AGILENT TECHNOLOGIES, INC. Q3 2025 earnings call

Thank you and welcome everyone to Agilent's Conference Call for the third quarter of fiscal year 2025. With me are Padraig McDonnell, Agilent's President and CEO, and Rodney Gonsaves, Agilent Vice President and Interim CFO. Joining the Q&A will be Simon May, President of the Life Sciences and Diagnostics Markets Group, Angelica Riemann, President of the Agilent Cross Lab Group, and Mike Zhang, President of Applied Markets Group. This presentation is being webcast live. The press release for our third quarter financial results, investor presentation, and information to supplement today's discussion along with a recording of this webcast are available on our website at investor.agilent.com. Today's comments will refer to non-GAAP financial measures. You'll find the most directly comparable GAAP financial metrics and reconciliations on our website.

Unless otherwise noted, all references to increases or decreases in financial metrics are year over year and references to revenue growth are on a core basis. Core revenue growth is adjusted for the impact of currency exchange rates and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. As a reminder, beginning in the first quarter of fiscal 2025, we implemented certain changes to our reporting structure related to the reorganization of our three business segments. We have recast our historical segment information to reflect these changes and have provided the financial details on our website. These changes have no impact on our company's consolidated financial statements. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risk and uncertainty and are only valid as of today.

The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risk and other factors. Now I'd like to turn the call over to Padraig.

Hello everyone and thank you for joining today's call. Agilent Technologies delivered outstanding results of $1.74 billion in revenue in the third quarter, exceeding our guidance while continuing to transform our enterprise operating model in a highly dynamic environment. We also delivered $1.37 earnings per share in the quarter. Thank you to the Agilent team who has remained laser focused on our customers and committed to our mission of advancing the quality of life. Our fiscal 2025 third quarter marks our fifth consecutive quarter of sequential core revenue acceleration, a testament to how we've evolved our enterprise strategy to be market first and then realigned our businesses to our markets. For this fiscal year, we've gone from 1.2% in Q1 to 5.3% in Q2 and now 6.1% in Q3.

Just as important, our two-year growth stack also is improving, showing that this is a durable momentum, not just a short-term bounce. The two-year stack is a summation of our growth over two consecutive years, providing a clear view of sustained performance by smoothing out short-term quarterly fluctuations. Given this strength, we are raising our fiscal 2025 full year revenue guidance to the range of $6.91-$6.93 billion, representing a core growth of 4.5% at the midpoint. This is a $150 million increase from our prior range at the midpoint and 1.5 percentage points of additional core growth, a clear step up in our growth outlook heading into Q4. This upgrade reflects our confidence in delivering another step up of revenue into Q4 even as we absorb the impact of tariffs this year.

Our momentum is broad based and led by our two largest end markets, Pharma and Chemicals and advanced materials. In Q3 both grew 9% and 10% respectively. In Pharma, small molecule grew double digits fueled by demand in downstream QA QC and strong adoption of our InfinityLab LC Series Portfolio. GLP1s also continue to drive demand both for our leading analytical lab solutions and the unique capabilities we bring with Biovectra. In chemical and advanced materials, demand rebounded across all major geographies. This was supported by new investments in the semiconductor and chemical sector with robust uptake in our GC and GCMS platforms. We also saw healthy contributions from our food and diagnostics and clinical end markets and the academia and government end market returned to modest growth despite continued funding pressures. In the U.S., Environmental and Forensics was the only market to decline as changes in the U.S.

EPA led to some cautiousness on new capital spending. Despite this temporary headwind, our market-leading PFAS business grew low double digits globally during the quarter against a tough compare of nearly 50% growth last year. Demand outside the Americas continued to be excellent with broad-based growth in the low 30%. PFAS remains an excellent opportunity with strong long-term demand drivers intact. Globally, powering the strength of our execution is our Ignite Enterprise operating model. This year, our value-driven approach to pricing delivered results that were twice the impact of last year. At the same time, we streamlined the enterprise by reducing management layers by more than 15%. That didn't just remove cost, it gave us speed. We're making decisions faster and empowering our teams to be agile. We're also taking a consistent enterprise-wide approach to manufacturing and procurement.

These efforts already are delivering double-digit savings in key cost categories, and we see even greater opportunities ahead as we scale these practices globally. Our Ignite Tariff Task Force has shown the power of the model in action in a highly dynamic environment. We reorganized supply chains, shifted production across our global footprint, and implemented targeted pricing actions, giving us confidence we can fully mitigate the impact of tariffs in 2026 at current rates. Ignite continues to be a differentiating growth driver for Agilent Technologies. It is proving that by embedding new tools, enhanced capabilities, and smarter ways of operating across the company, we unlock the full scale of our enterprise. That means stronger performance today and resilience and growth for tomorrow. Innovation also continues to be a major driver.

Our InfinityLab LC platform delivered mid-teens growth with area adopters coming back for larger follow-on purchase based on superior performance and productivity gains. The Pro iQ LCMS system is tracking well ahead of our launch forecast, winning key accounts at major pharma customers. The new system of performance benchmarks opens new application possibilities across pharma and biopharma and is resonating strongly with customers as evidenced by strong funnel growth during the quarter. Also, the newly launched Dako Omnis family brings our gold standard fully automated pathology platform to a broader range of lab sizes, capturing a new market segment and strengthening our diagnostics portfolio. Together, these platforms are not just driving near term revenue, they're continuing to build a foundation for sustained growth into FY 2026 and beyond.

This growth is supported by a strong funnel and accelerating customer adoption across our portfolio, demonstrated by an instrument book-to-bill above one for the last six quarters. Importantly, we expect Q4 to be our largest revenue quarter of the year with core growth of 5.4% and revenue of nearly $100 million higher than Q3 at the midpoint of our guidance. Our sequential momentum and two year growth stack remain solid and combined performance of the second half provides a sound foundation as we look into FY 2026. The growth we expect in Q4 is underpinned by healthy demand for key platforms, strong funnel conversion, and broad based strength across our end markets. The latest industry data is evidence of our continued superior commercial execution with market share gains across all major geographies.

The combination of strong top line performance and stable operating margin means we have successfully delivered to our bottom line commitments throughout the year. However, we did have higher expectations for margin improvement in the quarter. The increasing revenue growth also comes with additional tariff expenses and higher variable payments. We've invested in our commercial capabilities to support our growth now and into the future. For the fourth quarter, we expect to deliver significant sequential margin improvement as increasing revenue combined with additional ignite benefits will result in accelerated profit leverage. Rodney will provide some additional details in his remarks. Now let me tell you more about why our Q3 was so strong. Starting in our largest end market, pharma, we grew 9% during the quarter and continue to see steady improvements we referenced for several quarters now.

This quarter we saw positive momentum in funnel conversion as lab managers are increasingly able to access and spend their available capital budgets. There is reduced dependence on executive level approvals that have slowed or stopped spending in the recent past. Our longtime lab-wide enterprise service relationships with large pharmacists enable us to capitalize on these improving conditions with deeper visibility into customer needs. This ensures we are in the right place at the right time with the right solution when lab managers are looking to replace aging instruments and expand capacity. In our second largest end market, chemical and advanced materials, we delivered 10% growth with broad strength globally. Growth was balanced between two submarkets. We saw increased capital investment from chemical customers and robust demand in advanced material space and investments in new semiconductor fab facilities globally. We continue to progress.

Our market leadership in key product platforms for these markets positions us well to capture the significant instrument replacement opportunity in a market that has seen several years of underinvestment. All our business segments delivered revenue growth that exceeded guidance for the quarter. The life science and diagnostics market grew 7%. Core growth was led by excellent low double-digit performance for LC and LCMS instruments, leveraging our recent InfinityLab launch and focused LCMS solutions for key applications across both pharma and the applied markets. LDG also saw another strong quarter from our CDMO business, NASD and Biovectra. NASD grew in the high 20s as we see continued growing demand for SIRNA modalities in clinical and commercial programs. Biovectra also delivered on expectations while executing a planned facility shutdown to work with a key customer to transition to a higher throughput process.

In the Applied Markets Group, growth of 5% was also ahead of expectations. Breaking down the performance, our market-leading platforms GCMS and Spectroscopy delivered strong growth in Q3 with encouraging momentum in the chemicals and advanced materials, food and pharma markets. Geographically, all regions delivered growth led by Asia, ex-China and EMEA. The geographic growth in AMG was driven by investment from supply chain reshoring, greenfield opportunities, capacity expansion and replacement from our large installed base. Also, our recent launch of new products including the 8850 GC continues to ramp up ahead of expectations as customers are attracted by their exceptional performance, superior lab productivity gains and leading sustainability benefits. The Agilent CrossLab group delivered 5% growth in Q3, better than we had guided. The CrossLab team drove mid single digit consumables supported by our focus on e-commerce and digital.

This was a strong result despite the $50 million tariff driven pull forward of sales into Q2 that we mentioned during our last call. The services business grew mid single digits, led by strength in the applied markets in Europe. Agilent service continues to delight our customers, achieving greater than 90% customer satisfaction and meeting our vision of our customers to feel confident, valued, and inspired. Lab activity remains strong, giving us confidence in the fundamental strength of this business plus the increasing pace of instrument sales for replacement of aging fleets in labs where capital budgets have been reduced or withheld. Expansion for new capacity and growing demand for automation bodes well for CrossLab business into the future. It provides a cycle to generate customer lifetime value through connections of high quality consumables, software, services, and automation to maximize instrument utilization and overall lab productivity.

Thanks Padraig and good afternoon everyone. In my comments today, I will provide additional details on revenue in the quarter as well as walk through the income statement and cover other key financial metrics. I'll then cover our updated full year and fourth quarter guidance. Q3 revenue was $1.74 billion, above the high end of our guidance. On a core basis, we posted growth of 6.1% while reported growth was 10.1%. Currency had a favorable impact of 2.1%, which was a point and a half better than what we estimated as part of our guidance. M&A contributed 1.9%, in line with our expectation. Gross margins in Q3 came in at 53.1%, down year on year, driven by currency, tariffs, and the impact of downtime to expand capacity of Biovectra. As Padraig mentioned earlier, operating margin was 25.1% in Q3 and has been consistent across the year in increasingly challenging conditions.

Ignite is enabling us to translate top line growth into bottom line results while we continue to invest in innovation and growth. As Rodney indicated, margins were below expectations. We've seen roughly equal impact from three areas. First, our higher revenue volume drove up net tariff cost as we shipped additional products and backfilled logistics centers to support Q4 growth, even while full tariff mitigation is still on track for FY 2026. Next, we increased variable pay expectation with higher awards driven by stronger business performance, consistent with our pay for performance culture. Finally, we invested incremental commercial spend required to support short and long term revenue growth, including for critical product launches and improving our geographical coverage. For Q4, we are targeting a sequential operating margin improvement of approximately 230 basis points.

We expect most of this improvement to come from leveraging our fixed cost as we drive another sequential increase in volume. We are also getting meaningful contribution from both excellent margin conversion on the significant step up in CDMO revenue in Q4 and delivering another step up in Ignite benefits, with a partial offset due to higher tariff costs. Now moving below the line, we had $6 million of income while our tax rate of 12% was as expected and we had 285 million diluted shares outstanding in the quarter. Putting it all together, Q3 earnings per share were $1.37. That was at the high end of our expectations and grew 4% from a year ago. Now let me turn to cash flow and the balance sheet.

Operating cash was $362 million in the quarter, down versus last year as working capital was up on volume growth and tariff-related inventory build. We also incurred severance costs related to our organizational efficiency efforts. Additionally, we invested $103 million in capital expenditures. We purchased 85 million shares and paid out $71 million in dividend during the quarter, and we ended the quarter with a net leverage ratio of 0.9x, so we continue to have a very strong balance sheet. Now let's move on to the outlook for the fourth quarter. We expect Q4 revenue to be in the range of $1.82 billion-$1.84 billion. This represents an increase of 4.8%-6% on a core basis and 7.1%-8.3% on a reported basis. Currency and M&A are expected to be 0.2% and 2.1% tailwinds, respectively.

Also, to help you with your models, I want to provide you with additional details on expectations for growth in our end markets during the fourth quarter. In pharma, we're expecting mid to high single-digit growth with stable to improving conditions in chemical and advanced materials. We're guiding high single-digit growth with another quarter of healthy capital investment expected. In diagnostics and clinical as well as in food, we expect mid single-digit growth. Finally, we expect very low single-digit growth in environmental and forensics and mid single-digit decline in academia and government as those markets face a difficult compare for U.S. Federal spending. At the end of the fiscal year, fourth quarter non-GAAP earnings per share are expected to be between $1.57-$1.60, representing leveraged earnings growth of 7.5%-9.6%. We expect a 12% tax rate, $9 million in other income, and 284 million diluted shares outstanding.

Turning to the full year, as Padraig McDonnell mentioned earlier, we are raising our revenue outlook. We now expect our full year reported revenue to be in the range of $6.91 billion-$6.93 billion. This represents an increase of 4.3%-4.6% on a core basis and 6.2%-6.5% on a reported basis. Currency is now expected to represent a small headwind for the year, while we expect a 2% revenue impact from M&A. Our full year EPS guidance is now $5.56-$5.59, unchanged at the midpoint versus our prior guidance, and we continue to offset additional tariff costs across the second half. This represents a year-on-year increase of 5.1%-5.7%. For clarity, let me briefly summarize the updated tariff assumptions that we incorporated in our FY 2025 guidance.

Based on the rates currently in place, we are now anticipating a $20 million net cost for the year, up from the minimal impact we guided in May. This increase is due to our better than expected revenue performance across the second half, as well as the 50% tariff increase on imports from Europe announced at the beginning of the month. Strong demand for our LC products that are currently produced in Europe until U.S.-based production begins to scale later this quarter also amplifies the impact of the recent European tariff increase. Finally, for your modeling, we are now projecting an increase of other income and expense to $26 million in income along with a 12% tax rate for the year and 285 million diluted shares outstanding. Now I'd like to turn the call back to Padraig for closing comments.

Padraig.

Thanks Rodney. These strong results are a testament to the progress we've made as a company over the past year. We are encouraged by the growth momentum we have created and look forward to building on that success next quarter and into the future. Thank you for your attention. I'll hand over now to Parmeet to kick off our Q&A. Parmeet.

Thanks, Padraig. Operator, if you could please provide instructions for Q&A now.