Labcorp (LH) Q3 2025 Earnings Call Transcript

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Date

Tuesday, Oct. 28, 2025 at 9 a.m. ET

Call participants

Chief Executive Officer — Adam Schechter

Chief Financial Officer — Christin O'Donnell

Executive Vice President, Chief Operating Officer — Julia A. Wang

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Risks

Management cited the divestiture and consolidation of non-core early development sites, resulting in a reduction of approximately $50 million in annual revenue.

The company lowered its midpoint revenue growth guidance for 2025 by 40 basis points due to acquisition timing and unfavorable foreign exchange rates.

Book-to-bill ratio was 0.89.

Takeaways

Revenue -- Revenue was $3.6 billion for the quarter, up 9% year-over-year, driven by diagnostics and central laboratories performance.

Adjusted EPS -- Adjusted EPS increased 19% for the quarter, reflecting margin improvements and strong operating performance.

Adjusted Operating Income -- Adjusted operating income was $513 million, representing 14.4% of revenue, led by organic demand.

Diagnostics Segment Revenue -- Revenue for the Diagnostics segment was $2.8 billion for the quarter, up 8.5% from last year, with organic growth of 6.3%, and Acquisitions contributed 2.2%.

Diagnostics Organic Volume -- Organic volume rose 3.5%, and Organic price/mix increased 2.8%, driven by higher demand and an uptick in tests per session.

BLS Segment Revenue -- Revenue for the BLS segment was $799 million for the quarter, up 8.3% from last year, with organic growth of 5.3%, and Favorable currency impact contributed 3%.

Book-to-Bill Ratio -- Book-to-bill ratio was 0.89; the trailing twelve-month book-to-bill remained stable.

Adjusted Operating Margin -- Margin improved 100 basis points compared to last year. Diagnostics margin was the primary contributor.

Free Cash Flow -- Free cash flow was $281 million, contributing to a quarter-end cash balance of $598 million.

Debt and Leverage -- Total debt at $5.6 billion, with gross debt to trailing-twelve-month adjusted EBITDA at 2.4 times, below the targeted leverage range.

Shareholder Returns -- $60 million paid in dividends, and $25 million in share repurchases.

Guidance Updates -- Full-year 2025 revenue growth guidance was narrowed to 7.4%-8%, with Adjusted EPS guidance was set at $16.16-$16.50 for fiscal 2025. (The midpoint of the adjusted EPS guidance implies 12% growth for the year.); Free cash flow outlook was raised by $25 million to $1,165 million-$1,285 million for the full year 2025.

AI and Technology Initiatives -- Generative AI is being deployed in digital pathology and microbiology workflows to improve turnaround and efficiency.

New Diagnostics Offerings -- Introduced the first FDA-cleared blood-based Alzheimer’s diagnostic test for specialty care settings and highlighted the Omniseq Insight genomic profiling test.

Summary

Labcorp (NYSE:LH) reported 9% revenue growth and a 19% increase in adjusted EPS compared to the prior year, citing strong demand in diagnostic and central laboratory businesses while also highlighting strategic investments in AI and new test offerings. The company is streamlining its early development operations, removing approximately $50 million in annual non-core revenue to achieve a moderate operating income improvement. Free cash flow was $281 million, with cash deployment focused on acquisitions, share buybacks, and dividends, while maintaining a leverage ratio below target range. Updated forward guidance reflects a tighter revenue and adjusted EPS outlook, incorporating the impact of recent acquisition timing and foreign currency fluctuations. New technology initiatives and FDA-cleared diagnostic offerings are positioned as future growth contributors, supported by expanding partnerships in oncology and specialty testing.

“O'Donnell said, ‘Margin for the quarter improved 100 basis points, driven by Diagnostics.’”

O'Donnell said, “We introduced the first blood-based test cleared by the FDA to aid in the diagnosis of Alzheimer's disease in specialty care settings.”

The company expects enterprise margins to improve further in both the Diagnostics and BLS segments for full year 2025.

The remainder was due to delayed acquisition closings in the current year, according to management.

Industry glossary

BLS: Biopharma Laboratory Services segment, providing laboratory services for pharmaceutical and biotech development.

Book-to-Bill Ratio: A measure of the value of new orders received (bookings) relative to revenue billed in the same period; a ratio below 1.0 may indicate declining future demand.

Omniseq Insight: Labcorp’s comprehensive genomic profiling test used for therapy selection in pan-solid tumors.

Adjusted EPS: Earnings per share excluding certain non-recurring items, as defined in company financials.

Full Conference Call Transcript

Christin O'Donnell: Double-digit EPS growth. Our financial results reflect continued momentum in our diagnostic laboratories and central laboratory businesses. At an enterprise level, revenue increased to $3.6 billion, representing 9% growth compared to last year. Margin for the quarter improved 100 basis points, driven by Diagnostics. Adjusted EPS grew 19%, and we generated strong free cash flow of $281 million. Moving to our business segments, Diagnostics revenue increased 8.5%, primarily due to strong organic growth of 6%. BLS revenue increased, and BLS margin improved 20 basis points with the trailing twelve months remaining strong. In response to the lower-than-anticipated revenue in early development, approximately $50 million of annual revenue and a slight improvement in operating income.

We continue to make progress in our strategy to be the partner of choice for health systems and regional local laboratories, using science and technology to improve operational efficiency. We have added a significant number of strong strategic relationships over the past several years. Through these partnerships and acquisitions, we've expanded our patient-provider network. These partnerships have increased access to our broad test menu, improved patient care, and positioned us as an industry leader in oncology. We continue to have a very robust pipeline of opportunities. Additionally, in the quarter, Omniseq Insight, our comprehensive genomic profiling test, PDDX ileo tissue complete, is used for therapy selection for pan-solid tumors in support of clinical trials.

As a commercial partner, we have one of the most comprehensive test menus in the industry. We introduced the first blood-based test cleared by the FDA to aid in the diagnosis of Alzheimer's disease in specialty care settings. Separately, in our consumer business, we are closing care gaps and delivering better experiences. Moving now to review our use of science and technology to improve operational efficiency, we have a generative AI tool in our core laboratory operations for digital pathology that enables remote viewing and rapid analysis of cell-based samples, improving turnaround times. Finally, we are using AI and automation to accelerate microbiology workflows to reduce turnaround times. These are just a few examples.

We look forward to discussing others in the future. In summary, as we finish 2025 and move into 2026, our focus remains on driving value and shareholders.

Adam Schechter: Please see our earnings press release and supplemental financial presentation for detail on our best results. Adjusted operating income in the quarter was $513 million, or 14.4% of revenue, primarily driven by organic demand, which offset typical increases in personnel costs. The adjusted tax rate for the quarter was 23.3%, compared to 22.8% last year. We continue to expect our adjusted tax rate for the full year 2025 to be approximately 23%, up 19% from last year. We had free cash flow for the quarter and for the full year, we expect capital expenditures. During the quarter, the company invested, paid out $60 million in dividends, and repurchased $25 million of stock.

At quarter's end, we had $598 million in cash, while total debt was $5.6 billion. Our debt leverage as of quarter's end was 2.4 times, gross debt to trailing twelve month adjusted EBITDA, slightly under the low end of our targeted leverage range of 2.5 times to three times. Now I will review our segment performance, beginning with diagnostics laboratories. Revenue for the quarter was $2.8 billion, an increase of 8.5% compared to last year, with organic growth of 6.3% and acquisitions of 2.2%. Total volume increased 4.7% compared to last year, with organic volume contributing 3.5% as we continued to execute our strategy and drive strong demand. Acquisitions contributed 1.2%. Price mix increased 3.7% versus last year.

Organic price mix was 2.8%, as we benefited from mix, primarily due to the annualization of the inmate as well as an increase in test prep sessions. Acquisitions contributed 1%, compared to $387 million, or 15.2% of revenue last year. Adjusted operating margin was up. Adjusted operating income and operating margin increased primarily driven by organic demand, including the strong performance of NiMeTay, coupled with slight favorability from weather year-over-year. Now I will review the segment performance of revenue for the quarter that was $799 million, an increase of 8.3% compared to last year, due to an increase in organic revenue of 5.3% and a foreign currency translation of 3%. We continue to perform well in Central Lab.

In constant currency, early development revenue was up 1.1%, anticipated revenue in early development, we are beginning to divest or restructure through site consolidation, impacting approximately $50 million in annual revenue in non-core areas. We expect this absence to result in a more streamlined business with a slight improvement in operating income. BLS adjusted operating income for the quarter was $172 million, or 16.5% of revenue, compared to $121 million, or 16.4% of revenue last year. Adjusted operating income grew 9% year-over-year driven by organic demand to convert into revenue over the next twelve months.

Christin O'Donnell: Our segment's quarterly book to bill was 0.89. Our trailing twelve-month book to bill remains.

Adam Schechter: Which assumes foreign exchange rates, effective as of. The enterprise guidance also includes the impact from currently anticipated capital allocation utilizing free cash flow for acquisitions, share repurchases, and dividends. Beginning with the seven, Diagnostics continues to execute well in the market space. We have maintained the midpoint versus prior guidance and narrowed the growth range to 7.2% to 7.8%, which assumes approximately 4.5% organic revenue growth. In BLS, we have lowered the midpoint by 40 basis points versus prior Biden due to the unfavorable impact of currency. In constant currency, we have maintained the midpoint versus prior guidance as strength in central lab is offsetting softness in early development.

Christin O'Donnell: We continue to expect the central lab to grow in the mid-single digits for the full year. We now expect early development to grow low single digits.

Adam Schechter: For the full year. With Q4 presenting the most challenging year-over-year comparison, we updated the 2025 revenue growth guidance range to 7.4% to 8%. We lowered the midpoint by 40 basis points due to timing of acquisition revenue, which are held at the enterprise, and the unfavorable impact from currency. We continue to expect full year enterprise margins to increase, with margins improving in both diagnostic and BLS in 2025 versus 2024. Our guidance range for adjusted EPS is $16.16 to $16.50, with an implied growth rate at the midpoint of 12%. As compared to prior guidance, we have narrowed the range and raised the midpoint by approximately 5¢.

Our free cash flow guidance range is $1,165 million to $1,285 million. We narrowed the range and raised the midpoint by $25 million versus prior guidance.

Christin O'Donnell: Given our strong cash flow generation year-to-date.

Adam Schechter: In closing, our quarterly performance reflects the strong execution of our strategy and the continued efforts of our teams across the organization. As we look ahead, we are confident in our ability to deliver sustainable growth and long-term value for our shareholders.

Christin O'Donnell: We look forward to updating you in the coming quarter.

Adam Schechter: Operator, we will now take questions. Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. In the interest of time, we ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster. And our first question comes from Lisa Gill of JPMorgan. Your line is open.

Lisa Christine Gill: Good morning, Lisa.

Adam Schechter: Thanks very much. Good morning, Adam and Julia.

Lisa Christine Gill: I just want to better understand when we think about the revenue and the updated guidance around revenue. So Julia, I heard you talk about currency and acquisitions. I'm curious, one, are you seeing an increase in utilization from, for example, the exchange population as people anticipate that they potentially could lose their benefit or it could cost more going into 2026. And then is there a way for you to break down that 40 basis point between currency and acquisitions? And again, if the acquisition's just a timing aspect, and so you know, we'll see that come through in '26.

Christin O'Donnell: Hi, Lisa. I'll start. First, I would say that $13 million of it was from the foreign exchange. The rest was from the acquisitions. And it's fully timing related. Some of the acquisitions this year closed a little later than what we anticipated. So that impacted us just a little bit, and then a few fell into next year. But overall, the pipeline remains strong. The acquisitions remain strong. So it's purely timing related. With regard to your question on utilization, I'll first start off by saying we had a very strong quarter. When you look at the diagnostic business. Yeah. And when you look at the organic volume, it was up 3.5%.

And when I think about the volume, we are certainly seeing some uptick, I think, from demographics in the marketplace, from market share that we are gaining. I do not necessarily believe it's due to people concerned about losing the ACA because doctors can only take so many appointments, and they are usually very booked. So it would be hard to get a large number of people into those offices that quickly. So I think we are seeing it more from organic volume increases.

Lisa Christine Gill: That's helpful. Thank you.

Christin O'Donnell: Thank you.

Adam Schechter: And our next question comes from Michael Cherny of Leerink Partners. Your line is open.

Michael Aaron Cherny: Morning, Michael.

Adam Schechter: Morning, Adam. Thanks for the question. Congrats on the nice quarter. Maybe if I can dig in a little bit on organic price per mix in particular. It's been strong. You had a tough comp this quarter, and yet it still grew nicely. As you think about the behavioral changes that you're making as an organization, how much of it do you feel is proactive versus reactive in terms of what you can push versus what the market is bringing to you as we think about how that builds beyond this year? Thank you.

Christin O'Donnell: Yep. Sure, Mike. I'll give you some context, and I'll ask Julia to jump in and give you some specifics on the price mix. So when I look at the diagnostic revenue, it grew 8.5% versus last year. Organically, it was about 6%. When I look at the organic volume, that grew 3.5%. And price mix grew about 2.8%. Some of that was from mix, but also from Invitae. But I'll ask Julie to give you some more specifics about the price mix.

Julia A. Wang: Yes. Hi, Michael. If you were to break down the impact between unit price and the mix, we continue to see unit price being relatively flat. Therefore, the price mix impact has really been benefiting from this. And as Adam just shared, in the third quarter, our organic price mix was up 2.8%. That was driven primarily by an increase in tests per session as well as Invitae. Now the use of Invitae was more pronounced in Q3 due to the timing of the annualization being in the '3. And going into Q4, we expect the Invitae to drive continued price mix durability. And the impact will somewhat moderate when compared to Q3.

And if we step back and look at price mix in general, over time, we have seen a slight yet consistent growth in test prep sessions post-COVID year. Longer term, we continue to believe that the mix growth will be supported by the increase in our partnerships with large hospitals and health systems, as well as the aging population, the health and wellness trend, the breadth of our test menu, as well as our focus on specialty testing. And for the full year, you might have seen that in terms of our updated guidance, we maintained the midpoint of diagnostic revenue guidance of 7.5% and updated the organic revenue growth expectation to 4.5%.

Whereby the price mix is going to be a big contributor to that expectation.

Christin O'Donnell: Thank you.

Adam Schechter: And our next question comes from Jack Meehan of Nephron Research. Your line is open.

Jack Meehan: Good morning, Jack.

Adam Schechter: Jeff. Good morning, Adam. Good morning, Julia. Hoping to get a little bit more color on the announcement around the site consolidation in the early development business. Can you just talk about what the factors were you're seeing in the market that led you to make this decision? And it sounds like you've got the revenue impact. Is it possible to think about, you know, it sounds like this might be a low-margin just what the earnings impact might be from the decision. Thanks.

Christin O'Donnell: Yeah. Absolutely. Jack, I'll start by giving some additional color, then I'll answer the questions specifically. If you look at the 8% increase in revenue or 5% in constant currency, it was really driven by strength in central laboratories. It was up 107% if you look at constant currency, and it more than offset the weakness that we saw in early development. Based on what we're seeing in early development, we've decided to look at some non-core areas. We are going to divest certain things there, but we are also going to have some site consolidation. And that will be leading to approximately $50 million of annualized revenue.

Without that revenue, we expect to see a slight increase in operating income. So it was negatively affecting our accretion. So that'll be a positive for us. What drove us to that decision was we looked at three things. With early development business, we look at RFPs coming into us, then we look at our win rate, and then we look at if the trial starts on time.

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