NEW YORK – Following Q2 financial results that missed Wall Street estimates on the top and bottom line, Thermo Fisher Scientific on Wednesday revised its revenue and earnings guidance for 2023, citing a "more challenging" macroeconomic environment, and announced $450 million in cost-reduction measures, including job cuts.
According to CFO Stephen Williamson, the company has initiated $450 million of cost savings beyond what was embedded in its previous guidance. These include reductions in discretionary spending and activity levels in certain areas, he said, as well as optimizing manufacturing operations.
In addition, the company is “appropriately reducing headcount where that makes sense across the business,” he said. Thermo Fisher did not respond to a request for more details regarding the workforce reduction before press time.
For full-year 2023, the Waltham, Massachusetts-based company now expects total revenue of $43.4 billion to $44.0 billion, down from its prior estimate of $45.3 billion. Core organic revenue growth is expected to be 2 percent to 4 percent, compared to 7 percent before, and adjusted earnings per share (EPS) is forecast to be $22.28 to $22.72, down from a previous estimate of $23.70.
"The macroeconomic environment became more challenging in the quarter," Thermo Fisher Chairman, President, and CEO Marc Casper told investors in a conference call recapping the company's Q2 financial results. "This impacted our Q2 results and informed a more moderate view for the full year."
According to Casper, when the company provided its revenue guidance at the beginning of the year, management assumed core market growth of 4 percent to 6 percent for 2023. However, given the challenging macroeconomic environment, this has changed to 0 percent to 2 percent.
In particular, Casper pointed to declining economic activity in China as well as the fact that businesses in general have become “more cautious” in their spending.
According to Williamson, the company observed “positive momentum” in the Chinese economy at the beginning of the year and assumed this trend would persist. However, as the second quarter progressed, economic activity in China “significantly slowed,” he said, leading to reduced customer activity. As such, the company now believes it is appropriate to assume the Chinese market condition will remain the same for the remainder of the year.
“Our leadership team from China came to the US, and [we] had the opportunity to sit down and chat with them about what they are seeing,” Casper added. “It really does feel like [the slowed market condition in China] is broad economic-based, and we saw that across our different businesses, not limited to one.”
As for customer spending patterns, Williamson said the company is seeing customers becoming more stringent with their spending due to the uncertain macroeconomic conditions across the board. “This dynamic became more challenging in Q2,” he pointed out. “We previously assumed that this would lessen in impact as the year progressed, and we now think it's appropriate to assume that the cautious spending will continue through the remainder of the year.”
Overall, Williamson said, Thermo Fisher’s revised guidance reflects lower core organic revenue growth of 2 percent to 4 percent while assuming $100.0 million less in testing revenues. “We recognize that the change in guidance is significant,” he told investors. “We think it's appropriate given the change in the macro environment.”
He said the company is likely to end the year with $43.5 billion in revenues and adjusted EPS of $22.36.
More specifically, Williamson said the firm is now assuming $300.0 million of testing revenue in 2023, of which the company has delivered $225.0 million through the half-year point. It continues to expect $500.0 million in revenues from vaccines and therapies in 2023. This is $1.20 billion less than the prior year, leading to a 3-percentage-point impact on core organic revenue growth.
Additionally, Williamson told investors that Thermo Fisher’s recent Binding Site Group acquisition is “performing well” and is expected to contribute approximately $260.0 million to revenue growth for the year or $.09 to adjusted EPS.
Turning to financial results, for the three months ended July 1, Thermo Fisher reported revenues of $10.69 billion, down 3 percent from $10.97 billion a year ago and below the average estimate by Wall Street analysts of $10.98 billion.
Revenues were $300.0 million lower than the company’s previous guidance, Williamson said, adding that $280.0 million was attributable to the core business and $20.0 million to COVID testing.
Thermo Fisher’s organic revenues dropped 3 percent during Q2. Meanwhile, core organic revenues grew 2 percent, driven by its microbiology, immunodiagnostics, and transplant diagnostic businesses.
Of the changes in core revenues, Williamson said approximately one-third was driven by lower economic activity in China while the remainder was caused by more cautious spending across the company’s customer base globally, particularly in the biotech industry.
By geography, Williamson said the company’s Q2 organic revenue declined mid-single digits in North America while growing in the low-single digits in Europe. Asia-Pacific declined in the mid-single digits, with China declining in the low teens.
Looking at business segments, Thermo Fisher’s life sciences solutions revenues for Q2 declined 25 percent to $2.46 billion, compared to $3.29 billion in Q2 2022. Organic revenue for the sector was also 25 percent lower than the prior-year quarter, driven by “moderation” in pandemic-related revenue and, to a lesser extent, macroeconomic factors.
Revenues from the specialty diagnostics segment were $1.11 billion, almost flat compared to $1.10 billion in the year-ago period. Organic revenue for the segment was 5 percent lower year over year. During the quarter, the company continued to see “strong underlying growth” from the microbiology, diagnostics, and transplant diagnostics businesses, Williamson said, which was offset by lower pandemic-related revenues.
Revenues from the analytical instruments segment rose 9 percent year over year to $1.75 billion from $1.61 billion in Q2 2022, representing 10 percent organic growth, primarily driven by the company’s electron microscopy business.
Meanwhile, revenues from laboratory products and biopharma services were $5.83 billion, up 5 percent from $5.54 billion a year ago, representing organic growth of 5 percent. Growth in this segment was led by the pharmacy services and clinical research businesses, according to Williamson.
Casper said the company’s revenues grew in the high-single digits during the quarter in the academic and government market, driven by the electron microscopy, chromatography, and mass spectrometry businesses, as well as its research and safety market channels.
In the industrial and applied markets, Thermo Fisher’s revenues grew in the low-single digits for the quarter, driven by the analytical instrument business. Additionally, the company’s revenues in the diagnostics and healthcare market were approximately 20 percent lower in Q2 than the prior-year period.
Thermo Fisher's Q2 net income was $1.36 billion, or $3.51 per share, compared to net income of $1.67 billion, or $4.22 per share, a year ago. Adjusted EPS was $5.15 for the quarter, falling short of analysts' average estimate of $5.42 per share. Williamson said Q2 adjusted EPS was $.28 lower than what the company incorporated in its previous guidance, with $.07 driven by currency effects and $.21 driven by core revenues.
The company's R&D costs dropped 5 percent in Q2 to $345.0 million from $365.0 million a year ago, and SG&A expenses decreased 4 percent to $1.67 billion from $1.74 billion.
Thermo Fisher ended the quarter with $3.13 billion in cash and cash equivalents.
In afternoon trading on the New York Stock Exchange, Thermo Fisher's shares remained almost flat at $567.70.