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01/11 04:45
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
The earnings call summary indicates declining revenue and operating margins, with mixed demand in biotech and a significant headwind from the loss of a CDMO client. Despite raised EPS guidance and stable DSA pricing, the outlook includes increased hiring costs and margin pressures. The Q&A section highlights concerns over client cancellations, hiring impacts, and CDMO performance. The negative revenue guidance and declining margins outweigh the positive EPS and free cash flow guidance, leading to an overall negative sentiment.
Revenue $1.03 billion in Q2 2025, a 0.6% increase year-over-year. Organic revenue declined 0.5%, driven by a low single-digit decline in the DSA segment, partially offset by low single-digit revenue increases in the RMS and Manufacturing segments. Nearly half of the revenue outperformance was driven by favorable foreign exchange.
Operating Margin 22.1% in Q2 2025, an increase of 80 basis points year-over-year. Improvement was due to cost savings from restructuring actions and operating leverage from better-than-expected first-half sales volume.
Earnings Per Share (EPS) $3.12 in Q2 2025, an increase of 11.4% year-over-year. The growth was primarily driven by operating margin improvement and a $0.12 benefit from a lower-than-expected tax rate.
DSA Segment Revenue $618 million in Q2 2025, a 2.4% decrease year-over-year on an organic basis. Decline was due to lower revenue for discovery and safety assessment services, partially offset by a favorable mix of higher-priced, longer-duration, and specialty studies.
DSA Operating Margin 27.4% in Q2 2025, an increase of 30 basis points year-over-year. Improvement was due to operating leverage from better-than-expected demand and prior cost savings actions.
RMS Segment Revenue $213.3 million in Q2 2025, a 2.3% increase on an organic basis year-over-year. Growth was driven by the timing of NHP shipments and higher revenue for research model services, including GEMS and Insourcing Solutions businesses.
RMS Operating Margin 25.3% in Q2 2025, an increase of 220 basis points year-over-year. Improvement was due to a favorable mix from higher NHP revenue and research model services, as well as cost savings from restructuring initiatives.
Manufacturing Segment Revenue $200.8 million in Q2 2025, a 2.9% increase on an organic basis year-over-year. Growth was driven by robust performance in Microbial Solutions and revenue from commercial CDMO clients, though some of this revenue will not repeat in the second half.
Manufacturing Operating Margin 32.8% in Q2 2025, an increase of 620 basis points year-over-year. Improvement was due to revenue and payments from commercial CDMO clients and operating leverage from Microbial Solutions growth.
Free Cash Flow $169.3 million in Q2 2025, an increase from $154 million in Q2 2024. Growth was driven by higher earnings and improved working capital.
NAMs (New Approach Methods) Portfolio: The company is expanding its NAMs portfolio, which includes innovative methods like in vitro liver on a chip assay and in vitro models for advanced modalities. This portfolio is generating approximately $200 million in annual DSA revenue.
Global Biopharmaceutical Demand: Demand trends are stabilizing, with global biopharmaceutical clients showing improved booking activity. However, smaller biotechs remain cash-constrained due to funding slowdowns.
RMS Revenue Growth: Revenue increased by 2.3% organically, driven by NHP shipments and research model services. Academic and government client revenue also grew despite NIH budget uncertainties.
Cost Savings: The company is on track to achieve over $175 million in cost savings for 2025 and $225 million in 2026 through restructuring actions.
DSA Segment Performance: DSA revenue declined by 2.4% organically, but the operating margin improved to 27.4% due to cost savings and favorable study mix.
Manufacturing Segment: Revenue grew by 2.9% organically, driven by Microbial Solutions and CDMO clients. However, one commercial CDMO relationship ended, impacting future revenue.
Strategic Review: The company is conducting a comprehensive strategic review to evaluate portfolio, capital allocation, and market position for long-term value creation.
NHP Supply Update: The U.S. Department of Justice concluded investigations into NHP shipments, validating the company's compliance and clearing legal concerns.
DSA demand trends: Net book-to-bill dipped below 1x in Q2 to 0.82x due to increased cancellations and revenue outperformance. Sequential decline in bookings for global biopharma clients and higher cancellations in both client segments, particularly for longer-term post-IND work, indicate demand uncertainty.
Biotech funding constraints: Smaller biotech clients remain cash-constrained due to a slowdown in funding, impacting their ability to support R&D programs and demand for services.
CDMO revenue decline: Revenue from one commercial CDMO client will not repeat in the second half of 2025, creating a revenue and margin headwind for the Manufacturing segment.
DSA staffing costs: Increased hiring in the DSA segment to support demand will create a $10 million cost headwind in the second half of 2025, impacting operating margins.
Tax rate changes: New U.S. tax legislation (OB3) will increase the effective tax rate in the short term, creating an earnings headwind despite generating cash tax savings.
NIH budget uncertainty: Potential NIH budget cuts have led to a modest reduction in scope for an in-sourcing solutions contract, resulting in an annual revenue loss of approximately $3 million.
NAMs transition challenges: The transition to NAMs (new approach methods) is expected to be gradual, with scientific capabilities not yet fully developed to replace animal models, potentially impacting long-term revenue growth.
China market moderation: Volume growth for small research models in China is increasing at a more moderate pace than historical levels, potentially impacting RMS revenue.
Revenue Guidance: The company has raised its 2025 organic revenue guidance to a 1% to 3% decrease, an improvement of 150 basis points from prior guidance.
Earnings Per Share (EPS) Guidance: Non-GAAP EPS guidance has been raised by $0.55 at midpoint to a range of $9.90 to $10.30 for 2025.
Demand Environment: The demand environment is stabilizing, with global biopharmaceutical demand trends showing signs of recovery. However, smaller biotechs remain cash-constrained due to funding slowdowns.
DSA Segment Outlook: DSA organic revenue is expected to decline at a low to mid-single-digit rate in 2025, an improvement from the prior outlook of a mid-single-digit decline. The company has begun modestly increasing staffing levels in this segment to support demand.
RMS Segment Outlook: RMS revenue is expected to remain flat to slightly positive for 2025. The third quarter is anticipated to see stronger NHP revenue due to shipment timing.
Manufacturing Segment Outlook: Manufacturing revenue is expected to remain flat on an organic basis for 2025. The second half will face headwinds due to the end of a commercial CDMO client relationship.
NAMs Strategy: The company is focusing on expanding its NAMs (New Approach Methods) portfolio through partnerships, selective M&A, and internal development, aiming for long-term growth.
Tax Rate and Interest Expense: The non-GAAP tax rate for 2025 is expected to increase by approximately 100 basis points to a range of 23.5% to 24.5%. Interest expense is expected to be lower than prior guidance, ranging from $100 million to $105 million.
Free Cash Flow and CapEx: Free cash flow guidance has been raised to $430 million to $470 million for 2025, driven by stronger earnings and tax savings. CapEx is expected to remain at $230 million.
Stock Repurchase: The company repurchased $350 million in shares during the first quarter of 2025 as part of its commitment to maximize shareholder value and diligently deploy capital.
The earnings call reveals mixed signals: improved revenue and EPS guidance, stable demand environment, and cost-saving measures are positive. However, uncertainties in divestitures, DSA growth, and reliance on nascent NAMs technologies add caution. The Q&A section highlighted analyst concerns about divestitures and growth forecasts. Despite raised guidance, the lack of clear growth predictions and divestiture specifics tempers optimism, leading to a neutral sentiment.
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