Azenta, Inc. (AZTA) Q2 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the Azenta Q2 2022 Financial Results. During the presentation, all participants will be in listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Monday, May 9th, 2022. I will now turn the conference over to Sara Silverman, Director 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 second quarter of fiscal year 2022. Our second quarter earnings press release was issued after the close of the market today and is available on our Investor Relations website located at investors.azenta.com in addition to the supplementary PowerPoint slides that will be used during the prepared remarks today. Please note that due to the divestiture announced in the fiscal fourth quarter of 2021, the results of the semiconductor automation business are treated as discontinued operations. On February 1st, we completed the sale of this business, and therefore, our second quarter results include 1 month of performance of this business. 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 if future financial data or events occur that differ from the forward-looking statements presented today. We may refer to a number of non-GAAP financial measures, which are used in addition to, and in conjunction, with results presented in accordance with GAAP. We believe the non-GAAP measures provide an additional way of viewing aspects of our operations and performance. But when considered with GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Azenta business. Non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves. On the call with me today is our President and Chief Executive Officer, Steve Schwartz; and our Executive Vice President and Chief Financial Officer, Lindon Robertson. We will open the call with remarks from Steve on the highlights of the second quarter. Then Lindon will provide a more detailed look into our financial results and our outlook for the third fiscal quarter of 2022. 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. Our second quarter results show continued strength in execution in the business. I couldn't be more enthusiastic about our performance and ability to deliver as a company. As an organization, we're focused on driving growth in the business, both through our differentiated offerings and superior operational capabilities. As many of you are aware, on February 1st, we announced the completion of the sale of the semiconductor automation business, and we're now a pure-play life sciences company with more than $2.5 billion in cash available for strategic investment. We're full speed ahead investing for expansion to meet our strong growth and we're actively evaluating multiple M&A opportunities that will strengthen our portfolio of capabilities that allow us to enable breakthroughs and therapies to market faster. I'll now turn to our results for Q2. Revenue for the quarter was $146 million, up 12% year-over-year and up 20% when normalized for the estimated COVID-19 impact in both periods. We consider this to be a strong result in a sometimes challenging operating environment as COVID impacts in Q2 were different compared to the past several quarters. Specifically, we had an impact from two fronts. As we mentioned on our February earnings call, the Omicron surge that was still raging in January caused some disruption in the Sanger business as demand from academic labs in the US and Europe was below normal due to scattered facility closures. This was largely passed us by early February, but it was noticeable in our revenue numbers compared to a normal run rate. And second, the sporadic and sudden closures of various parts of China in February and March caused occasional interruptions in demand from our Chinese customers in much the same way Omicron did in the US and Europe. Nonetheless, overall demand was strong enough to allow us to make up for the few million dollar shortfall caused by COVID interruption. And though, we were able to power through Q2 in spite of COVID surprises, the spillover effects have already impacted the start of our Q3. In late April, we experienced a government closure of our genomics facility in Suzhou that lasted for approximately two weeks. At this time, we're functioning at full power, and we believe that we'll be able to largely make up for these lost days. That said, the situation in China that's impacting many companies with operations there remains tenuous. If there are no additional shutdowns, we expect only a small impact to the results for our third quarter. All in, we're pleased with the results we delivered in Q2, even though they came a bit harder than we'd anticipated. Now back to the results from the quarter. Our services business reported revenue of $92 million up 19% year-over-year, driven by double-digit growth in both genomics and Sample Repository Services. Genomics revenue was up a healthy 18%, and though already a strong result, excluding COVID, genomics grew 23% powered by next-generation sequencing, which expanded nearly 30% year-over-year. These results are a testament to our portfolio and the value that we're bringing to customers. In the quarter, we saw continued commercial execution to land more large contracts, mostly with large pharma and biotech customers. This is particularly noteworthy because our genomics business has historically been comprised of many small and midsized projects. Now not only do we have the tailwind of healthy end markets at our back, we're also gaining traction with larger deals that can move the needle for us. As we noted, we saw some softness in the Sanger business in January due to the rise of Omicron in the US and Europe. Sanger nonetheless delivered a solid quarter, growing high single digits year-over-year. Consistent with our legacy and genomics, we continue to innovate and adopt new technologies to add to our services offering. In the first half of the fiscal year, we introduced seven new services, including our new proteomics and gene to antibody offerings. And cell and gene therapy research remains a healthy tailwind to growth. Our genomics revenue from cell and gene therapy once again grew more than 30% year-over-year, and our AAV offerings more than doubled compared to Q2 2021. We continue to expand our capabilities here, and while we're still in the early days of the opportunity for solidifying our position in the market as the go-to provider. Even as we're managing through a complicated COVID situation in China, we're still gaining momentum as, once again, we added hundreds of new accounts in the quarter. The sample and repository solutions business grew 21% year-over-year driven by the increased number of samples and storage. The transformation on our customer relationships as we shift from handling their sample storage transactions to being their sample management partner, the particularly exciting shift for us and it's driving a transformation to the next phase of how we'll operate this business. Historically, we've used manual freezers due to the archival nature of legacy sample storage. But now as we participate in more and more active clinical trials in addition to the archival storage business, quarterly sample volumes routinely measure in the millions of individual sample transactions. The next phase of growth for our SRS business now depends on significantly more automation in workflows and sample storage to be able to more efficiently and more cost effectively manage the high value sample assets that customers entrust to us. Toward that end, we're making significant investment in storage capacity and efficiency of our bio-repositories. In Q2, we installed a next-generation automated store that will handle multiple millions of samples in our Indianapolis bio-repository. Over the next 12 months, we plan to add additional stores of this configuration in both Indianapolis and Germany, as we transform this service offering to the next level of technology performance. At both of these major sites, we already performed laboratory services related to sample preparation, including aliquoting, blood fractionation, PBMC isolation and nucleic acid extraction. The additional boost from automation will significantly enhance our value proposition for clinical trial sample management. In SRS, we're growing rapidly, and we have a great ambition about what this business can become. We're using our automation skills and our balance sheet to enhance the offerings for a market that's demanding more of a bio-repository in terms of capacity, capability, technology and efficiency. We're excited about how our sample management solutions are taking hold, and we look forward to the next level of capability that we're bringing to customers at exactly the time when it's needed most. The products business delivered revenue of $54 million for the quarter, representing 2% growth year-over-year on a difficult COVID compare. Excluding COVID impact, this business grew 12%. The solid performance was driven by continued demand for our automated cryogenic store systems, which have strong applications in cell and gene therapy as well as good execution in our consumables and instruments business. Our cryogenic sample systems business continues to build momentum and expand footprints and new customer wins, and we're increasing our manufacturing capacity to stay in front of the demand. We anticipate more strong growth in this segment in the second half of the year. Our large automated stores business is also seeing significant traction. As of the end of April, large store bookings are already 40% higher than they were in all of fiscal 2021. We saw particularly strong bookings in April, and these systems are scheduled to begin to convert to revenue in the Q4 time frame and extend into fiscal 2023. In the consumables and instruments product line, non-COVID related C&I bookings reached a record level in the quarter with increased bookings across most C&I product lines to a level that's nearly twice what it was pre-COVID. This is important because we postulated that the accelerated transition to workflow automation that was brought about in large part by high volume COVID testing demands would provide additional post-COVID support for our consumables and instruments business, as our products are geared almost exclusively to highly automated workflows. The fact that we're indeed sustaining much of the share that we've gained during COVID supports what we believe to be the case when we doubled down on our ability to supply in the earliest days of the pandemic. Finally, moving to capital allocation. I've already mentioned some of the organic expansion that we've undertaken, and we're actively exploring many potential complementary solutions to add to our existing portfolio. As you can imagine, with the strength of our balance sheet, we're in a good position, and we are confident we have good visibility of the market landscape. As we move into the second half of fiscal 2022, we're well positioned to execute on our growth plans. The commercial team is firing on all cylinders and our businesses are executing solidly. We believe we have a differentiated high value portfolio of offerings that will only continue to gain traction with new and existing customers. Our value proposition is strong, and we continue to drive awareness of the Azenta brand. We believe we're still in the very early days of growth with a long runway ahead. As always, we thank you for your interest and support as we work to deliver value to our customers and shareholders. And I'll now turn the call back over to Lindon.

Thank you, Steve. Before I proceed, I'd like to thank everyone for their patience and understanding on rescheduling our earnings call. The change in date was solely due to the complexity of the carve-out of the sale and the team needing more time to finalize the numbers. To that end, we intend to file a Form 12b-25 to extend the 10-Q filing deadline by five days. Today, we are sharing preliminary financial results and we encourage you to review the Form 10-Q upon filing for our final results. The complete statement of cash flow will be available with our 10-Q. I now refer you back to the slide deck available on our website. Turning to slide 3. Q2 was another strong quarter, delivering revenue of $146 million, up 12% year-over-year and up 20% when you exclude the estimated impact of COVID in both periods. I would like to clarify that all references to COVID-based impacts are estimated based on our insights to customer applications and product types indicating such demand or constraints on regional demand or ability to deliver. Growth was driven by strength in the services segment up 19% year-over-year. Again, if you exclude the estimated impact of COVID, the base business grew an impressive 25%. And products delivered 2% growth year-over-year and expanded 7% sequentially. The year-to-year comparison is a bit compressed due to the peak of COVID demands in Q2 2021. Excluding this estimated impact of COVID, this business was up 12% year-over-year. The strong sequential momentum of 7% was significantly driven by the non-COVID consumables and instruments and large store systems. Non-GAAP earnings per share for the quarter from continuing operations was $0.12, flat sequentially, supported by revenue growth but with a bit more expense this quarter as we invested in the business and had higher stock compensation expenses with our recent changes in executive leadership and our annual Board grant. Adjusted EBITDA margin was 13.3% and is net of 30 basis points or $400,000 of headwind from overlapping G&A structure, which is no longer with us. We will talk more about this position as we go through the P&L. With the completion of the sale on February 1, you will see one month of Semiconductor results and the net gain on the sale of the semi business and discontinued operations and approximately $3 billion of the transaction proceeds on the balance sheet. Taxes on the gain are now expected at approximately $450 million, of which the majority is expected to be paid in June. Moving to slide 4. You can see the revenue was up 4% sequentially and up 12% year-over-year. Reviewing the GAAP basis on the left side of the page, the key point to highlight is that the total earnings per share is driven by discontinued operations, which includes the gain on the sale of the semi business. Now let's look into the non-GAAP P&L on the right side of the page for additional color on the performance. We indeed delivered a strong quarter with $146 million of revenue and 12% growth year-over-year. Breaking that down, organic growth was 12% also with an additional 1-point contribution from M&A and an offsetting 1-point headwind from FX. COVID-related revenue remained at approximately $10 million in the quarter driven by continued demand in the consumables business. Note that, while this amount is stable quarter-over-quarter, we saw a $7 million decline in COVID-related revenue versus one year ago in Q2 2021, which was our peak quarter for COVID-related revenue. Gross margin was 49.6%, up 30 basis points quarter-over-quarter. This was due to higher margins in the products business, partially offset by lower service gross margins. If you look at the operating income, the margin is down 210 basis points quarter-over-quarter. With revenue up 4% and gross margins up modestly, the pressure on the operating margin is in operating expense, up approximately $6 million. This is net of a reduction in overlapping G&A by approximately $2.5 million. Within the expense lines, we experienced higher stock compensation quarter-to-quarter of $2 million and the remaining increase was primarily due to business investment in the areas of direct sales, R&D and G&A to support growth. Adjusted EBITDA margin in the quarter was 13.3%, down 90 basis points quarter-over-quarter and down 500 basis points year-over-year. The year-over-year drop in EBITDA reflects those incremental investments we made during the year. I recognize this raises the question regarding our Q4 targeted milestone for EBITDA, which I will address with the guidance commentary. The current status reflects revenue on the expected trajectory and expense investments ahead of projections. Turn to Slide 5 for a review of our Life Sciences products segment results. The products business generated $54 million of revenue, up 7% from the first quarter and up 2% year-over-year. The products revenue was a bit stronger than expected, driven by consumables and instruments. The C&I had additional non-COVID demand, and the COVID demand remained steady at an estimated $10 million. Our automated stores business with the completion of multiple projects and initiation of new projects delivered strong results and is projected to show good growth in the second half. The Life Science products Q2 gross margin was 49.5%, a 310 basis point improvement year-over-year and a 360 basis point improvement sequentially reflecting favorable product mix in our consumables and instruments business as well as stronger margins in large automated stores. We continue to be pleased in the gross margin progress in the products business. Second quarter operating margin of 9.9% increased 110 basis points quarter-over-quarter as the top line performance dropped through to the bottom line. On a year-over-year basis, operating margin was down 400 basis points, primarily due to the previously mentioned investments, including R&D and sales aimed at driving future growth. Adjusted EBITDA margin for this segment was 15.5%, up 230 basis points quarter-over-quarter. Next, please turn to Page 6 for a review of our Life Sciences services segment results. The services business delivered revenue of $92 million, up 19% year-over-year. Sequentially, the business grew 2%. The genomic services business generated revenue of $65 million, up 18% year-over-year with next-generation sequencing delivering over 25% growth on a reported basis. I want to provide a little more commentary on our COVID-related headwind in the genomics business in Q2. While China represents less than 10% of total Azenta revenue, our genomics business has a large portion of this exposure, and as Steve mentioned in his remarks, a large effort by the team on the ground enabled solid results despite the difficult operating environment. In total, the genomics business faced a $3 million headwind from COVID in the quarter with nearly half of that coming in the gene synthesis business. Our primary synthesis operations are in China and the lockdowns there this quarter impacted customer demand and added complexities to our logistics. Sample Repository Solutions reported revenue of $27 million, another robust quarter of over 20% growth year-over-year and up 4% sequentially driven by growth in our core storage offering. We continue to expect to step up in Q3 and then again in Q4 driven by increased samples in storage. Like many of you on the line, we have been following the tragic events in Ukraine, and we have received questions on our exposure there as well as in Russia. We do not have direct customer exposure in those regions and have only modest exposure from a sample sourcing standpoint. Our sample procurement services has sourcing channels in multiple countries, and we are cultivating alternative sources. The services business delivered 49.6% gross margin down 150 basis points from first quarter and down 360 basis points year-over-year. The decline in gross margin was driven by increased labor cost and customer mix. Operating margin was 5.3%, down 350 basis points quarter-over-quarter and down 200 basis points year-over-year due to the lower gross margins and additional investment in the labor force. Adjusted EBITDA margin for the services segment was 13.7% down 220 basis points quarter-over-quarter. In regards to the current inflationary environment, we continue to see the competitive labor market as a factor. And on the supply chain side, we are managing our raw materials and inventory very closely. Where there have been increases in raw material costs, we believe we can generally offset these through disciplined pricing. Most importantly, the growth of our business will provide significant leverage to the bottom line. Let's turn to Slide 7 to review the balance sheet. As of March 31, we had approximately $3 billion of cash, restricted cash and marketable securities with no debt outstanding. In conjunction with the close of the sale of the semiconductor automation business on February 1, we repaid the remaining $50 million of outstanding debt on our term loan and canceled our revolving credit facility. On the tax front, we expect to pay approximately $450 million in taxes related to the sale, the majority of which will be paid in the June quarter. Let's turn to Slide 8 for our guidance on the third fiscal quarter of 2022. Revenue from continuing operations is expected to be in the range of $140 million to $150 million with a midpoint supporting growth of approximately 12% year-over-year driven by continued growth in genomics as well as strength in our automated stores and Sample Repository Solutions business. We expect product revenue to be in the range of $48 million to $54 million, supporting a growth rate of approximately 5% at the midpoint year-over-year and services being in the range of $91 million to $97 million supporting a growth rate of approximately 17% year-over-year, again at the midpoint. Guidance reflects a lower level of COVID revenue in the third quarter. In the C&I business, we have seen recent slowdown of COVID-based orders to continue at approximately $5 million, which is a quarter-to-quarter reduction of $5 million. In services, we expect the China COVID environment is dampening demand and constraining some deliveries for approximately a $3 million negative impact for Q3, which is, in large part, mitigated with vaccine management and SRS. Overall, we are projecting approximately $5 million of COVID-based revenue in the quarter, compared to an estimated $10 million in Q2 and $12 million in Q3 of 2021. Adjusted EBITDA is anticipated to be $17 million to $24 million, and non-GAAP earnings per share is expected to be $0.09 to $0.17 per share. Now I'd like to take some time to discuss our outlook for adjusted EBITDA in more detail. For those of you newer to the story, at the time we announced the separation last May, I provided a road map to help investors understand the evolution of our margin profile, as we complete the separation and become a stand-alone life sciences company. At that time, I explained that our adjusted EBITDA margin would initially fall and as we grew into our ongoing expense base and shed temporary overlapping expenses that we expected to see our adjusted EBITDA margin for the Life Sciences business return to its reported Q2 2021 rate by Q4 2022. This was meant to be a road map for investors and a milestone, as we expect adjusted EBITDA margins to climb to 25% to 27% in our fiscal 2024 target model that we presented at our November 2021 Investor Day. Today, we still expect our Q4 2022 adjusted EBITDA margin to reflect meaningful operating leverage in the business. However, our Q4 expectations are now in the 18% to 20% range and to continue to climb from there, as we progress along our three-year plan to fiscal 2024. As I shared previously, the key to our leverage track is top line growth and a stable level of operating expense. The good news is that the top line is on track for the expected growth, excluding COVID impacts, but this update does reflect a higher operating expense with investments for growth. The range leaves us room for variability in revenue and in gross margin. This updated range of 18% to 20% does not change our trajectory to the 26% milestone by 2024, we remain confident in our ability to execute the goals set forth in our three-year target model. We’re now three months into our journey as a stand-alone life science company, and we've made great progress. Still, there's much more to be done in a long runway ahead. Our core revenue trajectory is solid, and we are building an organizational structure to support long-term profitable growth. Furthermore, we intend to leverage our strong balance sheet position to build on our organic potential. In all, there is much to be excited about, and I look forward to continuing to report on our progress. This concludes our prepared remarks. I'll turn the call back now over to the operator to take your questions.

Hey, guys. Thanks for taking my question and congratulations on the print. Maybe one on the fiscal 3Q guidance here. So at the midpoint, $145 million of revenues, that's about 12% -- represents a 12% growth year-on-year. It looks like we have a few moving parts, right? Can you walk us through what the underlying growth is ex -- it looks like there is some China impact baked in, in the lesser COVID revenues. And perhaps remind us, is there -- are there any other supply chain disruptions that are being baked in into the fiscal 3Q revenue guidance. Thank you.

Hey Vijay, thanks a lot for your question. On the COVID side, the projection in Q3, as we shared, would be about half of what we saw in Q2 in terms of a positive contributor to the business. So in Q2, we had about $10 million of revenue. We could describe that as principally being C&I-driven. But as you've highlighted, we had a negative headwind as we shared about $3 million in genomics. And it was significantly offset by sample repository solutions. If you recall, we have pretty solid vaccine management contracts there that we still attribute to the COVID environment. When we look into Q3, we would say that our benefit -- our revenue contribution, I should describe it, drops to about $5 million overall. And again, I would attribute that primarily to a drop in C&I as we've seen in the last, I'll call it, 60 days, a drop-off in the order take on the C&I consumables. On the genomics, the China situation is still volatile, we would say, in terms of what might happen going forward, we're pleased to say that, while we had some demand depression in the various markets that are in lockdown from time to time, and in particular, Shanghai, as you know, has been in a lockdown fairly pervasively, and then also, we've had our own facilities temporarily locked down due to an event there with one positive, but it's been reopened. So it was a short-term and pretty fairly immaterial. But in total, we assess about a $3 million impact that would encompass some of the impacts we've had quarter-to-date and then also some of the expected impacts we have just on the suppressed demand because of the lockdowns. Again, that -- in big picture, if that's the limit of it, will be substantially offset by some of the SRS contracts we have on the vaccine management. So we would attribute about $5 million in total, the services having almost a wash between genomics and SRS and then C&I coming down to about a $5 million level on the consumables. Now, if I give you a picture versus the $5 million a year ago in total, we had about 13 -- I'm sorry, $12 million a year ago. And that was approximately $9 million in products and about $3 million benefit -- both benefits to revenue a year ago because we had really strong genomics performance without COVID impacts either way, but we had a ramp in the SRS contracts from vaccine management. So in total, about $12 million benefit Q3 one year ago and about $5 million in Q3 that we're in currently.

Sorry, Lindon. Just to summarize that, I guess, the reported guidance is at the midpoint, it's about a 12% growth. But given COVID as a year-on-year headwind in China, that's a low single-digit kind of impact, and FX on the -- incrementally it got worse, so the underlying year-on-year growth, is that north of 20%, which is roughly consistent with how you guys were thinking about the long-term?

Yeah, that's exactly right. So -- sorry, just to cut through all the arithmetic on the year-over-year comparison, we're looking at a midpoint that's slightly above 20% year-over-year.

That's extremely helpful. Then maybe, Steve one -- sorry, go ahead.

Vijay, I'll add to that, that it's a little above 20% on both products and services at the midpoint of the guidance that we've given, yeah.

That's helpful. And Steve, one big picture question for you. Clearly, the cash on the balance sheet, that is a source of upside. And I couldn't help but observe your comments about scouring the landscape. But just maybe talk about what kind of assets should we be thinking about? What would be considered as complementary here? And the ability to close deals in market environments like these, maybe talk about the pipeline and what it means to the model?

Sure. So thanks, Vijay. So a couple of things, Vijay, always, we're looking at near adjacencies to the capability. Anything that can -- that would be a good add that we'd be a better owner of something, that's the capability that we already have. So as we look at very specifically certain bio-repository collections would be good as others would not necessarily be because they don't fit the particular offering that we have in and around the genomic space, near adjacencies. You've heard us talk about gene to antibody, gene to protein, different kinds of activities that we've done as joint ventures to start, I think, are really meaningful adds on the genomics opportunity on the scientific side. And from a product side, there are a number of opportunities where we can continue to add value for cold chain capabilities in and along the management of samples, the preparation of samples, the handling of samples, the storage of samples, we do believe that automation continues to be a necessity here as we evolve cell and gene therapy capabilities, and we think managing the cold chain in a very controlled environment is going to be critical. So there are a number of companies that do very interesting things. The position that we have in the marketplace, plus the balance sheet actually, give us a look at almost everything that's an opportunity. And it's also helpful for us as we go to approach different companies that we've learned about and companies that we meet just to begin conversations. In terms of the environment, these are environments where buyers think there are a lot of things to be done and sellers aren't quite there yet. But it doesn't mean the conversation shouldn't be had, and I think we're really positive about the environment. And again, we're building the business for the long-term. So the conversations that should have been happening over the past few years have been happening. The conversations that ought to be happening today as a continuation of those are ongoing. So we’re undaunted by the environment, because all valuations aren’t necessarily said in the public market. So we think there are lot of reasons why lot of good conversations ought to be going on and are going on in and around the things that we're looking to do. I remind you and I remind everyone in a $10 billion market opportunity as a $500 million company, we're 5% penetrated. And so we see lots of upside and lots of opportunities for companies that serve elements of this space, and when we add into our portfolio, we think adds even more value.

That's helpful perspective, Steve. And if you don't mind, one quick if I could squeeze in, how big is cell and gene therapy for Azenta right now?

So Vijay, we haven't put a specific number out there, but we were hovering below $10 million. We're around the $10 million mark. Right now, on a on a quarterly basis, we did talk about 30% year-over-year growth again, in the current quarter. So it's a fast grower. So you can imagine that's about where we are. So certainly, the fastest -- consistently fastest-growing segment of the opportunity that we have, and we remain really bullish about our contributions there and what the market itself will do, so the market growth plus our ability to capture in almost element of the space.

Understood. Thanks guys.

[Operator Instructions] Our next question is from Paul Knight with KeyBanc. And your line is open.

HI Lindon, the -- you're saying that right now, in Suzhou, no closures of the facility, correct?

Not currently. As we highlighted, we had a short closure due to one case, but it's been reopened.

And then, the filing of the Q, what date would that be now?

Sorry, again?

The 10-Q filing date.

Yeah. So the official due date would have been tomorrow, and it gives us a five-day extension. So you should see us sometime between now and Monday.

Okay. Got it. And the cash is already on balance sheet, correct?

Yeah. That's absolutely right.

And then, what are your thoughts on COVID long-term would go completely away?

Well, let me answer it in two regards. One, in our model, we've not relied upon COVID revenue contributing in 2024. We do think that our capabilities to contribute in that problem statement in that environment with our customers has produced additional opportunities and deeper relationships for sure and demonstrated a lot of capabilities. In terms of whether COVID stays, with us in terms of a testing environment for long-term, we're just not in a motive of speculating right now. The line of sight for us even in the near-term is short. But I guess I would anticipate it becomes more of an off-the-shelf, commodity in terms of testing and plastics around that space and that we would, in another year, probably stop calling this out. We'll call it now as long as we can see it. But contributions here, I think this turns towards the value that we're offering. For example, in that vaccine management, we're getting additional opportunities around manufactured products and other opportunities, which are blossoming from our capabilities to respond so quickly and reliably in this environment. So there's, opportunities for us, but we wouldn't refer to them as COVID.

Paul, this is Steve. I'll pile on a little bit. Just to be clear, like all companies in and around the space, we dealt with the COVID environment really well. I think we knew the kinds of investments to make. But here now two years later, here we see the kinds of things that are going on in China, it really tested the business continuity, plans and processes that we had in place and the team really delivered well. So that although, China is uncertain, the capabilities that the team demonstrated as part of the business continuity planning allowed them to use different sites in China to move the distribution of materials and customer products around the sales force jumped in really well. So again, it's an uncertain environment, but we're really confident about our ability to deal with however it comes to us, and it has come to us a bunch of different ways. So that part gives us a lot of confidence. But again, something that we're going to deal with in a little bit different way because we do have a different structure from a China operation compared to some other companies.

Okay. And then regarding your guide 24-plus percent EBITDA margin on 2023 is that really linked to pricing pass-throughs on your increased cost?

Yeah. So Paul, your – the premise of your question isn't quite closing in my mind. So let me summarize what we presented. We described that by the time we get to the Q4, instead of the 22%, we provided 18% to 20% EBITDA. However, it is on a trajectory, and that's only a milestone on its way to 2024, which we said we still feel strongly we're on a trajectory toward approximately a 26% EBITDA by 2024. So perhaps you're interpolating that we'll be on our path from the call it, 18 to 20 on its weight to 26, and you're pointing to a midpoint. Is that your question?

Yeah. My question is your FY 2024 guidance – I'm sorry, 2023. What's your EBITDA goal on 2023, Lindon?

Yeah. We haven't put out an objective or target there. We only do the long-term model. And as we said, it's a really good question to air one more time. So we'll put up the long-term model, track ourselves to that, and we clearly give an indication of whether we think we're tracking ahead or behind that. Right now, as I shared in my commentary, we think we're tracking right to the top line of what we would expect to be on that trajectory. On the operating expense, we've invested a little bit faster in this year as we've gotten off the ground as a stand-alone company and significantly, I think you would look – you would see that in our commercial investments as well as some of our G&A. But with that said, we think we leverage that and grow into that. And by the time you see us at the end of 2023 going into 2024, we're on the trajectory towards that 26% EBITDA.

Okay. Got it. Thanks.

[Operator Instructions] Our next question is from Jacob Johnson with Stephens. Please go ahead.

Hey, good afternoon, everybody. And apologies if you've already covered this, but it looks like guidance assumes kind of a step down in COVID revenues in 3Q. Are you assuming any offset for selling to those customers kind of for non-COVID products, or is that something that could be, I guess, upside to your guidance if that plays out?

So Jacob, in the guidance, we do have a drop off on a sequential basis and a pretty significant drop off on a year-over-year compare. To summarize on the year-over-year in our guidance for Q3, we have about $5 million projected in Q3 coming up. And we had about $12 million a year earlier. What we described is if you remove it in both periods, our guidance supports a little north of 20% growth. So I think when we look at that, I highlighted that the 20% growth is supported both on services and products in the non-COVID offerings. We had conveyed before, and we would reinforce this as we move through the second half, we're seeing good performance in our automation systems and also in the services around SRS and continued consistent high growth in genomics. Those three pieces, I think you've continuously seen genomics perform. And then SRS and large systems or automated systems continue to percolate with accelerating momentum.

And Jacob, this is Steve. I think also at the last point in your question, indeed, the non-COVID portion of the consumables and instruments is -- remains higher than it was pre-COVID. So we do think the stickiness of the share gains that we've had are sustained. Again, we have a few data points. We're really confident about it. It's hard to quantify it exactly, but we did talk about non-COVID -- the non-COVID C&I bookings doubling from our -- prior to COVID.

Okay. Perfect. Steve. And then maybe following up on Vijay's cell and gene therapy question. I think there's a lot of interest in kind of the cold chain of custody and distributing the cell and gene therapies. As I think about your portfolio today, I would think certainly the B3 cryo plays in that process. But I'm curious if there's an opportunity on the SRS side there? And also if there's maybe more you can do there one day, I don't know, organically, maybe inorganically, just kind of thoughts around that, the distribution of the cell and gene therapies?

Yeah. So Jacob, we absolutely think that there's a tremendous opportunity, the B3C is part of the development line now in part of the manufacturing line for a number of companies. And so the repeat orders that we're getting there really firmly establish us in that workflow. There's another product that we have that's not as visible, but particularly as it assists the cold chain, we have a cryopod that deals with these cryogenically frozen samples for the movement inside the workplace. So it's a critical transport device. We had a record number of shipments of those products in the last quarter. That's a really strong element. And we do believe that as we continue to build out in support of cell and gene therapy, it's going to be strong. The SRS business is all over it. So the SRS business continues to see more opportunities. And we have a lot of customers we didn't have before, who we support for cell and gene therapy, cold chain applications.

Great. I'll leave it there. Thanks for taking the questions.

Next question is from David Saxon with Needham. And your line is open.

Hi, guys. This is Joseph on for David. I was wondering if you could give a little color on the backlog for freezers, both the stores and the cryogenic freezers. You had mentioned a handful of large orders in the quarter. I was wondering if you could maybe size those in terms of potential revenue or sample volume size of the units being built?

Yeah. Joseph, I appreciate that question, but we stopped talking about the backlog absolutely in a couple of years ago, and we do this because there's so many different characterizations of backlog on our res business, one on the SRS, one on the store systems. And I understand you narrowed it down the stores, but we just -- we aren't disclosing the backlog. But I would like to add some color for you. What we've seen is there were significant uptakes in large store systems as we entered the year and we saw customers at an enterprise level that we've been supporting engaging on large systems. We've seen larger quantities also on the cryo systems in more robust repeat and some orders from customers that have taken those in the past. And then we've had a pretty strong pipeline that's not fully materialized through orders in our backlog. And so I want to be clear about that. So, we anticipate that we'll have bookings in this quarter that will feed the fourth quarter. And so when we're talking about the ramp in the second half, it is being what we have to work on currently. And what we know the sales team is indicating is an increasing need across our customer base. So, we're very enthusiastic about this path.

Okay, great. That's very helpful. Thanks for that additional comment. And then maybe just kind of building off that a little bit with the customers. Could you guys maybe talk about, especially in this quarter, but here recently in the last couple of quarters, where a lot of these new customers have been coming from, especially as we see the COVID-driven revenue declining? Is there a certain business unit that most of these customers are gravitating towards whether it be SRS or GENEWIZ genomic services?

Yes. So, it would be tough to pinpoint there. We have -- we're getting close to 10,000 customers here. And I think Joseph, the testament to the aggressive gains everywhere they come from all the product lines. So, when we're growing in the double-digit up to 20% growth that each of the business units is capturing customers everywhere. So, we pride ourselves in our ability to sustain the customers that we've won already. and we drive a lot of growth there. And most of the customers that we win that are new customers are generally small companies, and we grow with them. So, I think that's been consistent for the last five years all the way through COVID as well. So, I think there's nothing unique or special here. We're heavily penetrated in all of the large pharma, biopharma companies and small projects for academic institutions and each one continues to grow. And we do track our ability to add more revenue with existing customers. And I think we're having the kinds of the success that we ought to be having in that environment. And as Lindon mentioned in his remarks, the commercial activities that we have continued to build on account base, the capabilities we bring as Azenta rather than individual product lines and product capabilities.

Okay, great. Thanks for taking our questions.

Thanks Joseph.

Next question is from Yuan Zhi with B. Riley Securities. And your line is open.

Thank you for taking our questions and congratulations, Steve and Lindon, for another great quarter. So, maybe two questions from us. First, can you provide some additional color on the impact of COVID to your China operation? I'm just curious was there a pent-up demand on genomic service relative to COVID? And then the second question is that in the last two quarters, the quarter-over-quarter growth of the cell and gene product sales were, kind of, single digits. And a lot recently has mentioned lower demand for their product. I'm just curious what kind of signals have you guys picked up from your customers regarding their demand in sample repository and related genomic services? Thank you.

So on the first one, I'll take that one. On the COVID impacts in China, think of it as really kind of three pieces that we have covered in our guidance. One, the demand being suppressed a bit already quarter-to-date and coming into the quarter due to the lockdowns we've already experienced. Second, we did describe we had a short temporary constraint on our operations in China to deliver gene synthesis, significantly gene synthesis. It impacts things that you're operating in China, but the synthesis is most. And what we highlighted, about half of our impact overall there was in genomics. And then, the third piece is what we project for the next couple of months as we finish the quarter. And in that regard what we've covered here is a bit of uncertainty on the demand environment and perhaps a little rockiness, but not substantial rockiness in our operations. What we've seen and we've been pretty pleased that the China government, there was very fluid communication when we had a temporary shutdown that we felt there was -- everybody had motivations to keep things open. They were being very cautious, I think, appropriately so, and we reopened in pretty short order. And we're pretty encouraged that that's going to be the mode of operations. So what we mostly assessed in the $3 million is a modest operational constraint. The larger part of it is the demand suppression.

And Yuan, this is Steve. Just about the impact, for example, cell and gene therapy on the product side. You're correct. When we back out COVID, a 12% growth in the product side, we still think is particularly strong. But you shouldn't attribute all of the growth and all of that market actually to the cell and gene therapy. So to be specific, we're -- we still ship about 75% of the BioStore III Cryo systems for cell and gene therapy applications. But the products also include the consumables and instruments. And from that standpoint, the cell and gene therapy is still a relatively small portion. So when we talk about 30% year-on-year growth in cell and gene therapy, the impact on the product side isn't -- it's not a dominating factor, if you will. But still the growth is strong and almost all of the BioStore III cryo business and the CryoPod, those are products that are related to cell and gene therapy growth. And similarly, on the sample and repository services side with a business that's kind of at almost $100 million run rate. Cell and gene therapy continues to grow and is a good contributor, but it's not big enough to push the growth rates there yet towards 30%.

Got it. Thank you for the additional color.

We have no further questions. I'll turn the call back to Lindon Robertson for closing remarks.

All right. Thank you. And thank you, everyone, for the interest in tuning in with us and especially, the analysts at these questions to help add color. We're very much energized by the momentum of the business, the responsiveness that our teams around the world have been able to have in difficult environments and our -- we particularly want to tip our hat to our China team in how they've executed. With that said, I'll just highlight to you, we couldn't be more enthusiastic about what we're doing. We are -- we have the revenue growth on track. We're putting investments in place for a long-term model with extreme confidence that everything we're putting in is capability that's going to benefit us in the near term and set for scalable growth in the long-term. And again, we reinforced the objectives for the 2024 model with a lot of confidence, and I think the proof points are starting to show up, which we couldn't be more encouraged. I'll remind everyone, watch for the 10-Q between now and the beginning of next week. And those results will be out and confirm the things I expect that we've said. But we'll file that in the next coming weeks. So, with that said, thank you again for tuning in. We appreciate it, and we look forward to talking to you again next quarter.

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