Conference Transcript - IDXX 2026-09-14

Michael (Mike) Erickson, CEO

Hi.

Erin Wright, Analyst — Morgan Stanley

Good morning slash afternoon to folks. Welcome to the Morgan Stanley Global Healthcare Conference. My name is Erin Wright. I'm the Lead Healthcare Services Analyst at Morgan Stanley. We're happy to have IDEX Laboratories with us today, Chief Executive Officer Mike Erickson, as well as Chief Financial Officer Andrew Emerson. For more important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com slash researchdisclosures. And with that, we'll get started with our fireside chat. Thanks so much for joining us.

Michael (Mike) Erickson, CEO

Thanks for having us, Erin.

Erin Wright, Analyst — Morgan Stanley

So you recently had an investor day in Maine that I was fortunate enough to attend. And you highlighted the innovation drivers. You reaffirmed the long-term growth targets, calling for 10% plus organic growth, 15% plus kind of EPS growth. So walk us through some of those key building blocks in terms of bridging to kind of from in terms of today's environment and what we're seeing with that office visit trends and then the long-term growth algorithm.

Michael (Mike) Erickson, CEO

Yeah, great. So let me just start by talking a little bit about the year and then I'll talk about the building blocks and tie back to some of those things. So we had an exceptional Q2 and really start to the year. We've got terrific momentum in the business. Aaron, we talked at our investor day about how we're in the very early stages of this broad-based innovation cycle playing out across really multiple different platforms at the point of care in reference labs and in software supported by what we're doing commercially to help our customers adopt these innovations. And we're seeing that flow through into double-digit growth, both in reference labs, recurring revenue, and in our vet lab, recurring revenue. And on that basis in Q2, we took up our guide for the overall year, as you know, and just reflecting that momentum that we see. And, you know, when we are in this sort of dynamic period that we're all in trying to manage signals and understand where things are headed, you know, with IDEX, we step back and kind of look through that haze. And to your point around the long-term view, it just reaffirms the conviction that we have in the strength of the sector and the long-term potential. We can see our way to the $45 billion TAM that we've talked about in diagnostics globally. And we know that diagnostics are dramatically under-penetrated around the world relative to the outsized value that diagnostics create in the practice. Pets can't speak. It's diagnostics that give them a voice in the healthcare equation. And then we also know that diagnostics drives 80% of all the activity in the practice. And so our entire strategy as a company is to move that needle through what we do on the innovation front and commercially, and we've been successfully doing that now for decades. And, you know, we measure that through the building blocks that you asked about. We've seen really robust new customer growth, but really the core of our strategy is to drive volume-based growth through innovation and utilization. and we've seen that across the sector and we know that customers that adopt our IDEX innovations grow faster. Sector-wide, we're driving about a 50 basis point increase in blood work inclusion annually and that translates to about 150 basis points of CAG diagnostic occurring revenue for IDEX. So, you know, we build that up across new customer growth, innovation and utilization and modest price tied back to the value that we're creating in the practice.

Andrew Emerson

Yeah, I think just to round out the financial model, obviously that reoccurring revenue growth stream really enables the rest of the P&L as well. We see high incremental gross margin drop through, you know, when we look at the ability to continue to grow our reoccurring revenues. We benefit from scale. We're focused on productivity. And to Mike's point, part of our growth algorithm is price in which we're creating value through various different sources of value to our customers. Some of that's innovation, some of that's things like our software capabilities, and a really keen focus on making sure that we can deliver product to them when they need it, because these are medical services, and they're often looking at making sure they can manage their own patient when it comes into the clinic. So that gives us a really nice, robust ability to reinvest back in the business and in R&D and our commercial efforts and be able to deliver operating margin improvement over a long period of time, ultimately to achieve that 15% plus EPS growth. So we see really significant opportunity and headroom for us, both on the revenue top line, but also our ability to continue to expand our margin profile on EPS.

Erin Wright, Analyst — Morgan Stanley

Yeah, the high margin drop through that recurring revenue, we always feel is underappreciated part of the story, too. But in bigger picture, you have shown the ability to grow even in a down market. But it is a question that I have to ask in terms of underlying vet demand trends. I think your guidance calls for what, negative 1.5% to 2% kind of vet office visit trend this year. what gets this market to normalize longer term, how confident are you in that, or just does it matter in light of the innovation drivers that you're seeing and the growth that you are seeing in light of that?

Michael (Mike) Erickson, CEO

Yeah, so to your question, we have seen this modest headwind to visit growth now playing out over multiple quarters, really more on the wellness side, as you know, Erin, which on the margin can be maybe seen as a little bit more discretionary than non-well. You know, we have to step back on that, though, as well, and maybe just, again, see the kind of broader arc through the ups and downs of the pandemic and the dynamic period since then. So if we compare where we're at today to before the pandemic, we have substantially more pets in the system, 22 million more pets through that period. And if you look at medicalized pets, also substantially more on the order of eight to nine million more medicalized pets. And we have a lot more visits as well from a total visit volume standpoint. And if you take any one of those factors just on a CAGR basis, they've been growing at or above the historical norm, again, through these ups and downs and this dynamic period that we're in. So we feel good about those things. But I think the bigger point that often gets lost in the conversation around visits is really looking at care, the demand for care, the intensity and quality of care that's happening in the visits when those visits take place. And that's, again, the core of our strategy is to drive that. On that dimension, what we've seen is this continuous expansion in blood work inclusion and wellness visits, 50 BIPs annually, growing inclusion, blood work inclusion, wellness visits, this overall step up that we've seen continuously quarter over quarter. We reported again in Q2 in diagnostic frequency and utilization, which is a very good proxy, again, for the quality of those visits. And when I sit down and talk to our corporate group, our large partners, this is a big focus for them because they understand that this drives their business model and they want to grow this too. And so it's a natural point of alignment. And when you kind of break down what are all the things that are driving this, IDEX innovation is playing a big role, but there are a number of really important underlying trends also. So we have these COVID pets that were adopted and are aging. And so if you double-click into the visit growth, we actually see positive visit growth, well and non-well, for pets over five. So that's a pretty, that's that bullets of pets coming through. And we also know that as pets age, just like people, they need more care. So they visit more, but they also need more care in those visits. And not only that, it turns out that pets are living longer, which is incredibly profound when you look at the data. So just over the last decade, dogs and cats are living about a year and a half, 1.5 years longer. And so that's about a 12% expansion in lifespan. But because they require more care as they age, that translates to a 16% or more increase in diagnostic lifetime value. And then on top of that, we're seeing an interesting trend around the mix of breeds coming into the practice. And, you know, that reflects consumer choice. consumers are opting into breeds, like the doodles, for example, and golden retrievers, breeds that actually require more care. And they realize that they require more care, but this is what they want. So between the age mix, pets living longer, breed mix, all of these factors drive a higher demand for care. And so as we dive into our incredibly large data set of not just practice management data, but now consumer data, what we see is a very high resilience around demand for care across every single consumer economic cohort. So we know it's a dynamic time, and we know that people feel pressure in the broader economy, but when they have pets, they're spending on those pets, and that's true across every economic demographic.

Erin Wright, Analyst — Morgan Stanley

Would you say, though, that even with an aging pet population, are you still going to see pressure on vet office visits but it's just about the nature of the visit is just so different than it was before how structural is this shift in terms of you're you're you're now posting high single digit you know utilization metrics is that durable here or do we think see things shift back to the way that you know vet office visits were like where do things shake out and is it really just a structural shift in terms of the nature of each underlying vet office visit seeing higher utilization, greater flow through those dynamics?

Michael (Mike) Erickson, CEO

Yeah, the nature of the visit keeps improving in quality, and that's translated into that higher diagnostic frequency and utilization step up that we've seen quarter after quarter. And the reason why we feel highly convicted that that can keep growing is because if you just look at today, what's the average inclusion of blood work in a visit? It's about one out of five visits get blood work. Wellness visits, it's about just over 1 out of 10, 13% in the U.S., and it's less internationally, about a third of that. And when you consider the incredibly outsized role that diagnostics plays in the visit, that's a low number. So sometimes we ask, do we have a 1 out of 10 problem, or do we have a 9 out of 10 opportunity? And, of course, we see it as a 9 out of 10 opportunity. And so for us, the way that we focus on that every day at IDEX with a tremendous amount of focus, wake up thinking about our innovations, things like CancerDX, InViewDX, what we're doing on Catalyst, paired with a large commercial organization whose job is to support the adoption and change management of those protocols and innovations in the practice. And that's what translates into customers using iDX Innovations grow faster, that sector-wide growth of wellness inclusion of 50 bits that I talked about. And so that's why we see this long into the future.

Erin Wright, Analyst — Morgan Stanley

And given those drivers that you're calling out, you know, without necessarily giving formal guidance, I mean, you can if you want for 2027, but how do you think about sort of the moving pieces as we head into, you know, 2027? Should we anticipate still kind of sluggish about office visits with durable price, innovation drivers continuing? Like, what would deviate from your long-term projections?

Andrew Emerson

Yeah, so as you highlighted, we're not providing a 2027 guidance today, and certainly we're not updating our guidance for 2026 today either. But I think the clinical visit headwind that we have seen, we've highlighted even in our initial guidance that we expected that to be a decline in 2026. It's come in slightly better than that in the first half, and we're anticipating about 1.5% declines on clinical visits in the second half as part of our guided midpoint, and there's obviously a range around that dynamic. But what we're really continuing to benefit from is a lot of the building blocks that Mike highlighted. We've launched a number of new, both transformational innovations with InViewDX and CancerDX, but we've also continued to add new menu additions to our core platforms. We have almost 80,000 catalyst instruments across the globe, and we've added around five new innovation menu to that instrument install base over the last three years. So we get continued benefits of that, you know, as customers adopt these new menu benefits, whether that's cortisol or pancreatic lipase. And we highlighted that we have pro BMP coming here in October. So a number of new innovation, new elements that, you know, really benefit clinicians' understanding of the overall pet health that we see rapid adoption of in that install base. So we have a number of innovation drivers that we're really continued to be excited by that we've publicly announced, and, you know, we have a really robust menu of options there, too. The other component that I would highlight is we've continued to invest in our commercial or our field-based employees, which are really the core customer engagement and engine that we have. In particular, we've seen, you know, strong double-digit growth in our international regions as we continue to broaden our customer base as well as, you know, just partnership. really changing behavior and mentality around how to use diagnostics globally, which is a key part of our overall strategy, to Mike's point, on expanding the utilization. So a number of factors that we continue to be excited about, but when time is right, we'll continue to highlight 2027.

Michael (Mike) Erickson, CEO

There's really three ways that our innovations translate into the utilization growth that you're asking about to kind of build on what Andrew said. So when we come forward with entirely new categories like CancerDX, completely unmet need, we'll probably talk a little bit more about it because there's 25 million dogs out there that are at risk for cancer and there's been no solution. That's a whole new category, and when we bring through a breakthrough technology with highly accessible pricing like we've done, we basically create all that volume, both for our customers and for IDEX. The second type is we come into a category like cytology where there's 150 million of these being done all around the world, and we're able to address that in a transformational way within VUDX, starting out with blood morphology, ear cytology, and now fine needle aspirate, and we can provide, take out all the manual work, a much better quality diagnostic, and we take the volume that's being done and we enable them to do more, and then we also translate that into addicts volumes, so we're growing together there. And the third way is, as Andrew mentioned, as we keep adding new menu into our existing platforms, our customers have their existing workflow, they get the benefit, and then that grows for them and for us too. So we can draw a straight line between the investments we're making in innovation and how that drives volume growth for our customers and for IDEX.

Erin Wright, Analyst — Morgan Stanley

So let's talk about innovation. You're rolling out F&A on InView right now. InView has talked well about my expectations in terms of placement trends to date, but what I care more about does that consumables flow through and where do we stand now in terms of that 35 to 5,500 range that you initially kind of targeted are you within that range with your you know existing install base or do you ramp to get there and does that is that inclusive of of FNA as well yeah so we've been um exceedingly pleased with uh with with InviewDX the reception to it it's one of the most successful launches new product introductions that we've had in the history of the company.

Michael (Mike) Erickson, CEO

And, you know, we focus on the quality of placement. We focus a lot on that utilization number, as you know, Aaron. And so, you know, what we're seeing is we're very comfortably within that range with the $3,500 to $5,500 per instrument in recurring revenue. And that's really at these very early stages, I should say, of fine needle aspirate, F&A being rolled out, still controlled launch, on track for the end of year broad availability that we talked about. And so, you know, we see headroom to that. The reception has been exceptional. It hits the mark. I mean, as I was talking about cytology, every practice around the world does cytology. They have a microscope. They do it. It's a very manual process, very technique-sensitive. InViewDX is paradigm-changing because it takes the slide out of the equation, so all that manual effort and subjectivity is gone and enables a really high-quality diagnostic. In the case of FNA, you're looking for, generally, this is a dog coming in, let's say, with a lump or a bump, and the question on the pet owner's mind is, is this cancer? So it's a pretty high-stakes question. Is this cancer? And, you know, today we know that there are 12 million FNAs being done around the worlds, but that represents 10% or less of all of the lumps and bumps that are coming into the practice. And the reason why it's so low is because it's really hard to do these. It's hard to make a slide and do all the steps, the multiple steps to stain it and dry it. It's 25 minutes or so of work, and then you've got to read it or you send it into the lab, and that can be expensive. And within VDX, it takes all that effort out. You get a real-time result right there. And what we're seeing is with the customers using FNA and VDX, they're doing twice as many lumps and bumps. And by the way, at an 85% lower cost. So this is a great example, again, of our innovations are driving volume-based growth in the practice, transforming how care is done.

Andrew Emerson

And as Mike did highlight, the 3,500 to 5,500 were in that range today, but we always said that that does include the launch menu, which was inclusive of F&A, and so we feel really good about, you know, kind of where we're at with the instrument, you know, reoccurring revenue, and these are really large categories that we'll continue to ramp over time, yet we also know that, you know, there's a number of, you know, extensible new options that we could also put on this platform in the future, and that's the way we tend to think about these innovations. They're really platforms that we can continue to innovate on, and so there's a really large economic value associated with this platform and we continue to see, again, a robust innovation roadmap ahead of us.

Michael (Mike) Erickson, CEO

Yeah, if you look at what we did on the catalyst, and Aaron, you know this, over a decade, we expanded the economic value of the catalyst in our customers' hands and for us by two and a half fold. And that was a combination of menu innovation, supporting utilization, all of these things. That's exactly the type of thing that we see in the future for NVIDX as well.

Erin Wright, Analyst — Morgan Stanley

I think we saw a 25% uplift in consumables volume for every upgrade for Catalyst. Yeah, significant. But I think for F&A in particular, you're already hitting the mark where I remember instead of you, I don't think we hit the mark right out of the gate in terms of hitting that consumables flow through. But for F&A, or for InView, you already are even without that broader F&A launch. But why is it more of a measured launch still? And it's still on track, I think, as you just said, for year-end broader launch. I guess anything else to comment on in terms of the early feedback on FNA?

Michael (Mike) Erickson, CEO

Yeah, this is our standard launch process for any new platform. And I think maybe the one sort of nuance here to appreciate, when we roll out, let's say, a new slide on Catalyst, customers have Catalyst, they have their workflow. Through our software, we're able to push out that new capability. They just have to order the slide and they can use it the next day. And they love that experience. Each of the applications on NvDX is like a new one of those platforms. So you think about ear cytology, blood morphology, and then the third platform within a platform now is fine needle aspirate. So this year alone, we've rolled out multiple, upwards of four new red cell morphologies within the blood morphology category in VUDX. And now that customers are trained on that and using that, we can just provide that over the software. And they love that experience and they get all that additional value. Now as we're rolling out fine needle aspirate, again, it's like a new platform. So we want to make sure we nail it, that we get the customer experience right, the training right, all the components. This also has the opportunity for customers should they want, because again, high-stakes cancer, if they want one of our pathologists to look at it, they just press a button, and the image is usually just sitting there already for our pathologist to take a look. So we want to make sure we nail all of those things because the long-term value creation tail on these is very, very compelling. And so just like we do whenever we roll out a new platform, We have this controlled launch process where we make sure we nail all those details. That's what our customers expect from IDEX, and so that's what we do.

Erin Wright, Analyst — Morgan Stanley

And presumably all the future platform additions to InView would be in a similar format in terms of being able to quickly onboard those and would be upside to your $100 million in consumables flow through.

Michael (Mike) Erickson, CEO

Yes, as we continue to expand the platform, we think we have a lot of headroom to grow it.

Erin Wright, Analyst — Morgan Stanley

So how are you going to launch two boxes at the same time? So in terms of rolling out, also multi-queue. So multi-queue, we don't know what it does yet, but presumably is the best way to characterize it similar to InView in that it's really replacing a lot of manual tasks. Is that the right way to think about it, and how should we think about the rollout? I think we'll hear more at VMX in January.

Michael (Mike) Erickson, CEO

Yeah, so we announced we're having a special event at VMX in January in Orlando. We're very excited about that, and we'll share more about MultiQDX and what it does and the category that it's in. So today, I won't go deeper other than just to make clear that it's in a category of diagnostics that is very important at the point of care, and it's totally complementary to today what we do with our vet lab suite, and we fully expect that it will be paradigm changing in that category. MultiQDX, just like InViewDX, just like Catalyst, just like ProSight 1 is designed and manufactured at our state-of-the-art facilities in Westbrook, Maine, and we'll talk more about it in VMX. I think the nature of what it replaces and all those things varies from instrument to instrument and category to category, so I'll probably put it there and we'll talk more at VMX.

Andrew Emerson

I would highlight, though, we have a whole suite of analyzers and reference labs and software all designed to really work with the same customer base. So, you know, our whole commercial model and the investments that we make towards our commercial model are really designed to continue to be able to sell that whole suite. It's not one instrument or another instrument. You know, we're really looking to, you know, bring this comprehensive package and partner with our customers across the globe. And if you look at some of the metrics we've shared, we've done a really nice job at continuing to bridge those categories where, you know, a single customer isn't using just that lab or reference labs. They're using both, and they're using the broader suite, and so that's a key part of, you know, how we tend to think about, you know, working with our customers, you know, having them believe in diagnostics and then helping them find ways to incorporate that into their practice on a medically relevant basis, and so, you know, a key part of our commercial model and the investments we make are really targeted around that, and it's part of what leads to the type of growth profile that we've had.

Erin Wright, Analyst — Morgan Stanley

And, yeah, I want to get to that, especially with CancerDX. But separate from multi-cure, sort of separate, I guess fecal is still an in-house, you know, gap in terms of your offering. You know, how do you think about the current reference laboratory offering? Is it sufficient for what you need today?

Michael (Mike) Erickson, CEO

Well, yeah, we have an incredible offering in our reference labs, fecal DX antigen. We just added tinea tapeworms to that this year, and that's on a string of innovations and expansions to that platform that we've made over the years. And we know that it's superior to what's been out there in terms of fecal floats. It finds up to two times more infections. And because it's looking for the proteins rather than trying to find fragments of eggs and other types of debris, it's the only approach that's actually correlated back with actual infection versus things that could be masking or masked as infection. And so it finds more. It finds it earlier in the process. And, you know, our customers really rely on that. It's one of the most adopted areas. And when you look at wellness diagnostics, we focus a lot on blood work. But incorporating fecal testing into wellness is a well-established pattern in North America with a lot of headroom still to grow there. And then we think opportunity around the world as well.

Erin Wright, Analyst — Morgan Stanley

Okay. CancerDX. So I think, you know, is it right to assume that CancerDX is driving meaningful market share gains across the reference lab for you? I think you gave some stats around 20% of the CancerDX customers are not actually primary reference lab customers at all. Well, one, why aren't they? Like that should be, I would think, an initiative initially when you're going in there with CancerDX, and how quickly can you convert a lot of those customers? And it seems like this could be a meaningful share game driver for you.

Michael (Mike) Erickson, CEO

Yeah, I mean, we're just exceptionally happy with what we're seeing with CancerDX. As I mentioned a little bit earlier, this has been a gaping hole in terms of the portfolio of options out there, particularly for general practitioners, also for specialists. maybe just to kind of frame that, I mentioned 25 million dogs are at risk for cancer around the world. One in four dogs will be diagnosed with cancer. And I've lost two dogs in my family to cancer. In both cases, by the time we knew what was going on, it was too late to take action. And it's heartbreaking, but that is an all too common story amongst pet owners. And there just hasn't been a tool set. But with 25 million dogs at risk, it turns out in the entire developed world, there are less than 600 board-certified veterinary oncologists. And so there's just no way to meet the demand for care in oncology and cancer without arming general practitioners with tools like this. And so CancerDX is a total breakthrough from a testing platform standpoint. We rolled out with lymphoma. It can find lymphoma up to eight months before there are any clinical signs with incredible performance, 99 plus percent specificity, 79 percent sensitivity, performance that matches the most sophisticated liquid biopsy tests in human medicine that cost upwards of, what, $1,800, $900, $1,000 and take a week or two weeks to get results back. And this is a test that we intentionally priced at $15, $1,500, $15 in an equivalent price around the world when it's paired with a blood work panel into the IDEX reference labs. And so the strategy really is we want to make sure that dogs are getting access to the care they need, and then we understand the emotional pull of cancer. This is one of the most common questions that comes into the practice. And so the strategy is to support broader adoption of blood work with that. And that's what we're seeing happen. I mentioned at our investor day and on the Q2 earnings call that we had a large corporate group in Australia went all in on including CancerDX themselves at no additional charge as part of their senior dog wellness program. And it's driving higher enrollments and higher utilization. I'm really excited to share now that we've had another large corporate group, this one in Europe, that's made the same decision to do that. At Investor Day, we announced that we're expanding CancerDX from lymphoma to now be a multi-cancer panel, adding mast cell tumor and hemangiosarcoma. These are three of the most common and most dangerous cancers covering 40% of all the cancers in dogs. And by the end of this year, we'll have all three of those. And we're sticking with the $15 price point. And when I shared that recently with one of our partners, a CEO, I think his jaw hit the table when he heard that. So we're excited and we want to make sure that we're supporting accessibility to this. And that's driving all the interest, Aaron, back to your question. So 20% of the customers on CancerDX are customers who have been using somebody else as their primary reference lab, but they're breaking their protocol and breaking whatever agreements they have because they are putting their patients first, and they want to have access to this innovation. And we certainly are seeing really high levels of new customer growth in the reference labs around the world that tie back to many things. the service level that we provide, things like FecalDX, the broader platform. But CancerDX is absolutely contributing to that. And 70% of the runs, by the way, are being done with blood work in the IDX reference lab. So the strategy of tying it to blood work pull through, we know, is working. We're in the early stages of this. We're going to make cancer history in pet care. And you can tell I'm a little passionate about this because it's personal for a lot of us. And, you know, we're really focused on this huge opportunity ahead of us.

Erin Wright, Analyst — Morgan Stanley

You're making some commercial investments kind of into the second half. I guess what exactly are those? What does that entail? And then also, you know, when do you take a step back and think that, I mean, obviously you're seeing the growth to support it, but, you know, and just, you know, stop spending and let it drop through in terms of cash flow?

Michael (Mike) Erickson, CEO

Well, we see a really, really reliable return on our investments into expanding our commercial model. So we've done something like 16 of these expansions in the last five years. And so to your point, we shared on our Q2 call and investor day that we're advancing incremental investment in the back half of this year, expanding in four countries, Spain, France, South Korea, and also Canada, as well as some targeted additions here in the U.S. And we're doing that because for two reasons, really. One, it supports this broad-based portfolio of innovations that we're bringing forward. But tied to that is a deep understanding that when we're in the practice, when we're present with our customers, working with them side by side, that supports higher adoption of these innovations. You know, it's not the innovation, whether it's an instrument or a test in the lab, the way it works better together, as Andrew described, ultimately comes back to incorporating that into protocols in the practice, getting the workflow right, making sure that they've thought through. They set the price, but that they've thought through it correctly and that that's all into the practice management software. And all of that has to be tied together. And that's what our commercial team does, really. They're change management agents supporting our customers. And we see that higher level of adoption and pull through when we're close to them. And we've done that in North America and different parts of the world. We're not yet at that kind of level of loading that we want to be at, and so we continue to find those opportunities, even in North America, kind of tuck in and get closer to customers. And as I mentioned, we see a very, very reliable return on these investments, and so we're going to keep doing them.

Andrew Emerson

Yeah, so Mike's point, I think the commercial model itself really starts with the opportunity that we see in front of us. We see significant opportunity within this sector to continue to expand the use of diagnostics. And, you know, as we look at each of these individual regions, it comes back to customer proximity to spend more time with our customers and really help them understand how to use this, share best practices, incorporate it into their clinics effectively. And so we want to make these investments. It really helps support, you know, kind of the top line growth algorithm that we have. And it's reinforcing, right, where we can continue to deliver really strong operating margins while investing back in the business. I mean, this year, our guide is for over 32% operating margins on a comparable basis. And, you know, I think that alone, you know, is quite a solid number. But, again, we've committed to the longer term, 50 to 100 basis points of average annual improvement over time. So, you know, it's something where we try to find this balance of continuing to invest back into the sector in an appropriate way between R&D research and development as well as our commercial model, you know, to fuel that long-term opportunity while still delivering really strong operating margins as well as free cash flow generation that we deploy back into both our business as well as, you know, back to our shareholders.

Erin Wright, Analyst — Morgan Stanley

Okay, so two things then kind of related to that. One, I guess anything to think about in terms of quarterly progression that we should be aware of into the second half from a modeling perspective. And then two, just capital deployment. I mean, you're obviously investing significantly in AI, the force multiplier for you from a diagnostics perspective, and new technology that you're launching on that front, too. So how do we think about, are you where you need to be from an M&A perspective in terms of, do you need to go out and buy more in terms of technology assets or otherwise?

Michael (Mike) Erickson, CEO

So why don't I take some of the question around technology and AI, and then, Andrew, you can kind of round it out and talk about capital deployment. So we see a tremendous opportunity when we go into the practice, when I go into the practice, there's still a lot of friction, the kind of complexity of the caseload, the rising demands from clients, all of those things factor into it's hard to do the work in the practice. And then also when we talked about things like blood work inclusion, we've seen in our own software how very, very simple things like including prompts in our pet owner engagement software, Velo, prior to the visit around, would you be interested in blood work in the visit? And then sharing that to the doctor drive incredibly outsized improvement in inclusion and receptivity in the visit to doing those diagnostics. So over and again and again, we see how software and configuring software and the addition of AI personalization has a really meaningful role in driving expanded care and diagnostics. Customers using our software relative to using competitive on-prem have about a 500 basis point higher level of blood work inclusion based on all those things. So we see this as still early days to do that well, and with AI adding personalization, automation of workflows. We talked about our investments into clinical decision support and providing real-time intelligence tools. And we certainly are open to innovations outside IDEX as well when they fit the mission. But, you know, our overall convergence of software and diagnostics and AI comes back to that core mission that we have of driving expanded care. And then I think we're almost out of time, but maybe you can hit the capital.

Andrew Emerson

Yeah, just echoing what Mike highlighted, you know, we have an ongoing active process where we're always looking outside our four walls for assets that, you know, really fit our themes and our principles as a company. And when we find those, we're willing to, you know, make that type of investment. But it really starts with our organic growth strategy. Those would be to help augment and, you know, continue to strengthen, you know, kind of our asset base overall. and then at excess capital we tend to redeploy back to our own shareholders through share buybacks.

Erin Wright, Analyst — Morgan Stanley

And quarterly progression?

Andrew Emerson

In terms of quarterly progression, again, we're not updating any guidance today, but on the Q2 call we did highlight that, you know, we expect at midpoint, you know, revenue is in line with the implied second half range and from an operating margin perspective on a comparable basis we anticipated 20 to 50 basis points of expansion in the quarter. So that gives you a sense for, you know, how we're thinking about the progression quarterly. Awesome.

Erin Wright, Analyst — Morgan Stanley

Great.

Michael (Mike) Erickson, CEO

Thank you so much.

Andrew Emerson

Thank you, Aaron.

Michael (Mike) Erickson, CEO

Thank you.