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

Maybe moving on to signals. Organic growth swung from mid-single-digit growth to down 20% in Q2. That was due to that contract timing issue that you talked about, the tough comp. But annual portfolio value kept growing double digits. You noted, ARR grew mid-20%. So can you maybe just reconcile those 2 pictures for us, walk us through the mechanics of accelerating from sort of down 20% in Q2, back up to high teens in the second half?

Sure. This is my favorite topic, which is revenue recognition. And today, of our software business, which is 9% to 10% of our total company revenue. Today, a little over 1/3 of our software revenue is SaaS in the cloud. And if you're not familiar with GAAP accounting, SaaS software revenue, you recognize the revenue on a monthly basis evenly over the contract. Call it, 2/3 or so of our software revenue is still legacy on-premise licenses. And the way GAAP revenue recognition accounting works is it's very lumpy. You have to recognize a large portion of that revenue when the contract is signed or renewed, which can cause the lumpiness in organic growth, which is why we talk about this metric annualized portfolio value or APV. And APV is a metric that basically looks at the growth in our software business if we were allowed to recognize revenue of all contracts evenly over the life of the contracts. And that APV metric has continued to grow in the low double-digit range, call it 12% or so. And I think another way to look at it is the APV is what our organic growth will average in the future without any new business wins. And so -- as we move into the back half of the year, the software business is the one that we have the highest level of visibility into just because of the contract renewal nature of the business. And so, yes, it was down 20% organically in the second quarter, which against a 35% positive comp. Obviously, there's just a contract timing dynamic. We're assuming the software business grows high teens in the third quarter and mid- to high teens in the fourth quarter and feel pretty good about that.

Yes. And then you have a really dense launch cycle this year, biodesign in April signals AI in June and then Anthropic connector in July. Signals for startup was in July also. So how do you position those competitively? And how do they start contributing to revenue?

Yes. I would add a couple more to that list, too. I mean, back at the beginning of the year, we announced the launch of an AI model marketplace called Xynthetica in collaboration with Eli Lilly, and before the end of the year, we're going to be launching another new offering called Logistics, which is another AI native really unique product offering that's coming out later this year. So we've talked about 2026 is easily the most important new product launch year in probably the history of our software business. Just -- we've got 3 major new product launches. And then I would say some of these Signals AI, the Anthropic connector, some of these other ones honestly really weren't even on the drawing board 12 or 18 months ago and were things that as the market has changed, we've been able to really accelerate some innovation in this business. With any new product launch, it takes a little bit of time to get it out in the customers' hands, go through RFPs and contracts and whatnot before you start really seeing more material revenue pick up. So our assumption for the contribution here in 2026 is fairly nominal, but you should start to see it add more revenue beginning next year than the year after. I think the other thing to understand about our software business that's changing is -- historically, our revenue model for software, whether it was SaaS or on-premise, it was all seat or license based. So based off of in one way or another, the number of people using the product. And that will continue. But with a number -- with many of these new products that we're coming out with, Xynthetica, LabGistics, Signals AI, the Anthropic connector we are adding a consumption element to the revenue model. And so you still have to have a seat or a license. But for many of these, it will be based off of compute usage. So how many tokens, how much compute are you using in these different product offerings. So that -- and potentially even how much storage you're using, which maybe we'll get into, but I think just data storage is changing in the AI world and so we might need to account for data storage in addition to compute usage from a revenue perspective.

And then last week, you announced a deal to acquire human cell design. Wondering if you could just give a little bit of background about that deal, walk through the strategic logic there.

Sure. I would say HCD, it's funny. Early in the year, we acquired a tuck-in software acquisition called ACD, now acquiring HCD. So whatever next is going to be something CD. HCD is a novel human relevant cell line that if you think about -- and where we're really focused here is helping customers analyze what is going on with their drug in a cell, in an animal model and something that looks like a human before obviously going into a human clinical trial. . And this is a really novel set of cell lines, one in particular is this pancreatic cell line that so far has been really used in metabolomic research focused on diabetes and GLP1s. And you're using the cell line to effectively see how your drug is interacting with these cells, which is very important for those types of conditions. And it plays right into the heart of our strengths, which is in high content screening and high throughput screening where we provide the instruments of the consumable to evaluate and analyze what is going on with cells preclinically. And so it's good. I think it's a small tuck-in deal, but in a very exciting area of science that is extremely complementary to what we're already doing.

That's great. Maybe moving to Diagnostics. Organic growth was 9% in Q1, accelerated to 11% in Q2. That was a plan and then you raised full year to high single digits there. So maybe just set the stage on what's driving that accelerating growth? .

Yes. I would say we've seen better growth in both the reproductive health side of diagnostics as well as immunodiagnostics. Immunodiagnostics for background, the bulk of our immunodiagnostics is rare autoimmune testing. And we took our assumptions on that business to high single digits for the full year. And I would note that, that high single-digit growth this year is despite probably a couple of hundred basis points of headwind from some pressures we are facing throughout all of this year in our latent TB business. Those pressures will should abate as we go into 2027. But I think it's worth noting that we're growing high single digits this year with TV pressures. On the reproductive health side, our LRP assumption for reproductive health is 2% to 4%. And when you look back over the last few years, we've been growing in the 5% to 6% range. Year-to-date, we're growing double digits, very strong growth. A part of that is incremental revenue contribution from a DNA sequencing contract that we won a year ago with the U.K. government, whereby it's called Genomics England, and the organization is, and we are doing sequencing of newborns for this project they are going. So that in the second quarter, added about 500 basis points to growth. But even excluding this Genomics England contract, our reproductive health business still grew about 10% in the second quarter, which is phenomenal especially considering that births globally are declining 1% to 2%. So market growth is negative 1% to 2%, and we're growing double digits. Part of that is strong instrumentation placements, but we've also had very strong diagnostic test demand as well. And it's -- it's a combination of geographic expansion, greater adoption of a broader array of our portfolio, uptick of new products we've come out with sort of the algorithm we laid out at our Investor Day two years ago.

And then on Genomics England, which you just mentioned, where the extension discussions stand there and then expectations into the back half and into 2027?

Yes. So right now, the Genomics England contract that started in the middle of last year. the way it's currently structured, it will run through the middle of next year. As we've talked about, we continue to remain in active discussions with them. I would say on extending the contract, continuing to do that. I would encourage you to maybe do a quick search. There's been a couple of recent DBC articles out about Genomics England and some of the very positive clinical outcomes that are happening because of this work. . There have been some babies who have -- their parents have opted into this program to have their DNA sequence and have been identified as having some extremely rare conditions which, if caught early enough in life can be treated and managed to a life instead of having what otherwise would be a terminal illness. And there was another article written by the BBC just in the last 2 weeks. So it's pretty cool being part of this project, which I think also from a financial perspective, also bodes well that it should hopefully be continued. If you're having these positive clinical outcomes, more and more parents are opting in to have their babies DNA sequence to be part of this. So it's really, I would say, having some momentum. But until it's extended, we're not going to assume anything either.

Appreciate that good program. And maybe thinking about immunodiagnostics, it was mid-single-digit and high single-digit growth the last couple of quarters. Your longer-term plan is 9% to 11% -- that's right. So what can consistently get you to that 9% to 11% growth? Does that China immunodiagnostics divestiture help you get there? Or can you do that even without that divestiture?

Yes. I mean, so the China divestiture is now excluded from our pro forma results. I would say that the pressures we faced in China have really been masking what has otherwise been some very strong results in our immunodiagnostics business. . Our immunodiagnostics business, excluding the China piece has been growing in the high single digits to low double digits over the last 1, 3, 5, 10-year period, whatever period you want to look at, it's been performing in the range. And the drivers of that are very strong market growth. The market growth for esoteric is probably growing in the 6%, 7% plus range. And then on top of that, we have a strong cadence of new products in additional like emerging areas, and then also very strong geographic penetration in the U.S. So we're still underpenetrated in the U.S., and we're growing very strongly in the U.S., which is helping us versus the market as well.

Yes. I wanted to touch on AI a little bit more. You made the case that AI generates just more hypothesis that have to be physically validated. So what's genuinely differentiated about revenues position there to win as more AI is essentially being used?

Sure. I'll reiterate some past comments, which is we believe that Revvity is one of, if not the best positioned company to benefit from how AI is changing science. And I think that science is different -- how you do science today is different than it was 12 months ago. And with AI, AI can allow customers to really process and manage and use vast quantities -- vast data sets that -- some of these data sets are so big that 12 or 18 months ago, they literally could not be used. . And I think that is probably understanding that and what the ramifications of that are, I think it could be very meaningful to the future and the future of Revvity. Our products on the life sciences side are used to test preclinically -- test drugs preclinically. And I think most people are now in an agreement that AI is making it easier to come up with new hypotheses, new drug ideas, which is likely to lead to more drugs being invented overall. I think many people now are also in agreement that you are still going to need to test those drugs. You can't just simulate them in the computer. Our products are used to do that wet lab research. And just using the high-content screening example, our high-content screening systems are the super high-resolution imaging systems, imaging of what's going on in a cell with your drug. It generates so much data, terabytes of data per instrument per day that in the past, it was not possible to actually process all that data. But now with AI, you can. And so it's changing how some of these products are even being used, which ultimately, I think, will lead to more refined and hopefully, better drugs, which I think is one of the reasons why we're seeing the inflection in demand in high-content screening so far. But it would make sense though that over time, you start to see improvements in other areas as well.

Yes. And you mentioned some orders from nontraditional customers building AI discovery platforms. Can you maybe size that, like how many customers, what they're buying? Is it a handful of orders...

Yes. Unfortunately, I'm not going to provide specifics on that. But I would say we have been seeing demand from both improvement in demand from both traditional as well as nontraditional customers. I would say the uptick or inflection in orders is probably more from traditional customers than it is from nontraditional customers, but the nontraditional customers, I think, is not insignificant and it's new. So I think it's noteworthy as well, so.

Yes. And as we're approaching the last minute, maybe just capping off, what do you think are the 2 biggest opportunities for Revvity over the next year?

Yes. I would say the thing with revenue, we've gone through this dramatic transformation. We did all of these acquisitions during the pandemic. We sold 30% of the company. We rebranded as Revvity. We've spent the last 4 or 5 years really driving a number of different operational efficiency programs. In '24 and in 2025, we bought back 15% of the company in 2 years. We just paid off a huge bond in July, 2 months ago. So our leverage in a very good spot right now. . We've made dramatic improvements in our free cash flow and free cash flow conversion. We're running over 100% free cash flow conversion year-to-date for exam, which is a tremendous improvement from where it was 5 or 6 years ago, which is a long way of saying we've made -- we've completely shifted the business we've made a ton of improvements operationally. We've made a ton of improvements on the balance sheet from a cash flow perspective. What we need now, the company is in a great position is just a little bit better organic growth, and the company is really positioned to do well because I think the last closing comment is we believe that Revvity has some of, if not the highest incremental margins in the entire life science tools industry, we just need a little bit better organic growth to actually demonstrate that sales leverage. And so hopefully, it's coming.

Awesome. And that's about all the time we have. Please remain thanking Steve and Revvity for coming to the conference. .

Thank you.