Revvity, Inc. (RVTY) Earnings Call Transcript & Summary

Good morning, and welcome to the conference. My pleasure to introduce Prahlad Singh, President and CEO of Revvity. I'm Matt Sykes, the life science tools and diagnostics analyst at Goldman Sachs. And Prahlad, thanks for being here and kicking us off this morning.

Absolutely.

Maybe just to start things off, maybe just talk through the recent Q1 results and some of the highlights and key takeaways from the quarter and kind of what you want to leave people with?

Sure, Matt. As I -- as we shared during the Q1 call at the end of April, I think the way I would look back is from our personal -- from a company performance perspective, I think we did better than expected, both on the revenue and cost and margin. I think from an overall market perspective, as we had shared, we continue to see a stabilization in the market environment. But by no means, we saw any great uptick. So I would say that from where Q3 ended in 2023, those were 2 quarters of continued stabilization that we observed. But I think that's where if you look from a performance perspective, that's where our portfolio differentiation started showing up. And I think we'll see that subsequently towards the year.

Got it. Yes, maybe that's a good segue. I want to kind of stay at a high level. Now it's been some time since the transition from PerkinElmer to Revvity. How is this transformation kind of away from a heavier interim mix towards more recurring revenue? How has that made your business more defensible amid the sort of dynamic macro environment? And maybe reflect back on some of the changes that have taken place at the company and I think that given the tougher macro environment, I think we're expecting to see that higher level of recurring revenue and sort of expenses come through.

Yes. It's a great question. I mean if you look at it where we started on our portfolio transformation journey, over the past for 3 to 5 years, we've sort of totally transformed the portfolio. I mean imagine what the impact of that, that we are seeing now is in terms of the numbers. If you look at our performance in 2023 or what we've guided to in 2024, I mean imagine what that would have been if we had our old portfolio today. And then I think you see that in terms of the organic growth and our performance versus our peers. The fact of the matter is what we focused is how we can evolve our portfolio to one where it was much more focused around recurring revenue, much more focused around pharma biotech. And I think we've accomplished that with 80% of our revenue coming from a recurring basis. And I think the impact of that will continue to show not just in our top line differentiation, but more importantly, in our margin profile, where already off the gate, we were in the top quartile in our industry. But as we continue to see the benefit and the leverage that we see from the internal synergies that we continue to see the impact of, once we -- as the integration continues, having a profile of top line growth, 200 bps above market and our margin in the mid-30s will make us in a category of one.

And just given your experience in the industry, it would be great to get your perspective on sort of recent downturn that we've seen in the industry and what you see as potential structural changes versus purely cyclical in terms of end market demand and customer behavior?

Yes. I mean, we have talked about this. But really, if you just look at it, from our perspective, what we see is not really a structural change, and we don't foresee a structural change coming in the market. What we do see is there was a lot of buying that happened during the pandemic. And I don't think that the impact of that is not fully absorbed. Obviously, there were other factors that have played, cost of capital, the economy, the market, interest rates, and those have impacted. More importantly for us, from a company perspective, we operate a majority of our businesses at the top end of the funnel, which is around innovation, preclinical research and development of the life sciences side. And that has to happen. Innovation has to continue. So I think from our -- we see it more cyclical in nature rather than a structural change. At the same time, 50% -- roughly 50% of our business is on the diagnostic side, on specialty diagnostics. And that acts as a very strong moat in market environments such as these.

Got it. And maybe kind of walk us through any of the trends that you're seeing so far in the second quarter. Are things kind of trending in line with your expectations and how are you seeing things now?

Yes. And obviously, I'm not going to give intra-quarter guidance, but it's worth a try. I think the way I would go back to what we said at the end of April in our Q1 call. What we do see is continued stabilization in the market, but by no means are we pointing out to any significant uptick in our customer buying pattern or behavior.

Got it. Maybe pivoting towards an area that's not necessarily new, but sort of reinvestment in it and you've talked more about is the software Signals business and particularly around the SaaS-only model that was highlighted to kind of give the company more long-term certainty around revenue contributions. Maybe talk a little bit about what that business represents today to contextualize it and then how you see sort of growth in margins and how it contributes to the overall group going forward?

Yes. I mean it's one of our most underappreciated assets in the company. We have a $200 million software business. We are in 48 or 49 of the top pharma biotechs in every one of those companies. I think the beauty of that -- the portfolio is that it's not just whether it's SaaS or on-prem, it is ingrained and the way to think of it is an ERP for scientists. It's literally like an ERP system for scientists where whether it's for molecular modeling, drawing, electronic, lab notebooks, analytical capabilities, it is ingrained, and it is independent of any instrumentation. So it is not dependent on ours or any one -- any other instruments. So it essentially becomes the fabric of a lab. And I think the beauty of that portfolio is that even now, while we are limited to preclinical research and development, there are a lot of opportunities for us to grow that both horizontally and vertically as we move forward into clinical with the launch of Signals Clinicals and Signals Synergy that we just announced a couple of months ago. SaaS, obviously, is an important aspect to it. And I think 1/3 of our portfolio and revenue comes now from the SaaS side, and it will continue to grow. But on-prem is equally important in many labs. And I think as SaaS continues to become a larger component of that portfolio, the reliability and the assurance of revenue stream continues. But most of these tend to be multiyear contracts, even on the on-prem side. So it is, again, as I said earlier, one of our most underappreciated assets in our portfolio, but one that we have a lot of promise and growth that it will continue to generate.

Got it. Last quarter, you noted that pharma biotech budgets were finalized kind of slightly later than usual, which led to a slower start to the year. Now that we have more of a line of sight to the budget release, have you seen sort of a positive momentum in conversations in line with your commentary around sort of March, April showing improvement? Maybe just an update on that.

Yes. I mean I think the way I would look at it, as I said earlier, Matt, there is stability. And I think for us, that's a sign of positivity that the market has stabilized. What -- and this is what I pointed out during -- on the earnings call is, typically you see budgets getting approved in November, December time frame. And this time, it was more December, January, late January time frame. So it was more around those programs ongoing and continuing on the path of functioning and operationalization. What we've not seen is a significant uptick nor a downtick. So I think what I would take it, as I said during the end of April is continued stability in the market.

Got it. If we kind of look geographically, Americas represents about 44% of revenue, EMEA is 27%, APAC 29%. In the medium to long term from a region perspective, where do you see opportunities for future growth? There's clearly a lot of focus on China. A lot of your focus in China is diagnostics. It is slightly different than some of the concerns that we have in the market. But maybe as you think about the business regionally and you think about sort of future capital allocation, how are you thinking about that?

Yes. I mean I think, look, all markets are growth areas for us. I mean, let's start on the U.S. side, right? I mean, outside of the pharma biotech, our autoimmune portfolio is -- still got a lot of traction in the marketplace and still a lot of growth opportunities for us in the U.S. I mean it is -- as I say, our penetration in the U.S. is still in its nascency with our autoimmune portfolio. And outside of that, if you go in -- even in China that you used as an example, while it is 17% of our revenue, 10% of it comes from Immunodiagnostics and Newborn Screening. So it's a very different profile compared to our peer group, and there is still opportunities for growth. In terms of EMEA and outside of China and U.S., Newborn Screening, it is very much underpenetrated as a market. So geographical expansion there, we'll continue to gain traction, whether it's in Indonesia or India or some of the other markets. So I think the portfolio that we have, whether it's on the Diagnostics side, more specifically, if you look at it, right, whether it's in autoimmune disease or newborn screening, they're still underpenetrated, not in terms of our share, but in terms of market growth. And there's still a lot of market growth opportunities for those before they reach any point of sort of maturity. So the portfolio that we have on the diagnostic side gives us that growth opportunity geographically variedly. On the Life Sciences side, again, China, with 7% of our revenue, 50% -- 50-plus percent of it is on the reagent side. But if there was any stimulus to come, none of that is assumed into our guidance. So that gives us an opportunity for growth. And the reagent portfolio, I think it will continue to have high sustained growth once the market normalizes.

Got it. If we just turn to financials for a minute. Your operating margin in Q1 came in above expectations in the quarter, maintain your full year operating margin guidance of 28%. Can you kind of walk us through your expectations of phasing of margin? I think I thought there was -- in the beginning of Q4, there was some concern about that, that margin ramp. But given what you did in Q1, it kind of derisked that a little bit. But maybe just talk about sort of margin uplift. Just given the transformation you've done in the business, and you said it earlier, I think margins is where you really see some of this transformation. So maybe talk about that phasing through the year, some of the drivers of that operating margin expansion.

Yes. Number one, obviously, is that we started seeing the impact of the cost cutting and the cost rationalization that we had done in 4Q and early Q1 to start showing its impact. And again, some of the variable expenses will come back in terms of comp, et cetera, but overall, we will continue to see a sustained effort and the impact of all the cost rationalization that has been done. Plus, with all the acquisitions that have gone through, there is still several synergistic opportunities that we've not fully leveraged and we'll continue to do so. And we will see the impact of that. So as we've said, we expect our margins to be in the 28% range, and we will continue to. And I think we've said for Q2 and Q3 to be just under 28%, and Q4, obviously, with the volume leverage we will see in the 30s.

Got it. And just staying on margins. Life Sciences and the instrument side were down mid-teens in the quarter with applied genomics instruments down sort of mid-20s. Can you maybe talk us through the expected impact on margins as instruments start to come back, particularly in the second half of '24, and maybe some of the incremental margin benefit that you could get from that?

I mean, again, it goes back to the point made earlier. Obviously, volume has a big impact, right, on cost and leverage. And if we are able to deliver 28% margin with that pressure that we have on the top line, just an assumption, as the volume comes back up, that's why we have confidence in coming out and saying that we expect our margins to be in the mid-30s over the next few years. And that's where the impact will start showing up. Once the margin -- once the volume leverage comes back, it will have a big impact on our margin.

Got it. Last quarter, you guys maintained the assumption of China to be roughly flat for the full year of '24. Now that we have sort of more line of sight and anticipated stimulus program in the region, maybe talk a little bit more about the expected impact of the business and whether this is sort of a late Q4 '24 dynamic or maybe 2025? I mean the way we kind of think about it, it's a lending program. The transmission mechanism might be a little bit more delayed than what the stimulus programs used to be, and it's a 3-year program, which doesn't necessarily create a massive sense of urgency to get that done. But maybe what are your expectations for stimulus impact from China?

Yes. I think the #1 thing is in our guidance, we've not assumed any stimulus. So let's start there. So if anything does come through, that will be upside. And then I think the way we -- as I've shared earlier, we continue to have good conversations and there is a lot -- there is quite a bit of discussions, but I would not say anything that has come through or you started seeing a significant uptick in orders coming from the stimulus program. And I think the timing of -- giving a sense of timing and when that would happen, would be speculation at this point of time. It could be Q3, Q4, Q1, somewhere. But I think what is more important to just sort of appreciate in our current guidance, which is quite differentiated from our peer group, we have not assumed any stimulus.

Got it. Okay. Instruments came in slightly better than expected in the quarter, which was down sort of mid-teens versus expectations of down mid-20s, which was a positive development, just given the environment. But maybe could you walk us through what you're hearing from customers in terms of willingness to purchase CapEx in terms of instruments and sort of your expectations for the rest of the year? I mean I think from the subsegment standpoint, there still is a lot of debate as to sort of slope of recovery and timing of recovery of instruments, and so kind of any color you can share on that would be helpful.

It's a good question. I mean it did come in better than expected. But I think, Matt, again, you have to go back and look at what instruments do we sell, right, and how does it make an impact? On the in vivo side, we totally refurbished and revamped our NPI portfolio there and launched it towards the end of last year. We are seeing quite a good -- a lot of discussions around that from academia and folks that depend on research grants. The big CapEx items on the life sciences instrument side, overall, we see the same profile that we have seen in the first quarter and the fourth quarter, i.e., there's a lot of discussions happening. People are still -- on the big CapEx item, there's still discussions but not big execution. And neither have we assumed any of that in our guidance. So I mean, our expectation, and that's why I think what we've done sort of better performance than what we anticipated is just based on the fact that anything that comes through will be upside. That's our assumption. That's our grounding hypothesis in our guidance.

Got it. Kind of a similar question, just more on the reagent consumables side. They were down high single digit range for the first quarter, expectations are sort of mid-single-digit growth for full year '25. But how much kind of your expected growth is sort of comp driven versus an underlying improvement in lab activity? I know you guys have taken a conservative approach. We've talked about stabilization, not assuming stimulus and things like that. But for the reagent side, what are your sort of underlying assumptions?

I mean quite a bit of it is comp driven, as you pointed out. I mean, we expect marginal absolute dollar increase in Q2 and Q3. But again, we've not assumed any big uptick at this point.

Okay. Maybe shift to immunodiagnostics particularly throughout the U.S. is kind of where you have grown your exposure 15% of ImmunoDX revenue versus sort of 5% five years ago with the goal to get to 40%. Can you talk a little bit about revenues on a go-to-market strategy, increasing U.S. Immunodiagnostics in the revenue mix? And sort of what are some of the obstacles that you're trying to overcome? What does the competitive landscape look like? How are you positioned to gain share in that market?

Yes. Let me talk about the obstacles first. It's just essentially time, resources and regulatory time lines. We just need to get stuff in front of the regulatory bodies fast enough to get approval. I think the opportunity where it comes on the autoimmune side of it, what the business has done a really good job is using indirect immunofluorescence to screen autoantibodies. I mean they have the best portfolio for that in the industry. Now if you combine that with their fastest in the industry microscopic imaging capabilities, for which they use proprietary AI patterns that they have for imaging patterns, they really are the best-in-class in the industry for that. If you combine that with the middleware that they use, which is they call Elo 3.0, essentially, what it does, it is a very good middleware sort of for the assay -- recognition assay development and linking it back to the lab information systems in big labs. So whether it is for a small rheumatology practice where they have manual solutions or for the big reference laboratories that they have fully automated solution using immunofluorescence, Western blot and Eliza. The total solution capabilities that EUROIMMUN brings to the portfolio is really what has been their success factor and the market position that they hold and command in autoimmune testing. And I think it is still at its very early stages in the U.S.

Got it. Just staying on Diagnostics. You guys have a pretty comprehensive suite of neurology-focused offerings that don't really get talked about very much. Now with the advent of sort of Alzheimer's disease altering therapies and the opportunities there, how do you see your neurology offerings evolving? And what do you think about that market?

Yes. I mean, again, it is probably one of our most undertalked about portfolio offerings like the software solution. Especially on the autoimmune neurological diseases, they can be very debilitating, if not fatal. And this is where our EUROIMMUN business has done a really good job. Working with KOLs and clinicians for the last decade where they have such a good IP profile around autoimmune neurological disease testing. And then building it out again, ring-fencing it with the software solution that they bring to the portfolio. And I think it's still in its very early stages in terms of what you will see us coming out with offerings on the neurology side.

Got it. On TB testing. With the acquisition of Oxford Immunotec, you were able to participate in that market. You recently added some pretty significant automation to that test. Maybe talk a little bit about sort of how you're looking to attack that market, still about 60% skin tests versus blood. There's another competitor that's been in the market for a while. But just maybe talk about sort of what do you think that increased automation will allow for in terms of the competitive positioning for your test? And how do you see that market evolving?

Yes. I think while we've had good presence in China and Japan as an example, and in the Asian marketplace, we are still quite underpenetrated in the U.S. And one of the challenges for it was automation. Ours was a much more manual based test. I think with the recent advent of what you talked about, of the launches that we have brought to fore in the U.S., it will -- despite the skin testing, even in the latent TB testing, there's a good opportunity for us to start gaining share. And I think with the launch of the AP2400, it will give us similar, if not better, time frame for the testing and automation that would be required. And it already is a much more sensitive test compared to the competition. So we feel very good about being able to gain share even in the latent TB testing. I think outside of that, overall, if you look at it the next 3, 5 years down the road, having a direct blood test for active TB is going to -- which is much more sensitive and specific than a skin test is, I would say, the holy grail.

Got it. I want to go back to something we were talking about earlier. And just given your involvement in sort of the R&D side of things, particularly in the Life Sciences segment, there's a lot of debate as to large pharma R&D spend, not just sort of the second half, but just sort of going forward. They've got a patent cliff that they're facing. There's been a lot of cost-cutting programs that have been announced. We talked earlier about structural versus cyclical. You're certainly in the cyclical camp as we are as well. But I'd just love to kind of given your view into those budgets over the long term, how are you thinking about large pharma over the next couple of years in terms of spending? Innovation will continue. IRA has caused a bit of a sort of rationalization shift in that. How are you thinking about R&D budgets? And how are you thinking about the positioning of revenue to gain exposure to whatever change that might be in those R&Ds budgets?

I mean, Matt, the answer was -- a lot of the elements of the response was in your question, if you think about it, right? I think what we are seeing is a consolidation cycle that is happening and it will happen temporarily until things get back to what normal is. But the benefit of our portfolio is, as I keep saying, we are at the wide end of the mouth of the funnel. Whether it is the impact of cost or consolidation or other aspects as AI is one that is mentioned, at the end of the day, you have to continue to identify target candidates. And for that, you will need reagents. You will need software to be able to do the analysis of candidates that you bring to the table. And that is why our focus has been laser -- we have been laser-focused around the top end of the funnel. And while whether that results in optimization of two targets going to clinical versus 3 in the past, that might have an impact, but I strongly believe that at the top end of the funnel, innovation cannot stop because that is the basis of existence for pharma biotech. And I think that will continue.

It's interesting, too, because you're also targeting products like the software piece that creates a stickiness once you get them into the funnel and so you're capturing the customer throughout their R&D journey. Are there any gaps in the portfolio that you see that where a customer might have to step out and use another service provider that you feel like would be additive to the business?

I think there were 2 elements that we've pointed out around what we needed to accomplish. One was on the GMP capabilities. And we've made quite a good amount of investment on that. And hopefully, you guys will be able to see that in San Diego in November. And that will continue the stickiness of that as it moves down to the clinical. And the second one is even on the software side, right? Primarily, our focus was on the preclinical side of it. And now with the launch of a couple of products and modules that we've announced earlier and more to come, we want to continue to have that stickiness as the journey of the compound goes from discovery to IND and beyond and be part of that portfolio. Because customers and researchers are continuing to want to look for that analytical capability even as it moves down into the clinical side of the domain.

Got it. Just going back to margins for a second. You said in the past, you obviously were targeting mid-30s operating margin, which you've spoken about. Maybe talk to the split between gross margins and OpEx leverage and how you kind of plan on driving expansion in the medium to long term?

Yes. I think as we've said, we expect 75 bps of margin expansion and 25 bps or 1/3 of it should come from gross margin. But I would say 50% of that you should expect to come from the SG&A side of it. There is still a lot of leverage that we have to be able to pull. So sort of that would be the split that you would see between gross margin and SG&A.

Okay. M&A, it feels funny to talk about M&A, just given all the activities that you guys have been doing over the past couple of years. But as sort of the delevering continues and as you start thinking about areas that you want to focus on, maybe just give us a sense of how you're thinking about M&A as part of the longer-term strategy. Given all that you've already done to transform the company, what areas do you feel like you still need to maybe invest in inorganically?

Yes. I mean, the funny thing is that it's been 20 months since we've last done an M&A. But look, we've -- we feel very good with the portfolio that we have right now. This has taken a lot of effort and it's been a pretty active journey for us to transform the portfolio by the 10, 12 acquisitions we've done. We've divested 1/3 of the company and the brand name along with it. So there's a lot that has gone through. And I think the portfolio that we have put together has taken a lot of thought process in building that out, so that it has the differentiated profile it does. We don't foresee us seeing -- we continue to be looking, and we continue to be active. But I don't think that whether it's from a valuation perspective or a relative valuation perspective, we feel compelled to do any M&A in the short term. I mean if we were to look at from an M&A perspective, it would be more technology acquisitions that would help to enhance what we have, but nothing significant. We -- it's something you would expect from us.

And just on one of the -- one of the larger acquisition of BioLegend. Clearly, your Investor Day, November will have some focus on that, so I don't want to [indiscernible] around that. But at the same time, the competitive landscape has changed a little bit with one of your peers acquiring Abcam. Maybe just talk about how you see BioLegend today given that sort of changes the competitive landscape and where the differentiation is and do you continue to see that sort of high single to double-digit growth that you've kind of talked about earlier on when you acquired it?

Yes. Matt, BioLegend has a very different profile than what the other company was. And I think if you recall, when we announced the BioLegend acquisition, we talked about the fact that what its growth rate was, what its EBITDA margin was compared to the other company. But I think more importantly, it's the product portfolio of BioLegend, you know 90% plus of products are homegrown or home made. It is not a sort of store of third-party products. Secondly, now [Audio Gap] portfolios flow, the fastest-growing place where it now [Audio Gap] genomics and single cell cytokines [Audio Gap] which is growing much faster. So there's a lot of growth trajectory [Audio Gap] capability was one that they were lacking, which I talked about earlier. That provides another tool in its box for it to continue to have the growth profile, it has shown. So I think there are a lot of elements in BioLegend, which have still not fully been capitalized and provide opportunities for sustained growth over a period of time.

Just going back to China for a minute. On the Diagnostics side, you've talked publicly about sort of the impact of the VBP and where it may or may not impact you. There was obviously some friction around anticorruption at the end of last year that seems to have kind of passed. Can you maybe talk about the diagnostic environment in China today, given VBP and how revenue is positioned in that area?

Yes. I mean look, and then we talked about this, but the way to think of it is, right, our Diagnostics business in China is essentially Immunodiagnostics and Reproductive Health. Newborn Screening has been there for 2-plus decades, and it has continued to do well. I think the impact for us in China is more from birth rate than VBP or anticorruption. And even on the autoimmune side of it, it's such a small piece from a country perspective, right? Autoimmune is a specialized niche market. And we've assumed low single-digit price declines in that portfolio, and we've seen that. So VBP doesn't need to come as a major surgery. It can continue to come as minor cuts, and we've assumed that into our growth profile. And it has pretty much played out the way we've seen so far.

Got it. Got it. Just on the Reproductive Health on the birth rate. You and I have talked about that in the past, it's sort of a demographic shift that's very hard to combat. But also the Newborn Screening also gives you potentially entree into rare disease and other areas. And so maybe talk about the importance of having that Newborn Screening despite the birthrate that's very difficult to change or impact. Maybe talk about how that could then translate into the rare disease market as well.

I mean think about the fact that despite the birth rate pressure, I think Newborn Screening grew 10% for us. I'm looking at Steve, as I said the number. So Newborn Screening for us grew 10%. And that shows the power of our portfolio there. I mean [Audio Gap] there are rare disease therapies that are coming out [Audio Gap] impact on the power of the Newborn Screening portfolio plays a role. To be able to screen newborns for these rare diseases at birth and with the ability of having FDA approved [Audio Gap] and the same, whether it's CIVD or NMPA-approved assay [Audio Gap] gives us a significant edge in that. Despite the fact that there is pressure on birth rates, there are still 100 million new borns [Audio Gap] perspective. I think we feel very good about the fact that we screen nearly 40 million new borns, but we still feel very pressured by the fact that there are 100 million new borns not being screened. I mean, in fact, as I just mentioned to you, I mean, after the conference, I'm headed to Turku in Finland, where we hold evolved newborn screening conference every other year where we bring in some of the top KOLs from around the world who talk about what is the next phase, what's the next pipeline of newborn -- of rare diseases that we focus on. And that sort of working with KOLs from around the world helps us build not only a continued new portfolio around rare disease testing [Audio Gap] presence in markets where newborns are not tested, whether it's you take India, there is still 20-plus million babies who are not tested. Indonesia, Africa. There still a lot of frontiers where we don't have any presence.

Got it. And just to wrap up, what do you feel is the most misunderstood part of the Revvity story and what would you want to get across to investors just about revenue and what you've accomplished over the past year or two and look forward to?

Yes. I think the differentiation in our portfolio is still to be understood. And obviously, as we've gone through the portfolio transformation, it would have been great to have a good market environment, to be able to show the value of what we've done. But I would just sort of, if you just take a step back and look at our performance in 2023 versus our peer group, and look at what we have guided in 2024 versus our peer group, it is clearly differentiated. And as I have said, more importantly on the margin side, we are just getting started. We still have a lot of work to do and a lot of plans that we need to continue to execute to build a company. And when market does come back to what is normal, we expect to be 200 bps above market and with a margin profile in the mid-30s. And as I said, that puts us in a category of one. But really, what we look at, I think we need to do -- continue to do a better job of explaining and educating the investor community about the differentiated portfolio profile that we have now.

Great. And I look forward to the Investor Day in November. Prahlad, thank you very much.

Thank you.

Thank you.