end market, you've announced a number of partnerships with hardware innovators in your space. How should we think about these relationships driving desktop growth in coming years? And is there any way to frame up any initial contributions from these relationships?

A: Yes. Thanks, Hannah. Certainly, that area of strategic collaborations and these partnerships in the cell and gene space, but even more broadly into the biologic hardware innovators too. There can be some near-term revenue impact, but we really believe that it creates a lot of value longer-term, as we get through and scale with these partners. We're working to get our technologies designed in, partnered, or in some cases, more of a co-marketing relationship with these organizations, really working to get these new novel technologies developed in by our collaborators. We announced Solaris and Terumo and that we're actively engaged with those accounts, but we're working with a handful of others that are quite exciting to us as well and really trying to get alliances there for the simple automated PET tools that we provide. So, as you know, cell therapies really need to address cost and access, and we believe, we're really directly contributing to that, and we're providing these real-time monitoring solutions, and we really don't have sampling risk on it. So, ultimately, this strategy really should impact our revenue. And I mentioned in Q4, we do expect it to be helpful to us, and those were really should be thought of as, call it, initial collaborator placements, initial engagements, call it, the first steps with those companies. But this integration strategy could create an inflection point for us, as we go because again it's really an ability for us to scale out in a little more efficient way. And then, yes, so I think it's a great strategic effort for us. It's an effort we started just formally in Q1, and it's already starting to bear fruit, and we've become more and more convinced it's the right thing to layer on to our direct sales.

Q: All right. Thanks. And then, as it relates to desktop demand, have you seen any changes in the competitive landscape for desktops, or do you think that this is still just largely macro-driven? And then, could you update us on how consumable pull-through is trending for desktops?

A: Yeah. I haven't seen a change in the competitive dynamics. I mean, I think when we think of the macros and look across definitely some encouraging signs with consumable-driven companies and organizations with some of our large tool peer set there and I think that's a positive indicator of things kind of normalizing out, but maybe not a perfect read through up for us, because our recurring elements of our desktops was about 10% of our total revenues in the quarter, and maybe 14% over our first nine months. So consumables are important, but the placements are incredibly needed and to grow. And so, that device placement, life science implementation into preclinical. We've just seen those challenges with prolonged cycles with the availability of CapEx. So I wouldn't say, there's any competitive dynamic, we've seen. We're not seeing anything or new surprises on that. Of course, we've got new technologies, so you have to always go out and prove your worth compared to what's out there with our MAVEN and our MAVERICK, but nothing new or concerning to report there on my radar.

Q: Hey, guys. This is Chad on for Brendan Smith. Just on the MX908 sort of next gen instrument, what are the main pain points that you're seeing that would drive that replacement cycle among the existing customers? And then beyond that, would the product enhancements also have the chance of expanding that market?

A: Yeah. Thanks for the question. The next generation of our MX is certainly an exciting one for us. I mean, if you just think of our handheld devices when we launched our MX908, it's now been about seven years, and we were able to have a CAGR of 27% between that 2018 and 2023, so good growth there and now we have over 2,500 actually, more than 2,700 of our MX908 out there. So we really think it is a great opportunity to disrupt that once again and kind of bring an upgrade cycle. These customers do value outside of, call it, just CapEx refreshment cycles, which you expect to be in that 7 to 10-year period, right? We're getting up on that now. But you can also drive some of these cycles earlier in our opinion by operating a step change of things. It could be size, weight, performance in terms of simplicity, workflow, user operations. We're working to do all those things and at the same time trying to do it with the lower cost of goods and having technology and connectivity capabilities in there to help us further have recurring revenue opportunities over time that we can develop on it. So, to us, it's a major new release that will be coming in the next couple of years and it's absolutely one of our priority R&D projects for us and we think it should get exciting given the growth we've seen over the last seven years and then the number of placements throughout there. But then in addition, I would say we're very fortunate and pleased that we have a fuller portfolio with the RedWave acquisition. We now have four products across that space, including our Explorer that we made in our prepared remarks that's been growing really, really nicely. So I think all of these help broaden, the groups that we can get to, broaden out the number of customers that we can get to as well as addressing those immediate replacement cycles.

Q: Thanks. And then just on some of the updated commercial strategy, like are these try before you buy program and approaches that you've taken from RedWave, are these built in place today and able to be executed, or is this going to take a few quarters to build out these technologies and transition them over to the legacy 908 devices?

A: Yeah. Look. I mean, we're six months into the acquisition. I think we're still very excited about it. We see all sorts of synergies that we tried to articulate today, definitely revenue synergies in addition to cost synergies. Definitely learnings that we can do to better our ability to get more efficiently at these customers. You touched on two that we think are straight out of the RedWave playbook, if you will, Try Before You Buy, more virtual demos, a little bit into your last question as we kind of broaden with the Explorer, the number of customers that can see a need and capability requirement for it. It helps us get there. So, yeah, one of the three structural adjustments that we're talking about today is really to align all of our sales force efforts, desktops teams, but also within our handhelds team to take advantage of such programs. And you're right, those are preexisting for RedWave products. We're going to look to see how far we can use those, in the -- with MX 908 products, but importantly, making sure that we're embracing and scaling those within the 908 commercial engine for the FTIR products as we go forward. So, yes, it will take some time. Obviously, we're six months in. I think we've made great strides on the integration. We announced some further big steps we're taking today, there, but, yes, a lot of -- lot more to come.