Azenta, Inc.

Greetings and welcome to the Adzanta Q1 2025 Financial Results Conference Call. 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 Store followed by the number 1 on your telephone. As a reminder, this conference is being recorded Wednesday, February 5, 2025. I will now turn the conference over to Yvonne Perron. Vice President at P&A and Investor Relations. You may begin.

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 2025. Our first quarter earnings press release was issued before the open 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 today during the prepared remarks. Effective this quarter, the first fiscal quarter of 2025, the results of the medical systems are treated as discontinued operations. 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 other 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 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. On the call with me today is our President and Chief Executive Officer, John Murata, and our Chief Financial Officer, Lawrence Lin. We will open the call with remarks from John, and then Lawrence will provide a detailed look into our financial results and our outlook for fiscal year 2025. We will then take your questions at the end of the prepared remarks. And with that, I would like to turn the call over to our CEO, John Murata.

Thank you, Yvonne. Good morning, everyone, and thank you for joining us today. We're happy to be with you in the morning rather than later in the day. And going forward, we will follow the same timing with the earnings release and the call before the market opens. This gives us more time for same-day interactions with our analysts, investors, and other interested stakeholders. Before getting into the numbers, I want to give you an update of how I've spent my time the first few months at Azenta. Since September, I've spent most of my time getting to know our business in the best way I know how, on the ground with our customers and our associates at our manufacturing sites and our lab facilities around the globe, including the UK, China, and the US. These meetings with our teams have been invaluable. They have given me a chance to see firsthand the incredible work being done and hear from those who drive our success every day. These visits have deepened my understanding of our operations, our opportunities, and most importantly, our people. I'm even more excited about what lies ahead. Alongside our highly talented teams, we've been making progress towards our accelerated goal of delivering profitable growth and long-term shareholder value. Our work is well underway to further enhance our competitively advantaged portfolio, differentiated products and services, and strong market positioning. The board, aided by the capabilities of the newly created Value Creation Committee, have been working alongside me and my team to focus on and oversee our strategic initiatives, portfolio optimization, operational excellence, and value-enhancing capital allocation. Our sample management solutions business is unique. I've had the opportunity to observe firsthand the highly differentiated products and services we deliver to our customers. To that end, we are excited that the UK Bio Center selected Azenta to expand its sample storage capabilities with the BioArch Ultra. The BioArch Ultra will deliver significant operational efficiency and reduce footprint through high density automated storage. The 16 million sample storage system includes our sample intelligence software solution with digitized library and warehouse workflows and the picking capability of up to 9 million picks per year. This is a clear testament to our market leadership position and reflects the trust and confidence that customers place in our capabilities and track record of delivering exceptional value. In our multi-omics GeneWiz business, I've clearly seen how much our customers consistently prioritize our high-quality offerings and trust the research expertise and consultative approach that our scientists provide to genomics analysis and scientific research. Across Tezenta, we have a talented team that is focused on enabling breakthroughs faster for our customers. Now I'll shift my focus to the first quarter 2025 results, our full year outlook, and then dive into key updates on the focus areas that I shared with you during the last earnings call. As a reminder, during the fourth quarter of 2024 earnings call, we announced our decision to sell B Medical Systems. Effective this quarter, B Medical is reported in discontinued operations, and I will not be discussing the business performance in my remarks. I'm pleased to share that fiscal 2025 was off to a good start with positive momentum on demand for our unique and differentiated offerings. On a year-over-year basis, organic revenue grew 4% and adjusted EBITDA margin expanded by 400 basis points. In multiomics, next-gen sequencing, gene synthesis, and clinical services were strong. And in sample management solutions, we saw growth in our consumables and instruments, clinical biostores, cryogenics, as well as sample storage. We remain cautiously optimistic about the gradual market recovery. We are confident in our outlook and are reiterating our full year 2025 guidance of organic revenue growth between 3% to 5% and adjusted EBITDA margin expansion of 300 basis points. Lawrence will go into more detail in our quarterly financial performance. At the last earnings call, I share with you that we're focusing on several key areas. The first is portfolio optimization. The second is operational excellence. And the third is value-enhancing capital allocation. Each quarter, I will update you on the progress we are making in each area. In portfolio optimization, the B Medical sale process is underway, which will help simplify our portfolio and will allow us to focus on driving revenue growth and profitability in our remaining businesses. We've engaged external advisors, but are still in the initial stages. We will update shareholders as this process develops, but won't be commenting further at this time. More broadly, our priority will always be to strategically review the portfolio on an ongoing basis and to ensure we are maximizing our full potential and creating value. We have made some early and positive strides in operational excellence. The efforts we are making will build the foundation for long-term value creation, reducing complexity and simplifying what we do and how we work each day. I am confident that by focusing on operational excellence and transformation, we will deliver best-in-class growth. Specifically, we started rolling out our business system and operating model. We brought together our top leaders for a two-day training on the business system and the implementation plan. The level of engagement and enthusiasm for the teams to learn a new way of doing business was encouraging. They understand the need for change. They demonstrated interest and curiosity in lean tools. We are equipping our leaders with the skills and the knowledge through participation in Kaizen events to become experts in the field, empowering them not to only excel individually, but also to lead and mentor others and amplify their impact deep into the organization. We are working to create an environment where continuous improvement and simplification is the way we work. The change in mindset will be modeled at the top and methodically cascaded throughout the organization. It will be challenging and sometimes bumpy, but we have a strong culture with winning instincts. The business system model will help drive our performance and further unify our culture. I'm excited about the road ahead. To measure our performance, we have carefully selected our key performance indicator, which we call core value drivers, or CBDs. These align our daily management and operating decisions with our strategy. The CVDs are broadly focused on revenue growth, profitability, customer-facing metrics for quality and on-time delivery, employee metrics on internal advancement and voluntary turnover, as well as working capital and cash management. We're starting to better utilize our information systems to provide more timely visibility and insights across the organization. Recently, our technology team quickly developed and rolled out a weekly automated sales report, which provides a visual dashboard to help focus deeply on running the business to see where we are off track and red and where we are on track and green. This new tool will allow us to prioritize and focus on addressing issues, identify countermeasures where necessary, and save valuable time and resources, and enable better, more consistent performance. This example illustrates the low-hanging fruit available to us. We have many opportunities like this that are highly achievable and can have rapid and meaningful impact on our performance. As an organization, we will be programmatic in how we spend our time. We are prioritizing customer on-time delivery and products and services quality, which will lead to gross margin improvements, indirect savings, inventory reduction, and importantly, improved customer experience and satisfaction. This will have immediate positive impacts on our profitability and how our customers see us, and organic growth acceleration will follow with a lag. In line with our priorities, we have scheduled three Kaizans for the fiscal second quarter. Two are in sample repository solutions, one focused on sample management workflow automation that will create efficiency and scalability, and the other on simplification of order-to-cash process to shorten cycle time and improve process quality. The third is in multiomics for improved payment capabilities to shorten the cycle from study inquiry to scientific results. These Kaizans will identify areas that will identify the need for more Kaizans starting the flywheel of continuous improvement. In January, we executed our corporate restructuring plan to right-size our G&A cost structure and reposition our resources. Simplification of corporate and operating company functions is critical to provide clarity and accountability while empowering our employees who are closest to the customer to make the right commercial decisions. We have restructured headcount and pushed R&D, quality, sales operations, finance, human resources, and other functions into the two operating companies. Each operating company will undergo an organizational transformation in the coming weeks to ensure an optimal go-to-market and commercial structure. We are freeing up capital that will be redirected to the highest impact growth investments in sales, marketing, and R&D. There is a sense of excitement and optimism in the organization towards the changes and increased clarity around accountability and decision-making. To help implement standard procurement processes, we are in the process of standing up a new global procurement organization. This group will drive direct material and indirect cost savings, optimize inventory levels, streamline our supply chain, and optimize our preferred supplier list. More to come on this in Q2. Finally, on the capital allocation, the value creation committee of the board was created in November. I'm working closely with the committee to establish the monthly framework where we will review progress on our financial performance, working capital initiatives, margin improvement, as well as evaluate potential investments. We will prioritize investment opportunities across the four levers, which are gross margin productivity, organic growth offerings, inorganic growth through strategic tuck-in and M&A, and repurchasing our stock. We will make our capital allocation decisions through a standard and robust returns-based process. As I mentioned before, we will compete for resources internally to unlock long-term shareholder value. I'm excited about Azenta's potential and confident in our ability to drive long-term sustainable value to our customers, our employees, and our shareholders. I will keep you updated on our progress.

With that, I'm pleased to turn the call over to Lawrence.

Thank you. Thank you, John. Good morning, everyone. Thank you for joining us today. I'm honored to be here with you for my first earnings call as the Chief Financial Officer at Zenta. Before we discuss our financial performance for the first quarter of fiscal 2025, I really want to take a moment to acknowledge the trust that you placed in me to help lead this great company. Additionally, I'd like to recognize the dedication of our entire Zenta team, who demonstrates every day their commitment to delivering value for our customers, fellow employees, and shareholders. I want to share my initial reflections following my first 90 days on the job. These past three months have been insightful and energizing as I've worked to immerse myself in learning the business, understanding the dynamics of our operations, and engaging with the talented individuals across the organization. I couldn't be more excited to be here. Azenta has a history of delivering value and innovation, and it's clear that the team is deeply committed to our purpose of enabling breakthroughs faster. I've been impressed by the resilience and adaptability demonstrated across the organization, particularly in navigating challenging market conditions. At the same time, after spending time with the team, it's clear to me there are numerous opportunities to enhance our financial performance. Streamlining our operations to work simpler and smarter while deploying technology more fully to automate processes and build robust capabilities will enable improved cash flow generation and accelerate profitable growth. These initiatives will not only help us address immediate priorities and challenges, but also sets the scalable foundation for sustainable long-term value creation. Now on to the financial results. As a reminder, the results we are referring to today, unless otherwise noted, excludes B medical systems, which is now reported under discontinued operations. I am pleased to report that we saw continued organic growth in our combined sample management solutions and multi-omic businesses. This demonstrates the strength of our portfolio and our ability to better address the needs of our customers in an ever-evolving and uncertain and still difficult market environment. In addition, our continued focus on cost optimization and driving profitable growth is positioning us well to improve margins to deliver strong and consistent results for our shareholders. To supplement my remarks today, I will refer to the slide deck available on our website. Turning to slide three for some highlights. First quarter revenue was $148 million, up 4% year over year on an as reported and on an organic basis. Both the SMS and multi-omic segments performed well in the quarter, given the continued challenging market environment, with growth in next-generation sequencing, gene synthesis, consumables, and instruments, storage systems, as well as sample storage. Non-GAAP EPS for the quarter was $0.08. Adjusted EBITDA margin was 9% in the quarter. This represents a margin expansion of about 400 basis points versus last year, demonstrating the impact of our transformation initiatives as well as our strong focus on improved operational efficiencies. Our results were impacted by certain one-time costs, including those related to executive compensation in connection with the recent restructuring of our management team. Free cash flow was $22 million for the quarter, driven primarily by lower accounts receivables and increased billings related to our storage projects. We ended the quarter in a strong position with $530 million in cash, cash equivalents, and marketable securities, which includes $27 million of cash held in discontinued operations. Now, let's turn to slide four to take a deeper look at our results in the quarter. Total revenue was $148 million, representing a growth of 4% reported and organic. In the first quarter, non-GAAP growth margin was 47.6%, up 270 basis points year-over-year. The improvement is largely a result of higher revenue, favorable sales mix, operational efficiencies, and certain non-recurring items recorded in the same period last year. Adjusted EBITDA margin in the quarter was 9%, up 400 basis points year-over-year. Again, non-GAAP EPS was $0.08 per share. With that, let's turn to slide five for a review of our segment results, starting with sample management solutions, or SMS. SMS revenue was $81 million for the quarter, up 3% year-over-year reported and up 2% organic, driven by growth in sample repository solutions and core products. Consumables and instruments, clinical and cryogenic store systems, and sample storage were the drivers of growth, which was partially offset by year-over-year decline in large automated stores due to timing. SMS first quarter non-gap gross margin was 47.8%, up 460 basis points year-over-year, mostly driven by operational efficiencies, sales mix, and the impact of certain non-recurring items recorded in the same period last year. Turning next to the multi-omic segment. Multi-omics delivered revenue of $66 million with a growth of 6% on both an as-reported and organic basis, demonstrating our strong execution in the face of several market headwinds. Next-generation sequencing grew 11% year-over-year. This was a third quarter of price stabilization and double-digit volume growth. Key large deals also contributed to the significant year-over-year gains, specifically in the North America and Europe regions. China delivered organic revenue growth of 7%, once again outperforming a market with macro challenges. Jeans instances grew 5% compared to last year, with great execution by our teams in China in what continues to be a tough market environment. Sanger sequencing revenue was down 11% year over year as we continue to see the impacts of the shift of sequencing technology. This pressure was offset by growth in PlasmaDZ, our ONT product, which continues to be strong and gaining ground. MultiOMIC's first quarter non-GAAP growth margin was 47.4%, up 30 basis points year-over-year, driven largely by the growth in NGS volume as well as labor and material productivity gains that helped to offset price headwinds. Next, let's turn to slide six for a review of the balance sheet. We ended the quarter with $530 million cash, cash equivalents, and marketable securities. Excluding discontinued operations, the balance was $503 million. We had no debt outstanding. Capital expenditures for the quarter were $8 million, of which $7 million was investment for growth and scale in our sample management solutions and multiomic businesses. Turning to guidance on slide eight, As you saw in our press release, we are reiterating our guidance for 2025 as we expect organic revenue growth of 3% to 5% for the full year, with multiomics to grow low single digit and sample management solutions to grow mid single digits. We are reaffirming our commitment to 300 basis points of adjusted EBITDA margin expansion year over year. In closing, my priority at CFO is to ensure that we deliver value to our customers, employees, and shareholders. This includes maintaining transparency, enhancing shareholder returns, and aligning our financial strategies with our long-term vision. I look forward to engaging with you regularly and sharing updates on our progress. This concludes our prepared remarks, and I will now turn the call over to the operator for questions.

Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press a star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press the star followed by the number two. One moment, please, for your first question. And your first question comes from the line of Jacob Jensen with Stephens. Please go ahead.

Hey, good morning, John and Lawrence. Thanks for the time. Maybe a couple questions on the headlines. Hey, good morning. A couple questions on recent headlines. First, John, you mentioned the UK Bio Center, BioARC win. Is there any way to frame up the size of that opportunity, maybe the timing of the revenues, and whether this is something that was contemplated in guidance? And then I guess along the same lines, I'm just kind of curious, how many other of these kind of BioARC ultra wins could be out there?

Yep, good question. And Jacob, thanks for your continued support here. So a couple things on our BioArk Ultra, as you know, that's our ultra-low, you know, high-throughput warehouse management system, sample management system, and biological management system. So it's got a lot of versatility on these end markets. From our perspective, that was in our guidance, and so that was contemplated there. We're really excited about the implementation of that. As you know, it's a POC business. highly customized and multi-millions of dollars. We have, just for some context here, I mean, we have seven quad banks in this facility already. So it's a continuation of our partnership with UK Biocenter, pretty important customer for us going forward. Lawrence, do you want to talk about phasing of this?

Yeah, I think, you know, as John said, the accounting for this is a percentage of completion, Jacob. I'm sure you're aware. You know, we expect the UK biocenters to be operational early in 2026. Got it.

Thanks for that. And then... Yesterday, there was a headline about Illumina being added to the unreliable entity list in China. I know it's probably early, but we're getting questions on it. So can you talk about any impacts that you could see from that headline to your NGS business in China? Or maybe another way to ask is, is there any way to frame up how large the NGS business in China is for you all?

Sure. So the team has done a nice job of anticipating this for quite some time in China. We do not own any Illumina products in NovaSeq specifically in China. We do have a few Illumina products internally. Most of our NGS business, we actually partner with BGI in China specifically. We run two platforms with them in particular on NGS, and that is the Illumina platform and the MGI platform from BGI. As you know, BGI was put on the list in Biosecure and a list at the Pentagon as well. Our partnership is only in China with that. And so we have the ability to move customers over to the MGI platform if needed. But again, the team in China has been anticipating this for quite some time. The risk is low. I'll let Lawrence quantify that in general. But we've been anticipating this for quite some time.

Yeah, Jacob, as you mentioned, you know, Really, when we look at the revenue for NGS, particularly in the region of China, it's roughly about 7%-ish to 10% of multi-omics. So, again, what John mentioned is we see no material risk due to the alumna issue.

Got it. That's super helpful. I'll leave it there. Thanks for taking the questions.

Thank you, Jacob. Appreciate it.

Thank you. And your next question comes from the line of David Saxon with Needham. Please go ahead.

Great. Good morning, John and Lawrence. Congrats on the quarter. Thanks for taking my questions. And I like the morning for the call. Yeah, of course. So just a few for me on multi-omics, maybe I'll start. So the guide stays at low single digits. You did 6% organic this quarter. It sounds like there were some orders that came in in this quarter, but You know, just given that guidance implies the deceleration in the back half of the year or the balance, I should say, you know, what's driving that? I think NGS comps get tougher, but like anything you're seeing in SANG or synthesis, that would drive that deceleration.

Thanks, David. Appreciate your comments here on the morning as well. It's good to be speaking with you in the morning. Let's talk about first the way we're thinking about this. We're looking at the full year. We're not looking at the quarters right now. Second thing is we are in the middle of a transformation, so we're holding that guide right now. We are going to be coming back to you in the summer with an investor day and kind of a view of our LRP in general. I want to hand this over to Lawrence to talk to you about phasing here and what this looks like quarter on quarter.

Yeah, and David, I speak with you. Look, as John alluded, it's mainly a timing issue here. We had a really solid quarter to your point, right? NGS was up 11%, so we're really pleased about that. As John noted, I think as we get closer to Investor Day, more to come here, but right now we've got a lot of change that's happening, and we're looking at the basin as well.

Okay, great. Lawrence, maybe I'll stay with you on margins, just, you know, really strong improvement in the quarter. It does seem like the guide implies EBITDA kind of margins kind of plateau in the back half. I don't know if it's just, you know, how you're thinking about the year versus the quarter, you know, it's still early, but any comments around like how much of that is conservatism versus you know, any timing from the Ascend 26 initiatives. And then just lastly on B-Medical, I don't know if this would be for John or Lawrence. I think last quarter you talked about potentially closing that in the fiscal first half. It sounds like this morning you're talking about still in the initial stages. So is the message essentially that it's going to probably take longer than that? Thanks so much.

Yeah. David, I'll take the margin one and maybe I'll pass it to John on the stats on the B medical. First foremost, you know, just kind of ground ourselves a bit. EBITDA for the first quarter was 9%. You know, I did mention during kind of the prepared remarks that we had some one-time events. Excluding some of those one-time events, we're north of 10% EBITDA. So it gives us a bit of a pathway towards kind of what we're looking at at 300 basic points. As we step through the balance of the year, John noted that we did a restructuring of the corporate function. That will also, it is within our guidance, and it is a couple million dollars to the balance of the year. We've got some more to come, but feel pretty confident right now with our guide based on some of the actions we're taking this quarter, but more importantly, what we've got in queue for the second and third.

David, a few other comments here. So in restructuring, about 17% of corporate we restructured. We're going to continue that transformation in the operating companies and making sure we've got the right structure to go forward. So the way we're framing this is it's around structure, process, and then our people is the framing of how we're setting the company up. In regards to Ascend 2026, you know, That put us on the right path. This is just going to be a way of life and how we run our business going forward. So we're going to I mean, we want to keep GNA at a very modest level in this company and then accelerate around sales and marketing and R&D in these growth investments. Right now, we're trying to. We're getting our resting heart rate in the organization to figure out what steady state looks like. We're really pleased with the progress the teams have been making. Restructuring at corporate was very well done. Hats off to our HR team and the rest of the leaders that executed that. And our operating companies are entering their transformational phase as well. As it pertains to the one timers that that Lawrence discussed, I mean, we're pleased about our trajectory financially on the bottom line right now. I mean, those one timers, if you if you back those out, we're pretty confident in where we're moving the bottom line right now and more in control there. In regards to Be Medical, what I can tell you is our Value Creation Committee board members are involved in that process. We're going to help accelerate that. We're very pleased about maximizing. Well, let me say it differently. We're focused heavily on maximizing the value of that sale, and we're pleased that the committee members are involved in that specifically. I think that's going to really help us partner with our outside advisors to maximize value. Listen, the funnel in regards to inbound and our outreach, I'm pleasantly surprised at how many parties are involved and interested in this business. So that's the update on that one, David.

Okay, super helpful. Thanks, guys.

And your next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead.

Hey, guys. Good morning. Thank you for taking my question. Good morning, Vijay. A couple of maybe macro-related questions. We've seen noise around tariffs. Can you talk about your exposure to China, Mexico, Canada, and any of the rest related to tariffs?

Sure. Let me talk about just... give you the high-level context, and then Lawrence will dive into the details if there's materiality there or not. As it pertains to Mexico and Canada, we have minimal risk. Again, our businesses in multi-omic specifically are set up regionally. It's a local-for-local model. We do have some global overlap around our synthesis business. In regards to SMS and that business unaffected, in China specifically, as you know, there's a 6.5% tariff in what's contemplated right now at 10. I'll let Lawrence get in the particulars of that in terms of materiality or not.

Yeah, BJ, good to be with you. In terms of China tariff, you know, looking at kind of a step up to 10%, we believe the impact to Zenta is really immaterial. Potential incremental, probably one, maybe two million at most. That would be at the upper end. Really, you know, as you think about this, we kind of know this was going to be happening, so we've really factored a lot of this into our guide. As you know, this is a pretty fluid situation, so we're kind of monitoring the developments here. And if the situation evolves adversely, you know, and the underlying understanding changes, we'll communicate that to you. But right now, we feel pretty good that it's a very immaterial amount for us.

Understood. And then maybe one on the guidance, you know, SMS. It looks like it was off in a slow start. I know the guidance contemplated mid-singles for sample management solutions. I think stores, you said low singles. So maybe talk about your orders, backlog. Was this just a timing element or some cautiousness from customers, perhaps, which we're seeing here in the numbers?

Yeah, Vijay, you know,

You're absolutely right. It's really around timing. Our large source in the first quarter was down 13%. However, we have a pretty robust pipeline and backlog. And it continues to build for 2025-2026. Just to provide a little bit of context around that, we've got a good line of sight for the next 12 months here. And we've got 75% of the 2025 revenue secured. So feel pretty good. Sometimes these capital projects do kind of move on us quarter to quarter, as you saw, similarly to what the UKBC did. came up, but we feel good. And on top of that, as you look at CNI, we continue to see really strong demand up in the quarter, about 9%, particularly in instruments. So again, mainly timing here, BJ.

Yeah, BJ, similar color here. So we were at SLAS last week. As you know, that's the biggest trade show in that segment of the market. we had a lot of inbound, over 300-some leads. We're pleased with the activity during that trade show. I think the other thing that we've learned, and we spoke with a lot of customers last week, I mean, personally, we spoke with a lot of customers, and there's some uncertainty in these end markets right now with new administration, but we think that it's more of a wait and see instead of canceling projects. Our sales leaders and our sales reps feel pretty confident with where we are in these programs. They're not seeing cancellations at all or delays. It's more of a wait-and-see approach we're seeing right now in these just first couple months. We feel pretty confident in our back half in general.

Understood. And maybe if I could squeeze one more in, gross margins, nice piece here in the quarter. Looks like there was some timing element on stock comp here in Q1 that perhaps depressed operating margins. When you think about the back half margin ramp, should gross margins sustain at these levels and visibility into that back half operating margin ramp?

Yeah, Vijay, you know, quite honestly, you know, in terms of the gross margin, really pleased with the results in Q1. We saw a similar profile last quarter, but, you know, a couple of positive things, right? We saw better margins within stores and the SMS business. Multiomics, we saw stabilization, NGS price, coupled with favorable sales mix, you know, and really operational efficiencies, right? And, you know, in general, we feel good about the gross margin trajectory here and then the investment opportunity.

Fantastic. Thanks, guys. You bet. Thank you, BJ. Thank you, BJ.

And your next question comes from the line of Matt Stanton with Jefferies. Please go ahead.

Matt, how are you? Good. Good. How are you doing? Thanks for taking the question. Maybe sticking with the theme on the recent noisy headlines, could you guys just remind us what the pro forma mix is within your academic and government exposure? And then within that, you know, what's directly tied to NIH and any kind of impact you've seen? I know it's early days, the last few weeks, but then kind of a choppy backdrop from a headline perspective within the administration, you know, anything you're seeing kind of in terms of activity levels at customers or things being pushed out. And then I assume that's kind of contemplated within the ARABAJA, the three to five guide, but if you just confirm that as well. Thanks.

It is contemplated in the guide. From an end market perspective, in general, so about 45% pharma biotech, about 16 academic, about 15 medical government, and we've got about 15 in emerging markets. The way I would look at this, Matt, is we've seen some pausing in or delays in some projects that are government-funded. We believe those are going to come back online once some decisions are made, either on the NIH front or outside of funding, government funding of some of these projects. So, again, we're able to respond to whichever way the markets are going based on the fact that there are always projects and programs going on. We toggle our call points based on that. I mean, the teams can move over and move over to more pharma and biotech in the event there is a pullback, slight pullback on research in other areas. So we're comfortable, but we're also monitoring the uncertainty out there in general in these markets. So that's kind of our view of it right now.

Thanks. That's helpful. And then maybe shifting gears a little bit, can you just talk about what you saw in the cell and gene therapy side in the first quarter? I think the last few quarters have started to see some improvement. Funding still may be a bit challenged, but there's some later stage programs ramping up. So I'd just love to see kind of what you're hearing and seeing from your customers on the cell and gene therapy side of things. Thanks.

Yeah, you bet. Last year, we saw our auto cryo business increase about 67%. Um, we have delivered, we've delivered about 11 units this quarter against that. So we're, we're, we're, we're seeing good progress in cell and gene therapy. I mean, that, that product is specifically sits under that, that value stream in cell and gene therapy, as well as our barky products. Um, we're, we're pretty bullish on that end market and we're seeing good, good traction there as well. It this year.

And that trend's continuing. Thank you. You bet.

Your next question comes from the line of Paul Knight with KeyBank. Please go ahead.

Hi, Paul. Hi, Paul. Hello. Great comments on Kaizen.

Thank you. Appreciate it, Paul.

The first questions I have would be, You know, the company has been, even before your tenure, buying stock. You know, we really didn't know what the margin target was, and I don't understand why there was such an aggressive share purchase program when there was no clear metrics out there on what business performance should be. So the question really is, as you are now on board, is there still a share buyback program available? Or will we wait to see what the business can return first? And then is there, you know, the likelihood that, you know, we could go back to what I think was a consolidator of the industry or you fill out on that? So two questions there.

Two good questions, Paul.

You know, we were at last year, we were with investors in our Q1. And this topic came up quite frequently. And our capital allocation framework is alive and well in the organization right now. And first, it's around gross margin improvement. And we're really focused around that specifically. The second is around growth initiatives and R&D and expanding our business lines and geographies. Third is around M&A and tuck-in. And last is share buyback. And I wanted to share that framework again because it's not going to go away. The teams understand that. The board is really focused around that. We're focused around that in the value creation committee. And so when I say share buybacks are last, everything competes against that fourth lever specifically. Right now, as we sit here today, we think there's much more opportunities in levers one through three. We see those opportunities. We're investing in those now. There's strict ROIC metrics around that, and we're head down and focused on that specifically. I think we're excited to get us into this steady state model where we can come back and to you all with a clear-eyed view on what is the algorithm of this business, what does it look like from a returns perspective? There's still work to be done there, Paul, but in general, that's the way we're thinking about it. And once we have that, then we can come back with a better answer around that. I don't view, you know, I've been pretty candid around this. I don't think that their shareholders hire us to do share buybacks. And I think the opportunity we have in front of us specifically around SMS and SRS and some other business lines and multiomics really excites us around our investment opportunities, but also at a certain point around M&A and when we get us into a good place to start to do that type of work.

Great. And then last question, I guess it's been asked about, but You know, it seems like this post-COVID era of overcapacity and ultra-cold temperature and even cold storage in general, it seems like, you know, we're starting to get past that glut of material and capacity that did emerge during COVID. So are we kind of in one step past it now? Or what's your feeling on, you know, where we are with this post-COVID hangover?

You know, as you know, we have some experience in the ULT market from my prior life. But thankfully, we've never, you know, I understand kind of the investment community lumps us into that. And I don't think that's the case. The more I get into the business, the more I'm kind of scratching my head, wondering why that we're being kind of lumped into that end market. And let me be more helpful here, Paul. So if we think about our stores specifically, those units are basically asset management units or warehouse management unions for highly valuable assets in pharma and biotech, specifically around compound management. specifically around sample management. And we're also seeing this around antibodies and using these as warehouse management systems and PIC systems for shipping of these products. Those are three different applications that a ULT just, I mean, you may get some support there, but it's very manual process. I mean, we're not seeing that overlap particular so we're pretty excited about these other applications and how they sit in other end markets that maybe you wouldn't see on a broad Mecco chart but we're able to to meet the needs of these customers very uniquely because of our inventory management at the at the facilities at you know providing that service to our customers really excited about that I mean these these are highly sophisticated 12 access automated robots that are inside negative 80 degrees Celsius, that what sits on top of that is a highly sophisticated software program. You can access your inventory very quickly, whether that's in compounds, monoclonal antibodies, antibodies, and or samples. So pretty excited about that end market. But this ULT glut, you know, I don't think we've been a party to that because we've been growing well over that end market on the ULT side.

Super helpful. Thank you. You bet. You bet. Thank you for that question.

Thank you. And once again, if you would like to ask a question, simply press the star followed by the number one on your telephone keypad. Your next question comes from the line of Andrew Cooper with Raymond James. Please go ahead.

Hi, everybody. Thanks for the questions. Maybe just one into a little bit of an integrity on multiomics. I just want to make sure you made a couple comments about stability on NGS pricing, but there was one in there about price headwinds as a drag on margins. So maybe just help adjudicate or confirm, was that just, hey, you're a handful of quarters through stability and the comp is a little bit difficult, or is there somewhere else in that segment where there's a little bit of pricing pressure we need to make sure we're thinking about?

Yeah, Andrew, just to clarify, you know, we are seeing price stability in NGS. Just to reiterate, we had a great quarter there, 11% growth. So overall, yeah, That's kind of where the NGS businesses, you know, when you look at Sanger, you're going to, you know, we have challenges in Sanger, but that's kind of a shift in technology, right? We're down about 11% there. And the big thing is, though, it's a shift in technology. we are seeing a significant kind of upside in our ONT technology called Plasmid EZ. And that is up significantly. I believe almost 30, 300% year on year in the quarter. So hopefully that's helpful.

Andrew, some color here. Our Sanger business is seeing some headwinds, but I'll tell you, with 2,500 drop boxes in the United States, just alone, I'm not even going to speak to Europe and our infrastructure there. In the United States, we've got 2,500 drop boxes. Sanger's being disintermediated by the ONT Plasma AZ product. We're going to double that business this year. because of our infrastructure. We're very excited about the growth of this in general, and I think the team's done a really good job of responding to that disintermediation. We've got great capabilities there, and frankly, we're investing in it.

Okay, great. That's helpful. Maybe just one more on that side of the business, and I'll sneak a third in at the same time as well. But just in terms of gene synthesis, you know, one area that you guys have talked about kind of capacity and needing to add some in Indy, I think, and more kind of coming out of China there relative to other parts of the business. So just to be clear, you know, it's the takeaway on the China tariff response that even that business you feel relatively comfortable with kind of the moving parts there. And where are we in that capacity expansion you've talked about before? And then lastly, just John, the one comment you made on, you know, getting in that right spot where it's time to execute on M&A and tuck-ins again, what do you need to see in the core business to feel like you're at that point where it is time to get a little bit more kind of forward-looking and aggressive on the M&A front. Appreciate it.

Yeah, you bet. So let's talk about gene synthesis. Then we'll go to capacity and then the M&A piece. So the gene synthesis business has been a mid-single-digit grower for us, very steady because our customer base is – biotech and pharma specifically. I mean, that's the lion's share of our customers, less academics. And I want to share that openly because I think there's a lot of noise and there's a lot of misrepresentation out there in the market, specifically around synthesis. We compete in a very niche part of this market that no one else does. And the needs of those customers are very unique because they're looking at very complex, long reads. And that takes a bit of automation, which we have. We're about 40% automated on that. And the rest, we've got about 300, I'm sorry, almost 400 PhDs that support that business, both in the U.S. and in China. And so we've got great capabilities there, and we meet those customers' needs very uniquely. There's a competitor out there that operates highly automated on a chip, and so it's high volume, lower quality, but it's a different segment of the market. Again, we're positioned very nicely in that market from a high quality, high complexity, very high margin. It's a very high margin business for us. So that's kind of gene synthesis in general. As it pertains to capacity, you know, Andrew, we're very early innings there. I mean, we're trying to figure out in general, we go back to Paul's question around discipline, around capital allocation. You know, we're not going to rush into decisions around capacity. of the business quite yet until we've got absolute clarity there. The easy wins for us around growth and R&D and some commercial investments, we're making those today. As it pertains to capacity, we're increasing capacity and the team is doing a nice job. We'll come back to you when we've got a clear line of sight into that specifically. Regarding M&A, I think this is a case where We have to demonstrate credibility and capabilities. And in all candor, we haven't done a good job of that in the past. And so we're trying to change that specifically about doing what we say we're going to do and showing those results and doing that. At the end of the day, we own these results. And when we show a track record on quarter on quarter what those results are, we've got stability in the bottom line, very tight controls in the bottom line, and we're chasing the upside, meaning we've made those appropriate investments in strategic areas, then I can come to you and say, I think we're ready for some M&A. As I sit here today, we're not sure when that is. We may see some tuck-ins that are opportunistic around strategic parts of our business. We're not going to let those go. We have capacity to to bring on some tuck-ins, but more to come on that, Andrew, as we go forward here.

Super helpful. I appreciate it. Of course.

All right. Thank you. I'm showing no further questions at this time. I would like to turn it back to John Brodar for closing remarks.

Very good. Thank you so much. And thank you again for all your support. I want to thank our 3,000 employees that make Zenta special every day and appreciate your time this morning here.

Thank you, presenters. And this concludes today's conference call. Thank you all for participating. You may now disconnect.