Revity (RVTY) Q3 2025: Signals Software ARR Jumps 40%, Offsetting China Diagnostics Drag
Signals software annual recurring revenue (ARR) surged over 40%, providing a growth anchor amid diagnostics turbulence in China. Life sciences maintained mid-single-digit growth, but policy-driven reimbursement shifts in China diagnostics forced a guidance reset and will weigh through mid-2026. Management’s focus on margin resiliency, software expansion, and free cash flow discipline underpins cautious optimism for 2026 despite ongoing macro and policy headwinds.
Summary
- China Diagnostics Reset: Reimbursement policy changes cut multiplex panel demand, driving a multiquarter headwind.
- Signals Software Momentum: ARR and net retention outpaced sector norms, fueling pharma and material science wins.
- Margin Focus for 2026: Cost actions, integration synergies, and supply chain levers target a 28%+ operating margin baseline.
Performance Analysis
Revity’s Q3 2025 results reflected a bifurcated business model, with robust software-driven growth in life sciences partially offsetting acute diagnostics headwinds in China. Organic revenue rose 3%, with life sciences growing mid-single digits and diagnostics in the low single digits. The signals software business—Revity’s SaaS platform for pharma and scientific research—stood out, growing over 30% and pushing ARR growth north of 40%. Net retention hit 115%, highlighting customer stickiness and pricing power.
Diagnostics, especially in China, was the quarter’s pressure point. New DRG (diagnosis-related group) reimbursement policies and a de-bundling mandate sharply reduced demand for multiplex panels, which make up two-thirds of Revity’s China diagnostics revenue. As a result, China diagnostics fell about 15% in Q2 and is expected to be down mid-20s for the second half, representing a material drag given China diagnostics is 9% of company revenue. Outside China, immunodiagnostics and reproductive health remained resilient, with Americas penetration and menu expansion driving mid-teens growth in key segments.
- Software-Driven Diversification: Signals software’s 40%+ ARR growth and 115% net retention provided a counterweight to diagnostics volatility.
- Diagnostics Headwinds Concentrated: China policy changes drove a sharp contraction in multiplex panels, with full baseline reset not expected until April 2026.
- Reagents Stability: Reagents business grew sequentially for the sixth straight quarter, with China leading regional growth.
Margin performance remains a focal point, with tariff headwinds (50bps) and cost actions shaping the near-term outlook. Free cash flow conversion exceeded 90% in H1, and buybacks accelerated as management leaned into discounted valuation. The fourth quarter is expected to see a step-up in both revenue and margin, driven by seasonality and the Genomics England contract ramp.
Executive Commentary
"I think when you look on the diagnostic side, as you mentioned, you know, China was a headwind, but we were able to offset that with the growth outside of China. And so kind of came in at a global level in line with our expectations."
Max Krakow, Chief Financial Officer
"We still believe our margin entitlement over the next several years is mid-30s operating margin. And so we remain excited about our ability to show that to investors. And I think probably the one other underappreciated area outside of just the margin opportunity is really on the software business, which we touched on earlier today."
Max Krakow, Chief Financial Officer
Strategic Positioning
1. Software as a Strategic Growth Lever
Signals, Revity’s SaaS platform, is increasingly central to the company’s growth narrative. With ARR up over 40% and net retention at 115%, software is both expanding wallet share with Tier 1 pharma and gaining traction in material science. The transition to SaaS and new product launches (including large molecule workflows) are broadening the addressable market and smoothing cyclicality inherent in hardware and reagents.
2. Diagnostics Portfolio Resilience Outside China
Immunodiagnostics and reproductive health outperformed in the Americas and Europe, with menu expansion and automation driving penetration. The U.S. now accounts for over 15% of ImmunoDx revenue, up from less than 5% five years ago, with management targeting further gains via FDA approvals and new high-throughput instruments. Reproductive health growth is anchored by newborn screening menu expansion and the Genomics England NGS contract, which alone adds roughly one point to organic growth in 2025.
3. Margin Expansion Playbook
Cost discipline and integration synergies are central to offsetting macro and policy headwinds. Management is targeting a 28% operating margin baseline for 2026, with levers including China cost actions, post-acquisition integration, and ongoing supply chain optimization (including tariff mitigation). Q4 margin expansion is expected to be driven 75% by seasonal volume leverage, with the remainder from discrete cost actions.
4. Capital Allocation and Cash Flow Rigor
Free cash flow conversion above 90% is now a structural target, with buybacks prioritized given current valuation. Management remains opportunistic on share repurchase, with M&A on hold until market and integration clarity improves. The focus on cash discipline is a marked shift from prior years and underpins margin and EPS durability in a low-growth environment.
Key Considerations
Revity’s Q3 reflects a business navigating structural change in diagnostics while leaning on software and cash flow to drive shareholder value. Segment divergence and macro caution dominate near-term dynamics, but the company’s strategic moves around software, cost, and capital allocation set the stage for margin recovery and eventual growth reacceleration.
Key Considerations:
- Software Outperformance: Signals ARR and retention metrics highlight a differentiated asset in an otherwise hardware-centric peer group.
- Diagnostics China Drag: DRG and de-bundling policies will weigh on growth and margins through H1 2026, with full baseline reset expected by April.
- Reagents Share Gains: Competitive disruption and customer service differentiation are enabling share gains, especially in China and pharma.
- Margin Management: Seasonality, cost actions, and integration synergies are all required to deliver on 28%+ margin ambitions amid flat core growth.
- Free Cash Flow Commitment: Consistent 90%+ conversion and disciplined buybacks support valuation and capital return.
Risks
China diagnostics exposure remains a major risk, with reimbursement and policy changes likely to pressure revenue and margins through at least H1 2026. Tariff volatility and regulatory complexity in Europe-to-U.S. supply chains could further disrupt diagnostics cost structure. Software growth sustainability and macro-driven spending caution in pharma and academic markets also temper near-term upside, while integration risk from multiple acquisitions remains a latent concern.
Forward Outlook
For Q4 2025, Revity guided to:
- Organic revenue growth accelerating to approximately 4% at the midpoint
- Operating margin expansion of 400 basis points sequentially, driven by seasonality and cost actions
For full-year 2025, management maintained guidance at:
- 2-4% organic growth (down 100bps from prior guide due to China DX)
- Operating margin near 27%, with a 28% baseline targeted for 2026
Management highlighted several factors that will shape 2026:
- China diagnostics headwinds will persist through H1, with a baseline reset by April
- Software growth will moderate from 2025’s 20% pace, but remains a key driver
- Margin expansion is contingent on cost actions, integration synergies, and steady core growth
Takeaways
Q3 2025 marks a transition quarter, with software and cash flow execution offsetting diagnostics disruption. Margin management and capital return are central to the near-term thesis, while China and macro caution temper growth expectations.
- Signals Software is a Standout Asset: ARR and retention metrics position Revity as a differentiated player in life sciences SaaS, supporting diversification and valuation.
- Diagnostics Will Remain Volatile: China reimbursement resets are a multiquarter drag, but developed market growth and menu expansion offer partial offsets.
- Margin and Cash Flow Resiliency Key for 2026: Investors should track cost actions, integration progress, and the durability of free cash flow conversion as leading indicators of margin recovery.
Conclusion
Revity’s Q3 2025 results highlight a business in strategic transition, leaning on software, cost discipline, and capital allocation to offset policy-driven diagnostics headwinds. Margin durability and free cash flow execution underpin a cautious but credible outlook for 2026, with software outperformance and China stabilization as key watchpoints.
Industry Read-Through
Revity’s results reinforce the growing importance of SaaS models in the life sciences tools sector, as recurring software revenue and high retention provide ballast against cyclical and policy-driven volatility in hardware and diagnostics. China’s reimbursement reforms signal broader risk for diagnostics players with multiplex exposure, while persistent macro caution in pharma and academic end markets suggests continued pressure on capital equipment spending. Peers with diversified software portfolios or strong cash flow rigor are best positioned to navigate the current environment.