Azenta, Inc. (AZTA) Q2 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the Brooks Automation Q2 2020 Financial Results. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded, Thursday, April 30, 2020. I would now like to turn the conference over to Mark Namaroff. Please go ahead.

Thank you, Malika. Good afternoon everyone on the line today. We hope everyone is staying healthy in this environment. We'd like to welcome you to our earnings conference call for the second quarter of fiscal 2020. Our Q2 earnings press release was issued after the close of the market today and it is available on our Investor Relations' Web site located at brooks.investorroom.com as are the supplementary PowerPoint slides that we'll be using during the prepared remarks. I would like to remind everyone that during the course of the call today, we'll be making a number of forward-looking statements within the meaning of the Private Litigation and 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 our aforementioned PowerPoint presentation on our Web site, 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 will also refer to a number of non-GAAP financial measures which are used in addition to and conjunction with results presented in accordance with GAAP. We believe non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Brooks' business. Non-GAAP measures should not be relied upon to the exclusion of GAAP measures themselves. So on the call with me today is our President and Chief Executive Officer, Steve Schwartz; and Executive Vice President and Chief Financial Officer, Lindon Robertson. We will open up the call up with remarks from Steve on the highlights of the second quarter and then Lindon will provide a more detailed look into our financial results for the quarter and an outlook for the third fiscal quarter of 2020. We will then have time to take your questions at the end of the prepared remarks. And with that, now I’d like to turn the call over to our CEO, Steve Schwartz.

Thank you, Mark, and good afternoon, everyone. We’re glad to have you with us today. As we’ve already published preliminary results in a press release we issued on April 13th, I’ll recap those results briefly and focus my remarks on some extra color at the segment level to give you some indication about how we see the current and near-term business environment. I’d like to start by discussing our priorities during this pandemic. First is the safety and well being of our employees and their families as well as our partners, including our suppliers and customers. Second, our ability to serve our customers that are deemed essential businesses with specific focus on any and all urgent COVID-19 requests and there have been many. And finally, the ongoing health of the company for the long term and actions we’re taking to ensure that we emerge from this crisis stronger than ever. With the exceptions of only a few brief work interruptions, all of our 20-plus factories, laboratories and repair centers were up and running throughout Q2 and all are currently operating. Of our approximately 3,300 global employees, about 1,800 have jobs that require them to be on-site. The rest of our employees are working from home. We are particularly proud of the way that each and every employee has embraced the new work practices that include social distancing, the diligent use of PPE, temperature screening, staggered shifts and other practices which have allowed us to continue serving customers. All have adapted to this new work environment and we could not be more pleased with the resiliency of our operations during these turbulent times. We’ve consistently met our delivery commitments to customers as they struggled with their supply chains, and in many instances on the Life Sciences side we stepped up to provide GENEWIZ, Sample Management and informatics services to customers who had either lost their regular services providers or who needed new services from us that came about because of the COVID-19 crisis. It's been energizing to bring even more capability to our customers and their need for our services underscores our purpose and mission. Finally, we're building this company for the long term and our quarter-to-quarter and year-to-year revenue and earnings growth speaks to the momentum that we’ve generated. We've amassed an incredible technology and scientific portfolio, a global presence that allows us to deliver our world-class capability to customers around the world and we possess market positions in trusted brands that are the envy of our competitors. We've accomplished this through the energy and commitment of our global workforce. They know just how to ensure that we deliver on our long-term goals. There's so much opportunity in front of us and it would be shortsighted of us to slow down now, especially since the capability we’re building will be even more valuable in the future. For that reason, we intend to retain our team and fund their activities for technology development, new discovery, market capture and customer support. With each day that goes by, we’re taking actions and making investments to emerge from the pandemic even stronger and more necessary to our customers. Our decision to continue these investments will have some impact on our earnings performance through the rest of this year, but we believe that it’s absolutely the right action to take. As companies and countries are contemplating how to reemerge from the pandemic, we have a definitive plan in place and a dedicated team that will continue to drive the momentum that we've established. Now, I’ll report on Q2. Second quarter performance was strong with revenue of $220 million, up 11% year-over-year with the same 11% growth for each of our Semiconductor and Life Sciences segments. As I mentioned, for the most part, our factories and laboratories were running throughout the quarter as we worked to meet customer demand, albeit with many adjustments to mix because of both supply and demand changes throughout the quarter. I’ll begin with Life Sciences which delivered strong results with $95 million in revenue, up 4% sequentially with growth coming from GENEWIZ and Sample Management. And each of these sub-segments witnessed its own dynamics. I'll cover them separately, starting with GENEWIZ. Once again, GENEWIZ outperformed even our expectations delivering a 25% year-over-year increase in revenue to $41 million. We were advantaged by our unique capabilities as both readers and writers of genes which allowed us to overcome some of the curveballs thrown our way. First, in early February when we announced our Q1 results, we told you that except for a team of scientists who remained on site in support of urgent COVID-19 research, our Suzhou, China operations were basically shutdown. It’s in our Suzhou site where we performed the vast majority of our gene synthesis. Although we were bracing for what could have been a prolonged slowdown, China operations came back much faster than we’d imagined. By the end of February, more than 90% of our employees were back at work. And even without a recovery in academia in China, demand from global customers was strong. In fact, despite the speed bump in February, the March quarter was a record for synthesis at just over $10 million. Similarly, in next-generation sequencing, we also had a record quarter with year-over-year growth of 46% and consistent 7% sequential growth but with more volatility as the quarter progressed. We saw a normal pattern for NGS demand in the first two months of the quarter and then something of a spike in orders in the first half of March, followed by two weeks of lower order volume. As we assess the NGS and synthesis businesses, we believe that much of the Q2 increase was the result of our normal customer capture. At the same time, it appears that some of the March burst came from researchers who no longer had capacity from their core laboratories or facing reduced productivity from their existing suppliers, while GENEWIZ remained at full capability and was eager to serve. That said, order patterns for April have been steady but slightly lower in both synthesis and NGS but we have mixed signals as customer engagements for both synthesis and NGS projects remains quite active. In Sanger sequencing, which is a high-volume overnight turns [ph] business where we performed millions of measurements for thousands of customers each quarter, revenue was steady for the first 10 weeks of the quarter. But when shelter and place orders closed many academic labs and caused the shutdown of non-essential research, we saw an abrupt reduction of more than 50% of our average daily volumes for the last two weeks of the quarter, and that level that has persisted throughout most of April. And though total Sanger revenue actually decreased slightly quarter-over-quarter, it was still up low single digits from Q2 one year ago. In Q3, we anticipate lower Sanger revenue until academic labs come back online and industry reaccelerates. And although we've seen average daily volumes increase during each of the past four weeks, we still remain below 50% of average. So at this point in the quarter, it will be too early to say that we have any concrete signs of a meaningful return to work. In terms of overall GENEWIZ outlook, we expect business to be slightly down until academic researchers return to their benches and the activities that support clinical trials are back on the upswing. We don't have a prediction for when that will be, but we model a gradual return towards more normal volumes as we make our way through the rest of this quarter. A difficult environment like the one where in provides opportunities for companies that are prepared. In Q2, customers challenged us with hundreds of COVID-19 projects that gave us opportunities to demonstrate our incredible scientific acumen, round-the-clock collaboration and fast turn high-quality results in support of their essential research. In addition, we took on many new urgent projects for first-time customers. We believe that over the long run, it’s this attention to solving customer issues that cement them to us and enable GENEWIZ to add more than 200 new customers in the quarter. Now I’ll turn to Sample Management, which, even with all the disruptions from the coronavirus, came in right on forecast. I’ll remind you that this year in Sample Management we have two areas of focus; a return to double-digit revenue growth and sustainable gross margin improvement, and we’re pleased with our progress against these goals. Even in this environment, Q2 was a very solid quarter. Revenue came in at $54 million, up 5% from Q1 and 3% year-over-year. Moreover, gross margin was up another 290 basis points from Q1. We’re very encouraged by these results and it gives us confidence that this business is solidly on a path to be able to deliver on our expectations. At the time we announced Q1 results, we knew two things; that the changes we had made to the organization structure and our focus on performance were set to deliver more growth and keep us on a trajectory for reacceleration of revenue in 2020, and that we were on track to deliver more profitability improvements. That said, we also mentioned to you that we could foresee approximately $2 million of potential headwind from the coronavirus because the inability of our field teams to complete system startups and perform revenue-generating service on our equipment. Unfortunately, our customers obviously did not open for our employees and we did incur the headwind that we had built into our forecast. That said, there were many accomplishments in the quarter and I do want to highlight a few as they relate to trends in the business. Our cryogenics' cold chain products continued to make strong progress. Revenue topped $3 million in the quarter and we shipped B3C cryosystems to nine different customers, six of those were repeat buyers. To date, three-fourths of our systems have been sold into cell and gene therapy applications and the momentum for these automated solutions continues to build. In spite of the significant slowdown in clinical trial activity in March, Q2 BioStorage activity generated our largest sample intake quarter since 2017, and we're encouraged by the reinvigoration of our customer capture activities. And in our consumables and instruments business lines, we made fast-turn capital additions to respond to increased volume of consumables that will be used for COVID-19 tests as part of packages that we sell to diagnostics companies. This added capacity should allow us to increase revenue in Q3. All-in, it was a very good quarter for Sample Management. Even with some COVID-19 related delays, revenue growth was right on track, profitability with ahead of schedule and the result of our deliberate actions and something that we’ll build upon. The team is energized and active and we plan to come out of the COVID-19 days stronger than ever. What energizes us even more is the amount and level of large customer, large deal activity that’s underway. During these days of no travel, our customer engagement activity has moved to the Internet and deals that we've been working on for months are still being advanced. We are currently negotiating the final [indiscernible] on two large contracts and we have more multimillion dollar contracts in the pipeline. These opportunities speak to our capabilities and confidence to resume growth and profitability in this business. On the Semiconductor side, our performance in Q2 demonstrates the value of our product portfolio. And because of our close working relationship with our supply chain, we experienced only a small COVID-19 related revenue impact in the quarter which caused no impact to our customers. At $125 million in Q2, we established a new record high for quarterly Semiconductor revenue and that's all the more remarkable because as an industry we're still not back to our highs for Semiconductor capital equipment spending. We attribute this outperformance to two factors; the strong high market share position of our contamination control solutions business, which satisfies our rapidly growing technology need and a continued design win and market share capture in our equipment automation products for OEM process equipment, along with a steadily evolving advanced packaging market. I’ll give some specific color from our major Semiconductor business drivers to our automation event packaging and contamination control solutions. Our automation products remain strong in the quarter with systems up approximately 10% and robots similar to last quarter's results. We had record bookings for our vacuum robots and vacuum systems indicating demand remains very strong. Sales to Chinese equipment manufacturers are picking up and this is a good indicator for both China fab activity and events packaging capability. We saw an uptick in advanced packaging in the quarter to just over $13 million or up 30% from Q1. This is still lower than one year ago, but it’s the first sequential uptick in the last three quarters and in general a positive indicator. Based on order activity, we do have some indication that advanced packaging opportunities may be starting to percolate, especially in China. Finally, I’ll give a brief update on our contamination control business which has been extremely strong as we delivered a record $45 million in revenue. The 45 million number is extremely significant for several reasons. First, we truly tested our supply chain and determined it to be very capable. In the first two quarters of 2020, we shipped as much revenue within the last three quarters of 2019 and those were already healthy business levels. Second, we met the demand for the expansion of 5-nanometer foundry ramp on schedule and with very high quality. And finally, we continued to win additional business across a broad range of customers, device technologies that will serve us well as Tier 1 foundry spending subsides. Revenue in CCS will necessarily be lower in Q3 after two very strong back-to-back orders, but still we expect healthy levels of more than $30 million in revenue which will be largely made up of a broader base of customers across different geographies and technology applications. All-in, we’re prepared for another strong quarter in our Semiconductor business. That said, we’re also aware of some COVID-19 related supply chain issues that are slowing delivery at some parts. So far, we’ve been able to navigate through most of these issues but it remains to be seen what the impact might be on actual demand from our customers. There’s currently a lot of speculation as to the outlook for Semiconductor processing equipment in 2020. Already our March quarter Semiconductor revenue was up 11% from one year ago and our Q2 Semiconductor book-to-bill was 1.2 for the quarter on a record revenue quarter. Depending upon June quarter capability of the global supply chain, our backlog and customer demand expectations would allow us to deliver yet another record quarter in June if we do not see any meaningful interruptions. All-in, we had a very solid second quarter. We adjusted where those changes hit us and all companies. We know that we’ll need to rely on these same adaptive skills in the June quarter which maybe even more uncertain, but already we’re well positioned and we’re extremely confident in the long-term opportunities that we’re diligently winning with all that we’re investing today. And that concludes my formal remarks, and I'll turn the call now over to Lindon.

Thank you, Steve. I’d like to refer your attention to the slides on our Web site, starting with Slide 3. Since Steve hit on these messages in his remarks, I will also be brief on what we see as the headlines of our performance. First, we had excellent momentum that has only modestly slowed by COVID-19 disruptions. We have performed remarkably well with double digit year-over-year revenue growth in both segments and have established ourselves truly as a top, reliable supplier in every market we serve. Next, we expanded earning substantially with continued performance enhancements in the Life Sciences segment. To put a finer point on it, gross margins in the Sample Management business are up nearly 600 basis points from a year ago. And third, we are well-equipped for what lies ahead. Our liquidity is strong with 198 million of net cash on the balance sheet and healthy cash generation. To this point, our year-to-date cash flow from operations, when you exclude the taxes paid on the sale of the Semi cryo business, are $51 million. This is a year-to-date improvement of 29 million over the prior year. The business is helping and both sides are contributing growth, profit and cash flow. Let’s move on to Slide 4 to review the overall P&L. Let me first point you to the GAAP earnings and highlight what is different in that comparison. The growth of revenue and operating income is similar to that shown in the non-GAAP profile on the right side. But what is different on the left side is in the tax line. In the first fiscal quarter, as guided under GAAP, we recognized the windfall tax benefit of approximately 6 million which is related to long-term incentive stock units divested in the first quarter. That allowed deduction, resulted in a net tax benefit of $3 million for the first fiscal quarter and the second quarter is back to a normal with a 3 million tax expense. The $6 million swing offsets the positive operating performance picture in the GAAP profile. In the non-GAAP results, we apply this windfall to the projected tax rate and take it across the quarters of the fiscal year so that you can use the financials for a level performance indicator. Continuing with the non-GAAP performance of the right side, you can see the performance supported 48% year-to-year growth in earnings per share. Starting at the top, the revenue growth came similarly from each business with each growing 11% year-to-year. We saw nice uptick in gross margins of 60 basis points sequentially. The Semiconductor gross margins remained approximately level from Q1 as expected and the uptick is driven by Life Sciences improvement. On a year-over-year basis, the dynamics are also similar with improvement in Life Sciences and a bit softer margins in Semiconductor. But all-in, gross margins continued to make progress and contribute to the bottom line. Operating expenses during the quarter were up. On a sequential basis, the increase was in R&D for our Semiconductor business. Our engineering team has been kept busy throughout the COVID-19 environment committed to advancing the projects with customers. On a year-over-year basis, operating expense was $7 million higher, driven by both R&D and SG&A. In the SG&A line, the growth was driven primarily around investments in Life Sciences, including our IT transition to a single cloud-based ERP platform, GENEWIZ growth and some additional structure from our recent acquisition of RURO software. While we are spending some extra to keep our team in a safe environment and onboard with us through the COVID crisis, we anticipate reductions in travel expenses and G&A which will result in lower operating expense by approximately $1 million to $2 million in the third quarter. You can see operating margin expansion. Combining the growth with the margin expansion, you can also see non-GAAP net income grew 51% year-over-year and expanded 11% sequentially. Moving below the operating income line, net interest expense was 600,000 lower by about $7 million compared with last year when we were carrying debt associated with the GENEWIZ acquisition. The non-GAAP tax rate for the quarter came in about 23%, very consistent with our expectation of 21% to 25% for the year. Let’s turn now over to Slide 5 to discuss the segment results, starting with Life Sciences. In the second quarter, Life Sciences revenue grew 11% to 95 million compared with the second quarter last year. On an organic basis, Life Sciences grew 11% as well. This quarter was the first full year-over-year comparison which includes a full quarter of GENEWIZ revenue since the acquisition of the business in November of 2018. GENEWIZ had a strong second quarter with revenue of 41 million growing 25% from last year, despite the impacts of COVID-19 that Steve addressed. As a reminder, our GENEWIZ China operations were largely closed down and observed strict quarantine restrictions from that Chinese New Year through February 10. The exception to that were the labs from which GENEWIZ provided gene synthesis support for COVID-19 research customers. We estimated that the shutdown had an impact of approximately $2 million in the quarter. We are currently fully operational and demand from the China market has largely returned. Sample Management provided 3% organic growth during the quarter, in line with our expectation when we started the quarter. We had described and we did see about 2 million headwind from COVID-19 in the large store systems and post warranty services. This was due to some delays and an on-site installation and general lack of access to customer sites. But there were bright spots in Sample Management as well. Year-over-year, growth was driven by cryo which more than doubled and more substantively BioStorage services grew 7%. We have been very encouraged by the continued significant engagements and wins by the teams in the large stores business and in BioStorage during this environment, fueling the path to return to double-digit growth. In addition, during the second quarter, we acquired the life science, informatics software firm RURO. RURO provides cloud-based software solutions to manage laboratory workflow and bio-sample data for a broad range of customers in the biotech, healthcare and pharmaceutical sectors. The business contributed approximately 0.5 million of revenue in the time that we've owned them since mid-February. As we announced in a March press release, effective April 1, we reorganized our Life Sciences business. We have combined the BioStorage services with GENEWIZ leveraging the common lab services and sample handling capabilities. This business combined is now $64 million of this quarter’s 95 million business and showed year-to-year growth on that basis of 17%. The remaining portion of this segment of Life Sciences is the Life Sciences products, which was about 31 million and was up 1% year-over-year. If we had avoided the negative impact of the COVID-19 constraints, we estimate that the Life Sciences products business would have grown about 4%. Another bright spot in the quarter was on the gross margin line. The segment improved nicely in the second quarter up to 45.8%, up 330 basis points compared with last year. The year-over-year improvement was driven by the performance in Sample Management. In fact, we had improvement on every area of the business, including our large Twinbank store systems and services, the Cryo systems, the consumables and instruments and the BioStorage services. This is driven by the performance improvements, the cost reductions and the improved price management that’s been implemented. The growth of this segment and gross margin expansion covered the increased operating expense and drove 260 basis points of incremental operating margin year-over-year. The leverage of this business model in growth mode is quite evident on this page. As we look into the third quarter, we are more cautious due to the continued and varied impacts of COVID-19. As Steve described, we've seen inside [ph] GENEWIZ sustained demand in synthesis, some volatility in the next generation sequencing and a lower run rate from Sanger sequencing. Most notable to us is that continued absence of the academic research institutions and we have seen only a portion of the commercial teams return full to active status. And in Sample Management, it is unclear when customer sites will fully open around the world limiting our access for installations and services. So at this point, we’re expecting Life Sciences to deliver revenue in the range of 85 million to 91 million which is about 5% to 10% lower quarter-to-quarter. Let’s turn over to Slide 6 to review our Semiconductor business. Semiconductor solutions revenue was 125 million for the second quarter, an increase of 5% sequentially and 11% year-over-year. If you were to look into the details of the quarter-to-quarter, you would see an uptick in the systems business which we shipped primarily to Tier 2 OEMs. I would highlight that the strength on that line is in the atmospheric systems as we expected. We do expect to see more vacuum systems coming in the second half which should assist gross margin. The real story in the revenue line, however, is the strength of the contamination control solutions which [indiscernible] user fabs. As referenced, these are record quarters for us in CCS and we continue to see expansion of qualifications and orders across many fabs. The rest of the Semiconductor story is in robots. While it is stable quarter-to-quarter, it is significantly higher year-over-year and our Tier 1 OEM customers continue to call for additional output as we head into our second half. It may appear we faced no challenges in the second quarter, but in fact the accomplishment reflects much diligence to coordinate supply availability, factory production and of course customer needs. We estimate that the negative impact of COVID-19 on revenue during the quarter for Semiconductor was approximately 5 million due to supply chain and the services challenges. On the positive side, these are delayed not lost opportunities. And due to the coordination efforts, our customers were not surprised nor disappointed by this. Gross margins in Semi were similar to the prior quarter at about 40% and operating margins improved by 70 basis points. As mix improves in the second half, we expect gross margins to strengthen. And if the market unfolds, growth will bring operating margins back upward on the leverage of the model. Similar to the Life Sciences business, we’re cautious about the outlook for the third quarter. We expect our supply chain will continue to face some issues. We also are sensitive, but the broader supply chain of our customers aside from us affects the end users’ timing for when they need our product. Finally, we know the impact of COVID-19 on the end markets can change rapidly. We expect our Semiconductor business to deliver revenue in the range of 115 million to 124 million. This is approximately flat to down 8% quarter-to-quarter. Let's turn now over to Slide 7 for a summary of our cash flow over the quarter. We generated 26 million of adjusted operating cash flow during the quarter. This excludes 92 million of income tax payments associated with the gain of the 2019 sale of over Semiconductor cryo business. We also used approximately 16 million of cash for the acquisition of RURO, as mentioned previously. Our CapEx amounted to 12 million for the quarter, driven primarily by investments in operations and it includes approximately 1 million for the new GENEWIZ operation facility in Suzhou, China. Total uses of cash during the quarter totaled 105 million and the change in net cash and equivalents during the quarter brings our cash, restricted cash and cash equivalents balance down to 249 million. The highlight here is the cash capability of the business we have built with GENEWIZ in subsequent to the divestiture of the Semi cryo business. Year-to-date, as I said before, our operating cash flow when you exclude the tax on the gain on the sale was 51 million or an increase of 29 million year-over-year. On Slide 8, you will see a summary of the balance sheet. You can see at the top of the March 31st column, we now carry 249 million in cash and marketable securities. With 51 million of debt, we have 198 million of net cash from operations and investments. The strong position provides us the fuel to invest for growth and gives us the confidence we will weather these uncertain times, and customers and our employees the confidence that we will sustain our investments. Let’s turn now to a summary on Slide 9. Fundamentals of the business are intact and we’ve gained customers and market share during these times. We have extended our leadership and continue preparing ourselves to be ready to accelerate with the recovery of the market. The balance sheet is strong, provides us the fuel for the journey and the strategic flexibility. We have seen growth momentum in each business. In Semiconductor, we saw strong orders and have healthy backlog but we also know the WFE CapEx environment comes down to the path which the chipmakers decide to take. And in this time in particular, the OEM customers depend on broad supply chain that is vulnerable. Our Life Sciences business continues to win new business. The active markets of pharma, biotech and clinical continue to engage on improving their infrastructure with our capabilities and to request our support for the COVID research that they’ve stepped up to do themselves. So, meanwhile, the academic research institutions have now returned to work and the timing of that return is uncertain and varied across the regions. So we find ourselves with unusually mixed signals. Good customer demand momentum, but uncertain market continuity in the near-term. We have solid backlog, but uncertain access to some customer locations. But there is one aspect that is very clear to us. We have the momentum with customers and the opportunity to delight them. We keep that momentum with us. We will maintain our resources and be ready for the ramp as markets do fully return. In the short term, we are carrying some costs. We have some elements of our business less active during this time, but we’re going to keep the team employed. We are providing premium pay for on-site labor, ensuring that PPE and clean facilities make a safe environment and expediting shipments to satisfy stress delivery schedules. We will carry some of this cost in the short term and we will win additional customers as we are there for them throughout, and we will be prepared for the full recovery ramp as the market returns to working order. Let’s cover the guidance for the third fiscal quarter of 2020. Revenue is expected to be in the range of 200 million to 215 million, adjusted EBITDA is anticipated to be 26 million to 34 million and non-GAAP diluted earnings per share to be $0.16 to $0.24 per share. GAAP will be in the range of $0.04 to $0.12. For Life Sciences, we factored in a return of the markets in the June month. This now concludes our prepared remarks, and I'll return the call back over to Malika, the operator, to take questions from the line.

Thank you. [Operator Instructions]. Our first question is from the line of Patrick Ho with Stifel. Please go ahead. Your line is open.

Thank you very much and hope everyone is well and congrats on a really nice quarter in these challenging circumstances. Steve, maybe first off in terms of the disruptions and the volatilities you’ve been seeing. Can you give a little bit of color on your end how you were able to manage a very fluid environment and making sure that your top Tier customers got what they needed? What were some of the steps you took, how did the business continuity plans work, if you could just give a little bit of color on that first?

Sure, Patrick, and thanks for the question. Specifically on the Semi side, we do a lot of credits to the large OEM customers. They give us a good look at the business. They adjust it quite frequently, so we’re able to get out in front of the supply chain. And then our team managed the supply base extremely well. I think this is something over the past years that’s become really fluid. When we get a signal from our Tier 1 OEMs, we’re able to transmit that quickly to our suppliers to get them prepared and I think the team managed it really well. It wasn’t without problems for sure, but everybody knew how to accelerate and get the job done. And Patrick, inside the company, everybody knows that the deliveries for the customers are top priority. So if we go over time what we spend, if we do something for it to get shipments there, we do it. And so I think that’s just – it’s a successful model that played out through the COVID period. And I think the business continuity plans that we have in place, we kicked them into action and I think they played out extremely well. I don’t know if anybody could have anticipated the magnitude of what everybody was going to be faced with, but I think the team responded well. We’re functioning completely differently just even two weeks into the shutdown period. Two weeks into the shutdown period, we were operating with the same fluidity but in a really different mode. So in general, the things that should have happened did and we continue to manage going forward the supply base. There are air pockets we’re finding coming from India, from Malaysia that we’ve been trying to work through now for the past five weeks. I think we’re doing very well. But when you hear uncertainty from everybody in and around the supply chain, I think we’re all dealing with the same kinds of things but I do believe the team is in front of it and we seem to be weathering it pretty well.

Great, that’s helpful. And maybe as my follow-up question staying on the Semi side, maybe Steve or Lindon in terms of the margin profile, it’s actually holding up very well given a lot of the moving pieces that are occurring on the Semi side of things. Can you discuss your I guess inventory management and what we’re going to see [indiscernible] your supply chain as well as your customers are all building a little bit of buffer inventory given the uncertainty that’s out there. How are you managing it internally both to ensure your customer delivery as well as keeping a little bit of buffer for yourself given the market uncertainty?

It’s a good question. So on the inventory front, I have to say the one thing that has been the most satisfying to see and hopefully the biggest change is the fluid communications on all fronts. So the communications on a daily basis with customers as well as supply chain is happening and I think the leader of our supply chain I would say is pretty intense on this. So he’s operating multiple time zones. So this has been the key aspect is tying out [ph] what our priorities and if we don’t have particular parts, we’re exercising those supply chain and most of them have been resolvable. We’ve had modest constraints and we marry that then with our labor force. And our labor force, we’ve been very – we’ve given our labor force latitude that if they have a concern or if they have a specific high-risk situation at home that they are not required to be here. However, in large part our force has been here. So we marry those things to the priorities of the customers. Now, to your point where is the buffers? We have decided to put in a couple of million, I’d call it 2 million to 5 million of investment in the third quarter as we go into third quarter into inventory in the supply chain to make sure that we’re securing what we need not because – we do see strong momentum which suggest we have to ramp, but it’s as much about making sure that we have what we need when we need it in this environment. So we’re exercising putting some buffers in ours. I think on our customer front, we’re seeing respectable inventory levels. We’re not seeing anybody slow down but we’re not seeing anybody put high demands just to pull things in either. So I think it’s pretty balanced on that front. Patrick, did you have another part of your question there that I missed? I want to make sure I covered your question.

No, that was – you’ve answered that very well. You answered it clearly in terms of how managing your own inventory levels given the uncertain marketplace or so. That’s it from me. Thank you very much.

Thank you, Patrick.

Thank you. Our next question is from the line of Jacob Johnson with Stephens. Please go ahead. Your line is open.

Thanks for taking the questions. I guess first question just be interested on your latest thoughts on the synergies between the Sample Services business and GENEWIZ. Now that these businesses I guess are now being managed as a single unit, are you seeing more overlap between these customer bases? And is there any way to quantify if GENEWIZ customers are beginning to use your Sample Management services or vice versa?

Yes. Hi, Jacob. So let me give you a little bit of background here and then talk to you about the future. So, historically, we’ve had a business that’s related to this in the alliance we have with Rutgers University, and this is something that came with the BioStorage team when we did the acquisition in 2015. And the business is called the BioStorage alliance. And there, there are a number of studies, a number of projects that are ongoing related often to a particular disease study. And the combination of the team at Rutgers in Indianapolis would prepare the kit, work with the collection, get the samples in, prepare the samples, often do measurements on those particular samples, give the data to the customer and then store the samples for long-term storage. So it’s a business model that we understand. And what we have now is with the acquisition of GENEWIZ, you can imagine for the – with any acquisition there’s a time and there’s a speed with which you go about integration. GENEWIZ was on such a growth tear that intentionally we left them without a full integration and we allowed them to continue to get their roots. We did three large capital expansions to allow them to keep growing, but all the time we had an idea and an eye for the synergies that we get between Sample Management and GENEWIZ which would be a much bigger version of the alliance. In other words, a much broader sales force, an incredible increase in the amount of laboratory and scientific capability that we would add to the global presence we have in the services business. So we’ve always had an eye to it. And now with the focus putting this business unit – both of these businesses under Amy Liao I think the team has really accelerated their effort about how to go after this business, how to identify it, how to go work on customer capture and to get this brought in to this business unit. So you’ll see over the next quarters – it’s not something we’re going to wait years for. You’ll see over the next quarters that we’ll start to win some contracts here and we will report them to you, because we think they are tremendous synergies to be had. The team’s working on a number of them already. And the speed with which they’ve engaged, it’s a business that they know particularly well and we think it will be tremendously successful. I will note one other change. Amy Liao is the person now responsible also for BioStorage and you know Amy is the Co-Founder or CEO of GENEWIZ. Amy took one of the business unit heads inside of GENEWIZ, Dr. Sarah Eckenrode who’s been with GENEWIZ for about 15 years. She until just now had run the Sanger business. On April 1, she took over. In the organization change, she took responsibility for BioStorage. So Sarah as the head of the BioStorage services business understands GENEWIZ incredibly well. And so she’ll help us to identify and capture those opportunities. So we think from a structure standpoint, it couldn’t be better. We think there’s good knowledge of the samples and the opportunities for the samples on the GENEWIZ side. We see a lot of energy put into that. And I do hope to be able to report to you some exciting new business here in Q3 and Q4.

Got it. Thanks for the color, Steve. I’ll leave it there.

Okay.

Thank you. Our next question is from the line of Steve Unger with Needham. Please go ahead. Your line is open.

Hi. Thanks. I just had one question. I wanted to understand the performance of the gene synthesis of GENEWIZ. Are these all COVID related projects and how are you doing relative to the expanded capacity that just came online?

Here’s what I would highlight is that one thing that made the team so proud was the fact that in – nobody likes the tragedy obviously, but what makes the team proud is that we were the first – well, we were the first impacted in China, we were the first call not just in China but the U.S. and the UK. And gene synthesis was the necessary element from GENEWIZ from the beginning. There was also sequencing done to help through analysis, but synthesis took on demand for COVID. It is [indiscernible] demand on COVID research and it has continued, but it is not solely that. We are seeing demands on other projects continue. And I would highlight as well we’re seeing engagements for gene synthesis to continue. So this is a core part of our business. It’s got a nice mix. It’s a record quarter. I think the record there reflects the momentum in the business and the usefulness that that service provides in the research step. Now in terms of capacity to expand, our expansion of labs has been a critical factor for us from day one. It’s the most capacity sensitive equation that I have. I will say those who have been with us know that I characterize our storage business as variable capital as we put freezers in place. That’s a pretty steady run and we put freezers in row after row as the samples are scheduled to come in. But on the lab space, you have to make sure that you have the labs, the equipment for sequencing on that other side. And then on synthesis, you have to have skills, the reagents and we continue to do fair amount of lab work just in our own R&D around the reagent. So all of this factors into it, but we make sure the capacity is there in each region.

To be clear, the COVID projects were important but they were relatively small dollar volume, so it’s not what moved the needle in the synthesis business. And the capacity as we put into place, one, we set up the European lab where we do not synthesis. So that was purely analysis for Sanger and for NGS. New Jersey, we did a major NGS expansion. So you saw some of that in the ability for us to deliver NGS. And the other major investment is in the building in Suzhou, China which is not yet functional. We already had Sanger – so we already had synthesis capacity in place and we still have more capacity already in place. So we can continue to grow that business without having to add capital on the synthesis side for right now.

Great, all right. Thank you.

Thank you. Our next question is from the line of Amanda Scarnati with Citi. Please go ahead. Your line is open.

Hi. Thanks for taking the question. I just want to talk a little bit about Semiconductor demand and where you expect to see that coming from this year. I know earlier in the year – at the start of the year, we talked about Tier 2 demand in Korea picking up and sort of replacing some of that Tier 2 in China from 2019. Have you seen any of that pickup at all or should we just expect to see more sort of Tier 1 demand if that were to continue on?

So, Amanda, we see both actually. We do see China activity picking up. We had a lull two quarters ago. We were on the call. We talked about a lull in China. It was pretty significant, but we had an uptick over the last two quarters. So the Q2 results remain pretty healthy. And in our backlog, it’s very representative of what we see in Q3. It’s tough to see any further than that. We don’t have any different visibility from what we normally have. But we’d say China activity is healthy these days both for the – at the end user factory level for products like CCS and certainly for the Tier 2 OEMs.

Great. Thank you.

Thanks, Amanda.

Thank you. Our next question is from the line of Paul Knight with Janney Montgomery. Please go ahead. Your line is open.

Hi, Steve. I guess you would say that the Sanger part of GENEWIZ was what was most impacted in the quarter, right, or will be here in 2Q?

Yes, it feels like that for the June quarter. Again, I think Lindon put it really well. Since this seems to be pretty steady and healthy and some volatility to NGS which could swing either way, but Sanger unless and until the academic facilities pick up and some of the industry gets going, that’s a swinger for us and it’s just at a relatively low level. We know share is good. We know customer capture has been tremendous. But if the labs aren’t open, that would really slow us down.

Okay. Thanks.

Thanks, Paul.

Thank you. Our next question is from the line of John Pitzer with Credit Suisse. Please go ahead. Your line is open.

Good afternoon, guys. Congratulations on the good results given the operating environment. I’m just kind of curious. It sounds like from your prepared comments that COVID was perhaps a 4 million to 5 million hit to revenue in the March quarter. I’m just trying to get a better understanding of what your embedding for the June quarter and is that March number right? And then just relative to the Semi business, I’m just kind of curious of your view on what the commerce department came out and said earlier this week about intensifying some licensees potentially into China and what risk that might pose for your business directly or indirectly?

Yes. So the first – the 4 million to 5 million that you referenced is more on the Semi side of shipments that we could have made had it not been disrupted from one factor or another. Generally it’s a supply chain or prioritization in talking with customers on what we could provide most fluidly. But in total on our business, we estimate it rounds to about 8 million in total including the impacts on the Life Sciences and that’s a netted impact, net of some of the opportunities that were also driven on research of COVID and consumable shift for PCR plates in the DNA analysis. So you asked, well, how does that shape up for Q3? Frankly, John, it gets more challenging to put a number on Q3 because Q2, the demand equation was quite defined and we know what disrupted us and we know coming into Q3 demand has been reshaped a bit by the absence of the market. So I will tell you without question both Life Sciences elements were expected to grow sequentially absent the COVID environment. And I can say that without any hesitation at all. And so when we talk about being down flat to 8% -- I’m sorry, 5% to 10%, it’s a pretty significant impact for us sequentially. We don’t think it’s an impact to us when we get through this that the market and in fact I think we’ve embraced a significant number of new customers on Life Sciences. On Semiconductor, similarly as you well know, it’s a design in business and we don’t see it impacting us. However, we all know that everybody’s watching the global economy to see what happens with semiconductor investments. For now, we haven’t had any one ask for a reschedule or a delay or a change in demand. In fact, our customers are more active in reiterating their demand to us and emphasizing to us, we still need it. Our customers still need it. What help do you need? How can we ensure that it’s coming? So all messages to us from our customer endpoints in Semi are full steam ahead. And we’re also conditioned that if a crisis is in the making that full steam ahead sometimes is long lived and sometimes it changes. So that’s why we say it’s a vulnerable time economically. Let me pause on that one and see if you have a question and I’ll address the regulations.

That’s a perfect answer. If you can just talk about the commerce, BIS regulations?

Yes. So we are assessing it but our preliminary reading is, is it’s not affecting us very much. So we anticipate that – most notably, if you went back three plus years ago, we had systems that were under scrutiny and under license requirement and we don’t have that any longer. We were able to qualify those to not require individual licenses. And for that and other – early assessments is that we won’t be directly affected.

Thank you, guys.

All right. Thanks, John.

Thank you. And there are no further questions at this time.

Okay. If no more questions, let me just finish the way we started. One, we’re really pleased to hear all the analysts on the call with us and we hope that that’s an indication that you and your families are healthy and solid in this environment. It’s without question unusual times. I will tell you we couldn’t be more proud to be working with an unusual team that has marched straight through it and has stayed fully engaged. And these are disturbing times but at the same time energizing in the mission that we have; two essential businesses, Semiconductor and Life Sciences and their response from our customers and what they need and what they want is support from us has been very energizing for us and encouraging. And we look forward to walking through this quarter stronger and delivering on this guidance. And we certainly hope that it continues to improve faster than what we anticipate, and then we’ll talk about the end of the year when we get through this quarter and what the longer term shapes up. But we have a lot of confidence that our fundamentals stay in place and we’re excited that we’re in a position that we are. So thank you very much for your interest with us.

Thank you. Ladies and gentlemen, this does conclude today’s call. We thank you for your participation and ask that you please disconnect your lines.