Azenta, Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

Azenta, Inc. is a leading global provider of sample exploration and management solutions for the life sciences industry. The company supports its customers’ research and development efforts with integrated workflow solutions, alongside providing a range of services to improve sample management and enhance overall operations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Azenta is a leading global provider of sample exploration and management solutions for the life sciences industry, helping their customers with storage, organization, and tracking of samples.

Business Overview

Azenta, Inc. operates within the highly specialized life sciences industry, catering to companies that engage in drug discovery, genomics, diagnostics, and other fields that require robust management of biological and chemical samples. The company offers a comprehensive suite of services ranging from equipment (such as automated storage and retrieval systems), software solutions, and analytical expertise. Azenta’s services are designed to streamline the entire sample lifecycle, starting from storage and processing to analysis and reporting.

Revenue Distribution

Azenta segments its business into two primary categories:

  1. Life Science Products: This division, historically known as Brooks Life Sciences, is responsible for designing and manufacturing instruments, equipment, and software solutions used in sample exploration and management. Their products automate the handling, processing, storage, and retrieval of biological and chemical samples.
  2. Life Sciences Services: This division is focused on offering a spectrum of value-added services, ranging from sample preparation, preservation, to specialized genomic and analytical services. They also offer storage services for their client samples.

While there is no full breakdown of revenues in the 10Q reports, their 2022 10K showed that Sample Management Solutions was 60% of revenue, Multomics segment generated 25%, and B Medical Systems generated 15%

The life sciences sector is experiencing a period of rapid growth fueled by advances in genomics, personalized medicine, and drug discovery, along with increased funding for research and development. This is a very competitive and highly fragmented industry where innovation and specialized expertise are key for success. Demand for automation and streamlined processes in sample management is increasing and this is where Azenta has positioned itself to provide these type of solutions.

The industry is characterized by rapid growth in pharmaceuticals, genomics, and diagnostics, creating demand for sample management and automation services provided by companies like Azenta.

Competitive Landscape

Although there is no direct mention of their direct competitors in their latest report, they mention a few indirect competitors like Danaher, PerkinElmer, Roche, and Thermo Fisher Scientific. The market is highly fragmented and contains a very diverse range of companies, from smaller startups to larger, established companies. The competitive pressures include:

  • Price and differentiation in the marketplace, given that the customers are big pharmaceutical companies that are focused on costs.
  • Ability to keep up with technological advancements and innovation in the sector.
  • Quality of the provided products and services.
  • Relationships with the customers.
  • Ability to acquire new technologies and product lines.

Although Azenta has a strong position in its specific field of sample management, it still faces significant competition from diverse range of established players to newer entrants.

What Makes Azenta Different?

Azenta stands out in the sector due to its ability to offer a full spectrum of services related to sample management—from equipment and software to analytical expertise. They are a one-stop shop for companies in the life sciences sector, something that is hard to be copied or rivaled.

  • Complete Solutions: Azenta provides fully integrated workflows, something not always seen, that span the entire lifecycle of a sample. This enables customers to reduce operational costs and also save on time.
  • Broad Technology Portfolio: Azenta offers specialized equipment, software, and analytics all under one umbrella and that integrates tightly with each other.
  • Scalability and Geographic Reach: Azenta is a global player, and has the capacity to serve both small customers as well as large ones.
  • Market Leadership in its Niche: They are generally considered the leaders in their market.

Financial Analysis

Income Statement

Analyzing Azenta’s historical financial performance is tricky, due to its previous acquisitions and business segment restructuring. Looking at the most recent quarterly filing, we see that total revenue grew to $173.7 million in the three months ended June 30, 2023, compared to $156.8 million in the same period last year which means an increase of 10.8%. That growth came mainly from the Life Science Products segment which grew 23% YoY, While the Life Science Services segment saw a decline of 14%. However, the company’s gross margin of around 48% is a good and relatively stable percentage.

In the quarter that ended June 30, 2023, the Life Science Products saw a 23% YoY growth, while Life Science Services segment saw a 14% YoY revenue decline. On the other hand, their costs have also increased. Operating expense of $124.5 in the three months ended June 30, 2023, compared to $110.5 in 2022, leading to the income from operations decreasing to $2.7 million in Q3 2023, from $11.6 million in Q3 2022. The overall, income from continuing operations was a loss of -$15.9 million in the three months ended June 30, 2023, compared to $3.7 million profit in 2022, due to increased interest expense and income tax expense, alongside non-operating gains and losses.

Their income from operations dropped down to $2.7 million in Q3 2023 from $11.6 million in the previous year, mainly due to increase in expenses.

Balance Sheet

As of September 30, 2023, Azenta had a very healthy level of assets, with cash and equivalents of $376.9 million, and total current assets coming at $1.46 billion. Total assets are $2.84 billion. This means the company has enough current assets to meet any short-term obligations. The company’s liabilities are manageable, with short-term liabilities of $666 million, and total liabilities of $1.16 billion. The company’s shareholder equity is strong at around $1.68 billion. The debt to equity ratio is low, which means that company’s capital structure is stable.

The company’s balance sheet shows a healthy profile, with an adequate amount of liquid assets to handle short-term obligations. And a comfortable debt to equity ratio is a sign of robust capital structure.

Cash Flow

While there isn’t a specific mention of cash flows in their quarterly report, the company should be able to maintain its cash flow because it is a leader in a rapidly growing industry, with strong business and revenues.

Although cash flows were not a focus, this still seems like a company that has high potential for continued cash generation and long term profitability.

Recent Concerns and Management’s Response

A recent issue that the company faced has been the drop in revenues of the Life Sciences Services. During the earnings call for Q3 2023, the management blamed this underperformance to a “softer pharmaceutical and biotech funding environment”, as well as “supply chain and lab staffing challenges”. Their primary focus is now on the Life Science Products segment which has been performing well. The management is also looking for cost cuts and will be reducing personnel by 8% to lower expenses. They are also planning to restructure the company’s segments. They are now emphasizing a focus on organic revenue growth and have already taken action on several fronts including R&D spending, streamlining the supply chain, and creating a customer-centric organization.

The main issues of the company has been a weaker financial performance with its service side. Management has noted the underlying issues and made steps to improve it.

Moat Rating & Justification

Azenta’s moat is rated at 2 / 5. While it has some advantages, it falls short in areas that limit its strength, and leaves it more vulnerable than companies with wider moats. Here are some key points:

  • Intangible Assets: Azenta has built up a brand in the life sciences, with established reputation, but it is not that high as to create a pricing advantage over their competition. Their intellectual property portfolio of patents and trademarks do offer a limited moat, but are still vulnerable to changes, as well as to the expiry of patents.
  • Switching Costs: Azenta’s clients invest a significant amount of time and energy into implementation of their software, data storage and other operations, thus generating a moderate switching cost. It is, however, not prohibitive enough to stop a company to switch. Customers can still make the switch if better options are available.
  • Network Effects: They benefit a little from the network effect, where more users of their tools makes it more valuable to new users. Yet, they do not have such a powerful network advantage in their space.
  • Cost Advantages: They do not show a clear cost advantage over all of their competitors, even though their focus on specialized manufacturing should give them a cost efficiency advantage.

While Azenta benefits from their established brand, some switching costs, and some minor network economics, their moat is not strong enough to guarantee them long term success and profitability in the rapidly evolving life sciences sector.

Legitimate Risks

The most prominent risks include:

  1. Technological Disruption: rapid pace of innovation in biotech could make their technologies and products obsolete. They must be able to keep up with new trends.
  2. Competitive Threats: The industry is very competitive and fragmented. The company is not immune to competition from larger companies, as well as from newer companies.
  3. Reliance on Key Customers: Some of the company’s customers may account for a large part of their revenue, making their revenue vulnerable.
  4. Acquisition Risk: The management has noted to continue to explore strategic acquisitions, and this can prove tricky to manage. If those acquisitions are poorly integrated, it can destroy value.
  5. Economic Factors: The macroeconomic conditions can affect the sales in the sector, and hence also Azenta’s sales.
  6. Loss of key personnel: If the company loses top engineers, scientists or sales people, they could struggle to perform as before.
  7. Foreign Regulations: Being a global company, they have to keep track of laws and regulations around the world. Changes in trade, currency exchange rates, could affect their profitability.

Business Resilience

Azenta does display a strong capacity to navigate short-term challenges due to its recurring revenue model, specialized customer base, and a strong position in its niche market. However, as a company with considerable exposure to cyclicality, and changing trends, the resilience of the business is not the highest:

  • Well-Diversified Revenue: Though the service segment has been declining, their business is still well diversified across geographies and offerings and segments. This adds a layer of stability.
  • Customer Loyalty: Their focus on specific niches will result in loyal customers that have unique requirements.
  • Adaptable Business Model: By being the leader in their respective field, they can continue to innovate and adapt to the changing conditions.
  • Experienced Management: The company’s management has also shown that they are able to navigate through a rough and changing industry.

While Azenta possesses some elements of resilience, there is a degree of vulnerability due to the competitive landscape, changing technology, and business conditions,

Understandability Rating & Justification

The understandability rating is at 4 / 5, indicating that the business is slightly more complicated but still within reach for most investors.

  • Business Model: Azenta’s business model, although a little more complex due to having different segments, is not very complicated to understand.
  • Financial Statements: Their quarterly financial reports are not complex in nature.
  • Industry: The main complexity comes in understanding the nuances and challenges that come with the life science sector, like R&D, intellectual property, regulations etc.

While the different moving parts of the business do add a layer of complexity, the business itself is mostly easy to understand.

Balance Sheet Health Rating & Justification

Azenta has a balance sheet health rating of 4/5.

  • The company has a lot of cash, giving them the flexibility to handle downturns and acquisitions.
  • Their debt to equity ratio is low, which means that they don’t have to pay big interest burdens.
  • The company’s current liabilities are less than its current assets, indicating that the company is well positioned to meet short term obligations.
  • Overall, the balance sheet represents a solid and well capitalized company.

Azenta’s strong financial position and low debt shows a healthy business with minimal risk of bankruptcy.