Revity (RVTY) Q3 2025: Software Up 20% as AI Drives Operational Leverage and Margin Resilience
Revity’s Q3 highlighted the resilience of its software and reproductive health franchises, even as China diagnostics volumes dragged on growth and margins. AI-driven innovation and operational discipline offset end-market volatility, while management’s capital deployment strategy remains focused on buybacks amid a cautious M&A stance. Guidance signals margin expansion and high-single-digit EPS growth for 2026, with underlying AI and software momentum poised to shape forward returns.
Summary
- AI Integration Accelerates: Revity’s rapid AI deployment is driving both commercial and internal productivity gains.
- China Diagnostics Drag Persists: Headwinds in China diagnostics remain the key constraint on segment growth.
- Margin Expansion Path Clear: Management is targeting 28% operating margins for 2026 on stable low-single-digit growth.
Performance Analysis
Revity delivered 1% organic revenue growth in Q3, with performance in line with expectations but marked by pronounced divergence across segments and geographies. The software business (Signals) grew 20% organically, maintaining its position as a portfolio bright spot, with ARR (annual recurring revenue) above 40% and net retention over 110%. In contrast, diagnostics in China declined by more than 20% due to ongoing DRG (Diagnosis-Related Group, a reimbursement policy headwind) impacts, while ex-China diagnostics grew high single digits, especially in the Americas.
Operating margins landed at 26.1%, modestly above internal expectations but down year-over-year due to tariffs, FX, and lower volume leverage—particularly in China. Free cash flow conversion remained robust at 88% of adjusted net income year-to-date, supporting aggressive capital returns via buybacks. Management raised full-year EPS guidance, citing strong margin discipline and incremental below-the-line favorability.
- Segment Divergence: Life sciences was flat, diagnostics up 2% organically, with software and reproductive health offsetting China weakness.
- Geographic Mix: Europe and Americas grew, while Asia—led by China—remained a drag.
- Cost Control: Recent restructuring and cost containment initiatives partially offset volume-driven margin pressure.
Buybacks remain the primary capital allocation lever, with $205 million repurchased in Q3 and a new $1 billion authorization secured. Management expects continued margin improvement as restructuring and AI-driven productivity gains take hold.
Executive Commentary
"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."
Prahlad Singh, President & Chief Executive Officer
"Our use of AI in our operations is already delivering significant value for both our employees and our customers, but also our financial performance. By leveraging our platform, our sales reps are now seeing a three to four times improvement in their lead generation conversion rates."
Max Grykowiak, SVP & Chief Financial Officer
Strategic Positioning
1. AI as a Core Operating Lever
AI is rapidly becoming embedded across Revity’s operating model and product suite. Internally, over 30 custom AI agents are deployed across commercial, technical, HR, and finance functions, driving measurable efficiency gains such as 3-4x improvement in sales lead conversion and 5-10% faster software development cycles. Externally, AI-powered products—like Signals One and Living Image Synergy AI—are shortening customer workflows and opening new revenue streams.
2. Software and Reproductive Health as Growth Anchors
The Signals software business continues to outperform, with high ARR growth and retention. Management expects mid-single-digit software growth in 2026 as tough comps moderate, but new product launches (such as lab design and logistics platforms) are set to ramp. Reproductive health, especially newborn screening, is also expanding, with regulatory wins and new assays (e.g., Neo LHD 7 Plex) broadening the addressable market.
3. Navigating China Diagnostics Headwinds
China’s diagnostics business remains the largest drag, now representing about 6% of revenue and down more than 20% year-over-year due to DRG reimbursement cuts. Management expects this headwind to persist through the first half of 2026, with stabilization and muted growth likely in the back half. Localization of manufacturing is a key mitigation strategy, with reproductive health and much of immunodiagnostics now produced in China for China.
4. Capital Deployment Focused on Share Repurchases
With limited M&A opportunities meeting return thresholds, Revity is prioritizing buybacks, having retired 10% of shares since its major divestiture. The new $1 billion repurchase authorization signals continued commitment to capital returns, while maintaining investment-grade leverage and flexibility for opportunistic deals.
5. Partnerships and Pipeline Progress
Strategic collaborations (e.g., with Genomics England and Sanofi) are beginning to deliver pipeline revenue, such as the GEL study’s initial $10 million contribution and a new four-plex diabetes assay partnership. Management anticipates further partnership-driven upside as these and other projects mature.
Key Considerations
Revity’s quarter was defined by disciplined execution, AI-led efficiency, and a clear-eyed approach to navigating persistent China headwinds. The company’s operating model is increasingly weighted toward software, AI, and reproductive health, while capital returns and margin expansion remain high priorities.
Key Considerations:
- AI-Driven Productivity: Tangible internal and external AI use cases are already boosting conversion, accelerating development, and improving collections.
- China Drag Still Material: Diagnostics in China will remain a headwind through mid-2026, but ex-China diagnostics and reproductive health are outperforming.
- Software Comp Dynamics: Signals’ 2026 growth will moderate to mid-single digits after outsized 2025, but APV and retention metrics remain strong.
- Buybacks Over M&A: Management’s disciplined approach favors share repurchases over acquisitions given current market valuations and risk.
- Margin Expansion Commitment: Cost actions and efficiency gains underpin confidence in 28% operating margin baseline for 2026, with upside if growth accelerates.
Risks
China remains a structural risk, with DRG-driven volume declines and reimbursement uncertainty potentially extending beyond current expectations. Academic and government funding softness could weigh on reagents demand, while FX volatility and tariffs continue to impact margins. Software growth moderation in 2026 could pressure overall top-line momentum, and reliance on buybacks for EPS growth raises questions about organic expansion.
Forward Outlook
For Q4, Revity expects:
- Organic revenue growth consistent with the 2-4% full-year range, implying 2-3% for Q4.
- Operating margins to reach 30% in Q4, the company’s seasonally strongest quarter.
For full-year 2025, management reiterated:
- Organic revenue growth of 2-4%.
- Adjusted EPS raised to $4.90-$5.00.
- Operating margin guidance of 27.1%-27.3%.
Management signaled:
- 2026 organic growth baseline of 2-3%, with potential upside if customer demand normalizes.
- 28% operating margin baseline, with high-single-digit EPS growth expected before additional capital deployment.
Takeaways
Revity’s near-term growth is anchored by software, AI, and reproductive health, while China diagnostics remains a drag through mid-2026. Investors should focus on the pace of demand normalization in life sciences instruments, the durability of AI-driven efficiency gains, and the ability of new product launches and partnerships to offset regional headwinds.
- Software and AI Provide Resilience: Strong software growth and real-world AI use cases are supporting margins and offsetting market volatility.
- China Headwinds to Persist: Diagnostics in China will likely remain a growth constraint until at least Q2 2026, but management expects stabilization thereafter.
- Capital Returns Remain Central: Aggressive buybacks and margin discipline are key levers for EPS growth as organic revenue stabilizes.
Conclusion
Revity is executing well on what it can control, with AI and software momentum providing ballast against persistent China and academic funding headwinds. Margin expansion and disciplined capital deployment set the stage for high-single-digit EPS growth in 2026, though organic growth will hinge on end-market recovery and further traction from new product launches.
Industry Read-Through
Revity’s results reinforce the sector-wide pivot toward software, AI, and operational efficiency as growth levers, especially amid persistent regional and reimbursement headwinds. China diagnostics remains a structural risk for all global players, with DRG-driven volume declines broadly impacting the peer set. AI adoption is moving from concept to operational reality, with measurable impact on productivity and commercial outcomes—an emerging must-watch theme for diagnostics and life sciences companies. Capital returns, particularly buybacks, are becoming the preferred lever in the absence of high-ROI M&A opportunities, a trend likely to persist across the sector as organic growth stabilizes.