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07-02-2025
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Q1 2025 Cerence Inc Earnings Call
Brian Krzanich; Chief Executive Officer; Cerence Inc Tony Rodriquez; Chief Financial Officer; Cerence Inc Nick Doyle; Analyst; Needham & Company Mark Delaney; Analyst; Goldman Sachs Colin Langan; Analyst; Wells Fargo Jeff Van Rhee; Analyst; Craig-Hallum Capital Group Jeff Osborne; Analyst; TD Cowen Operator Welcome to Cerence's first quarter of fiscal year 2025 conference call. Before we begin, I would like to remind you that this call may involve certain forward-looking statements. Any statements that are not statements of historical fact, including statements related to our expectations, estimates, assumptions, beliefs, outlook, strategy, goals, objectives, targets and plans should be considered to be forward-looking statements. Cerence makes no representations to update those statements after today. These statements are subject to risks and uncertainties which may cause actual results to differ materially from such estimates as described in our SEC filings including the Form 8-K with the press release preceding today's call and our Form 10-K filed on November 25, 2024. In addition, the company may refer to certain non-GAAP measures, key performance indicators and pro forma financial information during this call. Please refer to today's press release for further details of the definitions, limitations and uses of those measures and reconciliations of non-GAAP measures to the closest GAAP equivalent. The press release is available in the IR section of our website. Joining me on today's call are Brian Krzanich, CEO of Cerence; and Tony Rodriquez, CFO of Cerence. Please note that slides with further context are available in the Investors section of our website. Now on to the call, Brian. Brian Krzanich Thank you, Jason and good afternoon, everyone and welcome to the Q1 2025 Cerence's earnings call. I'm really excited to speak with you today while Tony will walk you through the details. I have the pleasure of sharing our great Q1 results with you first. Top line revenue of $50.9 million and adjusted EBITDA of $1.4 million both exceeded the high end of our guidance, and we had strong free cash flow of $7.9 million. On our last call I shared that our fiscal year 2025 goal is to return Cerence's to profitability a critical step to fuel the future growth. With our Q1 results on a non-GAAP basis we have moved toward profitability even earlier than we forecasted. I couldn't be more proud of what the team has accomplished and the great start this has given us for 2025. In addition, during Q1, we repurchased [27 million] of our convertible notes due in June of 2025. And as we've discussed in the past, our plan is to extinguish this step through some combination of repurchases and financing. And we will decide the best path for taking into account shareholders interests and with a view towards driving long term value. As many of, you know that those who are new to the call may not. Cerence AI delivered AI powered multi-modal and conversational agent experience for automotive and beyond. We partner with the world's leading automakers and transportation OEMs to create AI powered assistance. Empowering them to deliver incredible user experiences to their drivers while also maintaining their unique brand and data ownership and keeping costs in line. In addition to our deep technical expertise and our exciting product road map more on that in a moment. The world's leading automakers and tier one suppliers love to work with Cerence because we are a neutral and highly specialized supplier, living and breathing automotive and speaking the same language as our customers unlike our competitors. With the ongoing challenges OEMs are facing cost pressure slowdown in EV and car sales and an ever-changing geopolitical landscape. Cerence AI is uniquely positioned as the AI innovation partner who can help automakers deliver a premium experience while also navigating the impact impacts of a complex and rapidly changing industry. This quarter, the team has been laser focused on our three key deliverables for 2025. First, continuing our work to bring [Cerence Xey], our next generation product based on our CaLLM family of language models to market. [Xuis Agentic Multi LOM] architecture provides deep customization and enables compatibility with both new and existing in containment systems. Making it easier for automakers to deploy to both current and future vehicles. We reached several important milestones. For [Ex U I gen one] within the quarter, including delivering five proof of concepts and kicking off our first major customer program further validating and solidifying our product and go to market strategy. And we've partnered with leading AI companies like NVIDIA and Microsoft. Empowering us with tools and resources to deliver improved performance and cost efficiency to our customers and their drivers. These AI leaders are eager to work with us given our position with global OEMs and install base. And you'll see more announcements in this space as we approach NVIDIA's GTC in March and the Shanghai Auto Show in April. The [XU I GEN] two which we are demonstrating now and will be available to our customers by the end of 2025 will deliver a single conversational interface that works across both cloud and embedded applications to complete tasks based on user preferences, integrating all aspects of a user's interaction into a seamless conversational interface that extends beyond voice. Our future product vision is to enable the driver to get into the vehicle and put their phone down. Using the in-car system to complete the tasks they would normally do in their phone. In this new agentic world. We can combine activities like navigation, phone, calling, text messaging and web search that even with your phone today would require multiple footsteps and switching between various apps. [Xu I] brings the future of agentic and conversational eye to your vehicle and transforms the car into an assistant that saves you time and truly simplifies your life. The second key deliverable for 2025 is continuing to grow our business with new and existing customers. In this first quarter of fiscal 2025 we secured six new design wins across our current product line and two new wins for our Generative AI Solutions across large and global OEMs. We also saw start of production for six major customer programs and two generative AI programs within the quarter, including a large trucking customer and a major cloud win back in China and the Renault avatar program that includes our generative AI solution. The third key deliverable for 2025 is continuing our transformation and cost management. You've already seen the benefits of this work in our Q1 top and bottom-line results. And as I previously stated, we believe we should always be looking at how we can be more efficient from both a cost and operational perspective. For fiscal year 2025 we are focused on simplifying and streamlining our organization and our structure to continue taking cost and spending out of Cerence. We can find more efficient and productive ways to accomplish the same task while also finding opportunities to vastly improve our speed to market and get exceptional products into the hands of our customers at a more rapid and competitive space. This work is underway as we've continued to evaluate our office space and legal entities kicked off a process to streamline and improve our relatively complex customer contracts. And continue to evaluate every rehire and new hire as we move forward. We're looking forward to fiscal [Q2] to 2025. We're issuing initial revenue guidance of $74 million to $77 million with GAAP net income expected to be in the range of $1million to 5 million and adjusted EBITDA in the range of $18million to 22 million. And Tony will provide further details on the second fiscal quarter in his remarks. But this is my second earnings call as CEO of Cerence AI & I, and the rest of the team are proud and encouraged by the first quarter results. Cerence AI is bringing conversational AI and true agentic capabilities to the vehicle now, not just in the future and we have an exciting road map ahead. With that I'll turn it over to Tony to go through the detail of our quarterly numbers, our guidance and our restructuring activities, Tony. Tony Rodriquez Thank you, Brian. Today, I will be reviewing our Q1 results for fiscal year 2025 and providing some guidance for our second quarter. I will also comment on our progression toward full fiscal year 2025 guidance. Let's get into the Q1 operating statement. At the top we achieved Q1 revenue of $50.9 million which exceeded the high end of our guidance range of $47million to $50 million. Our revenue this quarter was aided by $2 million in connected royalty true ups for one of our OEM customers. As a reminder, this is normal as our customers self-report royalty volumes that approximate their auto shipments with our technology in each quarter and periodically true up to actual. With this revenue achievement. Our gross margin for the quarter of 65% also exceeded our, the high end of our guidance of 60% gross profit was also benefited from a greater mix of higher margin license and connected service revenue as compared to professional services revenue. While our professional services revenue was lower than anticipated during the quarter, it performed at a higher gross margin than anticipated. Moving down the operating statement our non-GAAP operating expenses were $34.1 million for Q1 compared to $44.4 million from the same [quarter in fiscal year '24] this decrease of $10.4 million or 23% represents a full quarter of savings from the restructuring efforts conducted at the end of last year. We also delayed some planned R&D hiring until Q2. Additionally, the company received notice of acceptance of an international tax credit that allowed us to record $2.5 million in operating cost benefit. The tax credit benefit recognized this quarter related to 2021 through 2024 fiscal years and was anticipated in our full year guidance but later in the fiscal year. Our adjusted EBITDA of $1.4 million well exceeded our guidance of loss in the range of [$6.6million to $9 million]. This was driven by improved gross profit as well as decreased operating expenses from continued effort of managing our ongoing operating cost and the previously discussed international tax credit of [$2.5 million]. As compared to prior year, our Q1 revenue declined $87.4 million but this was driven by $86.6 million of non-cash revenue recorded in last fiscal year associated with our Legacy Connected Services contract that was decommissioned in Q1 of fiscal 2024. Our net loss for Q1 was $22.4 million compared to net income of $23.9 million for the same quarter in fiscal '24 again, the decline driven by the decommissioned Legacy contract. We ended the quarter with $110.5 million of cash and marketable securities down $19.9 million compared to where we ended last fiscal year. The lower cash balance this quarter related to our repurchase of $27.4 million in principal value of our 2025 convertible notes offset by our positive free cash flow during the quarter of $7.9 million. Our cash flow in Q1 absorbed approximately $8.9 million of cash restructuring costs associated with the transformation efforts of Q4 last year. We believe the good start to the to the year positions us well, to achieve our full year cash flow expectations. During the quarter, we recorded restructuring another cost of $11.1 million which included a $10.2 million charge primarily related to our transformation initiatives of which $3 million related to accelerated stock-based compensation associated with the termination of former senior management employees. As we look at our revenue breakdown and operating metrics there, the license revenue of $22.7 million was up $1.9 million or 9.1% from the same quarter last year and slightly ahead of our expectations. As planned, there was no material fixed license revenue during the quarter. Q1 connected services revenue of $13.7 million was up $3.5 million or 34% from $10.2 million the same quarter last year. When excluding the legacy revenue. We believe this this reflects a positive trend of increased demand for our connected vehicles. As planned. Our professional service revenue was down year over year. However, the work performed was more profitable than a year ago. As we review our key performance indicators, this quarter total adjusted billings which are defined as our total billings adjusted to exclude professional services, prepaid billings and prepaid consumption was $227 million. An increase of 3% for the trailing 12-month period this year compared to previous year. Total billings including professional services for Q1 of $69 million were up 7% compared to $64.6 million for Q1 last year. As a reminder when we look at our total licenses shipped pro forma royalties is an operating metric. We use representing the total value of variable licenses shipped in a quarter including the shipments from fixed licenses where revenue was previously recognized upon contract signing. We refer to shipments where revenue was recognized in prior periods as fixed license consumption. Our pro forma royalties were $36.7 million which were higher by approximately $1.4 million as compared to Q1 last year and in line with our expectations. Consumption of previously fixed contracts totaled $14 million this quarter lower than the same quarter last year by about 3% and lower than projected. Going forward we anticipate a lower level of consumption of royalties associated with past fixed license contracts. Our penetration of global auto production for the trailing 12 months declined by 251%. We shipped approximately 11 million cars with [San technology] the Q1 up 2.6% compared to last quarter but down 10.5% year over year. Q1 worldwide IHS production declined 1.2% compared to the same quarter last year and was up 10.8% quarter over quarter, excluding China, worldwide car production was only up 2.8% quarter, over quarter and down 4.8% versus same quarter last year. This is important to note as this shows that part of our worldwide penetration decline relates to the increase in China production within worldwide auto production. And to date, we have not been significantly successful at selling to Chinese OEMs into the chinese domestic market. Weaker production volumes among our top customers also contributed to our year over year total volume decline. That said the number of cars produced that use our connected services increased 5.1% on trailing 12 months basis compared to the same metric a year ago and 5.6% compared to last quarter. This reflects the increased demand for connected vehicles. Now turning to our guidance for Q2, we currently expect revenue to be in the range of 74 million to $77 million. This includes $20 million projected fixed license revenue expected to be signed during the quarter. Additionally, our Q2 revenue guidance absorbs approximately $2 million of headwinds in professional services we saw in Q1. We're projecting, we're not projecting any additional fixed license revenue for the remainder of the year. With the level of fixed license revenue forecasted in Q2, we expect gross margins to improve to between 74% and 76% that income to be in the range of $1million to $5 million and adjusted EBITDA to be in the range of $18million to $22 million. When taken in the context of full year guidance this means that the implied second half guidance for adjusted EBITDA would be negative if you simply base your calculations off the midpoint of our range. To be clear, this is not our intention to signal any change in direction of the business rather it is still early in the year. And as mentioned, Q1 was aided by a few timing related factors on the expense side that will catch up to us later in the week in the year. With that said, we had a positive first quarter but are not yet prepared to officially revise our [20 fiscal '25] revenue profitability and cash flow guidance. The strong start to the year position us very well and gives us confidence that our full year numbers are likely to come in towards the top end of the range of our guidance that we gave last quarter, especially full year adjusted EBITDA and free cash flow. When looking at our liquidity as previously noted, we repurchased $27.4 million of outstanding 2025 convertible notes. As Brian mentioned, our plan is to extinguish the remaining $60 million of convertible notes due in June through some combination of payoff and financing. Between now and June, we will continue to evaluate potential capital structures that could position the company to execute our longer-term strategic direction while also allowing us to retain a cash reserve to be flexible as we move forward. Overall, we are pleased with the solid results for Q1 and our continued financial performance. I will now turn it back to Brian to close our remarks. Brian Krzanich Thanks Tony. In closing. We're happy with our Q1 results and motivated by our Q2 forecast. We remain focused on execution, business process improvement, cost reduction and advancing our next generation road map. Now before we close, I want to take a moment to explain my philosophy on forecasting. We take our commitment to the street seriously and our goal is always to meet or beat our forecast. I have a firm policy not to change guns after the first quarter, our first quarter results and second quarter forecast give us confidence in our fiscal year 2025 forecast for revenue and we are projecting to be in the upper end of the range for adjusted EBITDA and free cash flow. With regards to the recent tariff announcements, we don't believe that there will be a meaningful impact to Q2 as we're already halfway through the quarter and the recent tariffs were paused earlier this week. Now for the rest of the fiscal year, considering the number of changes that have occurred just in the last several weeks. We believe the situation is still incredibly fluid. It would be too speculative for us to say what if any impact there will be on our results at this time. And we'll provide an update on our next earnings call in May if there is meaningful impact. We continue to believe in our ability to deliver on our Q2 and Fiscal year '25 guidance and in our growth for Fiscal year '26 and beyond. And we look forward to continuing to share our progress with you and we will now open it up for questions. Operator Thank you. (Operator Instructions) Nick Doyle, Needham and Company. Nick Doyle Hey guys, thanks for taking my questions. The design line and sop commentary is really positive so two questions there. How big can that first major customer program with [SXU I] be and second, how many units or any help around, sizing the six SOPs that are expected to really start here and, and how does that impact your PPU going forward? Thanks. Brian Krzanich Sure. So, Nick, this is Brian. I tell you that the first one is with the European auto manufacturer. If you look over the life of the contract, it's several million units, I think in the first year it's roughly a [million ish], maybe slightly less. And we're seeing the PPU upgrades that we've talked about in the past. Tony's going to talk to you a little bit about PPU after I'm done here because we really have a plan to start bringing PPU to you guys moving in and starting in the next quarter. If you take a look at the rest of the POCs that we have going, it's with all of the major OEMs just about in various levels of completion or start. And so again, it could be for the next gen one one that we're looking at right now. It could be multiple millions of units as we move forward and we're seeing the PPU upgrade that we expect for this product. So, there's interest and we're getting paid for the product we bring this technology is really the beginning of the agentic connected vehicle model that we have. And it will continue in next gen one and then next gen two as well. Nick Doyle Thanks. Tony Rodriquez Hi, Nick. Yeah, I mean, just bridging that on PPU. We, we've talked in the past on these calls that, we really needed to simplify the model and get to a volume times price model effectively. What we can say, we're not prepared to guide on PPU or effective PPU going for at this point by next quarter, we will. And we'll be able to give you more of these volume questions and PPU questions, but what I can say is there's really two fronts to us growing our PPU and I'll comment a little bit about the how we are kind of seeing that trajectory. But, but the two fronts are the number of connected cars. How many of our overall car's shift are connected? The second is the price in the, with the additional features of these newer products on the connected side, that increase in price and how it's driving our effective PPU. And again, at this point, though, I'm not prepared to provide a number, I would say that our effective PPU is really thinking about our license revenue in a quarter for those cars shipped so divided. So, the revenue divided into those cars shipped. And then on the connected side, it's the volume of the connected vehicles times really invited the billings, because as you, as we talked about before those billings are then recognized over a subscription period. So, we want to get to an effective PPU. What was the value of those cars shipped. What I have seen, kind of precursor to next quarter is that we are seeing the benefits of those two fronts, the increased number of connected cars and the increased price impacting positively and growing that effective PPU number. Nick Doyle Really helpful. Thank you. And then second, billings is trending in the right direction. Can the conversion of some of what's in the pipeline today? Get you to the [$290 million] that you talked about. And then if I could just squeeze in, why take in all the fixed contracts this quarter? Thanks. Tony Rodriquez Yeah. Two things. Yes. So yeah, the number that we, the company has historically given on is trailing 12 months billings, right? And we quoted that [$227 million] of trailing 12 months adjusted billings. And again, it's adjusted for not including billings related to professional services and then gives up and down associated with previous fixed and current fixed. So that, that's a good number. We've talked about that, billings this quarter will outpace our, our projected revenue and again, our projected revenue, which we have noted is, [$236million to $247million]. So again, the billings outpacing that I think we're on track to certainly do that. The second question, what was the, so. Brian Krzanich The second question was why do all the prepaid now? And really, it's just a combination nick of customers and what we're able to negotiate. You gotta remember the prepaids come with a discount in the past. That discount was often quite high. And by a shrinking the total footprint that we're going to do down to $20 million. And really being more selective and making sure that it's with deep partners and the right discounts, we're able to get this discount down to record levels. So, it was really, we had more demand than we had budgeted of 20 we got the right discounts. And so we went ahead and administrate it. That's, that's why we always tell you and I always say you really need to look at the full year. There's going to be lumpiness in our numbers quarter to quarter. But it's just, right, customers great discounts lower than we've almost ever achieved and it's the right thing to do now. Tony Rodriquez And lastly the timing in these cases, these, these customers with those lower discounts and everything that Brian said are coming to a point where their previous fixed is now consuming, down to a point where they want, they want to re up that prepayment and it fits into their fiscal year as well, which starts April 1st or well, sorry, within this quarter. So, they want to get it ahead of the next quarter. So, I think all those things are why we would do it. It's not that we planned per se to do it. It's we're taking we're being opportunistic with that $20 million. Nick Doyle Thank you. Operator Mark Delaney, Goldman Sachs. Mark Delaney Yes and good afternoon. Thanks for taking the questions. Good to hear about the breadth of your customer engagements and momentum with your Gen AI Solutions. I'm hoping you can expand a bit more on that topic and maybe speak to the competitive landscape for digital assistance and any sense of how your market share may trend relative to what you've seen with your traditional products. Brian Krzanich Sure. So, I tell you the competitive landscape is, really pretty much what it was last quarter as well. We continue to see some of the big players like Google and Amazon in there. We see some of the, I'll call it software providers like ourselves. We see [Sound Homeone] and some of the others. And then we see some, I'll call it DIY where there are either [SoC] providers or some of the OEMs starting. Now, what happens is they're biting off bits and pieces. And they're often times being very prescriptive in some of the things like they must be connected, or you're locked into certain LLMs. So, our approach to that is always, hey, we're agnostic, we can use the latest and greatest LLMs, you can choose, we can customize, you can choose customized wake up words. A good example was Renault avatar where we customize the Wake-up word around Renault, which is their, their Avatar's name and really customize the user experience. And that's really how we approach these. So, and then we offer, embedded capabilities that are quite strong and as we move through this year get even stronger, next gen two. And this is what Microsoft is really helping us with around the CaLLM embedded LLM capabilities, shrinking the footprint and getting, two agentic LLM capabilities embedded in a car, which means you have to get small footprint from memory the right sizing the [SoC] and, being able to get it capable of having the right latency, those are all the things that we compete with, but otherwise the competitive landscape hasn't really changed. Mark Delaney That's a whole context, right? And, maybe too soon to try and quantify. But I mean that the share of market, do you think it's similar to what you've seen before? Do you think you can maybe gain some share with all the traction you're seeing? Brian Krzanich Yeah. So, I mean, Tony tried to kind of walk you through and, and basically, if you look at the OEMs that we typically participate in which although I'll call it, let's call it the Western OEMs, our market share is relatively flat in that space. What we're seeing is, China inside of China, which, is taken away from our traditional OEMs and our ability to progress into China in China has not been there yet. And we're continuing to look at options and ways to do that. We believe our technology competes very well in that space. It's all about, basically, national winners that they're selecting. Now China outside of China we have good relationships and are in BYD and Zeekr and Great Wall [Neo]. So, we're in some of the Chinese outside of China. But if you look at the OEMs that we typically the Western OEMs that we typically play in our market share is relatively flat. Yes. Mark Delaney Got it. So, one last one for me, just on the restructuring actions, I think you said on the last call you expected to be at the high end or maybe even someone above the $35million to $40 million annualized target, maybe update us on where that came in. And I think you said it's all in place, exiting the fiscal first quarter, but just to clarify where you stand on cost action and if there's any more to come or it's in place. Thank You. Brian Krzanich So, I can start that, and Tony and Tony can answer in more detail. I think also Mark; I may not have completely answered your first question. So, I do think we will in the OEMs that we play with or that we participate with, we will gain share. Our target is to gain share. We saw a win back in China around the cloud. We're continuing to drive we believe a leading-edge road map of products. So, our goal is to continue to gain share in the guys that we typically play with. And then, we're aggressively seeing what we can do inside of China. Now, your question was cost reduction. Your second question was around cost reductions and, and cost improvements and tell you that what we've already forecasted for 26 or excuse me for 25 is already, is work that's for the most part, already done. So, you're seeing the results of it filters through the cost system. So, whether it's headcount reductions or site closures or site reductions, things like that are already filtering through as the year goes on. We do have a set of programs that I talked about that we're continuing to look at and drive. And if we take something like improving our contracts and the efficiency within our finance unit, that's what Tony has ongoing right now. That work will probably take through at least halfway through this year and into probably the second half of next year. And you're really going to see the benefits of that one roll into 26 and it's hard for us to forecast right now because if we look at things like, reducing the number of legal entities or improving how we financially account for things and improving and streamlining that, we're still trying to figure out how do we account for how much effort and work? Does that remove from the system and spend it? You know, how many fewer tax returns do we have to do? How many filings do we not have to do? But most of those will roll into 26 for additional cost reductions as we move forward. Operator Colin Langan, Wells Fargo. Colin Langan Oh, great. Thanks for checking my questions. You mentioned you got it to the high end of the range. You said there were some factors in Q1 that were outliers. You just remind me what they are? Was it the $2 million of royalty? And then the 2.5 of tax credit. Are those the items you're referring to that were kind of? Tony Rodriquez Yeah, a couple of the onetime items, we say onetime items and I'll talk through a couple of it. One is the true ups and as we, as our royalty reports come in our OEMs and tier one's report royalties, they report and then they oftentimes will true up to actually report an estimated number of true up the actual. So, in this case, there was a connected services contract, and we did some work with an OEM, and you wanted to make sure we were capturing all of our activity and got $2 million of a true up for past. So, some of that was in quarter of that $2 million. So, it isn't it would have, it would have hit the quarter as well. So, and then some of this is before the quarter. But if you, even if you take that $2 million away, we were kind of smacked down in the middle of, of our, our guidance. This put us over, over the edge on guidance on the top line. The tax credit was something that was baked into our full year expenses. We just happened to get a confirmation of that credit in Q1. We were able to record it for previous years, [20 the years], 2021 through 2024 in the first in Q1 where we had [that B] into a savings of [CapEx] for fiscal '25 but not necessarily in Q1. So those were the two main items that drove in improved profitability to the bottom line. Colin Langan And the tax credit isn't a special, wasn't treated as a special item. Tony Rodriquez I'm sorry, say that again. Colin Langan The tax credit wasn't a special adjustment on special item. Just out. Tony Rodriquez Yeah, the tax credit was, it's an [off X] credit international tax credit associated with offsetting R&D costs. And, so, in previous years we incurred the entire international for this international, this country. We incur the cost for R&D without the same of the credit, this was a catch up for that country. And again, that 2.5 related to 24 and before, so we will have some savings, in 25 as well the rest of the year for the 25 expectations for that credit. But that was kind of the catch up. Colin Langan And you mentioned in the closing commentary about tariff risk, I got a bit, I'm a little surprised. I kind of assume software wouldn't have much risk, but where is your tariff exposure? If there are tariffs? I should be thinking about that. If you could frame it. Brian Krzanich Sure, it would just be in unit volume. So, if the projections were at one point that if the tariffs were applied, it could affect 25% of the cars and multiple [$1000] increases in cost. And so, if people buy fewer cars. That's when, we get paid from a shipment standpoint. Right. So, it would be purely volume. So, we don't get we are a US company. And so at least right now the talk of tariffs it's, it doesn't apply quote to our product, but it applies to the [Poten] or would have applied potentially to our customers products. And that's all we were, [counting again]. And as I said right now, they've all been put on hold and we're halfway through the year. So, we don't see it right now. It's just an impossible prediction. Colin Langan And just lastly, you talked about [XUI], how quickly can this ramp, how quickly can adoption be? Because are our contracts 2 to 3 years or is this something that could be, added and drive that pricing higher in the next year or two pretty quickly? Brian Krzanich Sure. So, you have to remember that there's two versions of our agentic large language model software version that we think about. One is an embedded non connected version and the other one is a connected version and the connected version gives you the ability to do things like, hey, what was the latest score on the football game or, who won La Liga this weekend? You know, it gives you real time data. It also gives you points of interest that are updated and all of that kind of information. But it's not required to run the car, do navigation. Those are all embedded efforts. Typically the cars come from anywhere, Tony and I were talking about this this morning from one to we've seen as long as 10 year contracts for connectivity. I tell you that the majority of them are probably somewhere in that 2 to 3 years. At that point, the customer, the end user, the driver makes some agreement with the OEM the manufacturer of the car to continue connectivity at some rate, we don't drive that. And we're just, it's the early days of seeing what we sign up is for people. So we don't really have a forecast for that. When we look at this, we look at just most cars are being connected as we ship them. What's that rate? And that's how we project through 25 and all from that perspective because most of those cars are going to still be within the one year to three-year terms. Colin Langan Got it. Alright. Thanks for taking my question. Operator Jeff Van Rhee, Craig-Hallum Capital Group. Jeff Van Rhee Hey, Brian Tony, this is Daniel on for Jeff. Maybe just sort of as an example of the sort of places where you're seeing momentum if you could speak to that Chinese win back, you mentioned, maybe just describe that deal in a little bit more detail, what that bake off was like, how you won, why you won, etcetera. Brian Krzanich Sure. So that one was with the Western OEM cloud infrastructure, and we won based on again, the technology leadership that we provided and our willingness to be much more flexible and configure their cloud system exactly how they want it. So, it was a win back that we've had against a very strong competitor, prior local competitor. Jeff Van Rhee That's helpful. And then just on connected, either for Brian or Tony, just on the metrics that we should be looking at, a few different ways we could read this in new connected, I guess if you exclude the [$2 million] up this quarter, I guess it's down sequentially, it's up single digits, year over year, the trailing 12 month car shipped, that's growing 5% but a little bit of a deceleration from last quarter. Just a bunch of different ways we could read that. How would you cutting through all that, speak to the metrics? What's the most relevant, how should we be looking at the trajectory there? Tony Rodriquez Yeah, so I think there's a couple ways to look at it as we think about our 22 fronts of growth with regard to connected, right, is the number of connected cars that connected rate. So, for every car that ships out, how many of those are connected? And then two, what is that price per unit that we're seeing over both, connected is that growing as we anticipate? And how is that contributing to overall PPU? So, it's, it's those two fronts, what I would say is that we're not ready to provide that, that, that guidance right now on connected rates and PPUs. But and then the second one is, or the third one would be billings. So just remember too that, we, so we, if a car ships out with a connected at that time, we're billing for two things. One is the embedded license which drops to revenue right away and then the connected, which then gets recognized over the future that's why as the first question was, hey, we're what's your billings? Are you on track for your billings this year which will outpace our GAAP revenue because the connected billings will be billed but not recognized until the future. So, and we're, we don't break apart our billings between license and connected. So there's components that if you're trying to model are missing and we, and we're, we know that it's important to you. It's important for us to know, to be able to give you that, that information to help you model. But that's the really next quarter. But I think the way things you need to think about as we go forward are the connection rate, the price per unit on the connected side, the price per unit overall of the car shipped. And then lastly the growing billings within connected. Jeff Van Rhee And then just last for me, just a modeling questions the professional services [COGS] dipped below $10 million this quarter. I think first time we've ever seen that and that's kind of been a little bit of a trajectory over the past year for those [COGS] have been going down. Is that sustainable? Is that structural, is, is that one time just sort of our expectations for PS COGS? Tony Rodriquez Yeah. So yeah, so PS is, is down as we, as we've said, what I mentioned in the call is that our margin for PS is, actually, proved, I think, we typically plan that business to see that business as a 30% margin business, which brings down our overall margin this quarter. It was north of that, which was beneficial to us. So overall COGS were down because professional service revenue was down. But also for what we did sell, we sold it at a higher margin. So, as you think about modeling, you could probably model professional service margins at north of 30 now. Jeff Van Rhee Okay, thanks, Brian. Thanks Tony. Operator Jeff Osborne, TD Cowen. Jeff Osborne Hey, thank you. Just two quick ones from my side. One, I think it was last quarter. You gave some usage stats on the gen AI platform. I want to say it was maybe June, July that your first customer in Europe pushed that update into the install base. Is there any metrics you can share about usage of the newer platform relative to the older conversational AI non-AI solutions. Brian Krzanich But I don't have any just any new metrics. I tell you we're continuing to see increased usage just if you look at our cloud traffic, that as the generative AI connected vehicles go out, we're continuing to see our cloud usage increase as well. But I don't have any new numbers for you from that perspective, but it is. Jeff Osborne Wasn't sure if there's like a halo effect in particular as you had an installed base of, I think it was the ID threes and fours if my memory is right that new users were using it for a month or two and then that tapered off, but it doesn't sound like that's the case. Is that right? Brian Krzanich That's, that's not what we're observing yet. No, we're continuing to see it. In fact, one of the biggest things we work on is really helping end users understand just what the car is capable of doing. So, what we're finding is as users see, all they can do with voice in their car, with these connected cars, with the gen AI, they're using it more and more. Jeff Osborne That's great to hear. My last question is just as we approach the June deadline for the debt, It remind us is there a minimum cash balance that you feel comfortable having? Obviously, you've got a nice EBITDA guidance here for Q2, I assume you generate nice free cash flow. But as you think about paying off the remaining tranche, how should we think about the options and then what the minimum cash balance you feel comfortable having? Tony Rodriquez Yeah, we don't, we don't have a minimum per se that, that said we're very comfortable with paying it if we pay it off and don't refinance any, we'll likely be north of $70 million at the lowest point. So, is, is that the exact right number? That's what we're looking at as far as overall capital structure to see, where we want to be, but we're comfortable that it if we need to, we can continue to grow the cash flow of the business and grow from a, a lower point of $70 million of cash after the payoff to you know, to where that optimal amount is. Jeff Osborne Got it. That's all I have. Thank you. Operator And I'm not showing any further questions at this time. I'd like to turn the call back over to Brian for any remarks. Brian Krzanich Okay. I would just like to, reiterate, we're really proud of our Q1 results. You saw our forecast for Q2, and we've also said that for the full year, we're comfortable in saying we'll be in the upper end of our guidance for both free cash flow and adjusted your data. We're really driving hard as we enter Q2 into continuing to push our generative AI development work and doing our POCs at the customers and we look forward to talking to you in May to give you an update and the progress on all of those. And with that, I'd just like to close the call with a Thank you very much and I look forward to talking to you all in May. Operator Thank you, ladies and gentlemen, let's conclude today's presentation. You may now disconnect and have a wonderful day. Sign in to access your portfolio
Yahoo
06-02-2025
- Business
- Yahoo
Q1 2025 Azenta Inc Earnings Call
Yvonne Perron; Vice President, Financial Planning & Analysis, and Investor Relations; Azenta Inc John Marotta; President and Chief Executive Officer; Azenta Inc Lawrence Lin; Executive Vice President and Chief Financial Officer; Azenta Inc Jacob Johnson; Analyst; Stephens Inc. David Saxon; Analyst; Needham & Company Vijay Kumar; Analyst; Evercore ISI Matt Stanton; Analyst; Jefferies LLC Paul Knight; Analyst; KeyBanc Capital Markets Inc. Andrew Cooper; Analyst; Raymond James Yvonne Perron 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 2025. Our first quarter earnings press release was issued before the open of the market today and is available on our Investor Relations website located at in addition to the supplementary PowerPoint slides that will be used today during the prepared remarks. Effective this quarter, the first fiscal quarter of 2025, the results of the medical systems are treated as discontinued operations. I would like to remind everyone that during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled Safe Harbor Statement, the safe harbor slide on the aforementioned PowerPoint presentation on our website, and on our various filings with the SEC, including our annual report 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, John Marotta, and our Chief Financial Officer, Lawrence Lin. We will open the call with remarks from John, and then Lawrence will provide a detailed look into our financial results and our outlook for fiscal year 2025. We will then take your questions at the end of the prepared remarks. And with that, I would like to turn the call over to our CEO, John Marotta. John Marotta Thank you, Yvonne. Good morning, everyone, and thank you for joining us today. We're happy to be with you in the morning rather than later in the day. And going forward, we will follow the same timing with the earnings release in the call before the market opens. This gives us more time for same-day interactions with our analysts, investors, and other interested stakeholders. Before getting into the numbers, I want to give you an update on how I've spent my time the first few months at Azenta. Since September, I've spent most of my time getting to know our business in the best way I know how. On the ground with our customers and our associates at our manufacturing sites and our lab facilities around the globe, including the UK, China and the US. These meetings with our teams have been invaluable. They have given me a chance to see firsthand the incredible work being done and hear from those who drive our success every day. These visits have deepened my understanding of our operations, our opportunities, and most importantly, our people. I'm even more excited about what lies ahead. Alongside our highly talented teams, we've been making progress towards our accelerated goal of delivering profitable growth and long-term shareholder value. Our work is well underway to further enhance our competitively advantaged portfolio, differentiated products and services, and strong market positioning. The Board aided capabilities of the newly created value creation committee have been working alongside me and my team to focus on and oversee our strategic initiatives. Portfolio optimization, operational excellence, and value-enhancing capital allocation. Our sample management solutions business is unique. I've had the opportunity to observe firsthand the highly differentiated products and services we deliver to our customers. To that end, we are excited that the UK bio center selected Azenta to expand its sample storage capabilities with the BioArc Ultra. The BioArc Ultra will deliver significant operational efficiency and reduce footprint through high-density automated storage. The 16 million sample storage system includes our sample intelligence software solution with digitized library and warehouse workflows and the picking capability of up to 9 million picks per year. This is a clear testament to our market leadership position and reflects the trust and confidence that customers place in our capabilities and track record of delivering exceptional value. In our Multi-Omics GENEWIZ business, I have clearly seen how much our customers consistently prioritize our high-quality offerings and trust the research expertise and consultative approach that our scientists provide to genomics analysis and scientific research. Across Azenta, we have a talented team that is focused on enabling breakthroughs faster for our customers. Now I'll shift my focus to the first quarter 2025 results, our full year outlook, and then dive into key updates on the focus areas that I shared with you during the last earnings call. As a reminder, during the fourth quarter of 2024 earnings call, we announced our decision to sell B Medical Systems. Effective this quarter, B Medical is reported and discontinues operations, and I will not be discussing the business performance in my remarks. I'm pleased to share that fiscal 2025 was off to a good start with positive momentum under our unique and differentiated offerings. On a year-over-year basis, organic revenue grew 4% and EBITDA margin expanded by 400 basis points. In Multiomics next-gen sequencing, gene synthesis and clinical services were strong. In sample management solutions, we saw growth in our consumables and instruments, clinical bio stores, cryogenics as well as sample storage. We remain cautiously optimistic about the gradual market recovery. We are confident in our outlook and are reiterating our full year 2025 guidance of organic revenue growth between 3% to 5% and adjusted EBITDA margin expansion of 300 basis points. Lawrence will go into more detail in our quarterly financial performance. At the last earnings call, I shared with you that we're focusing on several key areas. The first is portfolio optimization, the second is operational excellence; and the third is value-enhancing capital allocation. Each quarter, I will update you on the progress we are making in each area. In portfolio optimization, the medical sale process is underway, which will help simplify our portfolio and will allow us to focus on driving revenue growth and profitability in our remaining businesses. We've engaged external advisers but are still in the initial stages. We will update shareholders as this process develops, but won't be commenting further at this time. More broadly, our priority will always be to strategically review the portfolio on an ongoing basis and to ensure we are maximizing our full potential in creating value. We have made some early and positive strides in operational excellence. The efforts we are making will build the foundation for long-term value creation, reducing complexity, and simplifying what we do and how we work each day. I am confident that by focusing on operational excellence and transformation, we will deliver best-in-class growth. Specifically, we're starting on our business system and operating model. We brought together our top leaders for a two-day training on the business system and the implementation plan. The level of engagement, enthusiasm for the teams to learn a new way of doing business was encouraging. They understand the need for change, they demonstrated interesting curiosity and lean tools. We are being our leaders with the skills and the knowledge through participation in [Kaizen] events to become experts in the field, empowering them not to only excel individually but also to lead and mentor others and amplify their impact deep into the organization. We're working on continuous improvement and simplification is the way we work. A change in mindset will be modeled at the top and methodically cascaded throughout the organization. It will be challenging and sometimes bumpy. The business system model will help drive our performance and further unify our culture. I'm excited about the road ahead. To measure our performance, we have carefully selected our key performance indicator, which we call core value drivers or CVDs. These align our daily management and operating decisions with our strategy. These CVDs are broadly focused on revenue growth, profitability, customer-facing metrics for quality and on-time delivery, employee metrics on internal advancement and voluntary turnover, as well as working capital and cash management. We are starting to better utilize our information systems to provide more timely, visibility, and insights across the organization. Recently, our team quickly developed and rolled out a weekly automated sales report, which provides a visual dashboard to help focus deeply on running the business, to see where we're on track in red and where we are on track in green. This new tool will allow us to prioritize and focus on addressing issues, identify countermeasures where necessary, and save valuable time and resources and enable better, more consistent performance. This example illustrates the low-hanging fruit available to us. We have many opportunities like this that are highly achievable and can have rapid and meaningful impact on our performance. As an organization, we will be programmatic in how we spend our time. We are prioritizing customer on-time delivery and products and services quality, which will lead to gross margin improvements, indirect savings, inventory reduction, and importantly, improved customer experience and satisfaction. This will have immediate positive impacts on our profitability and how our customers see us, and organic growth acceleration will follow with a lag. In line with our priorities, we have scheduled three kaizens for the fiscal second quarter, two are in sample repository solutions, one focus on sample management workflow automation that will efficiency and scalability, and the other on simplification of order-to-cash process to shorten cycle time and improve process quality. The third Multiomics for improved payment capabilities to shorten the cycle from study inquiry to scientific results. These Kaizens will identify areas that will identify the need for more Kaizen starting the flywheel of continuous improvement. In January, we executed a separate restructuring plan to rightsize our G&A cost structure and reposition our resources. Simplification of corporate and operating company functions is critical to provide clarity and accountability while empowering our employees who are closest to the customer to make the right conversations. We have restructured head count and pushed R&D, quality, sales operations, finance, human resource and other functions into the two operating companies. Each operating company will undergo an organizational transformation in the coming weeks to ensure an optimal go-to-market and commercial structure. We are freeing up capital that will be redirected to the highest impact growth investments in sales, marketing, and R&D. There is a sense of excitement and optimism in the organization towards the changes and increased clarity around decision-making. To help implement standard procurement processes, we are in the process of standing up in new global procurement organization. This group will drive direct material and indirect cost savings, optimize inventory levels, streamline our supply chain, and optimize our preferred supplier list. More to come on this. Finally, on the capital allocation, the Value Creation Committee of the Board was created in November. I'm working closely with the committee to establish the monthly framework, where we will review progress on our financial performance, working capital initiatives, margin improvement as well as evaluate potential investments. We will prioritize investment opportunities across the four levers, which are gross margin productivity, organic growth offerings, inorganic growth through strategic tuck-in and M&A, and repurchasing our stock. We will make our capital allocation decisions through a standard and robust returns-based process. As I mentioned before, we will compete for resources internally to unlock long-term shareholder value. I'm excited about Azenta's potential and confident in our ability to drive long-term sustainable value to our customers, our employees, and our shareholders. I will keep you updated on our progress. With that, I'm pleased to turn the call over to Lawrence. Thank you. Lawrence Lin Thank you, John. Good morning, everyone. Thank you for joining us today. I'm honored to be here with you for my first earnings call as the Chief Financial Officer of Azenta. Before we discuss our financial performance first quarter of fiscal 2025, we want to take a moment to acknowledge the trust that you placed in me to help lead this great company. Additionally, I would like to recognize the dedication of our entire Azenta team who demonstrate every day their commitment to delivering value for our customers, fellow employees, and shareholders. I want to share my initial reflections following my 90 days on the job. These past three months have been insightful and energizing as I work to immerse myself in learning the business, understanding the dynamics of our operations, and engaging with the talented individuals across the organization. I couldn't be more excited to be here. Azenta has a history of delivering value and innovation, and it's clear that the team is deeply committed to our purpose of enabling breakthroughs faster. I've been impressed by the resilience and adaptability demonstrated across the organization particularly in navigating challenging market conditions. At the same time, after spending time with the team, it's clear to me there are numerous opportunities to enhance our financial performance. Streamlining our operations to work simpler and are deploying technology more fully to automate and build robust capabilities will enable improved cash flow generation and accelerate profitability. These initiatives will not only help us address immediate priorities and challenges, but also sets the scalable foundation for sustainable, long-term value creation. As a reminder, the results we are referring to today, unless otherwise noted, excludes B Medical Systems, which is now reported under discontinued operations. I am pleased to report all continued organic growth in our combined sample management solutions and multiomic businesses. The strength of our portfolio and our ability to better address the needs of our customers in an ever-evolving and uncertain and still difficult market environment. In addition, our continued focus on cost optimization and driving profitable growth is positioning us to improve margins to deliver strong and consistent results for our shareholders. To supplement my remarks today, I will refer to the slide deck available on our website. turning to slide 3 for some highlights. First quarter revenue was $148 million, up 4% year-over-year on an as reported and on an organic basis. Both the SMS and multiomic segments performed well in the quarter, given the continued challenging market environment. With growth in next-generation sequencing, gene synthesis, consumables and instruments, store systems as well as sample store. Non-GAAP EPS for the quarter was $0.08. Adjusted EBITDA margin was 9% in the quarter. This represents a margin expansion of about 400 basis points versus last year demonstrating the impact of our transformation initiatives as well as our strong focus on improved operational efficiencies. Our results were impacted by certain onetime costs, including those related to executive compensation in connection with the recent restructuring of our management team. Free cash flow $2 million for the quarter, driven primarily by lower accounts receivables and increased billings related to our source projects. We ended the quarter in a strong position with $530 million in cash, cash equivalents and marketable securities which includes $27 million of cash held in discontinued operations. Now let's turn to Slide 4 to take a deeper look at our results in the quarter. Total revenue was $148 million, representing a growth of 4% within organic. In the first quarter, non-GAAP gross margin was 47.6%, up 270 basis points year-over-year. The improvement is largely a result of higher revenue, favorable sales mix, operational efficiencies, and certain nonrecurring items already in the same period last year. Adjusted EBITDA margin in the quarter was 9%, up 400 basis points year-over-year. Again, non-GAAP EPS was $0.08 per share. With that, let's turn to slide 5 for a review of our segment results, starting with sample management solutions, or SMS. SMS revenue was $81 million, up 3% year-over-year reported and up 2% organic, driven by growth in sample repository solutions and core products. Consumables and instruments clinical and cryogenic store systems and sample storage were the drivers of growth which was partially offset by year-over-year decline in large automated stores due to timing. SMS first quarter non-GAAP gross margin was 47.8%, up 460 basis points year-over-year mostly driven by operational efficiencies, sales mix, and the impact of certain non-recurring items recorded in the same period last year. Turning next to the multiomic segment. Multiomics delivered revenue of $66 million with a growth of 6% on both and as reported and organic basis, demonstrating our strong execution in the face of several market headwinds. Next-generation sequencing grew 11% year-over-year. This was the third quarter of price stabilization and double-digit volume growth. Key large deals also contributed to the significant year-over-year gains, specifically in the North America and Europe regions. China delivered organic growth of 7%, once again outperforming a market with macro challenges. Gene synthesis grew 5% compared to last year with great execution by our teams in China in what continues to be a tough market environment. [Sanger] sequencing revenue was down 11% year-over-year as we continue to see the impacts of the shift of sequencing technology. This pressure was offset by growth in Plasmid-EZ, our ONT product, which continues to be strong and gaining ground. Multiomics first quarter non-GAAP gross margin was 47.4%, up 30 basis year-over-year, driven largely by the growth in NGS volume as well as labor and material productivity gains that helped to offset price headwinds. Let's turn to slide 6 for a review of the balance sheet. We ended the quarter with $530 million in cash, cash equivalents, and marketable securities. Excluding discontinued operations, the balance was $503 million. We had no debt outstanding. Capital expenditures for the quarter were $8 million, of which $7 million was investment for growth and scale in our sample management solution and Multiomic businesses. Turning to guidance on slide 8. As you saw in our press release, we are reiterating our guidance for 2025 as we expect organic revenue growth of 3% to 5% for the full year, with multiomics to grow low single digit and sample management solutions to grow mid-single digits. We are reaffirming our commitment to 300 basis points of adjusted EBITDA margin expansion year-over-year. In closing, my priority as CFO is to ensure that we deliver value to our customers, employees, and shareholders. This includes maintaining transparency, enhancing shareholder returns, and aligning our financial strategies with our long-term vision. I look forward to engaging with you regularly and sharing updates on our progress. This concludes our prepared remarks. Now I'll turn the call over to the operator for questions. Operator (Operator Instructions) Jacob Johnson, Stephens. Jacob Johnson Hey, good morning, John and Lawrence. Thanks for the time. Maybe a couple of questions on recent headlines. First, John, you mentioned the UK bio center, BioArc win. Is there any way to frame up the size of that opportunity, maybe the timing of the revenues and whether this is something that was contemplated in guidance? And then I guess along the same lines, I'm just kind of curious, how many other these kind of BioArc Ultra wins could be out there? John Marotta Good question. Jacob, thanks for your continued support here. Couple things on our BioArc Ultra, as you know, that's our ultra-low high-throughput warehouse management system, sample management system, and biological management system. So it's got a lot of versatility on these end markets. From our perspective, that was in our guidance, and so that was contemplated there. We're really excited about the implementation of that. As you know, it's a POC business. Highly customized and multimillions of dollars. We have -- just for some context here, I mean, we have seven quad banks in this facility already. So it's a continuation of our partnership with bio center, an important customer for us going forward. Lawrence, do you want to talk about phasing of this? Lawrence Lin Yeah, I think, as John said, the accounting process a percentage of completion, Jacob, I'm sure you're aware, we expect the UK bio center to be operational early in 2026. Jacob Johnson Got it. And then yesterday, there was a headline about Illumina being added to the unreliable entity list in China. I know it's probably early, but we're getting questions on it. So can you talk about any impacts that you could see from that headline to your NGS business in China or maybe another is there any way to frame up how large the NGS business in China is for you all? John Marotta So the team has done a nice job of anticipating this for quite some time in China. We do not own any Illumina products in [NovaSeq] specifically in China. We do have a few Illumina products internally. Most of our NGS business, we actually partner with BGI in China specifically. We run two platforms in particular on NGS. And that is the Illumina platform and the MGI platform from BGI. As you know, BGI was put on the list in biosecure and a Pentagon -- a list at the Pentagon as well. Those -- our partnership is only in China with that. And so we have the ability to move customers over to the MGI platform, if needed. But again, we've been -- the team in China has been anticipating this for quite some time. The risk is low. I'll let Lawrence quantify that in general, but we've been anticipating this for quite some time. Lawrence Lin Yeah, Jacob, as you mentioned, really, when we look at the revenue for NGS particularly in the region of China, it's roughly about 7%-ish to 10% of Multiomics. So again, what John mentioned is we see no material risk due to the Illumina issue. Jacob Johnson Got it, that's super helpful I'll leave it there. Thanks for taking the questions. John Marotta Thank you, Jacob. Appreciate it. Operator David Saxon, Needham. David Saxon Great, good morning. John and Lawrence, congrats on the quarter. So just a few for me on Multiomics, maybe I'll start. So the guide stayed at low single digits. You did send organic this quarter. It sounds like there were some orders that came in, in this quarter. But just given that guidance implies the deceleration in the back half of the year or the balance, I should say, what's driving that? I think NGS comps get tougher, but like anything you're seeing in Sanger or Synthesis that would drive that deceleration. John Marotta Thanks, David, appreciate your comments here on the morning as well. It's good to be speaking with you in the morning. Let's talk about, first, the way we're thinking about this. I mean we're looking at the full year. We're not looking at the quarters right now. Second thing is we are in the middle of a transformation. So we're holding that guide right now. We are going to be coming back to you in the summer with an Investor Day and kind of view of our LRP in general. I want to hand this over to Lawrence to talk to you about phasing and what this looks like quarter-on-quarter. Lawrence Lin Yeah, David, nice to speak with you. Look, as John alluded to, it's mainly a timing issue here. We had a really solid quarter to your point, right? NGS was up 11%. So we're really pleased about that. As John noted, I think as we get closer to Investor Day, more to come here now. But right now, we're just kind of -- we've got a lot of change that's happening, and we're looking at the phrasing as well. David Saxon Okay, great, Lawrence, maybe we'll stay with you on margins, just really strong improvement. It does seem like the guide implies EBITDA kind of margins kind of plateau in the back half. I don't know if it's just how you're thinking about the year versus the quarter early, but any comments around like how much of that is conservatism versus any timing from the Ascend '26 initiatives? And then just on B Medical, I don't know if this would be for John or Lawrence. I think last quarter, you talked about potentially closing that in the fiscal first half. It sounds like this morning, you're talking about still in the initial stages. So is the message essentially that it's going to probably take longer than that? Thanks so much. Lawrence Lin Yeah, David, I'll take the margin one, and maybe I'll pass it to John on as on the B Medical. First and foremost, just kind of ground ourselves a bit. EBITDA for the first quarter was 9%. I did mention during kind of the prepared remarks, that we had some onetime events. Excluding some of those onetime events, we're north of 10% EBITDA. So it gives us a bit of a pathway towards kind of what we're looking at 300 basis points. As we step through the balance of the year, John noted that we did it of the corporate function. That will also -- is within our guidance and it is a couple of million dollars on the balance of the year. We've got some more to come, but we feel pretty confident right now in our guide based on some of the actions we're taking this quarter. But more importantly, what we've got in queue for the second and third. John Marotta David, a few other comments here. So on restructuring, about 17% of corporate, we restructured. We're going to continue that transformation in the operating companies and making sure we've got the right structure to go forward. So the way we're framing this is it's around structure, process and then our people is the framing of how we're setting the company up. In regards to Ascend 2026, that put us on the right path. This is just going to be a way of life in how we run our business going forward. So we're going to -- I mean we want to keep G&A at a very modest level in this company and then accelerate around sales and marketing and R&D in these growth investments. Right now, we're trying to -- we're getting our resting heart rate in the organization to figure out what steady state looks like. We're really pleased with the teams have been making. Restructuring at corporate was very well done. Hands off to our HR team and the rest of the leaders that executed that. And our operating companies are entering their transformational phase as well. As it pertains to the one-timers that Lawrence discussed, I mean we're pleased about our trajectory financially on the bottom line right now. I mean those one-timers, if you back those out, we're pretty confident in where we're moving the bottom line right now and more in control there. In regards to B Medical, what I can tell you is our value creation committee, Board members are involved in that process. We're going to help accelerate that. We're very pleased about maximizing -- well, let me say it differently. We're focused heavily on maximizing the value of that sale, and we're pleased that the committee members are involved in that specifically. I think that's going to really help us partner with our outside advisers to maximize value. Listen, the funnel in regards to inbound and in our outreach, I'm pleasantly surprised at how many party involved and interested in this business. So that's the update on that one, David. David Saxon Okay, super helpful. Thanks, guys. Operator Vijay Kumar, Evercore ISI. Vijay Kumar Hey, guys, good morning. Thank you for taking my question. A couple of maybe macro-related questions on recent noise around tariffs. Can you talk about your exposure to China, Mexico, Canada, and any risk related to tariffs? John Marotta Sure. Let me talk about -- just give you the high-level context and then Lawrence will jump into the they'll dive into the details of our -- if there's a materiality there or not. As it pertains to Mexico and Canada, we have minimal risk. Again, our businesses in multiomics specifically are set up regionally. It's a local-for-local model. We do have some global overlap around our synthesis business. In regards to SMS in that business unaffected. In China specifically, as you know, there's a 6.5% tariff and what is contemplated right now at 10%. I'll let Lawrence get into particulars of that in terms of materiality or not. Lawrence Lin Yeah, Vijay, good to speak with you. In terms of China tariff, looking at kind of the step up to 10%, we believe the impact of Azenta is really immaterial. Potential incremental, probably $1 million maybe $2 million at most that will be at the upper end. Really, as you think about this is -- we kind of known this was going to be happening. So we've really factored a lot of this into our guide. As you know, this is a pretty fluid situation. So we're kind of monitoring the developments here. And if the situation evolves adversely and the underlying understanding changes, we will communicate that to you. But right now, we feel pretty good that it's a very immaterial amount for us. Vijay Kumar Understood. And then maybe one on the guidance. In SMS, it looks like it was off a slow start. I know the guidance mid-singles for sample management solutions. I think stores, you said low singles. So maybe talk about your orders, backlog. Was this just a timing element or some cautiousness from customers, perhaps which we're seeing here in the numbers? Lawrence Lin Yeah, Vijay, you're absolutely right. It's really around timing. Our large stores in the first quarter was down 13%. However, we have a pretty robust pipeline and backlog and continues to build for '25, '26. Just to provide a little bit of context around that, we've got a good line of sight for the next 12 months here. And we've got 75% of the 2025 revenue secured. So feel pretty good. Sometimes these capital projects do kind of move on us quarter-to-quarter, as you saw similarly to what the UK came up, but we feel good. And on top of that, as you look at C&I, we continue to see strong demand up in the quarter about 9%, particularly, in instruments. So again, mainly timing here, Vijay. John Marotta Vijay, similar color here. So we were at [SOAS] last week. As you know, that's the biggest trade show in that segment of the market. We had a lot of inbound, over 300-some leads. We're pleased with the activity during that trade show. I think the other thing that we've learned, and we spoke with a lot of customers last week, I mean, personally, we spoke a lot of customers in. There's some uncertainty in these end markets right now illustration. But we think that it's more of a wait-and-see instead of canceling projects. Our sales leaders and our sales reps feel pretty confident with the -- with where we are in these programs, they're not seeing cancellations at all or delays. It's more of a wait-and-see approach we're seeing right now in these just first couple of months, but we feel pretty confident in our back half in general. Vijay Kumar Understood. And maybe if I could squeeze one more in. Gross margins, nice share. It looks like there was some timing moment in stock comp here in Q1 that's depressed operating margins. When you think about the back half margin ramp, should gross margin sustain at these levels and visibility into the back half operating margin ramp? Lawrence Lin Yes, Vijay, honestly, in terms of gross margin, really pleased with the results in Q1. We saw a similar profile last quarter, but a couple positive things, right? We saw better margins within stores and the SMS business. multiomics, we saw stabilization and NGS price, coupled with favorable sales mix and really operational efficiencies, right. And in general, we feel good about the gross margin trajectory here and the investment opportunity. Operator Matt Stanton, Jefferies. John Marotta Matt, how are you? Matt Stanton Good, how are you doing? Thanks for taking the question. Maybe sticking with the theme kind of recent noisy headlines. Could you just remind us what the pro forma mixes within your academic and government exposure and then within what's directly tied to NIH? And any kind of impact you've seen, I know it's early days in the last few weeks, but then kind of a choppy backdrop from a headline perspective within the administration, anything you're seeing kind of in terms of activity levels at customers or things being pushed out? And then I assume that's kind of contemplated within the hour bar or the 3 to 5 guide. But if you just confirm that as well, thanks. John Marotta It is contemplated in the guide. From an end market perspective, in general, so about 45% pharma biotech, about 16% academic, about 15% medical government, and we've got about 15% in emerging markets. The way I would look at this, Matt is, we've seen some pausing or delays in some projects that are government funded. We believe those are going to come back online. Once some decisions are made either on the NIH front or outside of funding government funding of some of these projects. So again, we're able to respond to whichever way the markets are going based on the fact that there are always projects and programs going on. We toggle our call points based on that. I mean the teams can move over, and move over to more pharma and biotech in the event there is a pullback, slight pullback, on research in other areas. So we're comfortable. But we're also monitoring the uncertainty out there in general in these markets. So that's kind of our view of it right now. Matt Stanton Okay, thanks, that's helpful. And then maybe shifting gears a little bit. Can you just talk about what you saw in the cell and gene therapy side in the first quarter? I think the last few quarters have started to see, some improvement, funding, still maybe a bit challenged, but there's some later stage programs ramping up. So just love to see kind of what you're hearing and seeing from your customers on the selling gene therapy side of things? Thanks. John Marotta Yeah, you bet. Last year, we saw our auto cryo business increase about 67%. We have delivered about 11 units this quarter against that, so we're seeing good progress in selling gene therapy. I mean that that product is specifically sits under that value stream and selling gene therapy as well as our barky products. We're pretty bullish on that end market, and we're seeing good traction there as well in it this year. And that trend is continuing. Matt Stanton Super, thank you. Operator Paul Knight, Keybank. Paul Knight Thank you, appreciate it. First question I have would be the company has been even before your tenure buying stock, we really didn't know what the margin target was. And I don't understand why there was such an aggressive share repurchase program when there was no clear metrics out there on what business performance should be. So the question really is, as you are now on Board, is there still a share buyback program or will we wait to see what the business can return first? And then is there a likelihood that we could go back to what I think was a consolidator of the industry or are you still out on that? So two questions there. John Marotta Two good questions, Paul. We were at -- last year, we were with investing in our Q1, and this topic came up quite frequently. And our capital allocation framework is alive and well in the organization right now. And first, it's around gross margin improvement. And we're really focused around that specifically. The second is around growth initiatives in R&D and expanding our business lines and geographies. Third is around M&A tuck-in, and last is share buyback. And I wanted to share that framework again really focused around that. We're focused around that in the value creation committee. And so when I say share buybacks are last, everything competes against that fourth lever specifically. Right now, as we sit here today, we think there's much more opportunity in levers one through three. We see those opportunities. We're investing in those now. There are strict ROIC metrics around that, and we're head down and focused on that specifically. I think we're excited to get us into the steady-state model where we can come back with a clear eye view on what is the algorithm of this business, what does it look like from a returns perspective. There's still work to be done there, Paul. But in general, that's the way we're thinking about it. And once we have that, then we can come back with a better answer around that. I don't view -- I've been pretty candid around this. I don't think that those shareholders hire us to do share buybacks. And I think the opportunity we have in front of us, specifically around SMS and SRS and some other business lines in Multiomics really excites us around our investment opportunities. But also at a certain point around M&A and when we get us into a good place to start to do that type of work. Paul Knight Great and then last question, I guess it's been asked about, but you know it seems like this post COVID era of overcapacity and ultra cold temperature, and even cold storage in general it seems like you know we're starting to get past that glut of material and capacity that did emerge during COVID. So are we kind of in one step past it now or what do you -- what's your feeling on you know where we are with this post COVID? John Marotta Yeah, we have some experience in the ULT market from my prior life. But thankfully, we've ever -- I understand how the investment community lumps us into that. And I don't think that's the case. The more I get into the business, the more I'm kind of scratching my head wondering why we we're being kind of lumped into that end market. And here's -- and let me be more helpful here, Paul. So if we think about our stores specifically, those units are basically asset management units or warehouse management units for a pharma and biotech, specifically around compound management, specifically around sample management is around antibodies and using these as warehouse management systems and pick systems for shipping of these products. Those are three different applications that a ULT just -- I mean you may get some support there, but it's very manual process. I mean we're not seeing that overlap in particular. So we're pretty excited about these other applications and how they sit in other end markets that maybe you wouldn't see it on a broad macro chart, but we are able to meet the needs of these customers very uniquely because of our inventory management at the facilities, providing that service to our customers. Really excited about that. I mean these are highly sophisticated 12 access automated robots that are inside negative 80 degrees Celsius that what sits on top of that is a highly sophisticated software program that you can access your inventory very quickly, whether that's in compounds, monoclonal antibodies, antibodies and/or samples. So pretty excited about that end market. But this ULT glut, I don't think we've been parted to that because we've been growing well over the glut on the ULT side. Paul Knight Side. Super helpful. John Marotta Thank you. You bet thank you for that question. Operator (Operator Instructions) Andrew Cooper, Raymond James. Andrew Cooper Hi everybody, thanks for the questions. Maybe just one into a little bit of a nitty-gritty on Multiomics. I just want to make sure. You made a couple of comments about stability on NGS pricing, but there was one in there about price headwinds as a drag on margins. So maybe just help adjudicate or confirm, was that just, hey, you're a handful of quarters through stability and the comp is a little bit difficult? Or is there somewhere else in that segment where there's a little bit of pricing pressure we need to make sure we're thinking about? Lawrence Lin Andrew, just to clarify, we are seeing price stability in NGS. Just to reiterate, we had a great quarter there, 11% growth. So overall, that's kind of where the NGS businesses. When you look at at Sanger, you're going to -- we have challenges in Sanger. But that's kind of a shift in technology, right? We're down about 11% there. The big thing is, though, it's a shift in technology. We are seeing a significant kind of upside technology called Plasmid-EZ and that is up significantly. I believe almost [300%] year-on-year in the quarter. So well, that's helpful. John Marotta Yeah, Andrew, some color here. So our Sanger business is seeing some headwinds. But I'll tell you, with in the United states -- I am not even going to speak to you about the Europe and our infrastructure there. In the United States, we have got 2,500 drop boxes. Sanger's being disintermediated by the ONT Plasmid-EZ product, we're going to double that business this year because of our infrastructure. We're very excited about the growth of this in general. And I think the team has done a really good job of responding to that, we have great mediation, we're investing in it. Andrew Cooper Great. That's helpful. Maybe just one more on that side of the business and I will sneak a third in at the same time as well. But just in terms of gene synthesis, one area that you guys have talked about has to be and needing to add some in India, I think, and more kind of coming out of China there relative to other parts of the business. So just to be clear, is the takeaway on the China tariff response that even that business you feel relatively comfortable with kind of the moving parts there? And where are we in that capacity expansion you've talked about before? And then lastly, just, John, what you made on getting in that right spot where it's time to execute on M&A and tuck-ins again. What do you need to see in the core business to feel like you're at that point where it is time to get a little bit more kind of forward-looking and aggressive on the M&A front? I appreciate it. John Marotta Yeah, you bet. So let's talk about gene synthesis, then we'll go to capacity in an M&A piece. So the gene synthesis business has been a mid-single-digit grower for us, very steady because our customer base is biotech and pharma specifically. I mean that's the lion's share of our customers, less academics. And I want to share that overly because I think there's a lot of noise and there's a lot of misrepresentation out there in the market, specifically around synthesis. We compete in a very niche part of this market that no one else does and the needs of those customers are very unique, because they're looking at very complex long reads. And that takes a bit of automation, which we have. We're about 40% automated on that and the rest we have got 300 -- I'm sorry, almost 400 PhDs that support that business, both in the US and in China. And so we've got great capabilities there, and we meet those customers' needs very uniquely. There's a competitor out there that operates highly automated on a chip and so it's high volume, lower quality, but it's a different segment of the market. Again, we're positioned very nicely in that market from a high quality, high complexity, very high margin. It's a very high-margin business for us. So that's not a gene synthesis in general. As it pertains to capacity, Andrew, we're very early innings there. I mean we're trying to figure out, in general, we go back to Paul's question around discipline around capital allocation. We're not going to rush into decisions around areas of the business quite yet until we've got absolute clarity there. The easy wins for us around growth in R&D and some commercial investments we're making those today. And as it pertains to capacity, we're increasing capacity, and we're -- the team is doing a nice job. We'll come back to you when we've got a clear line of sight into that specifically. Regarding M&A, I mean, I think this is a case where we have to demonstrate credibility and capabilities. And in all candor, we haven't done a good job of that in the past. And so we're trying to change that specifically about doing what we say we're going to do and showing those results and doing that. At the end of the day, we own these results. And when we show a track record on quarter-on-quarter what those results are, we've got stability in the bottom line, very tight controls in the bottom line, and we're chasing the upside, meaning we've made those appropriate investments in strategic areas, then I can come to you and say, I think we're ready for some M&A. As I sit here today, we're not sure when that is. We may see some tuck-ins that are -- we're opportunistic around strategic parts of our business. We're not going to let those go. We have capacity to bring on some tuck-ins, but more to come on that, Andrew, as we go forward here. Operator All right. Thank you. I'm showing no further questions at this time. I would like to turn it back to John Marotta for closing remarks. John Marotta Very good, thank you so much and thank you again for all your support. I want to thank our 3,000 employees that make us special every day and appreciate your time this morning here. Operator Thank you, presenters, and this concludes today's conference call. Thank you all for participating. You may now disconnect.
Yahoo
27-01-2025
- Business
- Yahoo
Google's Stock Just Got a Big Upgrade--Here's Why It Could Soar.
Alphabet (NASDAQ:GOOG) just got a fresh endorsement from Needham & Company, which raised its price target to $225 from $210. The reason? Google Cloud is on fire. After meeting with 20 CEOs at CES and the Needham Growth Conference, analysts came away even more bullish, hiking their Q4 2024 revenue forecast to $96.4 billiona 12% jump year-over-year. But the real kicker? Cloud revenue got a 7% boost to $12.1 billion, nearly doubling its expected operating income to $2 billion. And lets not forget Googles advertising juggernautraking in over $260 billion last year and still commanding more than 40% of global digital ad spend. Looking ahead, the momentum isnt slowing. Needham now sees Alphabet pulling in $390.2 billion in total revenue for 2025 and $435.8 billion in 2026, each growing around 12% annually. YouTube remains the undisputed king of streaming in the U.S. and the top dog in social video advertising, while AI is set to drive even more demand for Google Clouds services. Needham analysts are crystal clearAlphabet isnt just another tech giant; its operating in a winner take most market. Even if regulators force a breakup, the parts might be worth more than the whole. Now, all eyes are on Alphabets Q4 earnings drop on February 4 post-market. Wall Street is penciling in $2.12 EPS on $96.67 billion in revenue. With analysts raising targets and Alphabet firing on all cylinders, investors betting against this tech titan might want to rethink their strategy. This article first appeared on GuruFocus. Sign in to access your portfolio
