Earnings Call Transcript - HOLX Q3 2024

Operator, Operator

Good afternoon, and welcome to Hologic's Third Quarter Fiscal 2024 Earnings Conference Call. My name is Cynthia, and I am your operator for today's call. Today's conference is being recorded. All lines have been placed on mute. I would now like to introduce Ryan Simon, Vice President, Investor Relations to begin the call. Please go ahead.

Ryan Simon, Vice President, Investor Relations

Thank you, Cynthia. Good afternoon, and thank you for joining Hologic's third quarter fiscal 2024 earnings call. With me today are Steve MacMillan, the company's Chairman, President, and Chief Executive Officer; Karleen Oberton, our Chief Financial Officer; and Essex Mitchell, our Chief Operating Officer. Our third quarter press release is available now on the Investors section of our website. We will also post our prepared remarks to our website shortly after we deliver them as well as an updated corporate presentation. A replay of this call will be available on our website for the next 30 days. Before we begin, we would like to inform you that certain statements we make today will be forward-looking. These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied. Such factors include those referenced in the safe harbor statement included in our earnings release and SEC filings. Also during this call, we will discuss certain non-GAAP financial measures. A reconciliation to GAAP can be found in our earnings release. Two of these non-GAAP measures are: one, organic revenue, which we define as revenue excluding divested businesses and revenue from acquired businesses owned by Hologic for less than one year; and two, organic revenue excluding COVID-19, which further excludes COVID-19 assay revenue, other revenue related to COVID-19, and sales from discontinued products in Diagnostics. Finally, any percentage changes we discuss will be on a year-over-year basis, and revenue growth rates will be in constant currency unless otherwise noted. Now, I'd like to turn the call over to Steve MacMillan, Hologic's CEO.

Steve MacMillan, CEO

Thank you, Ryan, and good afternoon, everyone. We are pleased to discuss our financial results for the third quarter of fiscal 2024. Total revenue for Q3 was $1.01 billion and non-GAAP earnings per share was $1.06, both exceeding the high end of our guidance. Importantly, we are excited that with COVID now mostly in the rearview mirror, our reported revenue has returned to growth. Our strong performance goes beyond the top line and shines throughout the P&L. For the quarter, we delivered a solid 31.2% operating margin and deployed $100 million during the quarter to repurchase 1.4 million shares. Overall, the $1.06 in EPS translates to 14% growth on the bottom line, a very strong result and also very encouraging as we shift now to reported revenue and EPS growth again. Looking back to the start of our fiscal year, there were still certain questions on some investors’ minds about the true strength and durability of our underlying business. These were questions that surfaced as we exited a period of uncertainty created by the pandemic, followed by the global chip shortage. While we and many long-term investors understood the power and potential of our transformed, much stronger business, we acknowledged that these unanswered questions created barriers for some newer investors to Hologic. As usual, rather than rely on words, we knew it would be our performance that would emphatically answer these questions and clearly demonstrate that we are indeed a bigger, faster, stronger company than before the pandemic. Our third quarter performance should make this very clear. In Q3, we bent the top-line curve to green after eleven quarters of COVID-driven declines. Our top line reported revenue returned to growth at 3.1% versus last year. Organic ex-COVID, we delivered healthy 5.8% growth, achieving these strong results on top of exceptionally strong 18.4% organic ex-COVID growth last year. Turning to our themes for today. First, we would recap our performance since the start of the fiscal year by answering five key questions on many investors’ minds. Second, we’ll pass the call over to Essex, who will highlight certain overlooked elements of our broad-based international growth and provide an update on M&A activities. On to our first theme: the top five questions which have been raised: One, will Panther utilization continue to grow? Two, will Breast Health return to full strength and maintain market leadership? Three, will Hologic return to delivering industry-leading 30% plus operating margins? Four, with a $2.4 billion cash position, will Hologic be successful in deploying capital? And finally five, can Hologic maintain its cervical cancer screening leadership if USPSTF issues an adverse cervical cancer screening guideline? The short answer to all five is an emphatic yes. We will continue to thrive. From here, we will take each question in order. First, our molecular diagnostics business continues to deliver and is much larger and stronger than it was prior to the pandemic. Our global installed base of Panthers exceeds 3,300 and is rock solid. More importantly, our customers continue to praise and utilize our platform. Panther’s superior workflow, automation, ease of use, and constantly expanding menu continues to drive demand and differentiate us in a competitive environment. In simple terms, revenue per Panther and the number of assays run per Panther continue to grow, demonstrating our Molecular Diagnostics growth rate. In Q3, our molecular business excluding COVID grew by 10.5% on top of 12.9% growth in the prior year period. We’ve now delivered high-single to double-digit performance in 13 of the last 15 quarters. Quarter-after-quarter, year-over-year, we continue to deliver by expanding utilization, and our outlook remains bright. Second, our breast health results continue to demonstrate profound strength in breast cancer screening. Our gantry business is on pace to fully recover from the chip shortage, and we continue to maintain our leadership position. Our supply chain has significantly improved and is now fortified from successfully navigating the chip shortage challenges. Over a decade from the initial launch of our groundbreaking 3D mammography, customers still view Hologic as a leader in performance, including image quality and scan time, service, and customer satisfaction. Letting the numbers speak for themselves, in Q3, we delivered 7.1% growth in Breast Health, on top of 27.5% growth in the prior year period. The business is now more diverse than ever and continues to add even more recurring revenue with our Endomagnetics acquisition. Third, on operating margins, as Karleen will share in more detail later, we delivered a 31.2% operating margin in our third quarter, a 230 basis point improvement from the prior year period, and an 80 basis point improvement sequentially. At the highest level, we are back to delivering pre-COVID margins, even with our International business being over 40% larger than it was in 2019. Consistent with our expectations, we recaptured our strong sector margin profile by maintaining focus on operational efficiency and moving past the amortization of higher-priced chips purchased during the chip shortage. Fourth, on capital deployment, our balance sheet and cash flow remain incredibly robust. As announced last week, we recently closed the Endomagnetics acquisition, a transaction that we view as directly aligned with our broader M&A strategy. Overall, the deal is a prudent investment of capital that we expect to add revenue, margin, and EPS accretion over time. Together, we have an incredible opportunity to improve interventional breast care for women. On top of closing the Endomag deal, we continue to demonstrate our willingness to bet on ourselves and repurchase shares. As a baseline, we are looking to offset dilution from our internal share plans. From there, with our strong cash position, we look to layer on additional share repurchases. Fiscal year-to-date, we have repurchased 10.5 million shares for $750 million. We plan to continue on our capital allocation path and fully intend for our deployment strategy to include both M&A and share repurchases. And finally, before turning the call over to Essex, regarding USPSTF, as we’ve done for nearly 30 years in cervical cancer screening, no matter the direction the USPSTF may take for its cervical cancer guidelines, we will navigate the landscape and remain strong. Overall, we achieved our strong results by maintaining our long-term focus and commitment to women’s health. As we shared on our Q2 call, the strength of Hologic lies in the sum of our parts. We expect our results to continue to answer the call and speak for themselves while we demonstrate our durable strength quarter-after-quarter, year-over-year. With that, I’ll turn the call over to Essex to share insight on international growth drivers and more on Endomagnetics.

Essex Mitchell, COO

Thank you, Steve. Overall, our third quarter performance speaks to the successful implementation of our growth strategy, building multiple durable growth drivers into our franchises around the world. Today, we’d like to highlight three specific growth drivers from International Diagnostics and Surgical. These drivers are sometimes overlooked because of their strong market shares in the U.S.; however, we still have a great growth opportunity outside the United States. That said, internationally, molecular STI testing, cytology, and MyoSure all delivered good growth in the quarter. This underscores the power of the sum of our parts and reinforces our ability to grow by expanding markets. Let’s start with STI testing, the largest category in our global molecular diagnostics business. In the U.S., STI testing is our largest category, and we have earned and maintained leadership for years. Internationally, we are still in the early stages of leveraging our expanded Panther installed base. We have a significant opportunity to increase our share, not only in STI testing but across all categories where we offer testing. We have a long runway ahead of us as we continue to build the new markets we’ve entered. With several irons in the fire, we expect to layer in more contribution over time, driven by more assays and more volume on our Panther systems. The same can be said for cytology and cervical cancer screening. In some regions, we are introducing liquid-based pap tests to the market for the first time and subsequently growing the market. While overshadowed by U.S. revenue, international cytology, like STI testing, adds meaningful revenue that positively impacts our overall growth over time. Shifting to Surgical and MyoSure, while MyoSure is still growing strongly in the U.S., the MyoSure international growth rate is even higher. This is possible because international markets are vastly underpenetrated, and demand remains high for our minimally invasive option for treating uterine polyps and fibroids. In many regions, we are the first and only minimally invasive alternative to a complete hysterectomy. We believe that all women should have access to minimally invasive options. Overall, while it's clear that certain products across our portfolio are more established in the U.S., it’s important to highlight that there are meaningful market expansion opportunities for these same products internationally. As leaders in these areas and champions for women’s health, we are well-positioned to capitalize on this global growth opportunity. And finally, before turning the call over to Karleen, I’d like to provide additional detail on Endomagnetics. As Steve mentioned, we are pleased to welcome the Endomag team to Hologic, which comprises 150 employees and offers seasoned management and R&D capabilities. The company has done an incredible job growing its business to what it is today, which includes treating over 500,000 women and adoption by more than 1,300 hospitals in over 45 countries. Endomag products encompass Magseed markers for wireless lesion localization, Magtrace for lymphatic tracing, and Sentimag, a simple, easy-to-use handheld device to visualize both. The Endomag portfolio allows us to provide robust and differentiated offerings to meet demand in the growing interventional breast surgery market. From an investment perspective, the business aligns directly with our Breast Health franchise and has proven on-market products that are well accepted into clinical workflows. With our established and deep-rooted sales channels, we expect to amplify revenue growth well above our corporate average while also expecting both margin and earnings accretion over time. Overall, we are excited to join forces and are determined to achieve even greater success together. Now, I’ll turn the call over to Karleen.

Karleen Oberton, CFO

Thank you, Essex, and good afternoon, everyone. In my statements today, I will provide an overview of our revenue results, walk through our income statement showcasing strong performance, touch on certain key financial metrics, and finish with our guidance for the fourth quarter and full fiscal 2024. Our third quarter financial results were robust, once again exceeding our expectations on revenue and profitability, building on the momentum from the first half of the year. To recap high-level results, total revenue came in at $1.11 billion, beating the midpoint of our prior guidance by $11 million. We delivered 3.1% revenue growth and organic growth of 5.8%, excluding COVID. In addition, non-GAAP earnings per share were $1.06, growing 14.0% and exceeding the high end of our prior guidance by $0.001. Before moving on to our franchise results, we want to highlight the continued strength of our balance sheet. In Q3, we generated over $400 million in cash from operating activities, ending the quarter with $2.4 billion on the balance sheet, deployed $100 million on share repurchases, and announced the acquisition of Endomagnetics. We continue to demonstrate that our strong cash balance, leverage ratio well below our target range, and ability to consistently generate cash provide us the flexibility to fund innovation and utilize both levers of our capital allocation strategy, tuck-in M&A and share repurchases, at the same time. Moving forward, we still have significant firepower to continue to deploy capital diligently as opportunities arise. Turning to our franchise results. In Diagnostics, third-quarter revenue of $440.8 million grew by 0.7%. Excluding COVID assay and related revenue, worldwide Diagnostics grew by 6.0%. Within Diagnostics, Molecular Diagnostics continues to contribute significantly, growing at 10.5% excluding COVID. We continue to see underlying strength in BV CV/TV, which has become our second-largest assay globally. Additionally, as expected, non-COVID respiratory assay sales declined sequentially from Q2 in line with the flu season. However, year-over-year growth remains strong, highlighting the continued adoption of our four-plex COVID, Flu A, Flu B, and RSV assays. Lastly, Biotheranostics continues to be accretive to growth for our Molecular business. Rounding out Diagnostics, Cytology and Perinatal declined by 2.9% globally, with U.S. declines partially offset by solid international growth, as Essex highlighted earlier. As a reminder, in fiscal Q3’23, customers built up cytology inventory levels in the U.S. due to third-party shipping constraints in Q2’23, leading to elevated sales in the prior year period. While the cytology business has largely returned to normal, year-over-year growth rates were impacted. Looking ahead, we expect flat to modest growth from the cytology business. Moving on to Breast Health. Total third-quarter revenue of $385 million increased by 7.1%, or 8.2%, when excluding the SSI. Within Breast Health, growth was primarily driven by Breast Imaging, with solid domestic and international contributions of 7.2% and 12.1% growth, respectively, excluding SSI. Third-quarter performance was driven largely by increased gantry shipments and robust Service revenue growth that continues to contribute significantly. Continuing next to Surgical. Third-quarter revenue of $166.6 million increased by 6.2%. Surgical growth continues to be propelled by MyoSure and the related Fluent Fluid Management System. Our Laparoscopy business grew significantly in the quarter and continues to progress nicely. Additionally, International continues to be a bright spot, growing just under 20% in the quarter. Finally, in our Skeletal business, third-quarter revenue of $19 million declined by 29.7% due to lower Horizon DXA shipments resulting from a temporary stop ship related to a non-conformance issue. We are working with our suppliers to resolve this situation and expect to resume shipments during the first quarter of fiscal 2025. Now, let’s move on to the rest of the non-GAAP P&L for the third quarter. Gross margin was 61.1% for the quarter, a 30 basis point improvement from the prior year period, even though COVID assay revenue declines continue to be a headwind. Additionally, gross margin expanded by 40 basis points sequentially from fiscal Q2, primarily driven by favorable product mix. Total operating expense of $302.8 million in the third quarter decreased by 3.5%. This decrease was driven primarily by the elimination of expenses related to the divested SSI business. Operating margin was 31.2% for the third quarter. The year-over-year increase of 230 basis points was driven by top-line growth, expanding gross margins, and lower operating expenses. Sequentially, as expected, operating margins expanded by 80 basis points from Q2, largely from lower operating expenses and higher gross margin in Q3. Below operating income, other income, net, represented an expense of nearly $3 million in our fiscal third quarter. Interest income is lower due to lower cash balances from the significant share repurchases we've completed throughout the fiscal year. Additionally, interest expense is up due to higher interest rates. Finally, our tax rate in Q3 was 19.75%, as expected. Now let’s move on to our Non-GAAP financial guidance for the fourth quarter and full fiscal 2024. For Q4 2024, we expect total revenue in the range of $970 million to $985 million, and EPS of $0.97 to $1.04. For the full year 2024, our guidance assumes revenue of $4.012 billion to $4.027 billion and EPS of $4.04 to $4.11. Unpacking this guidance, we lowered the midpoint of our prior revenue guidance by $5 million, which represents about a $20 million headwind related to the temporary Skeletal Health stop ship previously mentioned, partially offset by our strong performance in Q3 and the inclusion of an estimated $4 million to $5 million of revenue from Endomagnetics now that we have closed the acquisition. With respect to foreign exchange, we are assuming Q4 will have a headwind of about $3 million. For the full year, we now expect a slight tailwind of about $3 million. Turning to our franchises, we expect Diagnostics, Breast Health, and Surgical to grow mid-single digits in Q4 and the full year fiscal 2024, excluding the impact of COVID. As a reminder, fiscal 2024 has four fewer selling days compared to fiscal 2023, which we estimate to be a headwind of more than 100 basis points for the full year. Starting with Diagnostics, in Q4, we expect our Molecular Diagnostics business to drive high-single digit growth, excluding COVID, as customers continue to adopt and drive utilization of our broad Panther menu. In Cytology and Perinatal, we expect growth in the mid-single digits for the fourth quarter. Sequentially, however, we expect the business to perform flat versus Q3. In Q4 of last year, sales dropped below typical ordering patterns due to inventory buildup in Q3’23. We expect Cytology and Perinatal comps to stabilize in fiscal year 2025. Closing out on non-COVID Diagnostics, we expect blood revenue of approximately $6 million in Q4 and $20 million for the year. In terms of COVID revenue, we expect COVID assay sales to be about $7 million in Q4 2024, and about $70 million for the full year. COVID-related items are expected to be about $25 million in the fourth quarter and approximately $105 million for the full year. Moving on to Breast Health. We remain on pace to grow the business mid-single digits for the fourth quarter. We expect to see solid gantry placements in Q4, continuing the steady performance we have delivered year-to-date. The demand for our portfolio of products and services remains strong, and we have solid visibility into gantry orders. Further, our confidence in delivering more gantries than last year remains high. We are successfully managing resource availability among both our install teams and our customers, as customers balance the need to meet elevated demand for screening and staffing constraints. Finally, in Surgical, we anticipate Q4 revenue to grow mid-single digits. We expect the growth to continue to come from MyoSure, Fluent, and our laparoscopy division. Moving next to margins. Our guidance continues to assume a cadence of improvement moving into Q4, for both gross margin and operating margin, we remain on pace to exit the fiscal year in the low 60s for gross margin. Our guidance also assumes Q4 operating margins in the low 30s, and we are on pace to finish fiscal 2024 between 30% and 31%, which includes the stub period of Endomagnetics. Below operating income, we estimate fiscal 2024 other income, net, to be an expense of approximately $8 million in Q4 and $11 million for the full year. Our guidance is based on an annual effective tax rate of approximately 19.75%, and diluted shares outstanding are expected to be approximately 238 million for the full year. To conclude, Q3 was another strong quarter for Hologic. We continue to deliver robust growth and quality earnings. As we approach the end of fiscal year 2024 and look ahead to 2025, we are excited by the performance across all our franchises and the additional strength provided by a pristine balance sheet. As always, our stakeholders can count on us to deliver while also advancing the state of women’s health around the world. With that, we ask the operator to open the call for questions.

Operator, Operator

Thank you. We will take our first question from Patrick Donnelly with Citi. Please go ahead.

Patrick Donnelly, Analyst

Hey, guys. Thank you for taking the questions. Steve, probably the biggest inbound is just on the Q4 guidance. Obviously, Karleen talked a little bit there. It seems like a lot of it is around the skeletal piece. I guess just when you think about the core business going into Q4. Has anything changed relative to a few months ago? Has anything gotten worse? It seems like it's all skeletal, but I just want to talk through the core business and how you're feeling about it into Q4 here?

Stephen MacMillan, CEO

You nailed it, Patrick. It's probably a little alarming because of the skeletal piece, but the three core businesses are all going great, and it is completely a reflection of that. We just had a little hiccup with the supplier issue in our Skeletal business. It's our non-core, but for Diagnostics, Breast Health, and Surgical, we are feeling really, really good.

Karleen Oberton, CFO

Yeah. And just, Patrick, just to add a finer point to it. Of the $20 million headwind, about $16 million is related to the fourth quarter specifically.

Tejas Savant, Analyst

Hey, guys. Thanks for the time here. Karleen, I just want to follow up on Patrick's line of questioning there on the second question. Can you help us think through sort of the underlying algorithm for EPS growth, 5% to 7% for the top line? Presumably, it stays intact for next year as well. As you think through the different buckets here, right, between the margin expansion piece, which you said it sounds like you're on track to achieve, but then you've also got share repurchases and then you've got a little bit of dilution from potential tuck-ins, including ones you might do in the next 12 months or so. So as we think about those multiple pieces in the context of EPS growth next year, is sort of high-single digit essentially a fair way to think about it or could it be a little bit better than that?

Karleen Oberton, CFO

Yeah. So first of all, Tejas, I'll say that we're not providing guidance for 2025 at this point. We're still working through our budget cycle, and we'll be doing that in totality in the November call. What I would say at a high level when we think about earnings is that yes, we want to grow earnings faster than revenue. So again, that 5% to 7% would lead you to high single-digit, low double-digit earnings growth. We also consider that using the entire P&L, not just margin expansion, but share repurchases and potentially some favorability on the tax line as well. But again, we will be giving that full guidance on the November call.

Stephen MacMillan, CEO

Great. We'll kick that right to Essex to handle.

Essex Mitchell, COO

Great. Yeah. I’ll start with Boulder. We’re seeing great success expanding outside of the pediatric channel. I would say our fastest-growing area is actually in thoracic with the Reveal product. We are getting to new customers, really honing in and focusing similarly to our strategies that we've utilized with gynecology, where we focus on the specialty, really understand our differentiated position with the product, and expand from there. We feel really good about the success thus far with Boulder and still have quite a bit of potential left, I would say, with pediatrics as we look to focus there moving forward. Regarding Endomag, very early days. I would say we've just closed, and I'm feeling really great about that team, excited to have them as part of the Hologic family and know that we'll accomplish great things together. As far as feedback from customers, I don't have any comments on that right now, but I feel very optimistic about the prospects of this business, especially with the strong channel and relationships that we have today.

Jack Meehan, Analyst

Thank you. Good afternoon. Wanted to focus on the diagnostic business here, starting with Panther. I think I heard over 3,300 units in the field now. So it feels like that stepped up a little bit. Pre-COVID, you were placing about 50 a quarter. I was wondering, do you feel you’re getting back to those levels or still experiencing a bit of a COVID hangover on placements?

Stephen MacMillan, CEO

Yeah, still lower on the placements. Clearly, this chapter of our growth, Jack, is expanding the utilization for Panther, but we are still seeing a modestly moving up, which we consider to be good. But yeah, not back at that pre-COVID level.

Karleen Oberton, CFO

Yeah. I think that's a fair estimate of where it is. And I think we would be comfortable saying that it could become our largest assay someday. So, to put it in perspective, there's still room for growth there.

Vijay Kumar, Analyst

Hi, Steve. Good afternoon. Congrats on the nice quarter and thanks for taking my question. My first question is about the skeletal ship issue. How is that in the backlog? Could this now be a tailwind for fiscal 2025 or are those more like lost revenues?

Stephen MacMillan, CEO

It could potentially be a little bit of a tailwind for next year; it won't be lost revenue. I think we feel pretty good about it. There may be a couple of tiny ones. Overall, we feel confident. We’ll be back in place by the beginning of fiscal 2025.

Michael Matson, Analyst

Yeah. Thanks. I want to ask one on the cytology business, OUS. It sounds like that is a growth driver for you guys. Just want to understand what's happening in those markets and what's driving the growth while also observing the PAF versus primary HPV testing in the different regions of the world.

Stephen MacMillan, CEO

Yeah. We're seeing some nice acceptance of our digital cytology. One of the challenges outside of the United States is that there are not as many cytologists around. So the ability to enhance the workflow is a big win, and so rolling out our digital cytology, the Genius cytology there is showing promise. Additionally, we continue to engage with guidelines. The efforts mobilized during the pandemic to facilitate COVID testing, strengthened our relationships across the world with ministries of health, and we find ourselves in more discussions that are going to benefit many of our business segments, including our surgical and breast interventional businesses. Changes in guidelines in countries, like Germany, adopting a co-testing model in cytology and HPV in recent years, are contributing to our success.

Mike Matson, Analyst

Okay. Thanks. And then I think I heard Karleen mention the tax rate as a potential opportunity over the next few years. Given your tax rate is somewhat elevated compared to larger companies, could you elaborate on that?

Karleen Oberton, CFO

Yeah. As we analyze our operations and supply chain, particularly in leveraging Costa Rica for manufacturing, especially as we acquire new companies and optimize their supply chain, we are looking into adjustments that could lead to favorability concerning the tax rate.

Ryan Zimmerman, Analyst

Thanks for taking my question. Maybe Karleen, just to follow up on your next-gen gantry. You mentioned that you're on pace to grow gantries this year. Would you expect to grow gantries in 2025? Can you also provide timing on the next-gen gantry?

Karleen Oberton, CFO

Yeah. I don't think we're going to give specifics on timing, but as we look toward RSA, we might highlight that for certain of our customers and provide more details on what we're expecting for 2025 and beyond.

Operator, Operator

This does conclude today's question-and-answer session. And this now concludes Hologic's third quarter fiscal 2024 earnings conference call. Have a good evening.