Azenta Inc (AZTA) 2022 Q3 法說會逐字稿

Greetings, and welcome to the Azenta Q3 2022 Financial Results. (Operator Instructions) As a reminder, this conference is being recorded Tuesday, August 09, 2022. I will now turn the conference over to Sara Silverman, Head of Investor Relations. Please go ahead.

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 third quarter of fiscal year 2022. Our third quarter earnings press release was issued after the close of the market today, and is available on our Investor Relations website located at investors.azenta.com, in addition to the supplementary PowerPoint slides that will be used during the prepared remarks today.

I would like to remind everyone that during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled Safe Harbor Statement, the safe harbor slide on the aforementioned PowerPoint presentation on our website and our various filings with the SEC, including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today.

We may refer to a number of non-GAAP financial measures, which are used in addition to, 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, when considered with the GAAP financial results and reconciliation of GAAP measures, they provide an even more complete understanding of the Azenta business. Non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves.

In addition, we may refer to certain estimates of COVID-based impacts. 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 Operating Officer, Matt McManus; and our Chief Financial Officer, Lindon Robertson. Yesterday, after the market closed, we issued a separate press release announcing the signing of a definitive agreement to acquire B Medical Systems. Following the review of the third quarter results, we will provide highlights of the agreement and the B Medical business. We will then take your questions at the end of the prepared remarks.

With that, I would like to turn the call over to our CEO, Steve Schwartz.

Thank you, Sara. Good afternoon, everyone, and thank you for joining us today. I'd like to reiterate that this call will be longer than our usual quarterly call as we dedicate the first half to a detailed review of third quarter results, and the second portion will focus on the pending acquisition of B Medical Systems.

Our third quarter results reflected continued execution in what was for us a more challenging environment. While Q3 results came in a bit softer than expected, we believe this is a short-term perturbation and we remain extremely positive about our solid positions in robust markets, which will allow us to return to the strong growth profile we've been delivering for many years.

Despite the near-term headwinds we experienced, we still delivered solid organic growth of 6% year-over-year, driven by continued momentum in our storage services and cold storage systems. We continue to see customers turn to us to build out their lasting infrastructure. And while we will provide more details later in our remarks, suffice it to say the team is fully engaged and ready to tackle the needs of our customer base.

As you will note from our press release yesterday, we've been busy on the M&A front when we announced the acquisition of B Medical Systems, a global leader in innovative vaccine cold chain and temperature-controlled transport solution. This business, along with the addition of Barkey, which we closed on July 1, our meaningful additions to our portfolio of capabilities in the high-value, highly critical cold chain.

Both businesses advance our mission to accelerate discovery and development and both provide critical capabilities at the point of delivery of life-saving therapies to people across the globe. I want to welcome the Barkey team to Azenta, and I look forward to the B Medical team joining us when we closed the acquisition, which is expected in October 2022. Even after these transactions, we will still have roughly $2 billion in cash available to deploy for strategic investment. We're actively pursuing several meaningful organic expansion initiatives, and we continue to work a robust pipeline of additional M&A opportunities to enhance our portfolio.

I will now turn to our results for Q3. Revenue for the quarter was $133 million, up 3% year-over-year. At a headline level, this growth rate is lower than we've delivered in many years. But in terms of our ongoing business, we were up 14% when normalized for the estimated COVID-19 impact in both periods. That said, in the quarter, we experienced a complex operating environment that contained COVID-related headwinds as well as some changes in customer behavior that impacted our results.

Regarding the operating environment. Similar to past quarters, we continued to manage through logistics and supply chain issues for certain business lines as well as continued labor inflation. We've begun to implement pricing increases to offset these headwinds that provided a modest benefit in Q3, but the majority of the benefit will be seen in Q4 onward. With respect to COVID, I'll comment on our operations as well as on what we are seeing with demand.

On our last earnings call, we shared that in late April, we experienced a 2-week shutdown of our facility in Suzhou, China. We estimate that this negatively impacted revenue in our genomics business by roughly $1.5 million in the quarter. Since then, we've not experienced any additional facility shutdowns and all of our global operations are functioning normally. That said, on the demand side, the COVID situation in China continued to cause headwinds from our Chinese genomics customers, particularly academic institutions, which were closed for an extended period of time. We expect to see some continued demand volatility in China so long as COVID remains present.

In addition, although we had anticipated and forecasted a meaningful decrease in our consumables and instruments revenue for Q3, we were taken by surprise at the magnitude of the sequential drop, which turned out to be approximately $3 million more than the original $6 million decrease we had contemplated in our guidance. And although we believe the genomics performance is recovering in Q4, based on the order patterns to date at present, we forecast yet another drop in consumables and instruments in the fourth quarter. Matt and Lindon will give some additional color in their remarks.

We've also received the question from investors on our customer mix as well as exposure to small and early-stage biotech. Overall, we estimate the total Azenta exposure is roughly 2/3 pharma biotech, 1/4 academic and the remainder being hospitals, distributors, diagnostics companies, government and others. The trends we saw with our customers in Q3 were fairly broad and have not been limited to small, early-stage customers.

Overall, we acknowledge a more difficult environment, but we remain keenly focused on performance and encouraged by the progress we're making operationally as well as with our customers. We're confident in the market-leading capability we built that squarely addresses the needs of a growing market, and we anticipate strong growth to be the norm again in the near future.

Today, I'm pleased to have our Chief Operating Officer, Matt McManus, with us on the call. Matt joined us earlier in the year and has been a great addition to the team. Matt will cover more detail on the quarter and then turn it over to Lindon to cover the financials.

Thank you, Steve. It's good to be on the call with you all today. Since I joined Azenta in January, I've been continuously impressed by the team and our portfolio of capabilities. I've traveled to many of our sites, and I'm proud of the work we are doing to enable and accelerate our customers' scientific breakthroughs to market. I will now provide more detail around the results from the quarter, starting with our Products segment.

The products business delivered revenue of $47 million for the quarter, a 3% decline year-over-year. Excluding estimated COVID impacts, this business grew 16%. The growth ex COVID was driven by double-digit growth in our large stores, cryogenic stores and product-related services. Our large automated stores business had a record bookings quarter. And while it's difficult to identify a trend, this gives us increased confidence in our outlook for the next few quarters as these orders typically take 6 to 9 months to fully convert into revenue. In terms of the types of customers, we are selling more into GXP environments with large pharma customers as well as into clinical and repository applications.

Our cryo business also remained strong, growing mid-teens year-over-year. In the quarter, we placed our largest ever order in Europe at a new cell therapy production facility. This customer has also leveraged multiple aspects of the Azenta ecosystem, including our CryoPods, filling stations and qualification services. Separately, we completed the installation of a cryo exchange, a multiunit system controlled by a central cryogenic picking chamber at one of the country's leading research hospital.

We also saw record shipments of CryoPods and LN2 filling stations, which are great entry points for Azenta with the customer. Our product services business, which provides post-warranty services, spare parts and other product maintenance had a record quarter. This is an important part of our business, which ensures continued maintenance of our equipment and more importantly, continuity with our customers.

The consumables and instruments business declined 18% year-over-year. As we have discussed previously, the C&I business has experienced the largest benefit from COVID-related demand. And in the quarter, this benefit fell by $3 million, primarily from China customers. In addition, we saw some softness from the Americas and EMEA regions, which we believe is due to several factors, including: one, customer stocking positions as we're hearing from customers that they took on larger supply positions of consumables that are taking longer to work down as well as, two, a slower approval process for investment in laboratory instrumentation.

Our services business reported revenue of $85 million, up 6% year-over-year, driven by growth in sample repository services and more muted growth in genomics. Genomics revenue grew low single digits, a portion of our customers reduced scope of work or delayed projects, some citing the current market uncertainty as a factor for the more cautious spending. Next-generation sequencing grew 5% year-over-year. While the deceleration reflected softer ordering levels, we are seeing terrific traction with our new proteomics offerings and recent European launch of our Amplicon-EZ offering, an efficient sequencing chemistry, which has been great for bringing in new customers.

The synthesis business was the most impacted by our China facility lockdown in April as well as by the continued COVID situation in China. The latter impacted both our customers' demand as well as added complexities to our logistics globally during the quarter. We have a small but growing gene synthesis production capability in the U.S., which we believe will be a significant asset for us in the future.

In addition, we continue to launch new service offerings to expand our customer touch points. This quarter, we expanded our viral packaging services to baculovirus generation, an important tool for protein expression with pharma and biotech cores. We saw strength in preclinical and clinical services, driven primarily by continued momentum in our high-throughput genomics portfolio supporting clinical trials. Sanger revenue declined 1% year-over-year, primarily due to the COVID situation in China, where many of our customers, especially academics, were not placing orders. Assuming the COVID situation in China improves, we expect to see this customer demand return in Q4.

The sample and repository solutions business grew 19% year-over-year, driven by a continued increase in core storage revenue and the number of samples stored. We continue to work on securing additional large deals in the pipeline, and I can say with confidence that our customers are genuinely impressed with what they see when they visit our Indianapolis facility, which now boasts a newly installed automated store. The build-out of our Indianapolis facility dedicated to manufactured product is going well and will provide additional storage capacity as we expand this offering.

Cell and gene therapy research continues to be a growth engine for our business, representing approximately 10% of revenue in the quarter. Genomics, SRS and products, cell and gene therapy revenue all grew double digits year-over-year. The team continues to add services targeted to our cell and gene therapy customers. Most recently, we added a GLP AAV-ITR service in our preclinical and clinical business which enables us to extend our relationship beyond the initial research discovery stage.

The last point I'll make about our cell and gene therapy business is that the addition of Barkey provides an important new platform for growth. Barkey is a leader in control rate cell thawing with end-to-end applications from R&D all the way to the patient. They serve over 100 cell and gene therapy customers and their key product, the plasmatherm, is used for controlled rate tone of cryopreserved raw materials and patient therapies.

Finally, I'm also pleased to report that in July, we completed our laboratory moves in China to our new state-of-the-art facility in Suzhou as well as our move to a larger laboratory in the Boston area in June. Both milestones are significant for our customers, our business and our employees. These strategic investments significantly expand our capacity and provide room for future additional growth.

As we look ahead to the fourth quarter and beyond, we acknowledge the challenges may continue over the near term, but the immense potential of our portfolio and critical market applications is clear. As a stand-alone life sciences company, we will continue to deliver the value of Azenta to our customers and what we view as the very early days of this unique opportunity.

I will now turn the call over to Lindon.

Thank you, Matt. I now refer you back to the slide deck available on our website. Turning to Slide 3 to review some key points from the quarter. Third quarter revenue grew 3% year-over-year, that is 6% organically, which adjusts for the headwinds from currency. Q3 was unquestionably a challenging quarter as we faced a combination of external and internal headwinds. External factors of currency and COVID have affected us in the past, but this quarter, they each provided for a particularly severe comparison to a year earlier. And internally, we experienced the site shutdown due to COVID in the April month at our Suzhou, China site.

In total, the growth was impacted negatively from foreign exchange by the 3 points that gets you to the organic growth rate of 6%, and we estimate another 11 points from the change in COVID demand when comparing to the prior year. We will provide additional color on these impacts as we step through the detailed results of the segment. But for now, I will simply highlight that the services segment grew 6% year-over-year as reported and 8% organically and the product segment reported a decline of 3% year-over-year and was actually up 2% on an organic basis. The larger 5-point impact in products is due to its higher content of European-based revenue.

Non-GAAP earnings per share from continuing operations was $0.12, flat sequentially and up $0.01 year-over-year. We ended the quarter with over $2.5 billion in cash on the balance sheet. The acquisition of Barkey and the announced agreement to acquire B Medical Systems will be funded from this cash on hand.

Moving on to Slide 4. On the left side of the page, the GAAP P&L carries the traditional differences in SG&A, such as amortization and M&A-related expenses. More significant this quarter is the difference in the tax line. On a GAAP basis, we had accrued to the expected full year tax rate in the first half. When you do this on a negative pretax income early in the year with expectations for positive bottom line in the second half, quarterly tax accrual is always highly sensitive to an adjustment to the full year projection. As our projected full year has brought down with the current quarter top line results and expected M&A costs, you see the sensitivity in the quarter.

Now let's look into the non-GAAP P&L on the right side of the page for additional color on the performance. Total revenue for the third quarter was $133 million, up 3% year-over-year. As mentioned, the organic growth in the quarter was approximately 6%, which excludes the 3-point headwind from foreign exchange. The currency headwind on revenue was roughly 2 points more than anticipated in our initial third quarter guidance. We estimate we had $1 million of net positive revenue in Q3 from COVID effects compared to $10 million in Q2 and $13 million in Q3 2021.

The third quarter's COVID impact, positive and negative, is comprised of delivering a total of $4 million of COVID revenue in the quarter. $3 million of this COVID demand was in the consumables and instruments business, and approximately $1 million of services in our sample repository solutions business for managing vaccines. But we also saw an estimated $4 million of headwind in the genomic services business, which is a lack of revenue we believe was driven by the COVID environment. We had described approximately $3 million in our expectations, which included impacts from our operational lockdown in early April and some customer demand.

The extra $1 million impact in our results was driven by the extended China lockdowns on this customer and demand situation. Overall, our estimated Q3 COVID-related revenue was approximately $4 million less than we expected in our prior guidance.

Gross margin was 46.3%, reflecting margin pressure in each of the segments. Operating expense declined $5.5 million quarter-to-quarter, primarily reflecting lowering accruals for performance-based compensation. These accruals included a year-to-date adjustment and are expected to come back up approximately $2.5 million in this fourth quarter.

Adjusted EBITDA margin in the quarter was 10.4%, down 290 basis points quarter-over-quarter, reflecting the reduced operating leverage from the lower revenue base as well as the impact from the lower gross margin. This leverage works both ways. It accelerates the margin expansion as we grow. But in these periods, when we run lower, it takes our margin down substantially.

I would emphasize that we are indeed a growth business in a strong industry, and we are confident the headwinds are temporary and that with the leverage in our model, margin expansion comes back with our future growth.

Turning to Slide 5 for a review of our Life Science products segment results. The products business delivered $47 million of revenue, down 3% year-over-year. If I can refer you to the graphic on Slide 5, I will describe the bridge. Excluding the $2 million impact from currency, the product segment grew 2% year-over-year. Within C&I, we saw a $4 million decline at a constant currency or a drop to 14% year-over-year. We have estimated an approximate $6 million decline from COVID demands on tubes within the C&I line. The non-COVID demand has seen an increase of approximately $2 million or mid-single-digit growth.

Not to dismiss these surprises, but I do want to highlight we continue to have strong performance in systems and services. We had 27% growth at constant currency and systems and 25% in related services. As Matt highlighted, we saw significant bookings in the quarter, which continues to feed the backlog of revenue into 2023.

So there are 2 key messages as we look forward: In the highly differentiated value in the systems and services businesses, which includes the automated cryo storage for cell and gene therapy, we see high demand and expected continued growth. The consumables and instruments business will continue to see softness, and we saw $3 million of COVID demand in Q3, but we see minimal amounts of this quarter, perhaps supporting only $1 million.

The Life Sciences products Q3 gross margin was 44.9%, significantly lower than our peak in Q2 and 260 basis points lower year-over-year. The trend reflects the leverage hit as C&I dropped and less favorable mix as C&I does provide a higher-than-average margin. The trend in gross margin leads us to the lower Q3 operating margin of 4.7% and EBITDA margin of 9.3%.

For the fourth quarter, we expect to see $47 million to $51 million of revenue. That would be a reported decline of 4% to 12% year-over-year. We anticipate we will only carry about $1 million of COVID demand in our C&I business compared to $11 million a year ago, bringing C&I to an approximate 30% drop year-over-year. However, we continue to see momentum in automation systems and related services where we expect to see a positive 30% growth with approximately half of this from our organic growth and half from the addition of the Barkey automated controlled rate thawing offerings.

Our total projected growth of products carries an approximate 4.5-point drag from currency year-over-year.

Next, please turn to Page 6 for a review of our Life Science Services segment results. The services business delivered revenue of $85 million, up 6% year-over-year. Excluding $2 million in foreign exchange headwinds, services was up 8% year-over-year. The estimated impact of COVID was a negative $2 million in this quarter compared to a positive $3 million in the third quarter of 2021 or a headwind of $5 million. The negative $2 million in this quarter included a $3.6 million headwind in China genomics, partially mitigated by the continued vaccine management and sample repository solution.

Genomic Services generated revenue of $59 million, up $2 million or approximately 4% year-to-year at constant currency rates. We did not add a graphic on the page for sequential explanation, but I would be remiss if I did not add color to the decline evident in the top line numbers on the chart, $6 million of the $7 million drop was in genomics. More than $1 million of the $6 million was from currency. After that, the largest contributor was next-generation sequencing, which declined approximately $3 million, most all of it in Asia, where the COVID lockdowns impacted us. The remaining $1.5 million decline is within the synthesis and other lab services revenue stream.

Sample Repository Solutions delivered revenue of $26 million, reporting strong growth of 19% year-over-year, driven by our core storage services. As you can see in the graphic on Slide 6, this business contributed $5 million of top line growth year-over-year at constant currency, significantly driven by the global enterprise partnerships we have won in the biological sample storage space.

Services segment gross margin was 47%, down 260 basis points from the second quarter, down 450 basis points year-over-year. Gross margin decline was significantly driven by the leverage hit in genomics with growth in labor cost, but on lower growth of revenue. Adjusted EBITDA margin for the services segment was 10.3%.

As we look into the fourth quarter, we do see improved demand to put upon the genomics business and sequential expansion in the Sample Repository Solutions business. All in, we estimate revenue to be $84 million to $90 million, providing approximately flat to 8% year-over-year growth and is inclusive of a 3-point headwind from foreign exchange.

Let's turn to Slide 7 to review the summary of cash flows. At the free cash flow line, you can see that we had a use in excess of $400 million in cash, primarily driven by the taxes paid on the gain on the sale of the semiconductor automation business. Capital expenditures in the quarter totaled $15 million. We completed construction on the first phase of our new China headquarter in Suzhou and are now operating from that space. Final capital expenditures on this project are expected to be made in the fourth quarter.

Let's turn to Slide 8 to review the balance sheet. As of June 30, we had $2.5 billion of cash, restricted cash and marketable securities with no debt outstanding. As you move down the balance sheet, you'll see an increase in other current assets, which is primarily due to the currency translation adjustment for our net investment hedge. The decrease in other current liabilities reflects the tax payments that I mentioned for the sale of the semi business.

Turn to Slide 9 for our guidance on the fourth fiscal quarter of 2022. Revenue from continuing operations is expected to be in the range of $131 million to $141 million, with a midpoint supporting a decline of approximately 1% year-over-year. We expect products revenue to be in the range of $47 million to $51 million, supporting a decline of approximately 8% at the midpoint and services being in the range of $84 million to $90 million, supporting a growth rate of approximately 4% at the midpoint.

Foreign exchange is expected to be a headwind of approximately 4 percentage points, and the acquisition of Barkey is expected to contribute approximately 3 points to year-over-year growth. Overall, we are projecting approximately $2 million of COVID-based revenue in the fourth quarter compared to $12 million in fourth quarter of 2021. The $2 million this quarter reflects the lower level of NI-based COVID revenue, continued vaccine management and sample repository solutions and some relief in the China headwinds in genomics.

I also want to highlight that we will be making certain investments in operating expenses for strategic initiatives in light of having a significant expansion of global reach with our portfolio of cold chain capabilities. You should expect we will spend another $3 million to $4 million in operating expense this coming quarter to accelerate these initiatives. When combined with the change in variable compensation accruals and the addition of the Barkey structure, we expect operating expense to be approximately $7 million higher in the fourth quarter compared to this prior quarter.

With this in consideration, adjusted EBITDA is anticipated to be $8 million to $14 million. Non-GAAP earnings per share is expected to be $0.04 to $0.12 per share. So we'll be back with you in a few minutes to address the implications of our investments and our new acquisitions. But for now, I'll turn the call back over to Steve to talk about the acquisition of B Medical Systems.

Thank you, Lindon. Everyone, please turn to Slide 11 of the presentation. I'm very pleased to discuss with you the acquisition of B Medical Systems, a global leader in some of the most critical links in the vaccine cold chain and temperature control transport solutions. Across every part of B Medical Systems, saving lives as the purpose which drives all that they do, and they've embraced this mission for more than 40 years. As we've discussed in past quarters, we've been actively evaluating multiple M&A opportunities. And in B Medical Systems, we believe we have found a unique asset that fits perfectly into our goals at Azenta; to help our customers accelerate discovery, development and delivery of life-saving therapeutics.

In addition, B Medical capabilities add multiple dimensions to Azenta and provide capability that will further extend our global cold chain solutions. As you'll hear in my remarks, their business is mission-critical, enabling delivery of treatments to people across the globe. As part of Azenta, we see incredible opportunity for additional investments that will grow and expand this business even further. Like Azenta, B Medical is a company that prides itself on innovation and has a track record of challenging what's possible. The company has focused its R&D investment to meet the demanding needs of customers to reliably deliver vaccines in some of the most challenging climates and remote regions.

Scientific discovery and innovation is happening faster and faster, but that's only part of the story. You still need a way to effectively deliver these treatments, and that last mile to the patient is what B Medical makes possible. Reliable and traceable cold chain solutions are a necessity in markets that they serve and B Medical is the market leader in its core vaccine cold chain business, enabling the delivery of life-saving therapies anywhere, anytime to anyone.

When I say anywhere, I mean to some of the most remote and rugged areas of the globe with limited infrastructure such as electricity, cell phone service and paved growth, as well as in areas where temperatures routinely exceed 40 degrees Celsius or into the hundreds on the Fahrenheit scale. When I say anytime, I'm referring to situations where electricity may be temporarily unavailable and there's a need for continuity of cold chain, such as in the natural disaster.

And rather than say to anyone, I should have said to everyone as B Medical supports a global mission to make sure children receive vaccines to prevent life-threatening diseases for which there are known cures, but which they might not otherwise have access. To accomplish this, they have forged enduring relationships with aid groups, including the Bill & Melinda Gates Foundation, the World Health Organization, UNICEF, GAVI and others, and establish themselves as preeminent suppliers of cold chain solutions to ensure life-saving treatments will be delivered dependably.

The backing of these prestigious organizations is a testament to the superior capabilities of B Medical Systems to be entrusted with the last mile solutions to the critical health mission of these institutions in 150 countries worldwide. In addition, we've been thoroughly impressed with the support that B Medical receives because it's headquartered in Luxembourg. We see this as a very favorable business environment and one in which we'll continue to invest for growth.

The Grand Duchy of Luxembourg offers significant benefits, including a very strong innovation ecosystem, access to a highly talented workforce and significant government support to promote B Medical's mission of saving lives globally. This includes support from the Ministry of Economy and the Ministry of Development and Cooperation and Humanitarian Affairs.

Turning to Slide 12. Let me provide a bit more detail on B Medical and its business lines. B Medical brings to us in to more than 350 employees. They have a rich 40-year history of leadership in the vaccine cold chain market, including an installed base of more than 500,000 units across all business lines. The business today is divided into 3 subsegments: vaccine cold chain, which represents about 80% of their revenue, medical refrigeration, which is around 13% of revenue; and blood management systems, which account for roughly 7% of revenue.

The vaccine cold chain business line consists of end-to-end solutions for vaccine transport, including real-time location and temperature monitoring. These are robust and reliable product lines to protect the therapeutic until the last mile of its journey. For many years, B Medical has served the developing world using innovative technology to ensure reliable temperature control for long transport times.

Part of what makes B Medical unique is that they're not only dedicated to enabling the delivery of life-saving materials but also to reliability. Their product guarantees are market-leading and in certain cases, 3x the industry average. Their transport freezers are rotomolded out of durable corrosion-free materials at their state-of-the-art manufacturing facilities in Luxembourg and India. In addition, B Medical is leading in its regulatory approvals and their products are already certified with medical device approvals in the U.S. and EU.

As you can see on this slide, B Medical has many recognizable customers and partners and generates revenue across the globe, but mainly in Asia and Africa.

Turning to Slide 14. I want to talk about the market that B Medical participates in and why we think this is such a tremendous opportunity for Azenta. The market they serve today has significant cold chain needs. More and more medicines and development utilize novel technologies that require advanced cold chain solutions. Just to give you a sense of the magnitude of the importance here, more than 20% of the World Health Organization's list of essential medicines via a cold storage and transport and has reported that upwards of $35 billion of annual pharmaceutical industry losses are from temperature-related issues. Of course, the COVID-19 vaccine put a spotlight on the cold chain and opened the door for mRNA therapeutics, and we expect to see continued investment there.

On the topic of COVID-19, I'll mention that the company did see an increase in demand for their products in 2021 as COVID vaccines requiring temperature-sensitive transport solutions became more readily available to developing countries. We think that this helps to drive awareness of the need for a reliable cold chain, but our vision for their portfolio is so much more than that.

On its own, B Medical is a great business with a strong growth profile in a vibrant market. But just as we did when we acquired BioStorage Technologies to launch ourselves into the outsourced sample by our repository business and when we acquired GENEWIZ in the genomics space for the interrogation of samples. In B Medical, we see the same type of potential to drive tremendous incremental value from investments that we'll make to leverage the combined B Medical and Azenta capabilities into new market opportunities with new high-value products and services.

Turning to Slide 15. Let me outline some of those opportunities at a high level. I give just 3 of many examples of opportunities that are currently on our roadmap. The first is the expansion into other cold chain market opportunities using current B Medical capabilities. Using proven technologies for highly durable, highly configurable cold chain transport solutions with location and temperature reporting, products can be configured in size and form factor to handle from a single sample up to very large cold systems for both ground and air cargo transportation. Think about this as not just the last mile, but potentially all miles in the transport journey. We're already geared up to join our engineering teams for the development of more purpose-built cold chain solutions that are beyond current vaccine delivery.

Second, the B Medical vaccine cold chain refrigeration systems are a critical link and the opportunity to build our human health infrastructure in developing countries where the B Medical last mile cold devices are used not only for the last touch for outbound vaccine distribution, but also can be utilized as the first link in a cold chain return trip for population biological sample collections that can be banked in a local biorepository and ultimately studied in local genomics laboratory for the benefit of human health in a particular country, products and services already in our Azenta portfolio.

And finally, it's an advanced investment in our future as a truly global company. The B Medical footprint brings an incremental 3 billion people, approximately 40% of the world's population into our sphere of service. Most of this population is located in fast-growing emerging markets, which are as eager and deserving as any other part of the world to have access to the best of human health research and treatment. We are looking forward to learn from our B Medical colleagues and the people they serve as we accelerate the development of our offerings for these new markets.

Finally, we're particularly enthusiastic about the leadership team that's built this purpose-driven business and the dedicated employee base, which has met the challenges of the demands for reliable and innovative products for global human health. This is an exceptional team and an exceptional company, and we're proud to have a chance to join with B Medical on our combined purpose to bring and now deliver breakthroughs faster.

Now let me turn the presentation back to Lindon who will cover the transaction financials in more detail.

Thank you, Steve. Moving to Slide 16. I want to highlight some of the transaction details and a little more on the profile of B Medical Systems. The acquisition comes for a cash price at approximately EUR 410 million to be paid at closing an additional consideration up to EUR 50 million tied to a performance-based earnout, which will span our fiscal year 2023. The transaction will be funded from cash deposits, which we hold in Europe, and we expect to close in October 2022, which is our first month of our fiscal 2023 year.

In terms of the company profile, B Medical has generated $109 million of profitable revenue over the past 12 months ended June 30. Their last full year financial statements reflect a 20% adjusted EBITDA as we measure it. We do have planned investments to support the business growth, which will begin immediately. These will certainly continue to support the sales growth and portfolio development as well as appropriate G&A support to bring them into a public company structure. We expect the transaction with investment to be accretive in this coming fiscal year on a non-GAAP basis and on a GAAP basis by fiscal year 2024.

As you think about updating your models, I will add that the gross margins are quite comparable to our product segment and the revenue is more skewed towards the December quarter. This is due in part to the nature and timing of government spending. We will provide some further guidance for B Medical expectations on our fiscal year-end earnings call later this year.

With the addition of B Medical, we will be running at a pace with annual revenue of over $650 million with significant growth and margin expansion opportunities. This revenue comes with further reach and covers more of the cold chain challenge, extending our leadership position across broad markets with an enhanced portfolio.

Regarding our 2024 target model, we will hold off on updates for now and plan to revisit the model later in fiscal 2023. We will, of course, outline what we have added for our acquisitions and give you a more complete picture of the horizon.

I will wrap up with 3 messages from today's discussions: First, while our base business is running at a lower level of revenue and EBITDA than we estimated for the exit point of 2022, this does not sway us from our conviction of the growth and margin expansion capability in the business. It potentially sets us back some on a timeline for the model, but does not change the potential.

Second, we are excited to be taking in both Barkey and B Medical. They add capabilities that fit with our strategic objectives and our existing customer needs. They extend our leadership position, but more importantly, make us more valuable to our current and expanding customer list.

Finally, we are accelerating some investments for strategic growth. We will do this within these businesses and to initiate further strategic initiatives to unlock some of the possibilities within our portfolio. All of these points will reshape our model, and we will continue to give you clarity on the organic performance as well as that of our acquisitions and investments.

Of course, we still have another $2 billion in cash on the balance sheet for additional capital deployment opportunities. And we have the right team and the platform to support more capabilities and customers across the globe.

With that, I would like to thank everyone for joining us on the call today, and I will turn the call back over to the operator for questions.

(Operator Instructions) Our first question is from Jacob Johnson with Stephens.

I guess, first, Steve, you talked about some COVID benefit at B Medical. Is there any way to kind of quantify how much in revenue they were doing from COVID-related vaccines or maybe alternatively, just how that business has been growing in the last couple of years? I think it's tough for any of us to have a crystal ball around COVID as we think ahead. But I think it would be helpful framework to quantify that, if you could.

It's worthwhile because I think it's an important question about COVID. Let me start with -- this is a company we've known for a lot of years. We've been close to and we've been able to watch progress and how they've handled themselves just satisfying the vaccine cold chain market. They've done an exceptional job, and it's a tremendous company. It includes we knew them before COVID. So we watch the reaction in a COVID world and they stepped up and did exactly the kinds of things that a company ought to do. They were able to deliver to handle large volumes of shipments and product and responded to every demand that came to them from the market.

So because we're not yet the owners, we'll give you as much information as we ought to right now. But let me put it in perspective, in 2021, they did approximately $28 million of COVID revenue, they attribute to COVID. But again, in perspective here, in 2022, the current forecast, and we'll crisp this up when we talk at the next earning call. In 2022, the revenue for the company ought to be more than 2021, and it will incorporate very little COVID. In other words, less than $5 million in the current forecast for COVID. So just to give you an idea, really strong performance, really strong growth of the company. COVID indeed was part of -- a significant part of 2021. We anticipate higher revenue in 2022 and almost no COVID contribution by the current forecast.

So -- and the reason that comes about is a couple of things. One, just the alert that everyone was put on from COVID really shook their markets in terms of pandemic readiness. And so what we're seeing now is both a change in the number and the quality and the volume of funding that's coming toward entities who were able to help to deliver vaccines as a result of the COVID alert and pandemic readiness generally. So we're -- we, the company, we're bullish about the opportunities that exist because of the need for cold vaccines generally. And we quantified a little bit COVID vaccines specifically, but we do see the investments coming to satisfy and do pandemic preparedness across the markets that we serve. So I hope that's helpful.

Yes. Yes. That's super helpful, Steve. And then just, I guess, one follow-up again on B Medical, Steve. Just can you talk about the end customer they have? It sounds like there's some nonprofits and kind of government organizations involved. Can you just talk about the end customer and maybe how that overlaps with your existing customer base today?

Sure. So the customers obviously ultimately are the patients who are vaccinated and cared for. The people who drive the purchasing of the governments, if you will, of these various countries, and we count today about 150 countries. Often the mechanism is that the ad agencies will provide funding in various forms for various countries, depending on specific need as to what qualifies for an investment. And often, UNICEF is the agent in between to help to manage the funds and the distribution of funds, the receipt of product. So there's a mechanism in place that's existed for many, many years. The company operates in that configuration and that construct particularly well. But generally, it's individual countries taking care of their populations, working with the aid agencies going through an intermediary. That's our point of context for a majority of the business.

(Operator Instructions) Next question is from Paul Knight with KeyBanc.

Steve, the EUR 410 million, is that last 12 months ending June?

EUR 410 million is the purchase price. EUR 109 million is the trailing 12 months ending June, correct, revenue.

And do you have any thoughts on what a normalized growth rate is there?

Yes. Paul, we're assessing this to be a double-digit grower for us in our model expectations. And we look forward to giving a lot more color around that. As Steve highlighted, there is a -- there's been COVID ups and downs, but really strong growth in the recent times with those markets demanding a lot more.

And I think the walk away from the June quarter on continuing business is kind of like your slide show says 11% negative impact from COVID, I guess, is kind of the way to think about it, right? Relative to plus 6% ex currency. Does that mean 17% type growth ex COVID impact and FX?

Yes. That's right. I think you captured it just right, 3% reported, if you take out the currency, 6% organic. And our estimation is we had, if you remove the COVID impact from a year ago, we moved the COVID impact this year, the underlying business then on a constant currency basis grew approximately 17%.

Next question is from Vijay Kumar with Evercore ISI.

Just on Q4 guidance here, Lindon, perhaps to you. So the midpoint of your revenue guidance implies flattish revenues, and I'm assuming acquisitions and FX kind of offset each other Q4. How are we seeing like 0% organic in Q4? I mean, I understand, I think there's a $10 million COVID headwind in Q4. Ex that, I think you're guiding to perhaps 7% organic. Does it seem right, like your LRP was for high teens revenue growth. The China lockdowns, in my understanding is that, that market has opened up. Demand is normalizing. So why are you looking at almost 0 organic here, Q4?

Yes. So you're right, there is still implications from a year ago comparison on the COVID. And we also do have the FX baked into that. So when you back out FX, that gives you the organic, but we don't back out the COVID on that organic number. The implications are there. But it doesn't take away that our revenue is on a lower trend than what our expectations have been coming into the second half. What I would highlight is we continue to see strong growth in the systems. First on products, systems and services. But the biggest detriment in the COVID comparison is going to be on C&I. So products, that's where you get to the down 8% midpoint of range there. And that's the biggest detriment.

On the services side, we're still -- we're not satisfied with the numbers we're putting on the table here. It continues to have some expansion sequentially on SRS, and it will show solid growth, but on the genomics side, while we're seeing some expansion sequentially there potential, it's still lower growth than what we expect.

Let me add a little color what we're seeing in the genomics space because we have really crawled through this, as you can imagine, with our teammates with looking at our customer set. One, and I'm going to reflect a bit on Q3 data and then reflect what we see a bit in the Q4. And in the Q3 what we noted, we continue to see unique customer accounts expand. That's very encouraging for us because the marketing, the rebranding, all of that, we started to relook at, say, have we impacted something ourselves.

We're not concluding that we haven't softened the brand recognition by transitioning from GENEWIZ to Azenta or from FluidX to Azenta, but we think our team has really ramped that well, and we're providing latitude and investment dollars to make sure the marketing efforts are there. Whether that has dulled the effect of the Azenta growth curve where we'd be second guessing ourselves a bit. But the fact that we're expanding customer, unique customer accounts, we're pretty solid on that.

We look underneath the unique customer accounts. And we also see strong stability and, in most places, expansion of the PIs and the buying behavior. In other words, the buyers, unique buyers underneath, especially genomics, where they carry many PIs or buyers underneath the authorized account purchase order. And that indicates to us then that what we've seen is really a slower spend level, not a withdrawal of our customer representation and presence.

Now in terms of geographics, I'll give you a little more color. We had high single digits, I think, in the 7% to 9% range at a constant currency basis in the Europe space and as well obviously in U.S. at an organic rate in genomics, and I'm sticking to genomics here. So 7% to 9% there in that space, wasn't the strong double digits that we've seen in the past, but it wasn't -- it's not reflective of the 1% that you're seeing at the bottom line, right, on the total.

So where we were pulled down was the China impact in Q3. What do we expect in Q4? We think that we continue to see -- we do see a bit of relief and recovery in China. We've seen some strengthening there. We've seen -- actually, we've seen order load on a weekly basis, show some momentum through the month of June and July, particularly in the NGS space and we don't have a reason to think that that's going to pull back. So we've provided a range here with a little bit of expansion at the midpoint, more expansion at the upper end, but we also recognize the line of sight here isn't as clear to us. So we put a range around that level.

So Vijay, you've called out exactly what we're disappointed in, in our pre-announcement, what we're putting on the table here. But we'll always be as clear as we can with you, as transparent as we can. We're seeing strength across the base and participation in the customer base, a little bit of pullback in the spending thus far, and we'll keep seating this market and expanding forward.

And just -- sorry, just to clarify that, Lindon, so I have the numbers right. COVID is going to be a $10 million headwind in Q4. FX probably 3 to 4 points of headwinds. And then you have incremental M&A revenues of $3 million to $4 million-ish. Are there any other moving parts here for Q4 in the $131 million to $141 million guide?

Not moving parts other than what I would highlight as differentiated is on a sequential basis, we think that the products which you've captured in your dynamics, products will be just a touch softer excluding Barkey and services will be slightly expanding. And then Barkey gives you the net upward.

Understood. Then one, if I may, on the EPS guidance here for Q4. At the midpoint, it's about $0.08 because that would imply your annual EPS of $0.43. That's a year-on-year decline and your revenues on a reported basis, I think, going to be up high singles, maybe even perhaps low double. How do we -- I guess, we had an end (inaudible) we had the margin targets LRP. And the guidance here implies a margin degradation year-on-year. So can you just walk us through what changed in the last 3 to 6 months, Lindon, on the margin front?

Yes. So definitely, top line has -- brings leverage with volume, but it also pulls you down when you slip sequentially like we just did. And so unless on the year-over-year, but on a sequential basis, we saw the labor inflation in which we've described in the recent months. But with the sequential drop in the 130s here in the revenue range, that leverage bites you on the way down.

We'll continue to, I think, see the margin level about at this level at these revenue levels. It will be in a similar situation. There are puts and takes to that, but it will be approximately similar gross margin.

Our efforts are in 2 fronts. Obviously, growth top line. Secondly, we do have some pricing that we continue to exercise here. And then in the cost areas, this is no stranger to us in terms of cost in the manufacturing space. And the services side, I will tell you that the battle for talent continues, and we pay for that because that's what we deliver to our customers. So that will help to come through the price, we think. Obviously, we're geared for efficiencies in our operations there as well.

But not to avoid your question, the gross margin is the big pull down here in the second half of this year. Operating expense is under tight control. At the same time, we've highlighted investments here. We are -- we all -- I'll say we take second looks at it, but we have a strong conviction as we ever have that we're in the right space for the investment for the growth, and we'll move forward on the operating expense investments. But gross margin and revenue is what we're looking to see a little bit of, I'll say, stable performance in the coming quarter, and then we'll update you at the end of this fiscal year on what we see going into 2023.

(Operator Instructions) Next question is from David Saxon with Needham.

Maybe one on the base business, one on the deals. So first one, just on SRS, you called out increasing samples under management. So just curious why it was down sequentially in the third, there were any factors you'd call out? And then also, can you just give an update on kind of the strength of the customer pipeline there?

So first, in the SRS business, the business show a 19% growth year-over-year. On a sequential basis, we saw expansion in the pure storage. We did see a little softness in kitting and logistics informatics. These are -- we don't take any of this lightly, obviously, but these are not representative of the enterprise partnerships as of yet that we've gathered in collecting, managing samples. The data services that we provide today is our parcel to the storage services and people are subscribed to the stored services because of the value we add there. So that continues to expand. We've seen -- you just can't get away from the $5 million climb that this business has had over the past year.

So we continue to see that sequential momentum and we'll continue to see that in the fourth quarter, we expect, but the flatness that you're calling out there is more around the other offerings that we capture into that business.

Let me pause on that one and then come back to the rest of your question and remind me of the rest of your question.

Yes. Just around the pipeline. I guess, over the last year or so, you announced some larger contracts. So just wondering if we could expect anything in the near future on that front.

Yes. So one, we have signed significant contracts already, and that's contributed to what's come into storage. We've continued to see a strong pipeline coming through the second half. And we do expect. So the answer, the net of it is yes, absolutely yes. Again, we're not deterred at all by the quarter-to-quarter result on the SRS business. We're -- I would just say, I think this is a good point just to underscore. When you look at the business, in the services business, SRS is a standout performer and it's a foundation for partnership relationships across the business that where we hold their assets, they send us their assets or communication with those customers on a daily basis in terms of what we have, what we can do for them to advance the research by bringing out pieces of their asset database.

On the genomics it's -- I referred to it on our preannouncement highly transactional. It's high transaction, high-volume, short order and lead time and turnaround. And so two, represents long-lasting relationships, as I've highlighted, expanded customer counts. But the foundation there is formable in terms of the customer needs at the time period. As I said, I think that's a spending behavior change right now based on our assessments.

On the product side, again, we have a very strong differentiated ultra-cold store systems including the cryo products that just grew (inaudible) 25%, 27% growth rate year-over-year and showed a sequential expansion. We continue to see that pipeline proved to be very strong going into 2023 as well as we highlighted, we just had the best quarter in our books, so on bookings. But at C&I side, had grown to be about 2/3 of our revenue at this point last year. This brings it down to being less -- I mean when I say 2/3, 2/3 of our products revenue. Now we just went back down to being half of our revenue, a little less.

So we're continuing to tune that portfolio. But we'll take COVID -- sorry, we'll take C&I as it is, and we'll continue to market. So the differentiated product set before we put all of our investment in our team. When I say all of it, of course, we invest in marketing behind C&I, but our true differentiated IP, what our customers are -- our enterprise customers count on us for both large and small customers is really a differentiated cryo capability, reliability. And frankly, this is where we think that B Medical Systems and Barkey has just continues to solidify and extend the leadership there. But -- so I really appreciate the customer -- or the question. I'll pause there and see if I can clarify anything that I rambled on down about.

No, that was super helpful. Next one is probably for you again, Lindon. Just on B Medical. Is there any -- are there any revenue or cost synergies assumed in kind of your thinking around the combined entity? And then Barkey, I know it's a smaller deal, but any color you can give us on revenue growth profile and the margin profile.

Yes, those are good questions, Dave. One thing I'm happy to say is that both fit the profile and the criteria that we've described to our investor base. Both of them, we went under a thorough review and both obviously and they both clear our 5-year ROIC models that we use as a filter. And your question on synergies, neither rely on cost synergies. Neither of them were banked on revenue synergies. What we do see in the B Medical Systems opportunity, as Steve highlighted, is options to expand and innovate there with them. And so the revenue case that we have certainly takes their base of capabilities today combines it with ours. So I wouldn't call it synergies because it's not something that we think our customers or technology adds immediately, but it is an opportunity for investment to solidify and advance the cold chain.

Next question is from Yuan Zhi with B. Riley Securities.

We have a couple. First, in terms of genomic services, just want to hear your thoughts. Is the impact from the weakness of demand in general? Or is from the competitor taking market share that the growth is not that great in this category?

Sure. So this is Matt McManus. It's a great question. I think Lindon outlined a lot of the analytics that we've done in looking at it. And the -- as he pointed out the customer count has remained largely stable for us at the ordering PI level. And so what we're seeing is the continued engagement with the customer base and that -- those same customers have continued to order and we've added new customers as well.

And so from a market dynamic standpoint, mirrors, we can tell it's more that our customers are ordering less from us and not actually switching services, which is encouraging, but also points to some market effect just in the slowness of the orders from customers, either reducing, and we hear this from our customers that they're actually doing somewhat less work or have delayed some of their projects. So while the market environment isn't the one that we certainly hoped for in the last quarter, we think that our relationship and the -- really our interactions with our customers remain strong. We're not losing them to the competition.

Yes. Got it. And maybe, Lindon, can you comment on when we divide the revenue in different geographic areas like in U.S., EU and China, is it certainly that China has a slowdown in terms of overall revenue and all other areas are maintaining strong growth?

So in China, as a reminder, in the third quarter, we had locked down ourselves for a couple of weeks, a little less than 2 weeks in the month of April. Now we talked about that inside our guidance. We'd already comprehended how that impacted us on deliveries. And that was a portion of what we've factored into our guidance, but it contributes to the sequential and the year-to-year drop that we saw in China. In the -- and when I say that, I'm just addressing genomics. Overall, we expanded some in China with some product revenue.

But my -- but what I would highlight is that the overall -- the larger impact in China was demand driven in areas with -- it's a little bit of analogous to rolling blackouts, but it's rolling lockdowns throughout the quarter. You're -- I think your -- the implementation is that from an earlier question is correct. We're seeing that market is more open now. And even in the month of June, we saw a pickup and as we saw it pick up, we saw nice growth in the number of customers in China as well. So we're encouraged by that. And like I said in my guidance, we've picked up some relief in our numbers from genomics from China.

When you think about Europe and U.S., again, high single-digit revenue growth on an organic basis. We're looking at that is less than what we would like to see performance-wise. Again, we'll be continuing to drive in the marketing side. But at this point, the order load would suggest to us the stability to slight expansion overall. And while there's some upside there, we think at the upper end of the range, we have to acknowledge the lower end of the range is realistic as well.

So Yuan, I don't want to -- I don't want to say anything other than really the range that we see is based on our line of sight today and admittedly in the genomic space, it's a little less than what we would like to carry a little bit of backlog in NGS even less than gene synthesis and almost no backlog in Sanger, right? So it's just a reality that we deal with.

Yes. Got it. That's very helpful. And maybe one last question from me. Just curious, which part of your current business has overlap with B Medical Systems or you see the potential to see overlap there?

We think there's very little overlap, Yuan. This is really a tremendous opportunity, we think, to add a technical capabilities that will enhance the offerings that we have. And as we talked about, the opportunities going forward, just from a human health standpoint to utilize that link and the cold chain to couple to other offerings that we have with Azenta we think are just tremendous long-term value opportunities for us.

So we're really pleased by the capability. Certainly, refrigeration technologies are interesting. But at B Medical, they use Solar Direct Drive from power source, things that we can utilize. They have tracking devices and a long history of data collection. So we think those are offerings that will really enhance the things that we do already in the company.

So we're really enthusiastic about adding that technical capability as they are about combining with Azenta, we think it's just a great match with very little overlap and a lot of complementary capabilities.

No further questions. I'll turn it back to Lindon for closing remarks.

All right. Thank you. Look, everybody, we always come with you with a lot of the excitement and a lot of enthusiasm about our business. And it's no less today. It's just with a lot of banks in the results. But it's no less enthusiasm in terms of where we're headed. And in fact, it's underscored by the investments we're making with B Medical and have made with Barkey. We're excited about the path forward with these individual businesses, and we continue to invest in every aspect of our business to build out organically, and we'll continue on that path.

As I mentioned earlier, our intention is to look forward whether it's at the end of the year or a few months with experience with B Medical, we'll be updating our long-term model. So we won't refer to that now. Obviously, we're coming out of the year at a lower EBITDA traction than what we expected. But again, not with any less enthusiasm for where this model takes us. And as a reminder, we still have another $2 billion available on our balance sheet to continue to add to this business. So we're enthusiastic about that as well.

So we thank everybody for their time with us. And we look forward to the callbacks, we know we have some busy schedules ahead of us. We are at a conference this week. So watch our press releases that we put out recently. We've got more conferences coming up in the next couple of weeks as well. We look forward to doing those and meeting you out on the street, so to speak. So thank you very much.

And that does conclude our call for today. And we thank everyone for participating, and you can now disconnect.