Q3 2022 Hologic Inc Earnings Call
Good afternoon, and welcome to <unk> third quarter fiscal 2022 earnings Conference call. My name is Cody and I'm. Your operator for today's call today's conference is being recorded.
All lines have been placed on mute and I would now like to introduce Ryan Shannon Vice President of Investor Relations. Please go ahead.
Thank you Cody and good afternoon, and thank you for joining <unk> third 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 third quarter press release is available now on the investors section of our website along with an updated corporate presentation.
We'll also post our prepared remarks to our website shortly after we deliver them.
And a replay of this call will be available through August 26.
Before we begin we would like to inform you that certain statements. We make today will be forward looking.
These statements involve known and unknown risks and uncertainties that may cause actual result to differ materially from those expressed or implied.
Such factors include those referenced in the Safe Harbor statement included in our earnings release and SEC filings.
Also during this call we will discuss certain non-GAAP financial measures a reconciliation to GAAP can be found in our earnings release.
Two of these non-GAAP measures are what organic revenue, which we define as constant currency revenue, excluding the divested blood screening business and revenue from acquired businesses owned by Hologic for less than one year.
And two organic revenue, excluding COVID-19, which excludes COVID-19 assay revenue revenue related to COVID-19, and discontinued product sales in diagnostics.
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 logical CEO . Thank you Ryan and good afternoon, everyone. We're pleased to discuss our financial results for the third quarter of fiscal 2022.
Our results continue to showcase the strength durability and diversity of our business.
Total revenue was just over $1 billion and non-GAAP earnings per share was <unk> 95.
Both numbers exceeded the midpoint of our guidance on the top and bottom lines the.
The result of both enduring Covid revenue and also strong performances in our core diagnostics and surgical businesses.
In this dynamic and ever changing world, we continue to live our purpose passion and promise to enable healthier lives everywhere every day.
And the global champions for women's Health.
In doing so our industry, leading products continue to reach even more patients around the world.
While our business deliver strong financial performance and value for our shareholders.
To put it simply the durability and diversity of our business enables hologic to succeed in this challenging macro environment.
As we navigate a multitude of headwinds our confidence in our business remains steady and remains high.
Looking longer term our message is also unchanged. We are confident despite the current turbulence that our previously announced 5% to 7% annual organic revenue growth rate through 2025 remains an achievable target for.
<unk> the current ship headwind normalizes as we expect.
Ahead of turning the call over to Colleen to discuss our financial results in more detail, we'd like to highlight growth drivers and provide updates on each of our businesses.
Diagnostics breast health and surgical.
And to close we are excited to share our experience from the World Economic Forum annual meeting in May and experience that reaffirms the importance of our place and our voice.
On the world stage advocating for women's health.
Especially now.
Before jumping into each division it is important to revisit the impact of Covid on our business.
The reality is that whether the demand for COVID-19 testing as higher LOE, we are poised to succeed either way.
We have a natural COVID-19 heads as we have seen over the past two years COVID-19 prevalence affect each of our base businesses as.
As Covid cases rise elective well woman exams screenings and surgical procedures are often postponed <unk>.
Conversely, as Covid declines our base business strengthens.
As we responded with unprecedented speed to answer the world's needs for highly reliable molecular COVID-19 testing.
We also dramatically strengthened our company for the future.
We also know that many of you are trying to gauge the longer term impact and durability of our additional panther placements as well as the impact of our various acquisitions over the last couple of years.
Diagnostics and surgical.
The truth is the various surges in Covid cases around the world through many of the last quarters.
Often created wide variability in the comps as some quarters reflect times of significant non COVID-19 related to hospital and Doctor visits slowdowns well.
While others bounce back stronger in various varying geographies in any given quarter.
When we last reported in April for example, our core diagnostic and surgical businesses posted year over year growth rates of 4% and three 5% respectively.
Which to the Covid surge at the time.
So for anyone questioning these admittedly lower growth rates, we want to highlight two numbers from this quarter.
The first number one.
22, 4%.
That was the growth in our global molecular diagnostics business.
And the second number nine 7%.
That was the growth in our surgical business this quarter.
Now we would encourage too simple takeaways from these results one these businesses have strong underlying growth.
And to the true growth rate is somewhere in between last quarter's results and this quarters underscoring the need to view, how our strength evolves over time and.
And given the variability of Covid that no single quarter result is.
Is going to match a linear model.
Now shifting gears to the businesses.
First in diagnostics.
With Covid testing significantly down sequentially.
Our third quarter provided an opportunity for customers to validate and run more non COVID-19 assays on their Panther systems.
As a result, our diagnostics business grew 15%, excluding COVID-19 year over year worldwide.
Truly phenomenal result, and one that demonstrates the impact of women returning to their wellness exams and procedures.
Even more impressive as mentioned earlier, our global molecular diagnostics business grew over 22% excluding COVID-19 in the period.
And early yet clear sign that our expanded Panther installed base is a being utilized and D will prevail as an instrument of choice as customers consolidate their molecular testing menu to high throughput high automation platforms.
For more color on the growth drivers within molecular diagnostics performance was driven by a combination of both legacy and new assays.
Mainly the BV CV TV Vaginitis panel Amgen C TNG and our respiratory menu on the Panther fusion to name a few.
Our vaginitis panel continues to outperform and deliver impressive growth on both a sequential and year over year basis.
As we have previously stated the vaginitis panel is well positioned to become a top three assay in our molecular diagnostic portfolio over time.
International Diagnostics was also a bright spot in the quarter. The business grew 16, 5%, excluding COVID-19 driven primarily by our virology portfolio.
As expected <unk>.
Replacement slowed to 59, new systems placed in the quarter with nearly 70% of these placed internationally.
The decline from the $119 123 systems placed in our first two quarters.
Annualized in Q3's placement lands within our historic run rate of about 225 to 250 placements per year.
As a reminder, panther sales have minimal impact to the molecular diagnostics growth rate as assays are the primary driver of growth by far.
Further placements at lower levels going forward is consistent with our expectations given we have increased our panther footprint by nearly 85%.
Since the start of the pandemic, we now have roughly 3200 Panthers installed worldwide.
To close out the diagnostics update our bio <unk> business was again, a highlight for the quarter posting $18 $9 million in sales representing outstanding growth of 43%.
Moving on to breast health <unk>.
First and foremost as to chip supply, we reiterate our statement from last quarter, we believe the third and fourth quarters of our fiscal 2022 will prove to be the low watermark in terms of chip availability for our gantries.
Working closely with our suppliers, we observe positive trends in Q3.
These positive trends include stabilizing lead times procurement through a combination of channels and most importantly, narrowing the breadth and depth of tight supply.
Although we remain optimistic these positive trends will maintain throughout the remainder of our fiscal year the situation remains fluid.
As for Gantries demand remains strong our best in class technology service and customer satisfaction continues to differentiate and separate us from the competition.
In addition, our Salesforce continues to place orders in line with quotas set prior to the chip headwind surfacing and there has been no meaningful change to the rate of cancelled orders.
On the chip supply chain recovery, while we're not providing fiscal 2023 guidance on this call. We do anticipate that ship supply and thus gantry availability will be recovering throughout fiscal 2023 and continue into 2024.
Next in surgical the business returned to strong performance posting nine 7% revenue growth in the third quarter.
This growth was driven primarily by the combination of <unk>, our fluent fluid management system and Boulder.
As a reminder, our <unk> devices are used for fibroid tissue removal and the fluid system is complementary to <unk>.
<unk> physicians with history Scopic procedures.
The fluids systems simplifies and streamlines, the historically complicated and cumbersome fluid management workflow used in these procedures.
While my assurance fluent sales represent the lion's share of surgical growth in the quarter. We are also very excited by the growth from our laparoscopic portfolio.
Both the assessor procedure and Boulder devices that we acquired to add growth and diversify the franchise performed well spin.
Specifically, we are excited by the incremental progress in sales of the assessor procedure.
Smaller numbers, but revenue growth of nearly 50% year over year.
A meaningful step in increasing the utilization of this novel procedure.
Assesses growth was driven primarily by two factors.
<unk> excellent efforts from our team to increase patient covered lives to 84% compared to 26%. When we first acquired the business about two years ago.
With this critical mass of covered lives, which is often considered table stakes by many physicians more doors were opened.
Second growth was also driven by more physician access to conduct monitored cases.
Access was both in person and also via our innovative virtual case monitoring platform.
This virtual system was implemented specifically to address physician access challenges created by Covid.
As the Covid pandemic moves gradually to an endemic state and physician access improves we are confident that assessor will be a meaningful growth contributor going forward.
Yeah.
And finally as many of you know in May we had the opportunity to participate at the World Economic Forum annual meeting held in Davos, Switzerland.
At the Forum, we met with World leaders and change makers to further our mission and champion Women's health.
Our message was clear putting women's health at the forefront was long overdue the time to.
Elevate women's health with the help of science backed data to guide decisions and policymaking is now.
As we have said before women's health is the cornerstone of families communities societies and economies around the world.
With insights from our Hologic Global Womens Health Index project healthy quality and decades of leadership in women's health, we came to the forum to make a difference.
We left the forum, knowing we had.
We understand change does not move in a straight line and we are committed to supporting women every step of the way.
Before we turn the call over to Colleen to conclude we want to repeat that our third quarter results give us even more confidence in the strength of our business.
This confidence is rooted in our demonstrated ability to absorb and adapt to the pressures and headwinds of this dynamic macro environment as.
As the current pressures and headwinds subside over time, we are in strong position to continue our durable growth trajectory for quarters and years to come.
With that let me turn the call over to Carlin.
Thank you Steve and good afternoon, everyone. We are very pleased to see our third quarter results that once again significantly exceeded our guidance for both revenue and non-GAAP EPS.
Our third quarter financial performance highlights the strength of our core diagnostics and surgical businesses.
With the west surpassed our long term revenue target of 5% to 7% growth in the period.
In our breast health business, although we continue to see headwinds related to semiconductor chip availability as Steve mentioned, we remain optimistic that the supply environment will start to improve.
<unk> 2023.
In terms of COVID-19 testing, we continue to showcase our agility in responding to highly variable global demand.
And while we continue to meet our customers' Covid testing needs. We also have delivered on robust demand for our non COVID-19 molecular diagnostics.
Finally cash flow generation in the third quarter was very strong again coming in above pre pandemic levels.
As a result, our balance sheet remains in an exceptional pillar of strength.
Moving on we will now provide more color on our financial results.
In the third quarter, both top line performance and bottom line profitability, we're well ahead of previous estimates.
Total revenue came in just above 1 billion more than $100 million higher than the midpoint of our guidance and.
And non-GAAP EPS was <unk> 95.
25, <unk> higher than the midpoint of our prior guide.
Turning to our business results and diagnostics global revenue of $560 1 million declined 13, 6% compared to the prior year. However, excluding COVID-19 assay revenue related ancillary and a small amount of revenue from discontinued products.
Worldwide organic diagnostics revenue increased 15% a great result against a solid comp in the prior year.
As a reminder, our organic results for fiscal Q3 2022.
Bioterror into Opex and <unk> revenue as these transactions have now annualized.
Within diagnostics, our molecular business was exceptionally strong in the fiscal third quarter <unk>.
Excluding the impact of COVID-19, molecular revenue grew over 22% organically in the period.
Underlining this excellent result, with strong utilization across our base molecular menu.
As Steve highlighted growth from our Vaginitis panel led the way while our virology portfolio also delivered strong performance.
In addition, we saw stability in our core STI menu in the period.
Our leadership position in women's health diagnostics.
While these diagnostics results include a small amount of residual demand from the adverse impact of Covid itself in the second quarter. Our molecular franchise continues to be a key catalyst of our future growth.
We are very encouraged to see customers transition additional menu onto our Panther systems as COVID-19 testing demand declines.
As it relates to our Covid results, we generated $173 million of Covid assay revenue in the quarter exceeding our guidance of $100 million.
We shipped about $8 1 million test to customers.
Selecting a global ASP of approximately $21.
Although ASP held steady this quarter, we still believe that pricing will eventually fall as reimbursement declines.
In terms of Covid assay revenue split by geography domestic demand was strong while international demand declined throughout the quarter.
The U S. Covid assay revenue represented approximately 60% of told Covid testing revenue in the period.
Slipped in geographic Covid demand versus the prior year.
Underscoring the variability of Covid revenue.
Rounding out diagnostics, our cytology and perinatal businesses increased three 5% compared to the prior year.
This result is reflective of patients returning to the well women's exam. After postponing. These important visits during periods of high Covid prevalence.
In breast health Global Russell Global revenue of $282 8 million was down approximately 18% as expected.
Primarily driven by the chip supply shortages, we have discussed over the past six months.
Related to Gantries.
Slightly better than anticipated.
While our acquisition of chips in the quarter met our expectations.
We again delivered slight favorability through reclaiming refurbishing and recertifying printed circuit boards from servicing I can't gantry install base.
Moving to intervention abreast the segment grew over 4% in our fiscal third quarter.
This performance was driven by growth in <unk> disposable needles.
Customers continue to see the benefit of <unk> differentiated efficient biopsy workflow.
Especially as the labor resources have become increasingly constrained.
In surgical third quarter revenue of $138 1 million grew almost 10%.
We are very pleased with the strong rebound in the business during the period.
As positive procedural trends exiting our second fiscal quarter continued through June .
Following this quarter's performance for surgical was a nice lift from <unk> and the related fluent fluid management system plus bolt.
Lastly, in our skeletal business as expected revenue of $21 $7 million decreased approximately 14% compared to the prior year period.
Now, let's move on to the rest of the non-GAAP P&L for the third quarter.
Gross margin of 63, 3% was ahead of our forecast driven by the higher than expected COVID-19 testing volume and strong results in our base businesses in the period.
Total operating expenses of $311 2 million in the third quarter increased less than 1% compared to the prior year.
The increase in operating expenses was driven by spend within marketing and R&D, partially offset by less G&A and sales expense.
However, when we normalize the spending from <unk> and bolder operating expenses decreased 3% compared to the prior year.
Finally, our tax rate in Q3 was 21% as expected.
Putting these pieces together operating margin for Q3 came in at 32, 3% and net margin was 24, 1% both above pre pandemic levels.
non-GAAP net income finished at $241 5 million and non-GAAP EPS was <unk> 95.
Moving on from the P&L cash flow from operations was $336 million in the third quarter.
These robust cash flows continue to provide tremendous financial and strategic flexibility.
Based on this strong operational performance, we had $2 4 billion of cash on our balance sheet and our leverage ratio with 0.2 times.
As we've previously stated previously stated we are comfortable building our cash balance during this challenging macro backdrop.
That said, we continue to diligently pursue M&A opportunities in each one of our businesses.
Finally, while there were no cash repurchases during the quarter our share repurchase program remains an ongoing part of our capital deployment framework.
So far this fiscal year, we have repurchased approximately five 2 million shares for $367 million.
A sizeable outlay of funds.
Now, let's move on to our updated non-GAAP financial GAAP guidance for the fourth quarter and full year fiscal 2022.
As a reminder, our organic guidance excludes acquisition revenue until each deal annualize it.
Therefore, our fourth quarter guidance only excludes boulder revenue from our organic base.
Given our strong third quarter performance, we are once again, increasing our full year revenue and EPS guidance.
For the full year, we now see total revenue in the range of $4 75 to $4 78 billion and EPS of $5 79 to.
To $5 84.
Representing an increase of $115 million on the topline and 26 on the bottom line compared to the midpoint of our previous guidance.
With only one quarter remaining in our fiscal year. This annual guidance implies revenue of $840 million to $870 million in EPS of 60 to 65.
For our fiscal fourth quarter.
With respect to foreign exchange given the unabated strength of the U S. Dollar we are assuming an FX headwind of slightly more than $20 million in our fourth quarter of 2020 to nearly $10 million higher than our prior guidance incorporated for the quarter.
In terms of Covid sale, we expect Covid assay sales to be at least $70 million in the fourth quarter of 2022.
135 billion for the full year.
Covid related items inclusive of a small amount of discontinued product revenue are expected to be slightly less than $35 million in the fourth quarter and $215 million for the full year.
Yes.
As it relates to the breast health chip shortage, although we had marginal improvement versus expectations in Q3 guidance on the gantry rent revenue shortfall for the fourth quarter remains unchanged from our prior messaging.
Moving down the P&L for the full year, we forecast our non-GAAP gross margin percentage to be in the high <unk> and our non-GAAP operating margin percentage in the high thirty's to approximately 40%.
Both estimates are well above pre pandemic levels.
Further our Q4 guidance incorporates the margin impact from our breast health supply chain revenue shortfall.
As a reminder, gantry gross margins are accretive to the consolidated averages and we have maintained operating spend to be in a position to move quickly once we receive chips.
In addition, we have again incorporated elevated costs into our Q4 guidance as it relates to electronics plastics and logistics.
In terms of operating expenses, we expect spending to be down a few million dollars sequentially.
Below operating income, we expect other expenses net to be around $20 million in our fiscal fourth quarter.
Our guidance is based on an effective tax rate of 21% and diluted shares outstanding of around $250 million for the full year.
Finally, although we will update everyone on our fiscal 2023 guidance during our Q4 call next quarter.
I'll remind you that the headwinds related to higher input cost the stronger U S dollar and increasing interest rates are unlikely to subside in the near term.
Like many other companies we expect these headwinds to continue into our fourth quarter and into our fiscal 2023.
To help offset these pressures as we do every quarter, we seek out efficiencies in our business and strategically manage pricing, where we have the opportunity.
Though these temporary challenges are not unique to hologic. They are important to consider for modeling purposes.
To conclude let me wrap up by saying that slotted posted very strong third quarter results.
Underpinned by exceptional growth in molecular diagnostics and a healthy rebound in our surgical business.
We are also once again, raising our financial guidance for the year.
No the future macro outlook remains cloudy with a natural hedge to future COVID-19 uncertainties as well as an increasingly strong balance sheet and best in class cash flow, we are well positioned to continue to deliver strong results for our shareholders.
With that we ask the operator to open the call for questions.
Thank you.
Like to ask a question. Please stay on the pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure that your mute function is turned off to like your signal to reach our equipment.
Also in order to allow for as many questions as possible. We do ask you. Please limit yourself to one question and one follow up before reentering. The queue. Once again that is star one to ask a question.
We'll take our first question from Jack Meehan with Nippon Research. Please go ahead.
Thanks, Good afternoon.
Jack I wanted to.
I wanted to go into the molecular results on the 22% organic growth ex Covid. If you look at the Panthers you've installed over the last couple of years for Covid is it possible that call out now what portion are running something beyond COVID-19 now as well.
And also within that result can you just break out how much the vaginitis revenue was in the quarter.
I think from a I think it's certainly in the U S. The majority of our Panthers and running more than Covid for sure I think we are.
We are really pleased with the vaginitis growth, but I don't think we're going to give the absolute number at this time.
Okay, and then on the COVID-19 side would just be great to hear from you what youre hearing from customers and the government around demand as we head into the fall and the winter just.
You are going to be heading into guidance next quarter, just any early thoughts around how you approach setting guidance for the first time for 2023 as it relates to Covid.
Yes, I think when we get to that point, Jack will probably continue to be conservative on the Covid side, it's been such a rollercoaster for the last 27 28 months or whatever that.
It's almost been hard to predict within a quarter and we've watched a quarter start strong in that.
Dries up and Conversely, almost like this quarter last year looked like everything was gone in July and August and then the home of crime.
<unk> hit in our Delta hit.
In September and things started to spike up so we've had so many ups and downs that I think will be cautious as we as we forecasted having said that.
I think a lot of what we've said at the very beginning continues to play out.
And for those who bought the business was going to be dead when vaccines came in.
18, 19 months ago, we continued to say that we always thought this was going to leave a residual business that was probably going to be around for quite some time and might be one of our top three or four assets.
And as we sit here today in the world with Japan.
Japan, and a whole bunch of other countries very high in the U S. As you know is still running fairly ramp it and we said all along the goal of herd immunity was not going to be achieved in a mutating virus that this thing would become more endemic can probably create an opportunity for us to have a more.
Ongoing business I think we would see that in full expectations as we go into next fall and winter.
This thing is not burned away from the world. So there will be some business, but I think we will we will certainly model it on the lower side as we go in because it's just.
We can count on our base businesses. This one truly is call it opportunistic or.
Its subject.
We can't put a linear forecast on it.
Thank you we'll take our next question from pay Joseph <unk> with Morgan Stanley .
Hey, guys good afternoon, and thanks for the time here Steve.
Steve one one on the Capex environment I know you mentioned demand for Gantries is pretty strong you don't see an elevated cancellation rate et cetera.
What's your sort of line of sight into the order book here.
Have some sort of mixed messaging from some of your med tech peers. Some of them are not seeing any impact other than just kind of like pointing to a softened capex environment.
Curious to get your take.
Yeah, we're not really seeing or hearing it.
From our customers and I think to a large degree its probably dependent on what products you're offering ours in the Grand scheme are not a huge capital outlay for the hospital systems.
We're also a both revenue and Pat and patient <unk>.
<unk>.
Topline generating.
Procedure for the hospitals, so I think they will certainly find it. So I think we're not hearing it but I would say as always we're going to plan a little more cautiously and would expect that somewhere over the next couple of years.
Does is there a little bit of contraction here or there.
All in all likelihood if we go into a recessionary environment.
Flip side is I think we've got pent up demand and I think even if there is a macro slowdown we actually believe we've got some micro.
Benefits working that will help us power right through that.
Got it that's helpful. And then just a follow up on your commentary around the slope of the recovery here on the gantry chips.
In the past you've talked about sort of having to figure out sort of construction timelines and installation timelines with your customers have you started to work on any of that here as you look to fiscal 'twenty three and.
Your comments around perhaps the full recovery, having to wait until FY 'twenty for you.
Are they on the margin a little bit more cautious and then.
You had shared earlier.
I wouldn't say, it's any more cautious I think for anybody that's listened to the leaders of the semiconductor industry.
Speak over the last.
Six months plus they've all been saying look recovery is not going to even happened throughout 2023, and it's going to go into 2024 and were largely operating on kind of a quarter to quarter allocation right. Now. So we're at a cadence that is at least <unk>.
Rather than where it was but I do think it's important.
For us to indicate this doesn't come bouncing back miraculously.
On the day, you flip a calendar to a new fiscal year.
Yes, I would just add that our field service engineers, the ones, who maintain the gantries in the installed base of the Wednesday also did install so there is a balancing of our own resources to that recovery as well as hospital scheduled.
Thank you, we'll now take our next question from Patrick Donnelly with Citi.
Hey, guys. Thanks for taking the questions Steve maybe one on that on the 23 set up again I know you guys aren't going to give guidance, but in terms of the cost.
Carly and touch on a little bit there at the end, what's the right way to think about some of those whether it's higher input costs. The dollar obviously.
<unk> on the chips the.
Is the expectation that kind of lingers throughout most of 'twenty three and its kind of slowly works its way back just in terms of thinking.
Thinking about the margin cadence it seems like most models become kind of flipping pretty normal almost day. One of 23. So just trying to wrap our heads around the right way to think about that cadence and some of that cost pressure lingering into 'twenty three again not surprising that your 23, obviously starts pretty soon here.
But just trying to get a handle on the right way to think about that piece.
Hey, Patrick This is currently let me try to give you some insight there. So when you look at our Q4.
The breast health revenue headwind is probably roughly 400 to 450 basis points of a headwind on operating margin now that I think as that business recovers over 23 that will come back over the course of 'twenty three.
As far as cost higher cost are probably about 202 hundred 50 basis points headwind on Q4, now that we think might persist.
A little longer.
Inflationary pressures continue so.
We think we've got good line of sight to how we get improvement from where we ended Q4.
Okay. That's helpful.
And then just on the molecular growth rates. Another question that I was the number jumps off the page a little bit can you just talk through Steve I guess, what goes into that again, obviously the acquisitions rolling into it they flipped organic.
Maybe Guy AG, maybe just talk through kind of the different components were the real drivers of strength, where because again I think that'll be be a focus goodbye I listen to you don't see a big number.
Yes, clearly, our new product launches and especially BV CV TV as we've talked the Vaginosis panel.
<unk> is off to a very nice start.
But it's a kind of across the board. It's also still.
More customers that we sold.
More Panthers two during the pandemic that are now able to start to take on our core women's health assays. So I think what's remarkable is it's it's fairly dispersed growth, which I think both geographically.
And.
And across product lines. So there is no one there.
<unk> completely dominated I think thats, what gives us a lot of confidence for the future, Yes, I would say of the acquisitions by what Theyre Gnostics is probably the most significant component of growth in the quarter.
As we would expect that one metric, which we called out.
Thank you, we'll now take our next question from Derik de Bruin with Bank of America.
Hey, this is Neal <unk> on for Derik.
To start off on the margins do you still think the 32% to 33% range is the right way to think about fiscal year 'twenty three margins.
Yeah. So what I would say is when we have a normalized chip supply that is exactly the way to think about them in that low 30, I'd point to our Q2 of 'twenty, which was 31, 5% operating margin, we believe that as a normalized.
Baseline if you will but again that recovery on the chip is going to occur over the course of 'twenty three we're still in that planning stages of how and when so it won't be kind of Q1 out of the gate likely.
Got you that makes sense and then one more like have you seen any changes on the order book for breast health how much catch up do you think we could see there as the chip shortage issues gradually go away in 'twenty three.
Yes, I think as we said in our prepared remarks.
Our sales teams are hitting quota that were set prior to the chip shortage. So we haven't seen any deviation in the booking rate and again as Steve mentioned no increase in the cancellation rate so yeah.
We think the business is still solid we're not losing any share and then it will just be again availability of chips.
In the scheduling of the installed that will again that we'll be working on to manage through the recovery.
Thank you we'll take our next question from Vijay Kumar with Evercore.
Hey, guys. Thanks for taking my question.
I had two on the guidance.
One on breast imaging.
The prior guidance.
$2 million of headwind for fiscal 'twenty two.
The thing that number changed.
It looks like <unk> came in better what does that updated number.
And what does it imply breast imaging.
<unk> for Q4 should be <unk>.
We're being prudent.
Based on <unk> trends.
So youre right, we did guide to $250 million. It was $50 million in Q2 $100 million in Q3 and $100 million in Q4, we did slightly better like you said the $10 million better here in Q3, I think we're holding to the $100 million in Q4 again because of that favorability Vijay with.
<unk> kind of.
Blood sweat and tears of reclaiming and Recertify circuit boards and just don't know if we'll continue to have those yields in this quarter.
We just got to be conservative and not the 100 million for Q4.
That's helpful color and then one on <unk> I just have an opex question for.
And look at the Q4 guidance at the high end <unk> revenue was 65.
EPS.
I think the guide implies.
Opex on a dollar basis sequentially flattish.
If we annualize that Q4 number.
The implied Opex for next year somewhere north of a $1 2 billion is that math correct just based on.
Commentary on <unk>.
We will hold the Opex line.
On the assumption that.
The chip shortage.
<unk>.
Eventually.
Yes.
Vijay for 2023, where we're still in the planning process.
Process, so not going to comment that I would just daily inside I would give you is that with our partnership with the WTO is that the expense, but that is loaded into calendar 'twenty two.
Most of that then expense is disproportion amount of expenses in our fiscal 'twenty, two which will be a tailwind as we get into 'twenty three and 'twenty four.
Thank you we'll move on to our next question from Mike Matson with Needham.
Hi, guys. This is Joseph on for Mike.
So I.
I guess during the pandemic SD STI rates seem to Spike then currently they still seem to be at or near record highs. Maybe just to start off can you talk about maybe some of the barriers that are currently in place in the industry that it removes could.
Increased screening rates.
And then maybe a similar question as we saw with Covid testing moving to the at home testing.
Do you see this as a potential market for <unk>.
Testing.
And then.
What were they introduced.
I guess, what it won't be <unk> solution, there for staying competitive.
That includes looking at at home.
<unk> options.
Yeah on the first part of that in terms of barriers to STI. As you know we did see a lot of call it inner city clinics and everything that either shut down or have got their resources redeployed.
During COVID-19 time.
From serving Stis and just serving their community folks to really focusing on COVID-19. So as some of those come back I think we feel good about hopefully the ability to get back to.
More screening and as you say theres probably been an increase.
Certainly we've seen in many pockets of stis. During this time, so hopefully the ability to pick those up on the idea of home testing. There is a lot more complications to women testing themselves at home in terms of administering the test and in terms of shipping.
It in a proper container everything else so candidly.
We were approached by lots of companies in Covid time, who all were convinced that they were going to be the next great Savior of home testing for Covid as well as home testing for Stis.
That don't.
We're not assure that market's going to move nearly as quickly.
Two home testing when you actually think about the pragmatic realities of it.
And so I think we continue to feel very good we continue to broaden out our own portfolios have partnerships.
To be able to try to capture them, but I would not expect that market to move nearly as quickly as some companies might be hoping.
Okay, Great. Yeah, that's that's very high the way I'd also say if it were its where our cash balance puts us in really good position.
Okay great.
And then I did happen to see I don't know if you guys have already got a chance to look at it but it seems the mtc and posted new guidelines for breast cancer screening and diagnosis.
Just a quick look at it it doesn't seem like anything really changed more or less just solidifying.
A diagnosis pathway is based on.
Your risk.
But could you maybe talk about anything that was that was seen in that update.
And then maybe just a similar question on that.
What's maybe been the.
Yeah.
Reception of some of the.
Mobile <unk>.
The immigrant screening that allowed you guys put out you know how has that been received during the pandemic.
And recently.
Yes, I think as it relates to guidelines we continue to.
Push for the.
Proper guidelines, I think sometimes USPS TF and some other folks who've gone too far.
But in general most of the <unk>.
Most of the folks I think are are adhering to pretty sensible.
Guidelines and.
Candidly I think theres still a lot of pent up demand there is still a lot of women that put off their screenings.
During COVID-19 time and are running behind so I think we will still catch up in terms of the mobile we made those available here or there it's de minimis.
In terms of any real impact on the business.
Great and we've been doing mobile mammogram, well before the pandemic really to reach underserved communities with is really the intent there.
Thank you we'll now take our next question is from Puneet <unk> with <unk> Securities.
Yes, Hi, Steve currently and thanks for taking the question so.
First one maybe for <unk>, how much of an offset are you getting today from Repurposing of these prior boards and chips and how much of that do you expect will happen.
In FY 'twenty three versus new chips.
Yes, so it's pretty de Minimis and if I look at Q3, we did better than the original forecast at 100 million of headwind by again roughly $10 million. So.
It's in the millions of dollars and again I wouldn't think that it's going to be the most significant solution to the challenges of supply it's going to be getting higher allocations.
Got it Okay and then Steve.
The first fiscal quarter call. You said, you know corrections do create opportunities for Hologic is the right time, and but valuation hadn't settled back at that time in your view, so obviously macro drop backdrop hasnt improved but.
<unk> that come down here meaningfully so I'm wondering if you have.
<unk> thoughts and views on how you're viewing the market and valuations now given your vantage point and the growing cash position is still strong cash flow.
Yeah, we like seeing some of the valuations start to truly settle in.
The fascinating part always becomes.
People are we still looking at the past 52 months or past 52 week high and wanting premiums off of that even though it's long since history. So the more time that goes by.
We believe puts us in a better position and really puts the potential sellers in a more realistic position, we feel great right now being patient.
And feel like.
We don't see something that's going to snap a lot of these especially earlier stage or smaller companies back in we're looking both early stage and we're also looking at things that bring some legitimate EBITDA.
In this time, but really like our position.
And we're in no.
No urgent.
Need given the strength of our base business to act, which I think also just puts us in a much better place.
While these companies come to grips with.
They are true true realities.
Thank you, we'll now take our next question from Casey Woodring with J P. Morgan.
Hi, guys. Thanks for taking my questions.
I guess the first one so on the diagnostics growth rate here wondering how much of that was pent up demand from the last quarter or two so you know last quarter you guys made the comment that women wellness visits had softened given COVID-19 impacts. So curious to hear if there was a catch up in visits this quarter and if there is some more pent up demand here in <unk> and maybe even the beginning of it.
Fiscal 'twenty three.
Yes, it's probably a little bit I think it's just it's so hard for us to say that these things just keep ebbing and flowing by geography, both within the U S. You see regions that.
Move to different paces, and Covid time, and different and certainly on a global basis different countries. So it feels like a little bit of pent up but I wouldn't say that.
The eight that created a big bolus.
It's just it more allowed a lot of the visits to come through.
That werent happening before so I think it's a pop but it's not like it was necessarily restrained. So again hard to exactly know we don't have that information from.
Our customers or anything else, but.
I think it's where we just keep saying, let's let's keep watching these trends over time.
Got it and then just on the international Diagnostics piece, you called out 16, 5% ex Covid growth.
Was driven by Barology, you Didnt mentioned women's health there. So I guess can you just sort of remind us.
How much of that diagnostics business.
Outside the U S.
If there's material greenfield opportunity on the <unk> side with women's health, especially given all the Panthers placed thank you.
Yes, its still our molecular business outside the U S has been underdeveloped and I think that's been one of the magical pieces of the.
Being able to place so many panthers during the pandemic that we're very excited about the opportunity really in the core women's health business, which has also been underdeveloped. So it's a combination of both the virals and the core women's health as we start to transition from some of those Panthers internationally that we used for COVID-19 into our core.
Business and I think that's something we expect.
It would be generating certainly double digit growth internationally for quite some time and that molecular business.
Thank you our next question from Max Masucci with Cowen <unk> Company.
Hi, Thanks for taking the questions.
First one.
Thank you are nearly done integrating bioterror gnostics lab operations into the San Diego headquarters if not finished the growth is tracking nicely there so and once bioterror nonsexist fully settled in the San Diego headquarters and how.
Motivated will you be to pursue additional M&A deals for say abreast focus specialty lab that you can that you would be able to serve with biotech gnostics.
The new lab operations and the commercial team that's in place.
We're continuing to look at.
It all options I think what we do feel good about and as you say, Matt we did a whole bunch of acquisitions in a relatively compressed period of time, and then really had to digest those and I think between <unk>, six which is not fully integrated it we're probably slightly behind exactly.
Your rosy Synopsys here, we're integrating it.
The San Diego facility, and moving the CLIA lab in and all of that but we still have a little bit of work to be done.
The same with that node and.
Moby dyad getting integrated nicely Boulder assess those have all been being integrated to where I would say, we're getting to the point, where we can certainly handle more integrations, but.
We're casting.
Net fairly broadly within our our existing store.
The state of business at the existing three businesses.
Got it and then just sort of following up there I mean, if you look at all the companies and the products that you have integrated over the past 18 to 24 months.
Which of the recently acquired products or services, whether it's access or some of the expanded intervention breast offerings and which of them have benefited the most you know under <unk> ownership or when they're they started being marketed alongside some of your cornerstone marquee products.
I think they're all benefiting very nicely.
About what we've been able to do from a covered lives standpoint within assess.
Early stages, even for Boulder, our surgical sales force is dying to get their hands on it it's been more of a supply issue that we've been holding them back a little bit while we ramp up.
Bioterror Gnostics that team when you talk to the commercial leader.
That team very excited by what the Hologic team and breath and marketing capabilities.
Everything have brought to that business as well the dyad node multi die AG teams I think also in Europe , very excited, particularly having to just have gone through the whole IV. Dr process, which was it was a hugely labor intensive business now to be get that behind us and really.
Focus to the future. So I think they are all looking at us and saying you know what.
The nice part is they're proud to be a part of us.
I was talking to a CEO of another company recently.
Actually been involved in one of ones, we bought and he was still close to one of the members of the team at the company, we bought and he said you know what that team loves being a part of Hologic.
And that's exactly what we always want to strive for field.
Feel pretty good that.
Each of them are really fitting that bill.
Thank you, we'll now take our next question from Ryan Zimmerman with BTG.
Thanks for taking the questions and I wanted to just ask on Carlin that's right.
I've been asked a lot about op margins for next year and I. Appreciate the color. There I think you had said.
Maybe a 400 450 basis point headwind on op margins and that'll come back over 2003 in a normalized environment, but if I look at the fourth quarter number next quarter op margins are kind of sitting at 26% and so add back kind of that 400 basis point dynamic and it puts it closer in and maybe I'm slow.
Harriss here, but closer to 30% and I just wanted to know.
I'm thinking about it the right way versus.
And again, a normalized environment 32 ish percent 31, 5% or are we still maybe 100 150 basis points off of kind of that normalized margin as we enter 2003, and then I have a follow up.
Yes, so I think beyond as I talked about the 400 to 450 is the higher cost of roughly 200 to 250, which.
From a planning perspective, we don't have line of sight to that resolving but eventually that will resolve I think the other piece with some higher marketing expenses, which is probably about another 200 basis point headwind to op margin that will abate over 23. So we have clear line of sight back to those normalized margin levels.
Okay.
That's helpful color and then if I think about I think mobi diack laps next quarter in terms of the.
The time of acquisition becomes organic.
That disclosure today for both multi diagram Boulder was about $8 million. If I go back to the revenue contribution from <unk> I think it was something on the <unk> I just want to understand kind of how that's tracking relative to maybe its previous disclosures I'm, maybe I'm misunderstanding.
Yes, so it's choppy a little bit below that and there's two reasons one that four handle would've had COVID-19 revenue in there that has come down that covered revenue was on their legacy amply Die AG platform, not the Nova diet platform and as well as there's been some supply chain.
Challenges with.
<unk> through those we're in we're ramping up inventory to kind of go hard commercially at the beginning of 2023. So couple of Choppiness here in the year, but still really good about what that's going to do.
Thank you we'll take our next question from Andrew Cooper with Raymond James.
Thanks for sneaking me in here, a lot's already been asked so maybe I'll just.
Just one quick one and let everybody go on so maybe just an update on <unk> potentially coming to the U S and sort of what's the latest and greatest thinking on the pathway there.
What we should be looking for for that product.
Yes, I think to Steve's earlier comments about the benefits of these acquisitions and Hologic 10, I think.
Our R&D teams have spent a lot of time in Finland that really dive teams have come to San Diego to really work through what that clinical roadmap is for approval in the U S and I think we were in a much better position of understanding of what is required for approval in the U S and that understanding.
Based on our expertise has pushed out the timeline a little also looking now more like early 2025, but we still feel really good about that acquisition.
Good about what's going to happen with the EU approvals that we already have here in 2023.
Okay great.
I'll stop there given the time thanks.
Thank you Greg and thank you and this now concludes <unk> third quarter fiscal 2022 earnings conference call have a good evening.
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