Earnings Call Transcript - AZTA Q2 2022

Operator, Operator

Greetings, and welcome to the Azenta Q2 2022 Financial Results. During the presentation, all participants will be in listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded, Monday, May 9th, 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 second quarter of fiscal year 2022. Our second 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. Please note that due to the divestiture announced in the fiscal fourth quarter of 2021, the results of the semiconductor automation business are treated as discontinued operations. On February 1st, we completed the sale of this business, and therefore, our second quarter results include one month of performance 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 if 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 the highlights of the second quarter. Then Lindon will provide a more detailed look into our financial results and our outlook for the third 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.

Steve Schwartz, President and CEO

Thank you, Sara. Good afternoon, everyone, and thank you for joining us today. Our second quarter results show continued strength in execution in the business. I couldn't be more enthusiastic about our performance and ability to deliver as a company. As an organization, we're focused on driving growth in the business, both through our differentiated offerings and superior operational capabilities. As many of you are aware, on February 1st, we announced the completion of the sale of the semiconductor automation business, and we're now a pure-play life sciences company with more than $2.5 billion in cash available for strategic investment. We are moving forward at full speed, investing for expansion to meet our strong growth, and we're actively evaluating multiple M&A opportunities that will strengthen our portfolio of capabilities to enable breakthroughs and therapies to market faster. I'll now turn to our results for Q2. Revenue for the quarter was $146 million, up 12% year-over-year and up 20% when normalized for the estimated COVID-19 impact in both periods. We consider this to be a strong result in a sometimes challenging operating environment as COVID impacts in Q2 were different compared to the past several quarters. Specifically, we had an impact from two fronts. As we mentioned on our February earnings call, the Omicron surge that was still raging in January caused some disruption in the Sanger business as demand from academic labs in the US and Europe was below normal due to scattered facility closures. This was largely behind us by early February, but it was noticeable in our revenue numbers compared to a normal run rate. The sporadic and sudden closures of various parts of China in February and March caused occasional interruptions in demand from our Chinese customers, much like Omicron did in the US and Europe. Nonetheless, overall demand was strong enough to allow us to make up for the few million dollar shortfall caused by COVID interruption. We powered through Q2 despite COVID surprises, but the spillover effects have already impacted the start of Q3. In late April, we experienced a government closure of our genomics facility in Suzhou that lasted for approximately two weeks. At this time, we're functioning at full power, and we believe that we'll be able to largely make up for these lost days. That said, the situation in China that's impacting many companies with operations there remains tenuous. If there are no additional shutdowns, we expect only a small impact on the results for our third quarter. All in all, we're pleased with the results we delivered in Q2, even though they came a bit harder than we'd anticipated. Now back to the results from the quarter. Our services business reported revenue of $92 million, up 19% year-over-year, driven by double-digit growth in both genomics and Sample Repository Services. Genomics revenue was up a healthy 18%, and though already a strong result, excluding COVID, genomics grew 23%, powered by next-generation sequencing, which expanded nearly 30% year-over-year. These results are a testament to our portfolio and the value that we're bringing to customers. In the quarter, we saw continued commercial execution to land more large contracts, mostly with large pharma and biotech customers. This is particularly noteworthy because our genomics business has historically been comprised of many small and mid-sized projects. Now not only do we have the tailwind of healthy end markets at our back, we're also gaining traction with larger deals that can move the needle for us. As we noted, we saw some softness in the Sanger business in January due to the rise of Omicron in the US and Europe. Sanger nonetheless delivered a solid quarter, growing high single digits year-over-year. Consistent with our legacy in genomics, we continue to innovate and adopt new technologies to add to our service offerings. In the first half of the fiscal year, we introduced seven new services, including our new proteomics and gene-to-antibody offerings. Cell and gene therapy research remains a healthy tailwind to growth. Our genomics revenue from cell and gene therapy once again grew more than 30% year-over-year, and our AAV offerings more than doubled compared to Q2 2021. We continue to expand our capabilities here, and while we're still in the early days of the opportunity, we are solidifying our position in the market as the go-to provider. Even as we're managing through a complicated COVID situation in China, we're still gaining momentum as we've added hundreds of new accounts in the quarter. The sample and repository solutions business grew 21% year-over-year, driven by the increased number of samples and storage. The transformation of our customer relationships, as we shift from handling their sample storage transactions to becoming their sample management partner, is particularly exciting for us. It's driving a transformation to the next phase of how we'll operate this business. Historically, we've used manual freezers due to the archival nature of legacy sample storage. But now as we participate in more and more active clinical trials in addition to the archival storage business, quarterly sample volumes routinely measure in the millions of individual sample transactions. The next phase of growth for our Sample Repository Solutions business greatly depends on significantly more automation in workflows and sample storage, to manage the high-value sample assets that customers entrust to us efficiently and cost-effectively. Toward that end, we're making significant investments in storage capacity and efficiency of our bio-repositories. In Q2, we installed a next-generation automated store that will handle millions of samples in our Indianapolis bio-repository. Over the next 12 months, we plan to add additional stores of this configuration in both Indianapolis and Germany, as we transform this service offering to the next level of technological performance. At both of these major sites, we already perform laboratory services related to sample preparation, including aliquoting, blood fractionation, PBMC isolation, and nucleic acid extraction. The additional boost from automation will significantly enhance our value proposition for clinical trial sample management. In SRS, we're growing rapidly, and we have great ambition about what this business can become. We're using our automation skills and balance sheet to enhance our offerings for a market that's demanding more from a bio-repository in terms of capacity, capability, technology, and efficiency. We're excited about how our sample management solutions are taking hold, and we look forward to the next level of capability that we're bringing to customers at exactly the time when it's needed most. The products business delivered revenue of $54 million for the quarter, representing a 2% growth year-over-year on a difficult COVID comparison. Excluding COVID impact, this business grew 12%. The solid performance was driven by continued demand for our automated cryogenic store systems, which have strong applications in cell and gene therapy, as well as good execution in our consumables and instruments business. Our cryogenic sample systems business continues to build momentum and expands footprints with new customer wins, and we're increasing our manufacturing capacity to stay ahead of demand. We anticipate more strong growth in this segment in the second half of the year. Our large automated stores business is also seeing significant traction. As of the end of April, large store bookings were already 40% higher than they were in all of fiscal 2021. We saw particularly strong bookings in April, and these systems are scheduled to begin conversion to revenue in the Q4 timeframe and extend into fiscal 2023. In the consumables and instruments product line, non-COVID-related C&I bookings reached a record level in the quarter, with increased bookings across most C&I product lines to a level that's nearly twice what it was pre-COVID. This is important because we postulated that the accelerated transition to workflow automation, largely driven by high-volume COVID testing demands, would provide additional post-COVID support for our consumables and instruments business, as our products are geared almost exclusively to highly automated workflows. The fact that we're indeed sustaining much of the share that we've gained during COVID supports what we believe to be the case when we doubled down on our ability to supply in the earliest days of the pandemic. Finally, moving to capital allocation, I've already mentioned some of the organic expansion that we've undertaken, and we're actively exploring many potential complementary solutions to add to our existing portfolio. With the strength of our balance sheet, we're in a good position, and we are confident we have good visibility of the market landscape. As we move into the second half of fiscal 2022, we're well positioned to execute on our growth plans. The commercial team is firing on all cylinders and our businesses are executing solidly. We believe we have a differentiated, high-value portfolio of offerings that will only continue to gain traction with new and existing customers. Our value proposition is strong, and we continue to drive awareness of the Azenta brand. We believe we're still in the very early days of growth with a long runway ahead. As always, we thank you for your interest and support as we work to deliver value to our customers and shareholders. And I'll now turn the call back over to Lindon.

Lindon Robertson, Executive Vice President and CFO

Thank you, Steve. Before I proceed, I'd like to thank everyone for their patience and understanding on rescheduling our earnings call. The change in date was solely due to the complexity of the carve-out of the sale and the team needing more time to finalize the numbers. To that end, we intend to file a Form 12b-25 to extend the 10-Q filing deadline by five days. Today, we are sharing preliminary financial results, and we encourage you to review the Form 10-Q upon filing for our final results. The complete statement of cash flow will be available with our 10-Q. I now refer you back to the slide deck available on our website. Turning to slide 3. Q2 was another strong quarter, delivering revenue of $146 million, up 12% year-over-year and up 20% when you exclude the estimated impact of COVID in both periods. I would like to clarify that all references to COVID-based impacts are estimated based on our insights into customer applications and product types indicating such demand or constraints on regional demand or ability to deliver. Growth was driven by strength in the services segment, up 19% year-over-year. Again, if you exclude the estimated impact of COVID, the base business grew an impressive 25%. Products delivered 2% growth year-over-year and expanded 7% sequentially. The year-to-year comparison is a bit compressed due to the peak of COVID demands in Q2 2021. Excluding this estimated impact of COVID, this business was up 12% year-over-year. The strong sequential momentum of 7% was significantly driven by the non-COVID consumables and instruments and large store systems. Non-GAAP earnings per share for the quarter from continuing operations was $0.12, flat sequentially, supported by revenue growth but with a bit more expense this quarter as we invested in the business and had higher stock compensation expenses with our recent changes in executive leadership and our annual Board grant. Adjusted EBITDA margin was 13.3%, net of 30 basis points or $400,000 of headwind from overlapping G&A structure, which is no longer with us. We will talk more about this position as we go through the P&L. With the completion of the sale on February 1, you will see one month of semiconductor results and the net gain on the sale of the semiconductor business and discontinued operations and approximately $3 billion of the transaction proceeds on the balance sheet. Taxes on the gain are now expected to be approximately $450 million, of which the majority is expected to be paid in June. Moving to slide 4. You can see revenue was up 4% sequentially and up 12% year-over-year. Reviewing the GAAP basis on the left side of the page, the key point to highlight is that the total earnings per share is driven by discontinued operations, which includes the gain on the sale of the semiconductor business. Now let's look into the non-GAAP P&L on the right side of the page for additional color on the performance. We indeed delivered a strong quarter with $146 million of revenue and 12% growth year-over-year. Breaking that down, organic growth was 12% also with an additional 1-point contribution from M&A and an offsetting 1-point headwind from FX. COVID-related revenue remained at approximately $10 million in the quarter, driven by continued demand in the consumables business. Note that, while this amount is stable quarter-over-quarter, we saw a $7 million decline in COVID-related revenue versus one year ago in Q2 2021, which was our peak quarter for COVID-related revenue. Gross margin was 49.6%, up 30 basis points quarter-over-quarter. This was due to higher margins in the products business, partially offset by lower service gross margins. If you look at the operating income, the margin is down 210 basis points quarter-over-quarter. With revenue up 4% and gross margins up modestly, the pressure on the operating margin is from operating expenses, which are up approximately $6 million. This is net of a reduction in overlapping G&A by approximately $2.5 million. Within the expense lines, we experienced higher stock compensation quarter-to-quarter of $2 million, and the remaining increase was primarily due to business investment in the areas of direct sales, R&D, and G&A to support growth. Adjusted EBITDA margin in the quarter was 13.3%, down 90 basis points quarter-over-quarter and down 500 basis points year-over-year. The year-over-year drop in EBITDA reflects those incremental investments we made during the year. I recognize this raises the question regarding our Q4 targeted milestone for EBITDA, which I will address with the guidance commentary. The current status reflects revenue on the expected trajectory and expense investments ahead of projections. Turn to Slide 5 for a review of our Life Sciences products segment results. The products business generated $54 million of revenue, up 7% from the first quarter and up 2% year-over-year. The product revenue was a bit stronger than expected, driven by consumables and instruments. The C&I had additional non-COVID demand, and COVID demand remained steady at an estimated $10 million. Our automated stores business, with the completion of multiple projects and initiation of new projects, delivered strong results and is projected to show good growth in the second half. The Life Science products Q2 gross margin was 49.5%, a 310 basis point improvement year-over-year and a 360 basis point improvement sequentially reflecting favorable product mix in our consumables and instruments business as well as stronger margins in large automated stores. We continue to be pleased with the gross margin progress in the products business. Second quarter operating margin of 9.9% increased 110 basis points quarter-over-quarter as the top line performance flowed through to the bottom line. On a year-over-year basis, operating margin was down 400 basis points, primarily due to the previously mentioned investments, including R&D and sales aimed at driving future growth. Adjusted EBITDA margin for this segment was 15.5%, up 230 basis points quarter-over-quarter. Next, please turn to Page 6 for a review of our Life Sciences services segment results. The services business delivered revenue of $92 million, up 19% year-over-year. Sequentially, the business grew 2%. The genomic services business generated revenue of $65 million, up 18% year-over-year, with next-generation sequencing delivering over 25% growth on a reported basis. I want to provide a little more commentary on our COVID-related headwind in the genomics business in Q2. While China represents less than 10% of total Azenta revenue, our genomics business has a large portion of this exposure, and as Steve mentioned in his remarks, a large effort by the team on the ground enabled solid results despite the difficult operating environment. In total, the genomics business faced a $3 million headwind from COVID in the quarter, with nearly half of that coming in the gene synthesis business. Our primary synthesis operations are in China, and the lockdowns this quarter impacted customer demand and added complexities to our logistics. Sample Repository Solutions reported revenue of $27 million, another robust quarter of over 20% growth year-over-year, and up 4% sequentially driven by growth in our core storage offering. We continue to expect to step up in Q3 and then again in Q4 driven by increased samples in storage. Like many of you on the line, we have been following the tragic events in Ukraine, and we have received questions on our exposure there as well as in Russia. We do not have direct customer exposure in those regions and have only modest exposure from a sample sourcing standpoint. Our sample procurement services has sourcing channels in multiple countries, and we are cultivating alternative sources. The services business delivered a 49.6% gross margin, down 150 basis points from the first quarter and down 360 basis points year-over-year. The decline in gross margin was driven by increased labor costs and customer mix. Operating margin was 5.3%, down 350 basis points quarter-over-quarter and down 200 basis points year-over-year due to the lower gross margins and additional investment in the labor force. Adjusted EBITDA margin for the services segment was 13.7%, down 220 basis points quarter-over-quarter. In regards to the current inflationary environment, we continue to see the competitive labor market as a factor. On the supply chain side, we are managing our raw materials and inventory very closely. Where there have been increases in raw material costs, we believe we can generally offset these through disciplined pricing. Most importantly, the growth of our business will provide significant leverage to the bottom line. Let's turn to Slide 7 to review the balance sheet. As of March 31, we had approximately $3 billion of cash, restricted cash, and marketable securities with no debt outstanding. In conjunction with the close of the sale of the semiconductor automation business on February 1, we repaid the remaining $50 million of outstanding debt on our term loan and canceled our revolving credit facility. On the tax front, we expect to pay approximately $450 million in taxes related to the sale, the majority of which will be paid in the June quarter. Let's turn to Slide 8 for our guidance on the third fiscal quarter of 2022. Revenue from continuing operations is expected to be in the range of $140 million to $150 million, with a midpoint supporting growth of approximately 12% year-over-year, driven by continued growth in genomics, as well as strength in our automated stores and Sample Repository Solutions business. We expect product revenue to be in the range of $48 million to $54 million, supporting a growth rate of approximately 5% at the midpoint year-over-year, with services being in the range of $91 million to $97 million, supporting a growth rate of approximately 17% year-over-year, again at the midpoint. Guidance reflects a lower level of COVID revenue in the third quarter. In the C&I business, we have seen a recent slowdown in COVID-based orders to continue at approximately $5 million, which is a quarter-to-quarter reduction of $5 million. In services, we expect the China COVID environment is dampening demand and constraining some deliveries for approximately a $3 million negative impact for Q3, which is largely mitigated with vaccine management and SRS. Overall, we are projecting approximately $5 million of COVID-based revenue in the quarter, compared to an estimated $10 million in Q2 and $12 million in Q3 of 2021. Adjusted EBITDA is anticipated to be $17 million to $24 million, and non-GAAP earnings per share is expected to be $0.09 to $0.17 per share. Now I'd like to take some time to discuss our outlook for adjusted EBITDA in more detail. For those of you newer to the story, at the time we announced the separation last May, I provided a road map to help investors understand the evolution of our margin profile. At that time, I explained that our adjusted EBITDA margin would initially fall, and as we grew into our ongoing expense base and shed temporary overlapping expenses, we expected to see our adjusted EBITDA margin return to its reported Q2 2021 rate by Q4 2022. This was meant to be a roadmap for investors and a milestone as we expect adjusted EBITDA margins to climb to 25% to 27% in our fiscal 2024 target model that we presented at our November 2021 Investor Day. Today, we still expect our Q4 2022 adjusted EBITDA margin to reflect meaningful operating leverage in the business. However, our Q4 expectations are now in the 18% to 20% range and will continue to climb from there, as we progress along our three-year plan to fiscal 2024. As I shared previously, the key to our leverage track is top-line growth and a stable level of operating expense. The good news is that the top line is on track for the expected growth, excluding COVID impacts, but this update does reflect a higher operating expense with investments for growth. The range leaves us room for variability in revenue and gross margin. This updated range of 18% to 20% does not change our trajectory to the 26% milestone by 2024. We remain confident in our ability to execute the goals set forth in our three-year target model. We’re now three months into our journey as a stand-alone life science company, and we've made great progress. Still, there's much more to be done and a long runway ahead. Our core revenue trajectory is solid, and we are building an organizational structure to support long-term profitable growth. Furthermore, we intend to leverage our strong balance sheet position to build on our organic potential. In all, there is much to be excited about, and I look forward to continuing to report on our progress. This concludes our prepared remarks. I'll turn the call back now over to the operator to take your questions.

Vijay Kumar, Analyst

Thank you for taking my question and congratulations on the results. Regarding the fiscal 3Q guidance, I noticed that at the midpoint, revenues are projected to be $145 million, which indicates a 12% year-on-year growth. It seems there are several factors at play. Could you explain what the underlying growth looks like, especially considering the impact from China and the reduced COVID revenues? Also, are there any other supply chain issues that might affect the fiscal 3Q revenue guidance? Thank you.

Steve Schwartz, President and CEO

Thank you for your question. Regarding COVID, our projection for Q3 indicates that revenue will be about half of what we recorded in Q2. In Q2, we generated approximately $10 million in revenue, mainly driven by commercial and industrial sales. However, as you noted, we faced a negative impact of around $3 million from genomics, which was largely counterbalanced by our sample repository solutions. In Q3, we anticipate our revenue contribution will decrease to about $5 million overall, primarily due to a decline in orders for C&I consumables. The situation in China remains uncertain, and while we experienced some demand challenges in various lockdown-affected markets, particularly in Shanghai, our facilities were temporarily closed but have since reopened. We estimate a total impact of about $3 million, accounting for both current challenges and anticipated effects from suppressed demand due to lockdowns. Fortunately, this is expected to be significantly mitigated by our SRS contracts related to vaccine management, which we attribute about $5 million to thus far. Overall, services have balanced out between genomics and SRS, while C&I consumables have decreased to about $5 million. Comparing this to last year, we had around $12 million in total revenue, which included about $9 million from products and $3 million from strong genomics performance without any COVID disruptions, alongside an increase in SRS contracts.

Vijay Kumar, Analyst

Sorry, Lindon. To summarize, the reported guidance is around 12% growth at the midpoint. However, considering the year-on-year headwind from COVID in China, that results in a low single-digit impact. Additionally, the impact from foreign exchange has worsened, so the underlying year-on-year growth is over 20%, which aligns with your long-term outlook.

Lindon Robertson, Executive Vice President and CFO

Yes, that's correct. To clarify the year-over-year comparison, we're anticipating a midpoint that is just over 20% year-over-year.

Steve Schwartz, President and CEO

Sure. So a couple of things, Vijay. We're looking at near adjacencies to the capability. Anything that would be a good add, that we'd be a better owner of, something that fits the offering that we have. As we look at very specific bio-repository collections, those would be good as others would not necessarily be because they don't fit with the specific offering that we have in and around the genomic space, near adjacencies. You've heard us talk about gene to antibody, gene to protein, different kinds of activities that we've done as joint ventures to start, I think, are really meaningful additions in the genomics opportunity on the scientific side. From a product perspective, there are a number of opportunities where we can continue to add value for cold chain capabilities in managing samples, preparing samples, and handling samples. We believe that automation will continue to be crucial as we evolve our cell and gene therapy capabilities. The position that we have in the marketplace, plus the balance sheet, gives us a look at almost everything that is an opportunity, and it’s helpful for us as we approach different companies we've learned about and met. The conversations should have been happening over the past few years. The conversations that ought to be happening today as a continuation are ongoing, so we're undaunted by the environment because all valuations aren’t necessarily said in the public market.

Vijay Kumar, Analyst

That's helpful perspective, Steve. And if you don't mind, one quick if I could squeeze in, how big is cell and gene therapy for Azenta right now?

Steve Schwartz, President and CEO

So Vijay, we haven't put a specific number out there, but we were hovering below $10 million. We're around the $10 million mark now on a quarterly basis. We did talk about 30% year-over-year growth again in the current quarter. It’s a fast grower, so you can imagine that's about where we are. It's the fastest consistently-growing segment of the opportunity that we have, and we remain really positive about our contributions there and what the market itself will do, as the market growth plus our ability to capture in almost element of the space.

Operator, Operator

Our next question is from Paul Knight with KeyBanc. Your line is open.

Paul Knight, Analyst

HI Lindon, you're saying that right now, in Suzhou, no closures of the facility, correct?

Steve Schwartz, President and CEO

Not currently. As we highlighted, we had a short closure due to one case, but it's been reopened.

Paul Knight, Analyst

And then, the filing of the Q, what date would that be now?

Steve Schwartz, President and CEO

The official due date would have been tomorrow, and it gives us a five-day extension. You should see us sometime between now and Monday.

Paul Knight, Analyst

Okay. Got it. And the cash is already on balance sheet, correct?

Steve Schwartz, President and CEO

Yeah. That's absolutely right.

Paul Knight, Analyst

And then, what are your thoughts on COVID long-term would go completely away?

Lindon Robertson, Executive Vice President and CFO

Let me answer it in two regards. One, in our model, we've not relied upon COVID revenue contributing in 2024. We do think that our capabilities to contribute in that problem statement in that environment with our customers has produced additional opportunities and deeper relationships for sure and demonstrated a lot of capabilities. In terms of whether COVID stays with us in terms of testing for the long term, we're just not in a mode of speculating right now. The line of sight for us even in the near term is short. But I guess I would anticipate it becomes more of an off-the-shelf commodity in terms of testing and plastics around that space, and that we would, in another year, probably stop calling this out. We'll call it now as long as we can see it. Contributions here, I think this turns towards the value we're offering. For example, in vaccine management, we're getting additional opportunities around manufactured products and other prospects, which are blossoming from our capabilities to respond so quickly and reliably in this environment. So there are opportunities for us, but we wouldn't refer to them as COVID.

Steve Schwartz, President and CEO

Paul, this is Steve. I'll pile on a little bit. Just to be clear, like all companies in and around the space, we dealt with the COVID environment really well. I think we knew the kinds of investments to make. But here now two years later, we see the kinds of things that are happening in China; it tested the business continuity plans and processes that we had in place, and the team really delivered well. So although China is uncertain, the capabilities that the team demonstrated as part of the business continuity planning allowed them to use different sites in China to move the distribution of materials and customer products around. The sales force jumped in really well. So again, it's an uncertain environment, but we're really confident about our ability to deal with it however it comes to us. It has come to us in various ways, and so that part gives us a lot of confidence.

Paul Knight, Analyst

Okay. And then regarding your guide for 24-plus percent EBITDA margin on 2023, is that really linked to pricing pass-throughs on your increased cost?

Steve Schwartz, President and CEO

Yeah. So Paul, your premise isn't quite close in my mind. Let me summarize what we presented. We described that by the time we get to Q4, instead of the 22%, we're providing 18% to 20% EBITDA. However, it is on a trajectory, and that's only a milestone along the way to 2024, which we said we still feel strongly we're on a trajectory toward approximately a 26% EBITDA by 2024. Perhaps you're interpolating that we'll be on our path from the 18 to 20 on its way to 26, and you're pointing to a midpoint. Is that your question?

Paul Knight, Analyst

Yeah. My question is your FY 2024 guidance – I'm sorry, 2023. What's your EBITDA goal on 2023, Lindon?

Lindon Robertson, Executive Vice President and CFO

Yeah. We haven't put out an objective or target there. We only do the long-term model. And as we said, it's a really good question to air one more time. So we'll put up the long-term model, track ourselves against that, and we clearly give an indication of whether we think we're tracking ahead or behind that. Right now, as I shared in my commentary, we think we're tracking right to the top line of what we would expect to be on that trajectory. On the operating expense, we've invested a little bit faster this year as we've gotten off the ground as a stand-alone company and significantly, I think you would see that in our commercial investments as well as some of our G&A. But with that said, we think we leverage that and grow into that. By the time you see us at the end of 2023 going into 2024, we see it on the trajectory towards that 26% EBITDA.

Operator, Operator

Our next question comes from Jacob Johnson with Stephens. Please proceed.

Jacob Johnson, Analyst

Hey, good afternoon, everybody. And apologies if you've already covered this, but it looks like guidance assumes kind of a step down in COVID revenues in 3Q. Are you assuming any offset for selling to those customers kind of for non-COVID products, or is that something that could be, I guess, upside to your guidance if that plays out?

Steve Schwartz, President and CEO

So Jacob, in the guidance, we do have a drop-off on a sequential basis and a pretty significant drop-off on a year-over-year comparison. To summarize on the year-over-year in our guidance for Q3, we have about $5 million projected for Q3. Last year, we had about $12 million. What we described is that if you remove it in both periods, our guidance supports a little north of 20% growth. I think when we look at that, I highlighted that the 20% growth is supported both on services and products in the non-COVID offerings. We conveyed before, and we enforce as we move through the second half, we're seeing good performance in our automation systems and also in the services around SRS and consistent high growth in genomics. Those three pieces, you've continuously seen genomics perform. And then SRS and large systems or automated systems continue to gain momentum. And Jacob, this is Steve. I think regarding your last point, the non-COVID portion of the consumables and instruments is still higher than it was before COVID. We believe the share gains we've achieved are being maintained. We have a few data points that support our confidence in this. While it's difficult to quantify precisely, we mentioned that non-COVID C&I bookings have doubled compared to prior to COVID.

Jacob Johnson, Analyst

Okay. Perfect. Steve. And then maybe following up on Vijay's cell and gene therapy question. I think there's a lot of interest in the cold chain of custody and distributing the cell and gene therapies. As I think about your portfolio today, I would think certainly the B3 cryo plays in that process. But I'm curious if there's an opportunity on the SRS side there? And also if there's maybe more you can do there one day, I don't know, organically, maybe inorganically, just kind of thoughts around that, the distribution of the cell and gene therapies?

Lindon Robertson, Executive Vice President and CFO

Yeah. So Jacob, we absolutely think that there's a tremendous opportunity. The B3C is part of the development line now in part of the manufacturing line for several companies. The repeat orders we are receiving there really firmly establish us in that workflow. There's another product that we have that's not as visible, but particularly as it assists the cold chain; we have a cryopod that deals with these cryogenically frozen samples for the movement inside the workplace. So it's a critical transport device. We had a record number of shipments of those products in the last quarter. That's a really strong element. We do believe that as we continue to build out in support of cell and gene therapy, it will be strong. The SRS business is all over it. So the SRS business continues to see more opportunities, and we have a lot of customers we didn't have before, supporting cell and gene therapy and cold chain.

Joseph Conway, Analyst

Hi, guys. This is Joseph on for David. I was wondering if you could give a little color on the backlog for freezers, both the stores and the cryogenic freezers. You had mentioned a handful of large orders in the quarter. I was wondering if you could maybe size those in terms of potential revenue or sample volume size of the units being built?

Steve Schwartz, President and CEO

Yeah. Joseph, I appreciate that question, but we stopped talking about the backlog. We do this because there's so many different characterizations of backlog on our res business, one on SRS and one on store systems. So I understand you narrowed it down to stores, but we're just not disclosing the backlog. I would like to add some color for you. We've seen significant uptakes in large store systems as we entered the year, and we saw customers at an enterprise level that we've been supporting engaging on large systems. We're also seeing larger quantities on the cryo systems with robust repeat orders from customers that have taken those in the past. We have a pretty strong pipeline that's not fully materialized into orders in our backlog. We anticipate bookings in this quarter feeding into the fourth quarter. We're talking about the ramp in the second half being about what we need to work on currently. What we know the sales team is indicating is an increasing need across our customer base. So we're very enthusiastic about this path.

Joseph Conway, Analyst

Okay, great. That's very helpful. Thanks for that.additional comment. And then maybe just building off that a little bit with the customers, could you guys maybe talk about, especially in this quarter, but here recently in the last couple of quarters, where a lot of these new customers have been coming from, especially as we see the COVID-driven revenue declining? Is there a certain business unit that most of these customers are gravitating towards, whether it be SRS or GENEWIZ genomic services?

Steve Schwartz, President and CEO

Yes, it’s challenging to specify exactly where new customers are coming from. We are nearing 10,000 customers, and our significant growth reflects our success across all product lines. With growth rates in the double digits up to 20%, every business unit is acquiring customers in various areas. We take pride in maintaining our existing customers and driving additional growth with them. Most of the new customers tend to be smaller companies, and we expand alongside them. We have a strong presence in both large pharmaceutical and biopharmaceutical companies, as well as in smaller projects for academic institutions, and each segment continues to grow. We monitor our ability to generate additional revenue from our current customers and are achieving the success we expect in this setting. As Lindon highlighted in his remarks, we are enhancing our commercial activities across our account base and emphasizing the capabilities that Azenta offers as a whole, rather than focusing solely on individual products or services.

Yuan Zhi, Analyst

Thank you for taking our questions and congratulations, Steve and Lindon, for another great quarter. So, maybe two questions from us. First, can you provide some additional color on the impact of COVID on your China operation? I'm just curious if there was pent-up demand for genomic service relative to COVID? And then the second question is that in the last two quarters, the quarter-over-quarter growth of the cell and gene product sales was kind of single digits. A lot of recently mentioned lower demand for their product. I'm just curious what kind of signals have you picked up from your customers regarding their demand in sample repository and related genomic services? Thank you.

Lindon Robertson, Executive Vice President and CFO

On the first one, I'll take that. On the COVID impacts in China, think of it as really kind of three pieces that we have covered in our guidance. One, the demand being suppressed a bit already quarter-to-date and coming into the quarter due to the lockdowns we've experienced. Second, we had a short temporary constraint on our operations in China to deliver gene synthesis. It impacts things that you're operating in China, but the synthesis is most. We highlighted about half of our impact overall there was in genomics. The primary synthesis operations are in China, and the lockdowns this quarter impacted customer demand and added complexities to our logistics. Sample Repository Solutions reported revenue of $27 million, another robust quarter of over 20% year-over-year and up 4% sequentially driven by growth in our core storage offering. We expect to step up in Q3 and again in Q4 driven by increased samples in storage.

Steve Schwartz, President and CEO

So the second half of your question regarding the demand on the cell and gene therapy product sales and signals we’ve picked up from customers. You’re correct. When finding a way to exclude COVID, a 12% growth on the product side is particularly strong. But you shouldn't attribute all of the growth and all of that market to the cell and gene therapy. We're still shipping about 75% of the BioStore III Cryo systems for cell and gene therapy applications. But the products also include consumables and instruments. And from that standpoint, cell and gene therapy is still relatively small. So when we talk about 30% year-on-year growth in cell and gene therapy, the impact on product side isn't dominating, but still the growth is strong.

Operator, Operator

We have no further questions. I'll turn the call back to Lindon Robertson for closing remarks.

Lindon Robertson, Executive Vice President and CFO

Thank you. Thank you, everyone, for your interest in tuning in with us, and especially, the analysts for these questions that help add color. We're very much energized by the momentum in the business, and the responsiveness that our teams around the world have been able to have in difficult environments. We particularly want to tip our hat to our China team in how they've executed. With that said, I just highlight to you, we couldn't be more enthusiastic about what we're doing. We have the revenue growth on track. We're putting investments in place for a long-term model with extreme confidence that everything we're putting in is capability that will benefit us in the near term and set for scalable growth in the long term. Again, we reinforced the objectives for the 2024 model with a lot of confidence. The proof points are starting to show up, which we couldn't be more encouraged by. I'll remind everyone to watch for the 10-Q between now and the beginning of next week. Those results will be out and will confirm the things I expect we've said. But we'll file that in the next coming weeks. With that said, thank you again for tuning in. We appreciate it, and we look forward to talking to you again next quarter.

Operator, Operator

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