Waters Corporation (WAT) Q3 2025 Earnings Call Transcript
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Overview
The earnings call reveals strong financial performance with raised guidance for sales and EPS. Key growth drivers include robust China sales, product innovation, and synergies from the BD acquisition. Analysts' questions highlight positive sentiment, especially towards the BD transaction and subscription model potential. Despite some uncertainties, like the biosimilars ramp-up, the guidance increase and favorable market dynamics suggest a positive stock price movement.
Key Financial Performance
Sales Growth Sales grew 8% as reported and 8% in constant currency. This growth was driven by strong performance in instruments (6% growth) and recurring revenue (9% growth), with service growing 7% and chemistry growing 13%. The growth reflects innovation, execution, and strategic expansion into high-growth areas.
Non-GAAP Earnings Per Share Non-GAAP earnings per share grew 16% to $3.40, which was $0.20 above the midpoint of guidance. This increase was attributed to strong sales performance and operational excellence.
Instrument Sales Instrument sales grew 11% quarter-over-quarter, representing the largest third-quarter ramp in the company's history outside of the 2020 COVID year. Year-over-year, Alliance iS sales grew over 300%, and Xevo TQ Absolute platforms grew 30%. Growth was driven by customer adoption of flagship products and new launches.
GLP-1 Testing Revenue GLP-1 testing-related revenue more than doubled year-over-year. This was due to wins in development and manufacturing settings in the Americas and Europe, as well as expanding demand from generic semaglutide manufacturing in India.
PFAS Testing Orders PFAS testing orders grew approximately 30% year-over-year. Growth was driven by strong demand in Japan due to new drinking water regulations and continued momentum from U.S. federal, state, and municipal labs.
India Revenue India revenue grew in high teens year-over-year. This growth was driven by strong demand from generics manufacturers and CDMOs, benefiting from volume growth trends tied to the ongoing patent cliff of blockbuster drugs.
Chemistry Growth Chemistry grew 13% year-over-year, fueled by the positive market reception of newly launched SEC and Affinity Bioseparation Columns. Bioseparations grew more than 20%, and small molecule applications grew 10%.
Pharma Sales Pharma sales grew 11% year-over-year, driven by double-digit growth in the Americas and Asia, and high single-digit growth in Europe. Growth was supported by instrument replacement activity, greenfield CapEx projects, and new system deployments in bioanalytical characterization.
China Pharma Sales China pharma sales grew by more than 20% year-over-year. This growth reflects continued spending improvement among Chinese CDMOs and biotech customers.
Gross Margin Gross margin for the quarter was 59%, a 70 basis point sequential increase versus the prior quarter. This improvement reflects normalization of tariff remediation costs.
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Operating Highlights
Xevo CDMS: Launched as a transformative breakthrough in bioanalytical characterization, enabling faster results, easier operation, and smaller sample sizes. It serves a $350 million market growing at high single to low double digits.
Empower Updates: Planned updates to evolve Empower into a modern, connected, and intelligent platform with AI and machine learning features, enhancing compliance and operational efficiency.
New Chemistry Products: Newly launched SEC and Affinity Bioseparation Columns contributed to 13% growth in chemistry, with bioseparations growing over 20%.
India Market: Revenue grew in high teens, driven by demand from generics manufacturers and CDMOs, benefiting from the ongoing patent cliff of blockbuster drugs.
China Market: Pharma sales grew by more than 20%, supported by spending improvement among CDMOs and biotech customers.
PFAS Testing: Orders grew approximately 30%, driven by demand in Japan and U.S. labs preparing for new regulations.
Instrument Replacement Cycle: Sales activity surged with meaningful runway ahead, tracking at a low single-digit CAGR versus 2019.
Recurring Revenue: Grew 9%, driven by 7% service growth and 13% chemistry growth.
Gross Margin: Improved to 59%, reflecting normalization of tariff remediation costs.
BD Biosciences & Diagnostic Solutions Combination: Integration planning is underway, with expected completion by Q1 2026. Synergies and long-term value creation are anticipated.
FDA Draft Guidance: Proposed framework to modernize biosimilar drug development could increase demand for analytical instruments and workflows.
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Risk or Challenges
Pending Combination with BD's Bioscience & Diagnostic Solutions: The integration planning for the combination with BD's Bioscience & Diagnostic Solutions business is complex and involves significant operational and strategic risks. There is a risk of delays or challenges in achieving the planned synergies and operational efficiencies, which could impact financial performance.
Tariff Structure Impact: The current tariff structure, including recent increases in tariff rates, poses a risk to the company's cost structure and profitability. This could affect gross margins and overall financial performance.
Instrument Replacement Cycle: While the instrument replacement cycle is driving growth, there is a risk of market saturation or a slowdown in replacement activity, which could impact future sales growth.
Regulatory Changes: The U.S. FDA's new draft guidance on biosimilar drugs could increase demand for analytical instruments, but it also introduces regulatory uncertainties that could impact product adoption and market dynamics.
Global Trade Conditions: Although global trade conditions are currently stable, any future disruptions or policy changes could negatively impact the company's operations and financial performance.
Currency Translation: Fluctuations in currency exchange rates pose a risk to reported sales growth and financial results, especially given the company's global operations.
Supply Chain Risks: While not explicitly mentioned, the complexity of global operations and reliance on various suppliers could pose risks of supply chain disruptions, impacting production and delivery timelines.
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Guidance & Outlook
Revenue Growth: Full year 2025 constant currency sales growth is expected to be in the range of 6.7% to 7.3%, with a midpoint of 7%. Reported sales growth is expected to be in the range of 6.5% to 7.1%.
Earnings Per Share (EPS): Adjusted EPS guidance for full year 2025 is raised to a range of $13.05 to $13.15, representing 10% to 11% growth. Fourth quarter 2025 adjusted EPS is expected to be in the range of $4.45 to $4.55, reflecting 9% to 11% year-over-year growth.
Gross Margin: Full year 2025 gross margin is expected to be approximately 59.2%, above prior outlook.
Operating Margin: Adjusted operating margin for full year 2025 is expected to be approximately 31%.
Market Trends and Drivers: Key growth drivers include instrument replacement cycles, higher service attachment, increased product adoption through e-commerce, and innovation in bioseparations and bioanalytical characterization. External environment improvements, such as stable global trade conditions and clearer policy backdrops for pharma customers, are also expected to support growth.
Product Launches and Innovation: New product launches, including the Xevo Charge Detection Mass Spectrometer and advancements in Empower software, are expected to drive growth in 2026. Empower will evolve into a more intelligent platform with AI and machine learning features, supporting a transition to a subscription-based model.
Combination with BD's Biosciences & Diagnostic Solutions: The pending combination is expected to be completed by the end of Q1 2026, with plans for near-term synergy realization and long-term value creation. Integration planning is underway, with a focus on operational readiness and synergy delivery.
2026 Outlook: The company expects to build on 2025 momentum with continued contributions from growth drivers, new product launches, and the BD combination. The Xevo CDMS system is expected to address a $350 million market growing at high single to low double digits.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Can you provide more details on the pharma strength in the U.S. and China, and the drivers behind the growth in chemistry?
A:Pharma grew double digits across all regions, with the U.S. and Europe driven by the replacement cycle in large pharma and traction of new products like Alliance iS (300% growth) and Xevo TQ Absolute. GLP-1 testing doubled, and biologics characterization instruments performed well. In China, growth was driven by CDMOs supporting local biotech, with strong performance from new products. Chemistry grew 13% this quarter, driven by bioseparations innovation, including MaxPeak Premier and new product launches like SEC columns and Affinity Chromatography.
Q:What are your thoughts on the BD transaction and its revenue synergies?
A:The BD transaction is progressing well, with significant opportunities in flow cytometry (FACSDiscover S8 and A8) and microbiology. Workshops and integration planning are underway, focusing on synergies like service plan attachment and pricing discipline. The company expects to be EPS accretive within the first 12 months and sees long-term growth potential.
Q:What is the impact of the FDA update on biosimilars for analytical assessments with LC-MS?
A:The FDA's move towards using analytical instruments instead of clinical studies for biosimilar equivalence could provide significant upside. This aligns with Waters' strategy in bioseparations and bioanalytical characterization, though the ramp-up speed is uncertain.
Q:Are you expecting a budget flush in Q4, and what are the expectations for instruments versus chemistry?
A:No pull-forwards were observed in Q3. The Q4 guidance assumes 5%-7% growth, with chemistry expected to grow 6%, service 8%, and instruments 5%. The guidance is prudent, with a 16% ramp from Q3 to Q4, lower than historical averages.
Q:What is the incremental upside of the subscription-based model for Empower?
A:The subscription-based model for Empower offers significant upside by providing value-added services like utilization data, anomaly detection, and compliance tools. Transitioning customers to this model could yield low double-digit millions in revenue per large pharma customer.
Q:What are the latest expectations for the TA business and the instrument order funnel?
A:The TA business is recovering faster than expected, driven by stabilization in tariffs and improved interest rate outlook. The instrument order funnel remains strong, with large pharma and CDMOs driving growth. The replacement cycle is ongoing, with additional opportunities as CROs and branded generics in China re-enter the market.
Q:How do you view the biosimilar opportunity over the next few years?
A:The biosimilar opportunity is significant, as lower prices from increased biosimilar availability can drive higher penetration and access to advanced therapies. This aligns with Waters' bioanalytical characterization capabilities.
Q:What is the margin impact of new product launches over the next 12 months?
A:New product launches in bioanalytical characterization, bioseparations, and Empower are expected to be accretive to gross margins. Value engineering of existing products like Alliance iS and TQ Absolute will further enhance margins.
Q:What are your thoughts on BD's academic headwinds and the 4%-4.5% top-line growth target?
A:The academic headwinds are in line with expectations, and the company remains confident in the 4%-4.5% growth target for BD, supported by strong customer reception of products like FACSDiscover S8 and A8.
Q:What are the expectations for China growth and its sustainability?
A:China grew double digits in Q3, driven by CDMOs and academic stimulus. The company expects high single-digit growth in Q4 and models low to mid-single-digit growth over the long term, acknowledging potential air pockets post-stimulus.
Q:Why did full-year guidance increase less than the Q3 revenue beat, and what are the expectations for 2026?
A:The full-year guidance reflects prudence, with puts and takes across quarters. The 2026 setup is strong, with drivers like instrument replacement cycles, GLP-1 testing, and bioanalytical characterization. The company expects high single-digit growth and double-digit EPS growth.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the ramp-up speed for biosimilars adoption and the exact incremental revenue impact of the subscription-based model for Empower.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Academic Government
BD Bioscience
BioAccord LC
Bioscience Diagnostic
Biosciences Diagnostic
Diagnostic Solutions
Empower
India teen
LC MS
MS System
Waters
acquisition Wyatt
backdrop pharma
bioseparations characterization
combination BD
condition policy
demand
development manufacturing
driver instrument
environment end
feature
forward
increase
informatics
lab
molecule application
platform
product success
sale midpoint
tariff
win
workflow
WAT Transcript
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The earnings call summary indicates strong financial performance with better-than-expected revenue and operating margins. The Q&A section reveals optimism in growth areas like microbiology and LC-MS, and strategic localization efforts in China. Despite some uncertainties in management's responses, the overall sentiment is positive, with revenue synergies and disciplined cost management. The guidance reflects cautious optimism, and the company's strategic initiatives suggest potential for continued growth, leading to a positive outlook for the stock price.
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The earnings call indicates strong financial performance with 11% EPS growth and optimistic future guidance. The transition to subscription models and new product launches are expected to drive growth. Despite some challenges in BD assets, management is confident in achieving synergies and improving execution. The Q&A section reveals cautious optimism, with a focus on pricing discipline and operational improvements. Overall, the positive guidance, strong EPS growth, and strategic initiatives suggest a positive stock price movement over the next two weeks.
WAT Slides
WAT Report
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