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Bailey
Moderator
Hello and welcome to today's Reverty Inc Q4 2023 earnings conference call. My name is Bailey and I will be the moderator for today's call. All lines will be muted during the presentation portion with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by the number one on your telephone keypad. I'd now like to pass the conference over to our host today, Steve Willoughby, Senior Vice President of Investor Relations. Please go ahead.
Steve Willoughby
Senior Vice President of Investor Relations
Thank you, Operator. Good morning, everyone, and welcome to Revity's fourth quarter 2023 earnings conference call. On the call with me today are Prahlad Singh, our President and Chief Executive Officer, and Max Krakowiak, our Senior Vice President and Chief Financial Officer. Before we begin, I'd like to remind everyone of the safe harbor statements that we have outlined in our press release issued earlier this morning, and also those in our SEC filings. Statements or comments made on this call may be forward-looking statements, which may include but are not necessarily limited to financial projections or other statements of the company's plans, objectives, expectations, or intentions. These matters involve certain risks and uncertainties. The company's actual results may differ significantly from those projected or suggested due to a variety of factors which are discussed in detail in our SEC filings. Any forward-looking statements made today represent our views as of today. We disclaim any obligation to update these forward-looking statements in the future, even if our estimates change. So you should not rely on any of today's statements as representing our views as of any date after today. During this call, we will be referring to certain non-GAAP financial measures. A reconciliation of the non-GAAP financial measures we plan to use during this call to the most directly comparable GAAP measures is available as an attachment to our earnings press release. I'll now turn it over to our President and Chief Executive Officer, Kralad Singh. Kralad?
Prahlad Singh
President and Chief Executive Officer
Thank you, Steve, and good morning, everyone. As we highlighted in our pre-announcement a few weeks ago, while industry headwinds continued throughout the end of the year, we were able to perform slightly better than we had anticipated and finish the fourth quarter with a 3% decline in non-COVID organic revenue. While Max will provide more details on the quarter in a bit, I would say that our stronger than anticipated results were broad-based as both our life sciences and diagnostic segments performed better than expected. I would also highlight that our performance was well-balanced geographically as each major region performed in line to slightly above what we had assumed. We also did a good job continuing to tightly control our expenses in light of the challenging environment that persisted through year end. And along with some favorable one-time tax benefits, helped deliver additional EPS upside in the fourth quarter. We also had a very strong cash flow in the quarter with nearly $200 million of free cash flow while continuing to execute on our capital deployment initiatives. For the full year 2023, we generated 2% non-COVID organic growth. While not what we hoped for at the start of the year, I think you will see that our performance was differentiated versus the broader industry and likely will be near the high end of the peer set for the year once the dust fully settles. We expect this differentiated financial performance to continue going forward. As demonstrated in the new financial framework we recently provided for our expected performance over the coming years. As part of this new long-range outlook, we now expect Revity's organic revenue growth to be 200 basis points above the broader industry, regardless of the macro environment. In a normal year, we would expect this to result in 6% to 8% organic growth and 75 basis points of operating margin expansion annually. In the post-COVID world we all now operate in, we anticipate this level of growth will result in performance that continues to be at the high end of our industry overall. As we highlighted during a recent investor conference, we expect approximately 60% of our business that is comprised of immunodiagnostics, life sciences reagents, and our signal software business to grow in the 9% to 11% range over the coming years, generating mid-single-digit growth on their own for the total company. Given the stronger profitability of these segments, as they continue to grow faster than the remainder of the business, we expect it to result in natural margin expansion as they become an increasingly larger piece of the overall company over time. Brevity is extremely well positioned to capitalize on some of the most exciting areas of pharmaceutical research and development, such as cell and gene therapy, multiomics, and precision medicine. We are also involved in some of the most durable, higher growth areas within clinical diagnostics, such as autoimmunity, tuberculosis, and other emerging infectious diseases. With what our company has become over the last several years and where we are planning on going in the future, I think you will see that Revity will continue to stand out as a very unique company. We have a differentiated approach with our customers, a competitive and novel product portfolio with continuous innovation, and a unique position within the attractive life sciences and diagnostic categories in which we compete. A good example of this in the fourth quarter was the launch of our IonisQ system in our newborn screening business. The IonisQ system is a first-of-its-kind workflow which streamlines molecular testing for both spinal muscular atrophy and SCID in newborns. It is a new and complete CIBD solution which consists of a new PCR equipment with dedicated software and a specialized diagnostics kit. With no wash steps being needed in the new workflow, it results in a significantly faster turnaround time and less hands-on involvement from sample to answer than existing methods. This allows for lower operating costs and greater sustainability, as fewer consumables and plastic ware are required. The introduction of this innovative solution is also perfectly timed from a commercial perspective. As the European Alliance for Newborn Screening in Spinal Muscular Atrophy mandates that by 2025, all newborns in Europe should be screened for SMA going forward. Our new IonisQ system is just one example of how we are continuing to bring cutting-edge and innovative solutions to market from across the company, benefiting both our customers and ultimately the patients they serve. We have also been making good progress on our operational initiatives. A good example of this is the launch of our new e-commerce platform, which went live in the US in mid-December, approximately five to six months earlier than we anticipated. The platform's integrated design was built specifically for the needs of what our business has become. It is expected to be extremely consumer-friendly while also over time delivering both revenue and operating synergies. We expect this new system to go live outside the U.S. in early 2Q. Another thing I'm extremely proud to see is the strong collaboration that is occurring amongst our teams across the company. A great example of this was how last year we had a sole source antibody supplier for one of our diagnostics assays begin to have quality inconsistencies in their batches. Through the rapid collaboration amongst scientists from Euroimmune, BioLegend, and Horizon, within nine weeks, we had developed our own replacement antibody, validated it, and were able to manufacture it in sufficient scale for commercial use. The ability and agility would never have been possible in the company of the past, and I'm not sure it would be possible at most companies today other than Revity. As we look ahead to this year, we expect the ongoing headwinds from our pharma and biotech customers to continue, particularly in the first half of the year, as they still are working through the impact from their elevated spending levels during the COVID years. We are assuming this pressure will begin to stabilize in the back half of the year when we are anticipating returning to growth for the company overall. In light of the dynamic end market challenges continuing into 2024, as well as the return of some of the variable costs that we reduced in 2023, we have recently implemented additional structural cost actions to protect our strong profitability through this temporary period. We anticipate these actions will allow for our operating margins to remain approximately flat year-over-year at 28% this year. Despite the low single-digit organic growth we expect to repeat into 2024. We expect this to result in our 2024 adjusted EPS to be in the range of $4.55 to $4.75. With our significant number of acquisitions over the past several years coupled with the large divestiture we completed in early 2023, we still have many areas to further optimize in order to reach our full potential as a company. The significant actions we took in 2023 combined with the additional measures being implemented as we begin 2024, have put us on a good trajectory to further streamline and adjust our operations for the business we have now become. It also strongly positions us to capitalize on the leverage potential that exists in our company once industry growth normalizes. Overall, when looking back on 2023, I'd say it certainly ended up playing out quite differently than we had anticipated when sitting here a year ago. However, I'm so proud of the transformation that we have undergone over the past few years, which we ultimately completed last year. While we are continuing to face external challenges, I'm extremely grateful for what Revity has become and the significant efforts of so many who have made it come to fruition. Without everyone's efforts and the rebirth of the company, our differentiated performance in 2023 would not have been possible. We remain confident that we will emerge from this temporary period of industry headwinds as a unique and stronger company that remains well positioned to help expand the boundaries of human potential through science. With that, I'll now turn the call over to Max.
Max Krakowiak
Senior Vice President and Chief Financial Officer
Thanks, Pralad, and good morning, everyone. The company demonstrated its perseverance in the fourth quarter during a period in which underlying industry demand continued to remain dynamic. I am proud of our team's performance despite these challenges continuing through year-end, allowing our results to exceed our expectations for the quarter. As I'll comment on more in a bit, we are now assuming the current market environment remains largely in place through at least the first half of this year, which will continue to put pressure on our results and cause our full year expectations to look fairly similar to what we achieved in 2023. However, we would expect our performance to be somewhat of the inverse of what we saw last year with the first half of 2024 remaining challenged and facing organic revenue declines before returning to growth in the second half. While we work through this dynamic period, we have continued to remain extremely focused on those items and actions that are more fully within our control. We progressively tightened our expense management efforts throughout last year And as previously mentioned, we have already implemented significant additional structural cost measures so far this year, which we anticipate will allow our operating margins to remain flat at 28% this year, despite our low single-digit growth outlook paving the way for greater operating leverage in the future when growth normalizes. We also made good progress with our balance sheet and cash flow in 2023. In the fourth quarter, we generated $196 million of free cash flow as we made meaningful progress on collections and inventory management. Excluding the divestiture-related outflows we incurred during the year, much of which will be coming back to us in 2024, we generated over $400 million of free cash flow in 2023 overall. Given the amount of change that has occurred at the company over the past year, I view this as very strong performance, and we are well positioned to continue executing on our capital deployment initiatives this year. Now, moving to our specific fourth quarter and full year results. Overall, the company generated total adjusted revenues of $696 million in the quarter, resulting in a 3% decline in non-COVID organic revenue, which was above the high end of our guidance. The outperformance was fairly broad-based as both our life sciences and our diagnostic segments performed slightly above our expectations for the quarter. FX was a 1% tailwind, and we again had no incremental contribution from acquisitions. For the full year, we generated $2.75 billion of total adjusted revenue, which was comprised of 2% non-COVID organic growth, no impact from FX or M&A, and a modest 3M contribution early in the year from COVID. As it relates to our P&L, we generated 27.5% adjusted operating margins in the quarter, which were in line with our expectations. For the full year, our off margins were 28%, which represented approximately 100 basis points of expansion, excluding the removal of COVID-related revenues. We incurred a favorable pricing impact of approximately 130 basis points in the quarter, which brought the full year impact from pricing to approximately 150 basis points. We continue to expect at least 100 basis points of favorable pricing annually going forward. Looking below the line, we had adjusted net interest and other expense of 16 million, which was largely in line with our expectations. For the full year, our adjusted net interest and other expense was 58 million. Our adjusted tax rate was 12% of the quarter, which was favorable by a few 100 basis points to our expectations due to a couple of 1 time tax items. These favorable discrete tax items contributed approximately 5 cents to our in the quarter. For the full year, our adjusted tax rate was 18.6%. but would have been approximately 20% and in line with our expectations, excluding the favorability we incurred here in the fourth quarter, which we do not expect to repeat in the future. We averaged 123.4 million shares outstanding in the quarter and 124.8 million for the full year. This all led to adjusted EPS in the fourth quarter of $1.25, which was 9 cents above the midpoint and 7 cents above the high end of our expectations. our full year 2023 adjusted EPS was $4.65. Moving beyond the P&L, as I mentioned, we generated free cash flow of $196 million in the quarter, while on a full year basis, our free cash flow was $198 million, which includes a headwind of slightly over $200 million from one-time divestiture and rebranding-related activities. Also, as I previously mentioned, We expect a large portion of these outflows to reverse in 2024 and positively impact our investing cash flows when they come back to us. As for capital deployment, we continue to remain active in the fourth quarter. We purchased an additional $400 million of U.S. Treasuries with maturity aligned to the remainder of the $800 million bond we have coming due in September. We now have over $700 million of Treasuries on our balance sheet, which will mature shortly before our bond comes due this September, that we will use to extinguish this debt. We finished the quarter with a net debt to adjusted EBITDA leverage ratio of 2.8 times. I will now provide some commentary on our fourth quarter and full year business trends, which is also included in the quarterly slide presentation on our investor relations website. The 3% decline in non-COVID organic revenue in the quarter was comprised of a 9% decline in our life sciences segment and 3% growth in diagnostics. Geographically, we declined in the high single digits in the Americas, declined in the low single digits in Europe, and grew low single digits in Asia, with China flat overall. For the full year, we achieved 2% non-COVID organic growth with 5% growth in diagnostics and flat performance in life sciences. The Americas declined low single digits, Europe grew mid single digits, and both Asia and China grew mid single digits for the full year. Within China in the quarter, we experienced mid single digit growth in diagnostics with high single digit growth in immunodiagnostics offset by a high single digit decline in life sciences. For the full year, China grew in the mid-single digits organically with high single-digit growth in diagnostics overall, low double-digit growth in immunodiagnostics, and mid-single-digit growth in life sciences. From a segment perspective, our life science business generated total adjusted revenue of $320 million in the quarter. This was down 8% on a reported basis and 9% on an organic basis. For the full year, our life sciences business was flat organically. From a customer perspective sales into pharma biotech customers declined in the mid teens in the quarter. And in the mid single digits for the year, which was offset by high single digit growth. From academic and government customers in the quarter and mid teens growth for the year. Our life sciences instrument revenue represented about 30% of total life science revenue in 2023. And was down high teams in the quarter and down in the mid single digits for the year. Our reagent licensing and specialty farmer services revenue represented about 57% of life sciences revenue in 2023. And grew low single digits in the quarter and in the mid single digits for the year. Finally, our signal software business, which represented the remaining 13% of life science revenue in 2023. Decline double digits in the quarter and in the high single digits for the year. The decline in both the quarter in the full year was in line with expectations. And was driven by fewer multi year contracts renewing. Which we anticipate to normalize in 2024. our diagnostic segment we generated 376 million of total adjusted revenue in the quarter which was down four percent on a reported basis and six percent on an organic basis on a non-coveted basis the segment grew three percent versus a year ago in the quarter and five percent for the year our immunodiagnostics business represented about 50 percent of our total diagnostics revenue in 2023 and grew in the mid-teens organically, excluding COVID during both the quarter and the full year. Our immunodiagnostics business was strong globally as it continued to grow in the high teens outside of China, both in the quarter and the full year. Our reproductive health business, which represented about 34% of total diagnostics revenue in 2023, declined in the low single digits organically in the quarter and the full year. This business was again pressured by a significant mid-20% decline in our revenue omics lab business in the quarter and nearly 35% decline for the full year. As we transition to 2024, we will have now lapped the contract completions which pressured growth last year and do not anticipate such major year-over-year declines to continue. These pressures were partially offset by strong performance in 2023 from our newborn franchise, which grew in the high single digits overall for the year. Finally, our applied genomics business, which represented the remaining roughly 16% of total diagnostics revenue in 2023, continued to see pressure from the slowdown in pharma biotech spending and the hangover effect from elevated clinical lab COVID spending. Non-COVID organic revenue for our applied genomics business was down in the mid-teens during the quarter and was down in the high single digits for the full year. Now, as it pertains to our outlook for 2024, we expect current industry headwinds to remain over at least the next couple of quarters before we begin to face easier comparisons as the year progresses. Our initial guidance for organic growth is similar to what we experienced in 2023 in the 1 to 3 percent range. From a quarterly pacing perspective, we expect revenue in the first quarter to be down mid single digits with sequential improvement in the second quarter, resulting in the first half still being down year over year overall. We expect to return to positive growth starting in the third quarter this year. We also expect FX to contribute approximately 1% to total revenue based on the rates at the end of December. Moving down the P&L, we expect to hold our operating margins flat at 28% as our recent structural cost actions will help offset both some variable cost returning and the lower than normal organic growth we expect for this year. We expect total revenue in the first quarter to be the lowest of the year, which when combined with the only partial quarter impact from our recent cost actions, We expect it will result in our operating margins being several hundred basis points below our full year guidance year in the first quarter. We currently expect our margins to be fairly similar to each other in the second and third quarters at around our overall full year average, with the fourth quarter being the strongest quarter of the year. We expect adjusted net interest and other expense in 2024 to be approximately $70 million, representing a 20% increase versus last year. This increase is attributed to less interest income on lower cash balances as we pay off $1.3 billion in debt in 2023 and 2024. We expect our tax rate to be 20% and our average share count to be $123.5 million, similar to what it was in the fourth quarter. This all results in our initial 2024 adjusted EPS guidance to be in the range of $4.55 to $4.75 with the midpoint being flat to what we generated in 2023. We expect approximately 20% of our full year earnings to come here in the first quarter, as our tax rate will be about 200 basis points above our full year average, and net interest expense will be down about 5 million sequentially from the fourth quarter before increasing over the remainder of the year. As we enter 2024, we will ensure we closely manage those items that are fully within our control, such as delivering on our innovation pipelines, reducing our working capital, and remaining active with capital deployment, while continuing to take appropriate actions to further streamline and optimize the company following its transformation. When current industry headwinds subside, Revity will be in an even stronger position to capitalize on this recovery, continue to highlight our differentiation, and realize the full potential of what we have become. With that, operator, we would now like to open up the call for questions.
Bailey
Moderator
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Once again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question, and please do ensure that you have unmuted locally. Our first question today comes from the line of Jack Mehat from Nefron Research. Please go ahead. Your line is now open.
Jack Mehat
Analyst at Nefron Research
Thank you. Good morning. Prahlad, I wanted to just start and get your thoughts, how you're feeling about visibility in the business now. The macro is still pretty volatile. Just would be great to hear what you're hearing from customers and the things that build your confidence this 2024 outlook is in the right spot.
Prahlad Singh
President and Chief Executive Officer
Morning, Jack. You know, 23 certainly did not play out as we or others had envisioned it. But I think it was good to see that in the fourth quarter, you know, while the environment remained challenging, for the first time in 23, it did not deteriorate, you know, more than what we had anticipated. I mean, I would say as we look forward into 24, including here in the first quarter, we are not anticipating any sort of meaningful or significant improvement. But I would say rather more of a continuation of current trends. So things do start to pick up. I would say that I would expect that to provide more upside to the current outlook. So, you know, somewhat where we are is more of a temporary holding pattern before demands comes back. But I'm optimistic that, you know, we are perhaps what we are experiencing currently is more of a draw. As far as we go, I think, you know, one of the things that do help us is the portfolio transformation journey that we have gone through. You know, if you look at our portfolio now, we have more diagnostics than our peers. You know, we've got less of a capital-intensive business now than our peers. You know, we've got a meaningful software business. And this differentiation allows us to have the confidence that, you know, we are in a pretty decent spot.
Jack Mehat
Analyst at Nefron Research
Great. And then follow-up for Max. Just as you appreciate the color on the pacing you provided, if you look at sales, you know, so core down, mid-singles in the first quarter, just to get, you know, to the ramp you're talking about, just wanted to confirm, are you kind of assuming this is just comp dynamics, or is there anything else, like, noteworthy you're assuming in terms of the assumptions behind that? Thanks.
Max Krakowiak
Senior Vice President and Chief Financial Officer
Yeah, hey, Jack. So comps is definitely driving the majority of it. So we mentioned a little bit in the prepared remarks, as you pointed out, that we'd be down mid-single digits for Q1. A slight improvement in Q2, but still negative with the return to growth in the third quarter. I wouldn't say that we are expecting material change in the market environment in the second half. There's always a little bit of quarterly nose, but it's mostly comp-driven. And another way to think about it is if you look at our two-year stack between the first half and second half, both are at a low single digit with those sort of annual cadence that I previously mentioned.
Operator
Operator
Thank you. Operator.
Bailey
Moderator
The next question today comes from the line of Matt Sykes from Goldman Sachs. Please go ahead. Your line is now open.
Matt Sykes
Analyst at Goldman Sachs
Thanks for taking my questions. Good morning. Maybe, Prahlad, I wanted to start for you. As you look at the life sciences segment and the number of acquisitions you've made in that business, how do you feel the synergies are playing out in terms of covering the needs of researchers in both academic and biopharma? Are there portions of their workflow and spend where you see gaps in your offering? Do you think you might lose the customer touch points along the way because of those gaps? Or do you think you're capturing the customers through the majority of their early R&D workflow? And if there are gaps, is that an organic solution, inorganic solution? Just would love to get your thoughts on that.
Prahlad Singh
President and Chief Executive Officer
Yeah, good morning, Matt. You know, great question. I think the whole journey that we have gone through on our portfolio transformation was indeed to fill the gaps that we had in our portfolio. And if you recall two years ago, it was primarily a small molecule portfolio in preclinical research and differentiation, preclinical research and development. I mean, the whole concept of what we went through our acquisition journey was was to fill the gaps in our portfolio around large molecules, biomolecules, cell and gene therapy. And I think, you know, the synergies that we have started seeing from the Horizon, Syrian, BioLegend, and Nexalom acquisition is on the biomolecule side of the table. So I think, you know, we feel very good where we are. And if you add the software component that, you know, allows us more differentiation, we feel very, you know, we're very good with the portfolio that we have. Are there other additions that we will continue to make? Absolutely. But I think we feel very good with the portfolio that we have built.
Matt Sykes
Analyst at Goldman Sachs
Great. Thanks for that. And then, Max, just on phasing for diagnostics specifically, how are you thinking about, as we progress through the year, in terms of diagnostics growth and recovery, there's some different types of comps that business has relative to maybe life sciences. And then specifically on China, AminoDx, How are you thinking about that phasing of growth within your 2024 guidance framework? Thanks.
Max
Yeah. Hey, Matt.
Max Krakowiak
Senior Vice President and Chief Financial Officer
So, I would say from the diagnostics ramps perspective, the first half will be, I think, roughly flat from a diagnostics standpoint. So, if you remember, we have the big, the continued headwinds we'll have in applied genomics. Throughout the years, we still are going through the additional, you know, COVID purchases and the life sciences weakness. And so it'll be about be a flattish for the first half and then second half. We're anticipating a return to mid single digit growth for the diagnostics business. In terms of your question on immunodiagnostics, China. Our assumption there for the full year is mid-single digit growth. However, if you exclude the impact of a change in go-to-market strategy we had for one of our legacy infectious disease businesses in China, the growth there is still similar to what it was in 2023 in terms of the high single to low double digit range. And the reason why we made that change in the legacy business was actually to improve the profitability of us overall, though we'll come with a little bit of a hit from a revenue perspective.
Josh Waldman
Analyst at Cleveland Research
Great. Thank you. The next question today comes from the line of Josh Waldman from Cleveland Research.
Bailey
Moderator
Please go ahead. Your line is now open.
Josh Waldman
Analyst at Cleveland Research
Thanks for taking my questions, too, for you. I wonder if you could provide more context on what you're seeing in the life science instrument business. I guess the instrument business broadly, both life science and applied genomics. I mean, it looks like both of those came in a bit better than you were thinking when you guided Q4. I'm curious if maybe you didn't see quite the pullback from pharma you were expecting, or maybe, you know, did you see some budget flushing in November and December come through? And then what's What's assumed for those businesses in 24?
Max
Yeah. Hey, Josh.
Max Krakowiak
Senior Vice President and Chief Financial Officer
So, I would say if you look at the fourth quarter results, you know, to your point, instrumentation on both the life sciences and applied genomic standpoint fared a bit better than our expectations. You know, I think coming into the quarter, we had mentioned that we were wanting to be a little bit more conservative on our instrumentation assumptions. And so those did prove out to be conservative and they were slightly better. Although we wouldn't really call it there was a budget flush activity in the fourth quarter. You know, so as we look out to 2024, we do still believe our instruments will be pressured for this year. And I think if you look at the overall assumptions, both the life sciences instruments and applied genomics will be down in the high single-digit range for 2024, and that'll put them closer in line to what their LRP is when you look at that over a four- or five-year period. Got it. Okay.
Josh Waldman
Analyst at Cleveland Research
And then, Prahlad, can you talk about any momentum you're seeing in key accounts as it relates to Revity's ability to cross-sell or realize commercial synergies following the divestiture and rebranding? I guess, are there any specific examples you can point to of how Revity is making progress towards being a more effective strategic partner, specifically within pharma?
Prahlad Singh
President and Chief Executive Officer
Yeah, Josh, I think, you know, and I mentioned that during one of the health care conferences earlier in January, you know, our example with one of our most important customers that we talked about in the pharma side is how we are able to leverage our relationship both on the diagnostic and the life sciences side of the portfolio to not only license technology to them, but also provide the tools and capabilities and our service offering from the DX side that allows for being part of the journey of drug development for our important customers all the way from preclinical research and licensing them the technology, providing them the tools and capabilities that allows them to use and leverage that technology towards drug development and then being part of the journey with them through their development process as they take it through the regulatory approval processes and then further on leveraging our global lab infrastructure from the omic side of the business to be able to follow up those patients both for efficacy of the drug and for follow-ups so You know, that sort of allows us, you know, initially when we were on the small molecule side in life sciences, our focus was on providing them the reagents and tools and instruments and in vivo imaging components to just do their research. Now, with the full expansion of our portfolio, it allows us to be, you know, with them from the start to when it gets to commercialization.
Steve Willoughby
Senior Vice President of Investor Relations
Makes sense. Thanks, guys.
Bailey
Moderator
The next question today comes from the line of Patrick Donnelly from Citi. Please go ahead. Your line is now open.
Patrick Donnelly
Analyst at Citi
Hey, good morning, guys. Thanks for taking the questions. Probably one for Max on the margin side. You know, understand this year more flattish given the revenue outlook. You know, sounds like you guys are continuing to implement some cost plans there. Can you just talk about the confidence in that 75 bps expansion algorithm that you guys talked about at JPM and just this becoming that 30 plus percent margin business in the relative near term? What are the key levers you see and maybe just the process that went into revisiting that algorithm? Did you guys want to set it more as a floor where you saw a clear path to executing on it? Even the China piece sounds like you're chasing more profitability there. So maybe just kind of pull the curtain back a little on the margins. And again, that algorithm you guys set.
Max
Yeah, sure. Hey, Patrick.
Max Krakowiak
Senior Vice President and Chief Financial Officer
So, you know, as we step back and look at it from a margin perspective, you know, I think that 75 basis points, it was taken down from the previous MRP of 75 to 100 basis points. And that was mostly just attributed, I think, to the change in the top line assumptions. You know, if you look at the assumption of the market on average is growing four to six, we're a couple hundred basis points better than that. That's going to drive natural operating leverage just from a pure growth perspective. And so even in addition to that, I think where we have confidence in sort of the margin expansion is really still the fact that we're still in the early innings of what the actual overall structure of this company should be given all the transformation. Right. In terms of the number of acquisitions and integrating them into our core business and processes. as well as sort of working our way through all the stranded costs related to the divestiture. So I think we have a lot of stokes or irons in the fire from an up margin expense expansion standpoint outside of just, you know, the natural volume leverage you would get. I think there is a high degree of confidence. And in terms of your question, in terms of the the amount of conservative or whether it's a floor, I think we thought it was a fair number that we can consistently deliver on with that expected growth algorithm.
Patrick Donnelly
Analyst at Citi
OK, that's helpful. Pallad, maybe just on China, it sounds like you guys talked a little about the immune ODX on an earlier question, but just in terms of this year, what you're seeing there, confidence both on the diagnostics and then the life science side, which is obviously a little more variable. Again, it sounds like you guys are making some changes in terms of going after a little more profitable business, but just the outlook in China, confidence in that region, and what you're seeing here near term. Thank you.
Prahlad Singh
President and Chief Executive Officer
Yeah, Patrick. I think, you know, Nothing's changed in our view regarding China, and that level of confidence is because of the portfolio differentiation. I mean, this is where I think it really comes down to a good understanding of the markets and the segments where we play in that market. If you just look at the portfolio that we have built out over there, in terms of life sciences side, I think on the instrumentation side, we will continue to see some pressure, which is not very different from the other global markets. But I think on the reagent side, we will continue to see it coming back. On the immunodiagnostic side, I think excluding the impact of what Max talked about for a small legacy business that helps us improve profitability, it is going to be on a continued growth trajectory. Newborn screening is going to get impacted, but we've got quite a few of our reagents that are awaiting an MPA approval, and hopefully they will compensate for the pressure that we will see from the birth rate decline. So overall, I think it again comes back to the differentiation of our portfolio in China and outside of China. you know, the lower, it sort of, you know, risk mitigates our portfolio, both the exposure to the diagnostics, life sciences, and the software market, which sort of, in the longer run, is going to be the competitive advantage that we will have.
Bailey
Moderator
The next question today comes from the line of Andrew Cooper from Raymond James. Please go ahead. Your line is now open.
Andrew Cooper
Analyst at Raymond James
Hey, everyone. Thanks for the questions. Maybe first want to talk about margins a little bit more just for this year. You have modest top line organic growth. You've got 100 BIPs coming from price, some cost action. So I guess, you know, what are some of the counterpoints to preventing maybe a little bit of expansion year over year in 23? Or maybe asking it a different way, what's the threshold of revenue growth you need to see to actually see that margin expansion?
Max
Yeah. Hey, Andrew.
Max Krakowiak
Senior Vice President and Chief Financial Officer
You know, I think as we previously mentioned, the one dynamic you didn't mention for 2024 that we have already previously discussed is the fact that we will have variable costs that are returning in 2024. And I do not believe we are alone in that dynamic, as you've heard some of the others in the industry mention it. So I think from that perspective, that's really what's offsetting, to your point, the price and the structural cost actions that we have been taking. You know, as you look out more longer term, I would say in a normal environment where you don't have that snapback of the variable cost, even with, you know, I would say a lower growth than the LRP model assumes, I would anticipate us still being able to drive margin expansion given some of my earlier points. But again, you know, volume is a heavy driver when you think about it from a margin expansion standpoint.
Andrew Cooper
Analyst at Raymond James
Okay, helpful. And then maybe just one on the e-commerce rollout. Any early feedback there or metrics you can share in terms of what the rollout has really looked like and whether it's more on the cost side, how we think about customer retention, sort of what the benefits are as we think about that, you know, moving beyond just the U.S. rollout and globally longer term?
Prahlad Singh
President and Chief Executive Officer
Yeah, Andrew, I mean, as we mentioned it, you know, we just rolled it out in mid-December, so it's early days of the MVP, and we are seeing good traction on it. From a customer flow perspective, the OUS launch is expected to be out in the early part of the second quarter. So I would say it's four to five months ahead of schedule. It is still early days. It looks promising. I think over the longer term, the benefit that we get out of it is not just synergies of being able to offer our comprehensive portfolio to our customers on a common platform, but obviously the synergistic opportunities that you get from a cost perspective or an OPEX perspective. So we are very excited about what we are hearing and seeing, but early days is the best way I would frame it for now.
Andrew Cooper
Analyst at Raymond James
Great. Appreciate it.
Max
I'll stop there. Thanks.
Bailey
Moderator
The next question today comes from the line of Catherine Short from Baird. Please go ahead. Your line is now open.
Catherine Short
Analyst at Baird
Hey, guys. Thanks for the questions. Maybe first, your software and genomics lab businesses have faced headwinds over the last year due to some contract renewal and project timing dynamics. You mentioned those normalizing in 24, but can you just walk us through the timing there and what kind of performance you expect from those businesses, both for the first quarter and the full year?
Max
Yeah, sure. Hey, Katherine.
Max Krakowiak
Senior Vice President and Chief Financial Officer
You know, so as we look at, you know, maybe if we take a step back and just think about our guidance more holistically, you know, I think the way to think about it is, you know, we're assuming sort of a market down low single digits here in 2024. Revity grows a couple hundred basis points above the market, so call that flat overall. And then the way we get to 2% is sort of that normalization of the software and omics business. So it's about a 200 basis points specific Revity tailwind for this year. You know, in terms of the individual assumptions for those businesses, for the software business, it declined high single digits in 2023. We expect it to return to high single digits growth in 2024. And for the omics business, that was down a little bit more than 30% in 2023. And we are expecting that to be flat in 2024. So essentially, assuming none of those new contracts get signed. We continue to remain encouraged by the pipeline we have for that business, and if we're able to close on some of those deals, that would be upside to what's assumed in the guidance case here.
Catherine Short
Analyst at Baird
Okay, great. And then how should we think about free cash flow in 2024, just particularly with those AES outflows coming back to you?
Max Krakowiak
Senior Vice President and Chief Financial Officer
Yeah so from a from a cash flow perspective again we were encouraged by the results that we had here in the fourth quarter. You know, for the overall year that would have meant about roughly more than 400 million once you normalize for those AES outflows. As we look to 2024 you know our anticipation of free cash flow generation is about 450 million. The AES outflows will actually come back to us as inflows in investing cash flow. If you add that to the $450 million, we are targeting to have about $600 million of overall cash generation in 2024. Great, great.
Catherine Short
Analyst at Baird
Thank you.
Bailey
Moderator
Thank you. The next question today comes from the line of Vijay Kumar from Evercore ISI. Please go ahead. Your line is now open.
Vijay Kumar
Analyst at Evercore ISI
Hi, guys. Thanks for taking my question. Good morning to you, Prahlad. Maybe my first one for you on Q1, organic guidance assumption of down-low singles. You did colored comps. You look at Q4, down-low singles. Most of your peers are assuming first have to be similar to a Q4 jump off. So maybe just talk sequentially why perhaps what's driving that change from down-low singles to down-low singles.
Prahlad Singh
President and Chief Executive Officer
Yeah, I think, you know, as we talked about, you know, we are from a Q4 to a Q1 perspective, you know, a lot of it is obviously the comps that we had from last year. So it is more an impact of that than anything else. And I think as Max laid out the cadence of the calendar for the year. There is nothing outside of that that I would say, you know, we do have some pressure from reproductive health, especially in China, you know, and on the instrument side, we will see some impact of that. But more than anything else, it is just timing is where I would, you know, allocated to the impact that we see on one Q versus anything else.
Max Krakowiak
Senior Vice President and Chief Financial Officer
Yeah, I mean, the only point I'd add to that, Vijay, you mentioned it yourself, right? Most are saying that the first half will be similar to what they had in Q4, and that's what I just mentioned previously, right? That our first half assumption is down low single digits, which is in line with what we just printed for the fourth quarter.
Vijay Kumar
Analyst at Evercore ISI
Understood. Max, maybe one for you. If your gross margins in Q4 are down sequentially. So what happened in Q4 and when you think about fiscal 24 guide, is the guide of ZMN gross margins to be flattish up or down versus fiscal 23?
Max Krakowiak
Senior Vice President and Chief Financial Officer
Yeah, sorry Vijay, I might have missed the first part of your question. I think you were mentioned on just asking the question on gross margin for this year. So in the fourth quarter, the gross margin was about 60%. It was down quarter over quarter as we had some mixed dynamics play out in the fourth quarter. You know, as we look to full year 2024, we expect gross margin to be roughly flat year over year. And we expect it to build as the year goes on as we get increased volume leverage throughout the year.
Vijay Kumar
Analyst at Evercore ISI
And so it's essentially the mix improves, Max. Is that the assumption, like what's driving the step up from Q4?
Max Krakowiak
Senior Vice President and Chief Financial Officer
Yeah, I think from Q4 to Q1, it's relatively similar. We're expecting kind of a similar mixed dynamic from Q4 to Q1. As the rest of the year progresses, it is mostly a volume leverage story as opposed to a massive change in mixed dynamics.
Josh Waldman
Analyst at Cleveland Research
Fantastic. Thanks, guys.
Bailey
Moderator
The next question today comes from the line of Dan Brennan from TD Cowen. Please go ahead. Your line is now open.
Dan Brennan
Analyst at TD Cowen
Great. Thanks. Thanks for the questions, guys. So Mino DX, another solid quartering year. Can you just give us a sense of kind of what's driving the strong growth and like what's the range of outcomes we can expect for 24?
Prahlad Singh
President and Chief Executive Officer
I think, again, as I talked about earlier, it is the differentiated portfolio of the high-end neuroimmune tests that we have in China that allows us to be in the face of limited competition that we see in that marketplace. And that innovation pipeline has worked for us, and we expect that to continue as we look forward.
Dan Brennan
Analyst at TD Cowen
Got it. Okay. Maybe on pharma, I know you kind of talked about it throughout a little bit, but it was a key drag at Q3. You guys talked about instruments still under pressure here, maybe from a post-COVID high. Just can you speak to some of your discussions with pharma? You know, what do we expect this year? Just kind of any more color on kind of what you're hearing there. Thank you.
Prahlad Singh
President and Chief Executive Officer
Yeah, Dan, I think on the instrument side or on the capital side, I think we will continue to see some pressure or at least the current trend we expected to continue in the first half of the year. You know, the benefit, again, that allows us is that the reagent side of the portfolio, once that starts stabilizing and coming up in the second half of the year, that's what, you know, the assumption that we have in our current forecast allows us the confidence that we would look Overall, as we see pharma, I continue to believe that this is a temporary throw in the marketplace, and I think it will come back to what we have seen is normal pattern of mid-single-digit growth in the market over the past several years.
Max
Got it. Thank you.
Bailey
Moderator
The next question today comes from the line of Eve Burstein from Burstein Research. Please go ahead. Your line is now open.
Eve Burstein
Analyst at Burstein Research
Good morning. Thanks a lot for the questions. First one, you said that you've already taken structural cost measures so far this year and you'll be taking additional cost actions in 24. Can you just give us some more color on what those actions are and what's giving you confidence in the ability to achieve those benefits in this time frame?
Max Krakowiak
Senior Vice President and Chief Financial Officer
Yeah, so from a structural cost action perspective, the easiest way to think about it is really just right sizing the company given all the transformation, whether that's the integration of the acquisitions, which I mentioned, we're still what we would consider in the early to mid innings from a process standpoint. And then it's working our way through the stranded costs from the divestiture. So that's really what's driving the structural cost actions. In terms of the confidence, those actions have already been taken place and communicated. There's a little bit of timing in terms of when the actual cost comes out throughout the course of the year. But those actions have more or less already been executed. And it's just a matter of timing at this point. So we have, I would say, a high degree of confidence in those for this year.
Eve Burstein
Analyst at Burstein Research
Great, thank you. And then you just talked about integration of your acquisitions. You said it's still early to mid-innings, but you also shared an example of how you brought BioLegend together with other parts of your business to do something really cool. Where are you really against your synergy target of $100 million in year five, your, you know, two-fifths of the year, two-fifths of the way through? Where would you put yourself on that scale?
Prahlad Singh
President and Chief Executive Officer
Yeah, I'm not, you know, good morning. I don't think I'm going to quantify as to what's the dollar amount of how much synergies we are seeing. You know, the intent of what we provided as an example is how we are starting to see not just commercial synergies from the full portfolio, but also operational and technological synergies. You know, I think as Max said, I would say we are still in the early to mid innings of the opportunities that we see from integration of the acquisitions. You know, keep in mind, two of our acquisitions, BioLegend and Euroimmune, are two of our strongest and fastest growing businesses. And I think the opportunities that they provide are crown jewels in our portfolio, and we expect them to continue to perform well. Our intent is how do we support those businesses and how do we leverage the opportunities that we see across the portfolio with them?
Eve Burstein
Analyst at Burstein Research
Great. Thank you.
Bailey
Moderator
Our final question today comes from the line of Luke Sergot from Barclays. Please go ahead, Luke. Your line is now open.
Luke Sergot
Analyst at Barclays
Awesome. Thanks for squeezing me in. So real quick on the 1Q margin target, you said like a few hundred basis points lower than your four year. So I assume that's around like 25%. Can you talk about, you know, even though it's the growth and everything looks a little bit like the 4Q, can you just talk about what's really driving that, that D cell and then kind of where you're going to get the, the margin uplift throughout the year and then on that steep ramp?
Max
Yeah, hey, Luke.
Max Krakowiak
Senior Vice President and Chief Financial Officer
So I think maybe just to tackle the margin question first, you kind of led with that. So, look, I don't think your math is that far off from Q1. I think we've given you the pieces below the line in Q1 that you're going to get to roughly that number. You know, as you look at comparison, comparing that to Q4, I would say the two main, really the main driver of that is just a volume step down from a top line perspective. If you look at the actual overall gross margin percentage, it's roughly flat quarter over quarter. OPEX costs are similarly in line quarter over quarter. And so from that standpoint, I don't think really much has changed. You know, again, as you then look at the volume ramp over the remainder of the year, as we mentioned, one, you're going to have the timing of the structural cost actions coming into play. And the second piece is, you know, you're going to have volume leverage as the year builds. So that's how I would think about it from a margin perspective. In terms of the slowdown from an organic growth perspective between Q4 to Q1, I think we've mentioned part of that is definitely comp driven. And the biggest piece of that is going to be on the immunodiagnostics business outside of China. You know, outside of China in the first half last year, immunodiagnostics grew in the high teens. You know, we've always said it should be, you know, sort of a low double digit. And so there is just some normalization there on a two year stack for immunodiagnostics business outside of China.
Luke Sergot
Analyst at Barclays
Yeah, great. Thanks. I was just referring to the 4Q to 1Q, kind of just the similar. You have a pretty steep decline there on the margin. I got the core commentary. And then I guess on the software piece, you guys have talked about converting a lot of these customers more to SaaS-based, and that's kind of aiming to reduce the lumpiness and the orders. And talk about the progress that you're seeing there. And then You know, on the non-SAS piece, can you talk about what the orders look like and if they're inflecting? Because as you talked, gave that 2% framework prior, you were talking about just if software's not a headwind next year or the way that the contracts come in, that will just be at least 100 basis points of lift.
Max Krakowiak
Senior Vice President and Chief Financial Officer
Yes, so then i'll maybe start with your second question first Luke so as I mentioned software business was down high single digits in 23 it should be moving to up high single digits that's what's assumed in our guidance here for 24. That is, you know roughly 125 basis points to the overall company from an organic growth perspective. And so as you look at that dynamic, it's really driven by this contract renewals. Again, that's a business that has, you know, upper 90% renewal rate. And so most of the contracts, we know what they're coming due, and I would say have a high degree of confidence in our ability to deliver on our 24 expectations. And then to your first question on sort of the SaaS transition, I think we continue to make really good progress. We view the transition to SaaS as actually a differentiator for us versus our peers. We believe we are ahead of them in terms of that transition. And so although that might create a little bit of noise from a revenue recognition standpoint, it is the right thing to do for the business. And we think our SaaS products are going to help us actually take care from our competition.
Prahlad Singh
President and Chief Executive Officer
Yeah, and look, in the longer term, it definitely helps us increase revenue and reduce our volatility for that business, which I think is another one of the opportunities that the software business provides us from a differentiation perspective.
Luke Sergot
Analyst at Barclays
Great, thank you.
Josh Waldman
Analyst at Cleveland Research
This concludes today's question and answer session. I'd like to pass the call back over to Steve Willoughby for any closing remarks.
Steve Willoughby
Senior Vice President of Investor Relations
Thank you. Thanks for your interesting questions today, and we look forward to further discussions over the coming weeks. Have a good day. Bye-bye.
Bailey
Moderator
This concludes today's conference call. Thank you all for your participation. You may now disconnect your line.
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