Earnings Call Transcript - AZTA Q1 2022

Operator, Operator

Greetings, and welcome to the Azenta Q1 2022 Financial Results. As a reminder, this conference is being recorded on Tuesday, February 8, 2022. I will now turn the conference over to Sara Silverman, Director of Investor Relations. Please go ahead.

Sara Silverman, Director of Investor Relations

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 first quarter of fiscal year 2022. Our first quarter earnings press release was issued after the close of the market today and is available at our Investor Relations website located at investor.azenta.com in addition to the supplementary PowerPoint slides that will be used during the prepared remarks today. Please note that due to the divestiture announced in the fiscal fourth quarter, the results of the semiconductor automation business are treated as discontinued operations. Subsequent to quarter end, on February 1, we completed the sale of this business. 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 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. On the call with me today is our President and Chief Executive Officer, Steve Schwartz; and our Executive Vice President and Chief Financial Officer, Lindon Robertson. We will open the call with remarks from Steve on highlights of the first quarter, then Lindon will provide a more detailed look into our financial results and our outlook for the second fiscal quarter of 2022. 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.

Stephen Schwartz, CEO

Thank you, Sara. Good afternoon, everyone, and thank you for joining us today. Q1 was another exciting quarter for the company. On top of continued strong performance, we held our Investor Day on November 16, where we introduced Azenta to the investor and analyst community and presented our new 3-year target model for fiscal 2024. In addition, on December 1, we officially changed our name to Azenta and began trading on the NASDAQ under the ticker AZTA. And subsequent to the quarter close, last Tuesday, February 1, we announced the completion of the sale of the semiconductor automation business for $3 billion in cash. Recall, we had expected to close the transaction by mid-calendar year. However, our regulatory approvals came quickly, and our internal preparation made it possible to close this transaction earlier in the year. Today, we're a pure-play life sciences company with more than $2.5 billion in cash to deploy in a vibrant market landscape. As a stand-alone life sciences company, we're already seeing great promise from our One Azenta approach. Our unified commercial strategy is resonating with our customers. Our value proposition is strong, and we're closely engaged with customers to craft solutions that meet their ever-evolving needs. As we continue to grow, we saw an opportunity to bring on another outstanding leader to the organization. Earlier this month, we announced that Dr. Matthew McManus would be joining us as Chief Operating Officer. Matt comes to us from Bio-Techne, where he was most recently leading the Molecular Diagnostics division following its acquisition of Asuragen, where Matt was President and CEO. Matt reports directly to me and has responsibility for Life Sciences Services, Products and the commercial operations of the business. He brings a deep understanding of the industry and a set of experiences that line up perfectly with Azenta. We're fortunate to have Matt on the team. So turning to Q1. I'll now provide some color on our performance and trends we saw in the quarter. Once again, the team delivered impressive results. Our success and strong reputation continue to open the door to new opportunities with customers. Revenue for the quarter was $140 million, up 18% year-over-year. Our Services business remains vibrant with the revenue up 24% compared to Q1 of last year, and we continue to expand our menu of offerings. The Products business delivered solid 10% growth and continues to prove itself a critical part of sample exploration and management value proposition. Our Services business reported revenue of $90 million with both Genomics and Sample Repository Solutions growing over 20% year-over-year. Genomics revenue was up 23% driven by both Next Generation Sequencing and Synthesis businesses. NGS demand was notably strong even through the December holiday timeframe when things tend to slow down. In gene synthesis, we saw strong demand from pharma and biotech customers, particularly in the Americas. This quarter was also our first quarter of synthesis production in our Indianapolis facility. This service is co-located with our largest biorepository and will allow us to provide expedited services to U.S. customers. Our offerings are also expanding beyond the core portfolio of Sanger, NGS and Synthesis services with a focus on key growth markets. Revenue from our proprietary AAV solutions had nearly doubled year-over-year. And while these are still a small portion of revenue, we're gaining the confidence of key cell and gene therapy customers, which we believe is a market still in the very early days of growth. In addition, we continue to expand our reach by adding adjacent services to our clients' workflows. And we continue to ramp our plasmid prep and molecular genetics laboratory services. Most recently, we added proteomics and a gene-to-lentivirus offering, both of which are garnering early interest. The Sample and Repository Solutions business was also strong, growing 26% as we continue to onboard samples from our two most recent large pharma wins as well as the expansion of our on-site sample services model. Our large pharma projects are going well, and we continue to move samples from customer facilities to our global sites, and we see more relationships with similar scale on the horizon. Our value proposition to customers in the SRS business has never been stronger. And as we've scaled, we've gained experience and proficiency unmatched in the industry. As demand across our portfolio of services offerings continues to grow, we maintain our investments in footprint and talent to satisfy strong global demand. In Genomics, our new Suzhou, China facility, which will become fully operational later this year, will consolidate our existing multisite footprint while doubling our potential capacity. In addition, we're relocating our Cambridge, Massachusetts laboratory to a larger site in Waltham as we've outgrown that facility. In SRS, we're constructing another Indianapolis repository and all manufactured product, a nascent but growing area of the business for us, where we store, distribute and manage logistics for vaccines and other finished products. We remain bullish about our expansion initiatives that each is tied to satisfying strong existing customer demand. In the Products business, we delivered revenue of $50 million for the quarter, representing 10% growth year-over-year. This business has firmly established itself at a new run rate of revenue and is on a solid growth trajectory. There is much to be enthusiastic about from the Products business. We're particularly pleased by the accelerated acceptance of our automated cryogenic storage systems, which set another record in Q1, more than doubling year-over-year as we provide a truly critical capability for cell and gene therapy applications. Additionally, sample management continues to move toward automated systems for all temperature ranges, and we broadened our portfolio to meet these requirements across a wide variety of storage volumes. As a result, we have a very healthy pipeline of storage opportunities, which leaves us particularly bullish about our growth prospects in the second half of 2022 and beyond. Quarter-to-quarter, we may see some fluctuations in this segment due to the nature of large capital purchases and systems and demand for consumables used in COVID testing. But longer term, we expect continued above-market growth. We know many people are curious about the recent business impact of the Omicron variant, so I want to be sure to address that here. Lindon will talk about the financials in more specifics. But in general, we saw continued demand for our consumables and COVID testing and sample management projects in SRS. On the Genomic Services side, recent COVID spikes, particularly in China, which implemented lockdown measures, have increased the complexity of logistics, but our teams have risen to the occasion. And similar to what we observed in the June quarter of 2020 as COVID first hit, in the first weeks of January, we saw some measurable decrease in Sanger revenue from academic institutions. The decrease was not as dramatic as when labs were completely closed in 2020 but was representative of lower lab activity consistent with the absence of lab personnel. And though it appears that as of the last week of January, we are back very close to normal Sanger run rate, our guidance for Q2 does contemplate some impact in Sanger due to Omicron. That said, our ability to deliver to customers remains resilient in a difficult environment. The team has been equipped with sourcing and inventory management. While this has led to some temporary increase in cost, we continue to be able to deliver for our customers. Before I wrap up, I want to take a moment to acknowledge the Brooks Automation employees and team at THL. We're proud of the team's many accomplishments and see nothing but continued success under THL's leadership. Moving forward, Azenta is a fully stand-alone life sciences company with a strong portfolio of products and services critical to the development of life-saving therapeutics. As we look to the future, our opportunities for more growth are abundant. Our markets are rich and growing. And our portfolio of solutions are at the heart of all that's driving life sciences business opportunity. We're aware that there's considerable interest and attention as to how we'll make use of the balance sheet to add capabilities and more scale to the company. And I can assure you that we're all over this with a strong deal team giving consideration to a rich pool of opportunities. However, it's important also to emphasize that with the portfolio of sample value chain products and services that we hold today, there remains tremendous opportunity for more organic growth that will be delivered from our scientists and engineers and also driven by customers who are encouraging us to expand our scale and footprint to allow them to achieve their objectives faster. Over the course of the past five years, we've demonstrated organic growth close to 20%. And we continue to uncover more high-value vectors from services like AAV service offerings, cryogenic sample solutions and the new offerings in our repository solutions business. And although we're actively looking at acquisition targets, we'll remain aggressive investing in organic growth opportunities. And there is still tremendous potential for strong profitable growth from our current portfolio. In summary, our performance remains strong. Our markets are healthy. And we're eager and ready to take on the growing opportunity ahead of us. We're enthusiastic about our strong growth prospects as well as the opportunity for significant profitability that comes with leverage. And as always, 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.

Lindon Robertson, CFO

Thank you, Steve. I now refer you back to the slide deck available on our website. Turning to Slide 3. As Steve highlighted, it's exciting times here at Azenta with many transformational changes and landmark events to touch on as we enter fiscal 2022. Amidst all of these events, the team continued to execute solidly on our commercial and financial objectives. We started the fiscal year strong with Q1 revenue of $140 million, up 18% year-over-year. Growth was driven by strength in the Services segment, up 24% year-over-year. Non-GAAP earnings per share from continuing operations was $0.12, up 1% sequentially, supported by 60 basis points of operating margin expansion. Adjusted EBITDA margin was 14.2% and is net of roughly 200 basis points of a headwind from overlapping G&A structure. And now that we closed the sale on February 1, you should expect to see these costs substantially come out of Q2. In Q1, we also held our Investor Day and presented a new 3-year target model for fiscal 2024. We outlined expectations with significant color in the underlying segments for a 3-year revenue CAGR of 16% to 20%. As you can see, we began with a fast start at 18% year-over-year growth this quarter. As we walk through the results, you will see the earnings profile is also on track. With the completion of the sale, which was subsequent to our Q1 close, you will see the semi assets in today's report are still in the assets held for sale category on the balance sheet and the P&L results in discontinued operations. But I can confirm the transaction is complete, and we are indeed currently in possession of the cash proceeds. After fees and taxes are completely settled, we expect net proceeds of approximately $2.4 billion, which brings us to approximately $2.6 billion in net cash available to deploy for strategic investment. Moving to Slide 4. Reviewing the GAAP basis on the left side of the page, you see the revenue was up 2% sequentially and up 18% year-over-year. Total GAAP earnings per share was a profit of $0.58, which includes $0.54 classified as discontinued operations. The GAAP earnings per share from continuing operations was $0.04 for the quarter. The significant sequential improvement of $0.34 on a GAAP basis primarily reflects the one-time impairment of trade name assets as we rebranded the life sciences company and portfolio to the Azenta name. In addition, we had lower professional fees supporting the company's separation in this quarter. Now let's look into the non-GAAP P&L on the right side of the page for additional color on the performance. We started off fiscal 2022 strong with $140 million of revenue and 18% growth year-over-year. Breaking that down, organic growth was 16% with an additional 2-point contribution from M&A while FX had little effect on the top line this quarter. COVID-related revenue remained relatively stable, generating approximately $10 million in the quarter, again, primarily in the consumables business. Normalized for COVID this year and last, our business grew 20% year-over-year. Gross margin was 49.3%, lower by 40 basis points quarter-over-quarter. This was due to lower margins in the Products business, partially offset by higher Services gross margin. If you look at the operating income, the margin is up 60 basis points quarter-over-quarter driven by leverage over the operating expense. Within operating expense, we added some planned structure, both commercial and corporate, as we separated the company. But it was offset this quarter by lower performance-based variable compensation, including stock comp. To update you on the overlapping corporate G&A structure, this was approximately $3 million for this quarter, a little less than we had sized previously but still applying about 200 basis points of pressure. Since we closed the transaction last week, we see the G&A overlap dropping off quickly to approximately 50 basis points in Q2 and then falling away completely. By Q3, you will be able to see a full quarter without trailing effective cost. Adjusted EBITDA margin in the quarter was 14.2%, down 130 basis points quarter-over-quarter. The other expense line is burdened with a little more this quarter primarily with FX losses. It may also be worth pointing out that the stock compensation is excluded from our measure of adjusted EBITDA. So the help it brought to the operating income does not translate to help in this EBITDA margin line. Importantly, we continue to project that by Q4, we will be performing with an adjusted EBITDA margin in the range of 22%. Turning to Slide 5 for a review of our Life Sciences Products segment results. The Products business generated $50 million of revenue, 6% lower than the fourth quarter but up 10% year-over-year and on our expectations for the quarter. As we described at our Investor Day, the Products business was expected to start with lower growth rates in the first half of 2022 and then strengthen with higher growth rates as we complete the year. This reflects the height of COVID demands on consumables in the comparative periods of the first half of 2021 as well as our line of sight to revenue in the second half of 2022. I would like to provide additional clarity around the growth results here. For Products in total, the growth rate was 10% year-over-year. And if we exclude the estimated COVID revenue in both years, that growth rate would be 14%. The strength came through in the store systems business, which grew 42% led by continued strength in shipments of our automated cryo stores, which continues to see strong adoption in cell and gene therapy applications. The business portfolio has continuous growth drivers, including a solid base of consumables business, unique infrastructure offerings to the largest of customers and a growth engine in the cell and gene therapy space with the automated cryo store. Life Science Products Q1 gross margin was 45.9% with a 20 basis point improvement year-over-year. Gross margin was softer 200 basis points quarter-over-quarter coming off the higher stores margin in Q4, but partially offset by stronger C&I margins in Q1. Q1 operating margin of 8.8% declined 40 basis points over last year driven by investments in the operating expense line, including commercial investments and the increased corporate expenses referenced earlier and which are allocated to each segment. On a quarter-over-quarter basis, we have pressure on operating margin, reflecting the softer gross margin and the effect of lower revenue. The Products business executed to our expectations for the quarter and remains on track for the year, including a healthy pipeline for revenue expansion in the second half and the leverage that will come with the growth. Next, please turn to Page 6 for a review of our Life Sciences Services segment results. The Services business with a continuous stream of demand in Genomic Services and an expanding recurring revenue stream in Sample Repository Solutions generated revenue of $90 million, an increase of 24% year-over-year. This was an increase of 7% on a sequential basis, accelerating above our expectation. The Genomic Services business grew 23% year-over-year with both NGS and Synthesis delivering year-over-year growth in excess of 20%. Sequentially, Genomics expanded 8% quarter-over-quarter driven by NGS up 13% driven by strong year-end demand. Sample Repository Solutions also delivered strong growth, up 26% year-over-year, led by storage, where customers entrust us to hold their research samples. Sequentially, SRS revenue for the first quarter was up 6%. The Services business delivered 51.2% gross margin, lower than a year earlier when we saw very high utilization during the initial global recovery, an improvement of 40 basis points sequentially driven by stronger margins in the Genomics business. Operating margin was 8.8%, up 360 basis points quarter-over-quarter due to higher gross margins and sharp leverage from 7% expansion of revenue. On a year-over-year basis, operating margin declined 80 basis points, reflecting the moderation in gross margin, significantly offset by the positive leverage from the revenue growth. As a portion of the improvement comes from a reduction in stock comp, not all of the benefits dropped through to the adjusted EBITDA. Let's turn to Slide 7 for the summary of cash flow for the quarter. Our operating cash flow is shown on a consolidated basis, including results from discontinued operations. We generated operating cash flow of $16 million in the quarter. We made necessary working capital investments for both continuing and discontinued operations. And as a reminder, we pay out our annual variable pay inside the December quarter, traditionally putting some pressure on the quarter's cash performance. Capital expenditures for the quarter totaled $18 million, including approximately $2 million for semi. $10 million of the spend was for the new building in China. We continue to expect to complete our move by the June timeframe. We did pay out $7 million of dividends in the quarter. This brings our total dividends paid to shareholders since its inception in 2011 to more than $0.25 billion. As we announced previously and now that we have closed the sale of the semiconductor business, we will discontinue the quarterly dividend. Going forward, we plan to use all excess cash for strategic investment and expect we will optimize returns in that way for our shareholders. Turn to Slide 8 to review the balance sheet. As a reminder, the semi assets were moved to the net assets held for sale line in Q4. We closed with $232 million of cash, restricted cash and marketable securities, along with approximately $50 million of debt, providing $182 million of net cash. The PP&E line of $147 million increased $17 million quarter-over-quarter, reflecting the $10 million on the China building project and the balance significantly driven by lab and sample storage equipment. As noted, the recent completion of the divestiture for $3 billion will contribute, when all is done, an estimated $2.4 billion net proceeds of cash. The cash is in hand today, and you will see it in next quarter's statement. We have applied $50 million to eliminate our debt, and we also have closed our revolving line of credit. Let's turn to Slide 9 for our guidance on the second fiscal quarter of 2022. Revenue from continuing operations is expected to be in the range of $137 million to $147 million with a midpoint of supporting growth of approximately 10% year-over-year. This softer year-over-year guidance reflects this challenging compare we have in the Products business with the COVID environment with an expectation to be lighter in revenue there by approximately 3% year-over-year. The Services business continues to show growth at approximately 18% at the midpoint. Adjusted EBITDA is anticipated to be $18 million to $24 million. And non-GAAP earnings per share is expected to be $0.07 to $0.15 per share. As I said earlier, we continue to expect the stand-alone business to return to around 22% adjusted EBITDA margin by the fourth quarter of fiscal 2022. As we have concluded the divestiture, I would like to take a moment to point you to resources readily available to you to understand and analyze our business. Our recent Investor Day, held on November 16, featured our business leaders and provided a deep dive into our capabilities. We continue to receive great feedback on the insights and transparency our leaders provided, and you can still view this on the Investors section of our Azenta website. You will also find there our 3-year target model describing our financial objectives for fiscal 2024, supported with the goals from each of our business leaders. For those of you newer to our story, this is a practice we have followed for many years. We hold ourselves responsible for these metrics and have a history of delivering on these metrics as well. In addition, in the appendix of this deck, we have included quarterly historical financial information back to the first quarter of 2020. I encourage investors and analysts to refer to these materials, which are all posted on our website for your reference as you build out your models. As I reflect on where we stand today, we are now fully on our life sciences stand-alone path. We have had a strong start to fiscal 2022, and we have $2.6 billion in cash available to deploy for strategic investment. The team is incredibly excited about the reception Azenta has seen in the marketplace and is going full speed to address the many opportunities to support our customers across the industry. So this concludes our prepared remarks. I will turn the call back over to the operator to take your questions.

Operator, Operator

Our first question is from David Saxon with Needham.

David Saxon, Analyst

Yes. Steve, Lindon, congrats on the quarter. One on SRS and one on margins. First on SRS, can you give us a sense of how much progress you've made with bringing the samples from those two large pharma contracts? It sounds like you're still working on bringing them in. So is it fair to assume some sort of modest sequential growth in SRS over the next few quarters? And then any additional color you can give on traction you're getting with other potential customers?

Stephen Schwartz, CEO

Sure. I'll take that. This is Steve. So thanks, David. A couple of things. You should expect increases in SRS, and it's exactly, as you said. We have a number of contracts that we always bring in. But in particular, the two large contracts that we've been working on, these are tens of thousands of samples on a weekly basis typically. We've almost exhausted one of the North American sites, and now we've ramped up in Europe. And the other one is behind that by six months. And this is an onboarding, if you will, of millions of samples. And I'd say we're probably halfway through. But things are on schedule and on plan. On one of the contracts, it involves a pretty significant on-site presence for us to help them to get organized before they ultimately send the samples to us. Everything is on track. But yes, you should anticipate that we'll continue to see revenue expansion from those two contracts through the duration of the fiscal year. And the pipeline, we think, is pretty significant. As we prove capability for a large contract capability, it brings more interest from customers who can now consider somebody who could handle millions of samples as opposed to somebody who could handle maybe thousands or a few hundred thousand samples. So we're bullish about the business. We'll be cautious as we guided, but North American progress is good. Europe has now picked up on both contracts.

David Saxon, Analyst

Okay. Got it. And then maybe one for Lindon on margins. It looks like operating margins for Products was down. I wasn't clear on what caused that. So can you talk about what drove that? Was that just mix with the cryo stores versus C&I? And then if I heard the prepared remarks correctly, it sounds like you're expecting Products to be down around 3%. Can you confirm that? And if that's the case, can you talk about how that kind of flows through the gross margin line?

Lindon Robertson, CFO

Yes, thank you, David. You are correct that gross margins decreased by about 200 basis points quarter-over-quarter in the Product segment this quarter. However, we anticipate an improvement in Q2. The comparison of Q1 to Q4 shows some fluctuations due to customer mix and project timing. In Q4, we experienced a more favorable customer mix, while Q1 was somewhat weaker. This can occur as projects conclude, leading to different timing of sign-offs, which I would categorize as temporary variations. I want to emphasize that we are still seeing year-over-year growth, having gained approximately 800 gross margin points over the last three years, sitting around a 46% range. We expect to see continued growth, particularly through cryo products, which are a key growth area moving forward. While there may be fluctuations in product delivery timing quarter-to-quarter, we are optimistic about our current position. Although the 200 basis points decrease in gross margins from quarter to quarter is challenging, we remain encouraged by the structural aspects of our business. When revenue declines quarter-to-quarter, particularly in a growth phase, it can present challenges, but we will continue investing as we believe in this growth business. The product segment has been a significant driver of growth, and we are optimistic about the pipeline in the second half of the year. Regarding the lighter revenue in Q2 compared to last year, we are looking at about $1 million in growth for both the Products and Services businesses. This places us in the range of $1.40 to $1.42 midpoint. However, with those numbers, we are down about 2 to 3 percentage points compared to last year due to higher COVID-related revenue in Q2 last year, which was our peak quarter for consumables and instruments related to COVID. We recorded approximately $17 million in total company revenue, with around $14 million from the C&I business. This presents a tough comparison that we have discussed previously. As we move into the second half, we see potential in the large store systems and cell and gene therapy sectors for B3 cryo products. The C&I business may continue to experience challenging comparisons. We have noticed that COVID demand leveled off in the second half of '21, roughly from $9 million to $11 million. In Q1, our total COVID revenue for the company was about $10 million, with around $9 million coming from the C&I product space. This puts us at a similar level in the Products business, causing a slowdown due to the absence of year-over-year growth from that $9 million to $10 million. However, if we maintain stability for the remainder of the year, other areas of the business show promising growth for the second half.

Operator, Operator

Next question is from Jacob Johnson with Stephens.

Jacob Johnson, Analyst

Congrats on becoming the pure-play life and tools company. Maybe first on the Product side and freezer specifically, I think you posted another record quarter here. I believe Lindon just called it a growth engine. Certainly, when we think about freezers, those are the large stores, but a lot of focus on the B3 cryo for cell and gene therapy. But I think you launched a new cryo freezer recently. Maybe just talk broadly about the potential for continued innovation, especially, I guess, as it relates to cryogenic freezers as we look out the next couple of years?

Stephen Schwartz, CEO

We have a significant initiative focused on various types of cryogenic automated stores, which we believe are essential for all cell and gene therapy applications. The ramp-up is substantial, and we recently launched a manageable model that fits comfortably in many lab configurations. It can easily be wheeled through a door, and it stands upright like an appliance but operates as a fully automated cryogenic system. We see strong demand for this tool, and the response has been positive; we showcased it at the SLAS conference in Boston this week. Our portfolio includes a range of sizes, and demand is continuing to increase. We expect to double our volume year-over-year, and we already have customers with multiple units. We believe that the technology will be increasingly accepted because it is crucial for maintaining the fidelity of cells and samples, and we see automation becoming the preferred approach for customers. Regarding large automated stores, we observe a clear trend toward automation due to the complexity and volume of samples as well as the need for sample fidelity moving forward. We're noticing strong momentum in our pipeline for the second half of calendar '22, which is the strongest we've seen for large stores. While these projects take time to finalize, we are more engaged with customers than ever, and we offer a comprehensive portfolio across various temperature ranges and sizes. We are confident about the prospects for the latter half of the year across our entire line of automated stores.

Jacob Johnson, Analyst

Got it. And then maybe as a follow-up, just Lindon, just again on margins. If my calculator is right, I think you're kind of looking towards like 13% to 16% EBITDA margins in 2Q. You're still planning to exit the year at 22%. I know there's some moving pieces there, but maybe could you just help us bridge from kind of the 2Q margin to exiting the year at 22%?

Lindon Robertson, CFO

In Q2, our guidance is around 15% EBITDA margins, factoring in an additional 0.5 point for some ongoing issues, bringing it to about 15.5%. We still need to achieve roughly 6.5 more points to reach 22%. We're optimistic about our top line growth, which is crucial for us, and we believe this year will align with our long-term model overall. While I'm not detailing specific products and services right now, our general managers are anticipating growth as we advance into the second half of the year. Regarding our gross margins, we recently reported 49.3%, and we expect this to remain relatively stable in the second quarter. We anticipate a slight increase in our Products segment, while our Services business will face some duplicate building costs during our transition in China, and as we move to a new location in Waltham. We've also considered some increases in labor costs as we've made targeted investments in retention and hiring. Despite this, we expect stable gross margins for Q2 as we continue to support our investments. Although our expenses seem stable, there will be a reduction in overlapping G&A costs, and we will see a temporary increase in stock compensation due to the annual Board grant, which is a noncash expense. This should lower in the second half. When we look at the revenue through to the fourth quarter at a growth rate consistent with our long-term expectations and higher growth in the latter half, we believe this will enhance our gross margins. By the end of the year, we anticipate gross margins to be around 50% or better, and effective management of operating expenses will help bridge the gap. We're confident in our execution thus far; the first half was anticipated to be slower, but we are on track with our expectations at this point.

Operator, Operator

And our next question is from Paul Knight with KeyBanc.

Paul Knight, Analyst

Steve, obviously, you've got a balance sheet that's ready to go, but talk about the pipeline. A common question that we're getting is in this kind of equity sell-off. Are you seeing different pricing on the M&A side? Or do you expect a lag and what would that lag be? So I guess kind of your essay on M&A right now?

Stephen Schwartz, CEO

Sure. Paul, I'll start by saying that our pipeline is quite robust. The discussions we're having now are similar to those we had before securing the cash. Everyone is aware of the multiples in the public markets. We have completed 14 transactions over the past nine years, including with private companies, demonstrating various ways to create value and leverage what we can offer. I anticipate that as we approach pricing, expectations are elevated. However, we are focused on the long term, as are the companies we are engaging with. There are numerous ways to structure deals, and we will consistently add value while adhering to our return on invested capital focus. If the details align, we are confident they will work out well. We are truly excited about the good opportunities and companies that align with Azenta's goals. Moreover, our strengthened balance sheet gives us even more options. We are busy, optimistic, and we like our prospects. Ultimately, the pricing will depend on whether shareholders view it as positively as we do, and we will remain committed to that.

Paul Knight, Analyst

Yes. Regarding the capacity expansions focused on GENEWIZ, what is the capacity addition for GENEWIZ by June 30? Will it be 20% or 25%? What is it?

Stephen Schwartz, CEO

Yes, we've maintained over 20 percent growth in Genomics for several years, and we plan to continue this trend. Doubling our capacity in China will be beneficial and offer us room to expand further. We believe we can meet any demand growth between 20% and 30%, but beyond that, we'll need to put in extra effort. Our goal is always to sustain that level of growth, and we've never faced constraints that hinder our progress. We're capable of adapting quickly, both in genomics and biorepository operations, and we can manage production to meet demand. If we reach 30% growth, we are confident we'll keep up, even if it requires hard work. We are prepared and believe we have the necessary skills to continue our growth trajectory without limitations.

Paul Knight, Analyst

And then last, Lindon, on COVID. What are you expecting for full year, down mid-single digits, double digits? What's your thought on full fiscal year?

Lindon Robertson, CFO

Yes, we had approximately $10 million in revenue during the first quarter. We've accounted for some stability in the C&I area. While we anticipate fluctuations between $8 million and $11 million, our outlook remains within that range. I must admit, as I have consistently stated over the past year, we have limited visibility into customer transactional orders in this sector. Nevertheless, there is no indication that testing is declining; demand for tubes is high globally, and customers still urgently require test kits. Most of our delivery focuses on tubes, with some involvement in research, and we see stability there. Additionally, we have some vaccine management contracts that will be implemented later, though that is more of a secondary area for us. The primary driver for the remainder of the year will be the C&I segment. All right. Well, thank you. It's with a lot of excitement and a lot of pride that Steve and I and the leadership team at Azenta have wrapped up our first fiscal quarter under the new name and under the legal structure under the banner of being able to say we have closed the transformation at this point of a milestone of becoming a stand-alone life science company, one that's producing a high-growth, high capability of value-add to our customer front with the unique portfolio that on each element of the portfolio not only have we demonstrated continuous growth, we have every expectation that every slice of it continues to grow. We just don't have a bad spot in the portfolio. And as a CFO, I think you can see that, that's an envious place to be in. And I just love being able to talk about that. We're completely proud of what we've been able to accomplish, but we're completely unsatisfied with where we are today. And we look forward to delivering more the rest of this year and over the next three years as we've outlined recently. Thank you for your attention, and we really look forward to talking to you again this time next quarter.

Operator, Operator

And that does conclude our call for today. We thank everyone for participating, and you can now disconnect.