908 Devices Inc. (MASS) Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to the 908 Devices Second Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Barbara Russo in Investor Relations. Barbara, please go ahead.

Thank you, and good morning. On this call, we will be discussing our financial results for the second quarter ending June 30, 2026, which were released earlier this morning. Joining me from 908 Devices is Kevin Knopp, Chief Executive Officer and Co-Founder; and Joe Griffith, Chief Financial Officer. During today's call, we will make 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. For a discussion of these risks and uncertainties, please review the forward-looking statement disclosure in the earnings news release as well as in our most recent annual report on Form 10-K and other SEC filings. These forward-looking statements reflect management's beliefs and assumptions as of the date of this live broadcast, August 11, 2026. Except as required by law, we disclaim any obligation to update forward-looking statements to reflect future events or circumstances. Our commentary today will also include non-GAAP financial measures, which should be considered as a supplement to and not a substitute for GAAP financial measures. The non-GAAP reconciliations can be found in today's earnings press release, which is available in the Investor Relations section of our website. With that, I now turn the call over to Kevin.

Thanks, Barbara. Good morning, and thank you for joining our second quarter 2026 earnings call. I'm pleased to report that we delivered strong results this quarter, demonstrating the power of our strategy and dedication of our team. In the second quarter, we generated $16.1 million in revenue, representing 23% growth year-over-year. Our momentum with U.S. state and local customers remain particularly strong with these customers representing more than half of our revenues in the second quarter. We're seeing continued funding support at the state and local level, driven by the urgent need to modernize detection capabilities in response to evolving threats from the ongoing fentanyl crisis to emerging synthetic drugs and chemical hazards. This funding momentum, combined with strong customer demand, gives us confidence in the durability of this growth trajectory. From a profitability standpoint, we are making meaningful progress. The cost structure initiatives we implemented last year are delivering results. Our adjusted EBITDA loss was less than $2 million in the second quarter, which is a 50% improvement year-over-year. These improvements demonstrate our commitment to scale efficiently while investing in growth. As announced on May 6, we acquired NIRLAB, expanding our narcotics detection portfolio. We now have an AI-powered subscription-based cloud-connected near-infrared spectroscopy platform that enables point and click analysis of common drugs in seconds. Along with our VipIR and MX908 devices, we provide a comprehensive narcotics workflow for law enforcement from fast screening to confirmatory analysis. Overall, I'm very pleased with our execution this quarter. We are delivering against our strategy on multiple fronts, expanding our market presence, both organically and through strategic M&A while building a stronger foundation for longer-term value creation. This execution maps directly to our 3 focus areas for 2026, scaling proven platforms, extending platform leadership and strengthening revenue durability. Let me walk through the progress we made in each. First, scale our proven platforms. Our objective is to accelerate growth by modernizing legacy detection equipment, especially FTIR across global fire, law enforcement and defense enterprise accounts. We've made tangible progress in these areas in 2026. Start with our scale. Over the past 24 months, we've shipped more than 750 FTIR devices, confirming this opportunity is real, substantial and one we're capturing. VipIR, our newest FTIR device, is leading that modernization push. We shipped more than 35 units in Q2, and we believe we will achieve our goal of shipping more than 100 VipIR devices this year. Two wins this quarter show why. A major South Asian law enforcement agency displaced an incumbent competitive product after a trial, purchasing more than 15 units and the Bureau of International Narcotics and Law Enforcement Affairs ordered its first VipIR unit to support Mexico's narcotic interdiction mission using U.S. State Department funding, a mechanism we believe can extend to other partner nations. Together, these show VipIR winning on 2 key fronts: capturing competitive share and capturing funding. Our flagship MX908 plays the same role for trace level analysis as it enables our customers to keep pace as the modern illicit drug landscape evolves from fentanyl to nitazenes and now to [ orphans ]. Clear evidence of the modernization cycle in motion is our Texas Department of Criminal Justice win, 15 MX908 devices for corrections facilities statewide were purchased in Q2, converting from a successful two-device trial with the Texas Office of Inspector General. We expect more orders to follow as that program's success becomes visible across the state. That's our playbook working exactly as designed, engage early, prove value, delight the customer and expand. We also attained a high visibility proof point this summer. MX908 Beacon, VipIR and XplorIR devices were part of the security toolkit at several stadiums during the FIFA World Cup. Deployments at major international events are exactly the kind of field validation that builds confidence across the first responder community, raising awareness of our solution. Finally, this momentum is being carried into the third quarter. We are pleased to announce that in July, we secured a $6 million ProtectIR order for corrections agency in the Asia Pacific region. This progress validates the 3 dynamics underpinning our platform scaling focus. Governments need better tools to identify unknown substances. We have the relationships and technical credibility to win competitive procurements and every deployment builds an installed base that opens the door to further expansion, feeding a flywheel. Turning to our second focus area, extend platform leadership. Our objective here is to drive growth through greenfield placements, differentiated capabilities and disciplined product introductions in markets our existing platforms don't yet reach. XplorIR is the clearest example of that strategy at work. XplorIR represents a genuine breakthrough in gas and vapor detection, and the market is responding. Placements grew nearly 70% over the 12 months ending June 30. That growth is being pulled forward by 2 tailwinds: one, HAZMAT incidents and the other [ CBRNE ] defense. Domestically, chemical incidents are rising. A recent Wall Street Journal article noted 131 serious chemical accidents in the U.S. in 2025, up 20% year-over-year, and first responders are feeling that pressure directly. In May, a chemical tank at a jet part manufacturer in California overheated, forcing the evacuation of more than 40,000 residents near Los Angeles. Responders used XplorIR on entry to identify and quantify the hazardous vapors and relied on it throughout cleanup. As these incidents rise, so does the case for XplorIR. Internationally, we see the same demand from defense customers. The Danish Defense Acquisition and Logistics organization selected XplorIR to enhance long-range chemical detection for defense operations and initial multiunit procurement paired with a framework agreement for future purchases, a strong signal of the confidence in the platform's differentiated performance. XplorIR is exactly what extend platform leadership is supposed to look like. We identified an unmet need, real-time gas and vapor identification and quantification in the field, built differentiated technology to solve it, and now we're capturing a market opportunity that's growing on its own as chemical incidents rise and customers see what modern detection technology can do. Finally, our third strategic focus area is strengthening revenue durability. Our objective is to build a more predictable revenue mix through recurring revenue from connected services, growth in OEM-based revenue and longer-term programs. NIRLAB is a key driver of the Connected Services vision we're building towards. And while OEM revenue and longer-term programs remain important parts of this focus area, I want to spend today's update on NIRLAB and where we see its potential. For decades, presumptive drug identification in the field has relied on colorimetric test kits, cheap, single-use and disposable with no data trail behind the result. That has created real problems. Innocent substances can trigger false positives, leading to wrong flurest and legal challenges, and it's becoming a legislative issue. Colorado's legislature voted unanimously this year to ban custodial arrest based solely on colorimetric results and reform efforts are underway in at least 7 other states. We see that as a durable tailwind, not a onetime event, and it points to where this category is headed away from disposable chemistry and towards connected technology that produces a defensible, auditable result with the identification, the underlying data and the chain of custody all captured and retained. That's the model NIRLAB lets us build towards the same kind of recurring subscription-based model that has transformed other public safety hardware categories, pairing durable hardware with a cloud-connected software layer that agencies rely on and return to every day. Within the first 60 days post close, our U.S. commercial team ran in-person and virtual demonstrations and secured field evaluations through our try-before-you-buy program, engaging 30 agencies and hundreds of prospects at the federal, state and local levels. This includes 7 HIDTA task forces, the multi-agency teams on the front lines of drug trafficking enforcement that tend to set the procurement tone for their regions. Agencies evaluating the platform consistently cite 4 things: speed, ease of use and intuitive interface and accurate identification, exactly the attributes that make the case against colorimetric testing. That commercial motion is already converting. In the roughly 2 months since close, we sold more than 35 NIRLAB devices, each with a multiyear software subscription, meeting our expectations for the initial post-acquisition period with shipments to law enforcement agencies in Colorado and California and customs agencies in Morocco and Iceland. Our overall pipeline is strong and growing, and we're starting to see enterprise scale opportunities develop in that pipeline, both domestically and internationally, a meaningful early signal of NIRLAB's longer-term potential. But the real opportunity is bigger than any one product. NIRLAB is an example of what our entire business has the potential to become, durable hardware paired with recurring connected software and the kind of real-time analytical reachback support our customers consistently tell us they value most from 908. We believe that model, hardware, software and expert support working together can guide how we build and monetize every product in our portfolio for years to come. With that, I will turn it over to Joe to walk through the detailed financial results for the quarter.

Thanks, Kevin. Total revenue was $16.1 million for the second quarter 2026, increasing 23% from $13 million in the prior year period. Handheld product and service revenue was $15.5 million for the second quarter 2026, up 24% from $12.5 million for the second quarter of 2025. The increase was primarily driven by our FTIR products, including more than 35 VipIR shipments in NIRLAB law enforcement revenue. In total, we shipped 198 devices in the second quarter, bringing our installed base to 4,101. Recurring revenue represented 31% of total revenues this quarter and was $4.9 million, a 4% increase over the prior year period, primarily related to software and accessories and FTIR service revenue, offset in part by the expected reduction in mass spec service revenue. Gross profit was $8.3 million for the second quarter of 2026 compared to $6.4 million for the prior year period. Gross margin was 52% for the second quarter of 2026 compared to 49% for the prior year period. The increase was driven by higher product revenue volume and decreased facility costs related to the move of our Boston facility in 2025. In addition, in the quarter, we benefited from a shift in channel mix with more U.S. state and local placements that have lower channel costs compared to international placements. These factors were offset in part by a lower service gross margin related to the decreased mass spec service revenue in the second quarter of 2026. Adjusted gross profit was $9.2 million for the second quarter of 2026 compared to $7.3 million for the prior year period. Adjusted gross margin was 57%, an increase of approximately 85 basis points compared to the prior year period. The increase in adjusted gross margin was driven by our improved 2026 operating structure, including higher revenues, channel mix and the reduced facility costs, as mentioned above. Total operating expenses for the second quarter of 2026 were $21.2 million compared to $21.5 million in the prior year period. The reduction was primarily due to decreases in the fair value of contingent consideration, lower facility costs and a reduction in R&D program spending, offset by operating costs from NIRLAB and transaction costs incurred with the acquisition. Net loss from continuing operations for the second quarter of 2026 was $11.9 million compared to a net loss of $12.9 million for the prior year period. This decrease in loss was primarily driven by the $2 million in higher gross profit, net of a $1.2 million reduction in transition services agreement income and a $0.3 million reduction in noncash charges for revaluing contingent consideration. Adjusted EBITDA for the second quarter of 2026 was negative $1.9 million compared to a loss of $3.9 million in the prior year period, representing a $2 million improvement. In the second quarter, we cut our adjusted EBITDA loss by more than 50% due to improved margins and a lower operating cost base. We ended the quarter with $101.5 million in cash, cash equivalents and marketable securities with no debt outstanding. We consumed $10.2 million of cash in the quarter, which was primarily related to the $13.5 million used for the acquisition of NIRLAB, net of the $3.5 million received from the release of the escrow from the desktop divestiture to Repligen. Looking ahead in 2026, we have raised the low end of our range and now expect revenue to be $68 million to $70 million, representing growth of 21% to 25% over full year 2025. Our guidance range includes the following assumptions: First, we now expect handheld product and service revenue to grow 23% to 27% year-over-year, which equates to a range of $65 million to $67 million. This increase is supported by our performance to date and the recent $6 million ProtectIR order. Second, we continue to expect OEM and funded partnerships, including contract revenue to be approximately $3 million. And third, given that the AVCAD program is still working through next steps, as Kevin will discuss more in a moment, we are excluding it from our core 2026 guidance. Any AVCAD contribution would represent upside to our stated range. Moving down the P&L, we continue to expect adjusted gross margins to be in the mid- to high 50% range for full year 2026. And on the bottom line, we continue to expect to reduce our adjusted EBITDA loss to the mid-single-digit millions, closing the gap on achieving breakeven while balancing investments to enable the growth opportunity. At this point, I would like to turn the call back to Kevin.

Thanks, Joe. As Joe mentioned, the U.S. military AVCAD program is continuing to work through next steps, and we fully support that process. The current contract has run its course. And as part of the next steps, the government is also considering our commercially available product due to a broader procurement reform at the Department of Defense that's prioritizing speed and program flexibility. We expect more clarity soon as the government's fiscal year closes and FY '27 begins on October 1. Overall, we believe we have the best-in-class aerosol and vapor detection technology, which has been extensively government tested and validated and can win this opportunity regardless of the chosen path, either in partnerships with Smiths Detection or directly with our commercial MX908. We remain excited about the long-term potential of this program. Now stepping back, as I reflect on our second quarter performance and look ahead to the remainder of 2026 and beyond, I'm energized by what we've accomplished and confident in the trajectory we're on. Let me be clear about how I characterize this quarter. Strong execution across the board. We delivered 23% revenue growth, placed 198 devices and expanded our adjusted gross margin by 85 basis points and cut our adjusted EBITDA loss by more than half, all while successfully integrating a strategic acquisition and continuing to invest in our growth initiatives. This demonstrates the fundamental strength of our business model, and I believe in our ability to meet our near-term and longer-term objectives. Before I close, I want to express my gratitude to those who have supported us through our strategic transformation over the past 1.5 years, to our customers who trust us to protect their communities, to our employees who execute with excellence every day, to our partners and distributors who extend our reach into markets worldwide and to our shareholders who continue to back our vision as we build a category-defining company in handheld detection. We're executing our strategy. We're delivering on results, and we're building momentum. I look forward to updating you on our continued progress when we report third quarter results later this year. With that, let's open it up for questions.

[Operator Instructions] Your first question comes from the line of Dan Arias with Stifel.

Kevin, as we think about this broader portfolio that you now have, can you maybe just talk to the extent that you see bundling opportunities as being higher than they were and more meaningful? Is there an appetite for multisystem orders across applications when you target these customer groups? Or is it still sort of siloed from an application standpoint? I'm just trying to make sure that I fully appreciate the benefit of just the different product lines that you have and what that might mean when you target some of these government agencies and law enforcement agencies.

Yes. Sure thing, Dan. Happy to touch on that. So I think that's one of the big advantages we've been having as we scale here with the FTIR portfolio now coupled with Mass Spec and now we have NIRLAB thrown in here. We're absolutely seeing and have many examples of bundled orders where they may order a couple of FTIR products or a couple of MX products, not yet with the NIRLAB because that's very new to us, but we absolutely see that pairing well with our MX. And I think if you look at it from a high level, right, we think about law enforcement, we think about their workflow. We think about what they need to do from screening to confirmation. And if you take in total, our MX, our NIRLAB as well as the VipIR, it creates kind of a complete workflow for those customers. So absolutely multiunit multisystem across there. And then similar on the HAZMAT side, so more on the fire services side, with our XplorIR, with our FTIR, our ThreatID device, absolutely, those can be bundled offerings, and we've seen that.

Okay. And then maybe just one on AVCAD. It sounds like there are some alternative courses of action that could come out of the evolution of that opportunity. If something more direct were to be the way that you go, how do you see that impacting the ramp and just the revenue potential that could come out of that in '27 and '28? You've kind of laid out some initial thoughts there. I'm just curious how that would change.

Yes, absolutely. On AVCAD, it's taking a little bit longer than we and the market expected, but our confidence in winning hasn't moved. Really, the current contract run its course and the government is working through those next steps, which we're fully supportive of. We believe we've got really the best-in-class vetted validated technology in the aerosol vapor detection category and can win this opportunity either way it plays out. And that can be in partnership with Smiths Detection, but it also can be through our commercial MX908. And as we mentioned and as you probably know, there is a shift underway within the Department of War that's really making sure that they take their moment in time and look at commercial off-the-shelf products and using that in a preferential way to speed up deployments and speed up getting solutions to the war fighter. So at the moment, the government is working through that process. They're looking at both COTS solutions like our MX908, these commercial off-the-shelf solutions. And then, of course, continuing with the program we've been working with Smiths on the custom development. From an economic side, yes, I think it's clear that the more product content we provide, whichever path they choose is better on the economics for us. From a ramp, as Joe mentioned, we have taken it out of the guide for today and taking it to upside, and we're pleased we're able to do that with the strength of our core business. And as we mentioned, we see this as a $10 million-plus opportunity into the future. And I don't think our confidence there has changed and how to ramp to that point is TBD here as we sit today. But I think the program is going to be good for us over the long term.

Your next question comes from the line of Brendan Smith with TD Cowen.

Maybe just first on NIRLAB. I was hoping, can you speak just a little bit more to what kind of potential cross-selling opportunities you're now seeing in these first 60 days? And maybe even broadly more qualitatively, how conversations with new customers are going now that you've got this arguably broader portfolio of products? I guess, are they coming to you with one in mind? Are they looking for a more comprehensive set of tools? Just trying to understand how kind of demand here is evolving across these different end markets as your catalog grows.

Yes. Sure thing, Brendan. Thanks for the question. We're very happy with how the NIRLAB integration is going. We've really been working hard to get out there fast. Part of the thesis was bringing this product into the U.S. markets where they've had very, very little to none penetration. And to your point, right, we can bring that right to the customers of our core flagship MX908, right to those law enforcement customers. And we closed here in early May, but the team has been moving fast, and we really hit that ground running. We've engaged about 30 agencies, hundreds of prospects across about 20 states in those first 60 days. That includes the 7 HIDTA regions, and these are multi-agency task force -- these are the ones that really are on the front lines, the illicit drug crisis. They really set kind of the tone for what gets adopted in their regions. So we've been doing a lot of engagement with those groups there, and we're pleased with where we're at. Absolutely, as you mentioned, there can be a bundling as we move forward. And there is an analyte compatibility, complementary compatibility there. So if you think on the THC side and cannabis, the NIRLAB is the product in our portfolio that can quantify that, and we can't do that with our MX. So those, you can imagine being paired very well. The subscription side, we think, is very exciting for the NIRLAB products. We think that's also a great model that we should work to get our other products in over time and making sure that we really provide that excellent service support and doing so on an ongoing recurring basis. And then I'd say the last point on NIRLAB really excited about a tailwind in the regulations that are changing. And that's really been going away from colorimetric kits, which have expiration dates, have usage issues and have been causing some false positives and wrong [ flurest ] and starting to get banned in different states. So we're excited to see where that will play out by having, call it, a lower price point offering with our NIRLAB that can help us there. And Colorado is one of the first states to ban such things. And in the quarter, we did receive orders from Colorado and California. So I think overall, we're pleased with it and do see a portfolio effect developing.

Got it. That's great. And maybe if I could just a quick follow-up. On your point about the kind of recurring revenues here. I appreciate all the color on kind of growing that as a proportional part of total revenue. I guess as we look at our model for maybe the next, I don't know, a couple of years, how should we think about that relative proportion of total revenues coming from that recurring bucket just as some of the more recent launches scale up? I mean you're talking about NIRLAB here. So I guess, is there like an ideal ratio between core recurring you guys have in mind that's capable over the medium term? Just any color there would be great.

I'll give a little bit of color and feel free to chime in, Kevin. But Brendan, we were about 30% for the current quarter or a little over 30% last year. That's kind of our current baseline. As we drive initial devices, example, the ProtectIR order that we talked about doesn't have recurring revenue. So in any given quarter or year, there can be a shift, right? You might end up in the high 20s, low 30s. But over time, I think that's where it gets exciting, especially with NIRLAB and the subscription model, more and more of a it carries 50% of recurring revenue opportunity with those subscriptions. You have the snowball effect of the installed base. So I think starting to creep up into the 30s, kind of approaching that 40% is what we aspire to. But it is good to sell those devices and build the opportunity, which we're focused on today.

Your next question comes from the line of Matt Larew with William Blair.

Just wanted to circle back on AVCAD. If indeed a different path is chosen by the Department of War, would there be another pilot phase where they trial a variety of different technologies? In other words, would sort of reopen a different RFP or based on the success of the first project where you were a sub and it's the same technology from your standpoint, would it be sort of the immediate opportunity? So I just wanted to be curious a little bit more on how you expect things to play out and I guess, how that informs your perspective on timing?

Yes, absolutely, Matt. Great question. So you're right, we've been performing for a long time now under the AVCAD program in partnership with Smiths. We've done a lot of testing of the base HPMS, a lot of analytical testing, a lot of rigorous testing of that. But similarly, if you think about our commercial product, our MX908, we have more than 3,000 of those devices out there. We estimate that about 1,200 are within the U.S. federal and military. We have quite an extensive test record for that, that also parallels what's been done in the AVCAD program. So I think it's a bifurcated path. I think they can choose to continue with the path we're on and/or a hybrid path where potentially they continue with the program and the development or some custom modifications there along the same lines and then use COTS products such as our MX908 to fill the gap to get -- again, their desire is to move the program faster here. So I know that you see a timing delay from this lens, but their desire is to ultimately move the program faster.

Okay. And then Joe, just thinking about the guide implies, I think, sort of high teens or $20 million of revenue per quarter in the back half, you did $16 million in Q2. It sounds like AVCAD has moved out of the guide. Can you just talk to us a little bit about what the progression will look like? And I guess, in particular, I'm thinking of the large order, $6 million order you got in July. I don't know if all of that or some of that might be coming in '26 versus perhaps more in '27.