Azenta, Inc. (AZTA) Earnings Call Transcript & Summary

All right. Good afternoon -- or good morning, everyone. I've lost track of time. My name is Amanda Scarnati. I am one of the semiconductor analysts here at Citi, and I am joined this morning by Lindon Robertson, the CFO of Brooks Automation; and Mark Namaroff, the Director of Investor Relations. We're going to start off with some introductory commentary and a slide presentation from Lindon, and then I'm going to dive into some prepared questions. [Operator Instructions] So with that, Lindon, I will pass it along to you.

Amanda, thank you very much, and thanks for this conference. It's really well run. We really appreciate it. I'm going to go right to my presentation slides, and hopefully, those are coming up in front of you, and we will put it in projection mode here. Are you seeing the projected slides okay?

Yes. Very good.

All right. Perfect. So thank you, everyone, for joining. We'll, of course, take care of the obligatory safe harbor, we'll make some forward-looking statements, and we use some non-GAAP measures. And I think everyone understands the setting that we are not obligated to update those, and we do encourage you to study the GAAP measures in conjunction with the non-GAAP. The agenda I have, really is to give you an overview of our business. We'll make some comments also on the COVID environment that we're in and how things are going, which we're very pleased with in terms of how we've been able to respond, but it's an overview. We'll take you into each of the segments that we operate in and then come back to the financial model and where we're headed financially. First, for those that may be new, understand that we participate in Life Sciences and Semiconductor. And in recent times, it's been about 43% Life Sciences, 57% Semiconductor. So we're approaching that 50-50 balance of -- probably and depends on Semiconductors continue to be very strong. And so our financial models, when you see it later, you'll see us, so it's still going to be about the same, but even 3 years from now or in 2022, 2 years from now. But I'll highlight that both segments are very, very strong, fundamental growth drivers of the business. We've tuned the portfolios in that way to capture the secular growth, but in both places, we are the infrastructure to help accomplish many things that are science and technology-related. So we don't sink into Life Sciences into a unique, narrow investment of an area of disease research, but we do everything sample-related, sample sequencing, sample synthesis. So every element of Life Sciences advances comes back to either a sample management challenge and/or the sequence and understanding of the sample-based research. And so we help facilitate that. Similarly, we have another parallel infrastructure highway running underneath Semiconductor that we help move the wafer in the product line. We help to provide contamination control at the fab level. We are an extension of our customer's engineering capability and reliable manufacturing supplier to a very robust industry space in Semiconductor. We're global in nature. While last year it was $781 million, you could see our guidance this quarter puts us in the race -- in the run to hit a $1 billion run rate soon. And so it's high growth as you could see last year it was, and this year it is expected to be double digit year-over-year again. And we sell all around the world, and we have -- and we do pay a dividend, historically, and we see that continuing for now. So let's go forward, and obviously, there are a couple of events, and I know Amanda will get to some of the more current events on the Semiconductor side we were just touching on before we started the call, talking about the announcements from SMIC. But let me hit on the prepared remarks here on the COVID environment. Things have continued to run very smoothly for us. Obviously, we all had to make significant adjustments and adaptations in the March to May time frame. And our teams were just remarkably resilient. And then similarly, the marketplace has treated us very well. So we've seen substantial stability throughout the period, and the momentum we had behind us continued to provide year-to-year revenue growth throughout. And we now see ourselves ramping on a sequential and year-over-year basis this current quarter in the guidance that we provided you all. And from day 1, we said we would maintain our investments and our resource teams on the field. So we haven't let any employees leave just -- or I should say, obviously, we let them go if they choose, but nobody has been sent home because of workload or reduction in workforce. So we've kept everybody in place. And our investments continue. We're making capital investments. In fact, we've increased in capital investments in specific response to COVID. And then as an example of that, we've made some investments around Gene Synthesis. We've made some investments around consumables that have been in high demand, particularly PCR plates used in the testing for DNA. So it's a very solid position for us. Stable, continued growth, continued investment. And big picture, we believe that we'll look back at this time as being, yes, a questionable challenge -- challenging time, one which we demonstrated continued capability to customers and won significant number of customers by being available to them and having loyal and reliable supply to them of both services and product. And that the trajectory will continue, and we have not, to date, seen a reason to change the models that we've been running financially. And so on the financials, you can see that over the last few years, we've had high double-digit growth, margin expansion of about 800 basis points over the recent 5 years. And we've also had that leverage point of going from minimal EPS up to $0.76 last year. But I'd just highlight to you just this last quarter, we hit a substantial amount of $0.32. So it's a -- we're well in and beyond the 2019 run rate here even for this year. So we're quite pleased with the track record that we've had over the long term and in the near term through these environments. The transformation of the company has contributed substantially to this, and there's been a very specific focus to tune both sides of our portfolio, Semiconductor and Life Sciences, for growth and for margin expansion. And so that focus has brought more opportunities on Life Sciences, and we do see, explicitly, our investment strategy will be biased toward Life Science expansion. We continue to expect that to be the case, but we've also made investments in Semiconductor. And as I highlighted, we've gone from a very small portion of our business being Life Sciences 5 years ago to now almost half of it and with a higher margin profile as we move to that direction. So now let's take that and dive right into the 2 segments, and I'm going to cover Life Science first. Then we will wrap up with the Semiconductor side of it before we show the financial model. First, in Life Sciences, as I highlighted, we provide really fundamental but critical functionality to our customers. So it's both sample services on storage and the cold chain of custody but also into the edge of science of providing the genomic analysis and services of lab prep that goes with that and with -- and storage. So we're handling samples, millions of samples every day. We're in the storage process where we have thousands coming in on a daily basis for sample testing and sequencing and/or being shipped out on a synthesis basis. And if you think about what our value proposition is to our customer, we are an extension of capability that they don't need to invest in. So we have the solutions around the science and technology that they need and would have to invest not just in equipment but in technology skills. And so about when we -- for example, in the sequencing and synthesis space, more than 1/4 of our resources are advanced PhDs or advanced degrees comparable around the world. They give a critical mass of consultative capability to our customers wrapped around that analysis and help them get the most clear readings and more efficient and higher throughput on the analysis and clarity of the readings. So quality definitely comes through. If someone is looking to take care of the most critical sample in the cold chain of custody, they'll turn to Brooks because they know that we don't let their equipment drop nor -- in temperature as we can complete their chain -- cold chain of custody, and we can help them remove things from on-site to off-site and store it for them or even be their infrastructure off-site if they don't need to physically handle the samples to get the test results and would like to retain those samples. So we're an efficient extension of the team. And again, the growth rates in Life Sciences have been pretty significant. You can see that the acquisition on top of the organic growth last year drove 70% overall. And that was the GENEWIZ acquisition, but we've seen handsome growth across Life Sciences for the last multiple years. The portfolio in Life Sciences is very robust, and we have organized this in our management team as well as -- and reflected that in the chart, the blue being the structure around products that we ship and the green being structured around the services that we provide. And then the products, again, you would find that almost all of this strikes back to the cold chain of custody. And it really does spread across all of the areas of science in terms of fundamental chemical compound storage to fundamental biological storage of research archives, but even to the most advanced gene and cell therapy, caretaking of samples that will eventually -- may be taken from a person's body, put back into a person's body by our customers. So we're helping in the most advanced areas, in the most fundamental areas. And again, this is fundamental as a company in capabilities that we provide, and people do not have to invest in that themselves. In our outsourcing or our services side, we're also storing samples. So at the bottom part of the chart, the sample and repository solution, we store more than 50 million samples on behalf of customers. But in many of those cases, increasingly so, we're handling the movement of samples for them. And in some cases, we're -- it's the banking samples, that being samples that come from third-party testing into our storage and then back out for additional testing. And so we're becoming increasingly the infrastructure arm for the customer. Moving on up around the pie chart, you see that sequencing and synthesis. I think it's pretty straightforward, but I'll highlight that we do this in multiple platforms. We do the advanced platforms of next generation, but we also are one of the larger players in Sanger Sequencing, which serves us well in the market of all research areas but also serves us well in doing Gene Synthesis on behalf of other customers. So we use that Sanger Sequencing for quality assurance of our Gene Synthesis as we send it out. So this is a very large market. It's relevant to the discovery space. The most advanced areas of research, including clinical capabilities. We do stay to the research orientation, but clinical research included, but you can see that it's a broad expanse of capabilities and relevance across the advances that you hear about nearly every day of our lives now. In particular, the exciting area that you hear about is cell and gene therapy. We have a substantial amount of companies around the world now making notable progress in the research in cell and gene therapy. There are famous ones that have addressed and conquered certain spaces to put cancer into remission through these therapies. There are less advancements of famous ones that are making life more pleasant and more suitable for their patients as well. We serve a substantial portion of those customers, both in our products that we ship, but also in the analysis that we provide. And so we have found that we're continuously a go-to shop for our customer base in this most advanced space. And in fact, to put some proof points behind it, it provides you some customer names. And certainly, it's some of the most notable names that you would find, both in household familiarity and also the most advanced biotech that you would find and some of the most respected institutions, whether it be in the health care space or academic space in addition to the pharma and biotech. But its leading institutions that are depending on us, and this is only a sampling of what we do. In the more immediate environment, we've seen indeed some short-term impacts on the left side we highlight. So our expansion, while it continued modestly, on the year-over-year growth, it did -- it continued to expand, but we were down 2% sequentially, but still provided 6% growth in the June quarter year-over-year in Life Sciences. But this left side captures -- why did -- what areas did slow down? We had some restrictions of installing customer equipment because customer sites just weren't open or ready for us to return completely through the quarter. We saw some academic institutions, as everyone would note, largely shut down and still, substantially, while there's some activity going there, we're not confident that they're fully back on the research side, even today. So we're seeing encouraging signs there, but everybody watches this space carefully. If I look at the -- the pace of vaccine research on the positive side in the short term, as I highlighted earlier, we're seeing opportunity in consumables, PCR plates used in research, Gene Synthesis. We were one of the first companies called back in February by the CDC organizations, not just in the U.S., but also in China and U.K. for Gene Synthesis. And that just highlights that what we're seeing in this environment is really a forward-looking statement of the value that we have long seen and have described, but we see ourselves that the Gene Synthesis is critical to the virus research and vaccine development, and that accelerated. We've seen ourselves engaging more in this active flow of samples, and we've highlighted some wins in our earnings call that included the storage of COVID patient samples that were collected for not -- for immediate analysis and for storage and for future analysis. But also, we became the infrastructure for some of the back scene workflow management that was being developed very quickly by companies, and where the vaccine developers are in the headlines, we're down in the footnotes of some of those companies and the infrastructure behind them. In the service synergies, certainly the genomics and the storage and the overlap of our lab prep between the 2 are providing us some beginning synergy opportunities here. And we've often shared that we foresaw that coming, but in this COVID environment, we'd certainly the overlap of the informatics, for example, bringing together the information on gene -- on the population studies and what it meant from a gene sequencing and synthesis basis as well. I'm going to shift now to the other side, Semiconductor, with the technology conference here, and this, I think, will tee up some of the other questions that are pressing today. But what do we do here? Think of it, similarly, the way where the infrastructure highways of providing fundamental but critical operation for Life Sciences, we do the same thing on the Semiconductor side. We help move the wafer in the fab, and so every process step is likely to include a robot from Brooks Automation. Every fab who has implemented automated contamination control, which is a substantial number of fabs nowadays, is using, almost certainly, Brooks Automation for contamination control. And this has helped define and support the process advantages. So in other words, let me highlight that when you are increasing yield and increasing throughput of a fab, you're looking for the best automation, most reliable that never lets you down but does not produce any incremental contaminants in the process and helps, in fact, to eliminate contaminants. And so we're enabling our customers to advance and to become not more of just efficient but enabling some of their most advanced technologies. But again, you don't see us sinking investment into a process step, you see us being the enabler behind that. And so we're relevant to all fabs, all product sets, whether it be logic, foundry or memory. And again, we've had a good, steady, ramp-up growth and even in FY '19, which was notably a declining year for WFE overall, you see us coming out and -- with 3% growth last year. And it's continued and it's expected to be in our current range of guidance this quarter, we'll get to that, but double-digit growth this year. If you look at what derives this in terms of volume and demand for the company, you'll note that volume demand and chip complexity, just as I've described, both drive this, not just the -- putting up a fab line, but a fab line that becomes increasingly complex with each node shrinkage is requiring more and more process steps, more care of removing contaminants and protecting contaminants. And so we see a higher propensity to spend around these product sets as a percentage of the WFE that is being spent globally. And again, it comes back to enabling that process advantage across our customers' all technology nodes. In fact, I'll highlight to you that 5G is not just spending in advanced technologies but also in 200-millimeter fabs and where -- our automation systems are well tuned to continue to support them. Again, household names, if you're in the Semiconductor space, many of these, you would know these just from your experience at home, but certainly, in the industry, we're servicing the most advanced device manufacturer as well as the OEM manufacturers. We're partners to both. Historically, overall, we've shipped approximately 1/3 of our product to the fabs and upwards to 70% to equipment manufacturers. There are some quarters that it swings more or less either direction, but it gives you a good feel of just how systemic we are to the industry. Everybody uses us as an input. And again, that's because we're in that common and critical infrastructure mode of helping them and enabling them to advance their process advantage. So now let's shift towards the profitable growth area and I'll cover this quickly. Our strategy has been outlined this way for years now. We continue to strive to extend the leadership in each of our core markets, both Semi and Life Sciences. We have biased our investments toward Life Sciences, but we provide both organic and acquisition investments to both segments. So we have -- you've seen us acquire in both places and certainly invest in engineering to advance the portfolios on both sides. All of our investments have an eye toward margin expansion, and while we haven't had to make choices, we still have also been able to deploy capital toward M&A, and we've been able to return some of that capital to our investors. So with that said, let's look at what we've said that the 2 segments could achieve by 2022. And you'll see that we're in the discipline of always having a forward-looking model out over multiple years, generally a 3-year model. This one we put out in 2019, and we'll track ourselves to until we approach 2022, and then we'll launch another one. In Life Sciences, we see ourselves growing double digit, about 16% from the 2019 baseline. We haven't seen any reason to recap this or to adjust expectations at this point, and we're pretty confident that we remain on these trajectories. The gross margin target seemed aggressive when we set them a year ago, but you've already seen us touch the low end of this range and substantially through gross margin improvement in our products area. And so we're quite proud of the progress we've made, but we continue to see additional progress into this range of 45% to 48%. And while we will invest in operating expense, it won't be at the same pace as revenue. So we'll get leverage. And the operating margin, while we've been operating about 7% recently, you'll see somewhere in the range of 10-point expansion at the operating margin line of Life Sciences. And then in Semiconductor, the growth rate will vary based on where we are in the semi-WFE cycle, but we see it somewhere around the double-digit growth rate of 12%. It could be 8% or 9% or it could be 14%, but our ballpark is -- if you range this, we would expect it to be about double-digit growth from the 2019 baseline. And the gross margin target, again, 42% to 44% is not of a space that's foreign to us. It provided improvement from the 2019 baseline that we were observing last year, but we've been operating at points in time, above 42%. You'll see some quarters below, but we have high confidence particularly with this incremental revenue. If you were to look at our revenue guide for this quarter, which happens to be our fourth fiscal quarter, you would see it's just over $500 million in the range. And so now when you add $80 million to $180 million, you can expect the leverage to drop through with some investments in engineering, pretty minor investment, if any, in SG&A. We'll give you the leverage to get to the 20%, 22% handsomely as it drops through. So now if you add that up, you've got a company that's growing 14% with margin expansion knocking at the door of 20%, ROIC of 13%, which is well above our weighted average cost of capital by 2022. And we are focused on driving all of these metrics as a team at Brooks. If I put it into numbers, it's there, and I won't spend a lot of time looking at the data. Obviously, you see the progression from a $400 million range to a $500 million to an $800 million. But in the 2022, you see that $1.1 billion, $1.2 billion range that this adds up to and giving really nice leverage, as I highlighted, the operating margin and EPS, as I said -- highlighted, we're well into momentum beyond $0.76 this year, and we see it being in that $2.00 to $2.40 by 2022. And we continue to focus on these objectives and drive our business strategically and see that that's -- this is where it aligns us. I highlighted the deployment of capital. And it is important to us and important to our investors. So I always give a report out it on this. In the last 5 years, you would see us more than 1/4 of our investment of cash goes to CapEx or organic growth. And so we are advancing both portfolios. Meanwhile, we're adding to the portfolio with M&A, and tuning that was 60% of our -- more than 60% of our cash deployed going into investments. And I'll highlight that we do have more than $200 million of net cash on our balance sheet. In our past, we've taken our debt up above $0.5 billion. So we have room to be very ambitious here, and we are indeed ambitious and develop the pipeline toward those investments. And at this point, we continue to return dividends to our shareholders, and we expect that is important to many of our shareholders. So we highlight that. Our M&A track isn't something that is done on a whim. We've done 20 transactions over the last 9 years. In total, over that time period, invested close to $1 billion. All of these investments are made with an ROIC focus, and that is to drive ROIC well above our weighted average cost of capital. And our objectives on an M&A deal is to do that in Life Sciences within 5 years and on Semi within 3 years. Highlight at the end of that arrow, you'll see our most recent investments were in GENEWIZ, which is at the beginning of the 2019 fiscal year; and in RURO, which is a software company we did earlier this year in February for $15 million. It was a software company driving about $5 million of the previous year revenue. And both in Life Sciences and nice additions and producing well on the track of the business cases we put out. More narrowly, zeroing in on the near term of the guidance. You'll highlight -- you'll see that the guidance of $229 million and $241 million in Q4, which is reflected of just what I said at the earnings, and we're not here to update. I'm just reflecting back to what we'd said at the earnings call. But at that range, you can see we're up $9 million to $20 million or I believe that comes up to about 15% to 20%, and we see that being in the Semiconductor side driven significantly, but on Life Sciences, also handsome growth on a sequential basis, on a sequential basis highlighting. So going up to $95 million to $100 million in Life Sciences and $134 million to $141 million in Semi, you see handsome expansion sequentially. On a year-over-year basis, it gets us to an objective for the year of double-digit growth in both segments and certainly much higher than that on Semi in the fourth quarter. In adjusted EBITDA, you see the nice expansion that we've seen. FY '20, again, continuing to show handsome momentum. In the EPS, I've noted, last year it was $0.76. The current guidance puts us well above $1. And so you see the momentum in the near-term period, very little disruption or distraction from the COVID environment. I don't mean to say it wasn't -- didn't require tremendous focus and dedication from our team made around the world to make that happen. And it was a significant adaptation but didn't take us off track. Finally, this is -- Amanda, you're probably glad to hear this, my wrap-up slide. So this is the summary. We have 2 strong businesses in 2 very strong markets. We have an attractive financial model that continues to build momentum and gain leverage. We're ROIC-focused in the deployment of our cash, and we are noted by our investors of having the rigor that they appreciate, I think, in the way we make those steps into M&A when we do make those investments, so we're very careful on that. Very strong balance sheet right now with a net cash position of more than a couple of hundred million. The growth rate, I think, speaks well for what our capabilities have been to transform the company and to continue to be most important, most relevant to the customers that we serve. And on the EPS basis, that leverage is coming through loud and clear. So with that, Amanda, I'm going to stop. I'll defer to you on questions and how you would like to spend the rest of the time.

Thanks, Lindon. That was a fantastic overview and very informative information on Brooks. I'm going to start with the question that is fairly new, and I've gotten a couple of investor questions already on it, but it's on the recent potential SMIC restrictions by the Department of Justice and what impact that could have to the potential semi-cap equipment space. Potentially it could be pretty bad, but we want to know sort of what the exposure is for Brooks, both directly and indirectly. We know that China has been a really important part of the growth story at Brooks for those sort of Tier 2 businesses. So what expectations could you have there? And again, I know it's very new. It just came out over the weekend.

It is very new. And for those reasons, we'll be a little reserved in our comments. However, let me first highlight what our strategy has been at Brooks around developing our business in China. And first, I'll reflect that if you went back to our business developing in Korea, we did exactly the same thing. We partnered, not just aiming toward the fabs, but with the second-tier OEM as well as the first-tier OEMs to be the most reliable supplier and helping to enable their process advantage close to what those fabs wanted. And if you went to the Korea fabs, you would know that their first choice would be to source locally if they could and to the degree that they need to leverage global technologies from -- for the processing or they do that as well, and we support both sides of that. And so we got very close to the Korea fabs that way. In China, we did exactly the same thing. So second-tier OEMs have been developing for a number of years in China. We do partner with them. We engineer in conjunction with them. If -- in pre-COVID days, if the door on my customer conference room was shut, it may stay shut for 4 or 6 hours at a time. And I wouldn't know if that was one of the Tier 1 OEMs or a Tier 2 from China that might be inside that customer-focused conference room with my team because we would deal with each of those customers the same, and the relationship is -- looks very much the same in the amount of and energy in investment we put into them. So indeed, the China second-tier OEM has become very important to us, but here's the thing, is our production -- we produce in the U.S., we do produce much of our product also outside the U.S., so the impact that we would have in the most immediate interpretations of the restrictions would be somewhat modest and helped to be mitigated by those things that might be sourced, even some light manufacturing we have in China or other production outside the U.S. Secondly, I would highlight that the first order of things is what is a fab able to advance in China. So I'd just highlight to you that if they cannot get all of the process steps, for example, from global Tier 1 OEMs, they're not going to build part of a fab with our automation and not have the process science, so we will be dependent on an entire industry being constrained or not constrained. So I have to highlight this, we do take steps to make sure that we stay as nimble as possible and always compliant. But at this point, I know your desire is "Hey, Lindon, how many millions of dollars do you do with China, and how much is that going to be impacted?" I don't have a sizing for you. I will say that it's a percentage of shipments into China that we look at, but we also feel some confidence that we are dispersed in our operations and in our sourcing. And -- but we are always guarded by the fact the very first order of the events here happens in what a fab is able to advance in total. And they're not going to take our automation if they can't get the process science. So I think we're all watching this very carefully. Anxious to see that things are ironed out for the right reasons, for the right motivations. Obviously, we trust they're there and that there are, I'm sure, strong efforts on both sides to get things worked out for the good of the global outcome. So we're optimistic toward that end. We keep our investments in place. I had a question this morning, Amanda, that I think ties in nicely to this. Somebody asked, have we thought about adjusting our investments and our portfolio because of the activity in China? And I would just tell you we're not because we ship the same portfolio, whether it be the China or to a U.S. fab that's going up or to Taiwan or to Korea. So the same portfolio of products is going everywhere, and we know the industry will advance, with or without that collaboration with China. And we'll continue to invest and advance this industry and the capabilities for customers.