Q2 2023 Azenta Inc Earnings Call
[music].
Greetings and welcome to the US into Q2 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 Tuesday may nine 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 second quarter of fiscal year 2023 are.
Our second quarter earnings press release was issued after the close of the market today and is available on our Investor Relations website located at investors data Center Dotcom. 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 you'll 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.
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 complete understanding of these enter business non.
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 each.
These figures are estimated based on our insights to customer applications and or product types, 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, Our Chief Financial Officer, Lindon Robertson, we will open the call with remarks from Steve on highlights of the second quarter, then lindon will provide a more detailed look into our financial results and our outlook for the third fiscal quarter of 2023, we will then take 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.
It's one year since we established ourselves as a Standalone life Sciences company, a year of hard work and many learnings from <unk>.
Full of optimism and reinforce conviction about our purpose and opportunity.
Over this period, we've got a lot of things right. We continue to invest in new products services and applications to stay on the cutting edge of this dynamic field, keeping us close to the customers who are at the forefront of discovery and drug development.
We increased our capability and capacity to deliver on this demand.
We made strategic acquisitions of three more market, leading companies that will be important contributors to our future.
<unk> adds a critical application in the cell and gene therapy cold chain.
<unk> brings a technology enabler for sample workflow solutions and.
<unk> medical vaulted us into a unique position to serve fast growing emerging markets. Additionally, we secured key customer wins further verification that our offerings do indeed have the potential to transform how our customers run their businesses.
In cement that if this is true partner and their development efforts at the same time as we introduced the xanthan went to market under this new brand, we reorganized our formerly specialized product and services sales teams around accounts and broaden their scope to represent all isn't the offerings.
Over time, we found that we were most effective when utilizing specific expertise of our sales personnel, particularly in complex areas of genomics in the innovative area of automated cryo storage systems.
We have also realized the importance to reinvigorate strong brands like gene was in fluidics within the <unk> framework.
Fortunately as we've made changes to go back to product and genomics dedicated sales. We've seen direct positive results. In addition, we came out of the chute prepared for sustained growth, which didn't materialize in part because of the transition I just mentioned.
And now facing a more challenging macroeconomic environment, we're left with much more cost than we need at this time.
We remain confident in the tremendous value of our portfolio to serve our customers in the life Sciences space and today, we further defined meaningful actions, we're taking to better align for growth and profitability as we deliver on this promise.
In my remarks today I'll focus on four areas.
One the return of growth for our genomics business in particular, the recovery of our synthesis business.
Our significant actions and investments for accelerated growth, including a realignment of the company in support of this critical proposition.
Three additional cost reductions that come with this realignment and for a reset of expectations for the near term as we prepare to deliver the full potential of this business.
Start, though by summarizing the overall business for the quarter.
Our Q2 results were mixed performance in our services business was solid and continues to track as expected.
Over on the product side, especially be medical we had some shortcomings in the quarter.
On a reported basis, we delivered 2% growth organic revenue, excluding estimated COVID-19 impacts declined 2% in the quarter.
Today, all of my comments on growth will be organic growth rates, excluding the impacts of COVID-19 unless otherwise specified.
Looking at the business by segment the products business declined 2%, reflecting a softer quarter than initially expected in the consumables business, we witnessed slower revenue as destocking kept our channel partners lighter than expectations. We do think these effects are temporary and are not impacting all customers, but the range of reports from various distributors.
Gives us little visibility into how long we might expect the channel to be slower for now we see Q3 consumables and instruments revenue flat to Q2.
In stores the revenue shortfall was a different story as large automated stores revenue was impacted by three customer projects that were delayed because their facilities, we're not ready for installation.
That said the storage revenue impact as a matter of timing and the revenue will be delivered in the coming quarters.
We remain at record backlog levels for automated stores in the backlog is secure but it.
Puts more pressure on manufacturing and installation teams as more projects ship in the second half of the year in.
In cryo stores, we shipped a record number of manual freezers, but our automated cryo system slowed due to budget uncertainty at large pharma companies, which delayed our ability to book and ship tools.
<unk> Cryo systems are critical tools for cell and gene therapy applications and we're the only commercial provider of automated systems. Although the timing of orders was delayed we do anticipate capturing this revenue once customer approvals are finalized. We believe this pause is consistent with a re prioritization of clinical trials work, that's making its way through some of the large pharma.
Companies.
The largest impact on our results came from be medical which delivered $15 million of revenue in the quarter. After a record $42 million in Q1 and considerably below our expectations.
Lower result was primarily impacted by timing delays in the cold chain business.
And the timing of revenue remains difficult to predict we are encouraged by the pipeline of opportunities that the team has generated we're focused on delivering on the benefits. We expect from this highly capable business, but admittedly the timing to achieve certain revenue milestones has changed.
Still the value of <unk> medical is enabling a large upside for us enter in new markets.
Accordingly be medical was accretive to earnings in the first half just not at the level we had anticipated.
And services performance was solid with genomics revenue coming in at the high end of our expectations and sample repository solutions delivering as expected.
We're particularly pleased that genomics is back on a positive trajectory.
Against the backdrop of January Covid impacts in China, and a decrease in funding for small biotech companies, we performed remarkably well in the quarter we.
We had two very meaningful takeaways in the quarter.
First we delivered a 6% sequential increase and gene synthesis revenue and good momentum entering this quarter and I know, it's been a while since you've heard me say that in.
In the quarter gene synthesis served more than 250, new pies and we performed several successful pilot runs that are key leading indicators of follow on business.
This sequential growth is a combination of a few elements.
The delivery issues, we had from our China facilities are confirmed to be remedied as quality and turnaround times are back to our best in class standards.
Customers, we'd lost have been coming back to us for exactly these reasons. They just can't get the quality or turnaround time from other suppliers and lower price from competitors doesn't make up for long turnaround times are diminished quality of results.
And finally strong focus by our account teams was the reason for our strong wins. This solidifies the notion that dedicated highly skilled salespeople are essential for success in this business.
We add to our business momentum, we launched two new gene synthesis offerings, the first being circular RNA synthesis, which targets the fast growing RNA therapeutics market, where we completed several pilots with large pharma accounts the.
The second is a high throughput length of viral packaging solution to support high throughput gene editing screens to be clear, we have much more opportunity across gene synthesis and confidence about our sturdy your position in the market.
In the rest of the gene was business Mgs in Sanger performed to expectation in both sub segments are poised for continued growth throughout the remainder of the year.
To round out services Srs as a whole grew 5% as expected driven by double digit growth in storage.
We're pleased with the continued inflow of samples to our sites as well as the traction we're seeing with new and existing customers. We won additional business with our existing large pharma and biotech customers and these wins are a testament to the strength of the business and the value proposition of the event the sample storage management offering.
In addition, our first automated multimillion sample store at our Indianapolis Srs sites has gone live and we're in the process of adding a second automated store as we're convinced that the future of bio repository business must incorporate automation and we continue to be ahead of the curve on that front. We believe we're increasing the competitive gap with each investment we make in the.
<unk> of state of the art sample management solutions.
LNG in therapy revenue grew 7% in the quarter driven by more than 20% growth in genomics and 60% growth in Srs the lower level of automated cryo systems orders kept us below 20% growth for CGT business this quarter.
As I mentioned at the beginning of my remarks, our number one issue is topline sales.
And we now have proof points that the realignment of sales activities and structure is supporting a return to higher growth and largely in our control as customer demand for products and services. We offer is clear.
We further determined that realignment of the business units is also key to allowing our account executives to best align our products and services to our customers needs.
So today, we announced the business realignment to enhance our commercial strategy and accelerate growth and profitability. These changes build upon the previously announced cost reduction initiatives aimed to streamline and optimize the business after.
After thorough assessment we've commenced the following changes.
One over the past four months, we've moved to realign marketing and increased go to market decision, making within the genomics business to further expand on the success of these initiatives were establishing a separate dedicated sales vertical for this business to enable the business to move quickly and efficiently in the fast turning sequencing and synthesis markets since we.
We acquired gene with four years ago, we've expanded both scale and sophistication of our offerings.
Genomics offerings of Sanger, and next generation sequencing and gene synthesis, we have enhanced our scientific power to offer many more services, including proteomics metabolomics single cell analysis digital spatial arrays bioinformatics and a host of laboratory services. This is now a multi omics platform and the need for focused highly capable.
<unk> sales is even more apparent and hence our dedicated sales alignment to this business unit.
This is all about scientists selling to scientists.
In recognition of this expanded service offering we're establishing this multi omics business unit, which will continue to be led by Dr. Ginger. So a 12 year veteran of <unk> with <unk>.
We're also combining all sample management capabilities into one organization.
Demonstrated that in the selling process, our sample management products and services complement each other well and often engaged the same customer decision maker.
And we're combining our Srs sample repository solutions business with our products business unit, which includes cold store systems as well as consumables and instruments. This.
This sample management solutions business will be managed by David Wang the current leader of the Srs business.
This business unit will also have its own dedicated sales organization focused on all things sample management.
Finally in this reorganization be medical will maintain its own structure. We believe the new structure will best align portfolio offerings to end customers, thereby enhancing collaboration and responsiveness.
Over the past few months, we've begun to move resources in this direction. The next changes will be to crystallize certain leadership reporting lines and moving towards formalizing this new structure.
In addition to bringing the needed focus of business units through fully aligned sales directly to customers. This restructuring will allow us to deliver an incremental $15 million of EBITDA by the end of this calendar year.
This is in addition to the cost reductions we initiated early in Q2.
Our objective and initiatives are completely aligned to restore growth and profitability for the long term goals, we set out at our analyst day in Q1 2022.
We're delayed in our delivery of that performance, but we're committed to achieving it.
We've already begun implementing the changes which will deliver positive momentum into 2024.
Finally, our capital position remains strong we ended the quarter with approximately $1 5 billion of cash on the balance sheet. We remain active in our share repurchase program and we've already spent more than $550 million to repurchase more than 11 million shares. Since we started the program in November which represents nearly 15% of outstanding shares.
A reflection of our confidence in the long term prospects for the company.
Even after our share repurchase commitment for fiscal 2023, we will have roughly $1 billion in cash available for strategic investments.
As I've described in my remarks today, there are many positive indicators as well as initiatives in progress to support growth and profitability enhancement.
These developments take time, but we believe are also the right steps to deliver long term performance and shareholder value.
This is a period of tremendous promise for events.
We uniquely provide a portfolio of best in class trusted products and services that enable breakthroughs faster.
Yo proposition at the heart of all investments in the life Sciences space, we're investing more in innovation and market leading capabilities.
We're bullish about our prospects not satisfied with our results, but doing just what we chose to increase growth and profitability.
That said, we use this time to recalibrate expectations for the next quarters.
We look forward to updating you on our progress and we thank you for your interest and support as we work to deliver value to our customers and shareholders and I'll now turn the call over to Linda.
Thank you Steve I.
Ill now refer you back to the slide deck available on our website.
Turning to slide three for some highlights.
Second quarter revenue was $148 million up 2% year over year.
Ganic based revenue was a little light on the product side, but in total still within the range, we provided as guidance.
As Steve commented, we are having difficulty with the predictability of the fee medical revenue. So you will see US lay this portion of the business out as clearly as possible with increased transparency to what we see.
Give me a moment to hit a few highlights and then we will go through each area of the business first I would like to highlight the progress made in the genomics business with a turnaround for the gene synthesis business has expanded 6% quarter to quarter, we had experienced some disruptions in logistics over the prior nine months and applied fixes to those immediate.
<unk> and at the same time applied sales and marketing to win back customers.
Second.
<unk> business continues to deliver growth up 5% year over year on the organic basis, excluding COVID-19.
This was led by double digit growth in core storage as samples continue to accumulate.
Next we confirmed the previously announced cost reduction actions were taken to enhance the adjusted EBITDA structure by two points of margin in the second half.
This reflects removing $20 million of annual cost and expense and making some investments in sales, which combined will net to approximately $14 million annual enhancement to EBITDA.
The second quarter benefited by the reductions by approximately $1 million.
As we look into 2024, we expect to reduce another $15 million of structural costs through the integration and rationalization of our acquired product businesses. Finally regarding capital deployment in early April we completed the previously announced 500 million accelerated share repurchase program under the ASR we reap.
<unk> just over 10 million shares at a total.
And we were prepared with a <unk> one program that commenced immediately upon the ASR completion and progress is underway on our next $500 million of repurchases in the open market.
This keeps us on track to repurchase a total of $1 billion in shares by the end of this calendar year as described last November .
That will leave us with a very strong balance sheet, holding approximately $900 million of additional cash and no debt with a path to continue high shareholder returns.
Let's turn over to slide four to take a look at our results for the quarter.
As already mentioned total revenue was $148 million up 2% year over year, and down 17% quarter over quarter $27 million of the $30 million sequential revenue decline was driven by beef medical.
This had a substantial impact on the details of our profit profile.
The year over year reported revenue growth of 2% was driven by the acquisitions made over the past year and you can see the bridge to the organic and estimated ex Colgate growth rates over to the right side of each page.
After you exclude the effects of the acquisitions foreign exchange and estimated Covid impacts the total business was down 2% year over year.
Each segment will show the same declined 2% on this metric the.
The services business performed just slightly better than what we expected for the quarter and the products business was light largely due to an underwriting consumables and some delay in large system projects. The puts and takes in each segment are interesting to understand is there a positive in both segments, we will get to those details in a moment.
Looking at the GAAP P&L on the left side SG&A expenses were lower quarter to quarter and year over year, driven by a $17 million reduction in the accrual for the contingent consideration related to be medical.
This was partially offset with operating structure, we added over the past year, primarily from the businesses acquired.
Below the line, you'll see we generated another $10 million in interest income this quarter similar to Q1.
GAAP earnings per share for continued operations was a loss of three sons, the 13th improvement quarter to quarter is largely driven by the change in the accrual for the contingent consideration for the medical looking at our non-GAAP results gross margin was 41, 1%, which was lower by 420 basis points versus the first quarter.
Each segment saw continued pressure on gross margins.
With clarity of performance. It is important to note the significant impact of the lower B medical revenue had on our margins the medical gross margin, which dropped 18 points to 29% on a non-GAAP basis drove 1.8 of the four two points of gross margin decline quarter to quarter <unk>.
Excluding the medical the business declined two four points quarter to quarter with similar pressures in both products and services.
Operating expenses were $74 million down 7 million quarter to quarter.
I should clarify that the change to the contingent consideration, which shows in the GAAP site is excluded from the non-GAAP .
The operating expense reduction you do see in the non-GAAP site reflects a substantive reduction of commissions as fee medical maintains a nicely variable commission structure and with the lower revenue this quarter at $4 5 million lower commissions compared to the first fiscal quarter.
The remaining decline was primarily driven by a reduction in variable compensation accrued driven by our performance expectations for the year. We also had a small benefit to opex from the previously announced head count reductions.
On a year over year basis, operating expenses were up $12 million roughly $10 million of the $12 million year over year increase was related to the acquisitions of <unk> medical and Bharti.
The remainder was driven by increased head count in the organic base business, partially offset by the lower performance based compensation accrual in the quarter.
Altogether, a lower gross margin combined with the factors on the operating expense line produced an adjusted EBITDA margin of a negative one 6%.
Adjusted EBITDA line dropped 14 million quarter to quarter of which the medical drove $10 million. We see this as a variable of timing more than a weakness in the profile.
But the dynamic is new to a center. So it brings me to emphasize at this point.
Now, let's turn over to slide five for a review of our life Sciences products segment results.
Total segment revenue was $59 million for the quarter up 10% year over year, driven by acquisitions, which contributed $19 million.
The medical revenue was $15 million, which was lower than expected due to the delay of anticipated orders.
We experienced this issue to a smaller degree in the first fiscal quarter and to a much larger degree this quarter.
We believe these delayed orders remain in the pipeline is business to be received and delivered but cannot predict the timeline with the reliability. We've come to learn that this is not a shortcoming and understanding of the business, but it is simply the nature of being in a business subject to the decision making of governments and funding agencies you can imagine we have attempted.
To form a model to predict timelines of demand.
Our conclusion is it going forward, we need to provide you with full transparency of order load and a clear message that additional revenue beyond that is unpredictable. We will give you an indication of orders schedule and the value of deals being worked.
In this quarter, the medical delivered $15 million of brothers.
This compares to confirmed orders back in early February of $13 million.
Team expected more to come in but it did not materialize by the end of the quarter.
For our Q3 to be medical team has $21 million of orders in hand expected to be delivered.
While its possible other projects may come in we will leave our Q3 guidance expectation that's $21 million.
The P&L consequences of the $15 million results are significant you can see lower gross margin, reflecting less absorption of fixed costs and weaker product mix on a positive note to be medical team has a highly variable commission payout, which brought the operating expense down by $5 million with this full view.
Hope to provide more clear understanding of the <unk> medical factor in our business.
The product segment organic base business declined 21%.
This removes all acquisition revenue and foreign exchange impact the.
The significant decline was driven by the estimated COVID-19 related demand in consumables in the second fiscal quarter of 2022, the last of the significant COVID-19 demand quarters presented.
When excluding the estimated COVID-19 impacts the organic based revenue was down 2% year over year with further headwinds in the consumables and instruments business.
We see elevated customer stocking positions as the driver of this weakness as we see similar messaging on this across the industry. We now estimate this will take some time to get back to normal growth on a consistent basis, perhaps into 2024 assist.
Our systems revenue grew 6% year over year as reported and 9% on an organic basis. This was a deceleration of revenue delivered due to customer delays and facility readiness, which surfaced in the quarter. This.
This is not reflective of a demand issue as we have with the large store orders in our backlog, which gives us confidence in seeing this translate to revenue in the coming quarters.
Systems team is working around customer readiness issues are proceeding with other projects and we expect some improvement in the fiscal third quarter and further improvement in the fourth fiscal quarter onward.
Second quarter gross margin was 35, 3% down eight points sequentially when.
When we remove the 18th sequential decline of the medical products gross margin was down two six points, primarily due to weaker product mix.
Lower operating expenses helped to mitigate the margin pressures with a lower commissions and variable compensation expenses. These.
These items resulted in adjusted EBITDA for the product segment of negative 8%.
As you can see the $12 million decline sequentially with substance is totally driven by the medical and the balanced by the softer revenue in systems on C&I.
Next please turn to slide six for a review of our services segment results.
<unk> segment generated second quarter revenue of $90 million, a decrease of 3% year over year, and an increase of 1% quarter over quarter.
As well as typical quarterly expansion from Q1 Q2.
N G. S was down modestly on a sequential basis, which is not an unusual seasonal trend in the March quarter versus December quarter, we actually saw a N G S deliver just slightly above our expectations.
Technology and demands for advanced capabilities continued to trend upward.
Proteomics offering remains strong and we continue to expand our geographic reach in technical capabilities for this service and.
And we were among the first to receive the Nova sic X plus which now is in service.
The services business delivered 45% gross margin down 2.6 points quarter over quarter.
Margins saw pressure from Labour and facility expansion as well as slightly weaker mix.
Second quarter, adjusted EBITDA margin for services was 6% and improved sequentially.
Now, let's review isn't this balance sheet and slight southern as.
As of March 31, we had one and a half billion dollars of cash restricted cash and marketable securities both short and long term we.
We have no debt outstanding our balance.
Balance sheet remains strong with roughly $900 million of additional cash available for M&A opportunities and organic investment.
As I indicated before in my remarks, following completion of the S. R. We commenced open market share repurchases under 10, B five one program and remain on track to repurchase a total of $1 billion of shares by the end of calendar year 2023.
Let's turn it over to slide eight to address cash flow adjust.
Justin cash flow from operations with $7 million in the quarter.
Capital expenditures for the quarter were $9 million the negative free cash flow you see on the page was largely driven by tax payments related to the sale of the semiconductor automation company you.
You may notice that inside the second fiscal quarter, no cash was consumed from the balance sheet related to share repurchases, but this was simply due to the accelerated share repurchase beginning in the first fiscal quarter and not finishing until we were into the third fiscal court.
Let's turn to the final slide for our guidance.
First a comment regarding COVID-19 impacts.
Going forward beginning with Q3, we do not intend to projector report the estimated impact of Covid revenue. So long as it has a nominal amount on a go forward in prior year basis.
We believe the amounts of Covid related revenue in our business will be nominal.
They have been for the past four quarters and a reflective of a world that lives with Covid on an ongoing basis.
If something changes in this regard of course, we will provide information as we have in the past.
With that said third quarter revenue is expected to be in the range of $150 million to $168 million with the mid point supporting growth of approximately 20% year over year.
This implies an organic growth rate of approximately 2% at the mid point, we estimate the foreign exchange impact to be a headwind of one point and the revenue from acquisitions to be a tailwind of approximately $25 million or 19 points of growth.
This includes revenue from be medical of approximately $21 million.
Or be medical given the unpredictable timing of revenue. It has just proven to be challenging forest estimate a final landing point Dora.
So our guidance for this business is heavily centered around order shipped to date and orders in hand planned to ship this quarter.
We believe this provides a more reliable external view of the business.
We expect products revenue, excluding the medical to be in the range of $42 million to $50 million <unk>.
Including the medical total product segment revenue is expected to be in the range of $63 million to $71 million, we expect services revenue to be in the range of $87 million to $97 million.
And adjusted EBITDA is anticipated to be approximately a negative three to a positive 6 million non.
non-GAAP earnings per share is expected to range between the negative seven cents to a positive three sons.
The cost savings initiatives that we announced last quarter remains on track and we expect to realize three and a half million dollars of net benefit per quarter. Starting in Q3 as a result of these actions.
As we look to the full year. It is clear that our results will likely fall short of our initial guidance.
Much of the shortfall comes in the timing of our expectations for be medical but we're also on a slower ramp up growth in our organic businesses we.
We now expect revenue in the range of $645 million to $675 million, which includes approximately $100 million from the medical.
A note on be medical guidance as I mentioned earlier going forward, we will provide quarterly be medical guidance based on orders in hand.
Provide a full year estimate as a rough expectation at this time, but you should anticipate us to update this in the queue for number based on our actual order book when we get to the next quarter.
With the lower top line expectations and the cost actions taken we anticipate modest improvement and adjusted EBITDA margin as we exit the fourth fiscal quarter setting us up for additional improvement in fiscal 2024.
The last topic I would like to discuss before turning the call over to Q&A as our business realignment initiative.
We believe the new alignment will further the goals with our commercial strategy accelerate revenue growth and ultimately drive profitability improvement.
As we enter fiscal 2024, we will assess segment reporting.
More directly related to guidance, we foresee in conjunction with a realignment, we will realize approximately $15 million of additional cost and expense reductions to further enhance EBITDA much.
Much of this will come through the integration and rationalization of the structures, we have acquired and some will come through the leaner management structure, we will carry when we combined based products and Srs business together for sample management solutions.
In closing the headwinds we are seeing in the business do not change the sizeable long term opportunity ahead of <unk> we.
We have a clear strategy in place and we are executing to that plan, we remain committed to continuous improvement at all levels and to deliver long term sustainable value for our shareholders.
I will now turn the call over to the operator for questions.
Thank you.
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Steve You mentioned that you would going back to your first analyst day around.
I think Q1 22, you were targeting roughly a 17.
Growth rate and 26% EBITDA margins it doesn't sound like you're on guiding to that but I'm I mean, you're you're pretty much that remained with goal is that right.
Yeah, Paul we're we're certainly not guarding to it but the fundamentals exist for us to get back there. So it's gonna take us a little bit of time to continue to increase the growth rate.
Quarter on quarter, but.
All the opportunities there all the potential and the company is still there. So that's R that remains our objective were delayed by a period of time, but we haven't let go with those objectives, because they're realistic for the business at hand.
And then what's broken down the medical is it more COVID-19 there the new font or.
What what caused that I know that the.
You wouldn't anticipated of 130 million on FY 2003, now we're at 100 once the App there.
Yeah. So Palmer learning on this business I think the projects are still all in place. So there's nothing fundamental that's changed we watch the forecasting capability, we launched we watch the opportunities that exist the ability to to get them closed finally is the part that is particularly tough with.
This moment and if we look historically at the business it's not.
It's not unusual that we see volatility to see volatility at this level, though is a little bit feels a little bit extreme at the moment.
But the pipeline is continuing to be served really well.
These aren't competitive types of issues when we when we have a project in our sights, we generally landed and the fact that we've had business. We know that we've won it as a matter of getting the contracts ultimately approved so we can get the product shift so I won't say that it is anything different from maybe what history was it certainly new for us.
Uhm.
We're we're going to continue to plow ahead, but without the visibility.
In terms of any kind of linearity I think lyndon laid it out really well, we're telling you where we are at this time in the quarter. If that's what we can count on and that's really the guide that we've given for the rest of this quarter of course that remains upside of projects can get closed, but we want everybody to know exactly where we are.
From a status standpoint on be medical so that we don't have another quarter, where there's a there's a surprise like we just hadn't Youtube.
And then lastly on my side would be on the Dom margin.
Fraction here on.
June and September periods, I guess Linden you fitted sequentially improve but can you give any more granularity on an EBITDA margin as we exit fiscal 2003.
With with some of the costs to actions that we've taken.
As well as albeit a little lower revenues than we were projecting previously.
Gain a little bit of incremental improvements so I'm looking for modest improvement as we exit the fourth quarter.
But we won't be at that 10% level, we don't anticipate so we're looking for a modest improvement.
As we do in Q3, and then again in queue for that will be in the single digits.
Thanks.
Your next question comes from line of Vijay Kumar with Evercore ISI. Your line is open.
Thanks for taking my question.
Steve.
<unk> one on the back half guidance and think up based business did you know low single digit declines in two two and I think <unk> guidance is for upload singles.
I'm doing the math correctly I think it applies Q4.
Doubled its organic.
For the base business Xb medical.
Matt correct and would rise this acceleration and back have I think we've touched upon a couple of things.
Destocking customers pushing out orders et cetera, but maybe talk about what drives the back half.
Yeah.
I'll give you a little color on the organic X COVID-19 growth. It is accelerating as you move through but not not quite to the degree that you're anticipating so we see our mid point where.
Whereas we were just down 2% on our organic eggs COVID-19, we see our organic.
And by the way, we're not adjusting for <unk>.
<unk> not only because there's not much there and either comparative period, but up about two points in Q3 at the midpoint and roughly up about 6.6% in queue for and so you're seeing that improvement track, but we're calling a.
Pretty modest.
Improvement on a year over year basis, and then of course as we go into 2024, we think the Atkins and the realignment will further support we're seeing good traction in.
Genomics and Srs and I would highlight as we reflected on this we've seen the continuation of momentum as we've gone through the April month as well on both of US are us in genomics products. We we do see growth supported from large systems in the second half.
As we said we had some rescheduling here in the second quarter, we don't expect that to repeat in fact, our team was very focused on making sure. We re slot production as well as the install labor on the projects to be complete in the second half so that will help support some growth in the second half as well I would highlight Vijay in the <unk>.
Product space.
Still have a substantial amount of revenue in the CNI and this is just something that as we said last quarter. We just couldn't see whether destocking would be finished or not this quarter was a disappointment and and we've seen it and I've seen in the industry across the other players that they've seen it as well.
We would say that C&I may take longer to get back. So we're not counting on growth from that and that's part of the that's part of the softer call here as in the Cni's space.
Understood and and just one follow up Uhm gross Martin turn the quarter.
Was this all just manufacturing variance just given the lower revenue base or.
It's just that sequential 400 basis points it seems like a big dog.
There anything else that went on on the gross margin line.
Yeah, so on the on the product.
For sure like like we called out the medical on the lower production was by far and away the bigger impact on gross margin of the biggest impact. However on both once you remove the medical both the rest of the products as well as the services business was down more than two points on the product side.
Definitely on the system site.
We had a bit of cost impact with a lower revenue that we put out.
We actually saw some modest improvement quarter to quarter on CNI, and then our services business and products, but what what I'll wait that was the system's site.
On the services side.
Genomics and S. R S.
We did see pressures and those businesses as well and I'll highlight to our investors because we announced the realignment we did provide into the back of our earnings deck.
Sarah has captured some good historical data in the current quarter data on genomics and Srs gross margins for Investor base, which we had not previously disclosed.
So you'll see really cleared data there and you'll see about four points of pressure on us or quarter to quarter and a couple of points and genomics.
That said in the <unk> business, we did have a credit memo.
That was put out that won't repeat itself that was an unusual event for us.
And and we see that.
Just a small tarnish on our revenue as well, but on our gross margin of drop through so with that said I'm still seeing strong ma'am momentum and S. R. US I think margins will come back there in Q3, and they will come back up some and then in queue for will also see.
A touch of enhancement on genomics.
Expansion is there in both businesses, we keep we put a little capital and Srs as well, but but that's the support that growth. So we always have those kind of perturbations on depreciation et cetera, but but the momentum is there for enhancement as we go into the second half.
Your next question comes from the line of David Saxon with need your line is open.
Hi, Steve Highland and good afternoon, and thanks for taking my questions Uhm, maybe to start on the four year guide.
Now expecting 20% versus prior guidance of 30%.
Think that's about it.
Split evenly between kind of the reduction in the medical and maybe a five point reduction for the organics head of the business for for that organic side can you break out the reduction in terms of how much is being caused by.
These are consumable destocking dynamics.
The large auto stores order.
<unk> being pushed Avenue.
The synthesis recovery and any other factors that you would call out.
Yeah.
I was gonna do my best Yeah, you are right in the in the ballpark.
We took down rough.
Roughly 60 million out of the growth projection in about half of that.
30 million out of.
Out of the medical on 30 out of the the rest of the business.
A portion of that is on the I would pointed out of the 30 and products is probably close to half of it is in.
As in product and let me say that differently and and the 30 that in the base business about half of that is in the products and we're seeing.
That just in the guide or just in the quarter that we gave you we were about six shore from the mid.
Mid point and so we also factored that into the rest of the year on CNI, Steve highlighted that we're a little bit slower right now and we want to be on the cryo business as well. So you can see about half of that would be in the product site of the business. Excluding the medical just on the base the other half a little slower.
<unk> in terms of the attraction, but we're seeing the momentum per Mil and so we do anticipate that will continue to expand and then the smaller pieces us her assessor us is probably the most stable as it has been over the past year or two in terms of continued progression through the year and into 2024.
Genomics higher transactional base, but we're gaining steam but a lower than our guidance and then 130 the pregnant I'm sorry in the 30 per cent growth projection.
Okay got it that's super helpful. Thanks for that and then and then on the fiscal third quarter guidance specifically for services.
And implies that there could be six sequential contraction.
Just based off the comments you just gave it sounds like <unk>.
Not driving that so uhm, but I started in your prepared remarks, you mentioned genomics.
With picking up into March so <unk> task.
Have those trends continued into the fiscal third quarter, and then with the sequential decline implied by the low end would that really just be around <unk>.
Synthesis recovery. Thanks, so much.
Yeah, No I appreciate that question for clarifying so so overall we're seeing.
Our services business expand of the and the guidance from Q2 to Q3.
As I mentioned, we had a small credit memos issue in Srs will pick that up and we're building some samples.
Accumulation there. So we're seeing Ah Ah are typical modest expansion in us are us that.
That just continues to go up every quarter, but in general mix.
This is where we're really starting to see what we believe to be substantial progression of what we used to see when I say that it's.
It's not been so long ago, where we would expand $2 million to $3 million a quarter.
The mid point of this guy we were looking at about $2 million, a pickup quarter to quarter on the genomic site supported with some momentum and both Ah well really in all three businesses and we saw it in Sanger and gene synthesis in the second fiscal quarter and the third physical <unk>.
<unk>.
We see it in all three including <unk> and I should highlight the second quarter N. G S as seasonally typically lower than the December quarter, but so were we.
We feel good on the genomics that we're seeing the momentum and highlight to investors.
Typically in the genomics business, you would get that in $2 million to $3 million, if you're at $3 million a quarter, you're at 5% expansion just on a quarter over quarter.
It takes that kind of momentum over four quarters, then you're into double digit Terry territory, starting to push the 20% on a year over year basis and this is what we're aiming a as we said this would be this last quarter will be the low point and that going forward. We expected the repair actions that we had in place to put us back on track and so I.
As we move across these next four quarters.
Watch point here is just continued quarter to quarter traction and we're not fully.
There on the on all sales resources, we still got some investments that were and path to put in place, but but that's contemplated in the guidance and and we think the attraction is building and still good.
Hi, David This is Steve I'm, a little bit too what Lynden mentioned, we're pleased by the <unk>.
By the movement in genomics, we feel good about the focus and what it's generating but I will say is lynden mentioned, we're still behind on the hiring because we we know there's.
There's a direct correlation between that skilled people we have called on customers. So the improvements that we have are from existing customers for the most part so business that we're receiving from customers who have always been our customers.
If you if you recall our past we also.
Generated in the in the past, we generate a tremendous number of new accounts on a quarterly basis and as we add more account people who were capable to help us from a <unk> standpoint, we'll get that back and it'll help the longterm growth for the company. So we're we're keen to.
To continue to add resources here, it's it's slow goin' because it takes a lot of skill to be able to be to be able to represent these products, but we're really encouraged by the results to date, we think the new organization structure is going to surface, particularly well.
And you ask one more question about the momentum indeed, the the March momentum that we had has continued into April so it makes us.
Positive about the outlook and how we're seeing the business here going into Q3.
Okay got it if I could just squeeze in a quick one and barky contribution for the ear is that tracking around $15 million.
You know, we haven't disclosed a budget you're not far off and we've been seeing uhm typically of three to 4 million dollar revenue number quarterly from them and what what we saw this quarter. What we've noted is while we have opportunities between.
In the cell and gene therapy space with them and with our cryo products similar to our product of cryo product, it's been modestly below $4 million instead of the 4 million that we've of four.
4 million plus we were looking at when we do do you see this in the similar.
Trajectory of what we've seen with the cryo being squeezed just a little bit but big market.
Opportunities that continued to gain synergies between the two.
Okay got it thanks, so much I'll pop back in queue.
Hey, David Thank you.
Your next question comes from the line of Jacob Johnson with Stevens Your line is open.
Hey, Hey, good afternoon, maybe for Steve O or for land and just kind of a higher level question. Your.
<unk> announced this this realignment you've got some efforts around the failed strategy, but it seems.
Maybe from the outside that that'd be medical could be a distraction and maybe that's a lot going on could you just talk about the kind of capacity to focus on the realignment and whether or not it's gonna be medical makes that more difficult in the near term or not.
Yeah, So Ah Jacob obviously, the lumpiness of the B medical businesses disturbing from the standpoint of any any guidance that we can give so I'll reiterate the the way Linden presented as the as the most straightforward way, we think to presented to you uhm, they're standing alone as a company. So it's not a distraction from that standpoint.
I think you'll recall, there's an earn out period here, where we need to make sure they have a chance to fulfill the opportunity for additional payment.
But it's not a distraction for the company there are some of US who pay particular attention to the opportunities there that they are booking now, but we are building capability based on the other promise for the business is how do we use it.
For his enters penetration some of these markets. So it's it's an ongoing effort to longer term initiative, but from a from a management distraction standpoint, it's it's really limited the team continues to run the business as they have.
Okay.
You know I just wanted to check and then maybe just kind of a macro question I'm I'm trying to <unk>, you and probably most other as I mentioned, a more challenging macro he's just just talk about <unk> kind of any impact as it relates it seems like cryo.
<unk> is there any potential impact on the large stores and then also maybe just give your appetite attunity to to touch on anything you're saying out of China, you've heard of some softness from that region, but also have others, calling for strength. There. So I'm just curious what you're seeing in that and market as well.
Sure So Jacob Linden I'll share the reply here, let me give you a few I think the macro environment, that's causing pharma companies maybe to reevaluate some of their spend certainly had an impact on cryo because when we get.
Larger numbers of cryo units to go for a particular manufacturing process, it's related to a particular drug. So we think that's likely some of it but also because we're the.
Only provider of that capability when those decisions finally get solidified will be shipping product to them. So I think that's one of the things that we've seen on the large stores. We have you know more than 12 months worth of backlog. So that's mostly our our ability to reshuffle the priority there and make sure that.
We can take the delivery so even if there wasn't impact of.
20% on customers, who are or aren't spending are shifting.
Their ability to take a product we ought to be able to accommodate so we will see maybe near term impacts like we saw with the ability to ship to facilities that were in completed but we do have the opportunity to burn down backlog and to get different products or different projects.
Staged for customers and so it would've been in talks about our ability to increase revenue in the large stores on the back half we think thats.
Outside of any particular macro environment would it would it slow at the build of the backlog, perhaps but it shouldn't impact us here over the next quarters.
And then finally on China, we had a slower start in January obviously with Covid, but.
But the team really came roaring back so they perform particularly well in February and even more so in March a lot a lot of good momentum there in China. So we're on the we're on the side of the Ledger, where China is a positive in Asia seems to be performing particularly well for us.
The teams are aggressively going after business in China for China, and they're obviously, it's our source for most of the synthesis work or they're ramping extremely well from our quality and on time delivery standpoint, So we're really active and the for us the China activities are pretty vibrant.
Got it <unk>.
Yep.
And your last question will come from the line if you want cheese with be Riley. Your line is open.
Hi, Stephen Linda could have no incentive for taking our questions maybe for that firstly <unk> delivery <unk> now can you remind us.
<unk> the milestone payment relatives are in the acquisition agreement linked to the revenue parks.
Yeah. That's a good question, we never put the target out, but you'd noted as I as I highlighted in the gap, we did reduce the the value of that accrual and I'll I'll make it real clear when when we made the deal struck the deal.
The price included in an opportunity for 50 million dollar are now we also disclosed the portion that we have crude we didn't include the entire amount because we felt that we had.
I had an expectation that was in the middle of the target we gave the team opportunities.
To to achieve some that we thought was achievable. We also gave them some premium above what we thought was reasonable so their fallen they've fallen off of that a bit what we had accrued we took about 17 million of what we originally of crude 18, and a half million dollars out of the.
Out of the year now initially and so they're not all the way down to the bottom with zero or no.
Our current accrual in there and they still have opportunity to come Roaring back.
When I say they have opportunity come Roaring back I I don't Wanna I don't want to put any indication there that we expect it to be more than 21 million. This quarter. We're we're not being I don't think overly conservative as I highlighted last quarter. They didn't pick up a lot of orders beyond this point in the quarter.
<unk> and.
And so I've got to be cautious on that but at the same time I would highlight to you that the 100 million.
We feel good about that it counts on 21 million this quarter in about the same amount the fourth quarter and will tune that as we get to it but the project that that had been delayed or stolen the Mets.
And so we really don't have predictability, we may end up accruing in.
Paying the more of that out.
By the time, we get to the end of the one year period and.
And we would have no regrets about paying that out if we hit those numbers of course, but but right now we have assessed that to be down you on so I think you've you've highlighted a good metric there we're not fully down out of the year, now, but but but mostly.
Yep got it thanks for the clarification, there and maybe Linda holding on that <unk> you may have colors as much no can you. Please clarify as a reason for a margin decrease across.
Different being in the sacraments, I think we've covered thyroid or even the be medical apart, but can you clarify other opinions sacraments hotspot.
Yeah, So I covered a bit of this and one of the other questions. So let me try to be more concise on the on the product side. It was more driven on the system large systems pullback.
And I highlighted that we had a modest improvement quarter to quarter and the second fiscal quarter on CNI and services inside products, but but with the system's pullback in a little bit of mix degradation.
Degradation, because consumables does have a good drop through.
Then that that hurt us a bit and products. We do see some return of March in in the third physical quarter on margin and products and so we have called that in our in our guidance.
In the services side, we had about two and a half 0.02 0.4 points quarter to quarter decline and I mentioned that we did give some margin breakup between genomics and an S. R us.
You'll see about four point drop in Srs and about two points in.
Genomics and the second fiscal quarter sequentially I'm on a sequential basis and so the two points of genomics take that to be a little bit of mix, a little bit of cost for capacity and labor, but but and we did implement by the way and this quarter or.
<unk> increase plan and that'll that'll be a headwind going into the next quarter on a service based business, but but we do we do see a margin coming back a little bit in the mix of genomics and significantly on when you add revenues, but a nice drops through.
And S arrest, the four points as I mentioned I had a credit memo in that that did impact us or us. We also had some expansion of facility.
Again.
We don't expect the credit memo those those are really unusual for us and and when we come.
Come back in Q3 weeks, but.
You're going to see a little bit of bounce back on revenue and and gross margin there so but they will.
Follow up if I haven't made that clear.
But but low pressure on both sides of the business services and products, excluding the medical and.
And we see.
Q Q3 guide for counting on a little margin enhancement there.
Yeah cause it. Thank you for the clarification that sounds a question I know.
Okay.
And that concludes the question and answer session I will turn the call back to Linden for closing remarks. Thank you.
Yeah. Thank you, we we really appreciate the investors and the shareholder support we felt in the past and we know that this quarter was a disappointment versus the expectations that we set at the same time. We also know that the opportunity ahead of us is right and and and it's significant.
For value not just significant in terms of what we serve today, but very significant what we expect to be serving in the future. So we see growth. We also see profitability and we're taking actions to reinforce that we highlighted that we've already executed on the previously committed cost <unk>.
<unk> and that we had another $15 million of EBITDA enhancement to be ready for by the end of the this calendar year more importantly to us is that the growth initiatives in the realignment will further that growth initiatives to be successful, but those initiatives are taking traction we do see traction as.
We go across the next two quarters and we look forward to reporting.
On that and hopefully we have taken some of the surprise out of the be medical variations in by giving you a different premise for guidance step being.
Direct visibility to the orders we have in hand.
That will have remove that volatility and we'll update you as we move quarter to quarter on that business and take a little bit of the guesswork out of that so we appreciate you tuning in with US and we look forward to following up with you as we go through the next quarter. Thank you.
Does that does conclude the conference call for today, we thank you for your participation to ask that you. Please disconnect your lines.
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