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

Thanks, everyone, for joining us this morning. I'm Vijay Kumar, the life sciences and device analyst here at Evercore. A pleasure to have with us Revvity this morning. We have CEO, Prahlad Singh with us. Prahlad, thanks for being with us.

Absolutely.

So maybe I'll just start with what happened. If you could just give us a review of third quarter, how did it play out in your mind? A lot of questions about the pace of recovery. Was this in line with your internal expectations? I know instrumentation and applied genomics were a little soft. So maybe just talk about how the Q progressed for you.

Sure, Vijay. Good morning. I think if you just go back and look at the quarter, we continue to execute very well. There were a lot of bright spots, as you pointed out, on the instruments and applied genomics side, we continue to see some pressure. But if you look at our reagent performance, that continues to outperform the market and that showed growth over the quarter. We continue to execute very well. If you look at our margins, our cash story, we were glad to raise our EPS for the year 2 quarters in a row. So a lot of bright spots is what I would say. Americas, Pharma biotech showed positive growth for the first time since the second quarter of '23. So on the reagent side, on the diagnostics side, the business continues to perform very well. The CapEx is where we've seen some pressure. But I would even say on that, we're starting to see a trend towards what I would say, normalization. I think we can confidently say that the worst is behind us. We've seen stability in the market. We continue to see growth quarter-over-quarter. But I think it will take some time, especially on the CapEx spending.

Fantastic. I think off of the comments on capital environment, obviously, with the elections, I'm curious on when you speak with your customers, any change in sentiment when it comes towards capital spending? Is there a pause in the market?

Yes. I don't -- I think it's a little early to start speculating. The administration still is -- still a couple of months away. I would not say that there has been any pause or any change in planning. Most companies have obviously planned for various scenarios as you would imagine. But there is nothing that we would say that has put any pause in terms of what we are hearing from the administration.

Fantastic. I know this came up at the Analyst Day for you. But maybe if you could just walk us through on the potential tariff impact, what kind of scenarios have you assumed at the low end, high end more specific in China, Mexico and maybe if we have a broader one, what percentage of revenues or COGS are imported by Revvity?

Yes. Surprised you've made it to the third question -- the first question, as you would think. Look, we've lived through COVID. And as you will recall, us and most of our peer group have built supply chain redundancies in most markets. Revvity as a company, we've been in China for China for the past decade. All our reproductive health products come out from in China for China. 40% of our immunodiagnostics is manufactured in China for China. The one that is not is really the ones that there is not much local competition. So we don't move -- haven't moved that to China. As a company, as you know, we are now 16% -- 16% to 17% of our total revenue comes from China, 10% of that is DX and 7% of that is on the Life Sciences side. Look, most of our products, we've sort of, as I said, build supply chain redundancy. So we feel very comfortable with it. Less than 2%, 1% to 1.5% of anything that is directly sourced from China is for products outside of China. We hardly export anything from China for markets outside of China. So we've sort of as you would think planned to whatever scenario plays out over the next several quarters and feel good where we are today.

Understood. And then maybe sort of related to that NIH exposure for you guys, how do you quantify it? Is it minimal, marginal, any sensitivity to NIH budget changes?

Yes. I mean, 35% to 40% of our revenue, as you know, is pharma biotech. NIH on the academia side is, I would say, probably 1% of our total revenue. So a very minimal impact that we see directly from NIH to our product portfolio. And again, most of what we now manufacture and sell, as you know, our reagents, consumables, software services. So they are very low ticket items". So they don't -- the impact that comes through their, basic research is going to continue. This is where we feel very comfortable about the differentiated portfolio and the transformation that we've gone through over the past 5 to 7 years.

Understood. The -- I guess, going back to about -- you mentioned 35% to 40% revenues from biopharma, that customer class, I think when you look at the spending priorities, how recent conversations that you've had with customers? Or when you say things are getting better, are they feeling a little bit more optimistic now with some of the changes that HHS, FDA, et cetera, maybe faster drug approval, et cetera. Would that be a thesis for them?

I think the way to think of it is, there's going to be some company-specific, right? Yes, there is a broader impact on sector specific. But if you break down into the 3 pieces, you've got instruments, we've got instruments on both the applied genomics and life sciences side. You've got software and you've got reagents and consumables. The reagents and consumables are not really getting that impacted. In fact, we are starting to see a lot more traction around that. You saw the results of that in 3Q, and we expect it to be sequentially better in the fourth quarter. Software is, again, if you look at our software business, it will probably go low double digits for the year. So that continues to do very well. It is the CapEx spending around the instrumentation and that to large ticket items is where you've seen an impact of that. And I don't think it's just the administration or just the rules and regulations. There have been several factors over the past, I would say, 7 to 8 quarters that have impacted that. But that's where we are starting to see, as I've said, a trend of stabilization. Yes, we are not assuming any budget flush in the fourth quarter. But still, we are going to see sequential improvement in the fourth quarter as one would expect.

Understood. Understood. Maybe switching back to China. Maybe just high level, talk about what's been your China trends just to set the context, what was it in 2023? What was that year-to-date China trends. When we look at China CAGR versus '19, maybe just give us a little bit of context what's happening in China?

Yes. Sure. I mean if you look at China from 2019 onwards, obviously, COVID had a big impact on it. But I think the way I would sort of think of China, last year, China grew mid-single digits. I think it was up 6%. This year, we expect China to be down roughly about the same amount than it was last year. I think overall, if you look at our trend -- our assumption around China, we expect China to grow mid-single digits. And then I think what we've done is we've put all the right pieces in place in terms of local manufacturing, local sourcing, local R&D. And our emphasis is really on if we are going to move products into China, how are they differentiated enough and how do we stay a step ahead of the game in terms of bringing innovation and technology. We just launched our innovation center at Taicang in China when I was there for about 10 days. We've built a lot of relationships over with the government, local administration, local officials in the places where we play. We've got a strong footprint in the market. And then I think we've also been very deliberate in what we assume as growth from China in our LRP. I mean we talked about this also at length at the Investors Day, as you know.

And just maybe when you look at China, there are some questions around VBP if some contracts would change. And I think you guys have told the Street that it is not VBP. Maybe just talk about what happened, why is this not VBP, could VBP be an issue?

Yes. I mean, look, I think you've got to go back and look at the portfolio that a company has in a particular market. We assume mid- to high -- mid-single-digit price declines in our LRP from China. When I say the mid-single digit growth. So we've assumed that has been -- there will be a continued price decline. I think what we sell in China really is around newborn screening and autoimmune testing. And if you look at those 2 product portfolios, those are very niche markets. Will there be an impact on it in 3, 5, 7 years? Probably. But right now, we don't see that as being a factor that plays into VBP. And we've talked about that. We've talked about local competition in the market and how we are dealing with it.

Understood. And I'm sorry, the LRP assumptions you did say pricing down mid-singles. Maybe walk us through on what are your assumptions for overall volume in diagnostics versus life sciences, how are you thinking about stimulus, et cetera, within the LRP framework?

Yes. So we've not assumed any stimulus as we've said when we talked about it during the third quarter call. I think the way I would look at it, we've said the price declines are going to be there. There will be some pressure from birth rates even though they did pretty good this year, compared to the previous year being the year of the Dragon. And we saw the impact of that both on prenatal and on the neonatal side. Longer term, in 2024, we also had the impact of the 500 bps pressure from some of the product portfolio, which we moved to a different channel. That is going to go away. I think you are also seeing that we had some unique aspects around COVID impact in the early part of the year last year from China. So as all of that dissipates over the next -- over the LRP that we've talked about, I think China is going to continue to be a mid-single-digit grower for us.

Understood. Understood. And that mid-singles does not assume any stimulus, right? I'm curious, have you heard anything on the ground on stimulus and what parts of the business could it potentially benefit?

Yes. I mean I think the biggest impact you're going to see is on the instrument side for us. Of course, it's going to be not as oversized as it might be for some of the other peers in our sector. So that's where we will see the impact. Look, there's a lot of conversations going on, and you've heard this from my peers across the industry, a lot of proposals being submitted. And I think in 2025, you will definitely see some benefit of that stimulus coming. What shape, what form and what the timing around this, I think it is probably anybody's guess.

And maybe a last 1 on this topic, Prahlad. Can you just remind us what kind of instruments this revenue you sell in China?

Yes. I mean most of what we sell is around our life sciences and applied genomics portfolio. So on Life Sciences, single-cell analysis, in vivo imaging. There is nothing that we sell, which is a whole lot more routine or used. It has got to be specifically needed, whether it's for an academic lab or for pharma biotech research. And on the applied genomics side, obviously, the DNA, RNA extraction, liquid handling platforms that are routinely used across labs, both in pharma biotech and also in clinical.

Understood. So maybe moving on to pharma reagents. That's a pretty big part of your portfolio. On your comment around we're seeing some stabilization in those end markets, right? Could you maybe give us a little bit more granularity between large versus small pharma. Any change in sentiment, one versus the other?

Yes. Again, I think for us, just to put it in context, a pre-revenue pharma biotech is 5% or less percent, 5% or less of our total revenue. So it's not that big a driver for us, but you obviously have seen funding come into that earlier in the year, and you're starting to see the impact of that on research dollars. For us, what becomes crucial and critical is 35%, 40% of our revenue is from pharma biotech on that side of the business. And as they become part of the program, as it moves into R&D, and as our reagents become part of the screening program, that is where we start seeing the impact. And in this year, we've seen a differentiated performance on our reagents portfolio. And obviously, some of that is because of there are some drug classes like GLP-1s, where they have been used in the screening programs, and that's where you start seeing the impact of that. And these are multiyear programs. So it's not that these are bulk reagents that are acquired, bought for a quarter or two. Once they become part of the screening program, they stick with it throughout the development -- research and development phase of the program.

Understood. And the -- sorry, between the large and the small, you said pre revenue rate.

Yes.

Has pre revenue pharma started growing coming back for you guys? Is it growing right now?

I mean, we've started seeing better performance than what it was last year, right? I mean, would it -- would we say that it has come back to what historical performance has been? Not yet. But definitely, it is moving in the right direction is the way to think of it.

Understood. And then reagents, since you brought it up, up mid-single digits in third quarter. How does that -- I think some of your peers have tried to make this analogy on look, when you look at the consumables, that's a leading indicator for activity levels amongst pharma customers. So how would you characterize that mid-singles reagent utilization and a signal for pharma coming back?

Yes. I mean if you recall, Vijay, when we talked earlier in the first quarter or the fourth quarter, there was a lot of instability with the restructuring with site closures, and that's where you are starting to see the impact of that. And as we've said and others have said, right, the reagents for us are the primary indicator of the market starting to come back. And once that stability has set in, when programs have been transferred from, say, one site to another site, and have been restarted and newer programs have been initiated. That's when you start seeing the impact of research reagents coming in. And typically, that is followed back by investment coming back into the CapEx side of the business. Now we don't expect it to be a sudden influx and that's why what we've talked about is that we continue to see what I refer to as a path to normalization into 2025.

That's helpful Prahlad. On, I guess, reagents, have you tried to look at reagent performance ex China? What was it in, with and without China?

Yes. I mean I think China grew low single digits on the reagent side for us. Even China grew low single digit reagent side for us. But outside of China, obviously, the Americas is a big driver. And as I said, this is the -- last quarter was the first quarter when we saw positive growth from pharma biotech coming in. And I think, look, at the end of the day, America is going to be the market for us, which is continuing to be a leader in coming back. They were the first ones where we started to see an adverse impact on the economy, and they are the first one that's going to come back.

Understood. That's helpful. And when you look at that LRP framework, what are you assuming for biopharma end markets within that LRP framework? How do you think reagent performs? Is that above your LRP framework?

On the reagent side of the business, I think that will continue to grow somewhere between the reagent side of the portfolio, as we have said, 9% to 11% is what we had said at the beginning of the year. We are trying to streamline and align all our life sciences portfolio, as you saw at the investor deck under Life Sciences Solutions. And that we are saying will be in the mid-single digits to where it will be. 80% of our business is softwares, consumables, services and assays. And as long as that growth continues to drive and our autoimmune business continues and immunodiagnostic business continues to do it the way it has performed over the past 5 years, and our software business continues to be the growth driver for the business, I think we are very well positioned from a portfolio perspective as to what we are bringing to market.

Understood. I'm curious, when you look at reagents, is that a daily run rate item? Or could orders be lumpy within reagents? When you look at that as a signal for activity levels coming back, how do you look at the reagent portfolio? And what visibility does it give you?

It depends on the portfolio, whether you're talking about antibodies or you're talking about our AlphaLISA or HTRF reagents those that are part of normal screening programs, right? They are a steady run rate business. Our antibody business tends to be, again, a run rate business. As we've talked about, you put in another 3:00 p.m., you have it at your doorstep next morning at 10:30 a.m. We have very -- not that many, I should say, bulky reagents that are lumpy in business that can sort of have an impact on quarter-over-quarter.

Fantastic. And maybe last question here on reagents, you did mention 9% to 11% LRP assumption. Are you assuming positive pricing within the reagent portfolio within that 9% to 11% framework?

Yes. Again, 9%, 11% is what I said was around the reagents is what we had said at the beginning of the year when we talked about it at a health care conference, right? In terms of pricing, again, it goes to the portfolio. Remember, we've talked about BioLegend. One of the things that they take pride in is the fact that they have only raised their price once. The way they are -- their delivery, their consulting aspect that the way they work with their business and their quality is what they take pride in. They have raised price once. So there is some impact of pricing from a reagent perspective. But most of I think what we will see is a steady-state price increase of 100 to 150 bps is what we've assumed in that.

Got you. And maybe -- I'm sorry, on the BioLegend since you brought it up. It's -- I know at the Analyst Day, I think a question was asked specifically on pricing for BioLegend for 2025 framework. And I think the comment was no price hike for '25. is that typical within that business? When you look at your competitors, is that typical behavior? Could this set you up for share gains when you look at revenue versus competition?

I think another way to think of it is there are enough other leverage points that we have in our business in terms of execution that we will get opportunities around incremental margins. And for BioLegend, pricing is not one we necessarily will need to go to. They have a lot of other opportunities where we can. We talked at length around the synergistic opportunities that we have with that portfolio. The quality, delivery and the way they interact with their customers are really the drivers of growth for BioLegend. And pricing hasn't been one of them. And I think to some extent, as you pointed out, that has been their USP and that has worked for them. We're not -- I mean, I don't think we are saying that we will never ever increase price, but that's not necessarily that's in our focus on our lens for 2025 for BioLegend.

Got it. And then immunodiagnostics, it's a big part of the business, grew mid-singles in the third quarter. Maybe you can talk about set it up as what was the CAGR from 2019? I know pandemic had a big impact. And when you look at China versus ex China, maybe parse out what the performance in the business has been.

Yes. I mean look, if you -- obviously, COVID had an oversized impact on the immunodiagnostic side of the portfolio. And especially if you see that in China, if you take that into account and the 500 bps of pressure that I said from the channel change that we had on the legacy immunodiagnostics side of the portfolio, that has -- that business has continued to grow high single to mid-single digits. And China has grown high single digits if you account for that. You know this very well. I think EUROIMMUN is probably one of the best acquisitions that will go down in our history as a company. The way it has performed, it has enough opportunities for growth. U.S. is one example that I have pointed out, there's 15% of the business, and we expect it to get to 40% of the business from an autoimmune perspective. There is a lot of opportunities for growth. We've got to get our -- continue to get our assays through clearance. We've got to get our instruments into the market registered here. And areas such as neuro autoimmune diseases or in nephrology, there are so many autoimmune factors, which are still -- which haven't been even the tip of the iceberg. Right now, our focus is primarily on assuming that everybody gets an ANA screen. And even that is not that common. So getting towards -- so I guess what I'm saying is that there are a lot more growth drivers for autoimmune disease testing and immunodiagnostics as a whole, with U.S. being the lead in that.

Got it. And -- sorry, and when you look at the current trends within that business, mid-singles and I think LRP is high singles doubles. Can you help us bridge on why is it mid-singles right now? And what's the path to getting back to normalized growth rate?

Yes. I mean, look, it's mid-single right now with the 500 bps of pressure that we had from the channel change that we did in China. If you just take that off, next year, it goes back to its normal growth rates. So just that itself has a unique impact on it in 2024.

Understood. So -- and just so I understand, like this 500 basis points, this is not the typical pricing decline. This was a unique one-off event and which shouldn't repeat in '25.

Yes, if you recall, we had some legacy immunodiagnostics products, which we had acquired 15, 20 years ago with the acquisition of Symbio, et cetera, 20 years ago, which we decided to make a channel, which we decided to take it away from our growth business and put it through a different channel. And that -- at the beginning of the year, we had pointed out that, that would have a 500 bps impact in 2024, and that's not going to repeat, obviously, in 2025.

Understood. And -- sorry, so is that entire immunodiagnostic franchise expected to grow at normalized levels for next year? Or is there any cadence issue that we need to be aware of?

No, I think in the -- over a period of time, as we've said in the LRP, it's going to continue to grow 9% to 11% in regards to 2025 guidance, I think, Vijay, we will talk about that when we do our 4Q earnings call.

Understood. And the pricing environment within diagnostics, when you say 500 basis points within China, how does that compare to like diagnostic pricing headwinds? And I know the LRP didn't assume any VBP impact. But when you think about the overall diagnostics franchise, maybe talk about pricing environment.

Yes. I mean, globally, with the Diagnostic side of the business, obviously, we have opportunities for price growth, not just on the autoimmune or immunodiagnostics side, but also on the newborn screening side, as newer and newer contracts come through for and come through renewal. It gives us an opportunity to put a pricing -- to put new pricing in place those. These tend to be multiyear contracts. And that's where they give us an opportunity to add some get some pricing leverage. And we'll expect some of that to come not just in 2025, but as the contracts get renewed.

Understood. So positive pricing?

On the diagnostic side, yes.

Fantastic. And maybe one on -- I think on the tuberculosis TB testing, I know when the Oxford acquisition was done, you were pretty optimistic. Maybe talk about what's happening on that side of the business. I think Roche has made some comments about entering the business. How do you see the competitive landscape changing within TB, if you have more competition?

Yes. I mean, I think the way I would look at it is you've got to look at that market as latent TB testing and active TB testing. On the latent TB testing side, when we made the Oxford acquisition, obviously, there was a -- we had an insight into what their pipeline, incoming pipeline would be. On latent TB testing, I think the one thing, while it was a clinically more sensitive and specific product. What it did not have was automation. And I think that's what we have now incorporated. We've started that already in ex U.S. In the U.S., we are waiting for the FDA approval to come through and that should make it a pretty competitive product in the U.S. market, too. So there's a lot of growth trajectory and opportunity to get market share there. I think the question really is that how can you come up with breakthrough technology to look at active TB testing. And that's where from an NPI and an R&D pipeline perspective, our focus will be.

Got you. And maybe a last one on -- when you look at the pipeline within diagnostics, are there any exciting products that you're looking for, either for fiscal '25 or beyond kind of launches I know back in the day of reproductive health was something that you guys spoke about, trisomy testing, et cetera. Anything we should be looking at from a pipeline standpoint.

Yes, sure. I mean on the -- we talked about this in some level of detail at the Investors Day, Madhuri Hegde, our CSO, talked about it. One of them is on the new bond screening side with the RUSP panel making more recommending MPS II, that is in our pipeline. DMD has been approved. We have an approved FDA product, Ohio, the state of Ohio has already started screening every newborn for DMD testing and hopefully more and more states take that on. So the newborn screening disorder is obviously an active area of research for us. She talked about diabetes screening for type 1 diabetes. That is, again, an area of interest for us that we continue to explore and see in regions and country where that becomes part of early screening for newborns and that obviously will have a big impact. On the autoimmune side, as I said, we continue to be actively focused around new assays for neuro autoimmune testing and for nephrology. Those are areas of focus for us. So it depends on which business and what you are seeing on the DX side, I think you'll continue to see new assays come out from us that tend to be more, I would say, unique specialized niche, whatever the adjective you might want to use.

Understood. Maybe since you brought newborn screening on the reproductive health side, it accelerated versus first half and third quarter, grew high singles. What drove this acceleration? Was this China, ex China, and talk about sustainability of those trends?

Yes. I mean, despite the pressure on birth rates, we've continued to see that business grow very well. And I think, obviously, China did -- with the year of the Dragon, as I said, it did see some benefit coming out of that in 2024. And even on the prenatal side, we saw some benefit of that. I think our focus really has been twofold there, continued geographic expansion. We use the example of Indonesia and India, two markets with large newborn populations every year that are our focus areas from a geography perspective and then menu expansion, menu expansion in areas where we already have testing, if you take China, most of the provinces test for 2 to 3. Egypt, they test for 2 provinces. And as you continue to add current approved disorders to the panel, it just becomes an incremental growth driver, plus the focus on rare disease from pharma therapeutics provides us an opportunity to partner with them and provide screening. Spinal muscular atrophy and Duchenne muscular dystrophy are 2 primary examples of that where we are partnering with pharma and bringing the assays and screening assays to the market.

Got it. And when you look at these, I think you look at prenatal, right, and that's a leading indicator for newborn screening, prenatal was still strong here as of third quarter. Is that sort of a signal that, look, first half of next year should still be pretty robust on the newborn side? And just give us a rough split between what is prenatal versus newborn screening as a mix within reproductive health?

Yes. I don't exactly remember what the number of prenatal is as part of the total portfolio. But you're right, it did -- it did pretty well in the third quarter. Some of that was some CapEx that we had a CapEx acquisition by our customers, and that had an impact. But China specifically also had a good performance there, which, to some extent, prenatal is a lagging indicator of how the newborn screening business is going to do. And plus, I would say that there was some market share gain in some markets where we captured tenders, which we didn't have earlier.

Fantastic. So it looks like a prenatal screening should be a good indicator for at least trends as we look at over the next 6 to 9 months, the -- on the instrumentation side, I think that's the other thing where you spoke about maybe environment getting perhaps stable, it was still down mid-singles, right? And I think your guidance is contemplating down mid-singles in fourth quarter. Is that like -- when you look at post elections, what customers have been saying is, are capital trends playing in line with how you had planned Q4?

I think the way I would think of it is that, look, we are not expecting any budget flushes in the fourth quarter. Typically, what you see is a sequential 20% jump in the fourth quarter versus third quarter. We are assuming mid-single digits, I think, 6% or 7% uplift from the third quarter. So I think we are being a bit more I would say, balanced in our assumption of what the growth trends would be from quarter-to-quarter, especially given the fourth quarter. I don't think that's in -- we've tried to temper our -- temper our expectations as to what we should say. The fact that we are growing in the right direction is a trend that we are expecting to not stop or to reverse. And as we've said, our reagents business tend to be a preceding indicator of where investments are starting to come back into the market. And then I think if you recall, as we've said, once we start seeing the growth in the reagents business, typically, you start seeing CapEx spending follow that over a period of time.

Understood. And so far, it looks like things are progressing in a nicely, nice stabilization, seeing improvements. No change if I had to summarize that. When you look at -- I think one of the concepts for some of your peers have brought up is this CAGR versus 2019? And what is your instrument CAGR versus 2019? And is there a catch-up opportunity on the instrumentation side for Revvity?

Yes. For Revvity now, instrument is, as I have said, it's 19%, 20% of our portfolio. So it really doesn't -- will not move the needle one way or the other for us. Our focus continues to be on using our instruments portfolio and platform to drive more consumables and more reagents. So for us, it becomes the ways to the means. If we are able to get -- in our HCS portfolio, our in vivo imaging portfolio, our liquid handling platforms, our DNA extraction platforms into labs, it just helps us drive more reagents, Vijay, and honestly, that is where our focus is. The more reagents we are able to bring into the marketplace, the better our margin profile is, better our growth profile is, and better our cash position is. So as a company, our consumable -- the 80% of our business drives the differentiated financial performance that we are able to bring to the marketplace.

Understood. Then applied genomics, I think, is one you're assuming flattish in a sequential revenues. What is -- I guess, if you had to look at applied genomics, obviously, the pandemic had a big impact. What's the current CAGR versus '19? Is that something that you look at? And how are customers within that segment sort of any change in behavior within the applied genomics?

I mean obviously, because of COVID, there were, I think, 2 years where that business grew 50% on an annual basis. So even if you look at over 5 years, I think that organic, the growth is -- the growth trend is in the mid- to high single digits. So that -- so it's now getting to a point where historically what the normalized growth rates should be. So I would say it has taken the last 2 years to sort of digest the growth that -- the outsized growth that, that business had seen during the COVID era. I think historically, that business will -- should see mid-single-digit growth, and that's what we expect it to be.

Got you. And software, which has been, I think, a differentiated piece for you guys. There was some timing impact here in our third quarter. I think -- and in my mind, one of the questions people ask me is this should be a renewable ratable business, SaaS kind of business, why do we have lumpiness within software? Maybe just talk about what caused the timing shift and whether Q4 is playing in line with your expectations on renewals?

Sure. So 1/3 of the business is a SaaS for us, nearly 1/3. 2/3 of the business is still on-prem, and they tend to be contracts, so it depends on when the contracts come up for renewal that you start seeing the variations between one quarter or the other, as we expect it to grow 20% in the fourth quarter as an example, right? Over a period of time, as our SaaS -- the portion -- proportion of the SaaS revenue continues to grow, that business becomes more and more predictable in terms of the -- what the performance of the business would be. So it is nothing more than the buying pattern and behavior. As we renew these contracts, the customers move more and more towards the SaaS part. And for us, the software business is truly a differentiator. We continue to have most of the pharma using our platform across their research and development phase. And I think it's a great entry point for us and a true differentiator.

And those renewal rates are -- those are playing in line with expectations.

Yes, I think what we look at is net retention rate, in terms -- including the upsells, we've had 106% net retention rate is typically what in the software community that's used as a metric to measure. And it's one of the tops that you will see in the industry.

Got you. Got you. And then I know you brought this up when I asked you on instrumentation, but the guidance still assumes a pretty big sequential fourth quarter revenue step-up. Maybe just talk about the sequential ramp assumptions and what is a typical seasonality versus any company-specific factors that help you -- help us give comfort around the sequential step up?

Yes. I mean on the instrument side, as I talked about it, typically, you would expect this to be a 20% uplift, and we are assuming mid- to high single digits. I think 7% is the number. For us, what's unique is obviously the software piece of the business, right? We said that's going to grow 20% this quarter. So that obviously has an impact of it. And there are some DX contracts or tenders that are coming up for renewal, which is unique to us in the fourth quarter. So sort of that's why despite the -- not as much seasonal impact that you would see from the instrument we expect the growth that we have forecasted.

Got you. And then when I look at margins, right, execution this year so far, it's been pretty solid. We're still seeing margin expansion off of very low single digits revenue growth. As you think about a normalized environment, how should we think about margin ramp here when you look at fiscal '25?

Yes. I think as we -- again, I'm going to refer back to the Investor Day. If you look at what we said, right, we expect in a normal market environment growth to the growth being 6% to 8%, we would expect 75 bps of margin, 25% coming from gross margin and 50 coming on the OpEx side of the business. Obviously, if the growth rate is more subdued, you would expect it to be more if it was 4%, 5%, it would be more in the 50 bps. But even in this environment, if you saw this year, we expect it to grow somewhere between 0 to 50 bps margin improvement. So I think that is truly a differentiator for us, Vijay. If you look at our performance, whether despite the pressure that we've seen on top line, margin improvements, our execution capabilities, the cash flow conversion that you have seen for the business, our EPS being raised 2 quarters in a row, I'm not sure you can truly say anybody else has been able to stand up and do that this year in such a -- I would say it's a tough market environment.

Got you. Or said another way, Prahlad, what level of revenue growth should we expect operating leverage in the business?

I mean you will expect some operating leverage at our point, as I would say, in a normal market environment, you would expect 25% coming from gross margin, 50% coming from OpEx, with most of that, half of that only half needed as you continue to grow sales, you only need half of that expense for sales and marketing.

Got you. Then maybe last minute or so here on broad thoughts on fiscal '25. I know you're not going to give guidance, but high level, what gets better, what gets worse? Any one-off factors we should be aware of?

I think, again, you got to go and look at a company and its portfolio. We feel very good with how we have positioned and transformed our portfolio. We are a lot more reagents, software and consumables-based business now with a regular run rate around how our reagents are used. I think our diagnostic business continues to perform very well on autoimmune and reproductive health. So we've positioned our portfolio well, we've demonstrated our ability to execute well and deliver a high quality of earnings even in a market environment like the one that we faced in 2024. I think pharma biotech is starting to get to a path to normalization, as I have said. And we will hopefully continue to see that trend. And in China, hopefully, the stimulus comes and that has an impact, positively across the market. So there are -- those are the positive trends. If you -- as you said, what we expect to continue to have pressure, birth rates. I would say that I don't think birth rates are going to switch overnight and start growing. And the way -- our way of dealing with it, and we've demonstrated that if you look historically, how we've performed is through menu expansion and geographic expansion. So I'd say sitting here, we feel very good about our portfolio and our ability to execute and stay differentiated in the market.

Great. Fantastic. With that, we're out of time. Thank you so much for the time this morning, Prahlad.

Thank you, Vijay.