Azenta - Q1 2024

Transcript

Operator (participant)

Greetings, and welcome to the Azenta Q1 2024 financial results. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Wednesday, February 7th, 2024. I will now turn the conference over to Sara Silverman, Head of Investor Relations.

Sara Silverman (Head of Investor Relations and Corporate Communications)

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 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 Securities Litigation Reform 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 (President and CEO)

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 the 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'd 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 tones.

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 multi-omics capabilities. 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 vector 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 in 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 and instruments business, which has faced the most notable headwinds in the post-COVID timeframe. 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 continued 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, like consumables and 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 storage 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 storage 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 biorepository operations.

In sample repository solutions, during the quarter, we closed another multimillion-dollar, multi-year large sample management agreement to provide sample storage and related services for a research consortium that currently has samples distributed across more than 25 sites. Similar to the large disease-specific projects we highlighted in recent quarters, we'll 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 and 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's aware, to the benefit of all discovery, the cost of sequencing is falling rapidly. We see this as 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 remains 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, UK, 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 that's 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 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 fourteenth. Now it's my pleasure to turn the call over to Herman.

Herman Cueto (EVP and CFO)

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 3 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 and 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 moved 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 at $15 million as we continued 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 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 4 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 -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 5 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. 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 6 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 8.

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%-8%, approximately 300 basis points of adjusted EBITDA margin expansion and non-GAAP EPS in a range of $0.19-$0.29 for fiscal year 2024. In terms of the quarterly guidance, please refer to page 9 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-forties 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.

Operator (participant)

Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge that request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Once again, to register for a question, it is one, four on your telephone keypad. Your first question comes from the line of David Saxon with Needham. Your line is open.

David Saxon (Managing Director, Medical Technologies Equity Research)

Great. Hi, Steve. Hi, Sara, Herman. Thanks so much for taking my question. I guess I wanted to start on the B Medical. So I mean, obviously, the December quarter is supposed to be the strongest quarter, but it looks like the second half of the quarter only drove, you know, $3 million-$4 million in revenue. So is the seasonality changing at all, or is there anything about the deals in the pipeline that's kind of resulting in that dynamic not holding or just requiring a longer selling cycle? And then just regarding the DRC deal, it doesn't sound like there's anything in the fiscal second quarter guide, but can you give us a sense of how we should think about the cadence of that deal's revenue, you know, being realized in the back half?

Herman Cueto (EVP and CFO)

Hey, David, it's Herman. How are you?

David Saxon (Managing Director, Medical Technologies Equity Research)

Good. Great, Herman.

Herman Cueto (EVP and CFO)

I guess I would start with, you know, bringing everybody back to some of the commentary that we talked about on the fourth quarter call, that B Medical, it's a pipeline business. Trying to predict the timing of these things is very hard to do. What I would say is we have a very robust pipeline, but the timing of the conversion of that pipeline is one of the unknowns here. You know, in terms of, you know, maybe just a little bit of backdrop on the funding environment. There's a baseline of Gavi funding out there that just hasn't happened yet. So, you know, in terms of, you know, seasonality and things like that, it's not that. It's just when that funding frees up, the orders will start to flow.

As I said, we have a robust pipeline. We feel good about where the pipeline is. The pipeline gives us confidence in the full-year guide. We just have to be comfortable with the timing of when it comes in.

Stephen Schwartz (President and CEO)

Yeah, and David, on the... This is Steve. On the DRC, there are ongoing, really active discussions about how to get the segments of the contract, lead and contributed. There's a lot of urgency from the DRC standpoint to get the vaccine cold chain products in place, but as we mentioned, there are also emergency vehicles and distribution vehicles that are being discussed. And what we can tell you is the multi-party discussions are going on, make sure the funding comes in, but we're confident about-

... the contract timing is what we're working on. So we will, we'll let you know when we've got it in hand. I think, as you can imagine, that's the, that's the way we've been guiding here, is what do we hold at the time of the call, just to make sure the expectation is set properly. But I can assure you, there's a lot of activity going on to make sure that, but by all parties, to make sure that gets accelerated here as we go forward.

David Saxon (Managing Director, Medical Technologies Equity Research)

Okay, great. That's helpful. Thanks for that. And then just as my follow-up, I wanted to ask on C&I and the recovery you're seeing there. I think you had kinda called out the U.S. as being ahead of Europe from, you know, a recovery perspective. So any color on, you know, the geographic mix of C&I, as Europe kind of recovers behind the U.S., how big of a tailwind could that be? And then, I think, Steve, it was you in your prepared remarks, you called out, C&I, you know, fully lapping the tougher comps, or maybe that was Herman. So should we think about C&I being a, you know, year-on-year grower, going forward? Thanks so much for taking my questions.

Herman Cueto (EVP and CFO)

Yeah, David, it's Herman. The commentary around C&I is very similar to what we talked about on the fourth quarter call. So the US, when we talked to the team, it does seem that distributors are now at pre-pandemic inventory levels. So whatever we're selling into the distributors, it's being sold through to the end market. So, that we feel very confident about, and it's a similar situation as we talked about on the Q4 call. Europe, it's very similar. They were lagging behind a little bit. The commentary is still the same, but again, they, we expect to be out of that when we get into the second half of this year. We did see sequential growth from Q4 to Q1, so that was about 5%. So we have two quarters in a row.

So from Q3 to Q4, it was 9% growth, and now we're seeing an additional 5. So, at this point in time, we do think we've cycled through it, and as we get into the second quarter and later in the year, we don't expect it to be a headwind. As we said in the past, we're not counting on a ton of growth in this, in this area, but we do believe we're out of the tough compares.

David Saxon (Managing Director, Medical Technologies Equity Research)

Okay, great. Thank you so much.

Operator (participant)

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

Jacob Johnson (Equity Research Analyst)

Hey, thanks. Good afternoon, everybody. Hey, Steve. Hey, Herman. I guess I'll—I, too, will start on B Medical. Steve, I just want to follow up on your comments about the DRC contract. You said you're confident in the contract, but then you mentioned kind of vehicle procurement and timing can be difficult. I just want to make sure, I guess, one, you know, is there any risk to the full-year guide from this? Or is this just more about kind of when it hits, you know, 2Q versus 3Q, 4Q? And then I guess along those same lines, obviously, the seasonality has been a bit different than we would have expected this year. And I know it can be a lumpy business.

I just, I'm curious, kind of on an annual basis, do you think this is a more predictable or stable business, or is there any risk this could be a lumpy business from year to year? I know it's too early to talk about 2025, but I think that.

Stephen Schwartz (President and CEO)

Yeah. So, Jacob, let me answer them backwards. This is Steve. So, thanks for the question. The-- on an annual basis, it-- I think it's not so lumpy. If we always run the business and we look at 12, you know, trailing 12 months, it's not linear for sure, but the lumpiness gets smoothed out. We expected, based on 3 data points from diligence, if you will, that the December quarter would be the largest one. And, you know, we came to this December quarter, and it was not, but we've seen that in our forecast. On the DRC, we just continue to be bullish about, you know, how many units, where they're going to go. It's just a matter of these things getting lent.

There's a pent-up demand for vaccines that need to be distributed, so we're confident that they will, you know, that they'll begin to be part of this year. We don't know the timing exactly, but I can tell you, there's a lot of energy going into making sure that everything gets resolved so that we can start to ship product to the DRC.

Operator (participant)

Your next question comes from the line of Andrew Cooper with Raymond James. Your line is open.

Andrew Cooper (Director, Life Science Tools and Diagnostics Equity Research)

Hey, everyone. Thanks for the questions. I'll start with something other than B Medical. So maybe just first in Multiomics, I think you pointed out, you know, growing at a time when that's not necessarily what we're hearing from some of the others in the space. So just maybe any sense for whether that's a something changing the competitive landscape. Are you taking share? Are you working with, you know, a little bit different sort of customer set than maybe some of the others are? Just help us think about what's allowing you to grow when others are struggling a little bit more.

Stephen Schwartz (President and CEO)

Yeah, Andrew, thanks. The when we look at it, for sure, I can tell you that contracts that we have, the customers that we have, are giving us more business, but I can't tell you it's because we've taken share from others. But as we get more capable, for sure, the size of the contract work we're doing for customers has grown for a lot of the larger customers. We attribute it to that because indeed, in North America, a lot of the biotech funding has been off or down as companies have either reduced funding or gone out of business. So from larger customers, without question, we're getting more business, and I do attribute the elasticity on some of the NGS. The number of reactions we do has gone up appreciably, and the-...

The revenue has grown. So I attribute it to both of those things. I will say, for example, on the Sanger side, that shrunk a little bit here in the last quarter. Two reasons: one, without question, this little bit softer North America business has caused us some issues there, and we begin to transfer some of the Plasmid-EZ sequencing into the NGS business. But I think just aggressive sales, close customer contact, and larger contracts with larger customers are what's allowed us to continue to sustain the business here.

Herman Cueto (EVP and CFO)

Okay, great. And then just a-

Andrew Cooper (Director, Life Science Tools and Diagnostics Equity Research)

Oh, go ahead.

Herman Cueto (EVP and CFO)

Yeah, Andrew, I was just gonna add, you know, in terms of the funding environment, I think, you know, from a macro perspective, we're seeing steady funding in pharma and academics. It's when you get into biotech, where you're still seeing a little bit of the funding pressure. So we'll just continue to watch that. When we do our scouting in the markets, we understand that if the interest rate environment gets a little better, maybe some of that funding will come along with it.

Andrew Cooper (Director, Life Science Tools and Diagnostics Equity Research)

Great, that's helpful. And then maybe just on margins in that segment, I mean, you mentioned a lot of the things that help you maintain as best you can, the margins there, but sounds like certainly still some pricing pressure. So just maybe what's baked-

Herman Cueto (EVP and CFO)

Yeah.

Andrew Cooper (Director, Life Science Tools and Diagnostics Equity Research)

... into the guide in terms of pricing and maybe longer term, you know, where do you think we can settle out? Or is it a continued kind of ongoing pressure at this pace, at a different pace? Just would love your thoughts on what that looks like.

Herman Cueto (EVP and CFO)

Yeah, it's Herman, Andrew. So it's an interesting dynamic with pricing right now in the Multiomics business, because what you have on the revenue line is you have the pricing pressure, but you now have a lot more volume than you've ever had before, because now sequencing is much more affordable than it was in the past. So you have that dynamic going on the top line. And when you look at margins, you have a couple of things going on. So first, you have a ton of leverage on your fixed overhead, so that drives cost savings. And then on top of that, you have labor efficiency because the technology is there, and also the direct material efficiency. So you're kind of seeing, you know, a nice stable gross margin. When we think about pricing in the guide, we cared for it.

We knew it was gonna be there, so it's all contemplated in the guide. But we think it's gonna be a dynamic as the market sort of cycles through the technology. We will start to see it settle down when we get into the back half of the year.

Andrew Cooper (Director, Life Science Tools and Diagnostics Equity Research)

Okay, great. And then maybe if I can just sneak one last one in. Just on C&I, you know, any sense for... I know you called out some of the sequential improvements here, both last quarter and this quarter, but, you know, what is the typical seasonal step up you might have seen into a, a calendar for Q, where we often do see some of those changes? And then, you know, aligned with that, is there anything in particular, whether it's, you know, more anecdotal or, or not, that you can point to, to give you that comfort that, "Hey, we're, we're past the worst, worst of it," other than simply the, the +5% sequentially?

Herman Cueto (EVP and CFO)

Yeah, I mean, maybe I'll step back and talk about it from an Azenta point of view. If you look at the Azenta business and you exclude B Medical, for the dynamics that we talked about, and you have Q1, you have the Q2 guide, and you have the book end of the full year guide, what you'll see, and it's just math, is that it's a very balanced business overall. You know, if you look at the mix of revenue in the first half versus the mix of revenue in the second half, it's very balanced. And if you look at the growth rates from the first half to the second half, it's very balanced. So I think you have similar dynamics in C&I, Andrew. It's a—I wouldn't look at that business as being overly cyclical.

Azenta overall, when you unpack the SMS business and also the Multiomics business, you see really a nice balance across the first half and second half.

Andrew Cooper (Director, Life Science Tools and Diagnostics Equity Research)

Great! Looking forward to seeing everybody in March. Appreciate it.

Operator (participant)

Your next question comes from the line of Paul Knight with KeyBanc. Your line is open.

Paul Knight (Managing Director, Life Science Technology Equity Research)

Hey, yes. Where are you with the transition on your sales distribution model? I know you had to redo that strategy, so are you half done? Where are you with, you know, where you think you might be?

Stephen Schwartz (President and CEO)

Yeah. Hi, Paul. Thanks. We're aligned, so we have the sales organization is complete. In each of the three segments, there's a dedicated sales organization, and now it's just getting traction and practice and making sure that we execute. But we believe the fact that we've been growing in this environment is because we've got the sales aligned again, as it should be. So distribution channel continues to build, and you can imagine as we exercise that channel, we'll be, you know, rotating through different distributors who are keeping up. But we like how the channel has built, and the scientists selling to scientists in the Multiomics business is already completely aligned.

We still have, you know, some openings to fill, but by and large, that organization is also in place, and that's why we're seeing—we're starting to see really good traction.

Paul Knight (Managing Director, Life Science Technology Equity Research)

Could you update us on China? I know you redid logistics a little bit there last year. Capacity expansion.

Stephen Schwartz (President and CEO)

You, you bet. And so let me talk to China a little bit. So we mentioned that we were, you know, double digits growth in China again for the third consecutive quarter. Most of the business we do in China these days is services related, so it's for the Multiomics business. And we grew 11% in synthesis this quarter again. So we've seen strong growth in synthesis, really good recovery. The issues we had in China 18 months ago are behind us, and we feel, we feel like we're in a really good position. Back to growth, I can tell you, the team is incredibly busy in China, you know, serving the customers both inside and outside of China.

We believe China is, you know, fully capable, full speed ahead, and just the growth characteristics they've exhibited, so different from what's going on in the rest of the market, is a tribute to a strong team, aggressively going after all their, you know, their local customer base.

Paul Knight (Managing Director, Life Science Technology Equity Research)

And then lastly, on B Medical, I mean, I thought the real reason to buy B Medical was to move it into things besides vaccine. The technology in the box was kind of what you liked a lot and, maybe move into other areas like service. Where are you in that journey with B Medical?

Stephen Schwartz (President and CEO)

Yeah, Paul, it, it's exactly what the, the DRC contract is about. That's the, probably the most exciting opportunity for us. The... We talked about the EUR 60 million portion of the EUR 100 million agreement is related to vaccine cold chain. But the DRC, Toyota, Azenta, B Medical, we're all focused on how to use those now to do whole blood recovery. So the, the plans are for how do we get to retrieving 1 million blood- 1 million whole sample, whole blood samples per year in the DRC through this channel, using the B Medical vaccine boxes on the outbound side, sample retrieval on the inbound.

And those are the, those are the active, live discussions that are going on right now because it is a top priority for the Ministry of Health, and that's, that's exactly where we are, and that's why we're really enthusiastic about the DRC.

We hope before the year is over, that we can articulate what that program is specifically with numbers and units and samples, in terms of what that's done from a transformative standpoint, to add tremendous value to a product-based B Medical vaccine cold chain, to a services revenue for Azenta on the sample retrieval side.

Paul Knight (Managing Director, Life Science Technology Equity Research)

Okay. Thank you.

Operator (participant)

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

Stephen Schwartz (President and CEO)

Hey, Vijay.

Vijay Kumar (Senior Managing Director, Equity Research)

Hi, Steve. Hi, Steve. Thanks for taking my question. I have a few, if you don't mind. Just, maybe a few questions on guidance. Second quarter, mid-singles to high singles, is that like total revenue growth, or is that an organic number? If you could clarify.

Stephen Schwartz (President and CEO)

That's gonna be an organic number.

Vijay Kumar (Senior Managing Director, Equity Research)

Fantastic. I think, based on those numbers, the implied for back half is high teens. The step up in the back half, what are you assuming? Is that all just coming from B Medical, the DRC contract revenue recognition, or are you assuming sample management and Multiomics to step up in back half?

Stephen Schwartz (President and CEO)

So Vijay, it's Herman. So when you look at the business ex B Medical for a minute, if you look at the Q1 actuals, and you now have the color on Q2, and you have the full year guide as the bookend, what you'll see is a very balanced mix of revenue between the first half and the second half. And you can do the math. It's around 49-51. And you look at the growth rates, again, they're very, very balanced. So when you look at SMS and Multiomics, between the first half and second half, you don't have very large step ups. It's not a hockey stick. The big piece is B Medical in the back half, and that becomes all about the pipeline conversion. We have a very robust pipeline.

The timing of when it converts is the thing that we've been talking about for the last two quarters. So, Vijay, Steve, I think you hit it exactly. We have good line of sight, good visibility to the business on the Multiomics side, on the SMS side. We feel really comfortable about what that looks like. And as Herman defined the progress, it's modest uptick from the first half to the second half, and we feel good about that, and we have a lot of good opportunity there. It's heavily weighted on bringing the B Medical business home in the second half.

Vijay Kumar (Senior Managing Director, Equity Research)

Understood. And then one on NGS here, Steve, the modest growth.

Stephen Schwartz (President and CEO)

Yeah.

Vijay Kumar (Senior Managing Director, Equity Research)

Is that just because the transition, because of, you know, price coming down? Like, can this business get back to, like, high singles? Like, how do you see NGS, market playing out?

Stephen Schwartz (President and CEO)

So, Vijay, what we see. Again, we need a few more data points, but the number of reactions we ran was up considerably, but we prepared for it. We knew this was coming, but we're starting to populate with a large number now of the NovaSeq X Pluses, and it does change the economics. So we're comfortable to help pass the reagent costs through to customers, but, you know, we still get paid for the value that we bring, for the consultative nature of what we do, for the capital that we've employed, and so that's why we can sustain the margin while we're growing revenue. The amount of work we're doing is significantly.

We're gonna work to stay in front of it, so I'm guessing that we'll ask each other this question one quarter from now and two quarters from now, three quarters from now, just to make sure that we're keeping up. But right now, that's how this is playing out. You know, we're able to sustain margin right now, but we are - we're putting a lot of volume through brand-new tools, and we think that transition will just keep coming.

Vijay Kumar (Senior Managing Director, Equity Research)

Understood. Maybe my last one, Herman, for you. The interest income assumption here for Q2, is that just because lower cash balance on share repurchase, and then the free cash flow performance in Q1, pretty impressive. Is that sustainable? I think it's annualizing to $60 million.

Herman Cueto (EVP and CFO)

Yeah. So, maybe the first one on the interest income. Yeah, so we do see a little bit of uptick in interest income in the second quarter, and we're calling that out. And again, it's just it's more around the timing of the cash that we're holding. And then free cash flow, it yeah, we feel good about where cash flow is coming in. We're doing a lot of work operationally, a lot of discipline around spend management, timing, working capital. So I don't want to speculate on where the number could go, but your math is right. 15x 4 is 60. So yeah, we'll see where it ends up.

Vijay Kumar (Senior Managing Director, Equity Research)

Fantastic. Thanks, guys.

Stephen Schwartz (President and CEO)

Thanks, Vijay.

Operator (participant)

And your next question comes from the line of Yuan Zhi with B. Riley. Your line is open.

Yuan Zhi (Managing Director, Healthcare Equity Research)

Thank you for taking our questions. First, we are trying to better understand the impact from recent news from NanoString and Invitae bankruptcy. Are these clients of the firm, and is there any risk through to your genomics customers in this clinical application space?

Stephen Schwartz (President and CEO)

Yeah. Yuan, not yet. I mean, we... This isn't so immediate, and you know, we've got other backup capabilities we provide to customers. So you know, we think there's no repercussions that we haven't guided or people aren't aware of.

Yuan Zhi (Managing Director, Healthcare Equity Research)

Got it. Another question is for AstraZeneca. AZ just announced a $300 million cell therapy project here in Maryland for cell therapy manufacturing. Can you maybe comment on for projects like this, what is the impact to different parts of Azenta's business? You know, the large store, the sample management, and maybe some genomics, and if you can, you know, win some business here.

Stephen Schwartz (President and CEO)

Yeah, Yuan, it's not something we're able to comment on specifically for a customer, but you can imagine anywhere there's an opportunity like this that we're involved. So, we can't be specific, but we've been partners with AstraZeneca for many, many years.

Yuan Zhi (Managing Director, Healthcare Equity Research)

Got it. That's all from my end. Thank you.

Herman Cueto (EVP and CFO)

Okay. Thanks, Yuan.

Operator (participant)

There are no further questions. I'll turn the call back to your presenters for closing remarks. Thank you very much.

Herman Cueto (EVP and CFO)

Okay. Thank you, everybody, for joining the call today, and a big thank you to the 3,500+ Azenta associates around the world. Thank you very much.

Stephen Schwartz (President and CEO)

We look forward to speaking with you at the Analyst Day on the 14th of March. Thanks, everyone.

Operator (participant)

That does conclude the conference call for today. We thank you very much for your participation. You may now disconnect.