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

I'm Jacob Johnson, life science tools and diagnostics analyst here at Stephens. Welcome to Nashville, everybody, the last day of Stephens Investment Conference. But we're finishing with a good one. Really excited to say for the first time, welcome to the Azenta team or the artist formally known as Brooks Automation. We have CFO, Lindon Robertson; and then Sara Silverman from Investor Relations with us today. Lindon, I'll turn it over to you for some prepared remarks, and then we'll have some Q&A.

Sure. Jacob, thanks very much, and we really appreciate everybody's attention. This is one of the best conferences, and we're so glad that we're -- it feels a little bit of normal this week. So appreciate the invitation. Couldn't be more excited to talk about Azenta as a company now formally change. We started trading as AZTA on the ticker symbol on Wednesday morning, and this has been a long transformational path for the company that's culminated in really a very interesting compelling change of identity as well as a consolidated brand set of offerings and a customer front that's just the most admired set of customers that anybody could ever ask for. So we couldn't be more proud as a company to launch this week as a formal Azenta company. With that as a backdrop, if you were looking at our past history, we've been a company that's associated with semiconductor for more than 30 years, think of it 45 years in the technology, more than 25 years as a public company. But 10 years ago, we headed down this path in the life sciences. And we built quite a portfolio of offerings centered, first and foremost, around cryogenic and automated capabilities that led us into -- and this isn't classic cryo storage. This is automated storage that differentiates in terms of helping customers to handle overwhelming volumes and flow-through of challenging workloads with the most precious research assets that you can imagine. And so as we do this in the millions of samples, it led us to helping customers to manage those outside the company -- outside the customer, I should say, on our premises. And so we stepped into an investment in acquiring a sample repository solutions business back at the time in 2016 called BioStorage. It's grown substantially since then. Looks a bit different than it did at the time, global capabilities, tens of millions of samples stored on behalf of customers on our premises, significant annuity-like revenue stream in our base of revenue. And then third, in 2018, we picked up the genomics analysis business, and that led us to thousands of customers that use what at that time was the GENEWIZ business that serviced and delighted customers in all 3 regions of the world, Europe, Americas, Asia, substantial operations in China included in that equation. Headquartered in New Jersey, close here in the States. And so as we think about the culmination of these, I've overlooked many of the pieces that picked up along those -- that time line. But as we accumulated all this, we built quite a handsome life science portfolio that never quite made 50% of the revenue of the total company, but became a $0.5 billion business in striving for that, and at the same time, the semiconductor business started, through the portfolio efforts that we made in both divesting and investing, became a really attractive growth and investment opportunity as well. And so at this juncture, over the past year, we've worked on this project to separate the company, stand up 2 strong companies, and in doing so, we sold the semiconductor business, we struck that agreement in the summer time. And our anticipation is that deal will close in the early months of 2022 calendar year. That will produce about $2.5 billion in net proceeds. So if I think about a nice outline of an overview, you've got now a life science business of $0.5 billion of revenue, it's been growing the last couple of years with 21% CAGR on the organic growth basis. We've had a high growth. We put out margin expansion that's been quite attractive over the recent years. We've been profitable as a life science business. And now we'll have $2.5 billion of cash to put to work once we close the sale of semiconductor business. The Brooks Automation name, we're all quite proud of, will go with the semiconductor automation business, as we've announced previously. And we, therefore, have launched the Azenta Life Sciences. So here we are, Azenta. AZTA is the ticker symbol. The promise going forward has been outlined in our recent Investor Day. We have a model that highlights 16% to 20% revenue growth based on what we own today between now and 2024. In that set of objectives, we take an EBITDA margin that will get to about 26% as a milestone for that year in 2024, up from about 17% that we've shown recently. And in that context, a nice point in the leverage curve, it will continue to produce margin expansion along with that growth. And we think that's with really nice investment afforded to support the expansion. And meanwhile, we'll continue our track record on the M&A front to look at deals with an ROIC lens, both for relevance to our strategy. We won't see us go far afield. You'll see us stay close to what we know. But we do look for those adjacency to continue to grow and address additional growth markets. And as we do that, we think we continue to add to that growth engine, the growth engine that's producing nicely and we anticipate to continue to do so. So we think it's a really unique business model that's in the market today as a stand-alone company of size, of scale, profitable, high growth and cash to put to work. So with that, Jacob, maybe I'd pause and see where you want to take it.

Sure. Thanks for that, Lindon. Maybe starting out with a higher level question. I think something kind of topical given you've been Azenta for day 3 now, I guess. At your Investor Day, your new Chief Commercial Officer outlined some updates to Azenta's go-to-market plans, does include having a more unified approach under a single brand, which I think you mentioned. But can you just talk about some of these changes and maybe how much kind of low-hanging fruit is there to realize synergies across the Life Sciences business as a whole as you move forward as a stand-alone life sciences company?

Sure. So one, as we built the various pieces and acquired various pieces and built organically some of what we have, we saw a lot of traction together just as a cohesive portfolio. Many of the customers got to know us because we had really significant presence with them in their R&D centers as infrastructure providers of automated storage. Others knew us because we were helping to store and handle their samples off-premise because of the sample repository solutions business. And others knew us from analytics. But as they got to know us, many very interested, and we could take it to them with a lot of credibility, one versus the other. But a beautiful thing about coalescing around a single brand name is it integrates that identity. It makes it immediately recognizable. And at the same time, we've coupled this with an investment in our commercial front. And we've just -- one thing the success brings is the ability to attract even more and more talent and capability. And so we've attracted some really nice talent and leadership on the commercial front. And we introduced at Investor Day, Linda De Jesus, in person on the -- as our Chief Commercial Officer, really helping to lead a blueprint of integrated sales and commercial presence with our customers, bringing not just a single name, but also an integrated sales equation, helping to transform both by reorganizing and bringing all sales and marketing underneath her in partnership with the brands that we take to market; secondly, helping to adjust and transform the quota system for our own salespeople to help energize those synergies and to make sure everyone is rewarded for the activity they bring back; and then third, just making the interface with the customer easier on a single website interface and ability to order and recognize what they're doing with Azenta as a single company. So many actions in place, including investments, into geographic leadership that Linda highlighted as immediate needs, which was great to support, and we've seen traction already.

That's really good. Maybe kind of following up and thinking about synergies across the segments and maybe some more discrete items. Can you just talk about the synergies between GENEWIZ and SRS since they're under the Life Sciences services business together? And then just would also be curious just to talk about SRS and the freezer business, which used to be kind of together, and I think we think of SRS and GENEWIZ now, but there's still a lot of synergies between selling freezers and selling storage or services.

Yes. So if I pull that apart a little bit, there are synergies across the entire opportunity set for us. But Jacob is exactly right, before we acquired the analytics business, we had the offsite services, coupled with the on-site infrastructure sale of automated storage. And that has natural synergies because it's complementing the needs of the customer. A customer who is in R&D at a pharma level will have our infrastructure at multiple sites, R&D sites for what they need to retain. And they will also commonly have not just necessarily a few hundred, but perhaps a few thousand freezers that they're archiving. And they're looking for -- to gain use of their capital for other purposes. And the outsourcing trend is really, I think, starting to expand. I think the adoption rate of outsourcing is well recognized but still young in its tracks. Now as Jacob pointed out, when we acquired the analytics business, we thought and we still -- and we found great success, as we combine that sample repository solutions with our services of analytics, that there will be additional synergies to be had as we are bringing in millions of samples each year to analyze on gene sequencing basis and as we're producing samples on a gene synthesis basis and we're handling samples in storage that the lab overlap became immediately opportunistic for us. First and foremost is the cost but also as an offering capability of supporting lab services. And then we saw a relationship-based synergies where a customer may be actively involved in sample repository services but not yet using GENEWIZ of size. But clearly, they have the investment inside the walls of their business for gene sequencing but still needing services outside. And so they -- we've seen a number of examples where we've been able to obtain additional business streams by presenting to the customer. And sometimes this happens during negotiations on the storage solutions expansion opportunities where they're bringing a project to us or a new acquisition that they've acquired and they want to adopt the services. And then we'll present the gene sequencing business opportunities with them -- to them. And these -- it's amazing, and I think many in the life science industry see this is -- it's fun to be in a business where you don't see the friction of, well, do we need it or not? Because they need it. The question is, are we going to match up on the requirements? Do we have the credibility as a brand? Do we have the ability to continue to delight? And I'm really proud of the team to say yes on all of those fronts. So we're finding synergies happening. I think we're still young at that stage, and we still have more ahead of us.

Got it. On SRS maybe, you've had some notable wins recently and I think for some large pharma companies and I think some pretty chunky wins. As we think about growth in SRS, and I know it's within services, and so maybe you're not going to call it out specifically. But as we think about the growth of that business, should we think about that as largely being driven by increased volumes? And I think we used to talk a lot more maybe about kind of more cross-selling opportunities and more revenue per sample. Is that still -- opportunity still very much in front of you?

So it's true, samples across research are growing at a double-digit rate. So you would naturally expect that outsourcing opportunities would grow at least with that. Nice thing is, as I said, the outsourcing business is still young in penetration, and the adoption rate is leading us to a faster than double-digit growth on a base. With that said, I always caution and try to be clear with investors, too, that over the last 20 years, we've accumulated tens of millions of samples in our repository centers. And so I always characterize that the sample repository solutions business will have -- it will always be growing, or at least this is our experience, it's always continuously growing. There will be seasons of high growth and seasons of lower growth because you're adding to a base of tens of millions that you accumulated over years. So we shared recently that our oldest sample has been in storage for 17 years. Our average sample has been in storage for about 5. And so as you're adding this year, I think a good measure is how's your activity compared versus last year's new activity. But in most cases, we're seeing the average growth of revenue to be double digit and stronger. And over the next 3 years, in our model, we described 18% to 22% growth on our total services business, with SRS probably being at the lower end of that. So high double -- high teens growth, strong. Part of this, Jacob, comes from line of sight with really large customers that we've recently won, and gives us good visibility into 2022 and somewhere into 2023, but also confidence that we continue to see that adoption rate and growth of the industry, again, based on growth of samples, adoption rate and then some of the synergies that we also pick up across our businesses.

Those recent wins you just mentioned, it sounds like those are largely in front of you.

So we have started activity to transition some in, and we have much more to do.

Okay. Yes. Got you. So you have some decent visibility you've got mapped in. Okay. On GENEWIZ, I think there's a lot of questions from investors about outsourcing, sequencing and synthesis, but something you talked about at your Investor Day is some of these novel offerings you have. I think AAV ITR sequencing is one of those things. Hopefully, we don't have to get into what that actually -- the mechanics of that because it's well over my head, but -- and I think you've also mentioned, I think, on your last call, maybe RNA sequencing innovation. So I'm kind of curious, as we think about the GENEWIZ revenue stream, what percentage of those revenues, or how much of that business is from some sort of more proprietary offerings versus maybe more standard offerings? And how important are those differentiated offerings for maybe selling the broader GENEWIZ service to customers?

And so I think the latter part of your question is the key operative part of the question, but let me address, we haven't put a number on how much of the revenue is represented on these proprietary offerings, but exactly what Jacob highlighted at the end of his question is how important are these to the overall sales of our genomic services. Here's what differentiates us. And so many people think of genomic analysis as arbitrage on using the Illumina tool or the BGI tool or the -- whichever platform you might be choosing to do sequencing on. And it's pretty far from the truth. And in fact, if you were to look at our Sanger business, many people think, well, it's Sanger, this must be commoditizing for you and margins must be -- but it's not the case. Sanger is antiquated technology, for sure, and -- but it's the service delivery value and it's the added to -- value of our consultative services of our scientists. So we've shared that we have about 400-plus resources inside our company that are either Ph.D.s or advanced degrees around the world, helping our customers to decipher what's the best way to sequence this particular gene, this sample. And in some cases, those samples like the AAV ITR are almost impossible to read without our solution. Customers would accomplish it in the past by running the same sample maybe through a sequence 15, 20 times, finally getting by chance the separated hairpin reading. But if they have the solution with us, they can get it the first time. And so tremendous reduction in just arbitrary success to predictable success. And it's those things, as combined with the fact that when a customer sends in samples and our team is able to say, we went through our prep cycles, but these particular samples aren't going to like -- are not likely to give you a clear reading, but here would be our advice how to get a better sample. If you would rather send us a better sample, or if you prefer, we'll go ahead and run these, but it could be costly to do this if we think the likelihood for it is not to give you a clear reading. The customers highly value this. Now each customer can get the equipment, the Illumina equipment. Each customer can get the prescribed reagents from that provider, but you can't get that kind of scientific experience and consultative nature without building critical mass inside your own company walls. And even within the company walls, you won't have the kind of proprietary developments that we've been able to add. So it really is your latter point, combined with what you think is a traditional turnaround -- high turnaround business that delights you to get the service back on Azenta's capital of equipment is nice to have. And it's necessary that it delights them because it's a reliability service model. But at the same time, combine that with intuitive, high-capable. Advanced degree scientists that is going to become an extension of your company's resources, and now you've got something that adds significant value. And that's why those proprietary things make a difference for us.

Got it. So we've been talking about the services business. You said 18% to 22%.

Yes.

I think consolidated company, you talked about 16% to 20% organic growth annually over the next 3 years -- or CAGR, I guess, I should say. I think we talked about the growth on the services side, but the 12% to 16% growth in Life Science products, I think that was certainly better than I expected. So can you just talk about what's driving that? And how much of that is related to the cryo freezer business?

Yes. So if you break down the products business, we have roughly a little more than 60% of that product's revenue is from consumables and instruments, and the other 40% is around ultracold automated storage and related service or post warranty service around that. And if you were to break these down, consumables and instruments has been the area that we've highlighted as having some extra COVID-driven demand in the past 18 months. And for those who have not stayed as close to us, you can know that the last couple of quarters, we've averaged about $10 million a quarter from that revenue that we would associate with likely COVID-driven demand. And over the course of the past year, a little more than $50 million overall for Azenta, but largely in consumables. And so in that product area, we put in a little slower growth rate on the consumable and instrument to take into account that headwind and, admittedly, with not very good visibility to when that may slip further or accelerate further. So there may be ups and downs to that. What we have detected where the higher end points were up closer to 20 million in consumables early on, it's been about 10 million in the last couple of quarters. We think testing environment continues for a long time, that we think many venues and surveillance testing and to clear certain participation or maybe in the workplace, that continues to drive a lot of demand on consumables going forward. But now back to your -- on the product -- other product side, that's where our higher growth is expected to sustain, and that would be on the ultracold storage systems. Now we have large ultracold storage automated systems that if you were to look at the ballroom that we're in here at the conference room, it's about -- it would run length to length. You could cut it either length of this room, and you could get a system that long, and you could store 1 million to 4 million or 6 million of samples inside of that with robots running back and forth with completely every individual sample connected to your lab information management system at the customer site. Those will grow nicely, we expect, in the next 3 years. We've got line of sight to several opportunities, but also we're seeing good traction and expansion in the market and in adoption of automation. On the more, what I would say, faster emerging side, we have the B3 cryo product, which is at the minus 190 level, and we see higher growth. Think of this above 20%, maybe up to 30% growth, in that range, driving that 12% to 16%, but it's still -- it's been nice revenue, but it's not the largest piece of our revenue as yet. But by the time we get to 2024, I wouldn't be surprised if it's the larger piece of our revenue. And this is automation on top of a traditional manual door that if you do it in a manual environment, you're taking the most precious samples out of minus 1 90 degree storage, and you're handling it manually, and you're dependent on whoever the lab technician is that's pulling it out and what they might decide to do with it. But if you put it in an automated environment, it ensures that the only samples that come out are those that you designed to come out or you select on the software to come out. And you could track. You know exactly that it's been in minus 150. And so someone who is looking at cell and gene therapy as being so critical, they're caring about this. They're investing in this type of system to keep it not just in cold storage, but under monitoring of how long it's been, where has it been on a continuous basis. And so it really leads to the thinking of what will be the standards and protocols required in the cell and gene therapy space going forward. We think we're very well positioned for that. We've seen high growth from that in the past 2 years. And again, while a still smaller part of our portfolio, it stands to produce really nice revenue over the next 3 years, and that's at the higher end of the growth rate.

Got it. Maybe just one kind of here and now question on the Life Science products business. I think your 1Q guidance, at least in our model, seems to apply that like the Life Science products are maybe kind of flat to down sequentially. Can you just walk through the moving pieces here? And then any puts and takes as we think about the balance of the year in that segment?

Jacob is exactly right. The guidance that we provided for the quarter provides a year-over-year growth of roughly at a midpoint of 14% to 15% growth year-over-year, a little less than the 16% to 20% that we talked about longer term. So some people have asked, well, 16% to 20% sounds great. Why is it starting slower? We do have -- we've wrapped around on those higher quarters on the COVID compares of last. But as you can see, 15% growth is still a remarkable growth, even in the face of a tough compare. And so on a sequential basis, Jacob's reference is exactly right, sequentially quarter-to-quarter, our products -- that guide provides for products being flat to slightly down. And both of our services lines are expected to be -- to have positives incrementally on a quarter-to-quarter basis. So it's taking into account some -- a little bit on consumables' concerns on whether COVID demand continues to sustain. And so that provides some of the downside of our range. But also as you approach the end of the calendar year, capital spending changes at a customer level, depending on whether they consume their budgets or if they have excess budgets. And our products team assessment is that they will see a little bit less in the December quarter on a seasonal basis sequentially compared to the September quarter. So it remains to be seen. So I've seen it go both ways, by the way, that some -- in the past. But this year, there has been a lot of spending at customers' front. So budget surpluses may be a little smaller this year to use up.

Okay. Got it. That's helpful. And then we've talked cryo, and you talked about the importance of the B3 for the cell and gene therapy end market. So maybe the bigger picture question on the cell and gene therapy market, just talk about the capabilities you have in your portfolio today to serve. And I think we've touched on some of them, but maybe just to get it all in one place.

Yes. So certainly, the relevant parts of our portfolio is spread across the space. The B3 cryos, the minus 190, automated door, that certainly strikes right at the center of cell and gene therapy. Safe storage, tracking, standards, everything is relevant to cell and gene therapy there. And we've highlighted that in a couple of our quarters, that's been the largest portion of our revenue in B3 cryo cell and gene therapy related. Goes well beyond that, it applies to other research initiatives in the IVF market, but cell and gene therapy is a good portion of that. In other parts of our portfolio, gene sequencing and synthesis, the gene sequencing certainly is analyzing on cell and gene therapy-based customers. It's relevant at every level of cell and gene therapy, obviously. It starts with an analysis of the structure. And so we provide a lot of support to customers there. And in the Sample Repository Solutions business, in cases, we certainly participated. It -- and generally, you will look at Sample Repository Solutions and you look at long-term storage being archived, that's a little bit less cell and gene therapy. This is -- our history has been archive of drug research and retention of samples for future research and/or support with FDA. And that tends -- much of that is minus 80. We do a lot of minus 190 storage also in Sample Repository Solutions. We don't have as much visibility to what the customer might be doing or have done with that. It could be cell and gene therapy, but it's long-term storage. So when you think about cell and gene therapy exploding today, Sample Repository Solutions has a value proposition to offer. It's less clear to us in terms of where we will always play. Certainly, transport movement of those samples is important. Storage is important. But I think the B3 cryo, both inside our walls of Sample Repository Solutions as well as at the customer, is going to be strategic positioning for us. We're so well positioned. We're so well positioned with an automated solution to take care of customer samples in that space, whether it be on our premises or their premises or their third-party premises following the protocol set up around that system because it really connects them with the software, and it gives them a tracking proof point of what's happened with the cells.

Got it. And then just, I guess, following up on that, can you just talk about percentage of your revenues today from the cell and gene therapy end market and where that could maybe go the next couple of years organically? And then we'll get to inorganic at some point.

I'm sorry, which market?

Cell and gene therapy. Sorry. Yes.

Yes. So I don't really feel adept at educating this environment for -- on cell and gene therapy outlook, but what I will -- so what I will say is as our revenue is probably impacted up -- whether it's 10% or more than 10% of cell and gene therapy-based revenue, it's hard for us to tell currently because many customers are identified specifically to be cell and gene therapy. And many customers, clearly, large pharma, participates in cell and gene therapy. We wouldn't categorize them that way by nature. So it could be larger. But certainly, what -- we've seen it growing more than 30% over the past year. And some would say, well, gosh, that's comparable to your total company growth rate. But we'd say, yes, but remember, total company growth rate had a little bit of COVID, and it also -- but this is the higher end driver. We think this has long legs, and it will continue. And as the base grows, that becomes a higher growth engine, for sure.

Yes. Got it. Just on the semiconductor close. Can you just remind us the timing of that? And what's still -- I'm sure there's a lot of work to be done. What -- but anything we need to be paying attention to in terms of getting it closed?

So first and foremost, it's -- time will determine, but various jurisdictional approvals are required to close this. So we're awaiting those approvals. We don't -- obviously, neither us or the buyers saw this as high risk. So it's a matter of timing getting through those steps. We anticipate having approval, as we said, in the -- somewhere in the first 6 months of 2022 calendar year. I think importantly, on that side of the house, we continue to manage the semiconductor business as a growth business, to nurture it, to make sure that it's an asset well cared for. And it's -- we couldn't be more proud of it, and the employees that are supporting that. And I would say the customers that we're supporting are just really critical customers that we all live by, right, all of us in society supporting technology. So we see that as a vital mission in life, and we'll hand that off carefully when the sale closes. So we continue to manage that. Supply chain is important there. Labor is important. Continuity of supply is important, and we all know the shortage of chips that are in the market. So we know that we're in a vital space. So handoff of that continues to be carefully managed, but the closure of the deal really comes down to fundamental, just jurisdictional approvals, which we have confidence in. It's a matter of time. When we get done with that, we will have proceeds of close to -- in excess of $2.5 billion to put to work. We're not waiting for the approvals to be working on this. So we've been moving -- we've never slowed down on vetting the M&A opportunities even while we're working on the separation. There's nothing about the timing of that closure that would keep us from moving forward on something that would come to life before that. So I wouldn't tag the 2 together. But certainly, the size of the funds opens the realm of ambitions, right?

Yes. Which leads to the $2.5 billion question. What are you going to buy, right? I think at your Investor Day, you mentioned expanding into adjacencies from GENEWIZ, it seemed to me, including maybe adding cell and gene therapy capabilities. Can you just expand on kind of the vision for that cash?

Yes. Sure. So first and foremost, we won't go far afield from where we've been. And we always look at adjacencies in -- as well as current spaces where we might roll up or supplement our capabilities, but we don't feel like we're missing anything in our capabilities as we're defined today. But there are certainly some assets out there. If there's another sample repository solution business that we're interested in, those are good ROIC business models that we would pursue to add to our capabilities. So there are examples there, and you saw us close to a year ago pick up really highly capable small revenue business, Trans-Hit Bio. Now it's Azenta procurement services, and helping customers to procure services prospectively on samples that they can't find otherwise. And we help them find difficult samples to advance and accelerate their research. So there's capabilities there that we work on that are supplementing what we currently already have that we would pick up, but those adjacencies in analytics or in production environments or in clinical environments are all opportunities for us to expand on. Again, what we commit, we wouldn't go far afield. We wouldn't jump to something that doesn't look familiar to us or close to us. But we're always excited when we expand into an adjacency that it expands the aperture of what's possible next. And so whether the next acquisition is $50 million or $500 million or $2.5 billion, I -- not telegraphing, I wouldn't intimate anything, my point is that if it's $500 million, it leads to a wider aperture of what's relevant and possible the next time for the next $1 billion or for the next $2 billion or the next $3 billion. And by the way, I would encourage people to think that when you have $2.5 billion in hand, there's also banks behind you willing to put more cash behind that capital behind us. So aspirations and ambitions aren't limited by what what's on balance, but it's on what's possible. Yes.

We've got a couple of minutes left. I'll just check and see if there's any questions. If not, I've got a couple more. All right. I've got a couple more. Margins, just a couple of quick ones. Just first, I think there's some incremental SG&A you had to absorb to stand up the 2 companies on their own. I think there's some other moving pieces there. But in terms of the kind of headcount you needed to add there, have you largely completed that? Or is there any more coming on that?

It's largely completed. There's nothing that would stop us from standing up or separating once the approvals come at this point. There are a few slots that we're recruiting for, but we can put that in the category for -- that we're always recruiting. And I think everybody in today's markets are in pursuit of talent. So we're excited about that. Expense -- your next question is, do you have the expense in your hands. Well, I'll highlight what people will see at the end of the December quarter, we'll have a little more operating expense in it because some of the structure that we had added by September 30 hadn't been in there the entire quarter, right? So we had hired, to stand up 2 companies, a significant amount of talent in the G&A back-office area, say, in the September month that wasn't in there for 3 months. A portion of that is that overhang of having 2 companies. Even though it's -- the semi company has moved to discontinued operations and your G&A structure, SEC accounting will tell you that everything that's actively managing the corporate entity should stay in your continuing ops until you separate. So we have highlighted it in our recent quarter of results. There's about 2.5 points of expense structure that once we separate, we'll immediately drop off because some of the people that we've added will move to the newly owned semi company, and we will become lighter by 2.5 points, even in our continuing ops. So we'll get that benefit. But the nice thing is, while you may see some extra expense as we report Q1, if we're presuming we haven't closed until we get into the calendar year, the nice thing is it will fall off by 2.5 or perhaps 3 points by then based on what we report in the December quarter and separate there in the later steps.

Got it. And then just last, kind of on the 2024, 2025 outlook, the 3-year outlook.

Yes. 2024.

That's what I'm trying to look -- 2024. You talked -- just on the gross margin side, I think both segments, you kind of guided flat, 200 bps. Can you just talk about the puts and takes on the gross margin side for both segments?

Yes. To be clear, in the last couple of years, we've gained 400 to 500 basis points on the gross margin. And this time, over the next 3 years, we've only targeted in our model to be flat to up 2 points. And it's not because we don't have the same ambitions to continue margin expansion. People who have known us over the past decade know that when we -- I've put out the business model on a 3-year -- I put something that's quite responsible, still aspirationally respectful. We have every ambition to drive to margin expansion. But the puts and takes that you're referring to, if you take the products, I say flat to up 2 points, we have gotten that to high 40s now. Whether that gets to 50% or not, I don't have that in the model. That's not saying that it couldn't. We have certain parts of our portfolio, if it accelerated growth, could carry the day, and those are our higher growth areas. So I think that's exciting potential down the road. But by 2024, we think it's responsible to highlight a flat to up 2 points. The takeaway there is not that we're shy about committing more. It's about we're giving you a model that we think is extremely achievable and produces almost a tripling of EBITDA at the bottom line. And so I think it's quite remarkable. On the services side, flat to up 2 points, takes a business that's already above 50% gross margin, which has increased substantially over the last 2 years. And again, looks for modest improvement, but also takes into the fact that I think we're probably all facing that challenge of labor currently, some wage inflation, retention of skills, demands on labor. And so in the near term, I have contemplated that and factored that in and still expecting some modest improvement with size and scale and leverage. But I think we've comfortably covered some of those cost pressures that we're all facing on the labor side.

Got it. Well, Lindon, congratulations on a lot accomplished since the last time you were in Nashville, at this conference, at least. So thanks for coming. We very much appreciate it. And thanks, everybody, for joining.

I really appreciate it. It's a great conference, Jacob. Thank you very much.