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

Great. Welcome, everyone. My name is Mike Podoll. I lead our U.S. life science tools and diagnostics coverage in the health care investment banking side at Morgan Stanley. Pleasure to be joined here by Max Krakowiak, the CFO of Revvity.

So maybe to kick things off, Max, Revvity is an organization that's been through a pretty big transformation over the past several years. And so for an investor that's newer to the Revvity story. What do you think the simplest way is to kind of understand where the business is today?

Yes. I think, as you mentioned, we've undergone a tremendous amount of transformation. And I think the company we now have is an innovative life sciences and diagnostics company that's focused on differentiation. I think when you look on the life sciences side, we are focused on preclinical research. And then on the diagnostics side, we really have specialty focus across reproductive health, autoimmune and allergy markets. And so as you mentioned, we've gone through a tremendous transformation to simplify the portfolio, again, with a big focus on innovation and differentiation, and I'm sure we'll get into more of the transformation as we go along here.

Yes. So on that transformation, can you talk a little bit about how that kind of positions you for the future where you're heading, especially within the context of AI and life sciences?

Yes. So maybe even just spending a little bit on the transformation overall. From our standpoint, if you look at where we've gone to for us, the big areas of focus was one, being in highly competitive market positions and faster -- markets. And we think we've accomplished that now with our focus across life sciences and diagnostics. We've also undergone a tremendous amount of, I would say, cultural transformation over the past few years becoming Revvity. I would say we were a little bit more of an old school scientific heavy instrument-based company, and now we are much more focused on innovation, scientific differentiation with a much higher mix of reoccurring revenue. And then I look -- I think if you look at the financial transformation, we've also taken a significant step change there. I've already mentioned that we're in faster-growing end markets. If you look at our cash flow conversion performance, it's dramatically improved since becoming revenue with the new portfolio. and operational execution. Our conversion now has been consistently north of 90% versus historically 70%. And even when you look at it from a margin profile perspective, this year, we're anticipating being upper 20s from an operating margin standpoint. Before the transformation, it was low 20s, which is a significant change over a short period of years. And I think, again, really a testament to the vision we had we wanted to create.

Great. You've talked before about the longer-term kind of growth algorithm or the long-range plan being in kind of that 6% to 8% range. How would you kind of deconstruct that? What are the kind of constituent components of that growth? And how should investors think about that?

Yes. So for the 6% to 8% long-range forecast for us as a company, the key baseline assumption is that in a normal market environment, markets grow sort of mid-single digits. And we should be growing several hundred basis points above that. I think when you look at the same percent and how it decoms by business unit, Diagnostics is probably maybe slightly on the lower end of that 6% to 8% range with life sciences being on the upper end of that range. And I think even when you look a little further underneath both Diagnostics and Life Sciences. From a diagnostics perspective, we have 2 main business units. You have your reproductive pellet franchise which in our LRP is assumed to grow 2% to 4%. It's been growing nicely above that, which again, I'm sure we'll get into some details on. And then on the immunodiagnostic side, it's been 9% to 11% LRP where it's mostly been executing within. I think then on the Life Sciences side, where we have 2 business units, our Life Science Solutions, which is our instruments and reagents. We anticipate that sort of, I would say, being in the mid- to high single digits growth over the long term with maybe some particular tailwinds there that might drive us to grow above it, one of which you mentioned around sort of this AI momentum. And then we've got our software business, which we anticipate growing 9% to 11% over LRP, and it's actually been probably going above that as well over the past couple of years.

Great. The past several quarters, I think, in the tool space more broadly. I think a lot of us are all aware of some of the challenges. But revenue has managed to grow the reagents business in most of those quarters. What do you -- how should investors think about where that growth is coming from? Is it market share gain and where do you see that business position going forward? And what do you need to do to drive more accelerated growth even.

Yes. So I think if you look at it from an overall reagent perspective, as you mentioned, the last couple of years have been a challenging market environment. I think though, we've been very encouraged that we've been able to grow I think several 100 basements above that sort of market or peer average over this past couple of years, which is a testament to the strength of our portfolio. And I think when you look at what's the real differentiation for us on reagent standpoint, I would call it a couple of factors. One, we are, I would say, very proud of our customer relations and really our ability to deliver best-in-class service. More than 95% of our reagents are delivered within 24 hours of the order, which is a true strength for us from a customer engagement perspective, I'd say additionally, we pride ourselves in being one of the more innovative reagent companies out there, but also being able to deliver that innovation with incredibly high quality at the best value price in the market. . And I think third, I think when you look at our -- just in reagents portfolio, we do have some, I would say, very strong value chain offering for our customers in their preclinical research and being able to span across their full continuum of needs. So I would say that differentiation is what's really led us to grow above market over these past couple of years. I think when you then flip it in terms of saying longer term, what do you need to get to sort of get back to that LRP growth, I think it's a combination of factors. One, if you look at things from an academic and government perspective for us, that's roughly about 1/4 of our reagents exposure. We just need more stability there from a policy perspective. That whipsaw makes it very difficult for customers to sort of plan over the long term and be comfortable sort of releasing budgets. I think the bigger concentration is obviously with pharma biotech though. And I think over the past couple of years, you've seen a real pinch down on the budgets from a preclinical perspective that narrative has definitely changed over the past couple of quarters, you're starting to see the opening of the faucet in terms of preclinical funds, which we knew they could not keep compressed for a long period of time. They need to keep feeding that innovation engine. And then even on top of that, sort of, I would say, no return to preclinical spending, we're starting to see some incremental tailwinds from some of the AI momentum.

That's great. So certainly in the last year, seen a meaningful amount of M&A and consolidation, especially involving large kind of flow cytometry and antibody portfolios, you all have indicated that flow represents roughly 40% of revenues reagent business. What comprises the remainder of that portfolio? And how should investors think about why that's attractive?

Yes. So I think, as you mentioned, in the reagents portfolio, we have 2 main pieces of it. You have the flow side -- RUO flow cytometry and then you have what we call sort of our research reagents and non-flow content roughly about another 40%, 45% of the portfolio. And actually, that piece of the portfolio has been growing above our overall reagents performance over the past couple of years. And what our research reagents portfolio is, it really allows scientists to basically screen and validate their drug candidates against a known number of targets and seeing how they interact at the cellular level. . And so for us, we've seen a very strong tailwind over there in the past couple of years. There's really 2 big players in the marketplace. It's us and then a privately owned company called Omega. We both have market leadership positions. And so I think when you look at what's maybe driven some of that outperformance in the past couple of years, it's actually been around different applications for sort of new therapeutic areas, so I think like GLP-1s and then I think as you look over the next sort of short to medium term here, it's also a portfolio that's very well positioned for what's needed from a pharma company's perspective data generation for their AI models and that ability to again, taking AI developed candidate and screen it against a number of targets to see with that interaction is and generate that data to feed back into your AI models. Again, this portfolio is very well positioned to take advantage of that momentum.

And your commentary around the AI-related demand on the second quarter earnings call, it was strong, but that there is a benefit that was not necessarily readily apparent yet. Can you talk a little bit about what you're seeing in terms of actual kind of customer behavior that gives you confidence that AI is becoming a tangible demand driver for Revvity?

Yes. So first, we're seeing it in the order trend. And again, I think that's most tangible proof point, I'll probably have few day as the orders are coming in, and now it's just an ability for us to go and execute against them. I think when you then look at some of maybe the softer indicators it's in a lot of the conversations we're having in customers is around this narrative of lab in the loop and sort of how do we get maximizing the ability to take our preclinical research and maximize the data output. And you can just tell, based on the customer conversations that, one, there is real momentum in they're setting up their infrastructure to take advantage of these new tools. But then secondly, the discussion around much larger projects, longer-term products, we talked about the bulk orders we're seeing from a reagent standpoint. And that's really giving us a strong indication that we are starting to see sort of loosening of the budgets on the preclinical side from pharma.

Can you talk a little bit more about -- you mentioned the backlog how should someone think about this incredible backlog that you've seen within the context of the overall life sciences growth within the business.

Yes. So obviously, backlog hasn't quite shown up in the growth numbers yet. I mean we did take up our second half forecast for our Life Sciences Solutions business to account for the stronger backlog, both on the instrument side as well as on the -- with the reagents business. And I think for us, again, as we mentioned, it was a nice increase in the order demand. We've just got to go on and execute it now from a supply chain perspective.

You've talked about how you believe there's likely to be a bottleneck in validation related work in the future. What exactly do you mean by that? How should investors think about it? And where have the bottlenecks been in the past in kind of the preclinical [indiscernible] development work?

Yes. So we actually started talking about this sort of validation bottleneck at the beginning part of 2026. And now that's sort of a little bit transformed into sort of this lab and the loop narrative that you heard a lot about. And what I previously mentioned. Yes, I think when we refer to the validation bottleneck, the example there is -- the way to think about it is, AI is going to help pharma companies develop and design these compounds at a much faster rate. However, you still need to go into the wet lab and test those AI developed molecules and compounds. And what you're also going to do is your going to be creating more compounds than you can possibly put through the infrastructure right now. And so you're going to create this validation bottleneck of these AI design compounds and the wet lab work needed again to validate and screen them against a number of targets and see how they interact. And so that's what we were really referring to in terms of the sort of validation bottleneck where it's evolved into that lab and the loop is sort of that sort of constant Infinity loop of design your molecule and compound validate in the web and then put that back into your AI model, tweak it and you get the sort of iterative loop before you ultimately get your compound into the clinic. And so that's really sort of -- again, a lot of what we're hearing from the customers, it was a lot of what we started to hear and see in the beginning of 2026, and it's really to continue to play out here over the first couple of quarters.

Great. So signal -- your signal software business is obviously an incredibly important part of all of this. Maybe for an investor who's not a research scientist, can you explain or just kind of give the context of how signals fits into the overall workflow of your customers kind of end to end and what's unique about it relative to some of the other offerings in the space.

Yes. So probably the easiest way to think about our signals franchise is it's an ERP for preclinical scientists. And so what you're able to do in our product suite is one, you're able to sort of, again, design and draw your chemical compound you're then able to build and document your experiment. And then we've got an analytical layer that sits on top of it to help you analyze the results from that experiment. It really is their ERP and what drives their workflows and operations on a day-to-day basis on the preclinical research side. And so for us, where we've now sort of continued to pivot the portfolio is figuring out how we take that sort of that infrastructure we have from a signal perspective and layering on top of it sort of where the market is going with these AI models and being able to have those AI models sit very closely to their preclinical research.

And so maybe say a little bit more about that, like why does the AI strengthen the Signals business as opposed to by passing it or circumventing it.

Yes, I think there was a lot of noise about the whole SaaS apocalypse, which I think has been subdued now since it first came out. I think that's pretty similar for how folks initially thought about it from a signal perspective for us is a big fear of it being overtaken by AI. But that's really not going to be the case. I mean, again, when you think about what our signal franchise is, it is the ERP for the scientists. It is their sort of their regulatory or their system of record from a preclinical standpoint, which is critical for them as they think about expediting their process from a clinical and regulatory submission standpoint. And so in that regard, it wasn't really something that I think was ever really in scope to be overtaken by sort of this AI narrative. It's really going to be much more of a complement and even a potential tailwind for our business. And I think what we've come out with is our product called Synthetica and essentially, what Synthetica infrastructure in the marketplace to host your AI models. And it will sit very closely to all of the preclinical data you have and creating that link between the 2 so that scientists are not operating on 15 different systems, rather they're in the signals notebook. They've got their AI models. They are tied in again to what they need from a regulatory perspective with the signal notebook.

Right. I think you said before or historically the signals is a business that you expect to double over the next 4 or 5 years. Walk us through kind of what you would need or how you see that progressing? Is it expansion with existing customers, new customers, pricing, like some combination of all of the above, something else. What's the right way to think about that?

Yes. Look, I think you mentioned about we are very excited about the signal franchise. We do anticipate our ability to double it over the next 4 to 5 years. I think when you look at sort of the growth algorithm for that business, again, 9% to 11% was what we have right now in its LRP. It's been growing above that. I think when you look at where it's going to go in the future, you've got about 106%, 107% as sort of our baseline net retention when a contract comes up for renewal. So you can almost kind of assume that as sort of the market growth rate for where we play. And then how we get to the 9011 is really 2 factors. One, increasing sort of our breadth of customer base. We've talked about in the past how we are predominantly focused on Tier 1 pharma. We have an ability to continue to move further downstream into Tier 2, 2 or 3 and even some of the smaller biotechs. We've recently launched some products that are perfectly positioned for some of those smaller biotechs, which we previously didn't have and then the second big sort of driver from a customer perspective is around material science. And so this is a new customer group for us. It uses very similar workflows and capabilities that we offer on front the side and that's been growing significantly, I would say, over the past couple of years and one that we think has a lot of room to run just given how fragmented that market is. The second, I would say, additional above-market growth rate lever we have in our Signals business is around our new product launches. And whether that's around biodesign and expanding what we offer from a large molecule capability standpoint or around logistics and partnering with our customers and how they run their labs. And then I also talked about Synthetica that we have from an AI marketplace perspective.

Great. Okay. Maybe shifting gears. You've obviously announced a divestiture of the China-focused immunodiagnostics business. Can you give folks a sense of that maybe aren't as familiar with that, how you came to that decision and the kind of time line between now and when you expect that to close? What are some of the risks to that, recognizing that any separation is always going to have complexities and challenges. So how should investors think about the separation in the context of the broader diagnostics business and kind of what it does on a pro forma basis for Revvity.

Yes. Look, I think again, we're incredibly excited about the ability for us to divest our immunodiagnostics business. I think it was really a culmination of external factors that were outside of our control that really drove us to the decision to divest that business. As you mentioned, it's going to complete her execute by the end 2027. I don't know that I would necessarily call it any specific risk associated with it, right? I mean we've talked about the fact that they've got to fully localize their manufacturing that you talked about the fact that we have to roll over the regulatory approvals to the new entity. And it's just a matter of, I would say, execution at this point, thankfully, are lucky for us. We've really just run a very similar play when we divested the legacy PerkinElmer. And so we've got a pretty strong playbook of what needs to happen from a sort of execution perspective, it's really just the pulling the tenants the regulatory approvals. The benefit for us is we've at least already been selling these products in the market, so it's just paperwork at this point in time. But that is really, I would say, more of the longest fall in the tent, but nothing really to call from an execution risk perspective.