Azenta, Inc. (NASDAQ:AZTA) Q2 2024 Earnings Call Transcript May 8, 2024
Azenta, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Azenta Second Quarter 2024 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, March 8 [May 8], 2024. I will now turn the conference over to Yvonne Perron, Vice President, FP&A and Investor Relations.
Yvonne Perron: 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 2024. 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 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, Steve Schwartz; and our Chief Financial Officer, Herman Cueto. We will open the call with remarks from Steve on the highlights of the second quarter, then Herman will provide a more detailed look into our financial results and our outlook for fiscal year 2024. 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.
Steve Schwartz: Thank you, Yvonne. Good afternoon, everyone, and thank you for joining us today. I’d like to start off by welcoming Yvonne to her new position as our Head of Investor Relations. Yvonne is steeped in the knowledge of all aspects of Azenta by virtue of the fact that she’s also been the leader of our global FP&A function for more than a year, and we’re fortunate to have her leading IR here at Azenta. And Sara Silverman, who many of you have gotten to know, has moved to become the CFO of our Multiomics segment. And of course, she’s flourishing in that role as well. Before we get into the quarter, I want to address the announcement that we made in addition to our earnings release about my decision to retire as CEO after more than 14 years at Azenta.
This decision follows the discussion with the Board as part of the company’s active succession planning process. To ensure a smooth transition, I will continue to serve as CEO until a successor is appointed. In the meantime, the Board has initiated a search to identify my successor and has engaged Heidrick & Struggles, a leading executive search firm, to assist in the process of identifying and evaluating candidates. I’m confident now is the right time for a transition and the Board agrees. During my tenure, I’ve been fortunate to work with the incredible people from whom I’ve learned much, and together, we accomplished some incredible feats, including transforming from semiconductor capital equipment company, Brooks Automation into Azenta, a stand-alone publicly traded pure-play life sciences company.
We’ve delivered outsized shareholder returns and yet it seems like we’re just getting started. At Azenta, we believe that’s the way all companies should feel. I also want to express my gratitude for the strong support of the Board of Directors that’s always been focused on delivering shareholder value and good governance. I’m confident that Azenta is now in a position of strength with annual revenue of almost $700 million and in clear pursuit of our Ascend 2026 plan, which will create further value for shareholders in the future. Being part of this incredible company for the last 14 years with such an outstanding team has been a true privilege. Now I’ll turn back to results from the quarter. Today, I’ll focus my remarks on a summary of solid Q2 results, our view on the current market environment and an update on our outlook for the full year.
Before I begin, I want to put today’s comments into the perspective of a company in transition. We entered the second half of our fiscal year positive about our prospects for the next years because of all the work we’ve done over the past years to get into this position. Specifically, we’re confident that the changes we’ve made to align the business units and sales organizations have fixed the company’s structure to best align our capabilities with our customers’ businesses. And in process, we successfully reduced annual expenses by more than $25 million, making us more efficient and putting us squarely on a path to accelerated profitability. Under Herman’s leadership, we’ve initiated a program we call Ascend to lift EBITDA to the high teens by 2026 and on a path to exceed 20% thereafter.
And we’ve developed and launched new innovative products and services in each of our segments that reinforce our ability to continue to outgrow the market in any environment by several hundred basis points. With that backdrop, we’re pleased to report that Q2 was another strong quarter, and we’re encouraged by the momentum we’ve seen in the first 6 months of the year. Even in what is still a down market, we delivered organic growth in all 3 of our business segments, a meaningful accomplishment in this environment. Now I’ll turn to highlights from the quarter. In Q2, we delivered revenue of $159 million, which translates to both the reported and organic increase of 7% year-over-year. I’ll briefly walk through each of the segments, beginning with Sample Management Solutions.
Revenue in the SMS segment grew 3% year-over-year and grew 8%, excluding the C&I line of business. Store Systems revenue was up 16%, our fourth consecutive quarter of double-digit year-over-year growth. Sample Repository Solutions was up 5% year-over-year. SMS is our largest segment and accounts for almost 50% of revenue. We’ve made strategic investments in highly differentiated products and service offerings, including the development of the BioArc Ultra store and in the move to automate our biorepositories. As we’ve detailed for you in the past, this market is fueled by two key factors: one, the sheer number of samples that are collected for future discovery; and two, the trend towards outsourcing of samples to our biorepositories for high-quality care and sample management.
We see a bright future for all things SMS as our customers increasingly recognize the value of Azenta’s sample management capabilities to improve their operations and speed to discovery. While the Life Sciences Services market continues to face headwinds, we’re pleased that the Multiomics segment revenue increased 1% year-over-year, meaningfully outpacing a down market. In the Next Generation Sequencing portion of our Multiomics business, we’re writing the next wave of technological advancement for research and discovery that enables processing of higher volumes of data at much lower cost. Our team is experienced not only on how to compete in this type of market environment but also how to be profitable. Our success formula is clear: invest in the latest technology, recruit top scientific talent and put capacity in place in advance of what we know will be high demand for this service.
We’ve honed this skill over several of these disruptive NGS technology cycles, and we’re added again. We currently have NovaSeq X Plus machines up and running in multiple sites. As an early adopter, we’ve already moved almost all of our NGS work to this technology. We’re delivering at the leading edge of what our customers need, and we’re working hard to deliver the better economics and superior cycle time our customers expect. In Q2, we saw modest organic revenue growth in Next Generation Sequencing on sample and data volumes that were again up significantly quarter-over-quarter. And while we met this increased volume, we were also able to hold gross margins year-over-year. In our experience from the last 3 generational shifts in NGS, we’re at pretty good point in the technology cycle and economics learning curve.
In another validation of our strategy to invest ahead of discovery needs, we saw tremendous growth from our new Multiomics vectors, which include high-throughput proteomics, single cell and spatial biology as well as some of our new clinical services. In a trailing 12 months comparison for the period ended March 31, revenue for these new services was up 33% year-over-year to an annual run rate of approximately $30 million. Our Synthesis business continued its strong recovery, delivering 13% organic revenue growth on a year-over-year basis, up 6% sequentially. We’re seeing good acceptance of our newer growth vectors, including antibody production and viral packaging. In some ways, the regional look at services tells a more complex story, but it’s also a testament to how we’re leveraging our global presence.
Our China business continues to perform extremely well. As in Q2, we delivered a fourth consecutive quarter of double-digit growth. We reported to you consistently strong performance from China in what we know to be an outlier compared to what others are seeing in the market. By contrast in North America, we continue to see softness across both NGS and Sanger sequencing. That said, we’re seeing indications of improvement in that Sanger revenue was flat quarter-to-quarter after several sequential quarters of decline, and the reports of increased investment in biotech is promising news that the opportunities will once again increase as small biotech companies have always been a meaningful source of GENEWIZ Multiomics revenue. Finally, in Europe, we had another quarter of strong performance, growing 12%, led by NGS.
Just 2 weeks ago, I had the pleasure to meet many of our customers at a well-attended grand opening of our NGS lab in Oxford U.K., where we’re off to a strong start in a key market location. All in, we had a very solid quarter from our Multiomics business. Before I move on, I want to touch on an area that’s important to us, which relates to the business from synergies we derive from the services offerings that include Sample Management Solutions and Multiomics capabilities. Over the past 2 years, we’ve been working to educate customers on the benefits of integrated workflow solutions from our combined portfolio. We’re seeing some good results from this endeavor as we currently have more than $40 million in our backlog that we can attribute to synergies across business segments.
As we improve the benefits of lower cost and cycle time reduction, we anticipate more and greater opportunities will accrue to us, but already, this is a meaningful proof of the value of synergies from our portfolio, and we intend to build on this momentum. Now I’ll turn to B Medical, which is the smallest part of the company at roughly 15% of sales, but understandably gets a significant amount of attention. B Medical is fundamentally a very good company. They operate in a supportive Luxembourg environment, have a team of very talented engineers, and they’ve developed manufacturing operations, which are highly efficient and high quality. Their products are essential cold chain equipment for the distribution of life-saving cures, and as such, they’re delivered under the approval of the FDA and other sanctioning bodies.
They have high market share and incredible technologies. They’re profitable and motivated to expand the value of their offerings to couple with Azenta for greater purpose and profit. And as you know, the hard part of the business is the unpredictable nature of the specific timing of purchase orders and hence, revenue, which is hard to forecast with any accuracy as the typical funding sources are large, global, humanitarian and health organizations, which are not predictable in terms of timing. We’ve taken some significant actions to better align the B Medical business to Azenta. Some of these actions we outlined in our Investor Day presentation, and we’ve taken some additional decisions since then. We’re now focused on the vaccine cold chain product lines only, and we plan to discontinue medical refrigeration and blood management product lines, which leaves us with a streamlined focus B Medical operation that will deliver at least 20% EBITDA in our outlook.
And even with the consolidation of factory space, we still have capacity to manufacture more than $200 million in annual VCC revenue. These actions will not improve the visibility of our timing, but will definitely allow us greater profitability through this focus. I want to give two additional updates on B Medical. First, we are still not confident within the timing of hard POs that will start to delivery the $60 million of VCC products into the Democratic Republic of Congo. Second, because we have 2 quarters of actual and 1 quarter of guidance, totaling approximately $60 million of B Medical revenue, we’re not in a position to hold our expectation for what we thought was a conservative $115 million to $120 million a year. Instead, we’ll reset expectations for fourth quarter revenue to be approximately $25 million to $30 million.
Even with this adjustments in B Medical revenue expectations, you’ll hear from Herman that we reiterate our commitments for EBITDA and earnings improvement for this fiscal year. Nonetheless, we remain very positive about this business. We’re operating with the largest opportunity pipeline in B Medical’s history and have much confidence in revenue that will be ours. That said, we’ve skinned down to the valuable defensible essence of market-leading capabilities for vaccine delivery and maintain the potential for upside value from unlocking the true strategic intent to B Medical, which is sample acquisition of the previously unreachable diversity of the African population. Toward that end, we’re actively involved in three critical initiatives that are underway in Africa.
In summary, our sample management business remains a steady and consistent source of growth, offering exceptional products. Our services solutions play a key role in discovery. And as mentioned, we’re expanding our service offerings. Both business solutions are in high demand. We’ll continue to make investments to lead the industry on both fronts with a lot of blue sky ahead. As we maneuver through the slower market, this is the natural time to be hyperfocused on improving profitability. Our cost and operational efficiency initiatives are in full swing and already delivering ahead of plan, and we’re preparing for the return of a healthier market. Herman will talk to you about the transformation initiatives he’s leading to build long-term scale and efficiency for Azenta.
As I turn the call over to Herman, I want to thank you for your interest and support of Azenta and for the support I’ve received from many of you over the years. Herman?
Herman Cueto: Thank you, Steve. Before I begin to discuss the quarter, I would like to add my thanks to Steve for leading Azenta for so many years and positioning the company where it is today. Steve, you will be a hard act to follow and I, like many others, I’m grateful for the leadership and collaboration you’ve shown me since I joined. And with that, let’s begin the review of the quarter. Good afternoon, everyone. As I shared with you in March, we are building the company for scale and growth and the actions that I’m going to talk to you about today will certainly bring that to like because things are moving at a terrific pace. Let me begin with the $111 million noncash goodwill impairment charge we recorded in the quarter.
This is related to the B Medical segment and is due to the reduction of the long-term revenue growth rate, which had included a contribution from the non-vaccine cold chain products that we are exiting. This is part of operationalizing the strategic portfolio shift that we outlined at Investor Day. The singular focus on vaccine cold chain enables a more profitable B Medical segment as we move towards its strategic intent of sample acquisition. Before I get into the quarterly results, I want to spend some time discussing Ascend 2026, the transformation program that I introduced at Investor Day in March. I am very excited to announce several key milestones beginning with our portfolio simplification initiatives. In the second quarter, we exited B Medical products in the U.S. market and announced the wind down of the sample sourcing product offering within our Sample Management Solutions business.
Within our site optimization initiative, we have successfully exited 7 locations with another 2 to be completed in the very near term. Included in the 9 is the exit from 3 Boston area sites, B Medical in the U.S. and sample sourcing. These early wins are giving us more confidence in the trajectory we are on to simplify the company and enable the profitability goals we have set forth. We are equally excited about the advancement of our IT system strategy, where in the quarter, we eliminated 1 ERP and launched an ERP initiative within Multiomics to simplify and scale operations. Turning to our results in the quarter and to supplement my remarks, I refer back to the slide deck available on our website. Turning to Slide 3 for some highlights. Second quarter revenue was $159 million, up 7% year-over-year on both a reported and organic basis.
We saw solid growth in SMS, both in storage and in large automated stores. Performance within B Medical against a soft compare in the prior year quarter helped drive the increase. The Consumables and Instruments business remained a headwind to growth in the quarter as we continue to see longer purchasing cycles for instruments due to the uncertainty in the timing of capital investment. However, on a positive note, we did have a late surge of orders come in at the end of March on the consumables side that didn’t convert to revenue in the quarter. Bookings in the month of March for consumables was the largest we have seen since the pandemic, and C&I bookings in the second quarter were the highest over the last 8 quarters. We continue to be confident that we have now cycled through the inventory stocking dynamics in the U.S. and Europe, and our distribution network has returned to pre-COVID inventory levels, which will help stabilize the consumables product lines as we move forward.
Excluding C&I, organic revenue growth was a healthy 9%. We delivered non-GAAP EPS of $0.05 and adjusted EBITDA of 5.9% in Q2, a nice acceleration from Q1 where adjusted EBITDA was around 3%, a meaningful 300 basis points expansion. We ended the quarter in a very strong balance sheet position with $975 million in cash, cash equivalents and marketable securities. Free cash flow at $2 million was positive for the fourth quarter in a row. In Q2, we returned $74 million of capital to our shareholders through the repurchase of 1.2 million shares of Azenta stock. To date, we have now completed roughly 1.1 billion of the 1.5 billion of planned share repurchases. We continue to be extremely well positioned from a balance sheet perspective. And as I have said in the past, after this investment, we will still have roughly $500 million of cash on hand that can be used for disciplined and long-term value-creating initiatives.
Now let’s turn to Slide 4 to take a deeper look at our results in the quarter. Total revenue was $159 million. Non-GAAP gross margin was 44.3%, up 310 basis points year-over-year. This was driven by strong operating efficiencies within our factories and labs, plus nonrecurring adjustments in the prior year. Non-GAAP operating margin was negative 3.6%, up 530 basis points year-over-year. Adjusted EBITDA margin was 5.9%, up 750 basis points year-over-year, driven by leverage for the combination of improved expense management, the impact of the cost reduction initiatives and a soft prior year compare. Again, non-GAAP EPS was $0.05 per share in the quarter. With that, let’s turn to Slide 5 for a review of our segment results, starting with Sample Management Solutions, or SMS.
Total SMS segment revenue was $74 million for the quarter, up 4% year-over-year on a reported basis and 3% on an organic basis, driven by growth in Large Automated stores and in Sample Repository Solutions. SMS second quarter gross margin was 46.3%, up 620 basis points year-over-year, mostly driven by operational efficiencies and transformation activities plus the impact of certain nonrecurring adjustments in the prior year. Turning next to the Multiomics segment. Multiomics delivered revenue of $62 million in the second quarter, flat year-over-year. Organic revenue for the quarter was up 1%, with gene synthesis growing 13% year-over-year, which is the largest revenue quarter since Q3 of ’22, spurred by innovations. Next Generation Sequencing was up slightly year-over-year on an organic basis.
Sanger sequencing was down versus last year and continues to face headwinds from the ongoing softness in the North American market. Our Multiomics business in China delivered another strong quarter with organic growth of 15% and continues to outpace competitors. The Multiomics business gross margin was 46.2%, up 90 basis points year-over-year, despite the pricing headwinds in Next Generation Sequencing. This expansion was driven by operational efficiencies and labor productivity, laboratory cost savings and volume leverage on our fixed And finally, the B Medical segment. Revenue was $23 million in the quarter, up 51% reported and up 49% on an organic basis. The higher than initially expected level of revenue we set forth during the Q1 earnings call was primarily due to additional vaccine cold chain orders received during the quarter.
Gross margin of 32.4%, was up 370 basis points, primarily driven by sales mix. Next, let’s turn to Slide 6 for a review of the balance sheet. As I mentioned earlier, we ended the quarter with $975 million in cash, cash equivalents and marketable securities. We had no debt outstanding. During the quarter, we generated $8 million of positive cash flow from operations that you could see on the next slide. Capital expenditures for the quarter were about $7 million, mainly from investments in Multiomics equipment as well as our Oxford U.K. site and the Boston biorepository facility build-outs. Again, free cash flow in the quarter was $2 million. Turning to guidance on Slide 8. As you saw in our press release, we continue to feel really good about our Multiomics and SMS businesses and are reiterating the full year organic revenue guide for both segments.
For the B Medical segment, however, we are adjusting down the full year revenue outlook. While the B Medical pipeline continues to be robust and in fact, is growing, the conversion to revenue remains unpredictable. Our experience with B Medical is that once something comes into the pipeline, it has a high probability of converting to revenue. The timing is and continues to be the great unknown. The Ascend 2026 transformation initiatives that we are deploying within B Medical will enable us to deliver approximately 20% of adjusted EBITDA. With 5 months left to go in the fiscal year, we feel it is appropriate to adjust B Medical revenue to a range of $80 million to $90 million for the full year. The adjustment in B Medical brings the full year company organic revenue guide to a range of negative 1% to positive 1% or $659 million to $671 million.
Even with this change, we stand by the adjusted EBITDA guide of approximately 300 basis points of margin expansion, and we will be raising the non-GAAP EPS guide to a range of $0.27 to $0.37 for fiscal year 2024. The EPS raise is equally distributed between operational improvements and higher interest income. In terms of the quarterly guidance, please refer to Page 9 of the slide deck for color and key considerations. In Q3, we expect revenue growth to be roughly flat year-over-year. Combined Multiomics and Sample Management Solutions revenue is expected to grow low single digits. We are holding $23 million of B Medical orders at this time, which would make the B Medical segment down 14% year-over-year. We expect gross margin to be approaching the mid-40%.
R&D expense as a percentage of revenue will be around 5%. SG&A is expected to be in the low 40s and better than Q2 as a percentage of revenue. Overall, we expect the business to deliver an adjusted EBITDA margin that approaches mid-single digits to high single digits and non-GAAP EPS to be a couple of pennies better than Q2. In closing, we are pleased with our performance in Q2. We are committed to delivering on our purpose, serving our customers and enabling life sciences breakthroughs faster. This concludes our prepared remarks. I will now turn the call over to the operator for questions.
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