Azenta, Inc. Q3 FY2025 Earnings Call

Greetings, and welcome to the Azenta Q3 2025 Financial Results. As a reminder, this conference is being recorded, Tuesday, August 5, 2025. I would now like to turn the conference over to Yvonne Perron, Vice President, FP&A and Investor Relations. Please go ahead.

Thank you, operator, and good morning to everyone on the line today. We would like to welcome you to our earnings conference call for the third quarter of fiscal year 2025. Our third quarter earnings press release was issued before the open of the market today and is available on our Investor Relations website located at investors.azenta.com, in addition to the supplementary PowerPoint slides that will be used during the prepared remarks today. Please note that effective the first fiscal quarter of 2025, the results of B Medical Systems are treated as discontinued operations. I would like to remind everyone that during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled Safe Harbor Statement, the safe harbor slide on the aforementioned PowerPoint presentation on our website and our various filings with the SEC, including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We make no obligation to update these statements should future financial data or events differ from the forward-looking statements presented today. We may refer to a number of non-GAAP financial measures, which are used in addition to and in conjunction with results presented in accordance with GAAP. We believe the non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Azenta business. Non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves. On the call with me today is our President and Chief Executive Officer, John Marotta; and our Executive Vice President and Chief Financial Officer, Lawrence Lin. We will open the call with remarks from John, then Lawrence will provide a detailed look into our financial results and our outlook for fiscal year 2025. We will then take your questions at the end of the prepared remarks. And with that, I would like to turn the call over to our CEO, John Marotta.

Thank you, Yvonne. Good morning, everyone, and thank you for joining us today. As we continue to navigate an uncertain and dynamic macro environment, one thing remains crystal clear. Azenta's core capabilities make us the partner of choice for our customers now more than ever. Whether it's navigating funding constraints, supply chain complexities, or market uncertainties, our commitment to operational excellence, innovation, and customer centricity enables us to remain a trusted ally. In times of uncertainty, it's our deep expertise and capabilities that sets us apart and ensures we continue to deliver value where it matters most. We are uniquely positioned to help our customers thrive, and we are committed to enabling breakthroughs faster, regardless of the challenges the broader environment may present. On the call today, I'll start by providing an overview of our business progress and our financial performance and then share some comments on the broader macro environment and relevant considerations before turning the call over to Lawrence for the financial review. Despite the ongoing macro challenges, our focus has not wavered. We remain guided by our North Star of long-term value creation, and our operational turnaround is moving us in the right direction. The structural realignment of our organization is allowing us to operate more effectively, reduce G&A costs, and redeploy critical resources into the operating companies so the decisions can be made closest to the customer. We're also advancing our key growth priorities, which include: one, strengthening commercial excellence by expanding regional capabilities and alignment, staffing opening sales territories, and investing in feet on the street; two, funding product management resources to drive innovation and tighter alignment to customers' needs; and three, investing in R&D to bring forward new and transformative solutions to our customers to accelerate growth. The foundation for all that we do is rooted in the Azenta Business System. ABS provides the structure and discipline to support and fuel growth through operational excellence and will be a competitive advantage for us. The business system model will harness the full potential of our talented team, unify our culture and drive our performance. We're reshaping the company for long-term profitable growth, efficient working capital management, and sustained value creation, all in service of enabling breakthroughs faster. In the fiscal third quarter, we saw clear pockets of strength with growth in next-gen sequencing, sample storage, and product services. Consistent with the broader life sciences tool space, these areas of our business with the most stable and recurring revenue streams performed well. This strong performance was partially offset by core products revenue weakness as customers were forced to contend with ongoing funding and investment constraints and broader policy and macro uncertainty. Importantly, we have a very robust products funnel. Based on our customers' interactions, we believe that our underlying demand is strong and that the order acceleration is a matter of timing. Against this muted macro backdrop, adjusted EBITDA margin expanded by 260 basis points year-over-year, a testament to our execution and cost discipline. We remain committed to our full year 2025 guidance of organic revenue growth between 3% to 5% and adjusted EBITDA margin expansion of 300 basis points. Our geopolitical war room remains actively assessing and responding to external developments, quantifying potential impacts, and working purposefully through countermeasures. Our customer outreach initiative, which began last quarter, remains a priority. Each week, we receive direct feedback from our team on what they hear from customers and how Azenta can be a better partner. This enables us to react and adjust in real time. Consistent with our prior view, we continue to estimate the reductions in NIH funding levels will result in approximately 1% headwind to the full year 2025 revenue. Countermeasures are in place. We believe that the tariffs have a nominal impact on our adjusted EBITDA. The turbulent and changing tariff landscape is challenging to navigate, and we continue to seek alternative supply chain sources and balanced and reasonable cost-sharing options. Thanks to the operational improvements we have made in the business, we are pleased we are able to reaffirm our guidance today despite these impacts. More broadly, we are in a strong position to capitalize on the considerable opportunities we anticipate will materialize from this dynamic environment. We believe we are a valuable outsourcing solution that can also help alleviate the cost pressures for our customers, and we are already seeing this play out. For example, we recently negotiated a new MSA with a core lab where our service offering will deliver to the customer both reduced costs and improved service quality. We anticipate seeing more of these opportunities. Elsewhere, we are seeing green shoots in our stores and instruments products given the robustness of our funnel. We remain in a strong financial position with $550 million in cash on our balance sheet, equivalent to $12 per share of cash, no outstanding debt, and meaningful free cash flow generation. We will prioritize investment opportunities across key levers, which are gross margin productivity, organic growth offerings, inorganic growth through strategic tuck-in M&A, and repurchasing our stock. Our M&A funnel is robust, and we see a healthy pipeline in high-quality strategic tuck-in opportunities that we believe can help to accelerate revenue growth and profitability. As we previously mentioned, we are planning to host an Investor Day later this calendar year to update the investor community on what we achieved and our outlook for our business. Details of this event will be released in the next couple of months. I'm proud of the work our team does each day to partner with our customers. I remain excited and confident about Azenta's ability to deliver long-term sustainable value to our customers, our employees, and our shareholders. With that, I'm pleased to turn the call over to Lawrence. Thank you.

Thank you, John, and good morning, everyone. I'll first take you through an overview of our company-wide results before providing you with some more color on our segment performance and then wrap up with details on our balance sheet and full year guidance. As a reminder, the results we are referring to today, unless otherwise noted, excludes B Medical Systems, which is reported within discontinued operations. In the third quarter, we recorded an additional noncash loss on assets held for sale of $69 million on B Medical. We believe the transaction remains on track to be announced in calendar 2025. To supplement my remarks today, I will refer to the slide deck available on our website. We'll begin on Slide 3 for a few highlights. Third quarter revenue totaled $144 million, flat year-over-year on a reported basis and down 2% on an organic basis. Strength in next-generation sequencing, growth in sample storage, and solid contributions from clinical biostores and product services helped offset softness in other areas of the portfolio. Non-GAAP EPS for the quarter was $0.19. Adjusted EBITDA margin was 12.3% for the quarter, which represents an expansion of approximately 260 basis points year-over-year. This improvement highlights the continued progress of our operational turnaround efforts and the benefit of increased efficiency and cost discipline. While profitability drivers varied across segments, our overall margin expansion demonstrates our ability to execute in a challenging environment and reinforces our commitment to building a stronger, more scalable business. Year-to-date, adjusted EBITDA expanded 350 basis points year-over-year. Free cash flow was $15 million for the quarter, including B Medical, driven primarily by improved working capital with a significant reduction in accounts receivable. We ended the quarter in a strong position with $550 million in cash, cash equivalents, and marketable securities. Now let's turn to Slide 4 to take a deeper look at our results in the quarter. Total revenue of $144 million represented flat growth on a reported basis and a decline of 2% on an organic basis. In the third quarter, non-GAAP gross margin was 48.5%, higher by 180 basis points year-over-year. The improvement is largely a result of favorable sales mix, operational efficiencies, and improved cost execution. Adjusted EBITDA was $18 million and adjusted EBITDA margin was 12.3%. Margin expanded both year-over-year and sequentially. With that, let's turn to Slide 5 for a review of our segment results, starting with Sample Management Solutions or SMS. SMS revenue was $78 million for the quarter, down 4% year-over-year on a reported basis and down 6% on an organic basis, primarily due to softer bookings for cryo and timing delays in our automated stores product line. This reflects customers pushing out orders as they delay larger capital investments amid ongoing budget constraints and internal realignment. Consumables and instruments were also down year-over-year, primarily due to a large order that shifted into the fourth quarter and a slowdown in instrument bookings. The segment was supported by growth in sample storage, along with strong year-over-year performance in product services and clinical biostores. These product lines continue to demonstrate solid execution and customer engagement and highlight the benefit of diversification in our portfolio. SMS third quarter non-GAAP gross margin was 53.6%, up 760 basis points year-over-year, reflecting a favorable shift in product mix and improved operational execution and cost management. Turning next to the Multiomics segment. Multiomics delivered revenue of $66 million, up 4% on a reported basis and up 3% on an organic basis. Growth was led by continued momentum in next-generation sequencing, where pricing has stabilized and volume is growing at sustained double-digit rates. Performance was further aided by large customer deals, particularly in Europe. Despite macro and geopolitical headwinds, China remains a strong market for us, posting 10% organic growth in the quarter. Gene Synthesis revenue declined high single digits year-over-year, reflecting continued softness among key pharma accounts. The decline was primarily driven by delays as some customers adjusted timelines in reprioritizing projects and internal resource alignment. Sanger Sequencing revenue declined mid-teens year-over-year, consistent with trends we've discussed in prior quarters as the industry continues to transition towards newer sequencing technologies. Plasmid-EZ, our Oxford Nanopore-based solution, continues to gain traction with revenue growth remaining strong and well ahead of last year's levels. This momentum is helping to offset the decline in traditional Sanger revenue, and we remain on track for Plasmid-EZ to substantially balance that impact over the full year. Multiomics non-GAAP gross margin for the third quarter was 42.6%, down approximately 500 basis points year-over-year. The decline was primarily driven by product mix and lower volume in Sanger Sequencing and Gene Synthesis, as well as the impact of certain nonrecurring items in the quarter. Next, let's turn to Slide 6 for a review of the balance sheet. We ended the quarter with $550 million in cash, cash equivalents, and marketable securities, excluding B Medical. We had no debt outstanding. Capital expenditures for the quarter were $11 million as we continue to invest for growth and scale in our Sample Management Solutions and Multiomics business. Turning to guidance on Slide 8. As you saw in our press release, we are reaffirming our full year 2025 organic revenue growth guidance of 3% to 5%. Previously, we anticipated low single-digit growth in Multiomics and mid-single-digit growth in SMS. While our overall outlook remains unchanged, we now expect Multiomics to grow in the mid-single digits and SMS to grow in the low single digits, reflecting evolving customer dynamics and the impact of budget constraints on product purchasing timelines. We are also reaffirming our commitment to 300 basis points of adjusted EBITDA margin expansion year-over-year. To close, our performance this quarter highlights our differentiated portfolio, improving operational execution, and a hard-working team unified around long-term value creation priorities. We are committed to delivering on our full year objectives and to advancing the initiatives that will position Azenta for sustainable long-term growth. This concludes our prepared remarks, and I will now turn the call over to the operator for questions.

Your first question comes from David Saxon from Needham.

So I'll have one on guidance and then one product-related question. So for guidance, fiscal '25 guide implies a step-up here in the fiscal fourth quarter. So outside of the easier comp, I guess, what are you seeing across the businesses that give you the confidence in that step-up? And then would love your early thoughts on how you're thinking about fiscal '26. You started '25 at 3% to 5% and have maintained it throughout the year. So is that a good way to think about fiscal '26? Or any puts and takes we should consider, particularly around the funding environment? And I'll have one follow-up.

Sure. David, it's Lawrence. Good to be with you. Let's discuss the fourth quarter. As you know, our organic revenue grew by 3% year-over-year for the third quarter year-to-date. To reach the 4% midpoint, we need to increase our revenue in the fourth quarter by over $15 million, amounting to approximately $160 million in total revenue for that quarter. There are a few factors giving us the positive momentum we expect. For one, we're seeing positive trends in NGS stores. Furthermore, we have a sufficient backlog for the fourth quarter. Also, C&I demand has shifted some orders, which are significant, into the fourth quarter. These are key factors that boost our confidence about the fourth quarter. Moreover, we've noticed great momentum due to our improved on-time delivery in our SMS business. John and his team have worked hard to enhance our on-time delivery, and we expect to see the results of that in the fourth quarter. Ultimately, it comes down to execution and making sure we meet our weekly targets. Regarding our outlook for 2026, we remain committed to our long-range planning numbers from Investor Day, which project a 5% to 8% compound annual growth rate. As I mentioned, towards the end of calendar 2025, we will hold another Investor Day to provide further updates.

Okay, that’s helpful. Regarding SMS and specifically core products, I’d like to know how much of the weakness is attributable to order timing as opposed to order cancellations. Are you experiencing any cancellations, or is it mainly that orders are being delayed due to how customers are allocating their resources?

David, it's John here. We're not seeing any cancellations at this time. Most of this is just pharma and around capital equipment pausing on some of the capital equipment purchases consistent with the rest of the market.

Your next question comes from Mac Etoch from Stephens Inc.

This is Hannah on for Mac. I just had one question on Gene Synthesis headwinds that you were talking about some softness from key pharma accounts. What do you think is kind of causing this softness? And do you expect these timing issues to resolve? Could you just elaborate a little bit more on what you're seeing and when you expect this to improve?

Yes, Hannah, it's good to be with you. We are currently experiencing some softness in projects coming in from pharma related to synthesis. We are noticing a bit of that starting to come in during Q4. There are some positive signs around that at the moment. However, I think we are remaining consistent in our outlook. This appears to be primarily a timing issue in North America.

Your next question comes from Vijay Kumar from Evercore.

Maybe returning to the implied Q4, your comment indicates that Q4 should see mid-single-digit growth, possibly around 5% organic. Can you quantify the order pushout in Q3 that provides insight into that 5%? Also, how do you view the segments, SMS compared to Multiomics in Q4?

Vijay, it's Lawrence. I want to highlight that there is typically a seasonal increase from Q3 to Q4, as we saw last year with a rise of about $7 million. The factors driving this, mentioned earlier in the call regarding NGS momentum, stores, and a significant order in the C&I segment for the fourth quarter, account for the remaining difference. This gives us confidence for Q4, but execution is key. Additionally, I want to emphasize the strength of our SMS business, particularly in terms of our sales funnel. Although we usually focus on backlog, our current funnel is performing exceptionally well. For example, in our C&I business, it is about 2.5 times our revenue. As John noted earlier, there is substantial pent-up demand, and we anticipate that much of this will be addressed in the fourth quarter and into the first quarter.

Understood. John, could you share your thoughts on the leadership changes you implemented? Specifically, have any new sales leaders played a role in cleaning up the order book, which might explain the transition from the third quarter to the fourth? I'm interested in how these leadership changes have influenced the business.

Vijay, it's great to be with you. That was an insightful question. We have several exciting developments happening commercially. We've appointed new commercial leadership in North America and transitioned to a regional model rather than a global one. We're beginning to see positive results from that change. Our sales leaders are actively engaging with customers, and this excites us. Personally, I dedicated a lot of time to meeting with our customers last quarter, and we always perform well when we have that face-to-face interaction. Regarding our sales leadership, Joe has recently joined us in North America, and we also have new sales leadership in SRS. Albert, who previously led our corporate sales organization, has moved to the SRS division. He's well-respected in the industry and has a strong background in both SRS and our biorepository business, so we are very enthusiastic about his leadership at this time.

Understood. Maybe if I could squeeze one more in. Your comments around M&A funnel seems constructive, positive. I'm curious what areas are you looking at, John? Would this be on the product side or service side or anything software-related? It looks like both revenue accretion and margin accretion seem like key criteria for targets.

The way I would think about our M&A funnel right now is I would think about really us kind of minding our knitting and sticking with our core. And that's specifically around our biorepositories, automation, and how we think about that. We, of course, are evaluating opportunities in the Multiomics business as well. But in general, that's the way I would think about it. I would think about it being accretive and us being very disciplined around these assets in terms of making sure that they're within our core or near product line extensions is the way I would think about it, just back to the basics here in M&A.

Your next question comes from Brendan Smith from TD Cowen.

Key areas you would highlight that may see more meaningful strength in terms of spending trends across end markets?

I'm sorry, we missed the first part of your question. Apologies.

Yes, no worries. I'm sorry about that. So I just wanted to double-click on the funnel that you mentioned earlier in the Q&A. How much visibility do you have stretching out over the near term? And are there any areas you would highlight that may seem like they might have more meaningful strength in terms of spending trends across end markets?

Yes. Our sales pipeline has shown strength as mentioned in response to Vijay's question and Jacqueline's follow-up regarding its commercial performance. The teams have been diligent in reviewing our deals weekly, diving deep into geographic specifics. Currently, we have strong visibility in the capital equipment sector. There are no cancellations on orders. While there is always competitive pressure, we are not encountering any significant losses or setbacks in the sales funnel due to competition. The timing is influenced by the current state of pharmaceutical capital expenditures. Overall, I am very pleased with the team's understanding and management of the sales pipeline and our progress toward closing deals, particularly in the SMS products sector.

That's very helpful. Just to fit one more in. Could you remind us somewhat the ideal buyer profile you're looking for, for the B Med divestiture? And I guess we have updates to timing in the near term.

Sure. We've been pretty consistent around B Medical. We were surprised at how much demand we had gotten on the process. We're very pleased with where the process is today. Your buyer set is anywhere from private equity to strategics. And again, pretty pleased on where we are. We see no reason we shouldn't be hearing about where we are in the coming months.

Your next question comes from Andrew Cooper from Raymond James.

Maybe I just want to dive in a little bit on the SMS margin dynamics. Can you give a little bit of color as to how much of that is really mix-oriented with some of the timing dynamics you talked about versus how much is structural cost out that are helping there because you did kind of outperform a number pretty materially on that line.

Yes, Andrew, good to speak with you. For the SMS margin, we were up 760 basis points in the quarter. Generally, I would say a large component is going to be mix, right, with favorable mix towards the consumables items. The one thing I would say is, on top of that, we had really good improvements in gross margin, particularly around stores execution and just generally in the overall cost management that was driven by a lot of the restructuring we talked about.

Andrew, there are a couple of points to address. You're beginning to see the benefits of the Azenta Business System in terms of productivity and efficiency. That team has effectively implemented the business system, particularly impacting the gross margin line, resulting in some positive changes. We are very pleased with this progress.

Okay. Helpful. And then maybe just in terms of looking at fiscal 4Q and some of the step-up here, I mean, what's your visibility today? And can you help us think about the comfort level knowing that, yes, you have the timing dynamic that helps you. You have the backlog, but we've seen this quarter a little bit of that backlog push out. So how comfortable are you with that kind of low single digits and the step-up in SMS in particular, in 4Q relative to kind of sitting here the first week of August and what you know you have in hand?

Look, Andrew, I feel good about kind of where we are, kind of the things we talked about with the seasonal aspect of the step in the third to fourth quarter, coupled with the items we just talked about with kind of the visibility on the stores backlog, what the positive momentum we're seeing in NGS. And ultimately, look, it's about execution, and we're meeting with the teams weekly to ensure that we can kind of land the fourth quarter.

Your next question comes from Matt Stanton from Jefferies.

Maybe on NGS, can you just put a finer point on the high double-digit growth you saw in the quarter? What exactly did NGS do in 3Q? I know you said volume was double digits and pricing stable, but maybe a finer point on the trends there in the quarter. And then I think prior, you had noted a potential tailwind here from some of the challenges on the A&G side with funding, especially in core labs and indirect funding. Maybe just talk a little bit more on kind of any traction you're seeing there as folks maybe look to outsource or move some of that volume elsewhere and the durability of that tailwind to your business over time?

The situation with NGS revolves around effective sales execution. The teams have successfully collaborated with core labs in both academic and pharmaceutical settings, and we are very satisfied with the team’s commercial performance. This reflects the implementation of the Azenta Business System, which is enhancing our ability to target customers and close deals, ultimately delivering value to them. Regarding A&G, we see several ongoing opportunities. We maintain our perspective on NIH funding as a 1% headwind. We've been actively engaged with the team, having transitioned from weekly meetings to a different rhythm, allowing us to better track funding dynamics and address any pressures. We continue to identify outsourced opportunities. In academic and government sectors, there is a focus on finding high-quality partners. In the pharmaceutical sector, companies are reducing their number of partnerships, prioritizing those organizations that emphasize timely delivery and quality. Azenta has consistently been at the forefront of these preferences, as confirmed through numerous discussions with our major pharmaceutical clients. This summarizes our insights on NGS and A&G.

And maybe to go to something you touched on in the opening remarks, you talked about the 3 areas of growth, I think, for both product management and on the R&D side, you noted innovation. Maybe just give us an update on kind of how you're feeling about the innovation pipeline and cadence? And then when could we start to potentially see some of these products in areas of innovation you're putting dollars and time into start to show up and contribute to the top line? Is that '26? Or is it a bit beyond that?

We'll provide clarity on when we expect to see significant contributions reflected in our financials. Regarding product management and our R&D roadmap, we are making noticeable investments now, with more expected next year. We're encouraged by how our team is becoming more disciplined in R&D, especially in our new product introductions and sustaining efforts within the POC business. Our C&I business needs revitalization as we haven't invested in it for a while, and we're enthusiastic about the upcoming investments in that area. The product management teams are diligently working on their roadmaps, and we've observed early positive signs. We’re excited about how product management is focusing on the voice of the customer, ensuring we address their needs and wants effectively, which aligns with our innovation strategy through the Azenta Business System. The team is actively supporting product managers and the business's growth. After reviewing product management, it was evident to me and the leadership that we've underinvested in these sectors for a considerable time. We're committed to reallocating resources appropriately, focusing on R&D, product management, and sales and marketing rather than general administrative expenses. The budget for '26 looks promising to ensure these investments are realized. We aim to fulfill our commitments, and you will notice these efforts in the results.

If I could just sneak one more in for Lawrence. On the pushout in the C&I orders, it sounds like it shipped here in 4Q. Any more color just on what that was? Was it like a couple of million dollars or something?

Yes. Look, it was a couple of million, and it just literally shipped in July. So hopefully, that helps.

Your next question comes from Matthew Parisi from KeyBanc.

This is Matthew Parisi filling in for Paul Knight. I want to congratulate you on a great quarter. I have a question regarding the NIH funding. You mentioned a 1% headwind, and I was wondering if we can expect that headwind to lessen given the update indicating that funding is actually going to increase this quarter or in 2026.

Yes, Matt, thanks for the question. Our view remains consistent. Last quarter, we rigorously examined this situation. The recent news from July 31 was very encouraging, particularly regarding the Senate appropriations and the bipartisan 1% step-up, which aligns with what we've observed in the field. We are seeing an increase in grants focused on chronic diseases. While we await developments in the House, we are optimistic about the NIH's direction for next year. Our team, including those in Multiomics and GENEWIZ, has effectively adapted to support both pharmaceutical and academic needs. They have done a commendable job. Regarding the 15% indirect impact, our business is generally unaffected by that. We anticipate that direct research funding will increase, creating a demand for more data, which can come from samples analyzed by our Multiomics team or supported through our SMS business. In either case, we are well positioned to benefit from the 1% step-up.

There are no further questions at this time. I will now turn the call over to management for closing remarks. Please go ahead.

Very good. Thank you. I want to thank all of our associates and what they do every day to advance the long-term and profitable growth of Azenta, how they work each day to enable breakthroughs faster for our customers and our shareholders. Thank you all. We really appreciate it.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.