Agilent Technologies Pricing Spineometer: 2 of 5 Vertebrae

Agilent Technologies, a global company providing instruments, software, services, and consumables for laboratories, had a positive Q1 2023. Revenue increased 5% to $1.6 billion while earnings before interest and taxes increased 13% to $426 million over the same period last year.

Agilent’s 28 February earnings call focused mostly on other issues, but pricing was acknowledged to have played a role in their positive performance.

Higher prices did contribute to higher revenue. CFO Bob McMahon stated, “Pricing for the quarter was higher than the full-year forecast.”  And later added, “I’ve been very pleased with our ability to continue to maintain that pricing throughout the course of the last several quarters, and I would expect that to continue going forward.”

Higher prices did not appear to come at the cost of lower volumes.  Bob McMahon continued “We are still planning and forecasting that 3% price contribution for the full year of FY 23 and you’re right that would speak to roughly a three-point volume.”  That is, he is anticipating growth in both pricing and sales quantity over FY ’23.

Instrument sales make up 43% of Agilent’s revenue.  Most customers would consider these capital expenditures.  The remaining 57%, or most of its revenue, is derived from software, services, and consumables, which most customers consider ongoing expenses.

A challenge often observed with sales of capital expenditure goods along with ongoing expense items is that the favoring of one type of sale harms that of the other.  Some companies tend to discount the capital expense sale to win the ongoing expense sales in a razor-razorblade strategy.  Other companies eschew that approach but find difficulty selling the ongoing expense items, specifically software, at a price which properly reflects its value to the customer.   These challenges can be aggravated by sales targets and compensation strategies that drive high “attach rates”, or high frequency, that a service contract or software subscription is attached to the sale of a capital expenditure good.

I don’t know how Agilent is addressing this commonly observed business challenge. I do know that they are proud of their attach rates.

Padraig McDonnell, President of Agilent CrossLab Group (ACG) spoke to the growing importance of services in revenue and the issue of attach rates of service contracts with equipment sales, and Agilent’s success in this area.  He stated “Our focus on solution-selling has really paid off. That’s really driven attach rates and I think our overall attach rates in both service and consumables.”

Jacob Thaysen, President of Life Science and Applied Markets Group (LASG) highlighted the importance of informatics specifically and attach rates.  It should be noted that informatics is a hot and highly contested area of investment, especially within life sciences, as the potential to apply artificial intelligence to enhance productivity is increasingly within reach of being realized.  Jacob Thaysen stated “Along worldwide product automation is that there’s been a lot of investment from both businesses and in commercial about driving connect [attach] rate also with consumables. …  It’s more about selling the full solution, and hence, going out not only 40% in the instrument, [but also] the consumables [and] informatics …, and other workflows into BioPharma’s.  … We’ve seen significant uptake in our attach rates in our consumables and I would say we will continue to see growth.”

As mentioned, pricing is not the only challenge faced by Agilent.  Long engagement with and continued market penetration in China, role in semiconductor manufacturing, reopening of engagement with hospitals post covid, scientific advancement in cancer research and treatment as well as CRISPR, all impact Agilent’s performance.

With the stated importance of pricing, global market reach, diverse revenue streams, and the wide variety of offerings produced and customers served, we expect to identify a robust pricing team.

Research into the quality of Agilent’s pricing team indicated a very poor state of affairs.  A few pricing professionals were identified with the title of manager, but many of them worked on transfer pricing.  Transfer pricing does not impact the top line in the same manner as customer pricing.  This implies that price improvements could significantly contribute to Agilent’s performance.

Given the importance and capability of pricing at Agilent Technologies as indicated in financial reports, management comments, and our pricing team research, and given their performance, we have come to the following conclusion as of May ‘23.

Agilent Technologies Pricing Spineometer:  2 out of 5 Vertebrae.

A (Agilent Technologies, Inc.) was relatively flat at 142 on the day prior to their earnings call to 140 one week later. FY 2022 revenue of $6.8 B with a 24% operating margin and P/E ratio near 31.

Currently, a 1% improvement in price would yield a 4.2% improvement in EBIT holding all else constant for Agilent Technologies.

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