The first half of 2019 was relatively boring for Codexis (NASDAQ:CDXS). It bagged Novartis as a software customer in the first quarter and landed a $50 million equity investment in the second quarter, but not much else stood out. That could be about to change.

The enzyme engineering leader exited June with $93 million in cash and the most diverse customer base in its history. That positions the existing platform to stabilize growth and frees up considerable bandwidth for management to explore new growth opportunities. Turns out, there's no shortage of new verticals to capitalize upon, the business just has to execute. Here's what investors need to know about the latest operating results.

A dollar sign decal on a wall projecting a shadow of an arrow.

Image source: Getty Images.

By the numbers

While shares of Codexis rose from obscurity in 2017 and 2018, returns have flatlined recently as investors watch and wait for the business to find the next gear. It may not show up on the income statement, but management has made plenty of progress to address headwinds and position the business for long-term success. 

One of the bigger problems in recent years was customer churn compounded by a limited customer base. Codexis would help a pharmaceutical company increase the efficiency of a manufacturing process and collect revenue from supplying the enzymes needed to do so, only to see the drug product lose market share over time. The result: the business was running in place, with new customers simply replacing old ones. Another problem was that the business would collect eight-figure payments from software licenses in a single quarter, resulting in choppy performance.

Those problems might be less of a drag going forward. Codexis reported that revenue is now spread over a wider base of customers. It counted contributions from Merck, Novartis, at least four additional top 25 pharmaceutical customers, and Urovant Sciences among software and enzyme customers in the healthcare industry; Nestle Health Science dished out research and development revenue from licensing an enzymatic drug developed by Codexis; Tate & Lyle kept purchasing enzymes in a food ingredient manufacturing pact; and two new customers in two new verticals chipped in as well. Meanwhile, the latest software license deal spreads out revenue over a much longer time period -- and it's more valuable, too. 

The new approach to business hasn't manifested on the income statement in the form of growth yet, but it should significantly reduce the risk of customer churn in future periods. 

Metric

First Half 2019

First Half 2018

Change (YoY)

Product revenue

$14.2 million

$9.9 million

44%

R&D revenue

$13.7 million

$17.7 million

(23%)

Total revenue

$27.9 million

$27.6 million

1%

Total costs and operating expenses

$39.8 million

$36.1 million

10%

Operating income

($11.6 million)

($8.4 million)

N/A

Operating cash flow

($7.9 million)

($12.1 million)

N/A

Data source: Press release. YoY = Year over Year.

Codexis has also worked to stuff its project pipeline with pent-up growth potential. The business is developing enzymes for 41 unique projects -- most funded by partners -- that could create long-term, recurring revenue streams if commercialized. Here's how the pipeline looked at the end of June 2019 only counting projects that have generated at least $100,000 in revenue in the last two years: 

Pipeline Project

Codexis Funded

Customer Partnered

Category Change from June 2018

Pharma projects, phase 2 or higher

0

15

+1 project

Patented marketed drugs

0

1

+1 project

Generic marketed drugs

1

4

+2 projects

Novel biotherapeutics (for licensing)

7

3

+1 project

Food ingredients

1

3

+2 projects

Molecular biology

3

2

+2 projects

Industrial enzymes

0

1

No change

Total

12

29

+9 projects

Data source: Codexis Pipeline Snapshot, June 30, 2019.

Not every project will be commercialized, but the business is clearly attempting to exploit the potential of its enzyme engineering platform. It ended June 2019 with 40 customer-partnered projects when both commercial and pre-commercial pacts are tallied. That's up from just 20 such projects three years ago.

Looking ahead

Management affirmed its full-year 2019 guidance calling for at least $69 million in total revenue, at least $26 million in product revenue, and product gross margin in the neighborhood of 50%. That suggests second-half product revenue will be roughly the same as the first half total, while R&D revenue will surge in the back half of the year. Total revenue is expected to grow at least 14% compared to 2018.

In other words, the business is well-positioned to live up to expectations this year. That might make investors eager to know: what's possible for Codexis in 2020? 

Product revenue has barely budged in two years thanks to customer churn, but new customers and new verticals promise to change that. R&D revenue has been choppy in recent periods, but newly structured software licensing deals can help to smooth out that pattern. Large milestone payments from Nestle Health Science will likely make the revenue category unpredictable regardless, but with another $86 million or so in pre-commercial milestones on the table, investors probably won't complain about the potential for volatility.

That makes the next several quarters come down to one thing: Execution. If management can leverage recent progress in diversifying the customer base and the business can successfully commercialize pipeline projects, then investors with a long-term mindset should be rewarded. Given the excessive levels of hype and high rate of failure among companies that get carried away marketing their association with synthetic biology, something Codexis has recently started to do, investors can't assume that success is guaranteed.