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

Good morning, everyone. I'm Matt Sykes, the life science tools and diagnostics analyst at Goldman Sachs. I have the pleasure of welcoming Prahlad Singh, the CEO of Revvity. Prahlad, thanks for being here. I appreciate it.

Thank you, Matt.

So let's just set the stage a bit. It would be great to get some opening comments from you kind of reflecting on the first half of the year, how your view has changed or not, along with the various policy changes and how Revvity is able to adapt to the changing business environment? This is a challenging one. So I would love to get your view on.

Well, it's a dynamic environment for sure, right? I mean when we began the year, we expected there to be some uncertainty and dynamism in the marketplace with the new administration, but it has been more than that, right, for us and our sector as a whole, whether it's around tariffs, pharma, biotech, academia, government, MNFs. It's a host of things that have cropped up or emerged. I think the thing really is this is where the diversity of our portfolio has shined. I mean this is third year in a row where our growth rate is at the top end of the publicly traded peer group. And this is what the portfolio transformation was supposed to do. We are essentially -- 60% of the company is diagnostics and software, which is pretty much in the LRP range that we had said. The variance obviously, is on the Life Sciences side of the business. But this is the whole journey that we went through to come to this stage that unfortunately, we have to demonstrate the resilience and the differentiation of our portfolio in a market that's challenged right now. But nevertheless, it showed. And when we came out at the beginning of the year with our guidance, we were prudent enough to be able to sort of ensure that we are able to anticipate the challenges that would be in a dynamic market environment. And it's played out as such with the resilience of the portfolio showing and also the ability to be able to sort of absorb the challenge from the tariff without in any way changing our guidance is another demonstration of how in this market environment, which has been challenging enough, the Revvity portfolio shines through.

Yes. I kind of want to touch on that just because I think one of the -- maybe not misunderstood aspects. But as you've mentioned, like you made this massive transformation. You in my view, effectively allocated a lot of the COVID-related cash flow that you generated over those years. But the timing was tough in terms of when Revvity was kind of reintroduced. Could you maybe help investors understand how the growth and profitability algorithm has significantly improved, perhaps sort of before and after comparison just to help drive home what a different company this is today? I mean, because you point out, you look at what the growth you've actually been achieving, you look at what the margins have done and what the margin potential is and the algorithm seems to be far improved to what you were before. It's just the level of appreciation in the market, either due to macro headwinds that's not quite there yet.

Yes. I mean for those of you who recall and Revvity in our -- when we were PerkinElmer, essentially, the company was a totally different portfolio and a product profile. 70% of our product portfolio and revenue that is in Revvity today did not exist nearly 7 years ago. So that is how different that portfolio is today. Now 80-plus percent of our revenue is on a recurring basis. In prior portfolio, it used to be 50%, 55% of our revenue was on a recurring basis. So much more of a CapEx-heavy portfolio. If you look at our growth rates, our LRP, we have said is going to be 200 bps above market in the 6% to 8% range. That used to be in the 3% to 5% range in the previous time when the market was healthy. And then I think the most important aspect is when you look at our operating margin, we are in the 28% profile right now, which used to be closer to 18% to 20%. So just factually, if you look at some of these data points that really starkly points out the differentiation of the portfolio that is within Revvity now versus what it used to be. And then as I said previously, 60% of our revenue is from diagnostics and software. And that is already within our LRP range that we have said that this is going to be. So if it wasn't for the pharma biotech and academia challenge on the Life Sciences side of the business, we would already be in our LRP range.

Could you maybe kind of talk about the organic growth guide this year, 3% to 5%. Sort of what are the upside and downside risks? I think a lot of us are familiar with the downside risk. But if you can kind of go through that in your mind, what are sort of the error bars around that 3% to 5%? What could cause it to be over, what could cause it to be under?

Yes. Again, I'll point to some of the comments that I made earlier. Look, when we came out at the beginning of the year, we were very prudent in how we define what our organic growth for the year is going to be. And this was again based on what we assess to be the uncertainties and the dynamism in the marketplace. And I think we were confident in it being there. And some folks said that we were being too conservative. But in hindsight now, that looks like it was a very appropriate move as such. Again, if you look at the portfolio, as I said, 60% is diagnostics and software. And that pretty much plays out as is, whether it's around newborn immunodiagnostics and software. The variance is really around the Life Sciences and Diagnostics side. And that's where we put a little bit more prudence in our guidance. So I think we are very comfortable with the error bars that we have or the deviation that we have in the 3% to 5% that we have forecasted for the year.

Just drilling down on Life Sciences segment, your exposure is to a lot of early-stage preclinical work. Obviously, that's either sentiment or in reality impacted some through academic and government, but also not necessarily today, but the potential overhang of MFN pharma sector tariffs. Maybe just talk about how your product portfolio can differentiate itself in this environment? Because the growth has been impacted, but probably not to the extent that people thought it would be. And I think that's sort of the key question for the second half of the year, as you point out, the sort of delta in the guide is the Life Sciences segment. So maybe talk about how you feel like you can weather through some of these issues.

Yes. I mean you have to break it down, right, into pieces within the business segment. When you start on the preclinical discovery side of the portfolio, at some point of time, innovation cannot stop because if you don't fuel the engine, there's going to be no byproduct coming out at the other end. And then from that perspective, if you look at what has happened over the past couple of years, I would say more of the funding has been slanted towards the clinical side, more from a short-term exposure. But if that happens, the pipeline is going to dry up from an innovation perspective, and that needs to continue to be fueled and what we have in terms of our differentiated product portfolio on the consumables side primarily, that has got a lot of stickiness as the product development process goes. So that's where we feel very comfortable. Obviously, the impact on the CapEx side of the funding is being felt by all. And I think that's going to be challenged till some of these overhangs clear out.

Yes. Drilling down on instruments, they've struggled as the sector has kind of grappled with CapEx-constrained environment. It's not unique to Revvity. How should we think about the incremental margin opportunity as that spend starts coming back because there probably is some level of operating leverage in that business when the CapEx spend environment comes back.

Yes. I think there are 2 questions in there. One is the impact on the CapEx side and one is on the operating margin side. I think the CapEx is going to be pressured, and we've seen that. But I think as that improves, if you look at our Life Sciences business, there are 3 pieces to the portfolio, right? One is the instruments, one is software and one is consumables. Consumables is -- and our margins are in the 30s with that. Consumables is at the higher end of it. Obviously, software is somewhere in the middle of it and instruments are at the low end of it. But overall, it is still a very high-margin business. The portfolio that we have on the instrument side is differentiated in that there are not a lot of commodity instruments that we sell. So there will be some modest impact on margins, but it's not going to be something that will be a significant needle mover.

Got it. How does kind of your leadership position within reagents consumables help drive the consistency of growth over the long term? And how do you continue to push utilization higher amongst the installed bases of the consumables that you serve?

I mean the reagents portfolio that we have is essentially open system. It's not related to our own instrument. So it is being used widely. I think the thing to keep in mind is what we develop and what we sell are related to long-term programs. GLP-1 is one that I've talked about earlier is once it starts, there is a lot of stickiness to it. From our perspective, what we focus on is how do we continue to generate more and more NPIs. We probably launched nearly 2,000 new consumables every year. So that innovation engine needs to continue to rev at a steady pace to be able to provide researchers with the tools that they are looking for in terms of their discovery and development process. And that's what our focus is on. And there is a lot of stickiness to the portfolio that we have, which is evident from -- if you look at the performance even in this depressed environment over the last 3 to 4 quarters.

Got it. You've quickly gained a pretty strong presence on the software side of tool spend. Many other tools companies in the past have tried to advance their software and bioinformatics business with mixed success. What differentiates Signals' offering? And how do you see this business driving customer stickiness going forward just because I think we've all understood the ability for tools companies to be software companies. But for whatever reason, it hasn't really come out, but you've seen to have reached a level of critical mass in your software business. How is your approach different perhaps than what has been tried in the past? And how do you think that will capture customers within that ecosystem that you have?

Yes, I mean our software business always did well. It's just that when we were PerkinElmer, we didn't have an opportunity to talk about it given everything else that was on the list of things to talk about. I think our software business is unique in the sense that it's not tied to any instruments or anything from that perspective that there is a CapEx and you need it as a -- it is more of an ERP for researchers. And that is something that is critical and instrumental in them being able to do their work. 48 out of the top 50 pharma companies have our software. And we treat it really, really like a pure software business. But the biggest also driver for it is our life sciences business turns to be a pure customer for our software business to be able to enable them to understand what is the pipeline. What is the product portfolio? What is the user needs that will play out, whether it is within our research, life sciences research service labs or on the clinical side on the diagnostic service labs. So there is a sandbox even within the company that the software business is able to leverage as a customer profile that would need. So I mean, we couldn't be prouder of the way they have been performing and executing, but there is a method to the madness that has resulted in it being 8% to 9% of the company's revenue at this point.

Got it. Switching over to diagnostics. You have immunodiagnostics and reproductive health, both of which have recovered pretty nicely post-COVID. Can you talk about the penetration and growth opportunities, specifically with ImmunoDx in the U.S., which has been a focus for you?

Yes. I mean immunodiagnostics is what, 15% to 20% of our total company exposure is within the U.S. which should be, I would say, around 35% to 40% historically, if you look at the size of the market. So this is our biggest opportunity and the low-hanging fruit that we have to continue to grab. And this is what we've continued to talk about. I mean even that, when we acquired EUROIMMUN, that was like 3% to 5% exposure. So it's continued to grow, but there's still a lot of room for it to grow in the marketplace. So we see that as a strong growth profile. And that will sort of balance out to some extent, the global exposure, specifically vis-a-vis China that the immunodiagnostics business has as it continues to grow its presence within the United States.

Are there any natural gating factors to increasing penetration in the U.S., whether it's competitive landscape, whether it's the offering you have like commercial intensity? Like what is it that you feel? And maybe it's just blocking and tackling and hard work to get there, but like what do you feel is sort of the unlock for that further penetration gains in the U.S.?

Yes. I mean there is -- it's just blocking and tackling in time. I mean it's gone, as I said, from 3% to 5% to 15% to 20%. So it has continued to grow at a torrid pace. We just need to continue to fuel the regulatory filings, ensure that we have enough feet on the street and penetration with the big large reference labs, which have been great partners and customers for us.

Got it. Shifting over to China. While your testing categories have not been in the VBP programs, technically, local competition is present, something you face every day there. How do you differentiate your capabilities versus local competitors? And what has sort of been the pricing impact over the past few years? And how do you maintain margins longer term in that market? I mean your growth has been really good, but you're facing similar levels of competition everybody else is over there.

Yes. Look, I mean, the competition in China is not new, as I have said, and it's going to continue to be intense. And even the external factors, whether it's VBP or DRG, we are going to see the impact of that. That's not there. Plus we've also had high comps. So we are going to see the impact of this, especially this year in the short term. But really, the differentiation for us, as I have continued to say, is our portfolio. We bring in assays that have got IP around it, that we are able to provide. And I'll use 2 examples that I always use is around nephro and around neuro, autoimmune diseases. It's not just the basic ANA screening or basic screening for lupus thyroid, et cetera, but it's for more complex diseases where you need tests that you have to have -- where we have an intellectual property around that. that is what will continue to ensure the growth and profitability of that business, not just in China but across.

For reproductive health in China -- and you've called this out pretty consistently, birth rate has been a consistent challenge. There's not a terrible amount you can do about that outside of the Year of the Dragon last year. But however, you still see growth in this area, does that sort of increase your exposure to rare disease testing in the future as sort of a future driver of growth? I mean there's sort of a natural move from reproductive to rare disease. So maybe talk about that potential evolution.

Yes. I mean breaking it down within China and outside of China.

Yes, yes, it's one global question, honestly.

Yes, I mean, within China, you're right. I mean, last year, we saw a modest increase from the Year of the Dragon. And look, we still have a long way to go in terms of the number of disorders that some provinces can test for. I mean the big ones around Shanghai and Beijing and Shenzhen, they get more than a few disorders, but there is still -- it's a very large country where there is still opportunity for growth from menu expansion. So from our perspective, in China, that's our play is how do we continue to be in China for China in terms of developing, discovering and getting approval from an MPA for disorders within China. And sort of that takes away the dependency on any other country for fueling the product portfolio within the country. outside of China and related to the rare disease component. I think we've -- over the past couple of years, if you look at it, we've done a very good transition on that, especially with our Omics business playing the catalyst in that play, whether it's around DMD, SMA, novel diseases, rare diseases, which are now having therapeutics in play, providing companion diagnostics, working with therapeutic partners to be able to, a, identify patients that would be good for their clinical trials, but more importantly, as population genomics starts to play a role, as we announced a few weeks ago, our partnership with Genomics England, that's a critical play being able to test for 100 newborns, be able to provide the competencies and capabilities along with the tools and the service component is really critical for us to partner over the long term in the identification of rare diseases vis-a-vis and also help therapeutic companies and pharma to develop novel therapeutics for that. So that is sort of our play is how do we take what we are doing in terms of basic screening for newborn errors of metabolism or genetic disorders in newborns towards helping pharma develop therapeutics for some of these disorders.

Yes. And I would expect that some of the language we've heard from CBER and the FDA about their willingness to accelerate rare disease drug approvals would be a nice tailwind for that business as well over time. Would you agree with that?

I think we are still at the very cusp. This is a tale of 2 different cities or stories, whichever way you want to say. There is still 100 million babies, newborns in the world that are not tested. So you have that scenario where the geographic expansion for basic disorders is still nonexistent or in its very early infancy. At the same time, there is an emergence or I would say, a surge of new novel therapeutics for rare diseases. Each of these cost $750,000 to $1 million per therapeutic regimen. But to be able to identify patients early on who would benefit from these therapeutics is a big market opportunity. So for us, since our presence on this side is pretty strong, it's a natural bridge and extension to be able to provide the product portfolio and the capabilities to not just therapeutics, but also to countries as they start developing their population genomics program.

Got it. One last question on China. We've seen, we'll see how long it lasts, but de-escalation of tariff rates in China. During your Q1 call, you talked about $135 million headwind if nothing was mitigated. How would you characterize the headwind today given the lower tariff rates? And does this allow you to speed up your mitigation efforts specifically with your BioLegend business?

Yes. I mean I think if you -- as you will recall, what we said is that was the opportunity or the challenge in terms of the tariff and the mitigation actions that we were placing in place in the second quarter to ensure that we don't have that uncertainty into play. So most of what we had planned is already in execution and that trend's sort of left the station because as in any negotiations, these things go up and down and up and down, and we've experienced that, right, since our earnings call. So from our perspective, there is very little upside if these were to go back because we've already put in place manufacturing capabilities in different parts of the world to ensure that all countries have the supply that is needed without having this hangover of the tariff scenario.

So are you similar to other tools companies that we've spoken to where despite what the tariffs may do, the regionalization of manufacturing will likely continue because it's probably the right way to be positioned in the future?

I think we had to re-exercise our COVID muscle to ensure that there is supply chain redundancy in all markets. And that's what we went back to. BioLegend was a new muscle because at that time, BioLegend was not part of Revvity. But it's amazing the amount of execution focus that they put in a matter of weeks to ensure that there was no disruption in product availability for the China marketplace.

Got it. Shifting over to academic and government market. You've outlined your exposure is roughly 5%, I think, total exposure, but NIH direct is around 1%. Given this is not hugely material, we have seen a pretty meaningful decline in demand in this segment regardless. How do you maintain your exposure to this important early-stage research while also kind of calibrating to a potentially lower level of demand going forward?

Yes. Look, this is always going to impact maybe short-term or near-term results, especially with academia and government on the in vivo side of the business where there is a bit more exposure. But really from a researcher's perspective, the more innovation that we can bring in place, Matt, the better off they are because if we are able to provide more productivity, more efficiency, more automation, from the instrument portfolio, it becomes a compelling proposition for them to move forward with some of these -- so if there is a limited budget, they will spend -- they will buy a limited amount of things. But our focus is really to provide a product that becomes compelling enough to take that. So this is where our focus is, like on the in vivo side, right, we provide imaging for research purposes. How do we provide automated regions of interest around organs. So they don't have to go and demarcate it, right? And if this is something from a machine learning perspective, we are able to instill it in the software. It just significantly reduces the time as they do imaging. That's an example of how our focus is really on the innovation side to be able to deal with some of the headwinds, temporary headwinds, hopefully, around the CapEx availability.

Got it. And then just to kind of frame it, embedded in your guide, what is your expectations for growth in the academic and government segment over the course of this year?

Yes. I would say we have not had -- I don't recall what the number is, but it's not really any high expectations around what academia and government would do.

Okay. So you're assuming some level of cut at NIH, whatever that might be?

Yes, yes. I mean NIH is a small component. As you said, it's 1% of exposure, but overall academia is around 5%.

Got it. Shifting to some of the recent policy changes to the FDA, which has largely been sort of headcount reduction so far, but also some announcements that I mentioned before, trying to accelerate the drug approval process, especially in the earlier stages. You have in vivo imaging, organoid, organ-on-a-chip capabilities. While some of these might still be pretty early in their stages of development or establishing use cases, how can Revvity benefit from this attempt to accelerate earlier stages of drug development? Like I would think this is going to be a nice tailwind for you because a lot of what you do is actually trying to solve that same problem.

Software. I mean the whole idea is how do we surround it with software. And by software, I mean more around machine learning and AI capabilities that we are able to bring to the portfolio, whether as you said, it's around organoids or organ-on-a-chip or 3D capabilities. Our focus really is that if I'm -- if you are a researcher and if you are looking for a certain tool set, how do we make it seamless and automated enough for you so that your efficiency improves, especially in a budget-tight environment. That's essentially where our focus has been.

Got it. Shifting to financials, asking you to maybe put Max's hat on for a minute. But you've outlined kind of given the challenging macro backdrop, operating margins are expected to contract between 20 and 40 basis points. You talked about that on the Q1 call that if tariffs were be scaled back, you would continue with your flexible manufacturing plans, which we just talked about and may not update the margin guide. However, do you see any upside to these margin targets if top line growth trends are a little bit better in the second half? And do you think that the long term -- what do you think the long-term operating margin target is for this business overall?

Yes, as we said during the first quarter earnings call, the 28% from 28.3%, the minor drop that we said is related to the tariffs. But I think the thing to keep in mind, it is still in the top quartile of our publicly traded peer group. To be able to take the operating margin to that level in the matter of time that we have done with the portfolio that we have assembled is really, I think, a great accomplishment. But I think what's more important for us is that we are still at the very early stages of what the true portfolio profile can result in terms of what the operating margin for the business should be. As we have said, assuming normal market environment and us being in our LRP range, we should be a company that has operating margin in the mid-30s. There is nothing that should be stopping us from doing that.

Do you think the upside to that margin case is more to do with Life Sciences segment than Diagnostics at this point? Or do you think there's equal opportunities in both businesses to get that margin expansion?

I think there is equal opportunities in both sides of the business. I mean on every side, I mean, look at our software business, the more it grows and the pace that it has been growing from -- it was 13% growth last year. This year, it will be probably be in the mid- to high teens. That continues to provide margin. Life Sciences, as you mentioned, obviously, will be a big driver. And even within Diagnostics, we've still got a lot of work to do with the acquisitions that we have made and bring them up closer to what we think is the corporate operating margin profile.

Got it. I do want to shift to M&A, and you spent a few years immediately post-COVID with an increased level of M&A versus your history. As you reflect back on these transactions sort of on a post-mortem basis, how would you assess the success of these deals? And how would you assess the overall kind of redeployment of the COVID cash flow that you generate in terms of transforming the company to higher growth and higher margins? And would you have done anything differently with the benefit of hindsight?

Yes. I mean we made 13 acquisitions in a matter of 22 months. And I think as I keep using the term that there was a method to that madness, right? We knew that the $700 million on average of COVID revenue that we were getting on an annual basis is going to go away and we needed to replace that with high-growth, high-margin portfolio. And on the Life Sciences side, that's what we set out to do. And we made some acquisitions on the diagnostics side. Did we get whatever, [ $1,000 million ] strike, right? Probably not. Maybe 1 or 2 of the acquisitions that we did have been a bit challenging. And one I keep pointing out is our tuberculosis franchise. I think we probably could have anticipated the amount of automation that it required for the U.S. marketplace more earlier and the amount of work that it would require, especially with the regulatory body and going through the approval process. So that's probably been at a slower pace than what we would have anticipated. But generally, I mean, some of the big ones that we've done around BioLegend, Horizon, EUROIMMUN, of course, they have been, I would say, spectacular acquisitions. And they'll continue to bolster the growth of the business overall.

Got it. And looking forward, how would you prioritize capital allocation strategy when you look at the options of M&A, organic, buybacks, dividends? How are you kind of rank ordering those in this environment? And do you expect that to change?

Yes. I mean going to your previous question, I think if you look at the past 7 years, we deployed around $7 billion to $8 billion of capital in acquisition. We divested 1/3 of the company and the brand name along with that. So there was a lot of M&A activity at that period of time. We are very happy with the portfolio that we have at this point of time. It is very well balanced. It's a high-growth, high-margin business that is set up to deliver the margin profile and the growth profile that we have laid out in our long-range plan. We feel very confident in that. I think from that perspective, we don't really have a burning desire to do an acquisition or an M&A activity at this point of time. I think what we will -- and to some extent, given the current market environment, the share buyback has been a very attractive opportunity for us to deploy capital. That's why I think we said we did $150 million in Q4, $150 million in Q1, I think $150 million also plus in Q2. So for us, we think the best investment right now is to do share buybacks. And right now, that's the opportunity. It doesn't mean that we are not going to be active on the M&A side. We continue to have a very active pipeline. We continue to look at opportunistic opportunities that are synergistic with the portfolio that we have put in place. But I would say that the share buyback provides us an attractive opportunity currently.

So would you characterize your willingness to invest given that you've transformed the company and done all these M&A transactions? And now would you characterize you kind of have the beachheads in place and therefore, a lot of the gap filling in the portfolio could be organic versus M&A?

I think you have to look at the portfolios differently, right? If I were to look at the 3 businesses, on the software side, if there is something that we can continue to add to bolster a faster-growing business, we might do something there. On the Life Sciences side, around cell and gene therapy, if there are any holes that we have to fill, we will look for opportunities. Similarly, on the diagnostics side, if there is an assay that bolsters our menu, we might add something there. So again, what our focus is looking at where there is a strategic fit, what can add to the growth profile of the business and meet our financial hurdles at the same time, we might do it. But as I said, right now, the share buyback is such a glaring opportunity for us that I would be -- we would -- our focus is on capitalizing that.

I want to touch on one comment you made about diagnostics just because -- and you had said it earlier about maybe expansion into other areas. And I think CNS is one that's starting to gain a lot of traction. particularly amongst some of the larger tools companies, whether it's Alzheimer's and you're starting to do ApoE type testing. How do you think about expanding indications within your diagnostics franchise where, one, you can get some synergies based on what you're already doing, but also go into larger attractive areas within diagnostics. And maybe Alzheimer's is one that you can address.

Yes. I mean our focus always has been, Matt, is providing specialty diagnostics. So we are not really in the space to fight on price or tender or compete around big boxes. Our focus is really how do we bring specialty diagnostics, whether it is in neuro or any other disease profile that is differentiated enough for the customers to have to -- that they must have that. And this is where I keep using the opportunity around neuro-autoimmune testing. There's not a lot known. And this is where -- whether it's around brain encephalitis or other tests that we bring to the marketplace, it is differentiated enough that customers need to have that in their profile. So that is sort of where we look for on the diagnostics side of the business is put together a portfolio that is a must-have opportunity rather than it would be good to have.

And then last question, just given the 3% to 5% expected growth this year, the 28% margins with some clear upside to that in a better market environment. And then I look at your multiple, like what do you think is the most underappreciated thing or underappreciated things about Revvity and that's not necessarily reflected in the stock price today?

I think number one is the macro environment. I mean, as you pointed out at the first question, given the challenges that are hovering and I think if you look at over the past 6 months or year-to-date or even over the 12 months, we are still one of the -- in our peer group, in a depressed market environment, we are still one of the better performing stocks in terms of the profile or multiples. But it is a tough market environment. And from an investor's perspective, I think some of this cloud overhang needs to go away. But this is where -- Matt, what I want to sort of leave with is we are very confident in our long-term prospect for the business. 60% of our business is already in our LRP. In this market, to be able to say that, I'm not sure how many people can say that, right? The Life Science variance is obviously there to play. Software business is a crowned jewel, but it is such because of how it is associated with our Life Sciences business. So there are a lot of tools and capabilities. We've put together a good portfolio and a good profile, and we are executing to the best. And we are being aggressive in our share buyback.

It's a great place to end it. We're out of time, Prahlad. Thank you very much. Appreciate it.

Thank you.