Revvity, Inc.

ladies and gentlemen thank you for joining us and welcome to the q3 2025 revity earnings conference call after today's prepared remarks we will host a question and answer session if you would like to ask a question please raise your hand if you have dialed into today's call please press star 9 to raise your hand and star 6 to unmute i will now hand the conference over to steve willoughby svp investor relations steve please go ahead thank you operator good morning everyone and welcome to revity's third quarter 2025 earnings conference call

On the call with me today are Prahlad Singh, our President and Chief Executive Officer, and Max Grykowiak, our Senior Vice President and Chief Financial Officer. I'd like to remind you of the safe harbor statements in our press release issued earlier this morning and those in our SEC filings. Statements or comments made on this call may be forward-looking statements, which may include but may not be limited to financial projections or other statements of the company's plans, objectives, expectations, or intentions. 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'll be referring to certain non-GAAP financial measures. A reconciliation of the 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, Prahlad Singh. Prahlad?

Thank you, Steve, and good morning, everyone. I'm glad you are able to join us this morning to discuss our third quarter results. and our updated outlook for the rest of the year. We continued to perform well during the third quarter and achieved our objectives during what continued to be a dynamic end market environment. We are consistently executing at a high level on those items which are more fully within our control, such as our margins, cash flow generation, opportunistic capital deployment, and a strong and consistent pipeline of bringing meaningful new innovations to market, which I will touch on more in a bit. While the current demand environment continues to remain stable, I'm increasingly optimistic that some of the larger industry overhangs we and others have been impacted by so far this year appear to be starting to gain clarity. which should continue to improve customer confidence levels and lead to more robust levels of investment into science. Our third quarter results overall were in line with our expectations with 1% organic growth being slightly offset by less favorable FX tailwinds due to the changes in currency throughout the quarter. Our signals software business continued to perform extremely well, growing 20% organically in the quarter, which again included even stronger SAS performance and conversion. Our reproductive health business also continued to perform exceptionally well and grew in the mid single digits year over year, with newborn screening again growing in the high single digits in the quarter. We anticipate continued strong performance in this business as we bring additional novel products and workflows to the market. A recent example of this is our new Neo LHD 7 Plex kit, which recently received IVDR approval in Europe and is awaiting FDA clearance, expected early next year. This expanded assay will complement our existing capabilities to now also include screening for MPS II, otherwise known as Hunter's syndrome. We also remain diligent with our expenses in the quarter and generated 26.1% adjusted operating margins, which were modestly above our expectations. With some additional favorability below the line, we generated adjusted earnings per share of $1.18, which was 5 cents above the midpoint of our guidance. Additionally, we continue to have a strong focus on cash flow generation and our capital deployment priorities. In the third quarter, we generated free cash flow of 120 million and also received the final $38 million brand payment related to our large divestiture from two years ago. This free cash flow continued to represent approximately 90% of our adjusted net income, solidly above our longer term expectations. Given our strong balance sheet position and disciplined M&A criteria, we again actively redeployed this cash by repurchasing our shares. In the third quarter, we spent $205 million repurchasing approximately 2.3 million shares. This brings our total buyback activity since we've completed the divestiture two and a half years ago to 12.5 million shares or 10% of the total shares we had outstanding at the end of the first quarter of 2023. Given our commitment to disciplined capital deployment, we recently received a new $1 billion share repurchase authorization from our board, which will replace what was left on our existing program. This new share repurchase program will provide us plenty of capacity to continue to meaningfully deploy capital in this area over the next two years. As we look ahead to the fourth quarter and into next year, Although end markets have continued to remain relatively stable, I'm increasingly optimistic on our future performance given recent signs that the impact from certain larger industry overhangs are becoming more transparent. However, for the time being, we want to remain prudent in our assumptions until we see sustained improvements in broader industry demand trends. While Max will provide more color on our updated guidance in a moment, at a high level, we are reiterating our 2 to 4% organic growth expectation for this year, while raising our adjusted earnings per share guidance to a new range of $4.90 to $5 to account for our outperformance in the third quarter. As we view our markets today, our best and most prudent assumption for next year is that organic growth continues to remain similar to what it has been over the last several years in the 2% to 3% range, but we see opportunity for improvements once customers consistently return to more historically normal levels of spending. While we have started to see some promising signs with customer activity levels in October, we want to see how the remainder of the year plays out before factoring in potentially more robust levels of growth for next year. Within the 2% to 3% growth scenario, we also remain confident with our 28% adjusted operating margin baseline expectation for next year. given the restructuring activities that are already well underway. I'd now like to take a moment to share some perspective on how we've been executing at a high level, both scientifically and commercially, as a number of the key initiatives we've highlighted publicly over the last year are now beginning to come to fruition. While the following are all great achievements on their own, I'd note our near-term pipeline is even more exciting and potentially impactful for the company overall. First, let me start with AI. While much has been said about how AI is being used or sometimes not used in the corporate world, at Revity, we are bringing real-world AI-based solutions to market for our customers at a rapid pace. This is not just automated note-taking or digital image creation, but rather true productivity improvements for our customers, in addition to new solutions which are changing and advancing how science is being done. In the past year alone, we have commercially launched new AI-focused software offerings, such as Signals One in our signals business, transcribe AI in reproductive health and phenologic AI in a high content screening franchise. We have also entered into a new collaboration with ProFluent Bio to offer novel AI engineered enzymes with our pinpoint based editing system. And only a month ago we announced the introduction of our new Living Image Synergy AI software platform for use with our in vivo imaging instruments. This new offering helps reduce the time needed for scientists to manually review and highlight images of potential interest for further evaluation from several hours to a few minutes. freeing up significant capacity for these scientists to focus more of their time on uncovering even higher level insights. While these are all great examples of how we are rapidly embedding AI's capabilities into new offerings for our customers, our development pipeline for additional new AI-based products is even more robust. We believe some of the novel solutions we are currently working on, which are not all that far away from coming to market, have the potential to truly change scientific paradigms and how preclinical discovery is done. I know that is a bold statement, but I could not be more excited about how our teams are embracing the power and potential of AI internally. but even more so what we are working on externally for our customers and the advancement of science. I look forward to sharing more on this with you in the coming months. In addition to delivering on our own innovation commitments, we are also making strong progress in bringing our strategic partnerships to fruition. Many of these collaborations have been years in the making and were first highlighted externally at our investor day last November. One recent example includes our sequencing partnership with Genomics England and its large generation study announced earlier this year with work beginning in the third quarter. When I visited our new lab in Manchester earlier this month, I learned about a powerful real-life example that's already come out of this study, which was recently featured by the BBC. Baby Freddy was among the first infants screened through the program. Within his first month of life, clinicians were able to identify a genetic condition linked to a rare form of eye cancer because of his participation in the study. Although he showed no symptoms and had no family history, follow-up testing confirmed he had a tumor on his eye. Thanks to the early detection, Freddie received laser and chemotherapy treatment, greatly improving his chances of normal vision as he grows up. While Freddie's story reflects the broader impact of the study, It highlights why our collaboration with Genomics England matters so deeply. Enabling transformative discoveries that can change and even save lives before families know there's a problem. A second key partnership was just announced earlier this month in collaboration with Sanofi. In this new relationship, we are developing and seeking global regulatory approvals for a new four-plex assay for the early screening of type 1 diabetes, while at the same time working to expand availability of our existing REO assay within our global clinical lab network. With Sanofi's disease-modifying therapy for delaying the onset of type 1 diabetes, T-Zield now approved in many jurisdictions around the world, including the US, and with recent regulatory advancements, such as Italy's new requirement to screen all children in the country for the disease. We believe this new assay has the potential to be a meaningful contributor to our diagnostics franchise once it receives regulatory approvals. While these are two recent examples of our strategic partnership efforts coming to fruition, our pipeline of additional projects continue to remain very active. And I expect you will hear more from us on these opportunities quite soon. I also wanted to take a moment to highlight the recent publication of our annual impact report, which showcases how our work is not only advancing science and healthcare, but is doing so in a sustainable way that keeps the best interests of our employees and communities we serve front and center. Highlights from this year's report include the company having a 6% reduction in our scope one and two emissions in 2024, and how we were able to divert 47% of our waste from landfills last year ahead of our multi-year goal. We achieved a 77% employee satisfaction rate in our recent all employee survey, which was above our target and were able to expand our STEM scholarship initiatives to two additional universities in China and the UK. These efforts are being recognized as we recently received a triple A rating from the well-known ESG rating agency, MSCI. which is its highest possible rating and is above most of our peers. I couldn't be more proud of our efforts in this area. Overall, we are making tangible progress on some of our key strategic partnerships and new product launch initiatives, with even more significant announcements hopefully coming very soon. We have done a good job navigating the dynamic market environment so far this year and are managing the business appropriately to continue to deliver on our earnings expectations for the year, while setting us up for even stronger financial performance in the future. I am increasingly optimistic that several key market uncertainties are beginning to ease. positioning us to benefit as demand eventually returns to more normalized levels. We are performing well, and the future is extremely bright for Revity as we help shape how drug discovery and development is done in new ways in the years to come, while also driving advancements in specialty clinical diagnostics, which are having a meaningful impact on human health. With that, I will now turn the call over to Max.

Thanks, Prahlad, and good morning, everyone. As Prahlad highlighted, our teams performed well in the quarter, as was evident in our operating margins coming in slightly above our expectations, delivering another strong quarter of cash flow generation and opportunistic capital deployment. Given this performance, potentially improving signs of customer activity and solid progress on our productivity initiatives, It positions us well to have a strong finish to the year with positive momentum as we head into 2026. While Prahlad highlighted how we are delivering new AI driven solutions for our customers commercially, I wanted to provide you some perspective on how we are currently leveraging AI capabilities internally. Our use of AI in our operations is already delivering significant value for both our employees and our customers, but also our financial performance. First, earlier this year, we deployed Revity AI for all of our 11,000 employees. This custom built, fully secure environment leverages leading large language models to drive both efficiencies and increase commercial opportunities across our business. For example, we have now deployed over 30 custom AI agents, which are being used in areas such as commercial sales, customer care, technical service and repair, software development, HR, and financial operations. And we expect to have over 50 agents in place by the end of the year. By leveraging our platform, our sales reps are now seeing a three to four times improvement in their lead generation conversion rates. In our software businesses, we are already seeing a 5% to 10% reduction in overall development timelines by leveraging our AI capabilities allowing us to bring new offerings to market even faster than what was previously possible. Within finance, our new custom built agents are having a fairly immediate and material impact on our collections, directly improving our cash flow generation. While these are just a few specific examples of how we are already harnessing the potential of AI and our day to day operations, They represent just a small sample of how AI is transforming our business. And I believe we are just scratching the surface on its ultimate impact. As a lot mentioned, AI at Revity is not just a theory or a long range goal, but has become part of our operating model that we are actively leveraging both internally with our employees and externally in our products on a daily basis. Now, turning to the specifics of our third quarter performance, Overall, the company generated revenue of $699 million in the quarter, resulting in 1% organic growth. FX was an approximate 1% tailwind to growth, a modest headwind compared to our assumptions 90 days ago, and we again had no incremental contribution from acquisitions. As it relates to our P&L, we generated 26.1% adjusted operating margins in the quarter, which were down 220 basis points year over year, but modestly above our expectations. Margins were pressured on a year over year basis from tariffs, FX and lower volume leverage, particularly as it pertains to the weakness from our diagnostics business in China. This was partially offset by a modestly better than expected impact from recently implemented cost containment initiatives. Looking below the line, our adjusted net interest and other expenses were $22 million in the quarter, which was modestly impacted by the increased share repurchase activity year to date, resulting in lower interest earnings on our cash balances. Our adjusted tax rate was 15% in the quarter, and we continue to remain active with our share repurchase program as we average 115.5 million diluted shares in the quarter, which was down over 2 million shares sequentially and was down nearly 8 million shares year over year. This all resulted in our adjusted EPS in the third quarter being $1.18, which was 5 cents above the midpoint of our expectations. moving beyond the p l we generated free cash flow of 120 million dollars in the quarter resulting in 88 percent conversion of our adjusted net income on a year-to-date basis our 354 million dollars of free cash flow equates to a solid 89 conversion of our adjusted net income regarding capital deployment We continue to remain active with our buyback program as we repurchase another $205 million worth of shares in the third quarter. This brings our repurchase activity through September to nearly $650 million, which allowed us to buy back 7 million shares so far this year overall. As it relates to our balance sheet, we finished the quarter with a net debt to adjusted EBITDA leverage ratio of 2.7 times, with 100% of our debt being fixed rate with a weighted average interest rate of 2.6% and weighted average maturity out another six years. As we evaluate capital deployment, we will continue to remain both flexible and disciplined in order to capitalize on the highest return opportunities while ensuring we maintain our investment grade credit rating. I will now provide some commentary on our third quarter business trends which are also highlighted in the quarterly slide presentation on our investor relations website. The 1% growth in organic revenue in the quarter was comprised of flat performance in our life sciences segment and 2% growth in diagnostics. Geographically, we grew in the low single digits in the Americas, grew in the mid single digits in Europe, while Asia declined in the mid single digits, with China declining in the low teens. From a segment perspective, our life sciences business generated revenue of three hundred and forty three million dollars in the quarter. This was up one percent on a reported basis and roughly flat on an organic basis. From a customer perspective, sales to pharma and biotech customers were up low single digits, whereas sales into academic and government customers declined in the low single digits in the quarter. Our life science solutions business declined in the low single digits in the quarter overall, which was in line with our expectations. Our signal software business was up 20% year over year organically in the quarter, and as Prahlad mentioned, continues to be a bright spot of the Revity portfolio. The business also continued to perform exceptionally well with an ARR of over 40%, an APV of 12%, and net retention rate of more than 110%. with all metrics solidly above levels from last year. In our diagnostic segment, we generated $356 million of revenue in the quarter, which was up 3% on a reported basis and 2% on an organic basis. From a business perspective, our immunodiagnostics business declined in the low single digits organically during the quarter, which was in line with our expectations. China immunodiagnostics declined in the mid 20s with the impact from DRG playing out as we had expected. Excluding China, the other 80 percent of our immunodiagnostics business continued to perform very well and grew in the high single digits with mid teens growth in the Americas. A reproductive health business grew mid single digits organically in the quarter, Newborn screening continued to perform well and grew high single digits globally, which was again driven by fantastic operational and commercial execution and the initial contribution from our work with Genomics England. As it pertains to China specifically overall, We incurred a low teens organic decline in the third quarter, driven by our diagnostics business being down over 20 percent as it continues to face the impact of the DRG related declines in volume. This was partially offset by low single digit growth in our life sciences business in China, where we continue to see solid year over year growth in reagents. Now, moving on to guidance, as Prahlad mentioned, we are reiterating our organic revenue growth outlook of two to four percent for the full year, with the fourth quarter expected to play out largely as we had previously expected. We continue to expect both our life sciences and diagnostic segments to each grow in the low single digits for the full year. And we now see the tailwind from FX being slightly less than a 1% benefit to our full year revenue. We expect this to result in our full year total revenue to be in the range of $2.83 to $2.88 billion overall. Moving down the P&L, we continue to expect our adjusted operating margins to be in the range of 27.1% to 27.3% unchanged from our prior outlook and assumes the tariff environment as of today below the operating line we now expect our net interest expense and other to be approximately 83 million dollars of slightly from our prior outlook due to lower expected interest income due to recent rate cuts and the impact from our continued share repurchase activity we now expect a full year adjusted tax rate of approximately 17 percent down 100 basis points from our previous assumption, and an average diluted share count of a little under $117 million for the full year. This all results in our adjusted earnings per share for the year to now be expected in a range of $4.90 to $5, up 5 cents from our prior outlook. Overall, our third quarter organic growth results were in line with our expectations and our outlook for the full year remains largely unchanged. As Perlat highlighted, we are making great progress with a number of our key new product launches and strategic partnership initiatives, while taking appropriate cost actions to achieve our goals for next year. We will continue to have a strong focus on our operational and commercial execution as we navigate the dynamic and market while remaining opportunistically disciplined with our capital deployment. This all positions us extremely well heading into next year and in the years to come. With that operator, we would now like to open up the call for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please raise your hand now. If you have dialed into today's call, please press star 9 to raise your hand and star 6 to unmute. Please stand by while we compile the Q&A roster. Your first question comes from the line of Patrick Donnelly with Citi. Your line is open. Please go ahead.

Hey guys, thank you for taking the questions. Prahlad, maybe to start on the 26th commentary, I appreciate the preliminary thoughts there. It sounds like maybe two to 3%. Can you just talk about the moving pieces? Obviously, you have the China diagnostics piece. I think a lot of focus is on that. I think Max hit on that being down somewhere in the teens there this quarter, or maybe even 20%. I guess, how do you think about that piece into 26? Obviously, software has been a big growth driver for you, up 20% in the quarter. You're going to come up against those comps. Do you mind just high level talk about those moving pieces into 26%? And then, Max, just the confidence on a low single-digit 2% to 3% type growth rate to be able to hold that 28% margin and the key levers there. Thank you.

Sure. Good morning, Patrick. Just starting with 2026, when our assumption around the 2% to 3% is being prudent, We've started seeing signs of activity, especially around the instrument side. And if that customer behavior continues to normalize, that is only going to get better. Especially around the China piece that you pointed out. If you look at the trend, starting with 3Q, while China was down mid-20s, ex-China, it continues to be up in the high single digits. So overall, the diagnostics business is performing very well, whether it's in reproductive health or immunodiagnostics ex-China. On the life sciences side, you pointed out to the software piece and in instrument side, as Max said in his prepared remarks, we are starting to see signs of increasing activity with customers, especially in September and October. And we expect that to start, you know, starting to result in actual demand coming into 2026. So I feel really good and confident about what we have put out there and only see signs of that getting better as customer behavior continues to be more normalized. Max, you want to talk on the 28%?

Yeah. Hey, Patrick. So, look, I think as we think about the margins for next year, you know, as we've previously commented, a 28% operating margin baseline for 2026. You know, we're feeling very good about that target. We've got actions already underway that are going to help us achieve that 28% baseline. I think there's even been some of them out there in the publications as you look at some of the Northeast consolidation actions we've already taken. And so, again, I think we're feeling very confident as a company in our ability to hit the 28%. I think your subsequent question on how do you think about organic growth and the impact to the 28%, I would say the 28% baseline is tied to the 2% to 3% organic growth. Should there be additional tailwinds to that organic growth, we would expect to be able to then start generating additional operating margin expansion off of that baseline. But obviously, that is dependent on exactly how much further up the organic growth chart we would achieve.

Okay, got it. That's helpful. And then maybe just inside the life science business this quarter, can you just talk about the reagents versus instruments piece? What did reagents do in the quarter in particular? And then expectations for that moving forward? What do you hear from the customers there? It would be helpful. Thank you guys so much.

Yeah, look, I think as you look at the third quarter results, you know, our life sciences solutions business, you know, was mostly in line with our expectations. I would say there was a little bit of geography between the instrumentation and reagents. You know, reagents were, you know, modestly lower than what we had previously anticipated as the summer months were just a little bit lighter from a run rate perspective. But I would say the overall lab activity, we continue to see sort of continued progress as we had in the first half of the year. You know, I think as you look at the fourth quarter, just out of prudence, I think we are assuming a similar market environment to what we experienced in the third quarter. And we have also baked in some modest impact from the government shutdown. And we'll obviously have to see how that plays out over the quarter here.

Thank you.

Your next question comes from the line of Vijay Kumar with Evercore ISI. Your line is open. Please go ahead.

Hey, guys. Thank you for taking my question. Prahlad, my first question is on your comments around October customer activity levels picking up. You're seeing some signs. Can you elaborate that on, is it like pharma? Is it academic and government customer base? Is that showing up in reagents or instruments, any color on that? the improvement that you're seeing. And was this, I'm curious, was this tied to the Pfizer announcement or was that just more anecdotal?

Hey Vijay, good morning. You know, when I mentioned the increasing signs of activities with customers, you know, as we are seeing it, it is more on the pharma biotech side and not obviously on the academia and government side. And it's particularly in the pockets of instruments. You know, I would say that it's not like broad change and a lot of actual demand coming through, but there is definitely increasing pockets of activity that is happening on the instrument side. And that's a clear trend that we have started seeing in the pharma biotech.

Understood. And then maybe, Max, one for you on your fiscal 26 comments were helpful. But should that two to three organic with 28% op margins translate to high singles EPS for 26? And I know Sherry has helped you guys, but how are you thinking about FX or below the line, et cetera, for next year?

Yeah. Hey, Vijay. Yes. To answer your question, it would imply sort of a high single digit EPS growth year over year at the two to three percent and the twenty eight percent operating margin baseline. I think in terms of below the line, you know, if you think about some of the assumptions, interest in others should be relatively flat year over year. From a tax rate perspective, you know, we have mentioned that our tax planning has sort of created a new sort of 18 percent baseline from a company which is significantly improved from where we previously were around 20 percent and so i'd probably point you to that sort of starting point for 2026 and we'll see what happens with you know any discrete items uh for next year and then i think from a share account perspective you know obviously we've done a lot of progress this year and return a lot of capital to the shareholders through our buyback programs And so I think when you factor in the lower share count for next year, all those below that item should point you to a high single-digit EPS growth for 2026 based off those assumptions.

Yeah, and just to add to that, Vijay, that high single-digit EPS growth is, you know, before assuming any additional capital deployment.

That's helpful, Prahlad. Thank you, guys.

Your next question comes from the line of Michael Riskin with Bank of America. Your line is open. Please go ahead. Michael, a reminder to kindly unmute yourself.

Hey, can you hear me now? Yep. Okay, that works better. Thanks, guys. I want to drill into the fourth quarter ramp specifically. I know you said 3Q kind of came in generally in line with expectations, but if you look at the both organic 3Q to 4Q and on the margins, it's still a pretty steep ramp, probably even steeper than it was before. So I know you talked about genomic singling coming online in the fourth quarter. There's some other moving pieces. There's some dynamics of the comps. Could you just give us the bridge again and sort of walk us through what gives you confidence in that, especially given, you know, like you said, you've got DRG still going on. Reagents came in a little bit softer in 3Q. So just give us confidence in that in that 3Q to 4Q ramp this year.

Yeah, sure. So two pieces of that. When you asked about the ramp on organic growth and then the ramp on margins, you know, I'd say first from a margin standpoint, there's been no change to our previous assumption. It's still 30 percent operating margins. The fourth quarter is always the biggest margin quarter for us. The company is it's our highest volume quarter of the year. And so I'd say there was no real changes there. Mike, I mean, if you think about holding costs relatively flat and the higher volumes, you're going to get to the to the 30 percent margins. I think when you look at it from an organic growth standpoint and the ramp between the third and the fourth quarter, I'd say there's really a couple key pieces of that ramp. One is on the IDX comps, as we've talked about, assuming the same sort of multi-year stack performance as we've seen through the first three quarters of the year. So that's one dynamic. The second is Software will have a ramp between the third and the fourth quarter, although we expect to step down in organic growth. We do expect a higher nominal dollar amount for software in the fourth quarter. And the third piece is you do see a little bit of seasonality just in terms of our instrument volumes between the third and the fourth quarter. So I'd say those are probably the three biggest pieces, Mike.

OK, and then following up on the China DRG comments, I mean, you know, If you look at China DX, China Immuno DX, I think it was down mid-teens or low-teens in 2Q. It's down 20% or more in the third quarter. So by the time we exit this year, could you give us sort of a snapshot of what's left in the portfolio for China Immuno DX and what the incremental risk or downside in 2026 is? Just sort of frame how much further headwind there will be next year for that. Thanks.

Yeah, Mike, look, so I think, look, the DRG situation has been playing out as we had anticipated. We had, you know, sort of foreshadow that IDX China would be down sort of mid-20s here in the third quarter. That's what played out in the third quarter. I think as you look for, you know, the impact into 2026 and even the fourth quarter here, you know, we don't expect much change in DRG. We do expect that, you know, once we lap sort of the anniversary in the second quarter of 2026, We do expect that business to return to more sort of muted levels of growth in the back half of the year. And so I think, again, no real change from our previous communication on the DRG situation in China.

All right. Thanks.

Your next question comes from the line of Dan Leonard with UPS. Your line is open. Please go ahead.

Thank you very much. I was hoping you could talk a little bit about what type of growth outlook for your software business is embedded into your 2026 framework, given the offsetting factors of difficult comps, but I think you also have a big new product launch coming before year end.

Yeah, absolutely. So look, as you look at software, to your point, you know, 2026 will be coming off, you know, a challenging comp here in 2025 from an organic standpoint. In 2025, we expect the business to finish, you know, in the high teens, you know, 20%. growth, so it will be a significant comp. Two things I'd say about that. One, in 26, we probably expect organic growth to be more in the mid-single digits. I would say we expect some contribution from the MPIs, but as you know, software MPIs take a little bit longer to ramp as they get released, and customers really start learning about the new tools and adopting them, etc. So there's some impact in there, but I wouldn't say it's a huge impact for 26. And if things pick up faster, that would be, I would say, upside to the mid single digit organic growth. The second thing I'd say is organic growth is always not maybe the best metric to look at when you're evaluating a software business. And I think as you look at the performance around AR, you know, your APV, which, again, just normalizes for revenue recognition, and then also our net retention rate, you know, those metrics continue to perform extremely well for us as a business. And we are incredibly excited about the software business in 2026 and beyond.

Yeah, and just to add to that, Dan, just, you know, as we saw previously last year, we launched Signals Synergy and Signals Clinical. And, you know, and it took some time for it to get traction and now it started really contributing. You know, similarly, as we bring in lab design and bio design and lab logistics and PIs, it takes a few quarters for it to start ramping up and we start seeing contributions from that, those new NPIs.

Understood. Thank you. And Prahlad, can you talk a little bit about your M&A thoughts in light of how big you're going with the share repo?

Yeah, I mean, again, we continue to be disciplined in our approach around M&A deployment. You know, we have an active pipeline, Dan, and we continue to look for opportunity. We will be in this environment pretty prudent in how we deploy. And honestly, the best opportunity right now from a return on capital investment is our share buyback. You know, we think that's the most attractive opportunity in front of us, and we are fully – taking advantage of that opportunity while keeping a very fertile pipeline and looking for opportunity for doing acquisitions.

Okay. Thank you.

Thank you, Dan.

Your next question comes from the line of Tycho Peterson with Jefferies. Your line is open. Please go ahead.

Hey guys, thanks. I want to probe a little more on reagents. I know you said modestly below expectations. Did reagents actually decline? I mean, if software was up 20, instruments down mid-single, it would imply reagents were down low single. So is that the right interpretation? And then how do we think about kind of go forward incremental margins on the reagents business? I know you've previously talked about 60, 70%. I guess given the pricing backdrop and inflation, just talk a little bit about the margin profile for reagents going forward too.

Yeah, absolutely, Tycho. So, look, I think as you look at the reagents performance in the third quarter, they were down very slightly year over year. You know, I would say that, again, as I mentioned the call, the summer months were a little bit lighter. We've taken a prudent approach to our fourth quarter guidance, but we still see, I would say, you know, stronger levels of underlying lab activity when you look at things year over year. So, again, I don't think we're saying that there's been, you know, some huge shift here really in lab activity. The second thing I'll answer is on the margin side of the incrementals. I would also say there's no change in the power of our incremental margins in our reagents business. Yes, it is a little bit of a tighter pricing environment, but we are still holding in there from a pricing perspective. And I think, you know, as the lab activity continues to ramp here, we are going to see the margin benefit as we get upside from those incrementals.

Okay. And that's helpful. And then maybe just, I know you've had a number of questions on instruments. I'm just curious, you know, budget flush in the year end from pharma, is that baked in or not? How are you thinking about that? You know, in the back of these announcements, I know you've talked about activity picking up, but how do you think about near term kind of budget flush here? Is that a call option on the fourth quarter?

Yeah, I think, look, as you as you look at the budget flush and what's sort of assumed in guidance here, you know, you do always have a modest seasonal step up for instruments between Q3 and Q4. I wouldn't say it was back to all the way of historical levels of budget flush, but you do definitely see an increase between the third and the fourth quarter. And as Perla mentioned, you know, there is we have definitely seen an uptick in the activity level in our instrumentation pipeline. It was a little bit better here in the third quarter. And we do believe that there's some some opportunity here for us in the fourth quarter as well.

Okay. And then just lastly, on the tax rate, you know, 18% baseline for 2026. Is there an opportunity for more and more leverage there? And how sustainable? I mean, I think you're going to be at 15% here in the back half of this year. I know you saw a step down in the back half of last year. So how do we think about maybe additional tax leverage beyond that 18% baseline?

Yeah, look, I'd say, look, our tax team has done a tremendous job, I think, in resetting what we even consider baseline from where we were a couple of years ago. Again, it was, you know, 20 percent and now we're at sort of an 18 percent baseline here. You know, I think just from a in terms of a forecasting and guidance approach, you know, we don't really roll in any expected sort of one time benefits. We kind of take our baseline and see how the year progresses. And that's how I would encourage you to think about 26 as well. OK, thank you.

Your next question comes from the line of Doug Schenkel with Wolf. Your line is now open. Please go ahead.

Okay, good morning, everybody, and thank you for taking my questions. Two topics I wanted to ask about. The first is I guess three parts to this one. One, I believe China Diagnostics is down to about 5% of total sales exit in Q3. I wanna make sure that's right. Two, it sounds like we should model that down 20 to 25% due to the changes in multiplex reimbursement. So down 20 to 25% year over year. And I think we should do that through Q2. And then third, can we confidently model that returning to growth thereafter? Or is there any reason to be more cautious than that? You know, there have been a few head fakes there in China, as we know, and you got folks like Abbott and Danaher who are telling folks to model incremental headwinds in 2026. How do you see it from there?

Yeah. Hey, Doug. Yeah. So a couple of different questions in there. So I think, look, as you look at the China as a percent of revenue, you had mentioned five percent, I think is closer to six percent, which is probably what I would use as you think about exiting this year. You know, I think, again, we've already kind of talked about the fact and what our expectations are for GRG is to continue to see the headwinds here from what we saw in the third quarter continuing until the anniversary in the second quarter. I think we've also talked about how we have in our LRP the assumption of closer to low single digit growth for our IDX business in China. And so I would continue to have that sort of same thought process as you sort of think about the second half of 2026. You know, I'd also say again, and on the immunodiagnostic side, you know, the business outside of China continues to perform incredibly well. Now, I know there's the focus on China right now with DRG, but IDXX China continued to grow high single digits. The Americas was up mid-teens. And so that business continues to perform incredibly well. And one will are excited they can keep performing well in 26 and beyond.

OK, sounds good. I'll leave it at that. Thank you, guys.

Your next question comes from the line of Puneet Suda with Leerink. Your line is open. Please go ahead.

Hi, guys. Thanks for taking my question. First one, I just wanted to clarify on the instrumentation side, the recovery or the improvement that you're seeing in this quarter, is it more of the China tariffs impacted situation from the last quarter or... Actually, our customers telling you that we're purchasing more this quarter and into the next quarter. Maybe just help us understand what you're hearing versus a sequential improvement because of tariffs and other concerns between the US and China that happened in Tokyo.

Yeah. Hey, good morning, Puneet. The answer is the latter part of your comment. You know, what we are seeing is more of a broader activity and it was not it is not specific to any China tariff related opportunity. And then it is specifically from pharma biotech customers. So what we are really seeing is a broader level of activity and discussions on pharma biotech on the life sciences instrument side.

Got it. Okay. And then just on the academic and government side, I know the reagent exposure is there. So just trying to understand if the grants are fewer next year, just given the funding, five-year funding in some of the grants and early funding that's happening, maybe just help us understand, how are you thinking about the overall reagent growth into 26? And then Just one more question, if I may. Could you remind us how much of your manufacturing for China sales is in China? Localization is emerging as an important theme beyond the VVP and DRG. So if you could elaborate on that. Thank you.

Yeah, sure. On the manufacturing side, all of our reproductive health and newborn screening is in China for China. Over the past decade, we have moved all of that. And on the IDX side, Puneet, more than half of it now is local in China for China. And the rest that we are shipping from Germany are specific and very unique assays where we have a minimal local competition.

Yeah, and I think, look, the other thing I'll add to that, too, is we have the capacity and the availability to move that additional product into China if we need to from a competitive or local requirement perspective. So I think we remain confident in our ability to handle anything there from a localization standpoint. I think as you look at your other question, Puneet, on the reagents and sort of how we think about 2026, Look, I think from a reagents perspective, again, as we've mentioned, two to three percent, we're really anticipating, I would say, you know, a similarish environment to what we are currently seeing. Obviously, we'll have to see what happens from an NIH and budget perspective. But our two to three percent organic growth guidance for next year is not expecting some huge ramp up or change in the underlying market activity. You know, if that were to change to the positive and we continue to see increasing momentum build, you know, that's not necessarily something we factored in a two to three percent.

Got it. Okay. Thank you.

Your next question comes from the line of Dan Arias with Stiefel. Your line is open. Please go ahead.

Hey, good morning, guys. Thank you. Max, on the gel contributions, which I think you've kind of pointed to as being heavily weighted in 4Q for 10 million or so, how should we model that sequentially in the quarters after that? Is there a drop down or do you think there's some level of stability into the front half of 2026. Yeah.

Hey Dan. So the 10 million for gel was actually the initial sort of second half contribution, full second half. So we did start to see the, a little bit of there in the third quarter as the contract and the lab came online, we do expect a little bit of sequential pickup here in the fourth quarter. I think as you look at sort of 2026, Yeah, I wouldn't anticipate too much further ramp from what we currently have assumed in there in the fourth quarter. And that'll sort of be a consistent quarterly number as we think about it for 2026. Okay.

And then maybe, Prahlad, on your pharma and biotech comments, can you elaborate a little bit on the biotech element and just how much of the incremental enthusiasm that you might be pointing to is due to some of the larger biotech companies versus some of the smaller and emerging players that might be getting a little bit more enthusiastic about what they might do.

Thanks. Yeah, I think that's a key differentiation. I mean, most of the louder activity we are seeing is on the typical large and mid-sized biotech. While the conversations are ongoing with the smaller ones, Dan, it's not at the same level as you would see with the mid and large-sized biotechs.

Okay, thank you.

Who tend to be more of our traditional customers anyway.

Your next question comes from the line of Catherine Schult with Baird. Your line is open. Please go ahead.

Hey guys, thanks for the questions. Maybe first, just for the 2% to 4% organic for the full year, it creates a pretty wide range for the fourth quarter. So should we be anchoring more towards the lower end of that range? And how should we think about performance by segment for the fourth quarter?

Yeah. Hey, Catherine, thanks for the question. Look, I think as you look at the full year range, the two to four percent, I don't think it's an uncommon practice to have sort of that range for the fourth quarter. I think as you kind of look at the midpoint, though, of what we have for the fourth quarter in terms of our full year guidance, that would sort of point you to a two to three percent organic growth for the fourth quarter in order to reach that midpoint for the full year.

Okay, great. And then maybe how did U.S. academic and government perform in the quarter? And you mentioned baking in a government shutdown impact in guidance. Any way to size kind of how you're thinking about that?

Yeah. So first, in terms of the academic and government performance in the Americas for the third quarter, it was down mid-single digits in the third quarter. Again, as we've talked about, most of the instrument activity pickup we're mostly seeing is on the is on the pharma biotech side versus academic and government. So that was a bit of a headwind for us in the period. I think as you then look at the government shutdown, you know, I think the bigger impact there right now that we're seeing is more so on the reagent side, which we have baked in some modest assumptions there for the fourth quarter. I would say, again, it's modest. It's not something that is a huge number to embed into the guidance.

Your next question comes from the line of Sabu Nambi with Guggenheim. Your line is open. Please go ahead.

Hey, guys. Thank you for taking my question. In your prepared remarks, you talked about how AI is improving your operating efficiency. As your customers implement AI, do you view this as a threat or as an opportunity? Meaning if AI improves their efficiency and reduces their risk, are you seeing any signs that this leads to more or less demand for Revity products?

It's a great question, Subbu. I think, you know, if you were to look in the short to midterm, and by that I define over the next three to five years, I think it will result in increased demand on the reagent and instrument side. Because I think, you know, not just traditional pharma biotech companies, but also AI focused companies on life sciences will want to create more and more data in order to sort of, you know, look at what modeling capabilities that you need to have, what AI models that you need to build. But I think over the second half of the decade, I would venture to say that the signals business is very well positioned on the AI side of drug discovery. We are in every lab, every researcher in big pharma biotech has signals at their fingertips. And if we are able to provide the capability and ability for pharma biotech customers to use the signals infrastructure and incorporate AI capability into that, it becomes a natural tool in the hands of researchers who don't need to be computer specialists to do drug discovery. And that's where we have the opportunity, both in the short to mid-term with our reagents and instruments portfolio, and in mid to long-term with our signals business.

Thank you for that, Praladin. Just as a follow-up, you described some signs of instrument recovery in your prepared remarks. If that continues to take hold, what instruments would you expect to be the first to participate in that recovery? Would you consider providing book-to-bill data on instruments heading into 2026 as we get to year-end?

Yeah, I think the benefit or the advantage that we have, Subbu, is most of the life sciences instruments that we provide are non-commoditized products. And the initial uptick that we start seeing is especially on the cellular imaging capabilities that we provide to our customers, you know, looking at cellular imaging products. our high content screening platforms specifically you know we've never provided book to build ratio and you know and generally that's not uh is something that we look at either thank you so much there are no further questions at this time i will now turn the call back to steve for closing remarks thank you nicole and thank you for everybody joining us this morning we look forward to catching up with more of you over the coming weeks