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

This is Paul Knight, the Life Science Analyst at Azenta, which I have followed for over a decade. And with me today is Yvonne Perron, the Head of Investor Relations; and Lawrence Lin, the Chief Financial Officer of Azenta.

Obviously, a lot of questions in all of life science right now, Lawrence and Yvonne, one of the topics has been, of course, amongst investors, NIH/academic exposure. I think that's probably the first topic to start with. If you want to talk to that.

Yes, of course. And Paul, thanks for hosting us, and thank you, everyone, for joining. So yes, let's get into a conversation on NIH. I think we've done -- I think we all agree this topic has created a lot of confusion and uncertainty. One of the things our multiomics team has done quite a bit of voice of customer to really better understand the customer segment. Given the 6-week pause on reviewing grants, which has recently lifted the indirect cost caps and staffing release not being hired. The customers are a bit cautious and are looking at levers to conserve cash. The positive note here, I think, is today, we have not received cancellations or no vein deals lost due to the NIH funding. We are seeing some kind of delays right now because of a lack of clarity. But more importantly, here's where we also see through the voice of customer work that there's an opportunity that exists for both our businesses in the segments. So really, as we kind of look at the landscape, our belief really in the past has been that there has been a place for Azenta as a substitution for the core labs, right? And some of what has happened in the last several weeks has really accelerated and confirmed our belief, right? A lot of the core labs can be less efficient and what we've seen is that in 2 cases recently, there has been kind of an affirmation around what we believe is our advantage. So just last week, we had a large medical research center make the decision to close their center and work with us. Additionally, one of the large universities have just contacted us to ask about getting quotes on how we can provide the service in replacement for the [ core ] lab. So we're really out of some of this confusion, really optimistic and excited about the opportunities that our businesses have in light of some of this uncertainty. And so that's kind of a bit of the work that's done. We spent a lot of time with about our top 30 customers because in the last several presentations or prior presentations, we went out and said roughly 35% of our revenue is related to academics, medical and government. We believe the potential headwind is much lower than we -- if you look at kind of that macro 35%. So we pulled all our top 30 customers kind of went customer by customer, asked them about kind of where they are, what their position is and what the potential risk is? And what the outcome of that kind of very intensive work was we believe in both SMS and multiomics, our potential risk is about 2% for 2025. Now that's kind of in isolation with the macro headwind. Again, I think that's a short-term impact for us. Long term, there's a significant opportunity in our multiomics business as well as our sample repository business around BioStores. Considering the indirect caps and a possibility that there will be CapEx constraints in the academic environment, we're a natural fit as Azenta in our bio repositories to provide them with a solution to store their samples.

Right. I mean, I think the argument that has been made by Azenta for many years is right, that a sequencer run going to be 35,000 or a lot of money on a next-gen sequencer. And some institutions don't want to make that; a, capital investment; and b, they don't have capacity to run on a next-gen unit, right?

That's right. And it's one of those things where we've got -- we're actually here in New Jersey. So we've just spent a lot of time with the lab team, and it's been great to see our capabilities exactly what you say. We've got the scale, the efficiency and also the ability for us to do some bespoke really partnerships with our customers, right? We will walk with them through the process hand-in-hand. And I think that's a bit of the value proposition that our GENEWIZ business provides.

Great. And then drilling into academic a little more. I mean roughly 18 or so percent of business is academic and then a little over half is U.S., right? So that's how you start getting that number to 2%, I think, is one approach as well, right?

That's right. And we kind of went through the macro really down to the granular because of the fact of -- as you know, right, some of the NIH funding can be indirect, right? And really, we wanted to wait till this conference really to talk about this because we wanted to do our homework and spend a lot of the time. But that's about right. So we kind of went both directions, just to make sure that we sharpened our pencil here around possible risk. Now what I will mention that, yes, we've got a 2% kind of headwind to our number, but we're actively countermeasuring that right now. And what do I mean by that? We've talked a lot about and John has talked a lot about kind of our cost journey that we've kind of embarked on. But part of that cost journey was around redirecting some of those savings that has happened over the last several months into sales, marketing and R&D. And that's progressing currently in the quarter. On top of that, there are additional sales incentives we've put in place for our sales reps in order to mitigate some of the risks that we've seen. So we've sized the price. Now the hard work begins as we work to ensure we can meet our commitments.

Yes. Like it's probably harder to sell a sequencer than it is to sell sequencing as a service.

That's right. Exactly.

Yes, completely understood. I think the other bit of confusion is in kind of the old pie chart, excluding B Medical. We have government medical nonprofit is maybe 15%, 16% of the company. There's a -- that's a pretty broad description. I'm guessing a lot of it's not NIH, right? Or -- yes, it's not NIH, I guess, or very little.

That's right. You'll -- and sometimes it's hard, right, to parse through the customer categorizations, but you'll obviously have private funding and private equity funding that's in the mix. That's why when quite frankly, when the team started, as I mentioned earlier, we looked at the macro level of kind of the pie chart and said, well, that's probably not enough for us to action it. And really that's when we double-click into each customer.

Got it. And then I guess in the samples business, how much of samples and storage is actual hardware sales?

Yes.

Can you restate the question, Paul? I'm actually not clear what you're asking.

Within the storage business, everything ex multiomics portion of that is cap equipment.

Well, that would be your -- principally your stores systems, right, which would be kind of automated stores, right, with the software and then you'd have your clinical biostores as well as cryogenics. I mean that would be the bulk that you're referring to.

Yes. And related to stores, I think, Paul, what gives us confidence is around the backlog we have that we referred to in the first quarter, right? We're seeing on about 75% of the year in backlog. There's been no cancellations around that. And remember, as you're aware, these automated stores, there's a long lead time, it's POC accounting. Once you're down the path, a lot of the infrastructure is already set up to kind of accommodate these. So we feel pretty good right now as it stands based on what we have in the backlog.

Yes. So I think, Paul, I'll say, core -- so within SMS, right, you have core products and then you'd have SRS. So you could probably think about the core products is in aggregate, like roughly 60%, but the balance being biorepository.

Yes. Right. Correct. Okay. I mean I think your pie chart that is in your corporate on the IR pages, that's pretty direct on talking about how much is the Ultra Cold systems and services. And then Lawrence, you've been at the job not long. What are you learning?

Look, I think at the heart of it, we know the products are great, but more importantly, the team has been extremely gracious and really adaptable to change. I know at the face of externally, when we look at kind of what we talked about, some of the rapid iteration around cost, the org restructuring, along with implementing a lean business system and that's a lot for everyone to digest. What I would say, and I've been on the road for about 5 months now consistently. And what I've heard is the passion from the team and the adaptability. I participate in 2 Kaizen events the last 3 weeks just working on how we improve the customer experience. We're here. Part of the reason we're here in New Jersey is there's a group of 15 individuals in the room with sticky notes and [ sharpies ] mapping out the experience for when a customer orders NGS or Sanger testing to at the end of the work stream. And the beauty of it is, one, we're focused on the customer, but also secondarily, they've just recently identified there's 97 items of waste that is opportunities for us to get more efficient. So the thesis stands. I think as John has laid out previously, right, we are focused on our priorities, right? Portfolio optimization, which we've already kicked off around B Medical, operational excellence, which I just touched on around lean, around cost optimization really kind of rightsizing our P&L, reducing G&A, investing for growth around sales, marketing, R&D, and then around indirect savings, right? And what does that mean, we at Azenta, have not had a formal indirect procurement team stood up. So recently, over this quarter, we've stood up a group and we're focused on how we optimize where we spend, what we spend, sounds very rudimentary, basic blocking and tackling, but I think it's core to how we get to where we need to be. And then really lastly, around the third priority is value-enhancing capital allocation, right? We're looking at opportunities ahead around how we are disciplined returning -- deploying capital. We're really going to prioritize based on the return opportunities that will yield the growth through productivity initiatives and really areas like M&A tuck-ins. So I think, again, really excited about the opportunity ahead, Azenta. We've kind of plotted a path forward. And right now, it's just we're executing.

Yes. Very good. Another question that comes up is China. What are you seeing in that market right now? How much of sales to China? We're hearing that the biotech originators are actually very robust and strong as an end market, but if you could talk to -- I know you have some operations there and we can talk on that.

Yes. So as mentioned in the last earnings call, our business, about 10% of our business is China for China. And I know in the recent headlines, there's been 2 items, right? The China Illumina issue, which we've pretty much covered in our last earnings call. But just to -- for avoidance of doubt, right, the team has done a nice job anticipating a lot of that uncertainty in China for the last several quarters, we do not own any Illumina products. Most of our NGS business is actually through a partnership that utilizes Illumina as well as BGI. So the transition and the shift to BGI has been relatively seamless. We've also pulled our customers in China and asked them if there would be an issue through the transition. Most of them have said, look, this is our preference with Illumina, but we are absolutely fine with BGI. And so there's extremely low risk around that front. As we get to talk about a bit of some of the China tariffs, right, talked about in the last quarter, our exposure for the first 10% tariff was about an incremental $1 million to $2 million that was in our guide. Now the second tranche, 10% that came on through our earnings call, we believe we've got a line of sight around countermeasures to offset that through cost reductions as well as possible market price increases selectively. More to come around that, but that's kind of our path forward around China. Overall, as you look at kind of China, last quarter, we grew high single digits, and we continue to really see that the team continues to execute. So really happy with our progress in China.

Good. The sample management business, meaning the Storage as a Service, it seems like one of the best businesses of Life Science, what do you plan to do with that? I guess, just keep growing it? Or if you can add more color around that management of Storage as a Service.

Yes. Look, I think one of the great -- this -- we always say this, the businesses are crown jewel, right? It offers us the competitive advantage. Business generates profitable reoccurring revenue streams, right? And so there's also opportunities here in this business to grow it organically, right? I think we've discussed this in the past, Paul, but just to reiterate, right, there's an estimated 24 billion clinical and research biological samples that are stored globally. 2.6 billion new samples generated each year, about 50% of these require cold storage, right? So that's kind of the market. We own 50 million samples right now. So -- and these, as you're well aware, are the most precious assets, right, like drug compounds, therapeutics, biological samples owned by pharmaceuticals, biotech, academic, right? And so we believe we've got a lot of run rate to grow this. More importantly, as I mentioned earlier, as the CapEx constraints come to play here in areas like NIH, we believe we have a competitive advantage where we could be the solution for a lot of the folks that no longer can afford like an ultra-low temperature freezer, they will come to us. And a lot of these contracts, as you know, are 7 to 25 years. And more importantly, what happens when most of our customers come to us, they realize our value fully. Meaning a lot of times, you know this probably better than I do, right? There'll be a ULT at the academic or the customer, and they just put the samples into their freezer and close it. Whereas once they come to us, all the items are categorized, the vials are bar-coded. And essentially, we have a warehouse management system. And we end up becoming an extension of kind of what they need, whether they need long-term storage or actively samples come in and out through one of our automated stores that we have in-house. So we believe, one, there's a huge runway, and we have a competitive advantage because of all the automation we have in place.

Yes, I agree.

And then the BioArc Ultra does seem to be kind of a game changer. Are you selling those yet? Or are you putting in a facility in Boston, if my memory serves me correct, utilizing the BioArc Ultra?

That's right. Yes. So in the press release recently, we talked about UKBC and them putting in a BioArc Ultra, right? I was just in Manchester, I can't remember -- last week. And these are impressive automated warehouse management stores. And so...

Manchester manufacturers.

Manchester manufacturers these. And one, just the ability to store within the space is a game changer. And that's why UKBC has really gone with us. Also, I think the University of Miami is also looking at this as well or has put in one for their institute of human genomics. And you're right, in Boston, we are going to stand up a Ultra in the back end of the year and that's currently in the works.

I'm guessing that will change the -- lower the price of storage for some of these customers as well?

Absolutely. I think down to the metric of sample per square foot, right? That's going to be key, especially with real estate CapEx constraints, the ability to put more in a similar footprint and go vertically, I think will be a significant advantage for our customers and us.

Yes. And then I'm looking at your PowerPoint from your long ago Analyst Day, but the portion of business that's related to like the B3C freezers. So how is demand for that type of technology?

So we've seen -- we saw -- coming out of the second half of 2024 and into Q1, we talked about the solid demand in cryogenics. So we feel good about that space, that performance and continuing to build the funnel there. And I think as we see more funding kind of flow in as well as a resurgence in kind of the CGT space. That's an area we can play strongly in. And that's coupled with automation as well, right? So those units as well. So it has the same advantage that Lawrence really talked about on the automated stores.

The question we've had here is B Medical, obviously, up for divestiture. Any update there, Lawrence?

Yes. Look, the B Medical sale process continues to progress. At this time, there's really no additional updates to share beyond what we discussed during our Q1 earnings call. As we mentioned previously, our Value Creation Committee is highly involved in the sales process, and we've engaged external advisers. Ultimately, we're really focused on maximizing the value of the sale. I know we've talked in the past of kind of putting ourselves in an internal deadline in the first half of the year, but obviously, we're looking at a broader scope of the 12 months that we've kind of given ourselves here. I hope to update everyone as there's additional news.

Yes. And then the kind of do you -- when will we see guidance on long-term potential of margins and growth? Will you do an autumn Analyst Day? What are you thinking there, Yvonne or Lawrence?

Yes. So we are in the midst of planning our upcoming Analyst Day. I think John mentioned, we're thinking in the June-ish time frame is at least what we're targeting right now. And at that time, we will certainly update LRP strategic initiatives as well as additional opportunities that we kind of see in our capital allocation space, right, in terms of what we want to do out to 2027.

And really, it will be in our Indianapolis facility. So I think that is going to be really a highlight that we hope to be able to give the investors a tour of kind of what we do. So really excited for that opportunity.

Right. I think you do a lot of [ lily ] work there, no?

Yes, yes, absolutely. It will be great to see.

What's the latest count on number of customers that are kind of basically sole outsourcing to you? Last, I remember was 7, but do you know or can you say?

I honestly, I'm not sure, Paul. I'm not sure. But we can get back to this group and kind of share, but I would think it's probably not less than what you recall, it's probably more, but -- well, we can follow up.

Yes. I mean I'm sure that the biopharma market continues to be pretty robust for you on storage.

Yes, absolutely.

I mean I think there was an overcapacity in the industry in '23, but what's your view on market and as the year '24 finished and we move into '25 for the biopharma for getting government academic.

Yes.

In terms of the market...

Just biopharma end market.

Yes. I think it's kind of in line with our expectations. Paul, still pretty robust as we look forward. I think the opportunity, as I mentioned, kind of overall landscape still exists, and it's really kind of our opportunity and our ability to win.

Yes. I think the biopharmas, too, they're settling in post some of the reorgs that they've been doing, right, in terms of where they're going to focus and prioritize. So I think that will -- has the potential to be a tailwind in '25 as well once they hopefully get past that activity and that reprioritization of priorities.

And you're in the New Jersey sequencing service site right now?

That's right. That's right.

What portion of business on service is sequencing as you do a lot more than that, I believe, right?

Yes. So this facility does primarily -- it's the NGS and Sanger.

Okay. But I don't -- I think in the past, you've offered other products like PCR.

Yes. Yes, yes. And there's -- yes, the PrEP and clinical is here as well.

Great. And then China was your last big expansion effort. What's the utilization rate of the China facilities now?

Utilization, so we've just really gotten to -- and John and I had the opportunity to see the China facility. It's a large 12-story building. In terms of utilization, we don't get into that level of detail, but again, our China growth was...

Multiomics was 7% in Q1.

7% and continues to grow.

Multiomics China. Yes. I mean that's -- it's a real hub of kind of our advanced degree specialists in that area, and they're really situated around a lot of similar life sciences companies. So we continue to see strong performance despite some of the other China more macro headwinds that we've seen to date from the China multiomics team. So great execution from that team there.

Great. Well, I know you're very busy. We really appreciate your time today and look forward to the year ahead.

Thanks for the opportunity to talk to the team.

Yes. Appreciate it, Paul.

Absolutely. See you soon.