Yahoo Finance Azenta, Inc. (NASDAQ:AZTA) Q1 2024 Earnings Call Transcript
Azenta, Inc. (NASDAQ:AZTA) Q1 2024 Earnings Call Transcript February 7, 2024
Azenta, Inc. misses on earnings expectations. Reported EPS is $-0.27728 EPS, expectations were $-0.03. 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 Q1 2024 Financial Results. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, February 7, 2024. I will now turn the conference over to Sara Silverman, Head of Investor Relations.
Sara Silverman: 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 2024. Our first quarter earnings press release was issued after the close of the market today and is available on our Investor Relations website located at investor.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 highlights of the first 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.
Stephen Schwartz: Thank you Sara. Good afternoon, everyone, and thank you for joining us. I'll focus my remarks on a summary of Q1 2024 results, our outlook for full year, including updates on some of our key initiatives as well as our view on the current market environment. Let me begin by saying that we're pleased with our Q1 results as we delivered everything we had intended for the quarter in terms of performance and progress on key initiatives for the year. We have momentum that supports the guidance we announced at our November earnings call. In addition, new Products and Services offerings are gaining market momentum and we're winning larger contracts of bundled offerings for larger customers. We're in a post-COVID world now that colors the Life Sciences industry in more muted tons.
This environment allows us to more clearly see the value of our capability in reference to peers in our space. We've embedded ourselves in a critical position in the center of a biological sample-based world that begins at discovery and goes all the way to the delivery of treatments. Our ability to source, manage and store and measure and interrogate samples ultimately providing discovery unlocking data is paramount to all that is advancing this industry. We serve this sample world with a unique set of capabilities. We've built a company that's headed towards $700 million in revenue this year by matching our capabilities to customers' needs for more automated sample workflows and world-class Multiomics capabilities. And we further benefit from tailwinds generated by an industry trend to outsource more critical sample management and measurement.
We see sustained long-term growth above the market rate that can persist for years to come. In addition, we've identified the potential for another strong growth factor that will utilize our core capabilities to allow us to add some of the rarest and most valuable biosamples into the discovery pipeline, samples that are sourced by us, managed by us, measured by us and owned by us. By this, we mean the chance to bring consented samples from Africa, Asia and South America, which will enrich and diversify the genomic sample population, which today is still dramatically underrepresented in research and discovery. There's still much work to be done to make this a reality, but we're uniquely positioned to deliver on this tremendous opportunity. We're a great company and strong market-leading positions, serving a market in need of all that we do.
I'll now turn to some highlights from the quarter. In Q1, we delivered revenue of $154 million, which translates to an organic decline of 15% year-over-year, but up 2% when you exclude the B Medical segment, which had a lighter Q1 due to the timing of orders as expected and up 5% when you also exclude our Consumables & Instruments business, which has faced the most notable headwind in the post-COVID time frame. Let's look at the business by segment. I'll begin with SMS and Multiomics segments before I turn to B Medical. In these market segments that were down for most peers in our space, we continue to grow. We expanded in and around the sample space and once again received some indications that even the areas of our business that have been slow to recover by Consumables & Instruments are showing signs of continued recovery.
Specifically, our Sample Management Solutions business grew 1% year-over-year on an organic basis and grew 9%, excluding the C&I business. Inside this, it's the growth of the sample volumes that continues to be the fuel for our SMS opportunities. Large Automated Stores revenue was up 37% year-over-year and Sample Repository Solutions was up a healthy 6% year-over-year, continuing the trends we saw in the September quarter. This pattern of business is fueled by two key drivers: one, the sheer number of samples that are collected for future discovery and two, the trend toward outsourcing the care and management of these large, precious and complex sample collections. We're positioned perfectly to provide on-site automated systems as well as off-site collection management and our workflow solution of best-in-class automated stores and repository services makes us into the ideal choice for customers regardless of their sample management strategy.
To add even more potential to our SMS opportunity. This week, we launched a breakthrough Large Automated Storage System, the BioArc Ultra, which we featured at the Society for Laboratory Automation and Screening 2024 International Conference in Boston. This new system designed to hold up to 10 million samples, offers unparalleled storage density. The Ultra features an innovative eco-friendly cooling system that utilizes natural air rather than ozone-depleting refrigerants. Furthering our commitment towards sustainability as an organization as well as supporting our customers in their carbon footprint reduction efforts. Not only will this provide a new level of sample management performance to our largest customers, but will also be transformative in the efficiency of our bio repository operations.
In Sample Repository Solutions, during the quarter, we closed another multimillion dollar, multiyear large sample management agreement to provide sample storage and related services for our research consortium that currently has samples distributed across more than 25 sites. Similar to the large disease-specific projects we highlighted in recent quarters, will provide consolidated management of this precious collection and centralized laboratory services to members of this research collaborative. This project will start with the transfer of the customer's existing sample collection with the anticipation that this collection is expected to grow rapidly over the next 5 years. Finally, we're also encouraged that Consumables & Instruments showed sequential growth for the second quarter in a row.
Our channel partners continue to see improvement and end-user demand is also showing signs of life with increased inquiries year-over-year. In a very challenging market for Life Science Services, we're pleased that Multiomics delivered organic growth of 2% with yet another record revenue quarter in our next-generation sequencing business. This result is particularly noteworthy as it highlights our ability to navigate through a market that's once again being disrupted by a quantum improvement in cost performance. As everyone is aware, to the benefit of all discovery, the cost of sequencing is falling rapidly. We see this is not just good for global health initiatives, but also as a driver for significant demand for our sequencing services. Necessarily, lower sequencing costs allow us to offer lower prices, and the elasticity of demand is driving more volume and lab efficiency.
As we manage this balance of volume, cost and profitability, we believe we're dialing it in just about right as revenue continues to increase while our gross margin is for now stable. So although a 2% increase is modest growth, we believe it represents strong outperformance as end markets remain muted. In general, pharma and academic funding remained steady to up modestly, but biotech continues to face funding constraints. From a regional perspective, Europe was up strongly, growing approximately 20% and the business was broad-based. The expected opening of our new NGS lab in Oxford U.K. in late spring is already helping us gain traction in several key accounts. Although our North American Multiomics business remains soft, declining in the low single digits, our China team delivered yet another strong quarter of growth in the low teens.
Our team in China is incredibly strong, and they continue to outpace competitors there, while they overcome some of the macroeconomic and regulatory headwinds that exist in that market. B Medical delivered $13 million of revenue, down 70% as expected. The lower level of revenue year-over-year is primarily due to the timing of orders. As of today, we have $19 million in orders on hand for Q2 and this number contains no revenue from the DRC. We recognize that we have much more product to ship this year, but we maintain our expectations for mid-single-digit growth for B Medical for the full year fiscal 2024. But I do want to take this moment to give an update on our activities with the Democratic Republic of Congo and the opportunity we announced on our last earnings call.
We're pleased with the vaccine cold chain business as expected from this project but even more by the fact that we have an opportunity to play a central role in the collection of millions of samples of whole blood in support of crucial health initiatives that are high priorities for the Minister of Health. We'll continue to keep you updated on this exciting opportunity as it develops. To summarize Q1 results, our Sample-based business remains a steady source of growth. Our customer positions across geographies and applications coupled with improving markets will only add to our above market momentum. Our investments to lead the industry in energy-efficient ultra-cold sample storage as well as our important role in coordinating focused health initiatives, gives us tremendous confidence in the sustained growth prospects in a Life Sciences market in need of these new solutions.
Yet as we benefit from this position, we're also keenly focused on enhancing our profitability through disciplined cost management, plus a series of transformative structural improvements that Herman is leading with a huge amount of energy and enthusiastic support from our team. A fulsome description of these focus areas and what we plan to deliver from these initiatives as well as our long-term outlook including our plans for B Medical, which better aligns with Azenta will be key features of our presentation at our Investor Day next month. We very much look forward to the chance to engage with you in more depth on March 14. And now it's my pleasure to turn the call over to Herman.
Herman Cueto: Thank you, Steve. My first 100 days at Azenta have been both busy and fulfilling. I have had the opportunity to meet with many of our employees and have visited several key sites with more visits planned over the coming months. I continue to be impressed by what I see and the opportunity that lies ahead. To supplement my remarks today, I refer back to the slide deck available on our website. Turning to Slide three for some highlights. First quarter revenue was $154 million, down 13% year-over-year and down 15% on an organic basis. As expected, the lower B Medical revenue drove the Q1 decline. Excluding B Medical, the business grew 2% organically. As we have discussed in the past, the Consumables & Instruments business, or C&I, remained a headwind to growth in the quarter on a year-over-year basis.
If you exclude C&I as well as B Medical, organic growth was 5%. This above-market growth rate is consistent with what we delivered in Q4 fiscal year 2023. In C&I, we did see another 5% sequential improvement as we move from Q4 to Q1, and we believe that we have now cycled through the tough year-over-year compares. We delivered non-GAAP EPS of $0.02 and adjusted EBITDA of 3% in Q1. Our cost reduction initiatives continue to track well relative to our plans. We ended the quarter in a very strong position with $1.1 billion in cash, cash equivalents and marketable securities. Free cash flow was positive for the third quarter in a row of $15 million as we continue to focus on commercial, operational and working capital management. In addition to the positive operational performance in Q1, we returned $113 million of capital to our shareholders through the repurchase of 2.3 million shares of Azenta's stock.
We have now completed roughly $1 billion of the $1.5 billion of planned share repurchases. We continue to be extremely well positioned from a balance sheet perspective. And even after this investment, we will still have roughly $500 million of cash on hand to be used for disciplined and long-term value-creating initiatives. Now let's turn to Slide four to take a deeper look at our results in the quarter. Total revenue was $154 million, as anticipated, non-GAAP gross margin was down year-over-year, coming in at 43.5%, down 190 basis points. Excluding B Medical, gross margin was roughly flat. Non-GAAP operating margin was negative 5.6%, down 560 basis points year-over-year. Excluding B Medical, we saw operating margin expand 160 basis points.
Adjusted EBITDA margin was 3%, down 370 basis points year-over-year, again, driven by the B Medical dynamics. This was partially offset by strong leverage from the combination of better expense management and the impact of the cost reduction actions implemented in fiscal 2023. Again, non-GAAP earnings was $0.02 per share in the quarter. Before I get into the segment details, I want to remind everyone that Q1 is the first quarter we will be reporting in the new segment structure. You should have seen an 8-K posted last week which provides two years of historical quarterly information in the new format. With that, let's turn to Slide five for a review of our segment results, starting with Sample Management Solutions, or SMS. Total SMS segment revenue was $79 million for the quarter, up 5% year-over-year on a reported basis, led by growth in Sample Repository Solutions, which was up 7%.
SMS organic growth was 1%. If we look at SMS, excluding C&I, organic growth for the segment was 9%. As Steve mentioned, continued momentum in Sample Repository Solutions and Large Automated Stores were the key contributors to the year-over-year growth. Ziath contributed approximately $1 million in revenue. SMS first quarter gross margin was 43.1% and was up 10 basis points year-over-year, absorbing the impact of strategic investments such as the New Boston Repository. Turning next to the Multiomics segment. Multiomics delivered revenue of $63 million in the first quarter, an increase of 3% year-over-year. The organic revenue for the quarter was up 2%, led by double-digit growth in gene synthesis, modest growth in next-gen sequencing and a decline in Sanger.
Of note, our Multiomics business in China delivered another strong quarter with organic growth of 12%. The Multiomics business gross margin was 47.1%, down 30 basis points year-over-year. As the cost of sequencing has come down with technological advances, the increased volume in conjunction with labor productivity and direct material savings has allowed us to maintain a fairly stable gross margin. And finally, the B Medical segment. Revenue was $13 million in the quarter, down roughly 70% on a reported and organic basis. The lower level of revenue was primarily due to timing of vaccine cold chain orders. Gross margin of 28.1% was lower than last year, primarily driven by sales mix. Next, let's turn to Slide six for a review of the balance sheet.
As I mentioned earlier, we ended the quarter with $1.1 billion in cash, cash equivalents and marketable securities. We had no debt outstanding. During the quarter, improvements in working capital translated to the strong operating cash flow that you could see on the next slide. Cash flow from operations was $26 million, primarily driven by an improvement in inventory, accounts receivable and customer prepayments. Capital expenditures for the quarter were $12 million, slightly elevated versus recent quarters, primarily due to investments in Multiomics equipment. In total, this brought free cash flow in the quarter to $15 million. Turning to guidance on Slide eight. As you saw in our press release, we are maintaining our previous full year guide that we initiated on our Q4 fiscal 2023 call in November, which calls for organic growth of 5% to 8%, approximately 300 basis points of adjusted EBITDA margin expansion and non-GAAP EPS in a range of $0.19 to $0.29 for fiscal year 2024.
In terms of the quarterly guidance, please refer to Page nine of the slide deck for color and key considerations. In Q2, we expect revenue growth to accelerate to mid- to high single digits. Multiomics and Sample Management Solutions are expected to grow mid-single digits on a combined basis, and at this point in the quarter, B Medical is expected to grow 25%. We expect gross margin to be approaching the mid-40s and slightly better than Q1 fiscal year 2024. R&D expense as a percentage of revenue will be consistent with Q1 fiscal year 2024. SG&A is expected to be slightly better than Q1 fiscal year 2024 on a percentage of revenue basis. Overall, we expect the business to deliver an adjusted EBITDA margin that approaches mid-single digits and non-GAAP EPS roughly flat to Q1 fiscal year 2024.
In closing, we are pleased with our performance in Q1 and look forward to our Analyst Day scheduled for March 14 of this year, where we will discuss our longer-term strategy, vision and financial goals. We are committed to delivering on our purpose, serving our customers and enabling life sciences breakthroughs faster. This concludes our prepared remarks, and I will now turn the call over to the operator for questions.
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