Executive Summary / Key Takeaways

• Agilent Technologies is executing a comprehensive "Ignite" transformation and strategic reorganization to become more nimble, customer-centric, and accelerate performance, leveraging its strong market position and differentiated technology portfolio.
• Recent financial results demonstrate resilience and sequential improvement, with Q2 FY25 revenue exceeding expectations, driven by growth in Life Sciences and Diagnostics Markets and Agilent CrossLab, despite ongoing capital spending constraints and macroeconomic uncertainty.
• Key growth vectors like PFAS testing, the Agilent CrossLab services and consumables business, and the expanding CDMO capabilities (NASD and BIOVECTRA) are providing durable momentum and are expected to contribute significantly to future performance.
• The company is actively mitigating risks from changing tariffs and government funding uncertainties through supply chain optimization, strategic pricing, and operational efficiencies, maintaining its full-year EPS guidance despite absorbing incremental costs.
• Agilent's robust balance sheet, strong cash flow generation, and commitment to shareholder returns, coupled with a strategic focus on innovation and value-enhancing M&A, position it for a return to more normalized growth rates in the second half of fiscal year 2025 and beyond.

Setting the Scene: A Leader's Evolution in Life Sciences and Applied Markets

Agilent Technologies, Inc. (A), incorporated in 1999, has established itself as a global leader providing application-focused solutions across the life sciences, diagnostics, and applied markets. Its journey has been marked by strategic evolution, including significant acquisitions like Varian and, more recently, BIOVECTRA and Sigsense, aimed at expanding its portfolio and capabilities. Operating in dynamic, innovation-driven industries, Agilent's core strategy revolves around a deep customer focus, delivering differentiated technology, and building a resilient business model capable of navigating fluctuating market conditions and geopolitical shifts.

In a significant move to enhance its strategic execution and customer responsiveness, Agilent implemented a new market-focused organizational structure in November 2024, reorganizing its operations into three core segments: Life Sciences and Diagnostics Markets (LDG), Agilent CrossLab (ACG), and Applied Markets (AMG). This restructuring is a central pillar of the company's broader "Ignite Transformation" initiative, designed to streamline operations, accelerate decision-making, and align resources more closely with market opportunities. The Ignite program encompasses strategic pricing, digital ecosystem enhancement, and procurement optimization, targeting over $130 million in profit contribution for fiscal year 2025 and aiming for annualized savings of approximately $80 million from organizational efficiency and over $50 million from procurement by the end of 2025. This transformation is critical in positioning Agilent for sustained growth and margin expansion in the years ahead.

Competitive Landscape: Leveraging Technology and Service in a Crowded Field

The life sciences and applied markets industries are intensely competitive, featuring large, diversified players and specialized niche providers. Agilent competes directly with global giants like Thermo Fisher Scientific (TMO), as well as specialized firms such as Mettler-Toledo International (MTD) in precision instruments, Waters Corporation (WAT) in chromatography, and Illumina (ILMN) in genomics.

Agilent's competitive positioning is anchored in its deep scientific knowledge, broad portfolio of analytical instruments, software, services, and consumables, and a strong reputation for quality and reliability. While larger competitors like TMO may possess greater scale and a wider array of consumables and reagents, Agilent differentiates itself through its application-focused solutions and a customer-centric approach, particularly highlighted by its Agilent CrossLab services. ACG's comprehensive service offerings, including contract repair, maintenance, and enterprise services, are uniquely positioned to support the growing installed base of instruments across all end markets, driving recurring revenue and fostering sticky customer relationships. The ACG segment demonstrated this strength by growing 9% core in Q2 FY25, led by consumables, automation, and services, with service contracts representing a significant portion of the business.

In specific technology areas, Agilent holds leadership positions. It is a leader in the GC and GCMS market, benefiting from a large installed base and recent product enhancements. In LC and LCMS, the launch of the Infinity III series is expected to drive a significant replacement cycle in its vast installed base, offering advanced automation and productivity gains that resonate strongly with customers. The company's strategic acquisitions, such as BIOVECTRA, further bolster its competitive standing in high-growth areas like CDMO services for advanced therapeutic modalities, complementing its existing NASD business and enabling a more complete offering in areas like gene editing.

Financially, while competitors like TMO and MTD often exhibit higher gross and operating margins, reflecting scale and manufacturing efficiencies, Agilent's profitability is expected to benefit from the Ignite transformation's cost-saving initiatives and strategic pricing actions. Agilent's TTM Gross Profit Margin stands at 53.79%, Operating Profit Margin at 21.38%, and Net Profit Margin at 17.59%. While these trail TMO's (41% Gross, 17% Operating, 15% Net) and MTD's (60% Gross, 29% Operating, 22% Net) on a TTM basis, the expected margin expansion from Ignite and a shift towards higher-margin offerings like services and advanced consumables could narrow this gap. Agilent's focus on high-value, application-specific workflows and its strong service attach rates are key competitive advantages that support its long-term profitability goals.

Technological and Operational Excellence: Fueling Growth Through Innovation

Agilent's investment thesis is deeply intertwined with its technological leadership and operational capabilities. The company provides a broad suite of instruments, software, and consumables that form the backbone of laboratory workflows across diverse industries.

Core to its offering are its chromatography and mass spectrometry platforms. The Infinity III LC series, launched in late FY24, is a prime example of leveraging decades of expertise. It features advanced automation and is compatible with previous generations, facilitating seamless upgrades for customers with older systems (like the extensive 1100 series installed base). This technology is My Green Lab certified, offering tangible benefits like reduced water, solvent, and energy consumption, aligning with customer sustainability goals. Early traction has been strong, with positive customer feedback and a growing order funnel, driving increased attach rates for service and consumables. Management sees this as a multi-year opportunity to refresh the installed base.

In gas chromatography, the Enhanced 8850-GC, when coupled with DCMS, allows customers to achieve greater productivity with a smaller footprint (50% reduction) and increased throughput (up to 5x), while using significantly less energy (45% lower) compared to conventional systems. Agilent is a leader in this market, and these innovations are expected to drive future momentum.

A rapidly growing area benefiting from Agilent's technological edge is PFAS testing. The 6495D triple quad LCMS system is highlighted as the most sensitive and robust solution, particularly effective for small and fragile molecules. Combined with specialized consumables and workflow services, Agilent offers a best-in-class solution for this emerging and expanding market. PFAS testing grew over 70% globally in Q2 FY25 and is now annualizing to well over $100 million, with strong growth expected to continue as regulations evolve and testing expands into new areas like air and volatile PFAS, where Agilent's GCMS capabilities are a strong fit.

In Cell Analysis, the new Seahorse XF Flex analyzer offers world-class sensitivity and versatility, empowering researchers exploring cellular metabolism. Agilent's xCELLigence RTCA technology has also been applied in the development and validation of potency assays for FDA-approved therapies, demonstrating its critical role in clinical applications.

The Agilent CrossLab segment embodies operational excellence and technological integration. Beyond traditional services, it includes software and automation solutions. The OpenLab laboratory software suite and InfinityLab Assist automation software provide differentiated functionality for instrument control, data analysis, workflow management, and remote monitoring, crucial for increasing productivity and ensuring compliance in high-throughput environments like pharmaceutical QA/QC labs. The growth in digital orders, reaching $1 billion for the full year FY24 and growing 12% in Q2 FY25, underscores the success of investments in the digital ecosystem.

Operational strength is further demonstrated by Agilent's manufacturing network, with four sites recognized as World Economic Forum Global Lighthouse Networks for their adoption of advanced technologies like AI, 3D printing, and robotics. A diversified, localized manufacturing footprint, including significant "Made in China" capabilities, provides resilience against geopolitical risks and is a strategic advantage, particularly in capturing opportunities like the China stimulus program. The ongoing expansion of nucleic acid therapeutics manufacturing capacity in Frederick, Colorado, represents a significant investment in a key growth area.

Financial Performance: Resilience Amidst Headwinds

Agilent's recent financial performance reflects a business navigating a challenging macroeconomic environment while executing strategic initiatives. For the three months ended April 30, 2025 (Q2 FY25), net revenue was $1,668 million, a 6% increase compared to $1,573 million in the same period last year, exceeding management's expectations. For the six months ended April 30, 2025, net revenue grew 4% to $3,349 million, up from $3,231 million in the prior year period. Foreign currency movements presented an unfavorable headwind, impacting Q2 revenue growth by 2 percentage points and the six-month period by 1 percentage point.

Growth in Q2 was primarily driven by the Life Sciences and Diagnostics Markets segment (up 8% reported) and Agilent CrossLab (up 7% reported), partially offset by a modest decline in the Applied Markets segment (down 1% reported). The BIOVECTRA acquisition contributed approximately 2 percentage points to the reported revenue growth in both periods.

Profitability metrics saw some pressure. Gross margin for the three and six months ended April 30, 2025, decreased by 2 percentage points in both periods to 51.9% and 52.7%, respectively. This was attributed to factors including unfavorable product mix, currency movements, higher shipping and customs costs, restructuring expenses, and increased variable pay, partially offset by targeted price increases and lower warranty costs.

Operating expenses increased, with selling, general, and administrative expenses rising 19% in Q2 and 11% in the six-month period, driven by higher restructuring expenses, transformational initiatives, corporate infrastructure costs, and variable pay, despite lower salary expenses from prior workforce reductions and favorable currency impacts. Research and development expenses saw a slight decrease.

Income from operations for Q2 FY25 was $300 million, down 17% from $363 million in Q2 FY24. For the six months, income from operations was $676 million, down 10% from $747 million. The operating margin decreased to 18.0% in Q2 FY25 from 23.1% in Q2 FY24, and to 20.2% for the six months from 23.1%. These declines were impacted by product mix, higher restructuring/transformational costs, and unfavorable currency, partially offset by higher sales volume and cost controls.

Net income for Q2 FY25 was $215 million ($0.75 per share), compared to $308 million ($1.05 per share) in Q2 FY24. For the six months, net income was $533 million ($1.86 per diluted share) compared to $656 million ($2.23 per diluted share) in the prior year period. The effective tax rate for the six months ended April 30, 2025, was 15.0%.

Despite the pressure on margins and net income, the company maintains a strong balance sheet and healthy cash flows. Cash and cash equivalents stood at $1,486 million as of April 30, 2025. Net cash provided by operating activities for the six months was $652 million, down from $818 million in the prior year, influenced by lower net income and changes in working capital, including increased inventory investment. Capital expenditures were $211 million for the six months, part of the expected $450 million for the full fiscal year, primarily for the Frederick, CO expansion. The company continues to return capital to shareholders, repurchasing $255 million in shares and paying $141 million in dividends in the six-month period. Total debt stood at $3,495 million (short-term and long-term) as of April 30, 2025, with significant liquidity available through credit facilities.

Outlook: Steady Recovery and Strategic Execution

Agilent's outlook for fiscal year 2025 is characterized by cautious optimism, reflecting an expectation of continued steady market recovery throughout the year, with growth accelerating in the second half. Management is maintaining its full-year core revenue growth guidance of 2.5% to 3.5%. Including updated, more favorable currency assumptions and the contribution from the BIOVECTRA acquisition (expected to contribute 2% to 2.2% to reported growth), the full-year reported revenue guidance is increased to a range of $6.73 billion to $6.81 billion, representing reported growth of 3.4% to 4.6%.

Full-year non-GAAP EPS guidance is maintained at $5.54 to $5.61. This implies that the company expects to fully absorb the estimated $50 million in gross incremental tariff exposure in the second half of FY25 (based on currently implemented rates), plus an additional estimated $40 million if proposed EU tariffs are implemented in July 2025. Mitigation strategies, including supply chain adjustments, strategic pricing, inventory build, and Ignite-driven savings, are expected to cover these costs in FY25 and fully mitigate them in FY26.

For the third quarter of fiscal year 2025, Agilent guides revenue to a range of $1.645 billion to $1.675 billion, representing core growth of 1.7% to 3.6% and reported growth of 4.2% to 6.1% (benefiting from FX tailwinds and M&A impact). Q3 non-GAAP EPS is expected to be between $1.35 and $1.37, representing growth of 2.3% to 3.8%. Segment-wise, Q3 core growth is expected to see LDG in the mid-single digits and ACG and AMG in the low single digits, reflecting some timing shifts from Q2 due to tariff-related dynamics.

Management's confidence in the outlook is underpinned by several factors: the sequential improvement observed in recent quarters, the instrument book-to-bill ratio consistently above one, the momentum in key growth vectors like PFAS (annualizing over $100M, expected to reach $1B addressable market by 2030), the strength of the ACG business, the potential for a replacement cycle driven by the Infinity III LC, and the strategic benefits from the BIOVECTRA acquisition (expecting double-digit growth from NASD in the second half of FY25). The Ignite transformation is expected to contribute meaningfully to operating margin expansion (projected 50 to 70 basis points for FY25) and overall profitability.

However, the guidance incorporates an element of prudence due to ongoing uncertainties, including the macroeconomic environment, geopolitical landscape, potential impacts from US federal government funding (NIH exposure is small, around 1% of revenue), and the dynamic nature of tariffs. Management emphasizes that while Q2 results exceeded expectations, maintaining a disciplined outlook is crucial.

Risks and Considerations

Despite the positive momentum and strategic initiatives, several risks could impact Agilent's ability to achieve its objectives:

• Tariffs and Trade Policies: Changes in tariffs, particularly those recently announced or proposed by the U.S. and other countries, pose a significant risk to costs of revenue and operational efficiency. While mitigation strategies are in place, the ultimate impact depends on the timing, amount, scope, and duration of implemented tariffs and the company's ability to fully offset them.
• Macroeconomic and Geopolitical Uncertainty: Slower global economic growth, inflation, interest rate fluctuations, and geopolitical instability (including conflicts and trade tensions) can adversely affect customer capital spending, demand for products and services, and supply chain stability.
• Government Funding: Continued pressure on U.S. federal government funding and limited granting of funds could impact customers in the academic and government markets, affecting demand.
• Competition: The intense competition in the analytical instrument industry requires continuous innovation and effective market positioning. Failure to introduce successful new products or manage costs effectively relative to competitors could impact market share and profitability.
• Supply Chain and Operations: Dependence on contract manufacturing and outsourcing, coupled with the risks of catastrophic events affecting manufacturing facilities or distribution systems, could disrupt operations and delay product delivery.
• M&A Integration: While acquisitions like BIOVECTRA offer strategic benefits, successful integration of operations, cultures, and technologies is crucial to realizing anticipated synergies and avoiding unexpected costs or disruptions.
• Regulatory Compliance: The company and its customers are subject to extensive regulations (FDA, environmental, data privacy, anti-bribery). Failure to comply or changes in regulations could result in significant expenses, penalties, or restrictions on business operations.

Conclusion

Agilent Technologies is strategically positioning itself for a return to accelerated growth by leveraging its differentiated technology, executing a comprehensive transformation program, and pursuing value-enhancing M&A. The recent performance, including exceeding Q2 FY25 expectations and maintaining full-year EPS guidance despite absorbing incremental tariff costs, demonstrates resilience and effective operational management in a challenging market.

The Ignite transformation, coupled with a market-focused organizational structure, is expected to drive significant efficiencies and accelerate innovation, particularly in high-potential areas like the Infinity III LC replacement cycle, PFAS testing, and the expanding CDMO business. Agilent's strong competitive standing, built on technological leadership, a broad portfolio, and a robust service business, provides a solid foundation. While macroeconomic uncertainty, geopolitical risks, and tariff dynamics present headwinds, the company's proactive mitigation strategies and strong financial health offer a degree of insulation. For investors, Agilent represents a company actively transforming to capitalize on long-term secular growth drivers in its core markets, with a clear roadmap focused on innovation, operational excellence, and strategic expansion, making it a compelling consideration as market conditions continue their expected steady recovery.