Q1 2023 Azenta Inc Earnings Call
Adult please continue to standby here isn't to financial results call will begin shortly we thank you very much for your patience. Please remain on the line you call will begin shortly thank you.
[music].
Yeah.
Greetings and welcome to the us into Q1 2023 financial results.
During the presentation, all participants will be in a listen only mode.
Afterwards, we will conduct a question and answer session.
At that time, if you have a question. Please press the 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 eight 2023.
I will now turn the conference over to Sarah Silverman head of Investor Relations.
Thank you operator, and good afternoon to everyone on the line today, we would like to welcome you to our earnings conference call for the first quarter of fiscal year 2023.
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 that isn't a dotcom. In addition to our 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.
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, our Safe Harbor slide on the aforementioned Powerpoint presentation on our website and our various filings with the SEC, including our annual reports on Form 10-K, and our quarterly reports on Form 10-Q.
We make no obligation to update these statements should future financial data or events occur that differ from the forward looking statements presented today.
We may refer to a number of non-GAAP financial measures, which are used in addition to and in conjunction with results presented in accordance with GAAP. We believe the non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with the GAAP financial results and a reconciliation of GAAP measures they provide an even more.
Our complete understanding of the event business.
non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves.
In addition, we may refer to certain estimates of Covid based impacts. These figures are estimated based on our insights to customer applications, and our prototypes, indicating such demand or constraints on regional demand or ability to deliver.
On the call with me today is our president and Chief Executive Officer, Steve Schwartz, and our Chief Financial Officer Lindon Robertson, We will open the call with remarks from Steve on highlights for the first quarter, then lindon will provide a more detailed look into our financial results and our outlook for the second fiscal quarter of 2023, who will then too.
Your questions at the end of the prepared remarks.
That I would like to turn the call over to our CEO Steve Schwartz.
Thank you Sarah good afternoon, everyone and thank you for joining us.
Today, we're speaking to you from our new headquarters location in Burlington, Massachusetts, and we're pleased to share with you. The progress we've made over the past three months.
Our Q1 results were solid and in line with our target as we delivered revenue growth of 28% year over year organic growth. Excluding Covid was 7% a result, consistent with our 2023 expectations and a signal that the adjustments we've made to the business are taking hold as planned today.
Today, all of my comments on growth will be organic growth rates, excluding the impacts of COVID-19.
Looking at the business by segment, we saw strong performance in our products business, which grew 15%, reflecting another quarter of double digit year over year growth in our automated stores business as well as some promising stability in our C&I business, which contained no COVID-19 revenue, one was up slightly quarter over quarter.
On the services side, both sample and repository solutions and gene with genomics performed well.
A particular highlight with double digit growth in our core storage business of Srs. When we first got into the Srs business seven years ago, occasionally we'd handle up to a million samples in the quarter.
Today, we touched more than a million samples per month and that number continues to increase as more and more customers see the value in our offering.
And as we continue to automate we're more able to satisfy the heavier transactional aspects of our customer sample management needs, especially around the critical steps in our clinical trial workflow.
High volume individuals' sample tracking capability is a highly differentiated offering this valued by customers and necessary for their future needs.
Hey, genomics, we begin to recognize the positive impact from the retooling of our go to market approach and we're confident that the continued execution of our plans is the right strategy.
Specifically once again, we delivered a record quarter for next generation sequencing and Sanger sequencing with steady.
Perhaps most importantly, we're seeing early signs that we are beginning to recover some lost momentum in our gene synthesis business as we saw double digit growth in China, which is a positive indicator in terms of what we can do in the global market now that are logistics issues are behind us to be clear, we're not declaring victory here if there's much more to be done in sales staffing a little more confident.
Our actions and plans are providing the remedy and this is all about investments and proper execution, which has the focus of the entire leadership team.
One particular bright spot in the quarter was our performance serving cell and gene therapy customers.
Over the past few years, we have observed steady 20% to 30% growth from CGT across our portfolio of offerings, but in Q1, we recorded nearly 60% year over year growth, bringing cell and gene therapy sales to approximately 10% of revenue not including barky or be medical systems.
This was up 30% quarter to quarter.
<unk> a record revenue quarter of $42 million secured the commitments we'd anticipated.
That said, we saw one large order get pushed out which landed us below the $45 million, we'd initially anticipated wished.
We shared with you that quarterly revenue would be difficult to predict for this business, but we will continue to refine our forecasting to the street.
The good news is that the business has one and we're still confident that will deliver $130 million in revenue for the year.
In addition, our long term key human health initiatives are underway and we remain encouraged by this unique headstart and a fast growing emerging markets opportunity that seated by the medical as expensive footprint an outstanding reputation.
And though it's still the early days were already in discussions with pharma companies on how we could leverage the medical technologies and beachhead tax S patients in hard to reach geographies.
All in the base business is stable and exhibit signs of strong momentum.
Even in a more challenging macroeconomic environment, we believe our opportunities significant and it's ours to capture.
Q1 was a quarter of positive proof that our position is solid and products and Srs and that our initiatives to accelerate top line growth, especially in our genomics business are proving to be the right ones and will continue to drive these forward specifically.
Specifically, we're accelerating our investments and additional sales talent for coverage of accounts, but also a specific genomics technologies with emphasis on synthesis. We continue to recruit for additional regional sales coverage, where we have known gaps.
And we're not slowing our investments and development of innovative new products and services, which are key to our future outperformance.
It will take time for some of these initiatives the impact the top line, but they are necessary for our long term success. We're optimistic that these actions will support continued progress towards the low double digit growth objectives in the second half.
Will fund these investments through cost reduction measures that come from a realignment of our internal operations that target efficiency and enhance focus on value creating activities.
In total will take out about $20 million of annualized cost.
The net impact of the actions we're announcing today are expected to remove about 200 basis points of cost. Most importantly, these are the right next steps to ensure both our near term and long term potential.
We believe the end result will be tighter coordination between business units in sales and will take advantage of recently implemented enterprise solutions to automate and streamline internal activities.
And finally, we continue to identify opportunities to grow the business.
Last week, we completed a tuck in acquisition of is I F. A leading provider of two D bar code readers for life Sciences applications.
<unk> portfolio fits perfectly with our consumables and instruments business and enhances our portfolio of high throughput offerings designed for laboratory automation workflows.
This is a great example of the types of transactions, we can do where we have the opportunity to take a company with a great product portfolio and put his aunts as commercial reach behind it.
In closing I want to address a few key points.
First we believe we have a unique portfolio of best in class products and services that gives us a chance to secure the pole position in all things sample management and sample measurement.
And R Q1 results and tracks and give us confidence that were properly addressing issues that will allow us to regain our outsize growth profile.
Second we're adjusting our operations to match, our current portfolio and profile.
Specifically were prioritizing strategic sales investment to drive the top line, while protecting our bottom line will.
We'll continue to monitor and measure results of actions taken in support all key sales initiative with the objective to turn the corner and Q2 and to see the progress in our results in the second half of this year.
And we're investing for growth, we have a strong balance sheet with more than $1 billion in cash available for opportunistic additions to our already powerful portfolio.
All were very positive about our momentum and where we are at this moment.
We have high conviction and the value that we bring to customers and our strong market leadership.
We look forward to continuing to update you on our progress throughout the year and we thank you for your interest and support as we work to deliver value to our customers and shareholders.
I will now turn the call over to London.
Thank you Steve I now refer you back to the slide deck available on our web site turning to slide three for some highlights.
First quarter revenue was $178 million up 28% year over year and up 30% sequentially.
This is up 7% on our organic year over year basis, when you exclude estimated COVID-19 impacts improv.
And products, we delivered 15% organic growth, excluding COVID-19, driven by 23% growth in automated systems, and 16% growth and CNI.
And services organic growth, excluding Covid was 4% led by our sampler repository solutions business up 10% and within our genomics business. Our next generation sequencing business was up 12%.
On a sequential basis significant expansion in the quarter was driven by the addition of the medical which closed on October 3rd That'd.
That'd be medical team achieved a record level of revenue for their business with $42 million in the quarter.
When I consider R. Q1 revenue results are based business came right in the range of our expectations and won't be medical had a record quarter. It was a bit short of our expectations.
As we have described previously revenue in this business can fluctuate each quarter due to project funding dependencies.
non-GAAP EPS was 12.
Flat year over year gap.
Gap EPS was the loss of 15 cents, an adjusted EBITDA margin approximately 7%.
As Steve disgusted and his remarks were taking several decisive actions to best position the company for long term success.
In light of continued inflationary and margin pressures, we recently initiated actions to fine tune our business structure, removing cost in certain areas, while making targeted growth investments and others. We.
We expected net approximately two points of cost reduction to contribute to margin expansion for the second half of fiscal 2023.
You should expect to see the impact of these actions in our third quarter financials movie.
Moving to an update on capital deployment as we announced during the last call. We entered into a 500 million dollar accelerated share repurchase program, which we expect to complete by the end of the third fiscal quarter ending June 30th.
Total we still plan to return approximately 1 billion to shareholders within this calendar year.
Beyond share repurchases, we remain focused on capital deployment in the form of investment and M&A.
After the expected 1 billion return to shareholders, our balance sheet will still have over $900 million in cash resources available for strategic investment.
And all we have a strong portfolio are well established in high growth markets and we believe the actions we are taking <expletive> position us to deliver results over the near term and into the future.
Let's move on to slide for to address the first quarter results.
As mentioned revenue of $178 million was up 28% year over year and up 30% sequentially to.
To the right we have provided the table to show the color on the reported revenue.
<unk> reported revenue, we remove four points of foreign exchange headwinds and revenue of $46 million from acquisitions, which provides an organic decline of 1%.
From there when we remove the impacts of Covid, which was an estimated $11 million of revenue in Q1 of fiscal 2022 and was approximately zero in this quarter on a year over year basis organic growth when excluding the estimated COVID-19 related impact from each period was 7%.
Looking at the piano on the left side total GAAP earnings per share was a loss of 15 cents compared to a loss of seven in the fourth quarter of fiscal 2022 <unk>.
Compared to the prior quarter increased expenses include costs associated with M&A R accelerated share repurchase program as well as the amortization impact of purchase accounting adjustments.
Now, let's look at the non-GAAP piano on the right side of the page.
The revenue increase of 41 million quarter to quarter period, higher gross margins up 150 basis points to 45.4%, primarily driven by the services segment and the addition of the medical <unk>.
Operating expense increased 23 million quarter over quarter with $13 million of the increase coming from the medical $7 million coming from the annual reset of stock compensation in variable compensation accruals and the remainder due to various corporate and commercial expenses, which translates into approximately 7%.
Adjusted EBITDA margin.
Now please turn over to slide five for a review of our life Science product segment results.
As you can see in the results today, we have determined that the beam medical operations will be reported as part of the product segment.
With that product segment revenue totaled $90 million for the quarter.
The acquisitions of the medical embarking contributed 42 million and $4 million respectively.
First quarter revenue was up 80% year over year on a reported basis substantially driven by the be medical and Barky acquisitions.
<unk> segment organic growth, excluding COVID-19 was strong up 15% year over year.
This was supported by large automated systems, which grew 23% year over year during the quarter and was supported by robust bookings, which we have noted in recent quarters as those bookings had begun to translate into <unk> and.
And consumables and instruments are business most impacted by Covid, we are starting to show some demand improvement from new and existing customers, resulting in a quarter over quarter increase of 3% and revenue.
Organic growth, excluding COVID-19 about a year over year basis for this business was 16%.
We have one more quarter of tough compares from Covid related revenue, but the X COVID-19 growth in Q1 is a strong indication of the growth capability in this business.
<unk> first quarter gross margin was 43.2% of 300 basis points quarter over quarter.
Excluding the medical gross margins for roughly flat from Q4.
Operating income was $3 million for the quarter compared to income of $4 million. The prior year. This year over year decline is due to gross margin softness on lower revenue as well as increased SG&A expense.
Adjusted EBITDA margin was approximately eight per cent.
Next please turn to slide six for review of our services secondary results.
The services segment generated first quarter revenue of $89 million, a decrease of 1% year over year.
Organic growth for the quarter, excluding COVID-19 was 4%, reflecting 2% growth in genomics and 10% growth in Sampa repository solutions.
The genomic services performance was led by next generation sequencing, which grew 12% year over year on an organic X COVID-19 basis, we.
We saw notable growth in some larger accounts, which are increasingly recognizing the value of our customizable solutions that offer industry, leading speeding convenience.
Singer first quarter tends to be seasonally lower and we saw that in our results at this time as well.
And gene synthesis, we continue to see softness as well as modest impact from the China Covid outbreak.
Just X challenges and gene sentences that we discussed last quarter for business shipped out of China have largely been resolved and we believe the sales initiatives. We have in place will continue to gain traction over the coming months.
Sample repository solutions organic growth, excluding COVID-19 of 10% year over year was once again, driven by our storage revenue, which grew 18% and continues to expand our recurring revenue base.
This quarter or storage business benefited from additional another large biotech customer this when similar to others. We have mentioned in the past demonstrates the value we bring to customers in our court capabilities in and around our sample management.
Services business delivered 47, 6% gross margin of 170 basis point expansion quarter over quarter, driven by next generation sequencing with a year over year drop by 360 basis points still reflecting inflationary pressures as well as lower volumes and gene synthesis.
Two one operating loss was $3 million due to the lower gross margin as well as higher operating expenses adjusted EBITDA margin was 4%.
Let's turn over to slide seven to review the balance sheet.
December 31, we had $1.4 billion of cash restricted cash and marketable securities with no debt outstanding.
As noted previously we completed the <unk> medical acquisition for $424 million in cash $43 million of which was be medical debt that we paid down in fiscal 2022 ahead of the clothes.
In late November we used $500 million of cash to enter into an accelerated share repurchase program.
We remain committed to returning an additional $500 million to shareholders. This calendar year for a total of approximately 1 billion in cash to shareholders.
Beyond this we continue to invest for growth both organically and through M&A with a clear lens toward deals with returns that exceed are weighted average cost of capital within five years.
Balance sheet changes significantly due to the addition of the medical you can see this scenario, including goodwill and intangibles, but also in property plant and equipment with the addition of the medical manufacturing assets and they wrote a molding capability as well as inventory receivables and payables let's.
Let's turn to the final slide for guidance.
<unk> is expected to be in the range of $156 million to $171 million with the mid point supporting growth of approximately 13% year over year. This.
This includes an organic growth create excluding COVID-19 of approximately 2% into mid point.
We estimate the foreign exchange impact to be a headwind of three points and the revenue from acquisitions to be a total of approximately $30 million.
That is approximately $4 million from Barky, and we expect the medical systems contribute approximately $24 million to $27 million.
We expect products revenue, including acquisitions to be in the range of $72 million to $79 million as we expect the base business to increase a couple of million quarter to quarter and be medical to show a decline quarter over quarter as it comes off of its December quarter, which tends to be the busiest of the year for vaccine cold chain orders.
And all the products guidance supports a low teens organic growth rate when excluding the impact of Covid.
We expect services to be in the range of 84 to 92 million, reflecting roughly flat quarter to quarter revenue in both Srs and genomics at the mid point of our guidance range.
Adjusted EBITDA is anticipated to be approximately $2 million.
non-GAAP earnings per share is expected to be breakeven plus or minus four cents per share.
And as you can see in the guidance, our second quarter is stable and the base business and reflects the lower March quarter for be medical.
From a profitability perspective, we anticipate second quarter to be the low point in our fiscal 2023.
We expect the cost actions as well as the strategic investments to show tangible progress starting in Q3 and together. We expect these efforts can support our full year expectations for revenue and that we exit the year above 10% adjusted EBITDA margin.
In conclusion, we continue to see indications momentum and we are taking actions in our cost base to set ourselves up for success and to deliver profitable growth and.
And lastly, we will continue to return cash to shareholders, while maintaining an active stance on the M&A from.
As always we will continue to provide updates on our progress throughout the year.
<unk> concludes our prepared remarks, I will turn the call back over to the operator to take your questions.
Thank you if.
If you would like to register a question. Please press the one followed by the four on your telephone you'll hear three total 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.
And your first question will come from the line of Jacob Johnson with Stevens. Your line is open.
Hey, good evening, everybody Linden.
<unk>, maybe just start on the guidance that you just touched on I think you're still kind of targeting the same 30 per cent revenue growth, but it but it seems like maybe March and expectations has been pushed out a little bit and you're talking about taking some cost out of the business can you just talk about kind of what's changed now versus the <unk>.
In terms of kind of cost in March and expectations.
Yeah, Jacob I take it you captured the.
Top lines right being we we still see ourselves getting to 30% revenue growth for the year.
With that said, we do see.
The margin pressures in the first half being a little heavier.
And partially in reaction to that also an opportunity to gain some efficiencies and effectiveness center operations take.
Taken some actions and.
And as we do that that's going to enhance some of that cost equation upset of those actions in total were taking about $5 million a quarter $20 million of cost out and at the same time, we will be proceeding with some.
Fairly fairly selective and.
Specific investments to continue.
Continue to drive growth.
So with that said, though with the margin precious we have in the first half.
You're right Uhm previously we had identified that we would be about 10% or better on EBITDA margins for the year here were saying will be a 10% or better by the fourth quarter.
Okay. Thanks for that one day and then.
Steve If I heard you correctly it sounds like you've seen you sound kind of an acceleration in grants from the <unk> gene therapy and market. You know I think this earnings season, you know I think that market's relatively healthy, but there's been some pockets of weakness and I think we've seen some other companies, where maybe throats decelerating a little bit and markets can you just talk about kind of what she saw from that and marketed on what.
You know what drove the pick up and grabbed some salad gene therapy.
Sure. So actually we were surprised by the magnitude of the increase but I think we attributed to some new offerings that we have we have some a V services. They were able to provide the team has been really aggressive going after the opportunities there, but the breadth of the offering we think is great about in rough terms, 60% of.
<unk> came from the genomics Jean with business.
Roughly 30% from products and roughly 10% was from Srs. So the complete offering is it.
It seems to be pretty attractive we do believe that these the offerings are necessary uhm, we'll see as we win as we wind projects this might be a little bit lumpy, but in general we've added customers. We think this is the sustainable.
Type of momentum and we're really pleased by the performance I don't know what to expect for the next quarter, but the engagement with customers is stronger and stronger with each quarter, just because of the value of the the scientific offerings that come from the gene was team.
Got it thanks for your question.
Your next question comes from the line of David Saxon with need your line is open.
Yeah, Good evening, guys and thanks for taking my questions.
Maybe I'll start with Srs.
The storage part of that business.
Was really strong I think you said, 80% I'm going from a million samples the quarter to now a million dollars per month. So just wondering how much visibility do you do you have in that storage part of the business and is it is kind of.
Hi T a.
A good starting point.
<unk> revenue growth for for that storage part for the year.
Yeah, David Let me start and Steve will at some color on the customer demand side.
But first you're exactly right in your reference or just said clarity for everyone.
We highlighted we saw 10% organic growth X COVID-19 and Srs.
Year over year.
Inside of that we have multiple elements of service delivery, but the largest piece is storage pure storage that.
Includes primarily offsite storage that being sample stored on our locations also includes a little bit of onsite storage, where services that we perform for customers at their site, it's getting to be.
More prevalent but with that said the total of that grew 18% and the nice thing about that is that represents.
Samples going into the freezers, which is our recurring revenue base. So now you're asking about the line of sight. The nice thing about that is once samples or in the freezer as we know they tend to stay there. So it gives us.
More solid recurring revenue base, so that that part of it's clear I've often described as a business seasons of hydro seasons of logos simply because we're accumulating millions of samples and so each period, where we show growth.
Growth on a pretty large base of samples in the freezer snow. So you can see that this is a momentum of really <unk>.
Outsource adoption.
Adoption rate business, where the outsource demands are increasing and and so the line of sight is good on the based revenue.
Seasons of higher growth lower growth Europeans still continue I would not highlight high teens as being a starting point I think the 10% organic growth on the total storage Srs business is probably a good starting point plus or minus to that overall.
But there will be times were up in his teens and if you recall.
You know if we went back a couple of years ago. We said, we said it wouldn't be unusual show us in the mid teens. So certainly some may be projecting that I think in the these environments. The outsource adoption rate seems to have momentum so somewhere between that 10 in mid teens.
Steve made.
Add some color to the types of demands we're seeing here.
Even I'll add a little bit I think as Linda mentioned, when we first got into this business most of the.
The Srs business was archival storage and the capabilities, we have to manage samples in a way that is really beneficial to customers is changed because it allows us to change the business pretty dramatically, we talk about automation and our ability to handle samples now we're able to participate in clinical trials, we can help the customers by doing <unk>.
By moving samples in N out much more frequently than we did before so we are we are an element of what they used to have onsite or the maybe had done historically at a ciara and our ability to touch and manage the samples on an inbound and outbound is is an efficiency play for them in a pretty dramatic change to the nature.
What we're able to offer to them. So a significant amount of touches a large increase in the storage revenue in our ability to store, but one of the reasons. We are getting more storage business is our ability to literally manage the transit the traffic and the the samples for clinical trial. So it's a pretty dramatic expansion.
<unk> and it's one of the reasons you hear us talk so much about automation R&D the ability to handle not just a million samples a month, but eventually millions of samples a month is going to depend on our ability to handle the samples. So in terms of line of sight.
On the.
On the dark in the freezer.
Freezers at the receiving area of the facilities, we always have line of sight to what's there, but our challenge has been to process those as quickly as possible to get them into storage and a management on a short cycle for customers and that's where we put all of our focus so we anticipate the direction of the business is good the volumes will increase in the better we.
The more customers will continue to allow us to participate in their workflow not just an archival storage and that's that's the transformation that we've seen.
Okay. Yeah, that's super helpful. And then maybe on M&A I mean, all all the M&A, it's been on the product side. So far so we just wanted to add.
Is that because you'd see more portfolio gaps on the product side or is that just where the joseph across the finish line and then going forward.
How should we think about where you're focusing on adding through M&A.
So much yeah. So I I think your observations correct, if things had been on the product side and and those are more about being actionable. We have a pipeline that's equivalent on the genomic side and we're interested in I think you could imagine that were active in both areas.
And there are capabilities, if you'd like to add.
Has it become actionable you'll see us participate.
Got it thank you.
Thanks, David.
Thank you next question comes from the line of Paul ninth with keep on your line is open.
Hi, Lynn and Steve could you talk to the is what percentage of revenue with someone gene therapy is at 10%.
Yeah. We're we're at the 10% were just starting to cross over there and I should highlight that we haven't captured that.
For for be medical so that's excluding the be medical revenue equation.
Okay, and then obviously the lifestyle services with the slower growth.
Portion and I'm guessing.
That's part of going to continue in March is it all ago productions, specifically the slowest part of the business.
And what's the towards the trend there.
Yeah, I suppose you could imagine I think you hit it right on the head were you Mgs was another record the Sanger is a little bit seasonal good that's really steady as we have thousands of customers. We've been slower in the synthesis side of the business Hollywood Productions, a small portion of the business is gene synthesis, that's been a little bit slower.
We've got some green shoots this show that activity is good we've got a lot of capability amount of capacity.
Quality capabilities and this is where we're focused with our sales initiatives and sales efforts to get that back. So we're encouraged by where we are it's just you're just gonna take a little bit of time, but the offerings are particularly strong and we're bullish that will get this back.
On a good growth passed by the year end, but indeed, that's been the soft spot for us on the on the genomic site.
And China, you said was what mid single digit growth and we will follow onto the China question is I know you would expand it in China to expand all ago production are you kind of getting to normal in China and all the gold production in China How's that.
Yeah, Paul I'm Gonna keep bringing it back to all ago production is mostly as a raw material for our synthesis business. We have we have all the go businesses, it's relatively small but production capability as the production capability is very strong this is about customers and engagement and getting back to customers the growth and <unk>.
Kinda on the on the synthesis side, both the all it goes and the gene synthesis was.
Was strong in China in particular in light of the Covid environment and a highlight we actually just struck low double digit growth in China and that was supported on the services side as well as products say when I say that growth on both sides and and.
It's encouraging on the gene synthesis eight there were quite competitive on the ground, where we weren't exporting as we mentioned on the call. One of the things that has held us back in other areas, where some logistics issues in the Covid environment.
But we've overcome that now and we're putting sales power behind that again and I think we're starting to see just beginning signs of recovering some of those.
Accounts.
Okay.
Thank you.
Yeah. Thanks.
Your next question comes from the line of Vijay Kumar with Evercore ISI. Your line is open.
Hey, guys. Thanks for taking my question.
<unk> I just wanted to understand.
The number of <unk>.
Up up 28% and I think you'd guidance.
Guidance is for maybe 12% in two Q at the Mccoin ready.
And when I located your annual guidance of 30 per cent growth that would imply a 40 per cent and go to the back half just give them more first half is shaking out.
What drives this second half acceleration when I look at the organic guide for two P. Here I think that diesel rated X code from the seven per cent in one <unk> two per cent, what's driving this desalination two Q and what gives us the visibility here for the back half.
Guide.
Yeah V. J. So it's really reasonable question, let me, let me say.
We feel like in the first quarter, we delivered really right on our expectations. Let me break it into two pieces are based business excluding the medical.
Right on right on our objectives.
And both businesses.
Some signs of strength.
There were counting on in the in the second half and this this is consistent when we shape. The guidance last quarter is that we would have low single digit growth on the organic basis X COVID-19, starting but that it would move toward low double digits or through low double digit.
I said to to achieve that and I think that's what we're seeing we're seeing signs of momentum. We've got we actually we truly believe that the investments, we're making are going to help.
Further fuel that and the efficiencies, we're creating I think will also fuel that and the coordination of our business.
And the other piece of the business and the medical we felt just a bit short of the number we had in our in our mid point.
Still as you said it reached us up to 28%, but two reminders here lumpy business, so that attributes to white with just a touch short, but we're not concerned because we know the projects and demands there are still there. It's just timing the other aspect of this as we highlighted the December .
Quarter every year and that business is the peak of the calendar year that means you're gonna drop off in the March quarter, and then you are gonna be lumpy and you can't project that it's linear at all but you've got fuel to carry it through the next the rest of the three quarters.
And that's what we see particularly with some significant orders that that we know are coming but but didn't come in the first quarter. So.
Another way to talk about the medical is if you look at what we've.
<unk> in our guidance will be about have achieved in the medical by the time, we get through the second quarter of that year that we've described for them at $130 million.
We will be pushing the needle so we feel pretty good about that first half the second half will show more growth and be medical year over year.
<unk> on a your year over year basis, but but it's not that et cetera. The woods relative to what we'll have delivered in the first half.
Sorry, just to clarify that <unk>, the medical $130 million revenues. It looks like you guys, who read creating the 130 is that right and and I wasn't clear on the second quarter of 2% organic what what drives but sequentially be celebration <unk>.
Code from Q1, I I don't think the cops got harder.
So I'm just trying to understand <unk> with their timing.
Anything else that's going on.
So.
One separated again, so the medical first uhm be medical.
It's a natural drop off from a December year end, where budgets and project funding drives the December quarter, but less so in the first calendar quarter on the base business, you're right. There's some deceleration of overall a year over year compares on an organic basis X COVID-19, but.
And that you're going to see if you if you break it apart you're gonna see the products business is still low double digits X COVID-19, but the services businesses in single digits still.
And the genomics businesses still lagging the sampler apostrophe solutions business I expect when we finish the second quarter will still be talking about strengthen srs and the momentum that we see signs of a moment of the general.
Still picking up the both of those businesses.
Holly be talking about Lowes, I should say single digit growth Uhm territory.
I'm just wondering if I could just maybe squeeze one more operating margins here.
K Martin's it looks like Q1 was.
Maybe zero percent margins.
What's driving this year on year declines right I think last year I heard you guys at high singles operating margins and there's two Q.
Are we looking at negative operating margins Linden because that will.
You know when I look at it EPS guidance if.
Flat Sierra E. P. S. At the mid point is that is that indicating.
Negative operating margins into Q.
Yeah. So first of your your correct on the on the.
[noise] observation that were down year over year, those those projections or I should say those.
Trends year over year.
Really were gross margin pressures and of course, we've added structure.
To the business to absorb more into take on V medical, but but curious exarate gross margin pressures are there we haven't made.
Made that up.
In in with the actions, we're taking as they said we will take about $20 million of annual cost out it'll be about $5 million or a couple of points will net a couple of points none of investments in the second half so.
So that's somewhat reaction to that.
But also it's position as for more efficiencies when when you are looking at the at.
At the second quarter.
You will be looking at negative operating profit in total and and that's very cognizant of our part.
And again it'll be a low point in the fiscal year as I made in my commentary, we're confident that we've got two convictions very strong one we are seeing the signs of momentum on growth, we're going to continue to invest we're not pulling back on that but secondly, we're reinforcing it with the cost actions.
And we are said I'm, making making it a more profitable based business and set it for leverage going forward.
I understood. Thanks, guys.
Yep. Thanks, Thanks for you too.
And your next question comes from the line of you want cheese with be Riley. Your line is open.
Yep. Thank you for taking our questions. Maybe you have covered the part homes is so for genomic services customers.
Break it down to government and stomach institutions Big pharma and then <unk> have you seen different customer behavior change over the last <unk>.
What I would say is we wouldn't.
Indicate a significant difference there we.
We have read we see.
Could we align academics to have a little bit slower spending or their constraints on spinning budgets I think there's a touch there, but it's a little difficult for us to call. It a trend.
In general what we have seen as acceleration in N G S.
And we see that across the board, but farm of biotech.
And academics or participate in the space for us.
So.
<unk>.
You want and I, just wouldn't call out a particular sector driving this weakness we see this is somewhat market centric.
Ah highlighted.
The the Americas has.
It has continued to be stable in China.
Grew pretty nicely overall Europe is still lagging a bit in this space for us and again I don't know that that reflects market. It could I think challenges are in Europe are certainly straw heavier, but but we also see that we're a small player.
Relative sherwell eyes leader and capabilities, but still small sherwood and so there's lots of opportunities for us to winning this war will be putting our investments in each market.
Got it maybe you can I verify all how you plan to reconstructed disease sales regional structure does it mean more sales in a certain region. So it was at the how more full cost of their own.
Yeah, Hi, this is Steve Indeed, we have more.
Very specifically.
Gnomic focus [noise].
Some critical regions, and we're hiring and training, but it requires a special.
Special talent, there, so weird, but we're aggressive in our hiring.
And in addition, you know we're.
We're making sure that the teams are intact right now and each one is filling out their specific positions. We do have a couple of regional gaps and we're working hard to hire there. So we're I think we're making progress we're pleased with the with the really exceptional talent, we've been able to bring but it takes it takes a lot of work to find just the right people.
Got it thank you for taking our questions.
Thank you yeah.
And there are no further questions Mister Robertson, Mr. Schwartz I'll turn it back to you for closing remarks, Thank you very much.
Thank you David.
Thanks, everyone for tuning in with us.
These are really key times for us were in a mode as as much of them. The market's I know that you're analyzing and and looking to find the right investments and.
We're at a juncture, where Ah wall growth moderated we're seeing positive growth. So we're talking about why are why are growth is positive, but but but.
But not as strong as it could be and what it has been in the past we expect that we're.
Making the right investments, we're headed toward I believe that acceleration and that's our intent and objectives here.
A highlight relative to some of the questions. We weird tuning the sales team for that performance with investments, we're putting more demand generation dollars behind that as we write say some of our structures and so we're going to facilitate that and.
Market by market and facilitated also with talent and skills the Steve outlined in his remarks, so with that I.
Look forward to it and I, just delivering on the second quarter, but being able to talk to you about the progress that we see out of the second fiscal quarter headed into a I think a stronger second half and that's been our objective as we talk to you about that three months ago and were convictions are today.
Thank you very much we look forward to keeping abreast of our progress as we move through the year and we'll talk to you soon out on the street. Thank you.
Yeah that does conclude the conference call for today, we thank you very much for your participation and ask that you. Please disconnect your line.
[music].
Mmm Mmm.
[music] [noise] [music].
Mmm.
Mmm.
[music].
Mmm.
Mmm.
[music].
Mmm.
[music].