Earnings Call Transcript - AZTA Q1 2023

Operator, Operator

Greetings, and welcome to the Azenta Q1 2023 Financial Results. As a reminder, this conference is being recorded Wednesday, February 08, 2023. I will now turn the conference over to Sara Silverman, Head of Investor Relations.

Sara Silverman, Head 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 2023. Our first quarter earnings press release was issued after the close of the market today and is available on our Investor Relations website located at investors.azenta.com, in addition to the supplementary PowerPoint slides that will be used during the prepared remarks today. I would like to remind everyone that during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled 'Safe Harbor' Statement, our 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 the GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Azenta business. Non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves. In addition, we may refer to certain estimates of COVID-based impacts. These figures are estimated based on our insights to customer applications and/or product types indicating such demand or constraints on regional demand or ability to deliver. On the call with me today is our President and Chief Executive Officer, Steve Schwartz; and our Chief Financial Officer, Lindon Robertson. We will open the call with remarks from Steve on highlights of the first quarter. Then Lindon will provide a more detailed look into our financial results and our outlook for the second fiscal quarter of 2023. 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, CEO

Thank you, Sara. Good afternoon, everyone, and thank you for joining us. Today, we're speaking to you from our new headquarters location in Burlington, Massachusetts, and we're pleased to share with you the progress we've made over the past 3 months. Our Q1 results were solid and in line with our target as we delivered revenue growth of 28% year-over-year. Organic growth, excluding COVID, was 7%, a result consistent with our 2023 expectations and a signal that the adjustments we've made to the business are taking hold as planned. Today, all of my comments on growth will be organic growth rates, excluding the impacts of COVID. Looking at the business by segment, we saw a strong performance in our products business, which grew 15%, reflecting another quarter of double-digit year-over-year growth in our automated stores business as well as some promising stability in our C&I business, which contained no COVID revenue and was up slightly quarter-over-quarter. On the services side, both Sample Repository Solutions and GENEWIZ genomics performed well. A particular highlight was double-digit growth in our core storage business of SRS. When we first got into the SRS business 7 years ago, occasionally, we'd handle up to 1 million samples in a quarter. Today, we touch more than 1 million samples per month, and the number continues to increase as more and more customers see the value in our offering. And as we continue to automate, we're more able to satisfy the heavier transactional aspects of our customers' sample management needs, especially around the critical steps in the clinical trial workflow. This high volume individual sample tracking capability is a highly differentiated offering that's valued by customers and necessary for their future needs. In genomics, we began to recognize the positive impact from the retooling of our go-to-market approach and we're confident that the continued execution of our plans is the right strategy. Specifically, once again, we delivered a record quarter for Next Generation Sequencing and Sanger Sequencing was steady. Perhaps most importantly, we're seeing early signs that we're beginning to recover some lost momentum in our Gene Synthesis business as we saw double-digit growth in China, which is a positive indicator in terms of what we can do in the global market now that our logistics issues are behind us. To be clear, we're not declaring victory here as there's much more to be done in sales staffing, but we're confident that our actions and plans are providing the remedy, and this is all about investments in proper execution, which has the focus of the entire leadership team. One particularly bright spot in the quarter was our performance serving cell and gene therapy customers. Over the past few years, we've observed steady 20% to 30% growth from CGT across our portfolio of offerings. But in Q1, we recorded nearly 60% year-over-year growth, bringing cell and gene therapy sales to approximately 10% of revenue, not including Barkey or B Medical Systems. This was up 30% quarter-to-quarter. Contributions to this growth came from GENEWIZ genomics especially from NGS and AAV services for products, particularly cryosystems and instruments and from SRS. From a geographic standpoint, the key top line drivers I mentioned, NGS, automated stores, SRS and C&I, drove growth at varying rates across the globe. The U.S. remains a steady grower. Europe is making progress, and China remains a highlight even amidst COVID noise. B Medical had a record revenue quarter of $42 million and secured the commitments we had anticipated. That said, we saw one large order get pushed out, which landed us below the $45 million we'd initially anticipated. We shared with you that quarterly revenue would be difficult to predict for this business, but we'll continue to refine our forecasting to the street. The good news is that the business is won and we're still confident that we'll deliver $130 million in revenue for the year. In addition, our long-term key human health initiatives are underway, and we remain encouraged by this unique head start in a fast-growing emerging markets opportunity that's spearheaded by B Medical's expansive footprint and outstanding reputation. And though it's still in the early days, we're already in discussions with pharma companies on how we could leverage B Medical's technologies and beachhead to access patients in hard-to-reach geographies. All in, the base business is stable and exhibits signs of strong momentum. Even in a more challenging macroeconomic environment, we believe our opportunity is significant and it's ours to capture. Q1 was a quarter of positive proof that our position is solid in products and SRS that our initiatives to accelerate top line growth, especially in our genomics business are proving to be the right ones, and we'll continue to drive these forward. Specifically, we're accelerating our investments in additional sales talent for coverage of accounts but also specific genomics technologies with emphasis on synthesis. We continue to recruit for additional regional sales coverage where we have known gaps, and we're not slowing our investments in development of innovative new products and services, which are key to our future outperformance. It will take time for some of these initiatives to impact the top line, but they're necessary for our long-term success. We're optimistic that these actions will support continued progress toward the low double-digit growth objectives in the second half. We'll fund these investments through cost reduction measures that come from a realignment of our internal operations that target efficiency and enhance focus on value-creating activities. In total, we'll take out about $20 million of annualized cost. The net impact of the actions we're announcing today are expected to remove about 200 basis points of cost. Most importantly, these are the right next steps to ensure both our near-term and long-term potential. We believe the end result will be tighter coordination between business units and sales and will take advantage of recently implemented enterprise solutions to automate and streamline internal activities. And finally, we continue to identify opportunities to grow the business. Last week, we completed a tuck-in acquisition of Ziath, a leading provider of 2D barcode readers for life sciences applications. The Ziath portfolio fits perfectly with our consumables and instruments business and enhances our portfolio of high throughput offerings designed for laboratory automation workflows. This is a great example of the types of transactions we can do where we have the opportunity to take a company with a great product portfolio and put Azenta's commercial reach behind it. In closing, I want to address a few key points. First, we believe we have a unique portfolio of best-in-class products and services that gives us a chance to secure the pole position in all things sample management and sample measurement, and our Q1 results and traction give us confidence that we're properly addressing issues that will allow us to regain our outsized growth profile. Second, we're adjusting our operations to match our current portfolio and profile. Specifically, we're prioritizing strategic sales investments to drive the top line while protecting our bottom line. We'll continue to monitor and measure results of actions taken and support all key sales initiatives with the objective to turn the corner in Q2 and to see the progress in our results in the second half of this year. And we're investing for growth. We have a strong balance sheet with more than $1 billion in cash available for opportunistic additions to our already powerful portfolio. In all, we're very positive about our momentum and where we are at this moment. We have high conviction in the value that we bring to customers and our strong market leadership. We look forward to continuing to update you on our progress throughout the year, and we thank you for your interest and support as we work to deliver value to our customers and shareholders. I'll now turn the call over to Lindon.

Lindon Robertson, CFO

Thank you, Steve. I now refer you back to the slide deck available on our website. Turning to Slide 3 for some highlights. First quarter revenue was $178 million, up 28% year-over-year and up 30% sequentially. This is up 7% on an organic year-over-year basis when you exclude estimated COVID impacts. In products, we delivered 15% organic growth, excluding COVID, driven by 23% growth in automated systems and 16% growth in C&I. In services, organic growth, excluding COVID, was 4%, led by our Sample Repository Solutions business up 10%. And within our genomics business, our Next Generation Sequencing business was up 12%. On a sequential basis, the significant expansion in the quarter was driven by the addition of B Medical, which closed on October 3. The B Medical team achieved a record level of revenue for their business with $42 million in the quarter. When I consider our Q1 revenue results, our base business came right in the range of our expectations. And while B Medical had a record quarter, it was a bit short of our expectations. As we have described previously, revenue in this business can fluctuate each quarter due to project funding dependencies. Non-GAAP EPS was $0.12, flat year-over-year. GAAP EPS was a loss of $0.15 and adjusted EBITDA margin approximately 7%. As Steve discussed in his remarks, we're taking several decisive actions to best position the company for long-term success. In light of continued inflationary and margin pressures, we recently initiated actions to fine-tune our business structure, removing costs in certain areas while making targeted growth investments in others. We expect to net approximately 2 points of cost reduction to contribute to margin expansion for the second half of fiscal 2023. You should expect to see the impact of these actions in our third quarter financials. Moving to an update on capital deployment. As we announced during the last call, we entered into a $500 million accelerated share repurchase program, which we expect to complete by the end of the third fiscal quarter ending June 30. In total, we still plan to return approximately $1 billion to shareholders within this calendar year. Beyond share repurchases, we remain focused on capital deployment in the form of investment in M&A. After the expected $1 billion return to shareholders, our balance sheet will still have over $900 million in cash resources available for strategic investment. In all, we have a strong portfolio, a well-established in high-growth markets, and we believe the actions we are taking should position us to deliver results over the near term and into the future. Let's move on to Slide 4 to address the first quarter results. As mentioned, revenue of $178 million was up 28% year-over-year and up 30% sequentially. To the right, we have provided a table to show the color on the reported revenue. From reported revenue, we removed 4 points of foreign exchange headwinds and revenue of $46 million from acquisitions, which provides an organic decline of 1%. From there, when we remove the impacts of COVID, which was an estimated $11 million of revenue in Q1 of fiscal 2022 and was approximately zero in this quarter. On a year-over-year basis, organic growth when excluding the estimated COVID-related impact from each period, was 7%. Looking at the P&L on the left side, total GAAP earnings per share was a loss of $0.15 compared to a loss of $0.07 in the fourth quarter of fiscal 2022. Compared to the prior quarter, increased expenses include costs associated with M&A, our accelerated share repurchase program as well as the amortization impact of purchase accounting adjustments. Now let's look at the non-GAAP P&L on the right side of the page. The revenue increase of $41 million quarter-to-quarter carried higher gross margins, up 150 basis points to 45.4% primarily driven by the services segment and the addition of B Medical. Operating expense increased $23 million quarter-over-quarter with $13 million of the increase coming from B Medical, $7 million coming from the annual reset of stock compensation and variable compensation accruals and the remainder due to various corporate and commercial expenses, which translates into approximately 7% adjusted EBITDA margin. Now please turn over to Slide 5 for a review of our Life Sciences Products segment results. As you can see in the results today, we have determined that the B Medical operations will be reported as part of the products segment. With that, Products segment revenue totaled $90 million for the quarter. The acquisitions of B Medical and Barkey contributed $42 million and $4 million, respectively. First quarter revenue was up 80% year-over-year on a reported basis, substantially driven by the B Medical and Barkey acquisitions. Products segment organic growth, excluding COVID, was strong, up 15% year-over-year. This was supported by large automated systems, which grew 23% year-over-year during the quarter and was supported by robust bookings, which we have noted in recent quarters as those bookings have begun to translate into revenue. In consumables and instruments, our business most impacted by COVID, we are starting to show some demand improvement from new and existing customers, resulting in a quarter-over-quarter increase of 3% in revenue. Organic growth, excluding COVID, on a year-over-year basis for this business was 16%. We have one more quarter of tough compares from COVID-related revenue, but the ex-COVID growth in Q1 is a strong indication of the growth capability in this business. Products' first quarter gross margin was 43.2%, up 300 basis points quarter-over-quarter. Excluding B Medical, gross margins were roughly flat from Q4. Operating income was $3 million for the quarter compared to income of $4 million the prior year. This year-over-year decline is due to gross margin softness on lower revenue as well as increased SG&A expense. Adjusted EBITDA margin was approximately 8%. Next, please turn to Slide 6 for a review of our Services segment results. The Services segment generated first quarter revenue of $89 million, a decrease of 1% year-over-year. The organic growth for the quarter, excluding COVID, was 4%, reflecting 2% growth in genomics and 10% growth in Sample Repository Solutions. The genomic services performance was led by Next Generation Sequencing, which grew 12% year-over-year on an organic ex-COVID basis. We saw notable growth in some larger accounts, which are increasingly recognizing the value of our customizable solutions that offer industry-leading speed and convenience. In Sanger, first quarter tends to be seasonally lower, and we saw that in our results this time as well. In Gene Synthesis, we continued to see softness as well as modest impact from the China COVID outbreak. The logistics challenges in Gene Synthesis, that we discussed last quarter for business shipped out of China have largely been resolved, and we believe the sales initiatives we have in place will continue to gain traction over the coming months. Sample Repository Solutions organic growth, excluding COVID, of 10% year-over-year was once again driven by our storage revenue, which grew 18% and continues to expand our recurring revenue base. This quarter, our storage business benefited from the addition of another large biotech customer. This win similar to others we have mentioned in the past, demonstrates the value we bring to customers in our core capabilities in and around our sample management. Services business delivered 47.6% gross margin, a 170 basis point expansion quarter-over-quarter, driven by next-generation sequencing with a year-over-year drop of 360 basis points still reflecting inflationary pressures as well as lower volumes in Gene Synthesis. Q1 operating loss was $3 million due to the lower gross margin as well as higher operating expenses. Adjusted EBITDA margin was 4%. Let's turn over to Slide 7 to review the balance sheet. As of December 31, we had $1.4 billion of cash, restricted cash, and marketable securities with no debt outstanding. As noted previously, we completed the B Medical acquisition for $424 million in cash, $43 million of which was B Medical debt that we paid down in fiscal 2022 ahead of the close. In late November, we used $500 million of cash to enter into an accelerated share repurchase program. We remain committed to returning an additional $500 million to shareholders this calendar year for a total of approximately $1 billion in cash to shareholders. Beyond this, we continue to invest for growth, both organically and through M&A with a clear lens toward deals with returns that exceed our weighted average cost of capital within 5 years. The balance sheet changes significantly due to the addition of B Medical. You can see this in areas including goodwill and intangibles, but also in property, plant, and equipment with the addition of B Medical's manufacturing assets and their rotomolding capability as well as inventory, receivables, and payables. Let's turn to the final slide for our guidance. Revenue is expected to be in the range of $156 million to $171 million, with a midpoint supporting growth of approximately 13% year-over-year. This includes an organic growth rate, excluding COVID, of approximately 2% at the midpoint. We estimate the foreign exchange impact to be a headwind of 3 points and the revenue from acquisitions to be a total of approximately $30 million. That is approximately $4 million for Barkey, and we expect B Medical Systems to contribute approximately $24 million to $27 million. We expect products revenue, including acquisitions, to be in the range of $72 million to $79 million as we expect the base business to increase a couple of million quarter-to-quarter and B Medical to show a decline quarter-over-quarter as it comes off of its December quarter, which tends to be the busiest of the year for vaccine cold-chain orders. In all, the products guidance supports a low teens organic growth rate when excluding the impact of COVID. We expect services to be in the range of $84 million to $92 million reflecting roughly flat quarter-to-quarter revenue in both SRS and genomics at the midpoint of our guidance range. Adjusted EBITDA is anticipated to be approximately $2 million. Non-GAAP earnings per share is expected to be breakeven, plus or minus $0.04 per share. And as you can see in the guidance, our second quarter is stable in the base business and reflects the lower March quarter for B Medical. From a profitability perspective, we anticipate the second quarter to be the low point in our fiscal 2023. We expect the cost actions as well as the strategic investments to show tangible progress starting in Q3. And together, we expect these efforts can support our full-year expectations for revenue and that we exit the year above 10% adjusted EBITDA margin. In conclusion, we continue to see indications of momentum, and we are taking actions in our cost base to set ourselves up for success and to deliver profitable growth. And lastly, we will continue to return cash to shareholders while maintaining an active stance on the M&A front. As always, we will continue to provide updates on our progress throughout the year.

Operator, Operator

Thank you. Your first question will come from Jacob Johnson with Stephens. Your line is open.

Jacob Johnson, Analyst

Hey good evening everybody. Lindon, maybe just to start on the guidance that you just touched on. I think you're still kind of targeting the same 30% revenue growth, but it seems like maybe margin expectations have been pushed out a little bit and you're talking about taking some costs out of the business. Can you just talk about kind of what's changed now versus the 4Q print in terms of kind of cost and margin expectations?

Lindon Robertson, CFO

Yes. Jacob, I think you captured the top lines right, that being we still see ourselves getting to 30% of revenue growth for the year. With that said, we do see the margin pressures in the first half being a little heavier and partially in reaction to that, also an opportunity to gain some efficiencies and effectiveness in our operations. We've taken some actions. And as we do that, that's going to enhance some of that cost equation, offset those actions in total. We're taking about $5 million a quarter or $20 million of cost out. And at the same time, we'll be proceeding with some fairly selective and specific investments to continue to drive growth. So with that said though, with the margin pressures we have in the first half, you're right. Previously, we had identified that we would be about 10% or better on EBITDA margins for the year. Here we're saying we'll be at 10% or better by the fourth quarter.

Jacob Johnson, Analyst

Okay. Thanks for that one. And then Steve, if I heard you correctly, it sounds like you've seen an acceleration in growth from the cell and gene therapy end market. I think this earnings season, that market is relatively healthy, but there's been some pockets of weakness. And I think we've seen some other companies where maybe growth decelerated a little bit in that end market. So can you just talk about kind of what you saw from that end market and what drove the pickup in growth from cell and gene therapy?

Steve Schwartz, CEO

Sure. We were somewhat surprised by the significant increase. We believe it is due to some new offerings. Our team has been proactive in pursuing opportunities related to AAV services. We feel the range of our offerings is impressive. Approximately 60% of the cell and gene revenues were generated from our genomics GENEWIZ business, about 30% came from products, and around 10% was from SRS. Overall, our complete offering appears to be quite appealing. We think these offerings are essential, but as we secure projects, growth may fluctuate. Nevertheless, we've gained new customers, and we believe this momentum is sustainable, which makes us very happy with our performance. I'm uncertain about what to anticipate for the next quarter, but customer engagement continues to strengthen each quarter due to the value provided by the scientific offerings from the GENEWIZ team.

Jacob Johnson, Analyst

Got it. Thanks for taking the questions.

Operator, Operator

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

David Saxon, Analyst

Yes, Good evening guys and thanks for taking the questions. Maybe I'll start with SRS. The storage part of that business was really strong. I think you said 18% going from 1 million samples a quarter to now 1 million per month. So just wondering kind of how much visibility do you have in that storage part of the business? And is kind of high teens a good starting point in terms of revenue growth for that storage part for the year?

Lindon Robertson, CFO

Yes, David, let me start, and Steve will add some color on the customer demand side. But first, you're exactly right in your reference; I'll just add the clarity for everyone. We highlighted we saw 10% organic growth ex-COVID in SRS year-over-year. Inside of that, we have multiple elements of service delivery, but the largest piece is storage, pure storage. That includes primarily off-site storage, that's being sample stored on our locations, also includes a little bit of on-site storage where services that we perform for customers at their site. It's getting to be more prevalent. But with that said, the total of that grew 18%. And the nice thing about that is that represents samples going into the freezers, which is our recurring revenue base. So now you asked about the line of sight. The nice thing about that is, once samples are in the freezers, we know they tend to stay there. So it gives us a more solid recurring revenue base. So that part of it is clear. I've often described this as a business with seasons of high growth and seasons of low growth simply because we're accumulating millions of samples. And so each period where we show growth, that's growth on a pretty large base of samples in the freezers now. So you can see that this is a momentum of really an outsourced adoption rate business where the outsourced demands are increasing. And so the line of sight is good on the base revenue. Seasons of higher growth and lower growth are going to still continue. I would not highlight high teens as being a starting point. I think the 10% organic growth on the total SRS business is probably a good starting point, plus or minus to that overall. But there will be times we're up in the teens. And if you recall, if we went back a couple of years ago, we said it wouldn't be unusual to show us in the mid-teens. So certainly, some may be projecting that. I think in these environments, the outsourced adoption rate seems to have momentum. So somewhere between that 10 and mid-teens. Steve may add some color to the types of demands we're seeing here.

Steve Schwartz, CEO

So David, I'll add a little bit. As Lindon mentioned, when we first entered this business, most of the SRS business focused on archival storage. Our capabilities in managing samples have evolved significantly, allowing us to transform the business substantially. We emphasize automation and our capacity to handle samples, enabling us to participate in clinical trials. We assist customers by moving samples in and out more frequently than before. We essentially serve as an extension of what they once managed on-site or at a CRO. Our ability to efficiently manage inbound and outbound samples represents a notable change in our offering. We have seen a substantial increase in storage revenue due to our capacity to manage the transit and movement of samples for clinical trials. This expansion is one reason why we focus heavily on automation. Our goal is to handle not just a million samples a month, but eventually millions, which relies on our capability to manage these samples effectively. We maintain visibility of what's available at the dock, in freezers, and in receiving areas. Our challenge has been to process samples quickly, get them into storage, and manage them efficiently for customers, which is where we concentrate our efforts. We anticipate positive trends in the business, with increasing volumes. As we improve our processes, more customers will allow us to integrate into their workflows, extending beyond just archival storage. This reflects the transformation we have experienced.

David Saxon, Analyst

Okay. Yes, that's super helpful. And then maybe on M&A, I mean all the M&A has been on the product side so far. So I just wanted to ask, is that because you'd see more portfolio gaps on the product side? Or is that just where the deals cross the finish line? And then going forward, how should we think about where you're focusing on adding through M&A? Thanks so much.

Steve Schwartz, CEO

Yes, your observation is correct. We have been focusing on the product side, which has been more about making things actionable. We also have a strong pipeline in genomics that interests us. You can expect us to be active in both areas, and we are looking to add new capabilities. As these opportunities become actionable, we will participate.

Operator, Operator

And your next question comes from the line of Paul Knight with KeyBanc. Your line is open.

Paul Knight, Analyst

Thanks, Lindon and Steve. Could you share what percentage of revenue came from cell and gene therapy? Is it 10%?

Lindon Robertson, CFO

Yes. Overall, we're at the 10%. We're just starting to cross over there. And I should highlight that we haven't captured that for B Medical, so that's excluding the B Medical revenue equation.

Paul Knight, Analyst

Okay. And then obviously, the Life Science Services was the slower growth portion, and I'm guessing that's part of going to continue in March. Is it oligo production, specifically the slowest part of the business? And what's the trend there?

Steve Schwartz, CEO

Yes, Paul, you made a great point. NGS reached another record, while Sanger is a bit seasonal but remains stable due to our large customer base. The synthesis side of our business has been slower, with oligo production being a small part of the Gene Synthesis business, which has also seen a decline. However, we are seeing some positive indicators that suggest activity is picking up. We have significant capabilities and capacity, and we are focusing our sales initiatives on revitalizing this area. We are optimistic about our position, though it will take some time to see improvement. Our offerings are particularly strong, and we believe we can return to a good growth trajectory by year-end. Nevertheless, this area has been a soft spot for us in genomics.

Paul Knight, Analyst

And China you said was what, mid-single-digit growth? And the follow-on to the China question is I know you had expanded in China to expand oligo production. Are you kind of getting to normal in China and oligo production in China? How is that?

Steve Schwartz, CEO

Yes. Paul, I'm going to keep bringing you back. The oligo production is mostly as a raw material for our synthesis business. We have oligo businesses. It's relatively small. But the production capability is very strong. This is about customers and engagement and getting back to customers. The growth in China on the synthesis side, both the oligos and the Gene Synthesis was strong in China, in particular, in light of the COVID environment.

Lindon Robertson, CFO

And Paul, I'll highlight, we actually just struck a low double-digit growth in China, and that was supported on the services side as well as products side. When I say that growth on both sides. And it's encouraging on the Gene Synthesis site there. We're quite competitive on the round where we weren't exporting. As we mentioned on the call, one of the things that's held us back in other areas were some logistics issues in the COVID environment. But we've overcome that now, and we're putting sales power behind that again. I think we're starting to see just beginning signs of recovering some of those accounts.

Operator, Operator

Your next question comes from the line of Vijay Kumar with Evercore ISI. Your line is open.

Vijay Kumar, Analyst

Hey guys thanks for taking my question. Lindon or Steve, I just wanted to understand some of the numbers. If I look at just total revenue growth, up 28%. And I think your guidance is for maybe 12% in 2Q at the midpoint, right? And when I look at your annual guidance of 30% growth that would imply a 40% growth for the back half, just given where first half is shaking out. What drives this second half acceleration? When I look at the organic guide for 2Q here, I think that decelerated ex-COVID from the 7% in 1Q to 2%. What's driving this deceleration in 2Q? And what gives us the visibility here for the back half guide?

Lindon Robertson, CFO

Yes, Vijay, that's a very reasonable question. In the first quarter, we met our expectations. To clarify, our core business, excluding B Medical, aligned with our objectives, and both businesses showed some signs of strength. In the second half, we anticipate low single-digit organic growth, excluding COVID, which we expect to transition to low double digits to achieve our targets. We're observing signs of momentum and are confident that our investments will further support this growth, along with the efficiencies we are creating in our business coordination. Regarding B Medical, we fell slightly short of our midpoint forecast, reaching 28%. It's a lumpy business, which contributes to the slight shortfall, but we are not worried because the projects and demands remain strong; it's just a matter of timing. We noted that the December quarter is the peak for this business, leading to a decline in the March quarter, which tends to be unpredictable. However, we see potential to sustain ourselves through the next three quarters, especially with significant orders expected that haven't yet materialized in the first quarter. Looking at our guidance for B Medical, we anticipate achieving about half of our target by the end of the second quarter, which is set at $130 million. We feel good about the first half, and the second half is expected to show increased year-over-year growth in B Medical. While we expect improvements compared to the first half, we recognize it's still a work in progress.

Vijay Kumar, Analyst

Sorry, just to clarify that Lindon. So with B Medical, $130 million of revenues. It looks like that you guys are reiterating the $130 million, is that right? And I wasn't clear on the second quarter, 2% organic. What drives that sequential deceleration ex-COVID from Q1? I don't think the comps get harder. So I'm just trying to understand 2Q, whether it's timing or anything else that's going on.

Lindon Robertson, CFO

To clarify about B Medical, the natural decline from a December fiscal year-end is influenced by budget allocations and project funding, which are more significant in the December quarter compared to the first calendar quarter. You're correct that there is some slowdown in the overall year-over-year comparisons on an organic basis excluding COVID. When you look deeper, you'll find that the products segment is still experiencing low double-digit growth excluding COVID, while the services segment remains in single digits, and the genomics segment continues to lag behind, especially the Sample Repository Solutions segment. I anticipate that by the end of the second quarter, we will still be observing strength in the SRS segment and some signs of growth in genomics. However, both of these segments are likely to stay in the low single-digit growth range.

Vijay Kumar, Analyst

Understood. And if I could just maybe squeeze one more. Operating margins here, EBITDA margins, it looks like Q1 was maybe 0% margins. What's driving this year-on-year declines, right? I think last year, I had you guys had high single operating margins. And this 2Q, are we looking at negative operating margins, Lindon? Because when I look at that EPS guidance of flat zero EPS at the midpoint, is that indicating negative operating margins in 2Q?

Lindon Robertson, CFO

Yes. You are correct that we are down year-over-year. The primary reason for this is the gross margin pressures we are experiencing. We've also added structure to the business, particularly to take on B Medical. You're right; gross margin pressures are present, and we haven't fully compensated for that. With the actions we're implementing, we anticipate reducing annual costs by about $20 million, which will yield approximately $5 million or a couple of points in the second half after accounting for investments. This adjustment is in response to the current situation and aims to enhance our operational efficiency. In the second quarter, we will observe negative operating profit overall, and we are fully aware of this. As I mentioned previously, we believe this will be a low point in the fiscal year, and we are confident in that assessment. We have two strong convictions: first, we are seeing signs of growth momentum and we will continue to invest without reservations. Second, we are reinforcing this momentum with cost reduction measures, positioning ourselves to build a more profitable base business and set us up for leverage in the future.

Vijay Kumar, Analyst

Understood. Thanks guys.

Operator, Operator

And your next question comes from the line of Yuan Zhi with B. Riley. Your line is open.

Yuan Zhi, Analyst

Thank you for taking our questions. Maybe you have covered part of this. So for genomic services customers, if we break it down to government and academic institutions, Big Pharma and then Biotech. Have you seen different customer behavior change over the last quarter?

Lindon Robertson, CFO

I would say we haven't observed a significant difference there. We have considered whether we could align academic spending to be somewhat slower and if there are budget constraints. There is a hint of that, but it's difficult for us to identify a clear trend. Overall, we have seen an acceleration in NGS across the board, but pharma, biotech, and academic institutions all participate in that space for us. So, Yuan, I wouldn't single out a specific sector as the cause of this weakness. We see it as mostly market-centric. I want to point out that the Americas have remained stable, and China has seen good growth overall. Europe is still lagging a bit for us in this space. I'm not sure that reflects the markets, but there are certainly greater challenges in Europe. We recognize that we are a small player in terms of market share, but we lead in capabilities, which presents us with many opportunities. Those are where we will focus our investments in each market.

Yuan Zhi, Analyst

Got it. Maybe can you clarify on how you plan to reconstruct the sales regional structure. Does it mean more sales in a certain region, so that they have more focus of their own?

Steve Schwartz, CEO

Yes, this is Steve. We are indeed focusing more on genomics in key areas, and we are actively hiring and training because there is a need for specific talent. We are being aggressive in our recruitment efforts. Additionally, we are ensuring that our teams are properly staffed and that everyone is filling their defined roles. We do have some regional gaps that we are working hard to address. Overall, I believe we are making progress and are pleased with the exceptional talent we have managed to bring on board, although finding the right people requires significant effort.

Yuan Zhi, Analyst

Got it. Thank you for taking our questions.

Lindon Robertson, CFO

Thank you, David. Thanks everyone for tuning in with us. These are really key times for us. We're in a mode as much of the markets I know that you're analyzing and looking to find the right investments in. We're at a juncture where while growth moderated, we're seeing positive growth. So we're talking about why our growth is positive, but not as strong as it could be and what it has been in the past. We expect that we're making the right investments. We're headed toward, I believe, acceleration, and that's our intent and objectives here. I'll highlight relative to some of the questions, we are tuning the sales team for that performance with investments. We're putting more demand generation dollars behind that as we rightsize some of our structures, and so we're going to facilitate that market by market and facilitate it also with the talent and skills that Steve outlined in his remarks. So with that, I look forward to not just delivering on the second quarter, but being able to talk to you about the progress that we see out of the second fiscal quarter headed into, I think, a stronger second half. And that's been our objective, as we talked to you about that three months ago and where our convictions are today. Thank you very much. We look forward to keeping you abreast of our progress as we move through the year, and we'll talk to you soon.

Operator, Operator

And that does conclude the conference call for today. We thank you very much for your participation and ask that you please disconnect your line.