Azenta, Inc. (AZTA) Q4 2022 Earnings Call Transcript

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 fourth quarter of fiscal year 2022. Our fourth 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. 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 our 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 should 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. In addition, we may refer to certain estimates of COVID-based impacts. These figures are estimated based on our insights to the customer applications and/or product types indicating such demand or constraints on regional demand or ability to deliver. On the call with me today is our President and Chief Executive Officer, Steve Schwartz; and our Chief Financial Officer, Lindon Robertson. We will open the call with remarks from Steve on highlights of the fourth quarter. Then Lindon will provide a more detailed outlook into our financial results and our outlook. 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. As we report on results from the final quarter of fiscal 2022, it's an appropriate time to discuss the very different company we are now compared to when we entered the fiscal year. In the space of just one year, we've completed the dramatic pivot from a company that was a life sciences arm of Brooks Automation to a stand-alone publicly traded life sciences company. There was no small task to separate into two companies, and our results show today that it's been successful. And though we realize we have more work to do, today's announcements are evidence of the decisive actions we're taking to continue to drive value for Azenta shareholders. Over the past decade, we transformed a small cyclical semiconductor capital equipment components business into a global market leader. And as we did so, we leveraged the core technologies and cash flow from that business to create a unique world-class life sciences business that meaningfully outgrew the life sciences market over the past five years. Today, our revenues are four times greater than they were five years ago. Now following the successful sale of the semiconductor business, we see this as the right time to reassess our approach to capturing the significant opportunity that lies in front of us and to ensure that we're doing all that we should to realize our purpose and, in doing so, deliver exceptional shareholder value. So today, I report on two key initiatives that we're taking opportunistically to deliver that value and ensure the long-term success of the company. Today, we announced a significant near-term return of capital to shareholders and a meaningful realignment of our operations to recapture growth rates ahead of market growth. First, I'll talk about capital allocation. Over the past decade, we built our successful Life Sciences business by focused execution with organic and inorganic growth, including ten acquisitions at the cost of approximately $1 billion. Nine months ago, we completed the sale of the semiconductor automation business which delivered a substantial return for our company and our shareholders. The resulting net cash balance of more than $2.5 billion ensures our ability to accelerate our growth ambitions as a stand-alone life sciences company. Toward that end, over the last four months, we continued our methodology of finding and acquiring precious assets that add to our valuable sample management solutions by acquiring Barkey and B Medical Systems. Both companies possess the characteristics of each of our most valuable acquisitions in that they strategically add to our technology and product and services portfolio, they're accretive to earnings in the first year as part of Azenta and are led by talented, energetic management teams with proven track records of success. In addition, in the case of Barkey and B Medical, they also both provide sales synergy opportunities for other Azenta products and services and expand our offerings to sizable new markets. But even with these two new companies in our portfolio and the success we've had, at this point, we find ourselves faced with the reality that our shares are significantly undervalued. So much so that at this time, it's difficult to find any target acquisition that would give us a higher return than what can be achieved by the repurchase of our own shares. So we believe it's in the best interest of our shareholders for us to return excess cash. Toward that end, today, we announced that the Board has authorized a $1.5 billion share repurchase program. We'll be aggressive in our share purchases with a target to return the first $500 million within approximately six months through a committed accelerated share repurchase program. It's our intention to repurchase a total of at least $1 billion worth of shares in the next year. It's important to note that this does not imply that we won't be acquisitive. We intend to continue to make both organic and inorganic investments as acquisitions are a powerful component of our growth strategy. Rather, this move recognizes that until we identify valuable targets that would require more substantial capital, we believe that cash should be in the hands of our investors rather than on our balance sheet. I'll now turn to the second initiative which underscores the operational adjustments we're implementing. Over the period 2016 through 2021, we had cumulative revenue growth of more than 20% per year, more than twice the market growth rate. As we finished the year, even a Q4 growth rate of 12% ex-COVID feels too close to the market growth rate and considerably below our expectations and capability. In a year of tremendous change, we believe we got most things right as we're now a fully functioning stand-alone life sciences company. In retrospect, we also think that the magnitude of the changes we made in our go-to-market approach caused some misalignment with customers that manifested in a slower growth rate of sales. Our branding initiative was first-rate, but the restructuring of sales and customer contact points has caused some disruption in our sales channel. Fortunately, the fixes are straightforward, and we have the right team in place to implement them. They'll just take some time to gain traction. But rest assured, we're full speed ahead and encouraged by our progress even over the past months. Since we recently separated from our Chief Operating and Chief Commercial Officers, Lindon and I are back in our positions of responsibility to be more directly involved in the daily operations of Azenta from product and service development to sales and customer satisfaction. We've hired new sales leadership and dedicated more product and services experts to the sales effort. Genomics has made scientists selling to scientists and in products that focus on automated storage systems and consumables and instruments. The sales organization has signed up to specific operational deliverables for 2023 with the expectation that we'll see a reinvigoration of growth as we move through the year. Our portfolio of best-in-class capabilities means there's no reason why we shouldn't be growing well above market growth rates. In the context of these changes that we're implementing to prepare for our next acceleration, I want to comment on one additional change that's consistent with our next phase of growth, which relates to Board governance. As we're now at the end of one full year as a stand-alone life sciences company, the Board sees this as an opportune time to further enhance the governance team by nominating two new outstanding independent directors who are known value creators in the life sciences space. We're excited to have announced that Dorothy Puhy and Dr. Tina Nova have been nominated for election to our Board. They bring a combined 50-plus years of experience in the life sciences space and have proven track records of outperformance and value creation, with experiences including sales of companies and leading boards. Their invaluable perspectives will further enhance Azenta's strong momentum as we execute on our long-term strategy. As part of this transition, Dorothy and Tina will replace two of our directors who have elected not to stand for reelection at the next annual meeting. On behalf of the entire Board of Directors at Azenta, I would like to thank Dr. Mark Wrighton and Mr. Al Woollacott for their service and contributions. Over their tenure, they've been exceptional stewards of the company during a period of significant transformation and value creation and have been instrumental in transforming Azenta into a global, world-class life sciences business. The timing for this transition is ideal, and we'll continue to evolve the board as we accelerate into the future as a life sciences powerhouse. Before I turn the call over to Lindon, I'd like to give some additional information about B Medical Systems, which we introduced on our last call. We're incredibly excited about B Medical Systems for many reasons. First, it's a great purpose-driven business. Saving lives for more than 40 years through innovations in cold chain products, they're market leaders because they're technology leaders, and we believe the world hasn't yet begun to fully take advantage of the sophistication of their offerings. Our attraction to the B Medical business is multifold. First, we believe there's tremendous value yet to be delivered to regions where the distribution of vaccines is still far behind need and demand. This is a multiyear source of opportunity and one that B Medical is positioned to serve better than any other company. And in doing so, not only do the products align perfectly with our Azenta portfolio, but the operational performance is also very consistent with ours. Specifically, we currently forecast that B Medical will generate revenue of at least €130 million in fiscal '23, a growth rate of approximately 25% from the equivalent period in 2022. Gross margins from the business are in the mid-40s, making B Medical's contributions to Azenta accretive to growth and earnings in fiscal 2023. A solid business and financially, a positive contributor to Azenta. In addition to this forecast, we anticipate sales synergies by penetrating sales of B Medical's ultra-cold freezers and blood management systems into the target-rich North American market, where they have essentially zero presence today. This is a young initiative, but one with a lot of internal support, and we believe we'll see measurable expansion by the second half of the fiscal year. The second part of our value creation thesis deals with what's made uniquely possible for Azenta because of the addition of B Medical Systems to our portfolio. There's an opportunity to bring Azenta offerings to a vast population and fast-growing emerging markets where demand for biorepositories is just awakening, but is still in need of a real solution. All of us in the Western world are familiar with the value of bio sample collections and biorepositories as sources for research into population studies and treatments for specific disease types. Collection sites are plentiful, as clinics and hospital networks exist, and there's adequate cold chain infrastructure in place to ensure that samples can be collected and transported without degradation. The same is not true for most fast-growing emerging markets where there's no consistent means for biological samples to be retrieved and brought to a research center. This is the opportunity for B Medical and Azenta to team up. As we assess this opportunity, we note that there are three key elements necessary to enable a foundation of high-quality biosamples that are essential for human health studies. First, the ability to source samples from a broad swath of the population. Second, the ability to securely transport these samples to a secure biorepository without degradation, that is cold chain transportation. Finally, a reliable biorepository with secure cold chain redundancy, informatics capability, and operating procedures that ensure the sustained value of these samples over long periods. The combination of B Medical and Azenta can play an enabling role in the fulfillment of this necessary capability. The B Medical distribution network consists of more than 150 distributors who have relationships in various countries. This is a well-functioning network for sales in these countries that is enviable for anyone looking to get started in these fast-growing economies that represent approximately 3 billion people. B Medical possesses an installed base of tens of thousands of vaccine cold chain systems, and they deliver thousands of new systems every quarter, establishing a last-mile connection to millions of first-time patients each quarter. This last mile cold chain capability, which is in place to preserve a vaccine dose that must remain cold during transport, is the same mechanism that can be used in the opposite direction to retrieve a blood sample from a patient and return it in the same cold transport carrier back to the cold chain box for safe storage until it can be retrieved and moved to a biorepository. The potential from samples collected in this fashion is game-changing as the samples can be from a much more diverse swath of the population, compared to just cities. Samples will have known cold chain care and hence will be more usable and more valuable. Finally, the value of a collection from a biorepository will increase exponentially, and hence the care taken to protect and preserve these samples will warrant real investment in infrastructure and process. We're pleased to be gaining traction on our first conversations as a unified solutions team, and we like what we're learning from very engaged principles who understand the value of this approach. This is incredibly exciting because it has the potential to enhance human health initiatives for underrepresented populations and allows the expansion of our Azenta offerings to serve the new population of billions of individuals. We'll report progress as we move forward, but we're excited about the capabilities that are enabled by B Medical and are an essential driver of the next level of healthcare in new markets. As we embark on fiscal 2023, we're energized about our prospects for the future. Our portfolio of capabilities is positioned as never before to address a global opportunity that's not only expanding rapidly but is in ever more need of our scientific and technology solutions. We've significantly expanded the breadth of our offerings and the size of our market opportunity, both through products and geographic exposure. We've refocused our go-to-market activities and alignment around customer capture, and we believe this will be a potent combination that drives faster and sustained growth. Additionally, we're taking actions to drive near-term shareholder value while preserving adequate capacity to make meaningful organic and inorganic investments to fulfill our strategic objectives. We're now a company of nearly 4,000 employees ready to address the ever-increasing needs of our customers. We're driven by our purpose to enable health breakthroughs faster. We're enthusiastic about our work in support of our customers' missions, and we're committed to delivering on the promise of enabling world-class performance for our customers and their patients. We very much look forward to reporting our progress to you over the coming quarters as we accelerate into 2023, and we thank you for your interest and support as we work to deliver value to our customers and shareholders. I'll now turn the call over to Lindon.

Thank you, Steve. As Steve discussed, with the successful transformation into a life sciences company behind us, we are focused and well-positioned to take advantage of the growth opportunities ahead of us to create significant shareholder value. We continue to build our business, and when we peel back the estimated impacts of COVID, we see clear signs of healthy organic growth, both in the Q4 and for the full year 2022 results. As I go through the financials, this will be a key focus to ensure you see the total reported results and the strong growth indicators, excluding COVID impacts. I now refer you back to the slide deck available on our website, turning to Slide 3 for some highlights. First, performance was strong in the quarter and full year. Fourth quarter revenue was $138 million, up $5 million or 4% sequentially. I'll say more in a few minutes, but this is up 12% on an organic year-over-year basis when adjusted to remove the estimated COVID impacts. On a sequential basis, growth in the quarter was notable in large automated stores, Sample Repository Solutions, and in all areas of genomics. We also added Barkey to the business, contributing to the sequential growth. I will provide more details in my segment remarks. Earnings per share improvement was evident on a GAAP and non-GAAP basis. Non-GAAP earnings per share was $0.16, up $0.04 year-over-year and sequentially. Adjusted EBITDA margin at 6.9% reflects investments and softer gross margins. For the full year, revenue was up 8% as reported and on an organic basis excluding the impact of COVID, was up 17%. Over this past year, we completed the transformation into a stand-alone life science business, and we are well established as a global market leader in our space. There's nobody else that provides the breadth and depth of sample management solutions and genomic analysis, which we bring to market. The forward momentum we are observing in our business lines looks much like the Azenta our shareholders have seen in the past and reaffirms our position for future growth as we uniquely address the demanding needs for sample management and genetic analysis for our customers. And of course, the addition of B Medical, which closed October 3, will bring further acceleration to the top line and is expected to be accretive to non-GAAP earnings per share in FY 2023. After putting $0.5 billion of capital to work on acquisitions, the company has announced a plan for a substantial return of capital to our shareholders with a $1.5 billion repurchase authorization, and we plan to return $1 billion to shareholders over the next year, starting with a $500 million accelerated share repurchase program in the coming days. With all of this in motion, our balance sheet still has more than $400 million in additional cash resources available for investment and growth. And finally, while I will provide more color on the guidance later, in summary, fiscal 2023 is expected to grow approximately 30% compared to fiscal 2022.

Let's move on to Slide 4 to address Q4 results. Revenue of $138 million, above our midpoint of expectations, was flat year-over-year and up 4% versus Q3. Excluding estimated COVID-related revenues, the business grew 12% year-over-year on an organic basis. To the right, we have provided a table to provide steps from the flat reported revenue to the adjusted 12% growth, excluding COVID impacts. From reported revenue, we removed 4 points of foreign exchange headwinds and 3 points of M&A tailwinds, which provides the organic growth of 2%. From there, we removed the impacts of COVID, which was an estimated $12 million in revenue in Q4 of 2021 and was approximately $1 million in this quarter. On a year-over-year basis, organic growth when adjusted to remove the estimated COVID-related revenue from each period was strong at 12%. Looking at the P&L on the left side, total GAAP earnings per share was a loss of $0.07, $0.02 better than Q3. The primary differences in the quarter compared to the third fiscal quarter were driven by M&A expenses related to the acquisition of B Medical and Barkey and which was offset by improved interest income. Getting deeper into quarterly performance, let's look at the non-GAAP P&L to the right. Revenue increase of $5 million quarter-to-quarter carried lower gross margin, primarily driven by the product segment results. The softer gross margin combined with investments in operating expense translates into a 7% adjusted EBITDA margin while increased interest income supported an improvement in the earnings per share. Turn to Slide 5 for results of our continuing operations on a full year basis. Organic growth was 9%, again, adjusting only for foreign exchange impacts and removing the benefit of the Barkey acquisition. In fiscal 2022, we faced a meaningful COVID headwind primarily in the consumables and instruments business. In total, we saw an estimated $22 million in COVID benefit in 2022 compared to a $53 million benefit in 2021. Organic growth, when adjusted to remove the estimated COVID impact from each period, was 17% year-over-year.

On the left side of the chart, GAAP earnings per share improved $0.24 year-over-year with top line growth and the interest income on investments. On the right side, we see improvement of $0.03 year-over-year in non-GAAP earnings per share. Again, supported by expansion in the top line and interest income. Profit profile reflects gross margins of 47.3% with pressures from labor inflation across the business as well as lower leverage in the products business. This flows through to the operating margins, as does the investment we put into the business for continued growth. The full year non-GAAP tax rate was 12.9%, culminating in full year non-GAAP earnings per share of $0.51, which is up $0.03 versus fiscal 2021. On a continuing operations basis, the full year adjusted EBITDA margin was 11.3%. Now please turn over to Slide 6 for a review of our Life Science Products segment results. Product segment revenue totaled $48 million for the quarter, consistent with expectations. As you can see, fourth quarter revenue was 9% lower year-over-year on a reported basis and 10% lower on an organic basis. This organic rate removed 7 points of headwind from currency and 8 points of benefit with the acquisition of Barkey. The driver of this decrease is mainly attributable to the 30% decline in consumables and instruments, which was impacted by the dramatic drop of COVID-related revenue, just as we expected. Fourth quarter organic growth for the segment, when adjusted to remove the estimated COVID-related revenue from each period, was 13% year-over-year. This double-digit growth is in the range that we have long described for the Products business. This was supported by large automated systems and services, both of which grew double digits year-over-year in the quarter. Notably, our large automated systems posted another record bookings quarter. Life Science Products Q4 gross margin was 40.2%. Pressures on the margins are driven by numerous factors, including under-absorbed costs in the automated systems area due in part to our recent investments for volume capability in the future. Also, a weaker margin mix as the consumables and instrument business has dropped and the effect of cost headwinds from inflation and to some extent, from foreign exchange. The operating income line is breakeven for the quarter, reflecting softer revenue on the base business, and an incremental expense structure with the addition of Barkey. Next, please turn over to Slide 7 for a review of our Life Science Services segment results. The services business generated fourth-quarter revenue of $89 million, an increase of 6% year-over-year and up 4% on a sequential basis. Organic growth for the quarter was 10%, reflecting 9% growth in genomics and 10% growth in sample repository solutions. Both businesses expanded sequentially with genomics expanding 6% and SRS 2% on a reported basis. The genomic services 9% year-to-year organic growth was supported by a return to double-digit growth at constant currency in the U.S. and China. Across the offerings, business growth at constant currency was led by NGS at 14% and nicely supported with Sanger growth of 8%. Gene Synthesis business was 3% lower year-over-year with the China business actually growing 11% and the other regions declining. As our synthesis samples are generated and shipped out of China, we have extended our commitment time lines to customers due to logistics challenges. That said, the local China business is not affected by this. We have initiatives in place to address this challenge over the coming months. Sample Repository Solutions organic growth of 10% year-over-year was driven by the storage revenue, which continues to expand our recurring revenue base. Excluding estimated COVID-related impacts in the fourth quarter year-over-year, organic growth rate for the Services segment was 11%. The Services business delivered a 45.8% gross margin with a drop quarter-to-quarter and year-to-year driven by labor inflation, which continues to weigh on us, as well as margin headwinds in the Gene Synthesis business. The NGS and Sanger businesses are relatively stable. Q4 operating margin was 2.1%, down year-over-year, driven by the gross margin trend, partially offset by the efficiency of operating expense. The adjusted EBITDA was approximately 8%. Let's turn over to Slide 8 for a summary of cash flow for the quarter. Capital expenditures for the fourth quarter were $14 million, which included laboratory equipment for our Genomics business, additional storage equipment and freezers, as well as investments to expand our SRS footprint in Indianapolis and our genomics lab here in the Boston area. For the full year, capital expenditures were $73 million, including $19 million for the new China building. Let's turn to Slide 9 to review the balance sheet. As of September 30, we had $2.3 billion of cash, restricted cash and marketable securities with no debt outstanding. Now following the close of our year, we finalized the B Medical acquisition on October 3, leaving approximately $1.9 billion in cash. This enables us to return capital to shareholders through the $1.5 billion authorization and continue to invest for growth both organically and inorganically. Our working capital increase was driven substantially by the change in other current assets. This was primarily related to the fair value adjustment of the net investment hedge. Let's turn to Slide 10 for our guidance on the first fiscal quarter and full year 2023. Revenue is expected to be in the range of $175 million to $190 million, with a midpoint supporting growth of approximately 30% year-over-year. This includes an organic growth rate excluding COVID of approximately 9% at the midpoint. We estimate the foreign exchange impact to be a headwind of 5 points, and the revenue from acquisitions would be a total of approximately $49 million. That is $4 million from Barkey, and we expect B Medical Systems to contribute approximately $45 million. Within our base business of Products and Services, both segments are projected to be stable sequentially. We expect products, including the $4 million from Barkey, to be in the range of $46 million to $50 million, reflecting a high-teens organic growth rate when excluding the impact of COVID. We expect Services to be in the range of $86 million to $93 million, which is approximately 6% year-over-year organic growth, excluding COVID. As we move through the year, we believe the business is set for higher year-over-year growth in the second half. To complete the equation, our range around B Medical expectations is $43 million to $47 million in the first quarter. We will determine during this quarter if this is to be a part of the Product segment or reported as a new segment. As you think about your models for next year and begin to incorporate B Medical, I would urge you to keep in mind that this business will likely be seasonal on a quarter-to-quarter basis and tends to have its strongest quarter in our first fiscal quarter. Adjusted EBITDA is anticipated to be $13 million to $21 million. Non-GAAP earnings per share are expected to be $0.08 to $0.16. For the full year, we expect reported revenue growth of approximately 30% year-over-year. We expect that the B Medical revenue will reach at least $130 million for the year. Excluding all acquisition revenue and a foreign exchange headwind of 4 points, we foresee organic growth for the year being high single digits. Excluding the COVID impacts in each year, this sets expectations for low double-digit growth for the year. As indicated, this begins with approximately 9% ex-COVID organic growth in the first quarter, and we expect to see a return to high teens growth in the second half. Regarding the profit profile, we have confidence in our gross margin improving a couple of points this year. We will have additional operating expense driven by variable compensation levels returning to a par level accrual and some continued investments. For adjusted EBITDA, keeping in mind that our Q4 adjusted EBITDA was 7%, we expect to see this metric move up past 10% through the year. We'll likely see fluctuation between Q1 and Q2 adjusted EBITDA given B Medical's seasonally strong Q1. However, the trend from the first half to the second half will follow the improvement I just described. We estimate the non-GAAP tax rate will be in the range of 22% to 25%. We expect capital expenditures to be approximately $65 million to $75 million. This completes the guidance discussion. In conclusion, we have an incredibly diverse profile for a company of our size and a profile aligned for higher growth. We are currently tracking to double-digit growth rates when excluding currency and COVID impacts. As these effects are expected to be significantly out of the comparison periods in the second half of 2023, we expect to see higher as-reported growth rates by that time. As we execute toward our fiscal 2023 goals, we are committed to returning substantial capital to our shareholders with our $1.5 billion share repurchase authorization in place. As Steve mentioned, this will not slow down our M&A efforts as we will retain a healthy capacity to invest for strategic growth. As always, we will continue to provide updates on our progress throughout the year. This concludes our prepared remarks. I will turn the call back over to the operator to take your questions.

And your first question comes from the line of Vijay Kumar with Evercore ISI.

Congratulations on the print and the ASR announcement. I have a couple of questions. First, let's discuss the organic growth for the base business. You're seeing low double-digit organic growth, but you achieved 12% in Q4. Could you share your thoughts on the macro situation and why organic growth might improve? Additionally, when do you expect to return to the LRP organic growth rate in the high teens?

Thank you for the question, Vijay. It’s an important one for us. We believe we have a solid understanding of our position in the market. It's not a uniform macro environment, so I'll share a few points. We experienced a record quarter in our Sanger business, which has been robust for 20 years. Our NGS business is balanced, but in India, our synthesis business is facing some challenges. As Lindon mentioned, we’re dealing with logistical issues in China that have affected our ability to deliver products to customers promptly. Nonetheless, we see a healthy market and ample opportunities. We’re proactive in addressing customer needs and are optimistic about returning to growth rates. We're working on some logistical challenges that may take a couple of quarters to resolve, especially in the synthesis area, but we're confident in our aggressive stance in NGS and the strength of our Sanger business. On the product side, we’ve seen particularly strong bookings for large automated stores, which has been a significant trend moving into the latter half of 2023. Record bookings have been noted, and we anticipate revenue will follow in the second half of the year. Regarding consumables and instruments, we believe we’ve reached a stable point as we move beyond the COVID environment, and now we need to focus on increasing our growth rate. We had a successful automation push during the pandemic, which we aim to maintain. As we step away from COVID and see some market share gains, it’s challenging to gauge our position accurately, but we feel we're nearing a bottom. While growth rates have dipped in the fourth quarter and the first quarter, we believe our efforts will enable us to achieve consistent double-digit growth in the second half of the year. As we approach the end of 2023, we expect to return to the growth rates we are used to.

That's helpful commentary, Steve. And maybe the ASR and the share repurchase here, that's a pretty big commitment, $1 billion for a company of your size. Does that perhaps seem to suggest, again, another way of getting back toward the bottom here in terms of growth rates? Maybe just talk about the timing of ASR and share repurchase here last year.

Yes. Just to remind everyone, the ASR is approximately $500 million. We announced an authorization for $1.5 billion and plan to execute $1 billion within the next year. The $500 million ASR will begin in the coming days, and its pace will depend on market prices. Overall, our bankers suggest that $500 million is achievable, although it may take a few months based on our average daily trading volume, which is why we have allotted a year to complete the full $1 billion. Vijay, I invite you to ask another question if you’d like, but I'm trying to convey the characteristics we're observing.

Understood. And Lindon, maybe one last one, if I may. If I just look at the guidance here for the year, 30% on the top line, inclusive of the acquisition, just some back of the envelope math, it looks like share count is going to be 15% below. And if I go back to your original margin commitment, I think back at the Analyst Day, it was 200, 300 basis points. And I understand it's a different environment, but assuming some margin expansion, we should be looking at at least 50% EPS growth for fiscal '23. Does it seem right to you?

I think that's a bit optimistic. However, I'm not providing a specific EPS target. We'll see how effectively the market can absorb shares. I want to emphasize the EBITDA comments we made earlier; as we approach the second half of this year, we are aware that we finished the year weaker than the latter half. Our starting point for EBITDA in the fourth quarter will be down 7%. As the year progresses, we expect that to increase to around 10% by midyear, averaging at least 10% for the year. In the next quarter, we are optimistic about some improvements in gross margin in the first quarter, but we will also see an increase in operating expenses. This year has not met our performance expectations, and in the first quarter, we'll be accounting for some variable compensation accruals that we deferred earlier this year. This will somewhat counterbalance the gross margin improvements, hence the slower initial EBITDA growth. However, as we experience the revenue growth Steve mentioned, I believe we will reach and exceed that 10% mark by year-end, averaging 10% for the year.

Your next question comes from the line of David Saxon with Needham.

Yes. Maybe starting with genomics. I mean, you called out a rebound there, which is nice to hear. What are you seeing that gives you confidence that this can be a sustained recovery?

We hope to see a sustained recovery. We're readjusting our go-to-market capabilities to attract new customers like we used to. We've focused on the academic sector to create new opportunities and have targeted small startups, ensuring past clients from other companies and universities continue to buy from us. We did shift our attention towards larger opportunities, but now we recognize the importance of doing both. We will maintain strong support for larger customers while also reaching out to individual scientists, which has traditionally driven our business. We may have strayed from this approach for a short time, but we believe it's a solid long-term strategy to return to. There are growth opportunities ahead, and while Sanger shows strong growth, we believe ours is outpacing the market. We are gaining market share from those unable to handle certain tasks themselves. Our technologies in the NGS area are helping us capture more business, and we feel confident about that. On the synthesis side, we are less certain about our ability to ramp up, but we think we have hit the low point and have a good chance of turning that around. We will win over our customers because we provide quick, high-quality services, and we’re focused on sustaining that. There is certainly significant market opportunity and capability available; we just need to ensure we're connected with our customers to leverage it effectively and challenge our lab and manufacturing capacities.

Okay. That's helpful. And then, Steve, another one for you. In the script, you called out sales synergies with B Medical and Barkey. Maybe can you give a little more color there? Can you quantify how you're thinking about those synergies?

Sure. When discussing B Medical at €130 million for 2023, we haven't factored in some of the synergies from the ultra-cold freezers associated with the blood management systems. We see significant opportunities, particularly in North America, where we have robust sales coverage and the potential to introduce this capability to hospitals, clinics, and blood banks. We have several interaction points in the sample management sector that allow us to promote their capabilities where we can make sales. Regarding Barkey, the integration of our blood management systems with their plasma-thawing devices creates a strong synergy. Wherever blood management is relevant, Barkey fits in. Additionally, their role in cryogenics for storing cell and gene therapy applications also aligns well. We're actively working on these synergies in areas where we have contact points, adding another solution to our portfolio for the same customer base.

Your next question comes from Jacob Johnson with Stephens.

Congrats on a really nice quarter. Maybe first just on the buyback, $1.5 billion is a pretty big number. Obviously, you've got a lot of cash. Why was that the right number? And then I think the inevitable question is M&A seems like something you're still interested in? Can you just talk about if something were to come along, what are your options to finance something like that?

Yes. So we have a lot of opportunity, for sure. But it's tough, Jacob, for us to be secure on some of that is going to take that kind of cash. So from the standpoint of what's the right number, we've been really successful when we've had $100 million, $200 million, now $500 million to put to work. We feel really confident that, that's a good number for us. The thing that we don't want to do is sit on cash for a long period of time. So we've had this much cash on the balance sheet now for nine months. We evaluate the prospects, and we think that it will be a really adequate cash position that we have $500 million that we can put to work based on the landscape out there and the number of things that we've gone after. We also believe that success over these next couple of years, if we needed to have access to capital for a large deal, that would be available to us. But right now, we think it's better for the shareholders to have it and allow us a chance to come back if we need it another time, if there's something larger that comes present; we'd be all over it. And $500 million is still a nice sum of money to do the kinds of things that we're doing about building a high-value portfolio here.

Yes. Just having $500 million, enviable position for sure. And then I think in the last week or so, there's been some who've called out some headwinds from the macro environment on kind of large ticket freezer purchases. Does it sound like you're seeing that in the storage business or maybe in cryo either, but maybe just give you the opportunity to talk about the macro backdrop from freezers and how we should think about growth in that offering in 2023.

Yes, we have heard the commentary. However, our customer base is different, and we are not experiencing those issues. Currently, the business appears to be quite healthy. For instance, many of our cryo systems are utilized by customers involved in large-scale cell and gene therapy work. We have numerous customers placing repeat orders, and they have modified how they manage these materials for manufacturing, increasingly moving towards automation. We believe this trend is sustainable. Additionally, our large automated systems have the strongest order position we've ever had, and we expect this growth to continue. As we venture into the ultra-cold freezer market with B Medical, we will gather more information in the coming quarters, but I can't provide any comments on that just yet.

Your next question comes from the line of Yuan Zhi with B. Riley.

Congrats on the quarter. We have a couple of them. First, maybe somewhat repetitive here. So can you articulate the challenges you are facing right now and the plans that you guys have in place to address them?

I'm sorry, could you please repeat that? We had a minor connection issue on our end, thank you.

Yes. So can you articulate the challenges you guys are facing in different business segments and the plans you guys have in place to address them?

Let me provide some comments on our current situation. We've discussed some of the momentum we've experienced and the challenges we're still facing. In the products business, we've encountered significant headwinds, particularly in the Commercial and Industrial sectors due to the impact of COVID-19. Although we might be reaching a bottom, we still have excess inventory. While we are receiving orders, the pace is slower than what we saw in the years leading up to COVID, so we aren't fully back to pre-pandemic levels. However, on a positive note, the automated store systems and cryogenic product lines have shown impressive growth. Our cryogenic product line has expanded by 30% year-over-year, and our automated large stores have reported record bookings for several quarters, indicating strong momentum. This reflects substantial infrastructure investments from our customers and highlights the importance of the reliable infrastructure we provide at their locations. Shifting focus to the services sector, particularly sample repository solutions, we've already noted double-digit growth. We're experiencing consistent wins and volumes, making this a strong contributor to our recurring revenue. In genomics, we’ve seen some improvement in our growth rates returning to double digits. We even saw significant growth in China year-over-year during the quarter, despite the tough conditions due to lockdowns. Growth in the rest of the world is positive, although Europe is slightly slower than we would prefer, showing growth in the lower single digits. However, the Americas and China have demonstrated strong double-digit growth during the quarter. Regarding our strategic actions, we’re actively managing the business and refocusing our marketing efforts to target specific products rather than just the Azenta brand. We believe in the value of the Azenta brand and will continue to build on it. Combining these initiatives with our acquisitions of Barkey and B Medical, we aim to drive those businesses while also realizing the synergies we've identified. We are beginning to see some positive momentum in growth rates and have confidence in improving our growth from the high single digits to lower double digits by the year’s end on an organic basis. When we also consider the acquisitions, we expect to achieve plans for 30% growth this year. Let me stop here and see if this provides clarity.

Yes. That's super helpful. And maybe one follow-up there is, like you mentioned, you are going to expand the product offering for B Medical in North America and then in ex-U.S. or in the territory of B Medical, you will your other part of the services. Just want to hear your thoughts on the OpEx investment in these different territories? And how should we think about the OpEx over the next 12 to 18 months?

So Yuan, this is Steve. I will address what we are doing regarding our operational expenses. Our sales coverage is quite strong, and we plan to increase our sales team to ensure we effectively serve not only our accounts but also the specific technologies, products, and services associated with those accounts. You will notice a slight increase in our spending, but we are nearly at the desired level of sales coverage for these additional capabilities. Most of our investments are already established. Now, I will hand it over to Lindon for a follow-up.

Yes. Regarding operating expenses, I want to provide some clarity. We're planning to increase our base business expenses, mainly due to the significant return to accruing for variable compensation and stock compensation for our team at the start of the fiscal year. Most of these accruals were removed in the fourth quarter to adjust the year for payouts related to poor performance. However, at the beginning of a new year, we begin accruing again. When we factor in the addition of B Medical, you can expect some operational expansion. I want to point out that we anticipate about $15 million in operating expenses from B Medical in the first quarter that we will allocate to that business. As we progress through the year, we will continue to support this effort, partially related to the G&A structure we mentioned earlier. We have already made some investments, but B Medical requires more structural compliance, especially as a public company, than what was previously necessary. We're in a solid position with this, and I wanted to highlight it for your financial models. This represents a significant increase.

And your next question is a follow-up from the line of Vijay Kumar with Evercore.

What are the COVID assumptions factored into the guidance for fiscal '23 regarding base business? Also, does the $130 million in B Medical revenues include any COVID-related revenues?

Yes. So the headwind that we'll have roughly think of 2022 as having $22 million of revenue for the full year. Most of that is in the first half. We only had modest amounts. And frankly, it was even more modest because we had the headwinds that we are constraints in the China market in Q3 and a little bit in Q4. But in the first half, we had, if you recall, $10 million to $11 million each quarter for C&I. So that's the biggest headwind. Once we get through the first half, you're going to see this become pretty much just modest noise level. So with that said, going forward, we really have very modest expectations. Think of about $1 million a quarter, plus or minus going forward, depending on whether we have any more disruptions in China. That might hold us back a little bit. But in our positive revenue that we'll be carrying, we still have some vaccine management going forward. We’re doubtful that we’ll see much in the C&I space. This quarter, it was just very, very modest in the C&I space. And by the way, Vijay, I'll point out to you and the other investors listening in. When you look at our chart deck this quarter, with the aim towards just giving a lot more clarity on this growth capability peeling out the COVID, on the very last page of our chart deck, we did provide a table to give you the historical by quarter, the breakout of the FX, the M&A, and then the COVID impacts by quarter. So you'll have a good historical baseline to use.

That's helpful, Lindon. And sorry, on the B Medical guidance of $130 million, is there any COVID revenue in that $130 million?

They would be modest. In this current quarter, they have pointed out a couple of variations, which is a positive aspect. When I mentioned $1.25 million, that refers to our core business, and B Medical noted that for this quarter we are looking at around $45 million, with a couple of million more included. I want to emphasize that we do not expect it to exceed that in the following quarters. Naturally, this business will fluctuate; it can be unpredictable with respect to the types of orders that may arise from projects. However, they do not anticipate that COVID will be a factor in 2022, nor should I say, predict for 2023 as it was in 2022.

Understood. And if I could just squeeze a quick 30 second, Lindon. On the margins, your 10% EBITDA margins, can you talk about what's the impact from FX, inflation, pricing, maybe acquisitions, perhaps being a drag? Because I think if I go back to your original margin commitment, I think back at the Analyst Day, it was 200, 300 basis points. And I understand it's a different environment, but assuming some margin expansion, we should be looking at least 50% EPS growth for fiscal '23. Does it seem right to you?

It depends on whether you're examining things on a year-over-year basis. Keep in mind that from the first half of 2022 to the second half of 2022, we experienced a decline. Therefore, we are starting from a lower point at the end of 2022. We're confident that we will achieve a couple of points of gross margin improvement in the first quarter, and we expect this to be stable and continue throughout the year. It's worth noting that the B Medical business will have a higher contribution in this December quarter, but typically sees lower revenue in the following quarters, which may slightly affect their leverage. However, we anticipate stability and growth in the rest of our business. Regarding foreign exchange impacts, we expect a year-over-year headwind of 2 to 3 points for the year, and we’ll provide updates on that as we progress. This estimate is based on the current exchange rates.

And there are no further questions. I'll turn the call back to Lindon Robertson for closing remarks. Thank you.

Thank you, operator. Everyone, this year has been quite exciting for us in many ways. Although we faced challenges in the middle of the year and were in a recovery mode in the fourth quarter, we believe we have made significant progress. There is still work to do, but the transformation is complete. We are now operating as a stand-alone life science business like no other, focused on infrastructure services related to samples. We are extremely enthusiastic about our portfolio and the opportunities ahead, not only from what we achieved in 2022 but also from our acquisitions and new team members at B Medical and Barkey, who are already adding great value as we enter this quarter. We look forward to connecting with you in person at conferences each week over the next three weeks. Thank you for your interest in the company and for being with us today.

And all, that does conclude the Azenta Q4 2022 financial results call. We thank you very much for your participation. You may now disconnect.