Long-term shareholders who believed in the technology platform of Codexis (NASDAQ:CDXS) have largely been rewarded for their patience. The stock rose from obscurity to deliver a 360% gain from the beginning of 2017 to late 2018. The company's market cap soared from less than $250 million to over $1 billion. But the spotlight can bring its own set of challenges.

Wall Street was a little more critical of the business in 2019. The most important source of revenue has experienced stagnant growth for three consecutive years, while other revenue streams have proved much less predictable. The small-cap stock was volatile last year and has tumbled 17% since the beginning of 2020. 

All of that has raised the stakes for the fourth-quarter and full-year 2019 earnings report scheduled to be released on Feb. 27. The business should also provide an important update for the year ahead. Here's what investors should be watching.

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Will Codexis meet guidance?

Codexis is an enzyme engineering company. It has developed a technology platform to rapidly design, build, and test enzymes in an iterative improvement process. Enzymes are used to catalyze chemical reactions including industrial food ingredient manufacturing, pharmaceutical drug synthesis, and bodily functions. 

The company generates revenue by selling licenses to its CodeEvolver software platform, supplying enzymes to customers in various end markets, and collecting milestone payments in a pharmaceutical development partnership with Nestle Health Science. 

Codexis ended September in relatively good shape to meet full-year 2019 revenue guidance, although investors have been prepared to expect an unusually low level of product revenue in the fourth quarter.  

Metric

Full-Year 2019 Guidance

First Nine Months 2019

Amount Needed in Q4 to Meet Guidance

Total revenue

$69 million to $72 million

$49.8 million

At least $19.2 million

Product revenue

$26 million to $29 million

$24.6 million

At least $1.4 million

Product gross margin

48% to 52%

50%

N/A

Data source: Press release.

On the third-quarter 2019 earnings conference call, CEO John Nichols admitted that product revenue remains unpredictable. That's partly due to the nature of the business. Customers purchase enzymes to prepare for batch manufacturing lots required to supply clinical trials and ahead of larger commercial launches, but the purchases from any single customer tend to be spotty.

For example, in the third quarter of 2019, an unnamed customer made a seven-digit order. Merck purchased millions of dollars of an enzyme used to manufacture Januvia. Novartis purchased nearly $2 million of an enzyme to prepare for an upcoming drug launch. Those sales don't repeat every quarter. 

Codexis has tried to mitigate the volatility by increasing its number of customers. It's had some success: Five customers purchased at least $1 million of enzymes each in the third quarter of 2019. But the business still isn't large enough to overcome choppy quarters. That makes full-year 2020 guidance very important for gauging progress. 

What's on tap for the year ahead?

Not surprisingly, product revenue is the most important metric to watch when the company issues full-year 2020 guidance. It's the most important kind of revenue because it comes from a diverse group of customers in diverse applications. Product revenue is also accompanied by high margins -- product gross margin in the first nine months of 2019 was 50% -- and can serve as a strong foundation from which to build upon for other areas of the business. 

Investors have been disappointed by the metric in each of the last two years. Product revenue totaled $26.7 million in 2017, but receded to $25.6 million in 2018. Full-year 2019 guidance expects just $26 million to $29 million in product sales. 

The slow growth has been mostly driven by customer churn, which meant new sources of revenue only replaced lost or expired contracts. But investors and Wall Street analysts might be less willing to accept that for a fourth straight year. 

The list of pharmaceutical customers continues to expand. Tate & Lyle continues to forge ahead with the ramp-up of food ingredients manufactured with the help of Codexis enzymes. Roche recently licensed a Codexis enzyme for use in sequencing and diagnostic products, while a second enzyme for next-generation sequencing (NGS) applications should be partnered in 2020. 

If product revenue doesn't begin to grow in an appreciable way, then investors should have questions. 

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An important update at a crucial time

Codexis has recently begun to rely a little too much on hype and marketing rather than tangible results. In the short term, that creates a positive perception. In the long term, the bill always comes due. Considering hype has had disastrous results for shareholders of other companies associated with the field of synthetic biology, investors will want to see the business refocus its attention on what matters.

That said, the company appears to be on a promising trajectory. Codexis ended September with $92 million in cash and reported a manageable operating loss of $11.6 million in the first nine months of 2019. It began 2020 with momentum on important fronts, such as progress commercializing enzymes for NGS applications and expanding its collaboration with Nestle Health Science.

Will the company finally claw its way to profitable growth in 2020? Investors will soon find out.