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

Go ahead and get started here. I'm Catherine Schulte. I cover Life Sciences and Diagnostics here at Baird. Very excited to have Revvity here with us today. From the company, we have Steve Willoughby, who heads up IR. So, Steve, thanks for being here.

Of course. Thanks for having me.

And maybe just to get started, just give us a quick kind of state of the union on the company coming out of the quarter, kind of key themes that you're seeing in the business.

Sure. I think the second quarter overall was good in line slightly ahead of our expectations, both on the top and bottom line. There's always moving pieces within the business. I think we've seen consistent stability in our Life Science business with pharma, biotech and academic government customers being under some pressure now for a couple of years, really. And I wouldn't say too much dramatically changed during the second quarter. We saw a continued low single-digit growth in our consumables. Consumables are very indicative of underlying lab activity. We saw -- I think this was the fifth quarter in a row of sequential growth in consumables. So it's moving in the right direction. Glad that it's positive, to be better for you even more than just low singles as well. On the instrument side, instruments were down mid- to high single digits again, consistent with where they were in the first quarter, also consistent with our outlook for the back half of the year. So I would say, given some of the uncertainties in the market environment right now, which there are several, customers are kind of taking a wait-and-see approach. And so there are people in the R&D labs working, but it's still having some impact on instrumentation for both pharma as well as academic and government. Outside of that, our Software business, which I'm sure we'll get into, is continuing to perform extremely well. And I would say is when you look at our Software business, which is about 9% of total company revenue has been growing sort of right through the last 3 years and very consistent strong levels of growth in Software. And then on the Diagnostics side, Diagnostics is about half the company. And outside of China, Diagnostics has been almost like clockwork. It's been very consistent, very good growth in the Americas, good growth in reproductive health. We have faced some new unexpected pressures in China, which I'm sure you'll ask me about, which did have an impact on the quarter and our outlook for the back half of the year, but outside of the piece in China, diagnostics also has continued to do quite well.

And maybe if we start on the Life Sciences side of your business, you have Life Sciences Solutions and then software and you're right. We'll get into Software in a bit. But starting on Life Science Solutions, I think that fell low single digits in the second quarter. You're expecting it down slightly for the year. As we think about academic pressure, MFN pricing, drug tariffs, like what do you think is having the biggest impact on that business kind of relative to what you would expect in a normal market environment?

I think it's hard to pinpoint 1 in particular. I mean, obviously, the NIH and concerns over funding in academia, different policy changes is having an impact on that customer base, which academic and government for us is 12% or so of total company revenue. So it's about 1/4 of our Life Science business. Outside -- and that's been more of, I would say, a recent change so far this year. The pharma biotech has been under pressure for really starting in 2023 coming out of the pandemic, and I would say it's been continuing. It's hard to say exactly what's currently driving the softer than historically normal levels of growth. I think it's probably the culmination of all of those things. And I think with the number of uncertainties in the market, it's causing customers to pause. And where we are focused, which is, I would say, different than some of our peers is we are really focused on preclinical R&D. So we are upstream. We need scientists working in the lab, doing innovative science. And there was some restructurings and cutbacks in 2023 that really started to settle out in 2024. And we've really seen stability since then, which is why I think you've seen sort of low single-digit growth in our consumables for the last 5 quarters or so now.

And maybe on academic, I think academic government fell low single digits in the second quarter.

That's right.

But you pointed to some signs of stability there.

Yes.

And it seems like NIH awards have looked better in July and August. Are you starting to see some better sentiment from customers? Or is it still a bit too early?

I would say, again, it's also, sort of, for right now, status quo as well. I think the low single-digit decline we saw from academic and government in the quarter. We also saw a low single-digit decline in academic and government in the U.S., which is maybe a little surprising to some folks given the concerns in the marketplace, I think it really speaks to the nature of our products. We sell specialized consumables, reagents and reagent kits and antibodies. And so folks are buying our products for a very specific scientific purpose. I think the other thing is within academic and government, our business is heavily weighted towards those specialty consumables. And so we do sell some instrumentation in academic and government, which has faced some pressures because of the uncertainty, but it's a smaller -- much smaller piece of the overall exposure.

And for pharma and biotech that grew mid-single digits in the second quarter. But as you mentioned, Software had a pretty big quarter, that's heavily pharma and biotech. So maybe what was pharma biotech performance just on that Life Sciences solutions?

around flattish. When you exclude Softwares around flattish, and that was with, I would say, similar levels of declines in instrumentation, offset by growth in reagents. And so again, it kind of speaks to -- and not a lot has changed over the first half of the year, and it's our assumption that it doesn't really -- the environment doesn't necessarily change in the second half of the year either.

And were there any performance differences between large pharma versus emerging biotech, and maybe remind us your split between those 2?

Sure. It's a common misconception because we are focused on preclinical R&D. And so many times, folks think that we have extremely large exposure to small biotechs, which is actually not the case. When you look at the roughly 35% of our total company revenue that is pharma biotech, roughly 85% of that is to medium- and large-sized customers. And so really, when you boil it all down, only about 5% of our revenue is to what we consider to be pre-revenue biotech. And I would say within that, yes, the larger-, medium- and larger-sized customers are probably doing still a little bit better than some of the small customers, but the small customers are a pretty small piece of the overall mix.

And as you mentioned, second quarter reagents did well instruments saw declines. It sounds like you expect instruments to continue their declines in the back half. But do you think there's a path to a return to instrument growth in '26?

I think there is a path to return to instrument growth eventually. I think sitting in September, I think it's a little too early to call what exactly different businesses are going to be doing 4 or 5, alone, 12 months from now. But we have seen 3 years now of declines in instruments. And I would say our instruments going into 2025, were within our medium-term expectations in terms of CAGR. And so the continued declines we've seen here in 2025 because of some of the uncertainties that have popped up this year, has probably taken our, I would say, our 6-year CAGR for instruments probably towards the middle, if not the lower end of our LRP assumptions. We're exiting '24 is following the middle of our LRP assumptions.

And then on the reagent side, you have flow, you've got more cell and gene therapy focused CRISPR. Are there any areas within reagents where you're seeing outsized growth or share gains?

One interesting thing within reagents, and again, it really speaks to the nature of our products is if you think about what is going on, for example, in China. And I'm sure you're going to ask me about some of the pressures we're seeing on the diagnostics side in China. But on the Life Science side of our business in China, our Life Science business in China in the second quarter as well as in all of 2024, grew in the mid-single digits. And our Life Science business in China is -- the majority of it is consumables. And I would say our instruments in China grew modestly, which means that if the overall piece grew mid-single digits, reagents were doing much better than that. If you think about what is happening with the pharmaceutical industry in China, it's gone from, I would say, focus on generics to a focus on maybe me-too type innovation to really now more truly innovative science, which you're seeing with a number of these out-licensing deals. Our products are used in innovative science. Whether that innovative science is being done in China or in Europe or in the U.S., they need to buy our specialty consumables to do that innovative sign. So that's 1 area. I would say there are some other areas in our nonantibody business that, for example, high-content screening, where we have seen over the last 12, 18 months, some improvement in demand, really tied to GLP-1 drugs. And so exploring what else GLP-1 drugs can be used for, et cetera.

And then maybe getting to Software, that's 1 area that's been outgrowing your LRP assumptions. Can you just talk through the strength that you're seeing there? And any timing or kind of comp dynamics that investors should be aware of?

Sure. So Software is roughly 9% of revenue, so a little over $200 million in revenue this year. It's a fantastic business. For those of you who aren't familiar with our Software business, it's called signals. And what signals really is, is think of it as workflow Software. It's Software that in the preclinical R&D lab, scientists are using it to set up, document, report out and analyze their experiments, collaborate with their colleagues. This is a business that in our LRP, we assume it will grow 9% to 11%. It's historically been doing a little bit better than that, more in the medium and long-term CAGRs of kind of 12% to 13%. This year, our assumption is that it will grow high teens, so even further above the long-term CAGRs. There is an element here where there is some -- a little bit of lumpiness in organic growth because of contract timing and how revenue is recognized, whether it's on-premise versus SaaS. So that can have an impact from time to time. I think the important thing to understand is a metric that we've been now providing for the last year called annualized portfolio value, which APV is really looking at the revenue growth on -- if you were able to streamline the revenue recognition. And -- it's been growing the 12% to 13% range for the last 5 years, the last 10 years. And so it's really kind of indicative of where the business is going in the future. I would say the Software business also has a very, very bright future in front of it. We've talked about some new upcoming product launches, 1 in particular coming at the end of this year, that is probably 1 of the more important new product launches really in the history of this business, expanded us into large molecule workflows, which we are not meaningfully played in so far in the past. So it's been doing well, and I think its future is very, very bright.

Yes. Maybe just talk through the large molecule side. I think, rolling out the end of this year and then launching more significantly next year. How does that change your positioning in the market and any other kind of new product launches we should be thinking about in the next 6 to 12 months?

Sure. Yes. I think when we have our -- I think with -- first of all, with any Software launch, it always sort of comes out in rolling iterations. And so we will initially launch the product and then have further iterations and expansions of its capabilities. I think it's 1 that will be very good to get out in -- at the end of this year into 2026. It will take a little bit of time to ramp just as with any normal Software launch. But I think it's 1 of those that as this business continues to grow, at an elevated rate off a larger and larger base will allow us to keep growing at an elevated rate of a larger and larger base. So it's -- yes, it's important, I think, in terms of differentiation, we believe we will have a unified offering, providing both small molecule and large molecule workflows all within 1 system, which we believe will be differentiated versus our competitors.

Yes. And maybe going back on the Life Science Solutions side, we're coming up on the 4-year anniversary of BioLegend. How has that been tracking relative to your deal model? Any kind of key learnings or surprises from that asset?

Yes. So, BioLegend, as to your point, we closed the acquisition in September of 2021. I think we're almost up on the exact day here pretty soon. The largest acquisition in company history, a little over $5 billion. Obviously, the market environment is a little different today in terms of pharma biotech and academic spending as compared to what it was in 2020 and 2021 when we acquired it. So it has -- there have been some impacts just from the market environment, but I think both on a relative basis, its performance as well as from a profitability because it continued to do very well. And I think it's a business that will pay very good dividends for the company overall as we go forward here.

And we've talked about some of the headwinds facing pharma and biotech. Are there any tailwinds for you in the tax bill, any kind of good guys when it comes to stimulating R&D spend?

As it pertains to the OBB tax bill, I think it's hard to say. I mean, I think if there's any opportunities to have customers having more cash, that's a good thing if they're able to expense R&D more quickly and generate some tax savings. I think that's a positive. I think it's too early to really say from customers, though at this point.

And then if we shift to China, you talked about seeing growth there on the Life Sciences side in the quarter. Was there any sort of pull through or pull forward that was happening there?

No. No. I mean we grew mid-single digits throughout 2024 when, as you know, covering the space, really, there wasn't anybody else who's even growing in China in 2024 given the real lack of stimulus that occurred, which was a surprise to many. But given that our portfolio is so much more heavily weighted towards these innovative consumables, it allowed us to really outperform, I would say, the peers. So it was fairly similar to what we saw throughout all of last year, too.

And for Diagnostics in China, maybe just provide some background on the DRG policy that got implemented when you saw that start playing out and how that differed versus your expectations?

Yes. So there have been a variety of different things going on within Diagnostics in China over the last couple of years from various pricing pressures and pricing policies to DRG. And we have been fairly insulated from most of them because of the relatively niche makeup of our business and the -- while we do have some local market competition in China, I would say we have less given the nature of the types of tests that we sell. However, near the end of April, going into the beginning of May, there was a policy change from the government there, which is having an impact on multiplex tests. Well, we specialize in multiplex tests. Our diagnostic business that you're referring to immunodiagnostics really is focused on esoteric autoimmune conditions. So very rare autoimmune conditions, I would say. And 1 of our -- 1 of the things that makes us unique is having a very broad panel. If you're trying to find a needle in the haystack, you want as many opportunities or shots on goal to find what's wrong with the patient. The government is asking to reduce multiplex panels in turn for single-plex or single assays. And so that's having an impact on volumes, which we started to see fall off. In the month of May, continued in June, I would say it's stabilized in July. We're now assuming that this business, which this year is about 6% of revenue, will be down 25% in the back half of the year. And I would say, as we sit here today, that's probably a fair assumption that that level of pressure on this piece of the business will continue until we probably anniversary it in the first or second week of next year -- May of next year.

And do you think at that point, once you anniversary this, does that get back to being a high single-digit growth business? Do you still feel good about kind of the long term growth factor?

We've assumed more like the low to mid-single digits in our LRP. So no, we don't need the diagnostics business in China to -- our overall LRP for immunodiagnostics is 9% to 11%, but that's with much stronger growth outside of China.

And just given what you've seen what others in the diagnostic space have seen in China. Does this at all change your conviction in investing in that market or kind of the long-term attractiveness of.

There have been some challenges that we are navigating through and continuing to navigate through, and we will continue to take some actions because of the volume pressures that we're facing right now. I think it's -- there is still very strong volume growth in the underlying market. That is 1 of the key reasons that we entered into this area of autoimmune in the first place, 8.5, 9 years ago, is esoteric autoimmune is a market that is growing in the high single digits globally with very good volume -- underlying volume growth in areas like China as well. And so there's still there's increase in adoption, increase in appreciation for these autoimmune conditions, which is leading to very good market growth and why we got into the business in the first place.

And then if we shift towards reproductive health, that performance has remained pretty solid despite some pressure on birth rates. I mean just talk through the strength you're seeing there and maybe touch on the Genomics England's partnership.

Yes. So yes, if you've read the newspaper in the last couple of years, you've read about how there have been pressures on fertility, pressures on birth rates. We have been able to grow our overall reproductive health business quite consistently in the mid-single digits despite birth rate pressures. And we do that through a combination of things, geographic expansion, menu expansion, new menu introduction, new assay introductions for rare diseases. It's been fairly consistent growth, too. And so I would expect that probably continues. I think the Genomics England that you mentioned, we put out a press release a few months ago now, announcing that we were awarded a contract with Genomics England, which is a piece of the U.K. government where they have what's called the generation study going on where they want to sequence 100,000 newborns. And we were selected to do all of that DNA sequencing work for them. It's a contract that the work has started in July. That would be -- I would say, becomes more significant as we go into the fourth quarter, which probably is a regular run rate at that point. And it will last, at least 2 years. So it will be some incremental revenue for us, both here in the second half of the year as well, even more incremental revenue in 2026.

And how much of an incremental driver could it be if you see more of this kind of sequencing at birth for that business?

It's a good question. This Genomics England is, I would say, maybe the first country that is looking to build a database of genetic data for -- on newborns, but probably not the only. And so we'll see. We know what happens in the future with other countries.

And on 2026, so last week, Max commented that if we assume the market is flat to slightly up next year, you grow a couple hundred basis points above that, you kind of be in the low single-digit range. He noted it wasn't guidance, but I think it's maybe been interpreted as such at this point. Any further comments you want to make on that framing? And I guess, just given what's going on in China diagnostics and kind of some of the unique exposures that you have relative to others in the tool space. Is that market plus a couple of hundred basis points still the right way to think about it?

I think a couple of things. I think there's always puts and takes within a business and within a company around the world. There's always -- things are going well, things that are more of a challenge. They change by year. I think our thoughts are, as we sit here in early September, there's still a long way to go before we even get to 2026. But as you even used the word framing, a good framework is we have seen stability. We've seen stability so far this year. We've seen stability over the last couple of years. And I think when you look at our overall financial performance, we have been putting up numbers that are a couple of hundred basis points above underlying market growth rates. And even a couple of hundred basis points above peers. And I think for the time being, until we get more clarity, and really consistency, understanding of what is going to happen, I think it's the best assumption in terms of a framework for now is that it continues like it is. But yes, there's puts and takes for sure. But I think that's probably the best outlook for right now.

And you put out that kind of 28% op margin baseline for '26. I guess given that framing, how should we think about margin expansion potential in various different top line scenarios?

Sure. So our current guidance, the midpoint for this year for operating margins is 27.2%. And as to your point, we said, listen, we will get to a 28% baseline for next year. And we're doing that through a number of different, I would say, structural actions we're taking to reposition, help offset some of the unanticipated headwinds we're seeing, so that the operating margin expansion time line that we have talked about with investors doesn't change. I think any business probably needs more than 2% to 3% top line growth to really drive meaningful sales leverage to drive margin expansion. And so I think a good framework for right now is kind of in that market 0 to 1. The nature of our business is just we are in higher growth parts of Life Sciences and Diagnostics compared to the broader market, should help us probably put up 200 basis points or so better than that, getting us to 280, but you need more than 2% or 3% organic growth to start really getting more meaningful sales leverage. We have talked about our business, and I think we'll probably get into this, but our business is -- has some of the highest incremental margins in the entire Life Science tools space. And our business is built to put up, call it, 50 basis points of margin expansion when organic growth is more in the mid-single digits. Our LRP is 6% to 8% top line growth, which should transpire into about 75 basis points of margin expansion. So there is opportunity for more margin expansion, but we're already calling for 80 basis points on sort of low single digit framework.

And is there anything from a mix perspective, if you have Software outperforming, you've got China diagnostics is going to be down again next year. Does that have a margin impact at all?

It could. Yes. I mean Life Sciences, our Life Science segment overall has, as you can see, has higher operating margins. I think the other thing to think about both in the near term, but also certainly even maybe more so in the longer term is some of our highest growth businesses also have our highest operating margins. And so we just -- as hopefully eventually hear things normalize, as things normalized, we will have natural margin expansion just given the fact that our Software business, our specialty consumables as well as our diagnostics have higher growth rates and just higher natural incremental margins.

And maybe if we think about tariffs, I think a $0.12 impact this year, 50 bps on the margin side. How does that evolve next year just from an EPS standpoint and the margin framework that you laid out?

We're taking actions to either offset and/or mitigate the tariffs impacts. And so we've already operationally navigated a lot of the tariffs as it pertains to U.S. to China. And so we're really focused on some of the diagnostic things right now, and we're taking some actions across a number of different parts of the business as well as looking at potential other mitigation efforts as well. But that's factored into the 28% baseline for next year.

And you announced some additional cost actions as well. Maybe where in the organization are those focused? And how do you kind of balance navigating this policy and macro environment versus kind of making those longer-term investments?

Yes. I mean we certainly don't want to disrupt growth and future growth. And so continuing to invest in our R&D priorities for sure. But I think you also need to adjust the business and the structure for the volumes that we have in different areas. And so we're taking some actions to accommodate that.

Yes. Okay. And maybe just on kind of broader capital deployment priorities. It's now been over 2 years since the divestiture and kind of the rebrand to Revvity. What are your priorities here? Are there any holes in the portfolio that you want to address through M&A?

I think a couple of things. One is we have gone through the transformation. We did 11 acquisitions in 2 years during the pandemic. Then about a year, 1.5 years later, we sold 30% of the company, many legacy product lines, including the legacy brand name. So the whole business is different today. I think when you look at the business today, only about 30% of our revenue was part of the company 8, 8.5 years ago. So it's a totally different business, management team and even the name of the company is different. So we've really gone through the transformation. I think every business is always continuing to evolve. To your point, though, it's been 2 years since we became Revvity. It's been 4 years since we've done an acquisition. We are still very interested in inorganic and M&A. I would say the bar has been raised for what we now are as Revvity. And so it needs to make very strong strategic fit, financial profile, financial return. And obviously, nothing that we've looked at has checked all those boxes. And so but we're still very interested. Are there are holes? I don't know if there's holes, but I think there are things that we would like to add over time to complement what we're already doing, particularly in areas that are the most attractive to us like consumables, Software, et cetera. At the same time, you've also seen us become more active in the share repurchase program. And I think we've bought 8%, almost 9% of the company back in the last 12 months. We bought back 3% of the company in the second quarter alone. And so with what has transpired here, we still have a very high degree of confidence in the medium- and longer-term prospects for the business. I know the last couple of years have been challenging. I do think it is a temporary. It is a prolonged -- it has been a prolonged temporary market environment that's been a little challenging, but I think the financial potential for both our industry as well as our company still remains. And so we think it's going to be a very good financial return for investors buying back our stock at these levels.

Yes. With a couple of minutes left, maybe just a bigger picture framing question. As you think about the next kind of 12 to 18 months, what do you view as the 2 biggest opportunities for the company? And what do you think is maybe most misunderstood or underappreciated about the Revvity story?

Actually, I would say, maybe somewhat similar answers to both of those. I think that some of the biggest opportunities are within our Software business. I think we've got, as we talked about a little bit, we've got a very good business today with a very exciting pipeline of new products coming out. So that will be very exciting as that business continues to grow. It's really -- when you think about what our Software business does, it helps drive efficiencies and provide better data analytics. Like that is where customers want to be spending money right now is driving efficiencies and better data. So I think that's one that is very exciting over the next 12 to 18 months, but it's also very much underappreciated by the Street. Two, I think another key priority for us is continuing to make good progress on our diagnostics business, particularly in the U.S., continuing to get some of our more recent product launches continuing to ramp like latent tuberculosis, but also continue to get some more FDA approvals in the U.S., too.

All right. Well, with that, we are out of time. Steve, thanks for being here, and thanks, everyone, for joining us.

Thank you.