WAT Q2 2025: New TQ XR boosts LCMS injections 10x, fueling demand
- Exceptional Instrument Innovation: The company’s new TQ Absolute XR instrument has dramatically improved robustness—customers have increased uninterrupted plasma injections from 3,000 to 30,000, underscoring strong replacement cycle momentum in its LCMS portfolio.
- Robust Demand and Strong Funnel Activity: There is strong customer enthusiasm across major segments—with healthy order funnels among large pharma, CDMOs, and notably double-digit growth in China—indicating sustained demand and a promising near‐term growth trajectory.
- Immediate Synergy and Operational Upside: The pending combination with BD’s biosciences and diagnostic solutions is expected to deliver early operational benefits through enhanced ecommerce adoption and service attach rates, which have historically driven robust growth and margin expansion.
- Weak performance in the TA segment: The call noted a roughly 20% decline in TA performance in The Americas due to macroeconomic and tariff headwinds, which could signal ongoing challenges in that key revenue segment [Speaker 2][Speaker 5].
- Reliance on one-off pull forward effects: Management cited an $8,000,000 pull forward in sales with uncertainty about its timing, suggesting future revenues could be adversely affected if this temporary boost does not recur [Speaker 6].
- Exposure to tariff uncertainties: Despite some improvements, the discussion highlighted that tariff remediation costs and related uncertainties continue to impact margins and could pose risks if tariffs remain volatile or worsen [Speaker 3].
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Constant Currency Sales Growth | Q3 2025 | 5% to 7% | 5% to 7% | no change |
Reported Sales Growth | Q3 2025 | 4% to 6% | 4.5% to 6.5% | raised |
Adjusted EPS | Q3 2025 | no prior guidance | $3.15 to $3.25 | no prior guidance |
Constant Currency Sales Growth | FY 2025 | 5% to 7% | 5.5% to 7.5% | raised |
Reported Sales Growth | FY 2025 | 4% to 6% | 5% to 7% | raised |
Adjusted EPS | FY 2025 | $12.75 to $13.05 | $12.95 to $13.05 | raised |
Gross Margin | FY 2025 | 59% | 59% | no change |
Adjusted Operating Margin | FY 2025 | 31% | 31% | no change |
Net Interest Expense | FY 2025 | $40 million | $40 million | no change |
Average Diluted Share Count | FY 2025 | 59.7 million | 59.7 million | no change |
Tax Rate | FY 2025 | 16.5% | 16.7% | raised |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Product Innovation | Q1 2025 highlighted multiple product launches (Alliance iS HPLC, Xevo TQ Absolute, chemistry consumables, TA division launches) and Q4 2024 emphasized a revitalized portfolio with mass spec innovations and new product launches | Q2 2025 emphasized “Revitalizing Innovation” with breakthrough products (Alliance IS, Zevo TQ Absolute XR, MaxPeak Premier, BioResolve Protein A) gaining strong traction | Consistent focus on innovation with an even stronger product portfolio and improved customer traction in the current period |
Instrument Replacement Cycle | Q1 2025 noted strong replacement growth in pharma (double-digit growth in LC and mass spec) and Q4 2024 described a recovering cycle with multiyear replacement planning | Q2 2025 reported a healthy replacement cycle supported by new product introductions (e.g., Alliance IS and TQ Absolute XR) and ongoing LCMS growth | Steady progress with continued robust customer activity and reinforcing momentum from product improvements |
Tariff Risks and Mitigation Strategies | Q1 2025 discussed modest tariff impacts (a $10 million operating margin impact, selective surcharges, and mitigation steps) ; Q4 2024 did not address tariffs | Q2 2025 detailed tariff impacts on gross margins, ongoing remediation efforts, and highlighted regional nuances (e.g. India’s funnel activity) | Re-emergence as a key discussion point with greater detail and emphasis on geographic impacts in the current period |
Macroeconomic and Regulatory Headwinds | Q1 2025 mentioned dynamic macro conditions, U.S. policy adjustments, and tariff factors affecting growth while Q4 2024 acknowledged macro uncertainties, FX headwinds, and NIH funding risks | Q2 2025 stressed macro sensitivity in TA segments with specific regulatory challenges in China and persistent tariff-related issues | Consistent headwinds with nuanced regional and segment pressures; steady caution maintained for 2025 |
Emerging Market Growth and Regional Dynamics | Q1 2025 reported robust performance in India (≈20% growth), modest growth in China (5%), and strong Asia (13%), Americas (6%), and Europe (low single-digit) while Q4 2024 noted Asia (9%), significant India (up to 34% constant currency), and Europe (11%) | Q2 2025 saw India advancing in the high teens, China accelerating to double-digit gains, with Asia at 14%, Europe at 8%, Americas only 2%, and PFAS applications growing over 50% | Persistent strength in emerging markets with accelerated momentum in China and region-specific disparities; India remains a key driver |
Operational Synergies, Service Attach Rates, and Recurring Revenue | Q1 2025 emphasized operational agility with tariff mitigation supporting mid-single digit recurring revenue growth and stable service attach rates and Q4 2024 highlighted operational excellence with >50% service plan coverage and recurring revenue growth of 6–7% | Q2 2025 provided detailed synergy targets (e.g. $345M in EBITDA synergies), service attach rates increased to 52%, and recurring revenue grew 11% driven by strong chemistry performance | Consistent operational focus with enhanced synergy targets and improved recurring revenue, reflecting strategic operational improvements |
BD Biosciences Combination Synergies | Q1 2025 and Q4 2024 had no mention of BD Biosciences combination synergies [N/A] | Q2 2025 presented an in-depth discussion on cost synergies (e.g. $200M by year three) and revenue synergies (e.g. $290M by year five) with detailed breakdowns | New topic that emerged in the current period with significant long-term potential for value creation |
Reliance on One-off Revenue Pull Forward Effects | Q1 2025 noted no pull forward effects and standard ordering patterns while Q4 2024 attributed strong Q3–Q4 ramp to a typical budget flush | Q2 2025 highlighted an $8M sales pull forward in chemistry due to tariff-driven safety stock buildup, with an even distribution assumed into Q3 and Q4 | Consistent discussion evolving from typical budget flush patterns to a quantifiable, though modest, pull forward effect in the current period |
Strong Pricing Power and Margin Expansion | Q1 2025 underscored strong pricing (200bps pricing gains plus tariff surcharges adding 50bps) and stable margins and Q4 2024 focused on 200bps pricing contributions and margin expansion (60bps increase to 35.5% adjusted operating margin) | Q2 2025 reiterated 200bps price contributions, introduced targeted pricing in new segments (e.g., microbiology with a 700bps margin opportunity), and noted tariff impacts with an expectation of improvement in H2 | Consistently strong pricing power with additional emphasis on product-specific pricing improvements fueling further margin expansion |
Declining TA and U.S. Academic/Government Segment Performance | Q1 2025 reported modest 1% growth in TA (attributed to order timing) and anticipated a 20% decline later in U.S. A&G based on cautious, derisked guidance while Q4 2024 recorded strong A&G performance driven by Asian markets | Q2 2025 revealed a marked decline in the TA division (20% drop in The Americas and 6% overall) and a 3% decline in U.S. A&G performance, reflecting challenges in macro-sensitive segments | A negative shift in TA performance with emerging concerns in U.S. A&G, indicating potential risks for future revenue in these segments |
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Acquisition Synergies
Q: How are revenue synergies divided?
A: Management expects $290M in revenue synergies over five years, driven by commercial excellence, improved service attach rates, and enhanced ecommerce initiatives across both biosciences and diagnostics, thereby underpinning the acquisition’s value [index: 8][index: 9]. -
Margin Outlook
Q: What drove Q2 margins?
A: Gross margin was 58.3% with an adjusted operating margin of about 29.1%, affected by tariff remediation costs and a 5% tax headwind, though improvements are anticipated later as these factors normalize [index: 3][index: 13]. -
Instrument Growth
Q: How is LCMS performing?
A: LCMS instruments grew in the high single digits, supported by a healthy replacement cycle in pharma and the strong market entry of the new TQ Absolute XR—which notably improved injection capacity from 3,000 to 30,000 without service interruptions [index: 2][index: 4]. -
New Product Timeline
Q: What’s the timeline for microbiology innovations?
A: Management projects that combining mass spec with microbiology could yield a new product in 2–3 years at the earliest, with a comprehensive rollout expected within 3–5 years, underscoring a long-term innovation trajectory [index: 4]. -
China Sales
Q: How sustainable is China’s growth?
A: China delivered double-digit growth this quarter, propelled by strong performance in pharma and industrial sectors, yet management remains conservative for H2, expecting low to mid single digit growth with only modest stimulus support [index: 5][index: 6]. -
TA Decline
Q: Why did TA drop significantly?
A: TA experienced about a 20% decline in the Americas, primarily due to softness in materials and polymer testing amid tariff challenges, although large pharma replacement cycles continue robustly [index: 5]. -
Academic Impact
Q: How is NIH funding affecting academics?
A: Despite some positive shifts in NIH sentiment, academic and government segments still declined by 3%, with management taking a conservative view for the remainder of the year [index: 7]. -
Pull Forward Effect
Q: What about the $8M sales pull forward?
A: There was a confirmed $8M pull forward in Q2, anticipated to spread evenly across Q3 and Q4, reflecting customer inventory strategies and safety stock adjustments, though its exact timing remains variable [index: 13]. -
Drug Discovery & Tariffs
Q: How are drug discovery and India tariffs faring?
A: Pharma drug discovery, constituting about 5% of pharma revenue, remains slow, while tariffs—particularly impacting India—haven’t yet affected operations as customers continue robust activity [index: 8][index: 11].
Research analysts covering WATERS CORP /DE/.