Revvity, Inc. ($RVTY)

[Audio Gap] Diagnostics team. And for our next session, we're joined by Revvity. Pleased to be joined by Steve Willoughby, Senior VP, Investor Relations, ESG and Risk. Steve, thanks for being here.

Thanks, Mike. Thanks for having me.

Thanks for having a longer job title than I do. Maybe just to kick things off, maybe some opening high-level remarks on how the quarter played out relative to expectations, you just reported results a couple of weeks ago. A lot of things to dig in there, but maybe give us sort of like an overview to get us started.

Sure. Obviously, I think we had a pretty good quarter overall from both the top line perspective, margin perspective and obviously, bottom line, too. So we have started to see some early signs of some end market improvements. And I think maybe some of that could be a little bit more company specific to us for some reasons, which I'm sure we'll get into. But overall, it was a good quarter, and I would say it progressed well throughout the quarter. Obviously, I would say the big news for us here in the first quarter, too, that we announced was the strategic decision to divest our immunodiagnostics business in China. I'm sure you have more questions on that as well, but that was a very key thing that we announced on the first quarter. And I think we also have a prudent outlook for over the remainder of the year, too, which we talked about quite a bit, too.

Okay. Yes, we'll dive into all of that, but maybe let's start on the China ImmunoDx divestiture. You said you announced that in the quarter. You haven't actually sort of formalized the deal yet, but you still -- you now stripped it out of the numbers. Can you walk us through the impact that, that has on 1Q, the impact that has on the full year guide, how to think about taking that out of the model and how that flows through?

Sure. So this was about 6% of revenue last year. We projected it would be about 4.5% of revenue this year. We talked about how by removing this business, it has about $0.20 of EPS dilution, which is offset a little bit by some better execution in our full year guide. From a straight financial metric perspective, it's going to improve our organic growth this year by 100 basis points. It's going to improve our adjusted operating margins this year by 30 basis points. But I think we also put out an 8-K last Tuesday. And I know last week was a very busy week for investors. And we provided 5 different documents for investors to parse through. One of those was an 8-K. And in that 8-K, we provided a couple of different disclosures that might be of interest to investors. One is a pro forma balance sheet. And so you can see what the business looks like at the end of the first quarter, excluding the China Diagnostics business. And I think if you take a look at that, one of the things you'll see is that this business had a pretty meaningful drag on our working capital and so consequently, our DSOs and our free cash flow conversion. Max made a comment on our earnings call on how by excluding this business -- if you were to have excluded this business in our 2025 results, despite it only being roughly 6% of revenue, it was a 3 percentage point drag on our free cash flow conversion. And so our free cash flow conversion would have been even better last year than it otherwise was. So a number of different ramifications by making this decision.

Okay. And then in terms of the rationale for the decision, you talked about it for a while, it has been a headwind. It seems like it's a relatively clean cut. what sort of -- there are other ways you could have gone after it. You could have tried to shore up the business, you could have tried to reinvest in it, you could have tried to partner with someone. Or as you said, there was a point that naturally the headwind would have gone away anyway. Why did you decide to go this route of all those?

Yes. So this is a business that has been facing, I would say, consistent mid-single-digit pricing pressure annually over the last maybe 6, 7 years. Obviously, a year ago, we then were -- have been negatively impacted by volume pressure related to DRG. And I would say that this market has become increasingly unpredictable, which is making it more difficult to plan in the future. And when we look at what has been discussed, not yet implemented or officially announced, but there are some other potential headwinds on the -- coming in the future related to some of these lab reimbursement unification policies, which, again, we don't know the final details yet, but very well could have further pricing pressure on this business. And we have taken a number of actions to offset the pressures we've been facing over the last 6 or 7 years, including the volume pressures we've been facing over the last 12 months. But I think the amount of change we would have needed to do to remain competitive with further significant meaningful pricing declines, we would have needed to invest significant amounts of capital, time, effort, management focus into this business, I would say, to remain as competitive as we are today, not necessarily improve our competitiveness, but remain where we are today. And ultimately, given the relative size of this business, roughly 4.5% of revenue, a little bit lower percentage of our profits. And I think it's also important to note, too, that this is not a primary growth driver for the business going forward. Our LRP, which is 6% to 8% organic growth, within that, we're only assuming low single-digit growth for this business in China. And so this was not what is going to be driving the performance of the company going forward. And so the level of investment that would have been required, we ultimately decided was not worth it for us. And so we look to find a partner to divest it to.

Okay. And then you talked about $0.20 dilutive to EPS this year. As you said in some of those other documents, you talked about, again, the deal is not signed, but you talked about a range of possible cash proceeds from the deal. I think it was I think, $140 million to $200 million depending on different conditions...

Earn-out, yes.

Right. So if you look at that, I mean, it looks like it will still be meaningfully dilutive in '27 as well. So how did that factor into your go/no go decision?

Yes. I mean we will -- obviously, we haven't given guidance or anything like that for 2027 yet, and we expect the deal to close in the latter half of 2027. So any proceeds that we would receive, I wouldn't expect them to have a meaningful impact of us redeploying those to offset dilution in 2027. But I think this really is going to allow us to set up to really show -- be able to really demonstrate the potential of Revvity much clearer where the drags on this business has been a little bit masking some better underlying performance. And we will continue to obviously work on our cost efficiency programs. And if top line growth starts to come back a little bit more, that certainly helps from a sales leverage perspective as well.

Okay. And on that point that the drag has been impacting sort of the rest of the business and the optics of the rest of the business, any implications on ImmunoDx outside of China in terms of will this impact your investment in your [indiscernible] areas? Or the other question I've got is, are there other pruning of the portfolio you could do? Is this step one? Or is this really just a onetime?

This is -- I would say this is a onetime thing. I mean the immunodiagnostics business outside of China is doing great. It's continued to grow high single digits, low double digits, very strong growth continuing in the U.S. It's really, I would say, the policy-related impacts that are a little bit more specific to this one region that are having a headwind on the business. So the immunodiagnostics business elsewhere is doing very, very well.

Okay. So let's talk about the rest of the business, like you said, you did about 3% organic in 1Q, but pro forma for ex-China ImmunoDx, it was 6%. It's a very solid result. Can you talk about the moving pieces that you saw there, sort of what draw that -- what delivered that 6% hit?

Sure. So a couple of moving pieces in the first quarter. Every -- the way our fiscal calendar works, every 6 years, we have an extra week of selling days, and that predominantly just really impacts our reagents. And so the extra week impact was in line with our expectations. It added about 100 basis points to total company organic growth. However, about half of that or 50 basis points was -- we had a headwind from the winter storms in January and early February. So net-net, the summation of the extra week and the winter storms is maybe about a 50 basis point contribution. On a year-over-year basis, we also had the incremental contribution from our Genomics England contract, which was all incremental here in the first quarter, so that helped a bit. We had very strong performance in reproductive health, even excluding the Genomics England business. And then we saw mid-single-digit positive performance in Life Science instruments. We had positive low single-digit growth in life science reagents. And so we did start to see a few things start to get a little bit better than they have been over the last going on 3, 3.5 years now.

Yes. Let's dig into some of that Life Science performance, both on the instrument and the reagent side. You've had a little bit more mixed results last couple of quarters. You have had pockets of strength, high content screening, some of the reagents businesses. Is this trends of -- is this enough that you want to call a stabilization in the market or recovery? Or is there still a lot of noise in the market?

I think we're still being a little bit more cautious in wanting to make a call on, hey, we're through the thick of it here and things are really starting to turn. With that being said, we had -- in the first quarter, we had positive growth for instruments from both academia and pharma biotech, which was the first time in 3 years that instruments grew in both those end markets. For example, in the fourth quarter, we had positive growth in instruments from academia, but not pharma biotech. I think another thing that's sort of interesting is we have been talking about, and you mentioned it high-content screening has been growing double digits now for 1 year, 1.5 years. Here in the first quarter, we started to see the instrument performance spread out a little bit. And so for example, about 1/4 of our instrument portfolio is in vivo imaging. And in vivo imaging was, I would say, dramatically impacted last year from some of the pressures we were seeing in academic markets. And while in vivo imaging still was softer in the first quarter, it wasn't anywhere near as soft as it has been for the last 4 or 5 quarters. And so that started to move in the right direction. I think also interestingly is another roughly 1/4 of our instrument portfolio is automation and robotic liquid handling, which has been, I would say, under pressure for probably the last 4 years coming out of the pandemic, which, if you recall, those types of businesses really benefited during the pandemic. And ever since then, they've been softer. But we started to see some of that -- those businesses return to growth here in the first quarter. So it's moving beyond just high content screening. One other piece that I think is interesting as it relates to instruments is, again, we've been talking about good performance in high-content screening. And that was really with a, I would say, our high-end system being fairly dated in terms of how long it's been out of the market. And in the middle of February, we announced the launch of a new Opera Phenix OptIQ system, which is a new flagship system for us. And so we've been doing -- performing well in this business with, I guess, you could say, an older product. And now we have a brand-new fresh product, which provides much greater automation and sensitivity, too. So very optimistic. I would say the last piece on it is in terms of the durability, we are assuming mid-single-digit growth in instrumentation continues here into the second quarter. For the time being, we're not assuming that continues over the second half of the year. We are assuming that growth in instruments, and I would say in many other parts of our business slows in the back half of the year in our current outlook. But we'll see how the next couple of months and next couple of quarters ultimately play out.

Okay. Well, I mean, on that point, can you talk a little bit more about the funnel. So for example, in vivo imaging, automation and liquid handling, you talked about broadening from high content screening for those areas as well. If we think about the business between diagnostics and life sciences, so you cut down to life sciences and you cut down between reagents and instruments. And then you cut down into each of those 4 buckets, you end up with a relatively small dollar amount for each of them. So we always wonder like is this 1 or 2 pharma companies buying 2 or 3 systems, and that's the difference between low single and mid-single, right? Is it broad-based? Is there enough there that you're calling a trend? And sort of what's the visibility in those?

Yes. Like I said, we're not calling it a trend as of right now. We're assuming that this -- in our guidance, we're assuming that instrument slows all the way down to flattish actually in the fourth quarter. But no, I mean, it's -- we sell a variety of instruments anywhere from $20,000 to $1.2 million. I would think the -- around -- our average ASP is probably $350,000, $400,000. So there's always a little bit of variability quarter-by-quarter.

Okay. Okay. Just while we're talking about high content screening, automation and liquid handling, maybe this will be a good chance to jump into some of the AI discussions. A lot of different ways Revvity is exposed, and we can talk about that at length. But maybe one of the things we're wondering is pharma rolling out AI and how it's impacting their spending behavior, what they're focusing on, what they're prioritizing. We'd imagine that a lot of it has to do with more data generation and therefore, areas like high content screening and automation of liquid handling would be beneficiaries. Is that what you think is happening there? Sort of would you draw any correlation between the 2?

Yes. I think it's very important to understand with Revvity is and this is, I would say, at the highest level of the company is what we do within life sciences and is different than many other publicly traded companies in our space. We overlap with various companies, but the specific products that we sell are a little bit different than others. And I think that differentiation can also -- there's different drivers of demand for different products. And over the last couple of months, there's obviously been a lot of talk about AI and how AI could or is likely to impact various companies and various businesses. And we've obviously been talking quite a bit about how we think AI and the emergence of AI -- sorry for my microphone, the emergence of AI is likely to be a benefit to our business and potentially meaningfully over time, depending on how things play out. I think our business maybe has seen a little bit better trends right now than some of the other -- some of our peers because we really -- if you think about what our products are used for, whether it's our consumables, our instruments, our software, we're really -- our customers use our products to do novel science to do something new or different. And I don't know what's going on with the mic here, but -- and so our product -- our customers are using our products to do new science. When you think about AI, you need novel, unique data. And so I know that there's been a lot of talk on AI potentially disrupting preclinical research. But if you actually think about what our products are used for, we help generate new data. And so we think that there could be some meaningful tailwinds. I think right now, what we're seeing is probably some initial signs of AI data generation starting to impact demand. I think we're also benefiting from some other specific trends. We mentioned a few of these on the earnings call, like GLP-1 research has been benefiting parts of our businesses over the last 1.5 years. I think some of the non-animal methodologies, if you think about things like organs-on-a-chip, when companies are working on developing organs-on-a-chip, they need to validate what they're creating and that it works. How do you do that validation? High content screening. And so I think there's a couple of other specific things going on as well.

Okay. That's on the instrumentation side. Let's pivot a little bit to software, Signals. You've had a lot of updates there. You've seen really good growth in this business in the last couple of years. And now in '26 and beyond, you're really excited about a number of new launches there. Could you just talk about that? Still sort of early, but what initial feedback, interest -- response we're getting from pharma?

Okay. So we have 3 major new products coming this year. We announced LabGistics a few months ago. That's going to launch in June. BioDesign, we announced shortly before our last earnings call. BioDesign is actually launching next week at a major Bio-IT conference. And then at the end of the year, we're going to be launching LabGistics, which is an AI-first workflow offering that we think is going to be unique in the marketplace. These are, as I mentioned, some of the most important new product launches in the history of our software business. And when you think about software launches, they typically take 6, 9, 12 months before the revenue starts really ramping. And so we really haven't factored in much, if any, revenue contribution from them this year. I think it will be more of a 2027 phenomenon. I think that the initial discussions with customers are obviously ongoing. I think the trade show next week will be very important in talking with customers and also not just customers, but also other, I would say, partners that we could be working with, too. So yes, it's progressing as expected, but the launches are still to get in customers' hands still a little bit yet to come.

Is pharma developing any of these solutions themselves? Or are they entirely relying on third-party vendors like you?

Think about what our Signals platform is. Our Signals platform is -- think of it almost like an ERP. It is the software that is used on a day-to-day basis by preclinical R&D labs to set up experiments, document experiments, collaborate with the colleagues, report out. It is where the data is created and stored and shared. And what we are doing with these offerings is we're basically making it easier to utilize AI by the everyday scientists within their workflows. And so we're building the connections to anybody and everybody's AI models or systems, LLMs, so you can use all that capability right with where all your novel proprietary data is already created and sits.

Yes. I think a lot of the debate that we've had with investors and companies in terms of how AI gets adopted and used by pharma kind of takes it from where it is now or maybe where AI and what drug discovery look like a couple of years ago prior to AI revolution and what it could look like in the final state and whether that final state is a year from now or 5 years or 10 years from now, but we'll be leveraging AI to process data to develop drugs faster. Where I think there's a lot of confusion and uncertainty is that transition curve, right? Like how is it going to be adopted over what time? Is there going to be a slowdown at first and then a pickup? Is there going to be a broad pickup -- increase in investment? So anything you can say there in terms of the pharma companies that are sort of at the forefront of adopting this, what steps are they taking? Are they reducing headcount? Are they reducing wet lab? And then with the idea of picking them back up on the back end, sort of like what's that transition process? Because I think there's a fear that could be painful.

Yes. I mean, Prahlad, our CEO, touched on this a little bit on the most recent earnings call and how we think we're positioned. But if you're familiar with the concept of lab-in-a-loop, I think customers are increasingly looking to figure out how They can create their own lab-in-a-loop. And this is the idea of -- because of AI, you're going to have more drugs and more compounds developed. And so there's just going to be more things invented that then need to be work through the preclinical workflows and validated and tested before you go into clinical trials. So I think there's going to be more things coming through the system. And then because of AI and the capabilities of AI, when you start to go work to test and validate, you're going to take that data and feed it back into your AI models. And that knowledge and then the AI models are going to be able to essentially uncover new and different things that we might not have been able to understand otherwise. And it's going to allow you to refine your drug more and more times than ever possible in the past. And that's this lab-in-a-loop that everyone is talking about. If you think about what our products are and how they're used, I don't know of a company that is better positioned to benefit from as customers adopt their lab-in-a-loop. We have the automation. We have the robotics, which you need as you have higher and higher volumes. We provide the high-content screening, which generates a lot of the data. We have a lot of the consumables that are used within this process as well. And so it's one of the reasons why over the last few months as we've been getting a lot more questions on AI and how AI is going to impact things. I know there's been a lot of fears over AI. And to your question, too, displacing things. We think that the most likely scenario that there ends up being a bottleneck of demand in the future where -- particularly at the validation stage, where you're going to need more instruments, you're going to need more automation and robotics and obviously drive potentially more consumable demand, too.

Okay. Just on the topic of some of your own software solutions like LabGistics, you talked about it takes time to ramp, no revenue -- no meaningful revenue contribution expected in 2026. Can you talk about some of the other dynamics? You talked about the result in the first quarter, but 2Q, you've got a really tough comp there. Just talk us through the pacing this year in terms of the comps, expectations for software as you go through 2026.

Sure. So software is 9%, 10% of revenue. It was up mid-single digits in the first quarter. If you recall, we had phenomenal performance in the second quarter of last year. And so because of very strong comps as well as just normal contract timing, we're anticipating the software business from an organic growth perspective is down 20% in the second quarter. However, based on contract timing and comps, we anticipate this business will then grow in the mid- to high teens in the back half of the year. And as a reminder, for software, given the contract nature and the multiyear contracts, we typically have very good visibility on this business, too. So it's one where we're expecting it to be roughly mid-single digits for the year overall. I think that is -- what's interesting about that is -- so that if you're up mid-single digits, down 20% in the second quarter, puts the first half at down high single digits. Then let's just say mid-single digits or so -- or sorry, mid-teens or so positive growth in the back half, which obviously is an acceleration. In the first half, the overall company grew approximately 4% is what is assumed in our guidance. Our guidance for the year is 3% to 4%, which obviously then would imply a slowdown in the second half of the year. And we're assuming a slowdown in our guidance and our assumptions despite software improving somewhat meaningfully. And so the other 90% of the company, we're assuming slows somewhat meaningfully in the back half of the year.

Yes. You already touched on the assumption for Life Science instruments being a little bit softer in the second half. Any other moving pieces there, whether it's reagents or more on the diagnostics side?

Yes. Reagents, we have growing low single digits for the year, but I would say also at the lower end or around flattish for that in the fourth quarter as well. I think another key piece is reproductive health. Reproductive health had an excellent first quarter, even excluding the contribution for Genomics England, which the contribution from Genomics England also did better than we had anticipated. But our newborn screening business still grew high single digits in the first quarter. And we're assuming that grows low single digits over the remainder of the year. We'll see -- again, there was nothing in the first quarter that was sort of onetime in nature or some large contract. It was just, I would say, the culmination of a lot of good commercial execution between geographic expansion, menu adoption, new products, all coming together to lead to high single-digit growth in newborn, but we have taken a more cautious assumption over the remainder of the year, which we'll see if we're proven wrong or not.

Okay. So rolling all that together, you talked about some of the more conservative assumptions in the second half. As we're exiting 2026, 3Q, 4Q, if there is a little bit of upside there, for the full year, like you said, 3% to 4%. How does that carry forward into beyond in an ex-China DX world?

Yes. Obviously, we can't -- I think we talked about software. Software is only going to grow mid-single digits this year. The APV for software, the annualized portfolio values, continue to grow double digits. So ultimately, the APV is effectively what we will average in terms of growth over the coming years. So at some point, that will improve, whether it's going to be next year or not, we'll wait a few more quarters to share that. We talked about the new products and the new products not really providing material revenue on the software side, it's still starting in next year. So I think about that as well. And then we need to see what happens with the life science end markets. Do the pharma, biotech and academic end markets continue to modestly improve? Do they stay where they are? Do they improve more materially? I think some of our peers are assuming more material improvement in market conditions over the remainder of the year, which if that occurs, that would be -- obviously be great and not factored into our current assumptions. Our LRP is 6% to 8% growth. And I know the last couple of years have been extremely challenging for the industry. Our confidence in our LRP has not changed. And it's one of the reasons why we have become so aggressive on share repurchases over the last couple of years is there have been a number of different headwinds for the industry, but we don't believe that the underlying market fundamentals of our industry have changed. And so as our stock and our multiple has come down, I would say we've been aggressively opportunistically buying back stock because we don't think that this is going to last forever.

I mean on that point, let's talk about capital deployment a little bit. Like you said, you're not going to get the proceeds for the divestiture for over a year, maybe 1.5 years, but you still have a balance sheet is in pretty good shape. Leverage is healthy. You just touched on share buybacks. Do you see more opportunities here? And can you talk about the pros and cons of that versus M&A or maybe other moves?

Sure. We were pretty active in the first quarter in capital deployment. We bought back $86 million in stock. We completed the acquisition of ACD/Labs right around $70 million, another small software tuck-in acquisition. From a capital deployment perspective, the most immediate thing in front of us is paying back -- paying off this $500 million Eurobond which is maturing in the middle of July. So given the weaker dollar, it's almost $600 million, and we plan to pay that off. And so we will knock that out here in 2 months from now. And then as we start to look in towards the back half of the year and into 2027, I think our capital deployment proceeds will be -- I would think they would be fairly balanced between opportunistic share repurchases, but also we continue to have a pretty active M&A pipeline. I would characterize it as largely focused on tuck-in acquisitions.

Okay. And along the lines of what you've done before in terms of technology...

yes, really. Focused in software and consumables.

Okay. Maybe just the last couple of minutes, any closing remarks or sort of our standard question is, what do you feel is underappreciated? What do you think is misunderstood? Or what do you think that -- what message would you like to leave investors with?

Sure. I think the thing that is most maybe not appreciated or misunderstood is, we went through this dramatic transformation during the pandemic. And coming -- during the pandemic, we did 11 acquisitions, then subsequently, we sold 30% of the company. And then we became Revvity 3 years ago, almost to the day. And ever since then, right, it kind of coincided with pharma biotech end market slowing down. And then you had obviously, the academic pressures, incremental pressures in 2025. So the entire time we have been Revvity so far, we've had pharma and then academic end market pressures. We have not been able to show investors what our potential actually looks like. And I think one of the things that is most exciting for us is not only differentiated organic growth, which I think we have been showing over the last couple of years despite the depressed market conditions, but it's really our incremental margins. And when you -- when we start to show a little bit better organic growth, I think you will start to see industry-leading incremental margins shine through. And the driver to our incremental margins is the fact that for the vast majority of our products, we don't need to add a lot more people in order to grow. And so we will get tremendous SG&A leverage once we're able to generate a little bit better top line growth. And so I think that is the thing that is -- and I get it. We haven't been able to show it yet, and it's been 3 years. And so it's still a little bit theoretical, but I think we're getting closer and closer to having that come through.

Okay. Great. All right. That's a good point to end it on. Thanks, everyone, for coming. Steve, thanks so much for being here. Really appreciate it. Thank you.