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spk05: Greetings and welcome to the Azenta Q1 2023 financial results. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Wednesday, February 8, 2023. I will now turn the conference over to Sarah Silverman, Head of Investor Relations.
spk01: Thank you, Operator, and good afternoon to everyone on the line today. We would like to welcome you to our earnings conference call for the first quarter of fiscal year 2023. Our first quarter earnings press release was issued after the close of the market today and is available on our Investor Relations website located at investors.azenta.com in addition to the supplementary PowerPoint slides that will be used during the prepared remarks today. I would like to remind everyone that during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled Safe Harbor Statement, our Safe Harbor slide on the aforementioned PowerPoint presentation on our website, and our various filings with the SEC, including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. We may refer to a number of non-GAAP financial measures which are used in addition to and in conjunction with results presented in accordance with GAAP. We believe the non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with the GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Azenta business. Non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves. In addition, we may refer to certain estimates of COVID-based impacts. These figures are estimated based on our insights to customer applications and or product types indicating such demand or constraints on regional demand or ability to deliver. On the call with me today is our President and Chief Executive Officer, Steve Schwartz, and our Chief Financial Officer, Lyndon Robertson. We will open the call with remarks from Steve on highlights of the first quarter. Then Lyndon will provide a more detailed look into our financial results and our outlook for the second fiscal quarter of 2023. We will then take your questions at the end of the prepared remarks. With that, I would like to turn the call over to our CEO, Steve Schwartz.
spk09: Thank you, Sarah. Good afternoon, everyone, and thank you for joining us. Today we're speaking to you from our new headquarters location in Burlington, Massachusetts. And we're pleased to share with you the progress we've made over the past three months. Our Q1 results were solid and in line with our target as we delivered revenue growth of 28% year over year. Organic growth excluding COVID was 7%. Our results consisted with our 2023 expectations and a signal that the adjustments we've made to the business are taking hold as planned. Today, all of my comments on growth will be organic growth rates, excluding the impacts of COVID. Looking at the business by segment, we saw strong performance in our products business, which grew 15%, reflecting another quarter of double-digit year-over-year growth in our automated stores business, as well as some promising stability in our C&I business, which contained no COVID revenue and was up slightly quarter-over-quarter. On the services side, both sample and repository solutions and GeneWiz Genomics performed well. A particular highlight was double-digit growth in our core storage business of SRS. When we first got into the SRS business seven years ago, occasionally we'd handle up to a million samples in a quarter. Today, we touch more than a million samples per month, and the number continues to increase as more and more customers see the value in our offering. And as we continue to automate, we're more able to satisfy the heavier transactional aspects of our customer sample management needs, especially around the critical steps in a clinical trial workflow. This high-volume individual sample tracking capability is a highly differentiated offering that's valued by customers and necessary for their future needs. In genomics, we began to recognize the positive impact from the retooling of our go-to-market approach, and were confident that the continued execution of our plans is the right strategy. Specifically, once again, we delivered a record quarter for next-generation sequencing, and Sanger sequencing was steady. Perhaps most importantly, We're seeing early signs that we're beginning to recover some lost momentum in our gene synthesis business, as we saw double-digit growth in China, which is a positive indicator in terms of what we can do in the global market now that our logistics issues are behind us. To be clear, we're not declaring victory here, as there's much more to be done in sales staffing, but we're confident that our actions and plans are providing the remedy, and this is all about investments and proper execution, which has the focus of the entire leadership team. One particularly bright spot in the quarter was our performance serving cell and gene therapy customers. Over the past few years, we've observed steady 20% to 30% growth from CGT across our portfolio of offerings. But in Q1, we recorded nearly 60% year-over-year growth, bringing cell and gene therapy sales to approximately 10% of revenue, not including Barkey or B Medical Systems. This was up 30% quarter to quarter. Contributions to this growth came from GeneWiz Genomics, especially from NGS and AAV services, from products, particularly cryosystems and instruments, and from SRS. From a geographic standpoint, the key top-line drivers I mentioned, NGS, automated stores, SRS, and CNI, drove growth at varying rates across the globe. The U.S. remains a steady grower, Europe is making progress, and China remains a highlight, even amidst COVID noise. Bee Medical had a record revenue quarter of $42 million and secured the commitments we'd anticipated. That said, we saw one large order get pushed out, which landed us below the $45 million we'd initially anticipated. We shared with you that quarterly revenue would be difficult to predict for this business, but we'll continue to refine our forecasting to the street. The good news is that the business has won, and we're still confident that we'll deliver $130 million in revenue for the year. In addition, our long-term key human health initiatives are underway. and we remain encouraged by this unique head start in a fast-growing emerging markets opportunity that's seeded by B Medical's expansive footprint and outstanding reputation. And though it's still the early days, we're already in discussions with pharma companies on how we could leverage B Medical's technologies and Beachhead to access patients in hard-to-reach geographies. All in, the base business is stable and exhibits signs of strong momentum. Even in a more challenging macroeconomic environment, we believe our opportunity is significant, and it's ours to capture. Q1 was a quarter of positive proofs that our position is solid in products and SRS and that our initiatives to accelerate top-line growth, especially in our genomics business, are proving to be the right ones and will continue to drive these forward. Specifically, we're accelerating our investments in additional sales talent for coverage of accounts, but also of specific genomics technologies with emphasis on synthesis. We continue to recruit for additional regional sales coverage where we have known gaps and And we're not slowing our investments in development of innovative new products and services, which are key to our future outperformance. It'll take time for some of these initiatives to impact the top line, but they're necessary for our long-term success. We're optimistic that these actions will support continued progress toward the low double-digit growth objectives in the second half. We'll fund these investments through cost reduction measures that come from a realignment of our internal operations that target efficiency and enhance focus on value-creating activities. In total, we'll take out about $20 million of annualized cost. The net impact of the actions we're announcing today are expected to remove about 200 basis points of cost. Most importantly, these are the right next steps to ensure both our near-term and long-term potential. We believe the end result will be tighter coordination between business units and sales, and we'll take advantage of recently implemented enterprise solutions to automate and streamline internal activities. And finally, we continue to identify opportunities to grow the business. Last week, we completed a tuck-in acquisition of Zyeth, a leading provider of 2D barcode readers for life sciences applications. The Zyeth portfolio fits perfectly with our consumables and instruments business and enhances our portfolio of high-throughput offerings designed for laboratory automation workflows. This is a great example of the types of transactions we can do where we have the opportunity to take a company with a great product portfolio and put Azenta's commercial reach behind it. In closing, I want to address a few key points. First, we believe we have a unique portfolio of best-in-class products and services that gives us a chance to secure the pole position in all things sample management and sample measurement. And our Q1 results and traction give us confidence that we're properly addressing issues that will allow us to regain our outsized growth profile. Second, we're adjusting our operations to match our current portfolio and profile. Specifically, we're prioritizing strategic sales investment to drive the top line while protecting our bottom line. We'll continue to monitor and measure results of actions taken and support all key sales initiatives with the objective to turn the corner in Q2 and to see the progress in our results in the second half of this year. And we're investing for growth. We have a strong balance sheet with more than a billion dollars in cash available for opportunistic additions to our already powerful portfolio. In all, we're very positive about our momentum and where we are at this moment. We have high conviction in the value that we bring to customers and our strong market leadership. We look forward to continuing to update you on our progress throughout the year, and we thank you for your interest and support as we work to deliver value to our customers and shareholders. I'll now turn the call over to Lyndon.
spk03: Thank you, Steve. I now refer you back to the slide deck available on our website, turning to slide three for some highlights. First quarter revenue was $178 million, up 28% year-over-year and up 30% sequentially. This is up 7% on an organic year-over-year basis when you exclude estimated COVID impacts. In products, we delivered 15% organic growth excluding COVID, driven by 23% growth in automated systems and 16% growth in CNI. In services, organic growth excluding COVID was 4%, led by our sample repository solutions business up 10%, and within our genomics business, our next-generation sequencing business was up 12%. On a sequential basis, the significant expansion in the quarter was driven by the addition of B Medical, which closed on October 3rd. The B Medical team achieved a record level of revenue for their business with $42 million in the quarter. When I consider our Q1 revenue results, our base business came right in the range of our expectations, and while B Medical had a record quarter, It was a bit short of our expectations. As we have described previously, revenue in this business can fluctuate each quarter due to project funding dependencies. Non-GAAP EPS was 12 cents, flat year over year. GAAP EPS was a loss of 15 cents and adjusted EBITDA margin approximately 7%. As Steve discussed in his remarks, we're taking several decisive actions to best position the company for long-term success. In light of continued inflationary and margin pressures, we recently initiated actions to fine-tune our business structure, removing cost in certain areas while making targeted growth investments in others. We expect to net approximately two points of cost reduction to contribute to margin expansion for the second half of fiscal 2023. You should expect to see the impact of these actions in our third quarter financials. Moving to an update on capital deployment, As we announced during the last call, we entered into a $500 million accelerated share repurchase program, which we expect to complete by the end of the third fiscal quarter, ending June 30th. In total, we still plan to return approximately $1 billion to shareholders within this calendar year. Beyond share repurchases, we remain focused on capital deployment in the form of investment and M&A. After the expected $1 billion return to shareholders, our balance sheet will still have over $900 million in cash resources available for strategic investment. In all, we have a strong portfolio, are well established in high growth markets, and we believe the actions we are taking should position us to deliver results over the near term and into the future. Let's move on to slide four to address the first quarter results. As mentioned, revenue of $178 million was up 28% year over year, and up 30% sequentially. To the right, we have provided a table to show the color on the reported revenue. From reported revenue, we removed four points of foreign exchange headwinds and revenue of $46 million from acquisitions, which provides an organic decline of 1%. From there, when we removed the impacts of COVID, which was an estimated $11 million of revenue in Q1 of fiscal 2022 and was approximately zero in this quarter, On a year-over-year basis, organic growth when excluding the estimated COVID-related impact from each period was 7%. Looking at the P&L on the left side, total gap earnings per share was a loss of 15 cents compared to a loss of 7 cents in the fourth quarter of fiscal 2022. Compared to the prior quarter, Increased expenses include costs associated with M&A, our accelerated share repurchase program, as well as the amortization impact of purchase accounting adjustments. Now, let's look at the non-GAAP P&L on the right side of the page. The revenue increase of $41 million quarter-to-quarter carried higher gross margins, up 150 basis points to 45.4%, primarily driven by the services segment and the addition of B-Medical. Operating expense increased $23 million quarter over quarter, with $13 million of the increase coming from B-Medical, $7 million coming from the annual reset of stock compensation and variable compensation accruals, and the remainder due to various corporate and commercial expenses, which translates into approximately 7% adjusted EBITDA margin. Now, please turn over to slide five for a review of our life science product segment results. As you can see in the results today, we have determined that the B Medical operations will be reported as part of the product segment. With that, product segment revenue totaled $90 million for the quarter. The acquisitions of B Medical and Barkey contributed $42 million and $4 million, respectively. First quarter revenue was up 80% year-over-year on a reported basis, substantially driven by the B Medical and Barkey acquisitions. Product segment organic growth, excluding COVID, was strong, up 15% year-over-year. This was supported by large automated systems, which grew 23% year-over-year during the quarter and was supported by robust bookings, which we have noted in recent quarters as those bookings have begun to translate into revenue. In consumables and instruments, our business most impacted by COVID, we are starting to show some demand improvement from new and existing customers. resulting in a quarter-over-quarter increase of 3% in revenue. Organic growth, excluding COVID, on a year-over-year basis for this business was 16%. We have one more quarter of tough compares from COVID-related revenue, but the ex-COVID growth in Q1 is a strong indication of the growth capability in this business. Products' first quarter gross margin was 43.2%, up 300 basis points quarter-over-quarter. Excluding B medical, gross margins were roughly flat from Q4. Operating income was $3 million for the quarter compared to income of $4 million the prior year. This year over year decline is due to gross margin softness on lower revenue as well as increased SG&A expense. Adjusted EBITDA margin was approximately 8%. Next, please turn to slide six for a review of our services segment results. The services segment generated first quarter revenue of $89 million, a decrease of 1% year-over-year. The organic growth for the quarter, excluding COVID, was 4%, reflecting 2% growth in genomics and 10% growth in sample repository solutions. The genomic services performance was led by next-generation sequencing, which grew 12% year-over-year on an organic ex-COVID basis. We saw notable growth in some larger accounts, which are increasingly recognizing the value of our customizable solutions that offer industry-leading speed and convenience. In Sanger, first quarter tends to be seasonally lower, and we saw that in our results this time as well. In gene synthesis, we continue to see softness as well as modest impact from the China COVID outbreak. The logistics challenges in gene synthesis that we discussed last quarter for business shipped out of China have largely been resolved, and we believe the sales initiatives we have in place will continue to gain traction over the coming months. Sample Repository Solutions' organic growth, excluding COVID, of 10% year-over-year was once again driven by our storage revenue, which grew 18% and continues to expand our recurring revenue base. This quarter, our storage business benefited from addition of another large biotech customer, This win, similar to others we have mentioned in the past, demonstrates the value we bring to customers in our core capabilities in and around our sample management. Services business delivered 47.6% gross margin, 170 basis point expansion quarter over quarter, driven by next generation sequencing, with a year-over-year drop of 360 basis points still reflecting inflationary pressures as well as lower volumes in gene synthesis. Q1 operating loss was $3 million due to the lower gross margin as well as higher operating expenses. Adjusted EBITDA margin was 4%. Let's turn over to slide 7 to review the balance sheet. As of December 31st, we had $1.4 billion of cash, restricted cash, and marketable securities with no debt outstanding. As noted previously, we completed the B medical acquisition for $424 million in cash 43 million of which was B medical debt that we paid down in fiscal 2022 ahead of the close. In late November, we used 500 million of cash to enter into an accelerated share repurchase program. We remain committed to returning an additional 500 million to shareholders this calendar year for a total of approximately 1 billion in cash to shareholders. Beyond this, we continue to invest for growth, both organically and through M&A, with a clear lens toward deals with returns that exceed our weighted average cost of capital within five years. The balance sheet changes significantly due to the addition of B-Medical. You can see this in areas including goodwill and intangibles, but also in property, plant, and equipment, with the addition of B-Medical's manufacturing assets and their rotomolding capability, as well as inventory, receivables, and payables. Let's turn to the final slide for our guidance. Revenue is expected to be in the range of 156 to 171 million with a midpoint supporting growth of approximately 13% year over year. This includes an organic growth rate excluding COVID of approximately 2% at the midpoint. We estimate the foreign exchange impact to be a headwind of three points and the revenue from acquisitions to be a total of approximately 30 million. That is approximately $4 million for Barkey, and we expect B Medical Systems to contribute approximately $24 to $27 million. We expect products revenue, including acquisitions, to be in the range of $72 to $79 million, as we expect the base business to increase a couple of million quarter to quarter and B Medical to show a decline quarter over quarter as it comes off of its December quarter, which tends to be the busiest of the year for vaccine cold chain orders. In all, the product's guidance supports a low teens organic growth rate when excluding the impact of COVID. We expect services to be in the range of $84 to $92 million, reflecting roughly flat quarter-to-quarter revenue in both SRS and genomics at the midpoint of our guidance range. Adjusted EBITDA is anticipated to be approximately $2 million. Non-GAAP earnings per share is expected to be break-even, plus or minus $0.04 per share. And as you can see in the guidance, our second quarter is stable in the base business and reflects the lower March quarter for B Medical. From a profitability perspective, we anticipate second quarter to be the low point in our fiscal 2023. We expect the cost actions as well as the strategic investments to show tangible progress starting in Q3 and together We expect these efforts can support our full-year expectations for revenue and that we exit the year above 10% adjusted EBITDA margin. In conclusion, we continue to see indications of momentum and we are taking actions in our cost base to set ourselves up for success and to deliver profitable growth. Lastly, we will continue to return cash to shareholders while maintaining an active stance on the M&A front. As always, we will continue to provide updates on our progress throughout the year. This now concludes our prepared remarks. I will turn the call back over to the operator to take your questions.
spk05: Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge that request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. And your first question will come from the line of Jacob Johnson with Stevens. Your line is open.
spk07: Hey, good evening, everybody. Lyndon, maybe just to start on the guidance that you just touched on. I think you're still kind of targeting the same 30% revenue growth, but it seems like maybe margin expectations have been pushed out a little bit, and you're talking about taking some costs out of the business. Can you just talk about kind of what's changed now versus the 4Q print in terms of kind of cost and margin expectations?
spk03: Yeah. Jacob, I think you captured the top lines right, that being – We still see ourselves getting to 30% revenue growth for the year. With that said, we do see the margin pressures in the first half being a little heavier, and partially in reaction to that, also an opportunity to gain some efficiencies and effectiveness in our operations. We've taken some actions. And as we do that, that's going to enhance some of that cost equation. offset of those actions in total. We're taking about $5 million a quarter, $20 million of cost out. And at the same time, we'll be proceeding with some fairly selective and specific investments to continue to drive growth. So with that said, though, with the margin pressures we have in the first half, You're right. Previously, we had identified that we would be about 10% or better on EBITDA margins for the year. Here we're saying we'll be at 10% or better by the fourth quarter.
spk07: Okay. Thanks for that, Linda. And then, Steve, if I heard you correctly, it sounds like you saw kind of an acceleration in growth from the cell and gene therapy end markets. you know, I think this earnings season, you know, I think that market's relatively healthy, but there's been some pockets of weakness. And I think we've seen some other companies where maybe growth's decelerated a little bit in that end market. So can you just talk about kind of what she saw from that end market and what, you know, what drove the pickup in growth from cell and gene therapy?
spk09: Sure. So actually, Jacob, we were surprised a little bit by the magnitude of the increase, but I think we attribute it to some new offerings that we have. We have some AAV services they were able to provide. The team has been really aggressive going after the opportunities there. But the breadth of the offering, we think, is great. In rough terms, 60% of the cell and gene came from the genomics, GeneWiz business, roughly 30% from products, and roughly 10% was from SRS. So the complete offering seems to be pretty attractive. We do believe that the offerings are necessary We'll see as we win projects. This might be a little bit lumpy, but in general, as we've added customers, we think this is a sustainable type of momentum, and we're really pleased by the performance. I don't know what to expect for the next quarter, but the engagement with customers is stronger with each quarter just because of the value of the scientific offerings that come from the GeneWiz team.
spk07: Got it. Thanks for taking the questions.
spk05: Your next question comes from line of David Saxon with Needham. Your line is open.
spk06: Yeah, good evening, guys, and thanks for taking the questions. Maybe I'll start with SRS. The storage part of that business was really strong. I think you said 18% going from a million samples a quarter to now a million per month. So just wondering kind of how much visibility do you have in that storage part of the business? And is kind of high teams a good starting point, you know, in terms of revenue growth for that storage part for the year?
spk03: Yeah, David, let me start, and Steve will add some color on the customer demand side. But first, you're exactly right in your reference. I'll just add clarity for everyone here. We highlighted we saw 10% organic growth ex-COVID and SRS year over year. Inside of that, we have multiple elements of service delivery, but the largest piece is storage, pure storage. That includes primarily off-site storage, that being sample stored on our locations. It also includes a little bit of on-site storage for services that we perform for customers at their site. It's getting to be more prevalent. But with that said, the total of that grew 18%. And the nice thing about that is that that represents samples going into the freezers, which is our recurring revenue base. So now you ask about the line of sight. The nice thing about that is once samples are in the freezers, we know they tend to stay there. So it gives us a more solid recurring revenue base. So that part of it's clear. I've often described this as a business with seasons of high growth, seasons of low growth, simply because we're accumulating millions of samples. And so each period where we show growth, that's growth on a pretty large base of samples in the freezers now. So you can see that this is a momentum of really an outsourced adoption rate business, where the outsourced demands are increasing. And so the line of sight is good on the base revenue. Seasons of higher growth, lower growth are going to still continue. I would not highlight high teens as being a starting point. I think the 10% organic growth on the total stored SRS business is probably a good starting point, plus or minus to that overall. But there will be times we're up in the teens. And if you recall, we went back a couple years ago, we said, We said it wouldn't be unusual to show us in the mid-teens, so certainly some may be projecting that. I think in these environments, the outsourced adoption rate seems to have momentum, so somewhere between that 10 and mid-teens. But Steve may add some color to the types of demands we're seeing here. So, David, I'll add a little bit.
spk09: I think, as Linda mentioned, when we first got into this business, most of the SRS business was archival storage. and the capabilities we have to manage samples in a way that's really beneficial to customers has allowed us to change the business pretty dramatically. We talk about automation and our ability to handle samples. Now we're able to participate in clinical trials. We can help the customers by doing aliquoting, by moving samples in and out much more frequently than we did before. So we are an element of what they used to have on site or they maybe had done historically at a CRO. and our ability to touch and manage the samples on an inbound and outbound is an efficiency play for them and a pretty dramatic change to the nature of what we're able to offer to them. So a significant amount of touches, a large increase in the storage revenue and our ability to store, but one of the reasons we're getting more storage business is our ability to literally manage the transit, the traffic, and the samples for clinical trials. So it's a pretty dramatic expansion, and it's one of the reasons you hear us talk so much about automation. Our need and ability to handle not just a million samples a month, but eventually millions of samples a month is going to depend on our ability to handle these samples. So in terms of line of sight on the dock in freezers at the receiving area of the facilities, we always have line of sight to what's there But our challenge has been to process those as quickly as possible, to get them into storage and to manage them on a short cycle for customers. And that's where we put all of our focus. So we anticipate the direction of the business is good. The volumes will increase, and the better we get at it, the more customers will continue to allow us to participate in their workflow, not just in archival storage. And that's the transformation that we've seen.
spk06: Okay, yeah, that's super helpful. And then maybe on M&A, I mean, all the M&A has been on the product side so far. So I just wanted to ask, is that because you see more portfolio gaps on the product side, or is that just where the deals have crossed the finish line? And then going forward, how should we think about where you're focusing on adding through M&A? And thanks so much.
spk09: Yeah, so I think your observation is correct. Things have been on the product side, and those are more about being actionable. We have a pipeline that's equivalent on the genomic side, and we're interested. And I think you could imagine that we're active in both areas, and there are capabilities that we'd like to add. And as they become actionable, you'll see us participate.
spk06: Got it. Thank you. Thanks, David.
spk05: And your next question comes from the line of Paul Knight with KeyBunk. Your line is open.
spk08: Hi, Lennon and Steve. Could you talk to the – what percentage of revenue is selling gene therapy? Is it 10%?
spk03: Yeah, overall, we're at the 10%. We're just starting to cross over there. And I should highlight that we haven't captured that – For B medical, so that's excluding the B medical revenue equation.
spk08: Okay. And then obviously the life science services was the slower growth portion, and I'm guessing that's part of going to continue in March. Is it oligo production specifically the slowest part of the business? And what's the trend there?
spk09: Yeah, so, Paul, you could imagine, I think you hit it right on the head. NGS was another record. The Sanger is a little bit seasonal, but that's really steady as we have thousands of customers. We've been slower in the synthesis side of the business. Oligo Productions, a small portion of the business, is gene synthesis. That's been a little bit slower. You know, we've got some green shoots that show that activity is good. We've got a lot of capability, a lot of capacity, high-quality capabilities, and this is where we're focused today. with our sales initiatives and sales efforts to get that back. So we're encouraged by where we are. It's just going to take a little bit of time, but the offerings are particularly strong, and we're bullish that we'll get this back on a good growth path by the year end. But indeed, that's been the soft spot for us on the genomic side.
spk08: And China, you said, was what, mid-single-digit growth? And the follow-on of the China question is, I know you would expand it in China to expand oligo production. Are you kind of getting to normal in China and oligo production in China? How's that?
spk09: Yeah, Paul, I'm going to keep bringing it back. The oligo production is mostly as a raw material for our synthesis business. We have oligo businesses. It's relatively small. But the production capability is very strong. This is about customers and engagement and getting back to customers. The growth in China on the synthesis side, both the oligos and the gene synthesis, was strong in China, in particular in light of the COVID environment.
spk03: And, Paul, I'll highlight, we actually just struck with low double-digit growth in China. And that was supported on the services side as well as product side. When I say that growth on both sides, and it's encouraging on the gene synthesis side there, we're quite competitive on the ground where we weren't exporting. As we mentioned on the call, one of the things that's held us back in other areas were some logistics issues in the COVID environment. But we've overcome that now, and we're putting sales power behind that again. I think we're starting to see just beginning signs of recovering some of those accounts. Okay. Thank you. Yeah, thanks.
spk05: Your next question comes from the line of Vijay Kumar with Evercore ISI. Your line is open.
spk04: Hey, guys. Thanks for taking my question. Lyndon or Steve, I just want to understand some of the numbers. If I look at just total rapid growth, Um, up, uh, up 28%. And I think your guidance, uh, guidance is for maybe 12% in 2Q at the mid point. Right. And, and, um, when I look at your annual guidance of 30% growth, uh, that would imply a 40% growth for the back half. Uh, just given where first half is shaking out, uh, what drives this, uh, second half acceleration? Um, you know, when I look at the organic guide for 2Q here, I think that decelerated ex-COVID from the 7% in 1Q to 2%, what's driving this deceleration in 2Q, and what gives us the visibility here for the back half guide?
spk03: Yeah, Vijay, it's a really reasonable question. Let me say we feel like in the first quarter we delivered really right on our expectations. Let me break it into two pieces. Our base business, excluding B Medical, is right on our objectives. and both businesses saw some signs of strength. There, what we're counting on in the second half, and this is consistent when we shaped the guidance last quarter, is that we would have low single-digit growth on the organic basis, ex-COVID starting, but that it would move toward low double digits or through low double digits, I said, to achieve that. And I think that's what we're seeing. We're seeing signs of momentum. We've got – we actually – we truly believe that the investments we're making are going to help further fuel that, and the efficiencies we're creating I think will also fuel that in the coordination of our business. On the other piece of the business, in B Medical, we fell just a bit short of the number we had in our midpoint. Still, as you said, it reached us up to 28%, but two reminders here. Lumpy business, so that attributes to why we were just a touch short, but we're not concerned because we know the projects and demands there are still there. It's just timing. The other aspect of this is we highlighted the December quarter every year in that business is the peak of the calendar year. That means you're going to drop off in the March quarter, and then you're going to be lumpy, and you can't project that it's linear at all, but that you've got fuel to carry you through the rest of the three quarters. And that's what we see, particularly with some significant orders that we know are coming but didn't come in the first quarter. So another way to talk about Be Medical is if you look at what we've inferred in our guidance, we'll be about half achieved in B medical by the time we get through the second quarter of that year that we've described for them in $130 million. We'll be pushing that needle. So we feel pretty good about that first half. The second half will show more growth in B medical year over year, obviously on a year over year basis, but it's not that it's out of the woods relative to what we'll have delivered in the first half.
spk04: Sorry, just to clarify that, Alan, so that B medical, $130 million of revenues. It looks like you guys are recreating the $130 million. Is that right? And I wasn't clear on the second quarter, 2% organic. What drives that sequential deceleration, XCOVID from Q1? I don't think the comps get harder. So I'm just trying to understand 2Q, whether timing or anything else that's going on.
spk03: Yeah. So one, separated again, so Be Medical first. Be Medical, it's a natural drop-off from a December year-end where budgets and project funding drives the December quarter, but less so in the first calendar quarter. On the base business, you're right, there's some deceleration of overall year-over-year compares on an organic basis. But in that, you're going to see, if you break it apart, you're going to see that the products business is still low double digits, ex-COVID, but that the services business is in single digits still. And the genomics business is still lagging the sample repository solutions business. I expect when we finish the second quarter, we'll still be talking about strength and SRS. and the momentum that we see, signs of momentum that genomics is still picking up. But both of those businesses will probably be talking about low, I should say, single-digit growth territory.
spk04: Understood. And if I could just maybe squeeze one more. Operating margins here, EBITDA margins, it looks like Q1 was maybe 0% margins. what's driving this year on your declines, right? I think last year I had you guys at high singles operating margins. And this 2Q, are we looking at negative operating margins, Lyndon? Because when I look at that EPS guidance of zero EPS at the midpoint, is that indicating negative operating margins in 2Q? No.
spk03: So first up, you're correct on the observation that we're down year over year. Those projections, or I should say those trends year over year, really were gross margin pressures. And of course, we've added structure to the business to absorb more and to take on B medical. But you're exactly right. Gross margin pressures are there. We haven't made that up. And with the actions we're taking, as I said, we'll take about $20 million of annual cost out. That'll be about $5 million or a couple of points. We'll net a couple of points net of investments in the second half. So that's somewhat reaction to that, but also to position us for more efficiencies. When you're looking at the... At the second quarter, you will be looking at negative operating profit in total, and that's very cognizant of our part. And, again, it will be a low point in the fiscal year, as I made in my commentary. We're confident of that. We've got two convictions very strong. One, we are seeing the signs of momentum on growth. We're going to continue to invest. We're not pulling back on that. But secondly, we're reinforcing it with the cost actions, and we are set on making it a more profitable-based business and set it for leverage going forward.
spk04: Understood.
spk03: Thanks, guys. Yep. Thanks, JJ.
spk05: And your next question comes from the line of Yuan Shi with B. Riley. Your line is open.
spk02: Thank you for taking our questions. Maybe you have covered part of this. So for genomic services customers, if we break it down to government and academic institutions, big pharma, and then biotech, have you seen different customer behavior change over the last quarter?
spk03: What I would say is we wouldn't indicate significant difference there. We have read, we see, you know, could we align academics to have a little bit slower spending? Are there constraints on spending budgets? I think there's a touch there, but it's a little difficult for us to call that a trend. In general, what we have seen is acceleration in NGS, and we see that across the board, but pharma, biotech, And academics participate in that space for us. So, Yuan, I just wouldn't call out a particular sector driving this weakness. We see this as somewhat market-centric. I'll highlight that, you know, the Americas have continued to be stable, and China grew pretty nicely overall. Europe is still lagging a bit in this space for us, and again, I don't know that that reflects markets. It could. I think challenges in Europe are certainly heavier, but we also see that we're a small player relative share-wise, leader in capabilities, but still small share-wise, and so there's lots of opportunities for us to win. That's where we'll be putting our investments in each market.
spk02: Got it. Maybe can you clarify on how you plan to reconstruct the sales regional structure? Does it mean more sales in a certain region so that they have more focus of their own?
spk09: Yeah, Yuan. Hi, this is Steve. Indeed, we have more, very specifically, more genomics focus in some critical regions. And, you know, we're hiring and training, but it requires, you know, there's a special talent there. But we're aggressive in our hiring. And in addition, you know, we're making sure that the teams are intact right now, and each one is filling out their specific positions. We do have a couple of regional gaps, and we're working hard to hire there. So I think we're making progress. We're pleased with the really exceptional talent we've been able to bring. but it takes a lot of work to find just the right people.
spk02: Got it. Thank you for taking our questions. Thank you, Jan.
spk05: And there are no further questions. Mr. Robertson, Mr. Schwartz, I'll turn it back to you for closing remarks. Thank you very much.
spk03: Thank you, David. Thanks, everyone, for tuning in with us. These are really key times for us. We're in a mode... As much of the markets I know that you're analyzing and looking to find the right investments in, we're at a juncture where, while growth is moderated, we're seeing positive growth. So we're talking about why our growth is positive but not as strong as it could be and what it has been in the past. We expect that we're, in making the right investments, we're headed toward, I believe, acceleration And that's our intent and objectives here. I'll highlight relative to some of the questions. We are tuning the sales team for that performance with investments. We're putting more demand generation dollars behind that as we right-size some of our structures. And so we're going to facilitate that market by market and facilitate it also with talent and skills that Steve outlined in his remarks. So with that, I look forward to not just delivering on the second quarter, but being able to talk to you about the progress that we see out of the second fiscal quarter headed into, I think, a stronger second half. And that's been our objective as we talked to you about that three months ago and where our convictions are today. Thank you very much. We look forward to keeping abreast of our progress as we move through the year, and we'll talk to you soon out on the street. Thank you.
spk05: And that does conclude the conference call for today. We thank you very much for your participation and ask that you please disconnect your line.
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