Q1 2022 Hologic Inc Earnings Call

February 2, 2022

Good afternoon, and welcome to the whole logic first quarter 2022 earnings conference call.

My name is Ron and I'm 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.

Thank you Ron good afternoon, and thank you for joining <unk> first quarter fiscal 2022 earnings call with me today are Steve Macmillan, The company's chairman, President and Chief Executive Officer, and Carlene Overton, our Chief Financial Officer.

Our first quarter press release is available now on the investors section of our website along with an updated corporate presentation. We will also post our prepared remarks to our website. Shortly after we deliver them and a replay of this call will be available through March four.

Before we begin I 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.

Such factors include those referenced in the Safe Harbor statement included in our earnings release and SEC filings.

Also during this call we will be discussing certain non-GAAP financial measures a reconciliation to GAAP can be found in our earnings release, one of these non-GAAP measures as organic revenue, which we define as constant currency revenue, excluding the divested blood screening business and revenue from acquired businesses owned biologic for less than one year finally.

Any percentage changes, we discussed 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 CEO . Thank you Ryan and good afternoon, everyone. We are pleased to discuss our financial results for the first quarter of fiscal 2020.

Two.

Once again our results are strong we are off to a great start in all divisions with diagnostics breast and skeletal health and surgical each delivering more than 8% global organic growth excluding COVID-19 revenue.

For the quarter revenue was $147 billion.

And non-GAAP earnings per share were $2 17.

Both numbers significantly exceeded the high end of our guidance by 28% on the top line and 74% on the bottom.

Over the last several quarters and most recently at the Jpmorgan conference we have been communicating three major themes.

First.

Our base business is stronger with more diverse growth drivers than ever before.

Second.

As the Covid pandemic remains we continue to help meet the worlds testing needs and generate financial upside.

And third because of the first two points, we are well positioned to generate strong result, regardless of how various uncertainties evolve from.

From the pandemic to supply chain challenges to health care utilization.

In other words, you can count on us to deliver in todays uncertain business environment.

These themes are certainly playing out as we look at our first quarter results and our dramatically improved outlook for the fiscal year.

Our base businesses are performing well and we are making a massive difference against COVID-19 .

As a result, we are raising our revenue and earnings guidance significantly as we expect upside from COVID-19 testing along with strength in our diagnostics and surgical businesses to more than compensate for temporary supply chain challenges that have emerged in our breast health business.

As we shared at Jpmorgan, we are a fundamentally different company than eight years ago.

Now more than ever before Hologic is more diverse and higher margin recurring revenue across each division in each geography.

Around the world.

Our strong performance is a result of execution against our strategic plan and has been accelerated by our financial success during the pandemic.

As evidenced by our Q1 results, we are well positioned for long term sustainable growth regardless of the direction. The pandemic may turn.

While we can't predict the future path of Covid, we'd like to expand today on what we do know that.

That whole logic is emerging from this pandemic a much stronger company.

More specifically, we will focus on what we know in each division that gives us clear confidence in our ability to maintain sustained growth over the long term.

First in our diagnostics division, we know that our huge industry, leading installed base of automated high throughput Panther systems.

Along with our robust menu of 19 assays across Panther and Panther fusion.

Will drive strong growth well into the future.

Today, our Panther installed base is over 3000 units.

75% larger than prior to the pandemic.

With almost half of these place to internationally.

Of note demand for our Panthers is still strong globally, we placed well over 100 Panthers in the first quarter alone more than double our pace prior to the pandemic.

At this stage in the pandemic. This clearly indicates that customers expect to use these systems for non COVID-19 testing.

Utilization of our Panther systems is also strong we are seeing clear signs that customers are leveraging our menu of 19 assays on our significantly expanded panther footprint.

First and foremost the growth in molecular diagnostics sales reflect this growing utilization.

For Q1, our core molecular diagnostics franchise grew 14% worldwide, excluding COVID-19 revenues.

Product discontinuation as well as recent M&A activity.

Now we know a question on some People's minds is.

Will these panthers be used post pandemic.

The answer is an emphatic yes.

Based on the following.

First nearly 90% of U S. Covid customers are already running at least one other assay.

This speaks to our customers being bonafide molecular diagnostics players who are invested in molecular testing for the long haul and who who we expect will adopt more of our assays over time.

And second the incredible automation and workflow simplicity of the Panther, which dramatically minimises labor activity and costs.

In a labor restricted world our customers realize the enormous advantage of our Panther system.

Extending and broadening the adoption of our portfolio of assays is a fundamental element of the diagnostic growth strategy.

Our sales teams have done a tremendous job winning strategic accounts strengthening our relationship with customers and fueling our razor razorblade business model with both legacy Women's health tests.

And new assays.

As an example, leveraging our leadership in women's health.

Our vaginitis panel is off to a great start with $13 million of revenue in the first quarter roughly two five times the first quarter of 2021.

We are extremely proud of the panel success and believe this will be our most successful diagnostic launch ever.

Over to Syed.

In Q1, we also once again responded to our customers COVID-19 testing needs and generated significant financial upside.

We posted $523 million in Covid assay sales.

Over $300 million more than our outlook and consensus.

Clearly COVID-19 is sticking around longer than anyone would like and just as clearly highly accurate molecular testing continues to play a major role in fighting the pandemic.

We continue to believe Covid testing will contribute materially to our business for the foreseeable future and we remain prepared to meet ongoing demand globally.

Second shifting to our breast and skeletal health business.

We know the broadening across the continuum of breast health care from screening and diagnosis.

Through surgery and treatment has transformed this franchise from a once capital dependent business to a division with more diverse higher growth recurring revenue.

In the first quarter the breast health business grew eight 4% as we've maintained our high market share and continue to grow our installed base of genius <unk> mammography systems.

The attachment rate of service on this gantry base continues to remain strong at more than 80%, making.

Making served as one of our largest topline contributors companywide.

And we continue to upgrade our installed base with high margin software.

And AI.

So mammography capital business is and will continue to be a meaningful and foundational part of our breast business going forward.

In addition, we have built a solid adjacent portfolio of more recurring interventional breast surgery products that is driving the growth of the division.

These intervention products include markers.

Needles, including those used in our <unk> biopsy system.

And handheld devices.

Sales are more recurring in nature with higher projected growth compared to the legacy capital business.

As points of reference today, the gantry business is only 23% of breast health revenue compared to 29% in 2014.

And interventional sales have grown to roughly the same size as gantry revenue.

We expect the interventional business to continue its growth and further transform our breast and skeletal division going forward.

The increasing diversity of our breast business will help us offset supply chain challenges that have emerged recently, specifically shortages of computer chips in our mammography and other imaging systems.

Our updated guidance incorporates a temporary but meaningful revenue headwind for the balance of our fiscal year.

Despite this as Colleen will discuss we are raising our revenue and EPS guidance significantly based on outperformance in Covid core molecular and surgical.

Now shifting gears to surgical we know that the diversification of the business will drive growth.

Despite pandemic headwinds the division grew eight 2% in the first quarter.

And we.

We continued to solidify our market leading positions for <unk> and <unk>.

With the addition of the assessor procedure and the close of the Boulder acquisition in late November our surgical business has a very different profile today with more growth engines than ever.

Assessor revenue in Q1 was nearly three times a year ago and the Boulder integration is off to a great start as we are already seeing bolder sales through the whole logic surgical sales team.

The recent launch of <unk> version five developed in House is also seeing good traction.

It's early days, but we're seeing a lot of excitement in the field around this product.

We are committed to maintaining our leadership position in this space with best in class products.

Further the fluent fluid management system.

Also developed in house is used to streamline the complexities of fluid management in history Scopic procedures.

Fluent is another great example of organic innovation driving future growth.

Fourth and finally, we know that our international business will be a consistent contributor of growth for years to come.

We are no longer the export business of prior years.

Through organic growth and M&A, we are direct in more regions than ever before especially in breast health with our feet firmly on the street and engaged with customers.

In Q1, the international business achieved nearly 13% organic growth excluding COVID-19 .

And we expect strong growth to continue.

With the leaders we have in place today, we are confident the foundation, we've laid and the progress we've made will yield strong results for many years to come.

To add additional perspective, there are over three 9 billion women in the world.

With only about 170 million of them in the United States, which is our largest market today.

Clearly, we have an opportunity to impact more lives and more women around the world.

Through our groundbreaking initiatives like the whole logic global Womens Health index in conjunction with the opportunity we've earned as leaders in the fight against Covid.

We are connecting with world leaders and change makers to elevate women's health around the world.

In summary, our first quarter results and improved outlook demonstrate the hologic as a much different and much stronger business than ever before.

Stronger through diversification and stronger from our leadership in Covid molecular testing.

These factors are generating exceptional cash flows and a pristine balance sheet that are especially valuable in the midst of uncertain market conditions.

As we've done for the duration of this pandemic, we are confident in our ability to manage our business through various uncertainties and continue to deliver strong growth regardless of how external conditions evolve.

What is clear to us at a logic is that we are poised to continue our strong growth.

Whether COVID-19 wanes or continues.

We have fundamentally changed our business into one with more growth drivers and more recurring revenue across all geographies.

Gives us the clear confidence that we can navigate change and continue to generate exceptional financial results with that let me turn the call over to Colleen.

Thank you Steve and good afternoon, everyone. We are very pleased to share our first quarter results that significantly exceeded our guidance on both the topline and bottomline.

Our first quarter highlights and improving base business that grew 9% organically, excluding COVID-19 revenues.

As Steve mentioned, our diversified business model is paying off.

Each of our franchises, excluding COVID-19 grew more than 8% in the quarter broadly exceeding our long term revenue growth target of 5% to 7%.

It's also important to note that our base business strength occurred in a quarter that started with the delta waves and ended with Covid cases 13 did on crime.

Total revenues for the quarter of $1 47 billion showcase strength in every business and was significantly ahead of our previous guidance.

EPS of $2 17 in the first quarter far surpassed our initial guidance range of $1 15 to $1 25.

We also continue to generate healthy free cash flow funding, our capital deployment priorities of tuck in M&A and share repurchases.

We believe our balance sheet is a significant advantage in times of market uncertainty, which I'll touch on shortly.

Before I do that let me provide some detail on our divisional revenue results.

Right clarity on our performance.

Excluding the impact of COVID-19, where applicable.

And diagnostics global revenue of $954 million.

Declined 15, 2% compared to the prior year.

However, excluding COVID-19 assay sales related ancillary items and a small level of discontinued products worldwide diagnostics revenue increased just over 10%.

To better understand the underlying performance of our non Covid molecular business I will again exclude COVID-19 benefit by.

By doing this based molecular revenue grew about 14% organically in the first quarter.

The growth was driven by strong execution across our global portfolio as our largest non COVID-19 assay chlamydia gonorrhea was above pre pandemic levels.

Our newer vaginitis panel contributed well ahead of last year's run rate.

And internationally, we continue to see strong demand for our Panther instrumentation.

For perspective, our annual molecular business, excluding COVID-19 is now more than $100 million larger than before the pandemic.

As it relates to our COVID-19 results, we continue to forecast conservatively, but act aggressively behind the scenes to meet demand for our customers.

In the quarter, we generated $523 million of Covid assay revenue and shipped about 26 million tests to our customers.

The United States represented about 60% of total Covid assay revenue, although demand was high around the world.

Rounding out diagnostics cytology, and perinatal grew 5% compared to the prior year. A nice result that was also about 2019 levels.

In breast health global revenue of $359 $3 million grew more than 8%.

This growth was driven by our interventional business as Steve highlighted which was up nearly 20% in the quarter.

Breast imaging and service also increased mid single digits in the period.

Scoring resilience in the face of Covid headwinds.

Our strategy to diversify and increase recurring revenue continues to pay off.

In surgical first quarter revenue of $134 3 million grew 8%.

This solid performance was driven by a nice rebound in Nova sure from the launch of our next generation <unk> system as.

As well as momentum from new products, such as fluid in a center.

While our surgical business was impacted by pullbacks in elective procedures the impact was minimal in the quarter.

We continue to stay close to our customers and monitoring the <unk> and relating staff related staffing issues, which we do expect to be a headwind in Q2.

Lastly, our scales of business had revenue of $27 $1 million increased 10% compared to the prior year period.

Now, let's move on to the rest of the P&L for the first quarter.

Gross margin of 72, 1% significantly beat our forecast driven by higher than expected COVID-19 test volumes in the period.

Total operating expenses of 330, $333 9 million increased 22% in the first quarter, but were down 5% sequentially compared to Q4.

We continue to reinvest for future growth with incremental spending in R&D and marketing pulling forward initiatives given the benefit from COVID-19.

Further within our operating expenses the inclusion of recent acquisitions accounted for spend of approximately $30 million in Q1 and.

And we also made additional charitable donations in the quarter.

Finally, our non-GAAP tax rate in Q1, 21, 5% as expected.

Putting these pieces together operating margin came in well above our forecast at 49, 4%.

And net margin was a very strong 37, 7%.

non-GAAP net income finished at $554 7 million and non-GAAP earnings per share was $2 17.

Nearly 75% above the top end of our prior guidance.

Moving on cash flow from operations was $564 million in the first quarter, a very strong result, which was more than 100% of non-GAAP net income.

These robust cash flows continue to give us tremendous financial and strategic flexibility.

For example in the quarter, we repurchased two 3 million shares of our stock for $167 million and closed the acquisition of bolder surgical for $160 million.

We continue to evaluate M&A that strategically fits well within our existing sales channels or is a near adjacency.

Based on our strong operational performance, we had $1 4 billion of cash on our balance sheet at the end of the first quarter.

And our leverage ratio was six times.

Our capital structure is as strong as it has ever been and we intend to deploy our excess cash on division led acquisitions as well as share repurchases that improve our top and bottom line growth rates.

For example, we have been buying shares under a <unk> one plan within our second fiscal quarter to take advantages of market volatility.

Finally, our ROIC was 29, 4% on a trailing 12 month basis, an increase of 270 basis points compared to the prior year.

Before we discuss our increased guidance for the second quarter and full year fiscal 2022, I want to mention a few key points.

Although the pandemic remains highly uncertain. We believe we are well positioned either way at any time.

Should there be future outbreaks, we will meet our customers need and generate additional COVID-19 testing revenue.

Or should the pandemic subside, we expect strong performance in our base businesses.

We believe we are nicely hedged against macro and market volatility.

As it relates to supply chain headwinds these challenges have become more specific in recent weeks.

Due to the lack of available chip, we expect a temporary shortage of supply that will lengthen delivery timelines for mammography capital in our breast Health Division.

While we hope to mitigate these effects for conservatism, we are estimating around $200 million of revenue will be pushed out of fiscal 2022.

This includes up to $50 million headwind in our second quarter.

As we are proactively beginning to extend lead times of new units to preserve inventory and maintain service continuity for gantries already in the field.

This headwind is purely a supply issue and not one of underlying demand which remains strong.

Despite the supply shortage, we are significantly increasing our full year revenue outlook.

Underscoring the evolution of our diversified business model, we expect our diagnostics and surgical businesses, along with Covid contributions to more than offset mammography headwinds.

Now, let me move on to our specific guidance.

In the second quarter of fiscal 2022, we expect a very strong financial results again with total revenue in the range of one to five to $1 3 billion.

As a reminder, our Q2 revenue is usually seasonally lower than Q1.

For all of fiscal 2022, we expect total revenue in the range of four four to $4 $5 5 billion.

Significantly exceeding our prior full year guidance by $600 million at the midpoint.

Given the recent strength of the U S dollar and to aid with constant currency modeling, we are assuming foreign exchange headwinds of approximately $23 million in the second quarter of 2022 and $56 million for the full year.

In diagnostics molecular continues to be the growth engine based on our larger Panther installed base of over 3000 instruments globally.

Further we are seeing encouraging uptake of new assays like our vaginitis panel as well as tremendous international expansion opportunities and a rebound in our core STI assays.

As a result for fiscal 2022, we expect our base diagnostics franchise inclusive of cytology and perinatal to grow high single digits.

In breast health, our organic and inorganic investments continue to perform well for example, <unk> is off to a great start in 2022.

Growing in the high teens for the quarter.

Further recurring service revenue represents approximately 40% of total sales in Q1.

Finally in surgical we expect <unk> to continue to drive growth with help from better <unk> performance.

In addition, we expect new products and the recent acquisitions of Vascepa in Boulder to add momentum to an already fast growing franchise.

Like based diagnostics, we expect surgical to grow our long term organic guidance.

Oh above sorry long term organic guidance for fiscal 2022.

In terms of Covid assay sales the only certainty is that no one really knows how demand will progress for the rest of the year.

Therefore, as we have done for the past several quarters we.

We are forecasting conservatively and will act aggressively.

With that in mind, we expect Covid assay sales to be at least $400 million in the second quarter of 2022.

And at least $1 billion for the full year.

Covid related items, including revenue from discontinued products and diagnostics.

I expect it to be approximately $50 million in the second quarter and $190 million for the full year.

As a reminder, our organic guidance backs out of revenue from acquisitions until the first full quarter after the deals annualized.

As well as revenue from our divested blood screening business.

We expect blood screening revenue of $5 million to $6 million in Q2, and 20% to $25 million for the full year.

In total we are backing out roughly $110 million of inorganic revenue for the year.

To appreciate the underlying growth of our business. It is important to back out of organic revenue Covid assay sales related ancillary items and a small amount of discontinued product revenue in diagnostics.

On this measure and excluding the previously mentioned supply chain headwinds in breast health, we expect the rest of Hologic to grow at least at the high end of our 5% to 7% long term guidance.

Moving down the P&L for the full year, we forecast our gross margin percentages in the mid sixties.

And our operating margin percentage to be in the mid to high Thirty's.

Both estimates are higher than our guidance last quarter.

We expect both percentages to decline sequentially throughout the year consistent with our conservative planning that most COVID-19 demand will occur in the first half.

In addition, we have incorporated additional inflationary supply chain costs into our guidance as it relates to electronics plastics and logistics.

Spite this for the full year, both growth and operating margins should be well above pre pandemic levels.

In terms of operating expenses, we expect spending to be up compared to 2021, but declined sequentially in the back half of the year.

We've continued to highlight in quarters with higher Covid testing revenue, we will take the opportunity to invest more for future growth.

Below operating income we expect other expenses net to be a little less than $25 million a quarter for the remainder of the year.

Our guidance is based on an effective tax rate of 21, 5% and diluted shares outstanding of around $256 million for the full year.

All this nets out to expected EPS of $1 50 to $1 60 in the second quarter.

Well above current consensus consensus estimates.

And $4 90 to $5 20 for the full year.

36% above our prior guidance at the midpoint.

As you update your forecast, let me remind you that macro uncertainty due to the pandemic and related supply chain challenges still high.

We would therefore encourage you to model at the middle of our ranges, which incorporate both potential upsides and downsides.

Let me wrap up by saying that Hologic posted very strong first quarter results that far exceeded expectations and guidance.

We are also significantly raising our financial guidance for the year highlighting the multiple growth drivers we have added to each of our franchises and the upside to our business from capturing demand for Covid testing.

With organic investments multiple acquisitions and additional financial flex flexibility for capital deployment, we are a much stronger company than two years ago, and well positioned to prosper in the face of various uncertainties.

With that I will ask the operator to open the call for questions.

These limit your questions to one plus a related follow up then return to the queue.

Operator, we are ready for the first question.

Thank you and ladies and gentlemen, just to give you some instructions if you'd like to ask a question. Please signal by pressing star one on your telephone keypad and if you're using a speaker phone. Please make sure. Your mute function is turned off by just coming up to reach our equipment as well. Please limit yourself to one question and one follow up question again press Star one to ask a question.

We will take the first question is from the line of Dan Leonard with Wells Fargo. Please go ahead.

Thanks for taking the call.

Great question.

On capital deployment could you elaborate or offer a bit more color on how aggressive you plan to be on the capital deployment front as cash builds on the balance sheet.

Yeah, I think what we've talked about is managing our free cash flow that we want to fully deploy our annual free cash flow between tuck in M&A and share repurchase, but having said that Dan. We obviously will continue to be disciplined as it relates to tuck in M&A that would be the priority. So we might let some cash build on the balance sheet.

Again disciplined in looking for the right deal.

And then an unrelated follow up have your views on endemic Covid testing needs evolved at all.

We believe COVID-19 will be endemic.

And we believe there will be ongoing.

Molecular testing and probably feel even stronger about it than ever right. If you go back two years ago, none of us would have imagined we'd be having the amount of testing going on now and at the end of the day I think most governments and most people around the world was realized while theres antigen testing out there for.

True population health and frankly to truly capture what's going on molecular is the answer.

And I think we feel better and better.

That's going to be an ongoing part of our business for many many years. This is a it's a virus mutates.

<unk> is not the last mutation of this thing.

And I think we feel that we're well poised.

We'll take the next question is from the line of Vijay Kumar with Evercore ISI.

Hey, guys.

Thanks for taking the questions.

Hi, Steve.

Just one on the supply chain that you brought up Steve what I guess is this on the breast health segment.

Which segment.

Is this impacting.

And I'm curious what.

We've been hearing this from other companies.

I feel like when we had the guidance three months ago, great things for us to spud and things changed in the last few months.

And whats been the base.

Guidance reduction because of the supply chain impact because I do feel like other parts of the base business are coming in better. So maybe if you could.

Just talk about if the gross impact from supply chain was $201 million of revenue push out how much of that was offset by better base performance.

Performance.

Yes, certainly some of it is as we've highlighted with both surgical and diagnostic space businesses strengthening.

Just as we've forecasted COVID-19 conservatively, we want to put that out there.

Have to anybody that has flipped around the supply chain issues.

The semiconductor chip issues have not gotten better.

And we're not totally sure exactly when that will fully work its way out we're lengthening lead times.

For our deliveries and it is it's all in the breast health primarily in the gantry business.

And we've got obviously maintain some chips for service so we're being conservative in taking care of our existing customers and we will lengthen and frankly, it'll make next year probably look better.

It's great. We can absorb this what I'd call annoyance right now when the rest of the businesses are firing yeah, I would just build on that Vijay is that.

I think what we have here in Q2, as we have inventory to cover that $50 million of revenue shortfall, but we're actively allocating to steves point to service because that's the most important thing is that we've got inventory to keep that installed base up and running so that women can get back to screening.

Understood and then maybe one follow up on.

I think the prior guidance had 150 million contribution from M&A did that Shankar noon and Steve.

You mentioned something about 90% of U S Panther.

Customers are they're using an additional asset.

Maybe talk about what kind of assays. So they are using or the CTC high volume what kind of revenue pull through can we expect.

Post pandemic, given the higher installed base.

Yes, yes, so I think on the total revenue from acquisitions in 2022 is roughly $170 million and then we talked about the inorganic piece that we're pulling out the $110 million and I think you know I.

I think you went to another question there on the assays I think certainly the STI assays are our biggest asset. So I would say that a lot of customers that would be primarily what theyre running.

And we'll now take the next question from the line of Jack Meehan with Nephron Research. Please go ahead.

Thanks, Good afternoon.

Hey, Jack Jack.

I wanted to maybe continue on that path.

Steve your comment around the Vaginitis panel I feel like it's a pretty big statement to say you think it could become your most successful launch outside of Covid.

If memory serves me right I'm pretty sure Chlamydia gonorrhea is in over $300 million business for you. So maybe just talk about the adoption you are seeing.

What you think.

It looks like for revenue.

Yes, I think clearly it's taken us a long time to get committee got to re up into that.

Into that multi $100 million range, but I think we feel really.

This is going to be over years, but I think we're feeling pretty good about that ramp you figure. If we just did $13 million in the first quarter.

Multiply that by four and you've got the very bare minimum of I think what we expect to do this year. So that will probably continue to build through the quarters and.

I think as we fast forward a few years from now certainly goes north of 120 to 200.

And I think again, when we talk about the launch I think for comparison, Jack If you think about the trick assay took about five to six years to get to that $70 million and we're getting close to that here only a couple of years out. So that's kind of the success of the launch that we wanted to highlight it's a very meaningful indication that's been completely under <unk>.

Diagnosed and I think that's part of it the rapid uptake.

And it's really a prime rate reasons.

Go to the Doctor.

Great.

And then also wanted to follow up just on the supply chain point I'm looking at the <unk>.

The model the breast imaging product sales didn't look like you really had much of an impact in the fiscal first quarter. So is this something that really is just.

Picking up in the last few weeks and $200 million in context seems pretty significant in light of that line item. So maybe just help.

A little bit more color around that would be helpful.

Yes. It clearly has emerged we kept hoping we would.

Find solutions I've watched our operations team over the last couple of years, they've just been a herculean first on empty use on <unk> tips on swabs on.

Glass tubes on everything we did the scale during.

Covid time to getting more Panthers out the door.

And we were hearing a lot of the issues from our chip suppliers, but kept thinking we would find some alternatives and some solutions and really as it's come down at the end of the day as you can see.

Where we were able to call it manufacturer additional plastic or find other things in the Covid piece.

We haven't been able to manufacture semiconductor chips and we're at the Beck and call of the global supply chain here, where everybody has been tugging on it so as we've gotten into so yes, clearly it didnt impact last quarter at all it's technically not even.

Hurting us in the very moment right now, but as we go forth and then there is two pieces of right. One is we could sell a lot more of the chips that will have an allocation into new gantries.

But we want to make sure that we keep every gantry that's out there up and running so we're keeping a good chunk of the chips that will be coming for ongoing service.

And if we were just trying to maximize short term revenue.

It wouldn't be nearly as big but we want to make sure we're taking care of of the service side So death.

Definitely an annoyance its one and to your point, it's a fairly big number that we want to call out right now in the midst of an overall.

I think it does underscore how far we've come as a company right you think about that kind of a hit eight years ago would have been a.

Big deal, even three or four years ago.

Would have been a very sizeable knockdown punch and now it's kind of annoying little body blow that.

We will work right through in <unk> and.

<unk> set ourselves up to continue to win.

We will now take the next question is from the line of Patrick Donnelly with Citi. Please go ahead.

Great. Thanks for taking the question guys.

Steve you touched a little bit on kind of the Panther outlook beyond Covid.

The question, we get most of as well.

Stretching beyond that utilization is going to be the right number to look at any more beyond. This I mean, how are you framing the right way to look at this business beyond Covid because again, obviously the installed base is far bigger I think everyone tries to put a utilization number on it how do you frame that view.

Kind of setting it up and looking at that business beyond COVID-19 or at least when Covid is endemic.

We kind of think about it in a real simplistic term, Patrick which is our total revenue.

That comes from it and so.

To that point right, we're going to have over 3000 Panthers clearly the pure dollar volume will likely come down from what it was pre pandemic on a global basis in the near term because we placed a whole bunch more internationally, where we don't have quite as much revenue per Panther.

And we've also gone to some smaller customers, where it will clearly pay off over time so.

The way, we think about it ultimately comes down to a number of Panthers times the amount of <unk>.

Revenue generated per Panther.

And we see enormous upside too.

That's going to go here over time, so many of the folks that brought bought Panthers in the last year, plus or where we've installed Panthers. They keep wanting they keep getting ready to put the regular assays on and then COVID-19 spikes, yet again and so it's still out there. So we have so much pent up volume all of those tours.

That were generated largely in 2000 22021.

Are all still delayed and it comes down to we just generated 14% growth in this quarter, even while COVID-19 was surging.

So I think it it's hard to exactly model it per se, but it's just going to come down to we're going to be selling a lot more assays on a lot more machines.

And that's going to generate clearly accretive growth rates above the company average for a long time and just to add maybe a finer point to that even versus Q1 19 that base molecular business is up over 40%.

The tremendous growth over the past couple of years.

Sure No that's helpful hard number to peg down for sure.

Through.

Total.

Yeah.

<unk>.

Currently and maybe one for you just on the margin set up obviously, you talked a bit about the supply chain stuff I imagine that's adding to some of the inflationary pressures can you just talk through kind of that core margin as we as we tried to back cope it out a bit how that sets up for the rest of the year and again any impact from some of the supply chain noise, you're seeing there on braskem.

Yes, certainly.

The supply chain is bulk of the revenue umbrella and some of the higher cost as well that we mentioned.

Absent the revenue headwind certainly that base business operating margins.

If we had minimal COVID-19 are still in that low 30% that we were prior to the pandemic. So keeping we continue to keep an eye on that and I think again some of the strengths that we've talked about.

Continuing to contribute to that base business is still healthy on the operating margin line.

We will now take the next question from the line of payoffs Savant with Morgan Stanley . Please go ahead.

Hey, guys good evening.

Just sort of following up on Patrick's second question there.

Arlene can you just give us your updated views on what is a good sort of blended ASP to use given the U S versus O U S mix on the Covid testing side.

To what degree do you expect some of the investments you've made in commercial capabilities and operating leverage as well.

The COVID-19 testing margin over time as the mix evolves.

Yes, so from an ASP perspective, certainly pricing has held pretty nicely.

I think roughly $20 with the overall average in the quarter I think as we look forward. We do expect that pricing will come down in that one as we renew international contracts, which are lower ASP as well as in the U S. When the higher.

When the public health emergency ends in this higher LOE.

Lower payment for the testing will probably come down but still we.

We have a way to go on that pricing to come down it's still have that revenue be accretive.

To the overall corporate average.

And I think <unk> got it.

Think about the overall business and margins.

Certainly our supply chain folks and.

Annually have improvement targets that they go after that some of them even in this year of buffering some of the higher cost that we're seeing.

We have network optimization opportunities that we're focused on and certainly we've talked about investing internationally intentionally over the past several years that we believe as international revenue continues to grow we will have more margin accretion from the international business.

Got it.

Then one for you Steve on the launch of the Panther Trax here in December .

You sort of quantify the cost savings that some of your high throughput customers could see from the added automation here and over time do you expect this to drive an uptick in panther's sales and new accounts or is this more of a convenience for your current high throughput customers.

Even some of the labor issues, everybody you're seeing at the moment.

Yeah, absolutely. We do think this would be a labor efficiency for our labs.

This is something that is a really long lead time to the track system. So 18 to 24 months. So we won't have any kind of data on actual cost savings for a couple of years, but this is something that we actually have partnered with our customers on on the development of how it will work in the lab and we're excited to officially launch it here.

Yes.

We'll now take the next question is from the line of Brian Weinstein with William Blair. Please go ahead.

Hey, guys. How are you doing thanks for taking the question.

Gov.

Alright.

So.

I guess, let's talk a little bit about geographic performance did you continue to lean into that and maybe it can be a little bit more specific about territories and products and kind of run through where you're seeing the strength.

I recognize it's kind of across the board, but if there's anything that you would kind of call out there and then maybe.

Maybe I missed it but can you talk also about what the U S growth rate was and I'll have a follow up after that thanks.

Yes.

Overall International obviously, we said is a is a double digit grower and I think we'd said years ago.

Expected that international would become probably a double digit grower for many many years and I think we're exactly into that.

A lot of it candidly, Brian is really coming out of Western Europe .

Because thats, where our biggest footprint is and it's where we've placed a ton of the Panthers were starting to get certainly more of it out of out of Asia Pac as well, but the bigger chunk is really is really western Europe , a little bit of Africa.

And I think continuing to feel good and overall.

That the international growth rate is above the U S. The U S.

Right.

Is there anything I've kind of a product side I mean, obviously diagnostics has I'm guessing driving that but are any of the other kind of business is seeing significant acceleration.

Yes.

That you'd want to call out there.

I think the magic easy to actually largely across the board.

Even our cytology business is actually doing well, particularly in a few key markets in western Europe . The overall diagnostics as we've been placing those Panthers I think you can go back really over 343 or four years now where the molecular business outside the U S is oftentimes Ben.

20 ish percent.

The growth rate and if anything it's just going to be turbocharged here going forward breast health has been very solid as well and even things like the <unk> acquisition, we did in breast health.

15 months ago, whatever a German based company with some of the markers.

Ill put us on the on the map there.

Surgical's picking up a little bit. So if there is no one I think the magic of it that makes us feel actually even better is it's not like a one hit wonder it's not one country. One geography, one product line, even one franchise is doing it it's really a whole bunch of incremental things.

Just in eggs Rubley getting stronger and then that's what gives us more more confidence for the future.

We will now take the next question from the line of Tycho Peterson with Jpmorgan. Please go ahead.

Mr. Pearson, perhaps your line is on mute.

Sorry about that this is casey on for Tycho, Thanks for taking my questions.

First one is on breast health. So how should we think about the breast health margins given the shift towards recurring revenue now.

The 22%.

The business is Gantries now how does that margin profile change alongside this mix shift and I guess in the near term what sort of impact to margins is embedded in the 2022 numbers with lower gantry sales.

Yes, I think on the breast health business, if we think about operating margins.

Certainly the service business is.

Creative to the operating margins, which is the biggest part of revenue for that division.

Then I would say then there's probably equal contribution from Gantries in the interventional from an operating margin perspective, you know certainly.

The headwind that $200 million headwind is significant to that division, but fortunately here, we were able to raise our full year guidance based on the performance of the rest of the business and the Covid contribution. So we can manage this headwind.

And not have to do things like that.

Manage head count or are the other things that preserve our great sales force that we have our service.

Engineers and so feel good about managing through this this headwind.

Got it that's helpful. And then was wondering if you can give us some updated test of record metrics on the Mark.

Your side.

How did those trend versus the last few quarters, how much of this ex COVID-19 growth is coming from existing customers.

Scott or just putting more of their menu over to Panther versus.

New customers.

Thank you, yes, the KC, we think of the test of record as an annual number so to put it in perspective prior to the pandemic, our largest share with $20 million, we did about $34 million in 'twenty 'twenty and about $40 million in 2021, and we expect that 2022 will be another number in that 30 to 40.

<unk> million dollars range.

We will now take the next question from Derik de Bruin with Boa. Please go ahead.

Hi, good afternoon.

Hey, Doug.

So actually I just wanted to follow up on that last question and just look youre, placing an enormously impressive number of Panthers at a 100. This quarter that was certainly more than I thought you would have.

Just a little bit color on where your installs are add ons to existing customers greenfields competitive replacements.

I guess where is.

If you go back you look pre pandemic and you look at the number of labs that were that were not doing molecular diagnostics, how is that sort of like overall.

That overall market expanded just try to get some idea on just the continued pace of Panther placements.

Market opportunity.

In terms of where they're growing Derrick it's really again, it's very broad based some work to existing customers. You know some might have three and they add they add a fourth.

We've definitely got new customers as well theyre going into hospitals are going into small labs that going into the big labs there.

Going into some certainly some are new customers for us.

And therefore, whether it's a <unk>.

<unk> when or just an expansion of that.

<unk> business, we're certainly seeing that and we do think the overall focus on.

High throughput instruments is going to be very good thing for us going forth and we feel like that's where we've got a real winning winning edge as you've noted Panther well.

Great and then just one other question.

You know as Youre sort of like.

Geographic mix shifts how should we sort of think about the tax rate.

Out years is there sort of permanent or is that still up in the air because of all the potential changes in tax laws that are being contemplated. Thank you.

Yes, certainly it's certainly hard to comment on the future tax rate. When there is no real legit legislation in place that as you know.

The Devil's in the details on something like that but.

Certainly if the federal headline rate went up our overall non-GAAP tax rate would go up but I would tell you that it would be certainly have inactive tax department that is partnering with our operations team to to put an efficiency strategies.

We will now take the next question is from the line of Ryan Zimmerman with <unk>. Please go ahead.

Thanks for taking the questions currently in just on the Covid guidance, if I think back to your floor number originally I think it was around 200 million can we kind of assumed about $50 million a quarter and how you guys are at a $1 billion you did 500 and change this quarter.

The pacing of that number is it fair to assume given the line and say you have the three the $400 million can be done in this upcoming quarter and we should think $50 50 in the back half of the year or are you thinking about the pacing of those COVID-19 sales a little differently than what I laid out.

Yeah, Ryan So as I said in my prepared remarks.

Assuming about a minimum of $400 million here in the second quarter, So that would lead to your math.

Roughly 50 50 in the Q3 and Q4.

I must have missed that I think for well density.

And then Steve just.

Breast.

You guys have moved downstream.

And.

You are in much more surgery now then youll refer obviously mammography with some of your future. When you think about the surgical options.

And where you could go beyond your existing.

Procedure categories is there room to go deeper.

Is there room to go broader in surgery and breast are curious kind of how you're thinking about I'll round. It of a portfolio you have today relative to where you want to take that.

Yes, we're looking both ways actually as we think about it whether we.

Obviously, we've done smaller build ons in terms of the markers.

<unk> kind of the breast conserving surgery. So I think we see various different ways. We can go.

And a really assessing what else we can be doing across.

Across the broad continuum of care and particularly on the treatment side of breast so more of that would be.

Potential inorganic some of its organic.

We continue to look at things that way.

We have time for one more question.

We will take the next question is from the line of Puneet pseudo with SVP Leerink. Please go ahead.

Yeah, Hi, thanks.

Thanks for taking the question so.

Maybe just one for me.

Obviously great.

Cash flow position that you have an.

Existing cash position as well so just.

A frequent question in these times happens to be around valuation.

And what appears to be somewhat of a disconnect between the buyers and the sellers given the sudden pullback in the public markets.

So it seems like expectations, having normalized so to speak in the public markets, but wondering if you're seeing anything different in the private markets.

Or if you are seeing just overall broadly.

This disconnect to sort of normalize and how do you look at the sort of the current our current timing and the valuations out there. Thank you.

Yes, it's great question I think is certainly when valuations correct you always have the sellers kind of remembering the the good old days that might've been in I think right now we feel we're in a great position. There is a lot of stuff that we had every banker and we had a bunch of both private companies went public.

Last year in our face that wanted us to buy them then.

And we said to a lot of them Yeah. Why don't you go ahead and go public.

We will keep our eyes on Ian look at you later, so I think a lot of the corrections may create opportunities for us.

At the right time.

Got to settle in themselves and candidly when you have a really successful business, which we have right. Now there is no urgency. So I think we're in that magical spot where our core businesses are so strong and growing that we don't need to do anything. Meanwhile, we keep racking up cash that puts us in a great.

Position when we do want to act.

And we think whether it's this year, whether it's next year opportunities will present themselves that will be able to tell.

Take advantage of but absolutely no urgency from our standpoint, while people readjust to what might be that the true reality is not what they want to believe the realities could be.

Great got it that makes sense. Thanks.

And Thats all the time, we have for questions. This now concludes <unk> first quarter fiscal 2022 earnings conference call have a good evening.

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Good afternoon, and welcome to the <unk> first quarter 2022 earnings conference call.

My name is Ron and I'm 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 <unk>, Vice President Investor Relations to begin the call.

These statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied such.

Such factors include those referenced in the Safe Harbor statement included in our earnings release and SEC filings.

Two.

For the quarter revenue was $1 $4 7 billion.

And non-GAAP earnings per share were $2 17.

Both numbers significantly exceeded the high end of our guidance by 28% on the top line and 74% on the bottle.

Over the last several quarters and most recently at the Jpmorgan conference we have been communicating three major themes.

First our base business is stronger with more diverse growth drivers than ever before.

Second <unk>.

As the Covid pandemic remains we continue to help meet the worlds testing needs and generate financial upside.

And third because of the first two points, we are well positioned to generate strong results.

Regardless of how various uncertainties evolved.

From the pandemic to supply chain challenges to health care utilization.

In other words, you can count on us to deliver in todays uncertain business environment.

These themes are certainly playing out as we look at our first quarter results and our dramatically improved outlook for the fiscal year.

Our base businesses are performing well and we are making a massive difference against COVID-19 .

As we shared at Jpmorgan, we are a fundamentally different company than eight years ago.

Now more than ever before Hologic is more diverse and higher margin recurring revenue across each division in each geography.

Round the world.

Our strong performance is a result of execution against our strategic plan and has been accelerated by our financial success during the pandemic.

As evidenced by our Q1 results, we are well positioned for long term sustainable growth regardless of the direction. The pandemic may turn.

While we can't predict the future path of Covid, we'd like to expand today on what we do now.

That hologic is emerging from this pandemic a much stronger company.

More specifically, we will focus on what we know in each division that gives us clear confidence in our ability to maintain sustained growth over the long term.

First in our diagnostics division, we know that our huge industry, leading installed base of automated high throughput Panther systems.

Along with our robust menu of 19 assays across Panther and Panther fusion will drive strong growth well into the future.

Today, our Panther installed base is over 3000 units.

75% larger than prior to the pandemic.

With almost half of these placed internationally.

Of note demand for our Panthers is still strong globally, we placed well over 100 Panthers in the first quarter alone more than double our pace prior to the pandemic.

At this stage in the pandemic. This clearly indicates that customers expect to use these systems for non COVID-19 testing.

Utilization of our Panther systems is also strong we are seeing clear signs that customers are leveraging our menu of 19 assays on our significantly expanded panther footprint.

First and foremost the growth in molecular diagnostics sales reflect this growing utilization.

For Q1, our core molecular diagnostics franchise grew 14% worldwide, excluding COVID-19 revenues product discontinuation as well as recent M&A activity.

Now we know a question on some People's minds is.

Will these panthers be used post pandemic.

The answer is an emphatic yes.

Based on the following.

First nearly 90% of U S. Covid customers are already running at least one other assay.

This speaks to our customers being bonafide molecular diagnostics players who are invested in molecular testing for the long haul and who who we expect will adopt more of our assays over time.

And second the incredible automation and workflow simplicity of the Panther, which dramatically minimises labor activity and costs.

In a labor restricted world our customers realize the enormous advantage of our Panther system.

Extending and broadening the adoption of our portfolio of assays is a fundamental element of the diagnostic growth strategy.

And new assays.

As an example, leveraging our leadership in women's health.

Our vaginitis panel is off to a great start with $13 million of revenue in the first quarter roughly two five times the first quarter of 2021.

We are extremely proud of the panel success and believe this will be our most successful diagnostic launch ever.

Covid aside.

In Q1, we also once again responded to our customers COVID-19 testing needs.

Generated significant financial upside.

We posted $523 million in Covid assay sales.

Over $300 million more than our outlook and consensus.

Clearly COVID-19 is sticking around longer than anyone would like and just as clearly highly accurate molecular testing continues to play a major role in fighting the pandemic.

We continue to believe Covid testing will contribute materially to our business for the foreseeable future and we remain prepared to meet ongoing demand globally.

Second shifting to our breast and skeletal health business, we know the broadening across the continuum of breast health care from screening and diagnosis through surgery and treatment has transformed this franchise from a once capital dependent business to a division with more.

A diverse higher growth recurring revenue.

In the first quarter the breast health business grew eight 4% as we've maintained our high market share and continued to grow our installed base of genius <unk> mammography systems.

The attachment rate of service on this gantry base continues to remain strong at more than 80% <unk>.

Making served as one of our largest topline contributors companywide.

And we continue to upgrade our installed base with high margin software.

And AI.

So mammography capital business is and will continue to be a meaningful and foundational part of our breast business going forward.

In addition, we have built a solid adjacent portfolio of more recurring interventional breast surgery products that is driving the growth of the division.

These intervention products include markers.

Needles, including those used in our <unk> biopsy system.

And handheld devices.

Sales are more recurring in nature with higher projected growth compared to the legacy capital business.

As points of reference today, the gantry business is only 23% of breast health revenue compared to 29% in 2014.

And interventional sales have grown to roughly the same size as gantry revenue.

We expect the interventional business to continue its growth and further transform our breast and skeletal division going forward.

Our updated guidance incorporates a temporary but meaningful revenue headwind for the balance of our fiscal year.

Despite this as <unk> discussed we are raising our revenue and EPS guidance significantly based on outperformance in Covid core molecular and surgical.

Now shifting gears to surgical we know that the diversification of the business will drive growth.

Despite pandemic headwinds the division grew eight 2% in the first quarter.

Ed.

We continued to solidify our market leading positions for <unk> and <unk>.

With the addition of the assessor procedure and the close of the Boulder acquisition in late November our surgical business has a very different profile today with more growth engines than ever.

Assessor revenue in Q1 was nearly three times a year ago and the Boulder integration is off to a great start as we are already seeing bolder sales through the whole logic surgical sales team.

The recent launch of <unk> version five developed in House is also seeing good traction.

It's early days, but we're seeing a lot of excitement in the field around this product.

We are committed to maintaining our leadership position in this space with best in class products.

Further the fluent fluid management system.

Also developed in house is used to streamline the complexities of fluid management in history Scopic procedures.

Fluent is another great example of organic innovation driving future growth.

Fourth and finally, we know that our international business will be a consistent contributor of growth for years to come.

We are no longer the export business of prior years.

Through organic growth and M&A, we are direct in more regions than ever before especially in breast health with our feet firmly on the street and engaged with customers.

In Q1, the international business achieved nearly 13% organic growth excluding COVID-19 .

And we expect strong growth to continue.

With the leaders we have in place today, we are confident the foundation, we've laid and the progress we've made will yield strong results for many years to come.

To add additional perspective, there are over three 9 billion women in the world.

With only about 170 million of them in the United States, which is our largest market today.

Clearly, we have an opportunity to impact more lives and more women around the world.

Through our groundbreaking initiatives like the Hologic Global Womens Health index in conjunction with the opportunity we've earned as leaders in the fight against Covid.

We are connecting with world leaders and change makers to elevate women's health around the world.

In summary, our first quarter results and improved outlook demonstrate that hologic is a much different and much stronger business than ever before.

Stronger through diversification and stronger from our leadership in Covid molecular testing.

These factors are generating exceptional cash flows and a pristine balance sheet that are especially valuable in the midst of uncertain market conditions.

What is clear to us at Hologic is that we are poised to continue our strong growth.

Whether COVID-19 wanes or continues.

We have fundamentally changed our business into one with more growth drivers and more recurring revenue across all geographies. This gives us a clear confidence that we can navigate change and continue to generate exceptional financial results with that let me turn the call over to Colleen.

<unk>.

Thank you Steve and good afternoon, everyone. We are very pleased to share our first quarter results that are significantly exceeded our guidance on both the topline and bottomline.

Our first quarter highlights and improving base business that grew 9% organically, excluding COVID-19 revenues.

As Steve mentioned, our diversified business model is paying off.

Each of our franchises, excluding COVID-19 grew more than 8% in the quarter broadly exceeding our long term revenue growth target of 5% to 7%.

It's also important to note that our base business strength occurred in a quarter that started with the delta waves and ended with Covid cases, 13 due to Amazon.

Total revenues for the quarter of $1 47 billion showcase strength in every business and was significantly ahead of our previous guidance.

EPS of $2 17 in the first quarter far surpassed our initial guidance range of $1 15 to $1 25.

We also continue to generate healthy free cash flow funding, our capital deployment priorities of tuck in M&A and share repurchases.

We believe our balance sheet is a significant advantage in times of market uncertainty, which I'll touch on shortly.

Before I do that let me provide some detail on our divisional revenue results.

Right clarity on our performance.

Will exclude the impact of COVID-19, where applicable.

And diagnostics global revenue of $954 million.

<unk> 15, 2% compared to the prior year.

However, excluding COVID-19 assay sales related ancillary items and a small level of discontinued products worldwide diagnostics revenue increased just over 10%.

To better understand the underlying performance of our non Covid molecular business I will again exclude COVID-19 benefit.

By doing this based molecular revenue grew about 14% organically in the first quarter.

The growth was driven by strong execution across our global portfolio as our largest non COVID-19 assay chlamydia gonorrhea was above pre pandemic levels.

Our newer vaginitis panel contributed well ahead of last year's run rate.

And internationally, we continue to see strong demand for our Panther instrumentation.

For perspective, our annual molecular business, excluding COVID-19 is now more than $100 million larger than before the pandemic.

As it relates to our COVID-19 results, we continue to forecast conservatively, but act aggressively behind the scenes to meet demand for our customers in.

In the quarter, we generated $523 million of Covid assay revenue and shipped about 26 million tests to our customers.

The United States represented about 60% of total Covid assay revenue, although demand was high around the world.

Rounding out diagnostics cytology, and perinatal grew 5% compared to the prior year. A nice result that was also about 2019 levels.

In breast health global revenue of $359 $3 million grew more than 8%.

This growth was driven by our intervention business as Steve highlighted which was up nearly 20% in the quarter.

Breast imaging and service also increased mid single digits in the period.

Scoring resilience in the face of Covid headwinds.

Our strategy to diversify and increase recurring revenue continues to pay off.

In surgical first quarter revenue of $134 $3 million grew 8%.

This solid performance was driven by a nice rebound in <unk> from the launch of our next generation <unk> system.

As well as momentum from new products, such as fluid in our sector.

While our surgical business was impacted by pullbacks in elective procedures the impact was minimal in the quarter.

We continue to stay close to our customers monitoring the <unk> surge and relating staff related staffing issues, which we do expect to be a headwind in Q2.

Lastly, our skeletal business had revenue of $27 $1 million increased 10% compared to the prior year period.

Now, let's move on to the rest of the P&L for the first quarter.

Gross margin of 72, 1% significantly beat our forecast driven by higher than expected COVID-19 test volumes in the period.

Total operating expenses of 330, $333 9 million increased 22% in the first quarter, but were down 5% sequentially compared to Q4.

We continue to reinvest for future growth with incremental spending in R&D and marketing pulling forward initiatives given the benefit from COVID-19.

Further within our operating expenses the inclusion of recent acquisitions accounted for spend of approximately $30 million in Q1.

We also made additional charitable donations in the quarter.

Finally, our non-GAAP tax rate in Q1 to 21, 5% as expected.

Putting these pieces together operating margin came in well above our forecast at 49, 4% and net margin was a very strong 37, 7%.

non-GAAP net income finished at $554 7 million and non-GAAP earnings per share was $2 17.

Nearly 75% above the top end of our prior guidance.

Moving on cash flow from operations was $564 million in the first quarter, a very strong result, which was more than 100% of non-GAAP net income.

These robust cash flows continue to give us tremendous financial and strategic flexibility.

For example in the quarter, we repurchased two 3 million shares of our stock for $167 million and closed the acquisition of bolder surgical for $160 million.

We continue to evaluate M&A that strategically fits well within our existing sales channels or is a near adjacency.

Based on our strong operational performance, we had $1 4 billion of cash on our balance sheet at the end of the first quarter.

And our leverage ratio was six times.

For example, we have been buying shares under our <unk> one plan within our second fiscal quarter to take advantages of market volatility.

Finally, ROIC was 29, 4% on a trailing 12 month basis, an increase of 270 basis points compared to the prior year.

Before we discuss our increased guidance for the second quarter and full year fiscal 2022, I want to mention a few key points.

Although the pandemic remains highly uncertain. We believe we are well positioned either way it may turn.

Should there be future outbreaks, we will meet our customers need and generate additional COVID-19 testing revenue.

What should the pandemic subside, we expect strong performance in our base businesses.

We believe we are nicely hedged against macro and market volatility.

As it relates to supply chain headwinds these challenges have become more specific in recent weeks.

Due to the lack of available chip, we expect a temporary shortage of supply that will lengthen delivery timelines for mammography capital in our breast Health Division.

While we hope to mitigate these effects for conservatism, we are estimating around $200 million of revenue will be pushed out of fiscal 2022.

This includes up to $50 million headwind in our second quarter.

We are proactively beginning to extend lead times of new units to preserve inventory and maintain service continuity for gantries already in the field.

This headwind is purely a supply issue and not one of underlying demand which remains strong.

Despite the supply shortage, we are significantly increasing our full year revenue outlook.

Underscoring the evolution of our diversified business model, we expect our diagnostics and surgical businesses, along with Covid contributions to more than offset mammography headwinds.

Now, let me move on to our specific guidance.

In the second quarter of fiscal 2022, we expect a very strong financial results again with total revenue in the range of one to five to $1 3 billion.

As a reminder, our Q2 revenue is usually seasonally lower than Q1.

For all of fiscal 2022, we expect total revenue in the range of $4 four to 455 billion.

Significantly exceeding our prior full year guidance by $600 million at the midpoint.

In diagnostics molecular continues to be the growth engine based on our larger Panther installed base of over 3000 instruments globally.

Further we are seeing encouraging uptake of new assays like our vaginitis panel as well as tremendous international expansion opportunities and a rebound in our core STI assays.

As a result for fiscal 2022, we expect our base diagnostics franchise inclusive of cytology and perinatal to grow high single digits.

In breast health, our organic and inorganic investments continue to perform well for example, Barbera is off to a great start in 2022.

Growing in the high teens for the quarter.

Further our recurring service revenue represents approximately 40% of total sales in Q1.

Finally in surgical we expect <unk> to continue to drive growth with help from better <unk> performance.

In addition, we expect new products and the recent acquisitions of assessor in Boulder to add momentum to an already fast growing franchise.

Like based diagnostics, we expect surgical to grow our long term organic guidance.

Well above our long term organic guidance for fiscal 2022.

In terms of Covid assay sales the only certainty is that no one really knows how demand will progress for the rest of the year.

Therefore, as we have done for the past several quarters, we are forecasting conservatively and will act aggressively.

With that in mind, we expect Covid assay sales to be at least $400 million in the second quarter of 2022.

And at least $1 billion for the full year.

Covid related items, including revenue from discontinued products and diagnostics.

I expect it to be approximately $50 million in the second quarter.

$190 million for the full year.

As a reminder, our organic guidance backs out of revenue from acquisitions until the first full quarter after the deals annualized.

As well as revenue from our divested blood screening business.

We expect blood screening revenue of $5 million to $6 million in Q2, and $20 million to $25 million for the full year.

In total we are backing out roughly $110 million of inorganic revenue for the year.

On this measure and excluding the previously mentioned supply chain headwinds in breast health, we expect the rest of Hologic to grow at least at the high end of our 5% to 7% long term guidance.

Moving down the P&L for the full year, we forecast our gross margin percentages in the mid sixties.

And our operating margin percentage to be in the mid to high Thirty's.

Both estimates are higher than our guidance last quarter.

We expect both percentages to decline sequentially throughout the year consistent with our conservative planning that most COVID-19 demand will occur in the first half.

In addition, we have incorporated additional inflationary supply chain costs into our guidance as it relates to electronics plastics and logistics.

Despite this for the full year, both growth and operating margin should be well above pre pandemic levels.

In terms of operating expenses, we expect spending to be up compared to 2021, but declined sequentially in the back half of the year.

As we've continued to highlight in quarters with higher Covid testing revenue, we will take the opportunity to invest more for future growth.

Below operating income we expect other expenses net to be a little less than $25 million a quarter for the remainder of the year.

Our guidance is based on an effective tax rate of 21, 5% and diluted shares outstanding of around $256 million for the full year.

All this nets out to expected EPS of $1 50 to $1 60 in the second quarter.

Well above current consensus consensus estimates.

And $4 90 to $5 20 for the full year.

36% above our prior guidance at the midpoint.

As you update your forecast, let me remind you that macro uncertainty due to the pandemic and related supply chain challenges is still high.

Therefore encourage you to model at the middle of our ranges, which incorporate both potential upsides and downsides.

Let me wrap up by saying that Hologic posted very strong first quarter results that far exceeded expectations and guidance.

With that I will ask the operator to open the call for questions. Please limit your questions to one plus a related follow up then return to the queue.

Operator, we are ready for the first question.

Thank you and ladies and gentlemen, just to give you. Some instructions if you would like to ask a question. Please signal by pressing star one on your telephone keypad and if you're using a speaker phone. Please make sure. Your mute function is turned off by your signal to reach our equipment as well. Please limit yourself to one question and one follow up question again press Star one to ask a question.

We will take the first question is from the line of Dan Leonard with Wells Fargo. Please go ahead.

Thanks for taking the call.

Good question.

On capital deployment could you elaborate or offer a bit more color on how aggressive you plan to be on the capital deployment front as cash builds on the balance sheet.

Yeah, I think what we've talked about is managing our free cash flow that we want to fully deploy our annual free cash flow between tuck in M&A and share repurchase, but having said that Dan. We obviously will continue to be disciplined as it relates to tuck in M&A, but that would be the priority. So we might let some cash build on the balance sheet.

Again disciplined in looking for the right deal.

And then an unrelated follow up have your views on endemic Covid testing needs evolved at all.

We believe COVID-19 will be endemic.

And we believe there will be ongoing.

Molecular testing and probably feel even stronger about it than ever if you go back two years ago, none of us would have imagined we'd be having the amount of testing going on now and at the end of the day I think most governments and most people around the world was realized while theres antigen testing out there for <unk>.

True population health and frankly to truly capture what's going on molecular is the answer.

And I think we feel better and better.

That's going to be an ongoing part of our business for many many years. This is a it's a virus mutates and <unk> is not the last mutation of this thing.

And I think we feel that we're well poised.

We'll take the next question is from the line of Vijay Kumar with Evercore ISI.

Hey, guys. Thanks.

Thanks for taking my question.

<unk>.

Hi, Steve.

Just one on the supply chain that you brought up Steve.

I guess is this on the breast health segment.

Which segment.

And is this impacting.

And I'm curious what.

We've been hearing this from other companies.

I feel like when we had the guidance three months ago, great things for us to spud and things changed in the last few months.

And what's been the base.

Guidance reduction because of the supply chain impact because I do feel like other parts of the base business are coming in better. So maybe if you could.

Just talk about if the gross impact from supply chain was $201 million of revenue push out how much of that was offset by better base performance.

Yes, certainly some of it is as we've highlighted with both surgical and diagnostic space businesses strengthening and just.

Just as we've forecasted COVID-19 conservatively, we want to put that out there.

Don't have anybody that's flipped around the supply chain issues.

The semiconductor chip issues have not gotten better.

And we're not totally sure exactly when that will fully work its way out we're lengthening lead times.

For our deliveries and it is it's all in the breast health primarily in the gantry business.

And we've got obviously maintain some chips for service so we're being conservative in taking care of our existing customers and we will lengthen and frankly, it will make next year probably look better.

It's great. We can absorb this what I'd call annoyance right now when the rest of the businesses are firing.

Just build on that Vijay is that.

Understood and then maybe one follow up on.

Hum.

I think the prior guidance had 150 million contribution from M&A did that Shankar Megan and Steve.

I think you mentioned something about 90% of U S Panther.

Customers are they're using an additional asset.

Maybe talk about what kind of assays. So they are using or the CTC high volume what kind of revenue pull through can we expect.

In a post pandemic given the higher installed base.

Yes, yes, so I think on the total revenue from acquisitions in 2022 is roughly $170 million and then we talked about the inorganic piece that we're pulling out the $110 million and I think you know.

I think you went to another question there on the assays I think certainly the STI assays are our biggest asset. So I would say that a lot of customers that would be primarily what theyre running.

And we will now take the next question from the line of Jack Meehan with Nephron Research. Please go ahead.

Thanks, Good afternoon.

Hey, Jack Jack.

Wanted to maybe continue on that path.

Steve your comment around the Vaginitis panel I feel like it's a pretty big statement to say you think it could become your most successful launch outside of Covid.

If memory serves me right I'm pretty sure Chlamydia gonorrhea is in over $300 million business for you. So maybe just talk about the adoption you are seeing.

What you think that ramp looks like for revenue.

Yes, I think clearly it's taken us a long time to get chlamydia gonorrhea up into that.

Into that multi $100 million range, but I think we feel really so.

This is going to be over years, but I think we're feeling pretty good about that ramp you figure. If we just did $13 million in the first quarter.

Multiply that by four and you've got the very bare minimum of I think what we expect to do this year. So that will probably continue to build through the quarters and.

I think as we fast forward a few years from now certainly goes north of 100 and on its way to 200.

And I think again, when we talk about the launch I think for comparison, Jack If you think about the trick assay took about five to six years to get to that $70 million and we're getting close to that here only a couple of years out. So that's kind of the success of the launch that we wanted to highlight it as a very meaningful indication that's been completely under <unk>.

Diagnosed and I think that's part of it the rapid uptake.

And it's really a prime rate reasons.

Go to the Doctor.

Great.

And also wanted to follow up just on the supply chain point I'm looking at the <unk>.

Model the breast imaging product sales. It didn't look like you really had much of an impact in the fiscal first quarter. So is this something that really is just kind of picking up in the last few weeks and $200 million in context seems pretty significant in light of that line item. So maybe just help put a little.

More color around that would be helpful.

Yes.

Clearly has emerged we kept hoping we would.

<unk> solutions I've watched our operations team over the last couple of years, they've just been a herculean first on empty use on <unk> tips on swabs on.

Glass tubes on everything we did the scale during.

Covid time to getting more Panthers out the door.

Where we were able to call it manufacturer additional plastic or find other things in the Covid piece.

Hurting us in the very moment right now, but as we go forth and then there is two pieces of right. One is we could sell a lot more of the chips that will have an allocation into new gantries.

But we want to make sure that we keep every gantry that's out there up and running so we're keeping a good chunk of the chips that will be coming for ongoing service.

And if we were just trying to maximize short term revenue.

It wouldn't be nearly as big but we want to make sure we're taking care of of the service side So death.

Definitely an annoyance its one and to your point, it's a fairly big number that we want to call out right now in the midst of an overall there.

I think it does underscore how far we've come as a company right you think about that kind of a hit eight years ago would have been a.

Big deal, even three or four years ago. It would've been a very sizeable knockdown punch and now it's kind of annoying little body below that.

We will work right through in and set ourselves up to continue to win.

We will now take the next question is from the line of Patrick Donnelly with Citi. Please go ahead.

Great. Thanks for taking the question guys.

Steve you touched a little bit on kind of the.

Panther outlook beyond Covid certainly the question, we get most of as well.

Setting it up and looking at that business beyond COVID-19 or at least when Covid isn't that Michael that's right.

We kind of think about it in a real simplistic term, Patrick which is our total revenue.

Okay.

Comes from it and so.

And we've also gone to some smaller customers, where it will clearly pay off over time.

So.

The way, we think about it ultimately comes down to a number of Panthers times the amount of <unk>.

Revenue generated per Panther.

And we see enormous upside to where.

That's going to go here over time, so many of the folks have brought bought Panthers in the last year, plus or where we've installed Panthers. They keep wanting they keep getting ready to put the regular assays on and then COVID-19 spikes, yet again and so it's still out there. So we have so much pent up volume all of those tours.

That were generated largely in 2000 22021.

Are all still delayed and it comes down to we just generated 14% growth in this quarter, even while COVID-19 was surging.

So I think it's hard to exactly model it per se, but it's just going to come down to we are going to be selling a lot more assays on a lot more machines.

The tremendous growth over the past couple of years.

Sure No that's helpful hard number to peg down for sure on the pull through.

Total.

Yes.

<unk>.

Currently and maybe one for you just on the margin setup, obviously, you talked a bit about the supply chain stuff I imagine that's adding to some of the inflationary pressures can you just talk through kind of that core margin as we as we try to back hope it out a bit how that sets up for the rest of the year and again any impact from some of the supply chain noise, you're seeing there on braskem.

Yes, certainly.

The supply chain is bulk of the revenue umbrella and some of the higher costs as well that we mentioned.

Absent the revenue headwind certainly that base business operating margins with if we had minimal COVID-19 are still in that low 30% that we were prior to the pandemic. So keeping we continue to keep an eye on that.

Again, some of the strength that we talked about.

I continue to contribute to that base business is still healthy on the operating margin line.

We will now take the next question from the line of payoffs Savant with Morgan Stanley . Please go ahead.

Hey, guys good evening.

Just sort of following up on Patrick's second question there.

Can you just give us your updated views on what is a good sort of blended ASP to use given the U S versus O U S mix in the Covid testing side.

To what degree do you expect some of the investments you've made in commercial capabilities and operating leverage as well.

The COVID-19 testing margin over time as the mix evolves.

Yes, so from an ASP perspective, certainly pricing has held pretty nicely.

When the public health emergency ends in its higher.

Lower payment for the testing will probably come down but still we.

We have a way to go on that pricing to come down, but still have that revenue be accretive.

To the overall corporate average.

And I think <unk> got it.

About the overall business and margins.

Certainly our supply chain folks Andrew.

Annually have improvement targets that they go after that some of them even in this year of buffering some of the higher cost that we're seeing.

We have network optimization opportunities that we're focused on and certainly we've talked about investing internationally intentionally over the past several years that we believe as international revenue continued to grow we will have more margin accretion from the international business.

Got it.

And one for you Steve on the launch of the Panther Trax here in December .

Are you sort of quantify the cost savings that some of your high throughput customers could see from the added automation here and over time do you expect this to drive an uptick in panther's sales and new accounts or is this more of a convenience for your current high throughput customers.

Even some of the labor issues, everybody you're seeing at the moment.

Yes, absolutely we do think this would be a labor efficiency for our labs.

This is something that there's a really long lead time to the track system. So 18 to 24 months. So we won't have any kind of data on actual cost savings for a couple of years, but this is something that we actually have partnered with our customers on the development of how it will work in the lab and we're excited to officially launch it here.

Yes.

We'll now take the next question is from the line of Brian Weinstein with William Blair. Please go ahead.

Hey, guys. How are you doing thanks for taking the question.

<unk>.

Alright.

So.

I recognize it's kind of across the board, but if there's anything that you would kind of call out there.

<unk>.

Maybe I missed it but can you talk also about what the U S growth rate was and I'll have a follow up after that thanks.

Yes.

Overall International obviously, we said is a is a double digit grower and I think we'd said years ago.

Expected that international would become probably a double digit grower for many many years and I think we're exactly into that.

A lot of it candidly, Brian is really coming out of Western Europe .

And I think continuing to feel good and overall.

That the international growth rate is above the U S. The U S right.

Is there anything that kind of a product side I mean, obviously diagnostics has I'm guessing driving that but are any of the other kind of business is seeing significant acceleration.

Yes.

That you'd want to call out there.

I think the magic is it's actually largely across the board.

20 ish percent.

Growth rate and if anything it's just going to be turbocharged here going forward breast health has been very solid as well and even things like the <unk> acquisition, we did in breast health.

15 months ago, whatever a German based company with some of the markers.

Put us on the on the map there.

Surgical's picking up a little bit. So if there is no one I think the magic of it that makes us feel actually even better is it's not like a one hit wonder it's not one country one geography, one product line, even one franchises doing it it's really a whole bunch of incremental things.

Just <unk> getting stronger and then that's what gives us more more confidence for the future.

We will now take the next question from the line of Tycho Peterson with Jpmorgan. Please go ahead.

Mr. Pearson, perhaps your line is on mute.

Sorry about that this is casey on for Tycho, Thanks for taking my questions.

First one is on breast health. So how should we think about the breast health margins given the shift towards recurring revenue now.

The 22% of the.

The business is gantries, how does that margin profile change alongside this mix shift and I guess in the near term what sort of impact to margins is better than the 2022 numbers with lower gantry sales.

Yeah, I think on the breast health business, if we think about operating margins.

Yes, certainly the service business is accretive to the operating margins, which is the biggest part of revenue for that division.

And I would say then it's probably equal contribution from Gantries in the interventional from an operating margin perspective certainly.

Not have to do things like.

Manage head count or this other thing so preserve a great sales force that we have our service.

Engineers and still feel good about managing through this this headwind.

Got it that's helpful and then with <unk>.

Wondering if you can give us some updated test of record metrics on the molecular side.

How did those trend versus the last few quarters and how much of this ex COVID-19 growth is coming from existing customers.

Theyre, just putting more of their menu over to Panther versus <unk>.

New customers.

Thank you, yes, the KC, we think of the test of record as an annual number so to put it in perspective prior to the pandemic, our largest year with $20 million, we did about $34 million in in 'twenty, 'twenty and about $40 million in 2021, and we expect that 2022 will be another number in that 30 to 40.

Range.

We will now take the next question from Derik de Bruin with Boa. Please go ahead.

Hi, good afternoon.

Hey, Doug Hey, so actually I just wanted to follow up on that last question.

Just look youre, placing an enormously impressive number of Panthers at a 100 this quarter and that was certainly more than I thought you would have.

Just a little bit color on where your installs are add ons to existing customers Greenfield competitive replacements, and I guess where use.

If you go back you look pre pandemic any look at the number of labs.

That we're not doing molecular diagnostics, how was that sort of like overall.

That overall market expanded just trying get some sclerosus IBM just the continued pace of Panther placements.

The market opportunity.

In terms of where they're growing Derrick it's really again, it's very broad based some are to existing customers. You know some might have three and they add they add a fourth.

We've definitely got new customers as well theyre going into hospitals are going into small labs that going into the big labs there.

Going into some certainly some are new customers for us.

And therefore, whether it's a <unk>.

Competitive win or just an expansion of that.

Labs business, we're certainly seeing that and we do think.

The overall focus on.

High throughput instruments is going to be a very good thing for us going forth and feel like that's where we've got a real winning winning edge as you've known path as well.

Great and then just one other question.

As you are sort of like.

Geographic mix shifts how should we sort of think about the tax rate on the out years is restored.

Or is it still that up in the air because of all the potential changes in tax laws that are being contemplated.

Thank you.

Yes, certainly it's certainly hard to comment on the future tax rate. When there is no real legit legislation really in places as you know the Devil's in the details on something like that but.

Certainly if the federal headline rate went up.

Overall non-GAAP tax rate would go up but I would tell you that it will be certainly have inactive tax department that is partnering with our operations team to to put an efficiency strategies.

We will now take the next question is from the line of Ryan Zimmerman with BTG. Please go ahead.

The pacing of that number is it fair to assume given the line and say you have the three the $400 million can be done in this upcoming quarter and we should think 50 and 50 in the back half of the year or are you thinking about the pacing of those COVID-19 sales a little differently than what I laid out.

Yes, Brian So as I said in my prepared remarks.

Assuming about a minimum of $400 million here in the second quarter, So that would lead to your math.

Roughly 50 50 in the Q3 and Q4.

I must have missed that I think for them since we've been in.

And then Steve just on breast you guys have moved downstream and.

You are in much more surgery now than you were before obviously mammography with some of your future. When you think about the surgical options.

Where you could go beyond your existing.

Procedure categories is there room to go deeper is there room to go broader in surgery and breast are curious kind of how you're thinking about how rounded up a portfolio you have today relative to where you want to take that.

Yes, we're looking both ways actually as we think about it whether we.

Obviously, we've done smaller build ons in terms of the markers.

In fact, with <unk> kind of the breast conserving surgery. So I think we see various different ways. We can go.

And a really assessing what else we can be doing.

Across the broad continuum of care and particularly on the treatment side of breast so more of that would be.

<unk> inorganic some of its organic.

We continue to look at things that way.

I have time for one more question.

We will take the next question is from the line of Puneet pseudo with SVP Leerink. Please go ahead.

Yeah, Hi, Thanks for taking the question. So maybe just one for me.

Obviously great.

Cash flow position that you have an.

Existing cash position as well so just.

A frequent question in these times happens to be around valuation.

And what appears to be somewhat of a disconnect between the buyers and the sellers given the sudden pullback in the public markets.

So it seems like expectations, having normalized so to speak in the public markets, but wondering if you're seeing anything different in the private markets.

Or if youre seeing just overall broadly.

This disconnect to sort of normalize and how do you look at the sort of the current our current timing and the valuations out there. Thank you.

Last year in our face that wanted us to buy them then.

And we said to a lot of why don't you go ahead and go public.

We will keep our eyes on Ian look at you later, so I think a lot of the corrections may create opportunities for us.

At the right time.

Settle in themselves and candidly when you have a really successful business, which we have right now there is no urgency. So I think we're in that magical spot where our core businesses are so strong and growing that we don't need to do anything. Meanwhile, we keep racking up cash that puts us in a great.

Position when we do want to act and we think whether it's this year, whether it's next year opportunities will present themselves that will be able to take.

Take advantage up but absolutely no urgency from our standpoint, while people readjust to what might be that the true reality is not what they want to believe the realities could be.

Great got it that makes sense. Thanks.

And Thats all the time, we have for questions. This now concludes <unk> first quarter fiscal 2022 earnings conference call have a good evening.

Q1 2022 Hologic Inc Earnings Call

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