Azenta, Inc.

Greetings and welcome to the Aventa Q2 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 Tuesday, May 9, 2023. I will now turn the conference over to Sarah Silverman, Head of Investor Relations.

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 second quarter of fiscal year 2023. Our second 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, the 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 second quarter. Then Lyndon will provide a more detailed look into our financial results and our outlook for the third 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.

Thank you, Sarah. Good afternoon, everyone, and thank you for joining us. It's one year since we established ourselves as a standalone life sciences company, a year of hard work and many learnings, but one full of optimism and reinforced conviction about our purpose and opportunity. Over this period, we got a lot of things right. We continued to invest in new products, services, and applications to stay on the cutting edge of this dynamic field, keeping us close to the customers who were at the forefront of discovery and drug development. We increased our capability and capacity to deliver on this demand. We made strategic acquisitions of three more market-leading companies that will be important contributors to our future. Barkey adds a critical application in the cell and gene therapy cold chain. Zyeth brings a technology enabler for sample workflow solutions, and Be Medical vaults us into a unique position to serve fast-growing emerging markets. Additionally, we secured key customer wins, further verification that our offerings do indeed have the potential to transform how our customers run their businesses, and cemented us as a true partner in their development efforts. At the same time, as we introduced Zenta and went to market under this new brand, We reorganized our formerly specialized product and services sales teams around accounts and broadened their scope to represent all Azenta offerings. Over time, we found that we were most effective when utilizing specific expertise of our sales personnel, particularly in complex areas of genomics and the innovative area of automated cryo storage systems. We've also realized the importance to reinvigorate strong brands like GeneWiz and Fluidex within the Azenta framework. Fortunately, as we've made changes to go back to product and genomics dedicated sales, we've seen direct positive results. In addition, we came out of the chute prepared for sustained growth, which didn't materialize, in part because of the transition I just mentioned. And now, facing a more challenging macroeconomic environment, we're left with much more cost than we need at this time. We remain confident in the tremendous value of our portfolio to serve our customers in the life sciences space. And today, we further define meaningful actions we're taking to better align for growth and profitability as we deliver on this promise. In my remarks today, I'll focus on four areas. One, the return of growth for our genomics business, in particular, the recovery of our synthesis business. Two, our significant actions and investments for accelerated growth, including a realignment to the company in support of this critical proposition. Three, additional cost reductions that come with this realignment. And four, a reset of expectations for the near term as we prepare to deliver the full potential of this business. I'll start, though, by summarizing the overall business for the quarter. Our Q2 results were mixed. Performance in our services business was solid and continues to track as expected. However, on the product side, especially B medical, we had some shortcomings in the quarter. On a reported basis, we delivered 2% growth. Organic revenue excluding estimated COVID impacts declined 2% in the quarter. Today, all of my comments on growth will be organic growth rates excluding the impacts of COVID unless otherwise specified. Looking at the business by segment, the products business declined 2%, reflecting a softer quarter than initially expected. In the consumables business, we witnessed lower revenue as destocking kept our channel partners lighter than expectations. We do think these effects are temporary, and are not impacting all customers. But the range of reports from various distributors gives us little visibility into how long we might expect the channel to be slower. For now, we see Q3 consumables and instruments revenue flat to Q2. In stores, the revenue shortfall was a different story as large automated stores revenue was impacted by three customer projects that were delayed because their facilities were not ready for installation. That said, the stores revenue impact is a matter of timing, and the revenue will be delivered in the coming quarters. We remain at record backlog levels for automated stores, and the backlog is secure, but it puts more pressure on manufacturing and installation teams as more projects ship in the second half of the year. In cryo stores, we shipped a record number of manual freezers, but our automated cryo systems slowed due to budget uncertainty at large pharma companies, which delayed our ability to book and ship tools. The B3C cryo systems are critical tools for cell and gene therapy applications, and we're the only commercial provider of automated systems. So although the timing of orders was delayed, we do anticipate capturing this revenue once customer approvals are finalized. We believe this pause is consistent with the reprioritization of clinical trials work that's making its way through some of the large pharma companies. The largest impact on our results came from B Medical, which delivered $15 million of revenue in the quarter, after a record $42 million in Q1, and considerably below our expectations. The lower result was primarily impacted by timing delays in the cold chain business. And though timing of revenue remains difficult to predict, we're encouraged by the pipeline of opportunities that the team has generated. We're focused on delivering on the benefits we expect from this highly capable business, but admittedly, the timing to achieve certain revenue milestones has changed. Still, the value of B Medical is enabling a large upside for Acenta in new markets. Importantly, B Medical was accretive to earnings in the first half, just not at the level we'd anticipated. In services, performance was solid with genomics revenue coming in at the high end of our expectations and sample repository solutions delivering as expected. We're particularly pleased that genomics is back on a positive trajectory. Against the backdrop of January COVID impacts in China and a decrease in funding for small biotech companies, we performed remarkably well in the quarter. We had two very meaningful takeaways in the quarter. First, we delivered a 6% sequential increase in gene synthesis revenue and good momentum entering this quarter. I know it's been a while since you heard me say that. In the quarter, gene synthesis served more than 250 new PIs, and we performed several successful pilot runs that are key leading indicators of follow-on business. This sequential growth is a combination of a few elements. One, the delivery issues we had from our China facilities are confirmed to be remedied, as quality and turnaround times are back to our best-in-class standards. Customers we'd lost had been coming back to us for exactly these reasons. They just can't get the quality or turnaround time from other suppliers. And lower price from competitors doesn't make up for long turnaround times or diminished quality of results. And finally, strong focus by our account teams was the reason for our strong wins. This solidifies the notion that dedicated, highly skilled salespeople are essential for success in this business. To add to our business momentum, we launched two new gene synthesis offerings. The first being circular RNA synthesis, which targets the fast-growing RNA therapeutics market, where we completed several pilots with large pharma accounts. The second is a high-throughput lentiviral packaging solution to support high-throughput gene editing screens. To be clear, we have much more opportunity across gene synthesis and confidence about our sturdier position in the market. In the rest of the GeneWiz business, NGS and Sanger perform to expectation, and both subsegments are poised for continued growth throughout the remainder of the year. To round out services, SRS as a whole grew 5%, as expected, driven by double-digit growth in storage. We're pleased with the continued inflow of samples to our sites, as well as the traction we're seeing with new and existing customers. We want additional business with our existing large pharma and biotech customers, and these wins are a testament to the strength of the business and the value proposition of the Azenta sample storage management offering. In addition, our first automated multi-million sample store at our Indianapolis SRS site has gone live and we're in the process of adding a second automated store, as we're convinced that the future of biorepository business must incorporate automation, and we continue to be ahead of the curve on that front. We believe we're increasing the competitive gap with each investment we make in the innovation of state-of-the-art sample management solutions. Cell and gene therapy revenue grew 7% in the quarter, driven by more than 20% growth in genomics and 60% growth in SRS. The lower level of automated cryosystems orders kept us below 20% growth for CGT business this quarter. As I mentioned at the beginning of my remarks, our number one issue is top line sales. And we now have proof points that the realignment of sales activities and structure is supporting our return to higher growth and largely in our control as customer demand for products and services we offer is clear. We further determined that realignment to the business units is also key to allowing our account executives to best align our products and services to our customers' needs. So today we announced a business realignment to enhance our commercial strategy and accelerate growth and profitability. These changes build upon the previously announced cost reduction initiatives aimed to streamline and optimize the business. After thorough assessment, we've commenced the following changes. One, Over the past four months, we've moved to realign marketing and increase go-to-market decision-making within the genomics business. To further expand on the success of these initiatives, we're establishing a separate dedicated sales vertical for this business to enable the business to move quickly and efficiently in the fast-turning sequencing and synthesis markets. Since we acquired GeneWiz four years ago, we've expanded both scale and sophistication of our offerings. From genomics offerings of Sanger and next-generation sequencing and gene synthesis, we've enhanced our scientific power to offer many more services, including proteomics, metabolomics, single cell analysis, digital spatial arrays, bioinformatics, and a host of laboratory services. This is now a multi-omics platform, and the need for focused, highly capable sales is even more apparent, and hence, our dedicated sales alignment to this business unit. This is all about scientists selling to scientists. In recognition of this expanded service offering, We're establishing this multi-omics business unit, which will continue to be led by Dr. Ginger Zhou, a 12-year veteran of GeneWiz. We're also combining all sample management capabilities into one organization. We've demonstrated that in the selling process, our sample management products and services complement each other well and often engage the same customer decision maker. To that end, we're combining our SRS sample repository solutions business with our products business unit, which includes cold store systems as well as consumables and instruments. This sample management solutions business will be managed by David Wine, the current leader of the SRS business. This business unit will also have its own dedicated sales organization focused on all things sample management. Finally, in this reorganization, B Medical will maintain its own structure. We believe the new structure will best align portfolio offerings to end customers, thereby enhancing collaboration and responsiveness. Over the past few months, we've begun to move resources in this direction. The next changes will be to crystallize certain leadership reporting lines and moving towards formalizing this new structure. In addition to bringing the needed focus of business units through fully aligned sales directly to customers, this restructuring will allow us to deliver an incremental $15 million of EBITDA by the end of this calendar year. This is in addition to the cost reductions we initiated early in Q2. Our objective and initiatives are completely aligned to restore growth and profitability for the long-term goals we set out at our analyst day in Q1 2022. We're delayed in our delivery of that performance, but we're committed to achieving it. We've already begun implementing the changes, which will deliver positive momentum into 2024. Finally, our capital position remains strong. We ended the quarter with approximately $1.5 billion of cash on the balance sheet, We remain active in our share repurchase program, and we've already spent more than $550 million to repurchase more than 11 million shares since we started the program in November, which represents nearly 15% of outstanding shares, a reflection of our confidence in the long-term prospects for the company. Even after our share repurchase commitment for fiscal 2023, we'll have roughly a billion dollars in cash available for strategic investments. As I've described in my remarks today, there are many positive indicators as well as initiatives in progress to support growth and profitability enhancement. These developments take time, but we believe are also the right steps to deliver long-term performance and shareholder value. This is a period of tremendous promise for Azenta. We uniquely provide a portfolio of best-in-class trusted products and services that enable breakthroughs faster, the value proposition at the heart of all investments in the life sciences space. We're investing more in innovation and market-leading capabilities. We're bullish about our prospects, not satisfied with our results, but doing just what we should to increase growth and profitability. That said, we use this time to recalibrate expectations for the next quarters. We look forward to updating you on our progress, and we thank you for your interest and support as we work to deliver value to our customers and shareholders. And I'll now turn the call over to Lyndon.

Thank you, Steve. I now refer you back to the slide deck available on our website. Turning to slide three for some highlights. Second quarter revenue was $148 million, up 2% year-over-year. The organic-based revenue was a little light on the product side, but in total still within the range we provided as guidance. As Steve commented, we are having difficulty with the predictability of the B medical revenue. So you will see us lay this portion of the business out as clearly as possible with increased transparency to what we see. Give me a moment to hit a few top highlights, and then we will go through each area of the business. First, I would like to highlight the progress made in the genomics business with a turnaround for the gene synthesis business as it expanded 6% quarter to quarter. We had experienced some disruptions in the logistics over the prior nine months and applied fixes to those immediate concerns, and at the same time, applied sales and marketing to win back customers. Second, the SRS business continues to deliver growth of 5% year over year on the organic basis, excluding COVID. This was led by double-digit growth in core storage as samples continue to accumulate. Next, we confirm the previously announced cost reduction actions were taken to enhance the adjusted EBITDA structure by two points of margin in the second half. This reflects removing 20 million of annual cost and expense and making some investments in sales, which combined will net to approximately 14 million annual enhancement to EBITDA. The second quarter benefited by the reductions by approximately 1 million. As we look into 2024, We expect to reduce another 15 million of structural costs through the integration and rationalization of our acquired product businesses. Finally, regarding capital deployment, in early April, we completed the previously announced 500 million accelerated share repurchase program. Under the ASR, we repurchased just over 10 million shares in total. And we were prepared with a 10B51 program that commenced immediately upon the ASR completion and progress is underway on our next 500 million of repurchases in the open market. This keeps us on track to repurchase a total of $1 billion in shares by the end of this calendar year as described last November. That will leave us with a very strong balance sheet holding approximately 900 million of additional cash and no debt with a path to continue high shareholder returns. Let's turn over to slide four to take a look at our results for the quarter. As already mentioned, total revenue was $148 million, up 2% year-over-year, and down 17% quarter-over-quarter. $27 million of the $30 million sequential revenue decline was driven by Bee Medical. This had a substantial impact on the details of our profit profile. The year-over-year reported revenue growth of 2% was driven by the acquisitions made over the past year. and you can see the bridge to the organic and estimated ex-COVID growth rates over to the right side of each page. After you exclude the effects of the acquisitions, foreign exchange, and estimated COVID impacts, the total business was down 2% year over year. Each segment will show the same decline of 2% on this metric. The services business performed just slightly better than what we expected for the quarter, and the products business was light, largely due to an underrun in consumables, and some delay in large system projects. The puts and takes in each segment are interesting to understand as there are positives in both segments. We will get to those details in a moment. Looking at the GAAP P&L on the left side, SG&A expenses were lower quarter to quarter and year over year, driven by a 17 million reduction in the accrual for the contingent consideration related to B medical. This was partially offset with operating structure we added over the past year, primarily from the businesses acquired. Below the line, you'll see we generated another 10 million in interest income this quarter, similar to Q1. GAAP earnings per share for continued operations was a loss of three cents. The 13 cent improvement quarter to quarter is largely driven by the change in the accrual for the contingent consideration for B-Medical. Looking at our non-GAAP results, gross margin was 41.1%, which was lower by 420 basis points versus first quarter. Each segment saw continued pressure on gross margins. For the clarity of performance, it is important to note the significant impact the lower B medical revenue had on our margins. B medical gross margin, which dropped 18 points to 29% on a non-GAAP basis, drove 1.8 of the 4.2 points of gross margin decline quarter to quarter. Excluding B Medical, the business declined 2.4 points quarter-to-quarter with similar pressures in both products and services. Operating expenses were $74 million, down $7 million quarter-to-quarter. I should clarify that the change to the contingent consideration which shows in the GAAP site is excluded from the non-GAAP. The operating expense reduction you do see in the non-GAAP site reflects a substantive reduction of commissions as V Medical maintains a nicely variable commission structure and with a lower revenue this quarter at 4.5 million lower commissions compared to the first fiscal quarter. The remaining decline was primarily driven by a reduction of variable compensation accrued driven by our performance expectations for the year. We also had a small benefit to OPEX from the previously announced headcount reduction. On a year-over-year basis, operating expenses were up $12 million. Roughly $10 million of the $12 million year-over-year increase was related to the acquisitions of B Medical and Barkey. The remainder was driven by increased headcount in the organic-based business partially offset by the lower performance-based compensation accrual in the quarter. Altogether, the lower gross margin combined with the factors on the operating expense line produced an adjusted EBITDA margin of negative 1.6%. The adjusted EBITDA line dropped 14 million quarter to quarter, of which the medical drove 10 million. We see this as a variable of timing, more than a weakness in the profile. But the dynamic is new to Azinta, so it brings me to emphasize this point. Now, let's turn over to slide five for a review of our life sciences product segment results. The total segment revenue was $59 million for the quarter, up 10% year-over-year, driven by acquisitions which contributed $19 million. B medical revenue was $15 million, which was lower than expected due to the delay of anticipated orders. We experienced this issue to a smaller degree in the first fiscal quarter and to a much larger degree this quarter. We believe these delayed orders remain in the pipeline as business to be received and delivered but cannot predict the timeline with reliability. We have come to learn that this is not a shortcoming in understanding of the business, but is simply the nature of being in a business subject to the decision making of governments and funding agencies. You can imagine we have attempted to form a model to predict timelines of demand. Our conclusion is that going forward, we need to provide you with full transparency of order load and a clear message that additional revenue beyond that is unpredictable. We will give you an indication of orders scheduled and the value of deals being worked. In this quarter, Bee Medical delivered 15 million of revenue. This compares to confirmed orders back in early February of 13 million. The team expected more to come in, but it did not materialize by the end of the quarter. For our Q3, the Bee Medical team has $21 million of orders in hand expected to be delivered. While it's possible other projects may come in, we will leave our Q3 guidance expectation at $21 million. The P&L consequences of the $15 million result are significant. You can see lower gross margin reflecting less absorption of fixed costs and weaker product mix. On a positive note, the B medical team has a highly variable commission payout, which brought the operating expense down by $5 million. With this full view, we hope to provide more clear understanding of the B medical factor in our business. Product segment organic-based business declined 21%. This removes all acquisition revenue and foreign exchange impact. The significant decline was driven by the estimated COVID-related demand in consumables in the second fiscal quarter of 2022, the last of the significant COVID demand quarters for Zenta. When excluding the estimated COVID impacts, the organic-based revenue was down 2% year-over-year with further headwinds in the consumables and instruments business. We see elevated customer stocking positions as the driver of this weakness. As we see similar messaging on this across the industry, we now estimate this will take some time to get back to normal growth on a consistent base, perhaps into 2024. The system's revenue grew 6% year-over-year as reported, and 9% on an organic basis. This was a deceleration of revenue delivered due to customer delays in facility readiness which surfaced in the quarter. This is not reflective of a demand issue as we have the large store orders in our backlog which gives us confidence in seeing this translate to revenue in the coming quarters. The systems team is working around customer readiness issues and proceeding with other projects And we expect some improvement in the fiscal third quarter and further improvement in the fourth fiscal quarter onward. Product's second quarter gross margin was 35.3%, down eight points sequentially. When we removed the 18-point sequential decline of B-Medical, the product's gross margin was down 2.6 points, primarily due to weaker product mix. Lower operating expenses helped to mitigate the margin pressures with the lower commissions and variable compensation expenses. These items resulted in adjusted EBITDA for the product segment of negative 8%. As you can see, the $12 million decline sequentially was substantively driven by B-Medical and the balance by the softer revenue in systems and CNI. Next, please turn to slide 6 for a review of our services segment results. Services segment generated second quarter revenue of $90 million, a decrease of 3% year-over-year, and an increase of 1% quarter-over-quarter. The organic revenue for the quarter, excluding COVID, was down 2%, with genomics down 4% and sample repository solutions with a growth of 5%, led by double-digit growth in core storage as we continue to accumulate sample storage. Genomics business showed sequential growth of 2% with a notable pickup in gene synthesis and Sanger sequencing, both growing 6% compared to the first fiscal quarter. The sequential improvement is a key indicator of progress for us. Genomics started the quarter relatively slowly and picked up into March. We are especially pleased with the progress in the quarter given the ongoing challenging market backdrop in which customers continue to point to macroeconomic pressures blowing down the pace and prioritization of spend over the near term. In synthesis, we're seeing results from our efforts to reinvigorate this business from both a commercial and operational perspective. optimistic about the turnaround here. Sanger was solid, demonstrating the stability and annual growth we have become accustomed to with Sanger, as well as typical quarterly expansion from Q1 to Q2. NGS was down modestly on a sequential basis, which is not an unusual seasonal trend in the March quarter versus December quarter. We actually saw NGS deliver just slightly above our expectations. Technology and demands for advanced capabilities continue to trend upwards. Our proteomics offering remains strong, and we continue to expand our geographic reach and technical capabilities for this service. And we were among the first to receive the NovaSeq X+, which now is in service. The services business delivered 45% gross margin, down 2.6 points quarter over quarter. Margin saw pressure from labor and facility expansion, as well as slightly weaker mix. Second quarter adjusted EBITDA margin for services was 6% and improved sequentially. Now let's review Azinta's balance sheet in slide 7. As of March 31st, we had $1.5 billion of cash, restricted cash, and marketable securities both short and long term. We have no debt outstanding. Our balance sheet remains strong with roughly $900 million of additional cash available for M&A opportunities and organic investments. As I indicated before in my remarks, following completion of the ASR, we commenced open market share repurchases under a 10B51 program and remain on track to repurchase a total of $1 billion of shares by the end of calendar year 2023. Let's turn over to slide 8 to address cash flow. Adjusted cash flow from operations was $7 million in the quarter. Capital expenditures for the quarter were $9 million. The negative free cash flow you see on the page was largely driven by tax payments related to the sale of the semiconductor automation company. You may notice that inside the second fiscal quarter, no cash was consumed from the balance sheet related to share repurchases, but this was simply due to the accelerated share repurchase beginning in the first fiscal quarter and not finishing until we were into the third fiscal quarter. Let's turn to the final slide for our guidance. First, a comment regarding COVID impacts. Going forward, beginning with Q3, we do not intend to project or report the estimated impact of COVID revenue, so long as it is a nominal amount on a go-forward and prior year basis. We believe the amounts of COVID-related revenue in our business will be nominal, as they have been for the past four quarters, and are reflective of a world that lives with COVID on an ongoing basis. If something changes in this regard, of course, we will provide information as we have in the past. With that said, third quarter revenue is expected to be in the range of 150 million to 168 million with a midpoint supporting growth of approximately 20% year over year. This implies an organic growth rate of approximately 2% at the midpoint. We estimate the foreign exchange impact to be a headwind of one point and the revenue from acquisitions to be a tailwind of approximately 25 million or 19 points of growth. This includes revenue from B Medical of approximately 21 million. For B Medical, given the unpredictable timing of revenue, it has just proven to be challenging for us to estimate a final landing point. So our guidance for this business is heavily centered around orders shipped to date and orders in hand planned to ship this quarter. We believe this provides a more reliable external view of the business. We expect products revenue, excluding B Medical, to be in the range of 42 to 50 million, including B Medical, Total product segment revenue is expected to be in the range of $63 to $71 million. We expect services revenue to be in the range of $87 to $97 million. An adjusted EBITDA is anticipated to be approximately a negative three to a positive six million. Non-gap earnings per share is expected to range between a negative seven cents to a positive three cents. The cost savings initiative that we announced last quarter remains on track, and we expect to realize 3.5 million of net benefit per quarter starting in Q3 as a result of these actions. As we look to the full year, it is clear that our results will likely fall short of our initial guidance. Much of the shortfall comes in the timing of our expectations for B Medical, but we are also on a slower ramp of growth in our organic businesses. We now expect revenue in the range of 645 to 675 million, which includes approximately 100 million from B medical. A note on B medical guidance. As I mentioned earlier, going forward, we will provide quarterly B medical guidance based on orders in hand. We provide a full year estimate as a rough expectation at this time, but you should anticipate us to update this and the Q4 number based on our actual order book when we get to the next quarter. With the lower top line expectations and the cost actions taken, we anticipate modest improvement in adjusted EBITDA margin as we exit the fourth fiscal quarter, setting us up for additional improvement in fiscal 2024. The last topic I would like to discuss before turning the call over to Q&A is our business realignment initiative. We believe the new alignment will further the goals of our commercial strategy, accelerate revenue growth, and ultimately drive profitability improvement. As we enter fiscal 2024, we will assess segment reporting. More directly related to guidance, we foresee in conjunction with a realignment, we will realize approximately 15 million of additional cost and expense reductions to further enhance EBITDA. Much of this will come through the integration and rationalization of the structures we have acquired. and some will come through the leaner management structure we will carry when we combine the base products and SRS business together for sample management solutions. In closing, the headwinds we are seeing in the business do not change the sizable long-term opportunity ahead of Azinta. We have a clear strategy in place, and we are executing to that plan. We remain committed to continuous improvement at all levels and to deliver long-term sustainable value for our shareholders. I will now turn the call over to the operator for questions.

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. Once again, to register a question, it is 14 on your telephone keypad. And your first question comes from the line of Paul Knight With Kibank, your line is open.

Steve, you had mentioned that you were going back to your first analyst day around, I think, Q1-22. You were targeting roughly a 17% growth rate and 26% EBITDA margins. It doesn't sound like you're guiding to that, but you're pretty much doing that. remains a goal. Is that right?

Yeah, Paul, we're certainly not guiding to it, but the fundamentals exist for us to get back there. So it's going to take us a little bit of time to continue to increase the growth rate quarter on quarter. But with all the opportunities there, all the potential in the company is still there. So that remains our objective. We're delayed by a period of time, but we haven't let go of those objectives because they're realistic for the business at hand.

And then what's broken down at B Medical? Is it more COVID there than you thought, or what caused it? I know that you anticipated 130 million on FY23. Now we're at 100. What's the gap there?

Yes, so Paul, we're learning on this business. I think the projects are still all in place. So there's nothing fundamental that's changed. You know, we watch the forecasting capability. We watch the opportunities that exist. The ability to get them closed finally is the part that is particularly tough at this moment. And if we look historically at the business, it's not It's not unusual that we see volatility at this level, though it feels a little bit extreme at the moment. But the pipeline is continuing to be served really well. These aren't competitive type C issues. When we have a project in our sites, we generally land it. And the fact that we've had a business we know that we've won, it's a matter of getting the contracts ultimately approved so we can get the product shipped. So I won't say that it's anything new. different from maybe what history was. It's certainly new for us. And, you know, we're going to continue to plow ahead. But without the visibility in terms of any kind of linearity, I think Lyndon laid it out really well. We're telling you where we are at this time in the quarter, as that's what we can count on. And that's really the guide that we've given for the rest of this quarter. Of course, there remains upside if projects can get closed. But we want everybody to know exactly where we are from a status standpoint on B-Medical so that we don't have another quarter where there's a surprise like we just had in Q2.

And then lastly, on my side, would be on the EBITDA margin, the direction here on the June and September periods. I guess, Lyndon, you said it's sequentially improved, but can you give any more granularity on an EBITDA margin as we exit fiscal 23? Okay.

Yeah, with some of the cost actions that we've taken, as well as albeit a little lower revenue than we were projecting previously, we'll still gain a little bit of incremental improvement. So, I'm looking for modest improvement as we exit the fourth quarter, but we won't be at the 10 percent level we don't anticipate. We're looking for modest improvement as we do in Q3 and then again in Q4, but we'll be in the single digits.

Okay, thanks.

Your next question comes from line of Vijay Kumar with Evercore ISI. Your line is open.

Hey, guys. Thanks for taking my question. Steve, maybe one on this back half guidance. I think the base business did, you know, low single-digit declines in Q2, and I think 3Q guidance is for up low singles. If I'm doing the math correctly, I think it implies Q4, up double digits organic. For the base business, XB Medical, is that math correct? And what drives this acceleration and back half? I think you touched upon a couple of things. Destocking, you know, customers, you know, pushing out orders, etc., but maybe talk about what drives the back half.

Yeah, I'll give you a little color on the organic ex-COVID growth. It is accelerating as you move through, but not quite to the degree that you're anticipating. So we see our midpoint, whereas we were just down 2% on our organic ex-COVID growth, We see our organic growth, and by the way, we're not adjusting for X code, only because there's not much there in either comparative period, but up about two points in Q3 at the midpoint and roughly up about six points, 6% in Q4. And so you're seeing that improvement track, but we're calling a pretty modest improvement on a year-over-year basis. And then, of course, as we go into... 2024, we think the actions and the realignment will further support. We're seeing good traction in genomics and SRS. And I would highlight, as we've reflected on this, we've seen the continuation of momentum as we've gone through the April month as well on both SRS and genomics. On products, we do see growth supported from large systems in the second half. As we said, we had some rescheduling here in the second quarter. We don't expect that to repeat. In fact, our team is very focused on making sure we re-slot the production as well as the install labor on the projects to be completed in the second half. So that will help support some growth in the second half as well. I would highlight, Vijay, in the product space, we still have a substantial amount of revenue in the C&I. And this is just something that, as we said last quarter, We just couldn't see whether destocking would be finished or not. This quarter was a disappointment, and we've seen it, and I've seen in the industry across other players that they've seen it as well. So we would say that C&I may take longer to get back. So we're not counting on growth from that, and that's part of the softer call here is in the C&I space.

Understood. And just one follow-up, gross margins here in the quarter, was this all just manufacturing variance just given the lower revenue base, or it's just the sequential 400 basis points? It seems like a big data. Was there anything else that went on on the gross margin line?

Yeah, so on the product side, for sure, like we called out, be medical on the lower production was by far and away significant. the bigger impact on gross margin, the biggest impact. However, once you remove B-Medical, both the rest of the products as well as the services business was down more than two points. On the product side, definitely on the system side, we had a bit of cost impact with the lower revenue that we put out. We actually saw some modest improvement quarter to quarter on CNI and in our services business and products. what outweighed that was the system side. On the services side, genomics and SRS, we did see pressures in those businesses as well. And I'll highlight to our investors, because we announced the realignment, we did provide in the back of our earnings deck, Sarah has captured some good historical data and the current quarter data on genomics and SRS gross margins for investor base, which we had not previously disclosed. So you'll see really clear data there, and you'll see about four points of pressure on SRS quarter to quarter and a couple of points in genomics. With that said, in the SRS business, we did have a credit memo that was put out that won't repeat itself. It was an unusual event for us And we see that put just a small tarnish on our revenue as well, but on our gross margin, it dropped through. So with that said, I'm still seeing strong momentum in SRS. I think margins will come back there in Q3, and it'll come back up some. And then in Q4, we'll also see a touch of enhancement on genomics. Expansion is there in both businesses. We could keep, you know, we put a little capital in SRS as well, but that's to support the growth. So we always have those kind of perturbations on depreciation, et cetera, but the momentum is there for enhancement as we go into second half.

Your next question comes from line of David Saxon with Needham.

Your line is open.

Hi, Steve. Hi, Lyndon. Good afternoon, and thanks for taking my questions. Maybe to start on the four-year guide, now expecting 20% versus prior guidance of 30%. I think that's about split evenly between kind of the reduction in B medical and maybe a five-point reduction for the organic side of the business. For the organic side, can you break out the reduction in terms of how much is being caused by these consumable, these stocking dynamics, you know, some of these large auto store order timing being pushed at, the synthesis recovery, and any other factors that you'd call out?

Yeah. I'm going to do my best. You're right in the ballpark. You know, we took down roughly $60 million in out of the growth projection, and about half of that, 30 million out of B Medical and 30 out of the rest of the business. A portion of that is on the, I would point to out of the 30 in products, it's probably close to half of it is in product, and let me say that differently. And in the 30 that's in the base business, about half of that is in the products. And we're seeing that just in the quarter that we gave you, we were about six short from the midpoint. And so we also factored that into the rest of the year on CNI. Steve highlighted that we're a little bit slower right now than we want to be on the cryo business as well. So you can see about half of that would be in the product side of the business, excluding B-Medical, just on the base. The other half, a little slower in genomics still in terms of the traction, but we're seeing the momentum for build. And so we do anticipate that will continue to expand. And then the smaller pieces, SRS. SRS is probably the most stable as it has been over the past year or two in terms of continued progression through the year and into 2024. Genomics, higher transactional base, but we're gaining steam, but lower than our guide in the 130, I'm sorry, in the 30% growth projection.

Okay. Got it. That's super helpful. Thanks for that, Lyndon. And then on the fiscal third quarter guidance, specifically for services, the low end implies that there could be sequential contraction. Just based off the comments you just gave, it sounds like SRS is, you know, not driving that. So, but I saw it in your prepared remarks. You mentioned genomics was picking up into March. So, I wanted to ask, you know, have those trends continued into the fiscal third quarter? And then, you know, with the sequential decline implied by the low end, would that really just be around the synthesis recovery? Thanks so much.

Yeah, no, I appreciate that question for clarifying. So, overall, we're seeing our services business expand a bit in the guidance from Q2 to Q3. As I mentioned, we had small credit memos issue in SRS, and we'll pick that up, and we're building some samples accumulation there. So we're seeing our typical modest expansion in SRS that just continues to go up every quarter. But in genomics, this is where we're really starting to see what we believe to be substantial progression of what we used to see. When I say that, it's not been so long ago where we would expand 2 to 3 million a quarter And in the midpoint of this guide, we're looking at about 2 million of pickup quarter-to-quarter on the genomic side, supported with some momentum in both, well, really in all three businesses. And we saw it in Sanger and gene synthesis in the second fiscal quarter. In the third fiscal quarter, we see it in all three, including NGS. And I should highlight, the second quarter NGS, is seasonally typically lower than the December quarter. So we feel good on the genomics that we're seeing the momentum. And I would highlight to investors, typically in the genomics business, you would get the 2 to 3 million. If you're at 3 million a quarter, you're at 5% expansion just on a quarter over a quarter. It takes that kind of momentum over four quarters, then you're into double-digit territory, starting to push the 20% on a year-over-year basis. And this is what we're aiming at. We said this last quarter would be the low point, and that going forward, we expected the repair actions that we had in place to put us back on track. And so I think as we move across these next four quarters, the watch point here is just continued quarter-to-quarter traction. And we're not fully there on all sales resources. We still have some investments that we're in path to put in place. But that's contemplated in the guidance, and we think the traction is building and still good.

Hi, David. This is Steve. A little bit to what Lyndon mentioned. We're pleased by the movement in genomics. We feel good about the focus and what it's generating. But I will say, as Lyndon mentioned, we're still behind on the hiring because we know there's a direct correlation between the skilled people we have calling on customers. So the improvements that we have are from existing customers for the most part. So business that we're receiving from customers who have always been our customers, I think if you recall our past, we also generated, in the past we generated a tremendous number of new accounts on a quarterly basis. And as we add more account people who are capable to help us from a selling standpoint, we'll get that back, and it'll help the long-term growth for the company. So we're keen to continue to add resources here. It's slow going because it takes a lot of skill to be able to represent these products, but we're really encouraged by the results to date. We think the new organization structure is going to serve us particularly well And you asked one more question about the momentum. Indeed, the March momentum that we had has continued into April, so it makes us positive about the outlook and how we're seeing the business here going into Q3.

Okay, got it. If I could just squeeze a quick one. In the Barkey contribution for the year, is that tracking around $15 million?

You know, we haven't disclosed them, but you're not far off. And, you know, we've been seeing typically a $3 million to $4 million revenue number quarterly from them. And what we saw this quarter, what we've noted is while we have opportunities between in the cell and gene therapy space with them and with our cryo product, similar to our cryo product, it's been modestly below $4 million instead of the $4 million plus we were looking at. And we do see this in a similar trajectory of what we've seen with the cryo being squeezed just a little bit. But big market with opportunities to continue to gain synergies between the two.

Okay, got it. Thanks so much. I'll hop back in queue. Yeah, David, thank you.

Your next question comes from the line of Jacob Johnson with Stevens. Your line is open.

Hey, good afternoon. Maybe for Steve or for Lyndon, just kind of a higher level question. You announced this realignment. You've got some efforts around the sales strategy, but it seems at least maybe from the outside, that B medical could be a distraction and maybe that's a lot going on. Did you just talk about the kind of capacity to focus on the realignment and whether or not kind of B medical makes that more difficult in the near term or not?

Yeah. So, Jacob, obviously the lumpiness of the B medical business is disturbing from the standpoint of any guidance that we can give. So, I'll reiterate the way Lyndon presented is the most straightforward way we think to present it to you. They are standing alone as a company, so it's not a distraction from that standpoint. I think you'll recall there's an earn-out period here where we need to make sure they have a chance to fulfill the opportunity for additional payment, but it's not a distraction for the company. There are some of us who pay particular attention to the opportunities there that they're booking now, but we are building capability based on the other promise for the businesses. How do we use it for Azenta's penetration in some of these markets? So it's an ongoing effort. It's a longer-term initiative. But from a management distraction standpoint, it's really limited. The team continues to run the business as they have.

Okay. Thanks for that, Steve. I just wanted to check. And then Maybe just kind of a macro question on kind of two fronts. You and probably most others have mentioned a more challenging macro. Can you just talk about kind of any impact as it relates? It seems like Cryo saw a bit of a headwind there. Is there any potential impact on the large stores? And then also, maybe just give you the opportunity, too, to touch on anything you're seeing out of China. We've heard of some softness from that region, but also some have others calling for strength there. So I'm just curious what you're seeing in that end market as well.

Sure. So Jacob, Linda and I will share the reply here. Let me give you a few. I think the macro environment that's causing pharma companies maybe to reevaluate some of their spend certainly had an impact on cryo because when we get larger numbers of cryo units to go for a particular manufacturing process, it's related to a particular drug. So we think that's likely some of it, but also because we're the only provider of that capability, when those decisions finally get solidified, we'll be shipping product to them. So I think that's one of the things that we've seen. On the large stores, we have more than 12 months' worth of backlog, so that's mostly our ability to reshuffle the priority there and make sure that we can take the delivery. So even if there was an impact of 20% on customers who are or aren't spending or shifting their ability to take a product, we ought to be able to accommodate. So we will see maybe near-term impact like we saw with ability to ship to facilities that weren't completed, but we do have the opportunity to burn down backlog and to get different projects staged for customers. And so when Lynn talks about our ability to increase revenue in the large stores on the back half, we think that's outside of any particular macro environment, would it slow the build of the backlog perhaps, but it shouldn't impact us here over the next quarters. And then finally on China, we had a slower start in January, obviously with COVID, but the team really came roaring back. So they performed particularly well in February and even more so in March. A lot of good momentum there in China. So we're on the side of the ledger where China's a positive. and Asia seems to be performing particularly well for us. The teams are aggressively going after business in China for China, and obviously it's our source for most of the synthesis work. They're ramping extremely well from a quality and on-time delivery standpoint. So we're really active, and for us, the China activities are pretty vibrant.

Got it. Thanks, Steve. Yep.

And your last question will come from the line of Yuan Shi with B. Riley. Your line is open.

Hi, Stephen, Linda, and good afternoon, and thank you for taking our questions. Maybe firstly, in the case of B. Medical only delivering $100 million revenue, can you remind us the incentive or the milestone payment related or in the acquisition agreement linked to the revenue part?

Yeah, it's a good question. We never put the target out, but you would note it, as I highlighted in the gap, we did reduce the value of that accrual. And I'll make it real clear, when we made the deal, struck the deal, the price included an opportunity for a $50 million earn out. We also disclosed the portion that we accrued We didn't accrue the entire amount because we felt that we had had an expectation that was in the middle of that target. We gave the team opportunity to achieve some that we thought was achievable. We also gave them some premium above what we thought was reasonable. So they've fallen off of that a bit, what we had accrued. We took about $17 million of what we originally accrued, $18.5 million out of the earn-out initially. And so they're not all the way down to the bottom with zero earn-out in our current accrual, and they still have opportunity to come roaring back. When I say they have opportunity to come roaring back, I don't want to put any indication there that we expect it to be more than $21 million this quarter. We're not being... I don't think overly conservative. As I highlighted last quarter, they didn't pick up a lot of orders beyond this point in the quarter. And so I've got to be cautious on that. But at the same time, I would highlight to you that the $100 million, we feel good about that. It counts on $21 million this quarter and about the same amount the fourth quarter, and we'll tune that as we get to it. But the projects that have been delayed, are still in the mix. And so we really don't have predictability. We may end up accruing and paying more of that out by the time we get to the end of the one-year period. And we would have no regrets about paying that out if we hit those numbers, of course. But right now, we've assessed it to be down. So I think you've highlighted a good metric there. We're not fully down out of the air now, but mostly.

Yep, got it. Thanks for the clarification there. And maybe, Linda, following on that, in addition to B medical, you may have covered this, but can you please clarify the reason for margin decrease across different business segments? I think we've covered several in the B medical part, but can you clarify the other business segments as well?

Yeah, so I covered a bit of this in one of the other questions. So let me try to be more concise. On the product side, it was more driven on the system, large systems pullback. And I highlighted that we had a modest improvement quarter to quarter in the second fiscal quarter on CNI and services inside products. But with the systems pullback and a little bit of mixed degradation, because consumables does have a good drop through, then that hurt us a bit in products. We do see some return of margin in the third fiscal quarter on margin in products, and so we have called that in our guidance. In the services side, we had about 2.4 points quarter to quarter decline And I mentioned that we did give some margin breakout between genomics and SRS. You'll see about four-point drop in SRS and about two points in genomics in the second fiscal quarter, sequentially, on a sequential basis. And so the two points in genomics take that to be a little bit of mix, a little bit of cost-poor capacity in labor, and we did implement, by the way, in this quarter, our salary increase plan, and that'll be a headwind going into the next quarter on a service-based business. But we do see a margin coming back a little bit in the mix of genomics, and significantly, when you add revenue, it's got a nice drop-through. In SRS, the four points, as I mentioned, had a credit memo in it that did impact SRS. We also had some expansion of facility. Again, we don't expect the credit memo. Those are really unusual for us. And when we come back in Q3, we expect you're going to see a little bit of bounce back on revenue and gross margin there. So, but anyway, Yon, follow-up, if I haven't made that clear, but a little pressure on both sides of business services and products, excluding the medical. And we see in our Q3 guide, we're counting on a little margin enhancement there.

Yeah, got it. Thank you for the clarification. That's all the questions I have.

Okay. Thanks, Yon.

And that concludes the question and answer session. I will turn the call back to Lyndon for closing remarks.

Thank you. Yeah, thank you. We really appreciate the investors and the shareholders support we felt in the past. And we know that this quarter was a disappointment versus the expectations that we set. At the same time, we also know that the opportunity ahead of us is ripe and it's significant for value. not just significant in terms of what we serve today, but very significant in what we expect to be serving in the future. So we see growth. We also see profitability, and we're taking actions to reinforce that. We highlighted that we already executed on the previously committed cost actions and that we had another $15 million of EBITDA enhancement to be ready for by the end of this calendar year. More importantly to us, is that the growth initiatives in the realignment will further that growth initiative to be successful. But those initiatives are taking traction. We do see traction as we go across the next two quarters, and we look forward to reporting on that. And hopefully we have taken some of the surprise out of the B medical variations, and by giving you a different premise for guidance, that being direct visibility to the orders we have in hand that we'll have removed that volatility and we'll update you as we move quarter to quarter on that business and take a little bit of the guesswork out of that. So we appreciate you tuning in with us and we look forward to following up with you as we go through the next quarter. Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.