Q3 2023 Hologic Inc Earnings Call
Yeah.
Please standby.
Good afternoon, and welcome to the <unk> third quarter fiscal 2023 earnings Conference call. My name is Cynthia 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. Please go ahead.
Yeah.
Thank you Cynthia good afternoon, and thank you for joining <unk> third quarter fiscal 2023 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. We will also post our prepared remarks to our website. Shortly after we deliver them as well as an updated corporate presentation.
And a replay of this call will be available on our website for the next 30 days.
Before we begin we would like to inform you that certain statements. We make today will be forward looking these statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied.
Such factors include those referenced in the Safe Harbor statement included in our earnings release and SEC filings.
Also during this call we will discuss certain non-GAAP financial measures a reconciliation to GAAP can be found in our earnings release two of these non-GAAP measures are one organic revenue, which we define as revenue excluding the divested blood screening business and revenue from acquired businesses.
Biologic for less than one year and two organic revenue, excluding COVID-19, which exclude COVID-19 assay revenue revenue related to COVID-19, and sales from discontinued products and diagnostics.
Finally, any percentage changes, we discuss will be on a year over year basis and revenue growth rates will be in constant currency unless otherwise noted now I'd like to turn the call over to Steve Macmillan Hologic CEO .
Thank you Ryan and good afternoon, everyone. We are pleased to discuss our financial results for the third quarter of fiscal 2023. Our results were solid total revenue was $984 million and non-GAAP earnings per share were 93.
Revenue exceeded our prior guidance and EPS finished at the high end of our range.
These results showcase the power of our transformed business and demonstrate the whole logic is built for the long term with the broadest strongest foundation we've ever had.
On top of this transformation with our strong cash flow and outstanding balance sheet. We continue to operate from a position of strength with strong operational discipline as we forge ahead.
Once again the proof is in the numbers.
Total company organic growth, excluding COVID-19 was rather remarkable at E team.
4%.
By Division, we posted 11, 8% organic diagnostics growth ex COVID-19.
The 14, 5% growth in surgical.
Standing alone these growth rates are impressive.
Given a wider context, we view these performances as exceptionally strong because we deliver these results on top of 15% growth in diagnostics and nine 7% growth in surgical in Q3 of 2022.
It's very high bars from a year ago.
And in breast health as expected, we delivered another strong quarter of 27, 5% growth.
Chip supply and gantry availability continued to improve and track to our expectations.
For this fiscal year, we remain on pace to achieve or exceed our 2023 low double digit organic growth targets excluding covet.
In fact, our expected growth rate for fiscal 'twenty three is now more than double our 5% to 7% long term growth target.
Based on our strong performance for a number of quarters now.
Combined with our continued confidence in our growth ahead.
We've recently given serious consideration to raising our long term target.
But given the uncertain macro environment, we face.
5% to 7% is still very much a solid long term outlook.
Put simply there are two reasons why.
First as you all well know growing 5% to 7% on top of double digit growth is clearly more challenging than growing 5% to 7% against single digit comps.
For example in fiscal 2024, we will lap several prior periods of double digit growth throughout the year.
Net will be entering 2024 already much bigger and stronger than when we first set the goal.
And second there are macro business and geopolitical challenges that persist today, which did not exist back in 2021, when we first set our guidance we will expand on this aspect later in today's call.
Taken together overcoming this combination of challenges, while maintaining 5% to 7% growth is in some ways and even last year goal than when we first established it.
On that note, let's move on to our focus for today.
First we will highlight the strengths of our business that underpin our strong Q3 results.
Our strengths our diverse and durable.
And second with a discussion of the unique advantages we provide our customers we hope youll share our confidence that whole logic is built for the long term.
Moving forward to our Q3 growth drivers as mentioned, excluding Covid, each division posted double digit organic growth for that quarter.
Equally impressive is the year over year consistency.
Our growth drivers a direct result of execution against our business strategy.
In diagnostics the divisions overall 11, 8% organic growth rate, excluding COVID-19 was again driven by strong performance in molecular.
For the quarter molecular diagnostics posted approximately 13% growth ex COVID-19.
On top of growing over 20% a year ago.
Growth in molecular was driven by a combination of both newer assays like <unk> TV and contributions from Amgen and HSV, each growing well into the double digits.
As well as strong growth from our longstanding women's health menu.
Rounding out molecular diagnostics, our bio <unk> acquisition continues to shine being both accretive to our top and bottom lines.
Cytology and perinatal led by Cytology also contributed strong growth this quarter growing nearly 10%.
Psychologies elevated growth for Q3 was driven by the timing of a few large orders placed in the last week of the quarter before the extended July 4th holiday. We view this as a onetime lift as opposed to a shift in the trajectory of the business.
That said co testing, which includes the path plus HPV continues to be the preferred cervical cancer screening method for medical practitioners.
These are the same practitioners who are on the front lines, who know the science and who have seen the overwhelmingly positive impact of the path and co testing firsthand.
By our estimates nearly 99% of cervical cancer screening today in the United States is performed using a combination of the capital loan or co testing.
Why.
The reason is clear the Pap test has been the most successful cancer screening test in history.
Since the path was introduced over 80 years ago, the rate of cervical cancer, which was the leading cause of death, among women has fallen by more than 70%.
As an advocate of women's health for over 35 years, we continue to support best in class care for women and for cervical cancer screening. The gold standard is co testing with thin prep the pack plus HPV.
Shifting to breast health as expected, we posted another exceptional quarter growing revenue 27, 5%.
This strong performance was driven primarily by the ongoing return of our mammography business as well as solid contributions from service.
In mammography as we guided in May we delivered more gantries in Q3 than Q1 and slightly less than in Q2.
Demand for our clinically differentiated gantries remains high.
In addition, our backlog is still at historically elevated levels we.
We're in great shape to work down this backlog to more normal levels throughout our fiscal 2024 and possibly beyond.
In breast service our business continues to grow and is becoming an even larger part of the division's mix.
Our strong service performance represents stable contracted recurring revenue and demonstrates deepening relationships with our customers.
Now moving on to surgical and our international business. The newer pillars of growth for our company that may not be fully appreciated.
In surgical and the business continues to grow stronger for longer growing 14, 5% in Q3.
Revenue growth was again, driven by <unk> and the fluent fluid management system with.
With contributions from <unk> and our newer laparoscopic portfolio.
Specifically, while still early days in smaller dollars Boulder continues its strong growth as.
The transformation of our surgical business over recent years has been phenomenal.
It underscores the value of both internal innovation plus product line additions through M&A or winning formula across all logic.
In surgical the sum of both strategies has injected new life into the business and transformed it into a meaningful growth driver for the company.
Our international business also continues to impress.
Growing 29% in the quarter excluding covet.
In May our global leadership team traveled to our Brussels office as part of our annual strategic planning process spending.
Spending a week in Brussels reinforced a sense of pride within our leadership team.
We are proud of the strides we've made expanding our global footprint and even more important we are proud of the energy and culture, we've built around the World Cup.
Coupled with a strong base of talent, we have developed over the past few years.
We firmly believe our highly engaged workforce and purpose driven culture truly set us apart.
As we've said before the revenue growth rate for our international business is accretive to our overall growth rate we.
We expect this trend to continue throughout our long term horizon.
Related earlier in today's call, we referenced persistent macro challenges in the context of our long term guide.
When we first announced our 5% to 7% guide we were expecting tailwind in places like China, and Russia, rather than the headwinds they have become.
Despite these challenges we remain committed to our targets.
And with strong performance in other geographies, where we operate our international growth remains on track.
This is a testament to the commitment grit and determination of all our employees that support and drive our efforts.
Round the world.
Now shifting gears to discuss the advantage, we provide to our customers and how we are poised for long term success.
To fully appreciate where we're going we must reflect on where we've been.
From there we will shed light on our unwavering patient and customer focus which sets the stage for our bright future.
Our transformation has been years in the making.
It started even before COVID-19 and as we know accelerated during the pandemic.
In the early days of Covid, when fear and uncertainty led to closures and shutdowns, we delivered our highly accurate COVID-19 molecular diagnostic tests around the globe.
Playing a pivotal role in helping get the world back on its feet.
With Covid surges in high testing volumes now further in the rearview mirror our ongoing performance shows that we are much more than a great pandemic story.
Without a doubt we are a bigger stronger company with more durable and diverse growth drivers.
And positioned well for the long haul.
On top of this transformation with our strong cash flow and exceptional balance sheet. We operate today from a position of strength and continue to exercise operational discipline.
As we look ahead, we are laser focused on our purpose passion and promise and never lose sight of the needs of our patients and our customers.
This is the magic within our business.
Today, our customers face the challenge of navigating this new operating environment.
Seek vendors, who can help them operate as efficiently as possible.
Our labs and hospitals pressures from inflation and labor shortages remain despite recent improvement.
With the efficiency of priority when our customers think of Hologic they see opportunity.
The opportunity to consolidate around our portfolio of products in diagnostics breast health and surgical <unk>.
That offer innovative solutions to dramatically improve their operational efficiency.
Seconds can turn to minutes and days of time and labor savings throughout the course of a year.
In each of our businesses, we feature products and streamline workflows and create real advantages that our customers not only love.
I need.
From our sophisticated automation with Panther and advances in AI with digital cytology and diagnostics.
Our industry, leading gantry scan speed and streamline biopsy process with provera in breast health.
And finally, our efficient fluid management approach with fluent in surgical.
Workflow efficiency is in the DNA of our entire portfolio.
In addition, the.
The fact that we have specialized service teams to focus on the unique needs of our customers.
Adds to our competitive advantage.
Our customers know that when they choose hologic, they not only receive world class products, but also world class service.
Between our robust portfolio of industry, leading products and specialized service capabilities, we create a very attractive opportunity for our customers.
We offer real and measurable efficiencies that improve their bottom lines and more importantly, improve the standard of care for patients.
This combination sets us up well to meet our customers' needs both today and into the future and creates an incredible pathway for hologic success.
In closing there are many companies that can sell products.
There are fewer who can consistently deliver so many leadership brands and sector, leading margins over the long term.
And there are even fewer who can succeed financially while also helping the world.
Hologic, we do all right.
We are tremendously proud to continue our journey delivering outstanding topline growth and profitability.
Driving value for all our stakeholders and.
And further enabling our ability to make a profound impact on patients' lives and women's health around the world.
With that I will now turn the call over to Colleen.
Thank you, Steve and good afternoon, everyone.
In my statements today, we will briefly revisit our divisional revenue results.
Locked down our income statement and speak to a few balance sheet and cash flow items.
We will wrap up with our guidance for the full year and fourth quarter of fiscal 2023.
As Steve highlighted our third quarter financial results were strong.
Showcasing the durability of our business and the diversified contributions to our growth.
Total revenue came in at $984 million exceeding our estimates.
And non-GAAP earnings per share were <unk> 93.
Meeting the high end of our previous guidance range.
Now starting with our divisional revenue performance.
In diagnostics.
Global revenue of $439 7 million declined 21, 3%.
<unk>, excluding COVID-19 assay and related ancillary revenues the division grew 11, 8% in the quarter.
We have once again thrilled by the solid performance.
Which reinforces the underlying strength of our diagnostics business.
As Steve shared molecular diagnostics grew approximately 13% during our third quarter, excluding the impact of Covid.
Additionally, the cytology and perinatal business posted nearly 10% growth in our fiscal third quarter.
For reasons previously discussed when modeling we would advise not to extrapolate this level of growth going forward to our cytology and perinatal segment.
Moving to breast health total third quarter revenue of $363 million increased 27, 5%.
In conjunction with our Q2 performance.
These results provide further evidence of strong demand for the division's portfolio of products and services.
While the current periods revenue growth rate was assisted by supply chain headwinds in the prior year.
We are encouraged by the trajectory of the business and the increasing predictability of our semiconductor chip supply.
Moving next to surgical third quarter revenue of 157 $3 million increased nearly 15% compared to the prior year.
Our internal R&D efforts internationally.
<unk> execution.
And recent laparoscopic acquisition are contributed to an increasingly diverse and robust business.
And finally in our skeletal business revenue of $27 $1 million was also very strong increasing 25%.
Now, let's move on to the rest of the non-GAAP P&L for the third quarter.
Gross margin of 68% was driven by strong performance in our base business and COVID-19 testing revenues, which came in slightly above our expectation.
Total operating expenses of $313 $9 million in the third quarter increased nominally by 9%.
This increase was driven by higher sales and R&D expenses.
Partially offset by lower marketing spend.
Below operating income other income once again represented a gain in our fiscal third quarter.
We continue to benefit from higher interest rates as interest income from our cash balance of nearly $2 8 billion.
And the favorable impact of our interest rate hedge has more than offset higher interest expense on our floating rate debt.
Our tax rate in Q3 was 21, 4%.
Higher than previously anticipated.
The increase in this quarters effective cash tax rate represents a cumulative catch up in the current period to increase our annual tax rate from 19% to $19 seven 5%.
The increase in our tax rate for fiscal 2023 is driven by stronger than forecasted domestic performance.
Putting these pieces together operating margin for Q3 came in at 28, 9% and net margin was 23, 5%.
non-GAAP net income finished at $231 3 million and non-GAAP EPS was <unk> 93.
Finally, while up to this point, we have discuss non-GAAP financial metrics.
It's important to call out a noncash impairment charge related to <unk>, which is excluded from our non-GAAP results.
To be clear, we continue to be excited about <unk> and its long term potential.
As we previously shared due to various challenges our entry to the U S market will be materially beyond our initial deal model expectations.
During our annual strategic planning process in Q3.
The need to lower the carrying value of primarily <unk> intangible assets became evident.
As a result, we booked a GAAP write down of $197 million in the quarter specific to di.
Which primarily impacts cost, but also operating expenses.
Moving on for the P&L cash flow from operations was 330.
$7 million in our third quarter.
We ended the quarter with $2 $77 billion of cash on our balance sheet and a net leverage ratio of one times.
In addition, we repurchased one 4 million shares for $114 million in the period.
Year to date, we have purchased three 6 million shares for $264 million.
As it relates to our longer term capital allocation strategy, we continue to operate from a position of strength.
With underlying strong organic growth in each of our businesses.
With the growth and margin profile, we have today, our hurdle rate to achieve accretion is notably higher than in years past.
In addition, we want to make clear that while we are now open to looking at transactions that could be slightly larger.
By no means the only targets in our funnel.
We are prioritizing the right deals not necessarily larger deals and continue to be active diligent and patient.
Now, let's move on to our updated non-GAAP financial guidance for the fourth quarter and full year fiscal 2023.
For the full year fiscal 2023, we are again, increasing our guidance at midpoint and expect total revenue in the range of $3 99, 5 billion to $4 035 billion.
And EPS of $3 87.
To $3 94.
With only one quarter remaining in our fiscal year. This annual guidance implies revenue of $910 million to $950 million and EPS of <unk> 80 to 87 for our fiscal fourth quarter.
With respect to foreign exchange, we are assuming an FX headwind of slightly less than $40 million for the full year.
Marginal improvement compared to our previous guidance.
Turning to our divisions, we want to reiterate that each business should grow double digits in our fiscal 2023, excluding the impact of Covid.
However, it is important to remember that 2023 is a unique fiscal year.
As a reminder.
Part of our elevated growth. This year has been due to weak comps in supply chain headwinds and COVID-19 impact on procedural volumes in fiscal 2022.
In addition, 2023 is a 53 week fiscal year.
Therefore, as we move closer to our fiscal 2024, Steve discussed.
It is appropriate to model our base business revenue growth within our previously outlined.
5% to 7% long term range.
Reinforce Steve's comments this growth is even more impressive than when we introduced the target given our recent base business outperformance and headwinds from the macro environment.
Starting with diagnostics, we expect to close out the year with another strong quarter led by molecular.
Our growth continues to be driven by improving utilization and menu expansion on panther, coupled with increasing contributions from bioterror and optics.
Closing out non Covid diagnostics, we expect blood revenue of approximately $35 million for the year.
In terms of Covid revenue, we expect Covid assay sales to be approximately $10 million in our fourth quarter of 2023.
And slightly more than $235 million for the full year.
So it related items are expected to be slightly more than $25 million in the fourth quarter.
Slightly less than $120 million for the full year.
As we look forward with Covid testing revenue demand in public concern for the disease continue to abate.
Therefore, although we planned financially conservative in our Covid estimates.
There is a significant upside to our COVID-19 guidance are likely in the rearview mirror.
It is also key to recognize that Covid is an accretive product and therefore as COVID-19 testing revenues shift lower in the next several quarters. This will represent a headwind to margins.
Moving to breast health and.
In Q4, we anticipate similar performance to Q3.
Delivering double digit revenue growth aided by strong demand as weak comps in the prior period as well as with constant prior period.
Finally in surgical we expect healthy double digit growth for the full year, but assume growth rates will start to moderate in Q4, given the elevated comparable period revenue we generated in the prior year.
Moving down the P&L.
For the full year, we expect our non-GAAP gross margin percentage to be in the low sixty's.
Our non-GAAP operating margin percentage to be approximately 30%.
Within this operating margin profile, we have again incorporated temporary elevated cost pressures in our guidance.
On this point, we remind everyone that our elevated cost profile is less related to current movements in spot prices, which have been receiving.
For example, one of the primary drivers of our higher assumed cost is semi conductor chips, we have previously procured at higher prices.
As we worked down our backlog in breast health.
See this higher cost amortized through the P&L over the next several quarters and persist into our fiscal 2024.
Continue to work down the P&L, we expect operating expenses in Q4 to be relatively flat compared to Q3.
Below operating income we assume that other income net to be an expense of slightly more than $10 million in Q4.
Our guidance is based on an annual effective tax rate of approximately 1970, 5%.
And diluted shares outstanding are expected to be approximately 240 $549 million for the full year.
To conclude our strong third quarter results highlights a durable business that is poised to sustainably grow over the long term.
Our growth in the quarter was diverse with each business again growing double digits organically excluding covet.
As we close out our fiscal 2023 and look to 2024, we are excited about the unique growth drivers in each of our franchises and the optionality provided by our pristine balance sheet.
Our stakeholders can count on whole logic to deliver against our financial commitments, while also advancing the global state of women's health.
With that we ask the operator to open the call for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow.
To reach our equipment.
In order to allow time for additional analysts to ask questions. We ask that you. Please limit yourself to one question and one.
We will take our first question from Patrick Donnelly with Citi. Please go ahead.
Hey, guys. Thanks for taking the question.
Steve maybe we can start on the molecular side, you, obviously start to come up against some more difficult comps here you guys have put up some good numbers can you just talk about the underlying performance here and I know you've called out a few growth assays Panther usage on non Covid assay is a bit any metrics. I know you guys don't want to talk to utilization anymore, but any metrics you can point to.
In terms of future growth, obviously, a big contributor to that that five to seven next year as well I'm sure just wanted to dive into that a little bit.
Yes, I think the big piece, we've got obviously the core women's health menu continues to do well and I think what keeps getting.
Not fully appreciated Patrick is all of those additional Panthers replace during Covid, we kept saying many of those are going to be adopting our new menu and that's exactly what we're seeing playing out so the core women's health menu frankly, some of the virals, especially outside the United States and then the new products.
The organic growth of BV, CV, which is really just been off to a tremendous start and while that's not going to exactly replace COVID-19 certainly not at its peak, it's rapidly will become one of the largest assays we've ever developed organically. So I think we just keep seeing tremendous growth.
For really years to come.
As they keep ramping up and I would just add that in Biopharma in Austin continues to be a strong double digit growth contributing to the molecular performance.
It's turned out okay, alright, that's helpful.
Yes, and then currently and maybe one on the margins you talked a little bit about some of the headwinds whether it's been the COVID-19 or the chip cost in the second half I think the second half 2008 and change in terms of the op margins.
I believe the streets almost 31% next year. So what's the right way to think about just the cadence as we work our way into next year, you, obviously talked a little bit about the growth.
But on that margin side do some of those headwinds alleviate or should we be resetting next year, a little closer to what we are seeing the exit rate out here on the margin side.
Yes. So a couple of comments first we haven't provided guidance for fiscal 'twenty, four and we're not doing that on this call.
I'd say that what we're seeing here in Q3 and Q4 for operating margins in that 29% range are probably the trough of the low and we do expect margins to improve over the course of 'twenty four.
Again, we haven't given that exact percentage, but we'd expect them to improve from here as you some.
Some of the inflationary pressures do abate over time.
We will take our next question from Mike Matson with Needham <unk> Company. Please go ahead.
Okay.
Yes. Thanks.
Yes.
Let's see here.
So.
<unk>.
I guess, just starting with the comments on China, and Russia, maybe you can provide a little more detail. There can you talk about.
I guess, Russia exposure, how much is that is that going to zero because of our latest sanctions and then China.
Do you think there's kind of a longer term slowdown in your business there.
Yes, Mike I think Russia for US was really opportunistic when we developed our strat plan. We went to the five to seven we were virtually nonexistent in Russia, but we had big plans to expand so the good part is we're not losing business, it's really the lack of the opportunity and the upside China.
We were pretty happy that only 2% to 3% of our revenue comes from China right now given.
All of the issues going on there. So again I think we've been able to weather that storm.
Reasonably well and again, it's just not going to be the growth that we would have expected. So I think thats a higher way to think about this is when we put out the five to seven we saw China, and Russia, becoming clearly accretive to that Theyre now Russia's effectively flatlined at zero and GE.
<unk> is not that the headwind or the tailwind that we had hoped so what it really means is our core businesses in our core geographies are growing even faster than what we had originally modeled at that time.
Okay and just in terms of your operating margin.
Ill go back pretty far because Fedex deal, but I think it was like 2000 fiscal 2016, it was kind of in the 43% 44% range.
Is there any reasonable and the longer term that you can't get back to those levels.
Decline from the kind of low thirty's to the high Twenty's.
But you are at now.
Obviously with Covid in between but I mean does that decline until the kind of non COVID-19 business really all due.
Okay. So are there other offers as the business mix didn't really look that different back then.
Yes.
Tackle this with a couple of points. So so one from a <unk>.
Earnings growth you know, if we talk about the 5% to 7% topline, we ground ourselves in growing EPS faster than that and likely in that double digit low double digit range.
Let's move on and ground ourselves in operating margins, we'd point you to Q2 'twenty.
Which was 31, 5% I think compare going back in 2016, I think the business is a little more diversified and then probably a growing business outside the U S compared to 2016, so as we know U S has been growing double digits on the top line, but there is kind of diluted from the total margin.
And then as we kind of move out of 'twenty three to enter 24 as I talked about it looks like this back half of 'twenty three kind of the low point of the 29% we would expect continuing improvement into 'twenty four as higher costs from the semiconductor as well as other higher inflationary pressures such as freight continue.
To abate.
Over the course of the year. So you know I think what we try to manage again growing EPS low double digit is still investing in things like R&D and marketing initiatives to grow the top line not exactly driving to that historical operating margin percentage.
We will take our next question from Jack Meehan with Nephron Research. Please go ahead.
Thank you good afternoon.
So Steve.
Steve So the number one question I've been getting on Hologic is actually related to alumina. So I was wondering if you could just share some brief thoughts on your decision to join as chairman there and just comment on your ongoing commitment to Hologic is chairman and CEO .
Yes, sure, let's be really clear Amit whole logic through the end of my useful life in terms of.
What I've worked for built for and as a reminder to everybody I am personally a top 15 shareholder in Hologic. So this is my day job. This is my passion. This is my love.
We'll have to see as a company five minutes away Thats troubled that I thought frankly, I could also help out in a different role which is chairman of the board.
And I am very proud that I think I can do both if I didn't have a great team around me at Hologic wouldn't be able to.
Frankly over there it is going to be about also just getting a great CEO in place and you're making a couple of key decisions, there, which are probably pretty obvious and then it's.
It's going to be a normal chairmanship from there so.
This is my love and.
And my passion, and frankly were fully engaged sometimes more than my teams would like.
I want to love it because that's what I want to hear.
Sounds good.
Okay and then another question I think get a lot from investors is just on the guidelines as it pertains to co testing.
So.
It was good to see the strong cytology quarter, but was just hoping you could share your latest thinking on the USPS TF. If you have a sense for when some update might come on cervical cancer screening.
And how you just latest thinking on how that may or may not impact the business. Thank you.
Yeah, Jack I think the interesting stuff on the USPS TF guidelines as they re look at cervical cancer screening is we don't have an exact timeline it could be months from now it could be anytime could be late this year. Early next you never quite sure where that plays out I think the biggest piece the way I look at all of this is there is the headline the day.
Any of those guidelines, whether it's breast cancer or cervical cancer screening guidelines get tweaked.
And then there's the reality of how it plays out in the marketplace with the physicians and I think just as when USPS TF raised the age of mammography years ago, and said women should really wait until their 50 instead of 40 and you have those kind of shifts medical practice.
Didn't change that much and now when they reversed it and came back to 40, just like that it's not going to dramatically change because it never changed that much in the first place. We think that is very true as well in cervical cancer. The Pap test has truly been one of the gold standards as we've said probably has had more impact.
On women's health and changing cervical cancer, one of the number one killer of women to going way down the food chain in terms of that because of how well it has been.
Well has performed over time.
And so while not the not necessarily the greatest procedure for somebody to have to have it has worked out incredibly well over time.
And we think it's going to continue to be strong so there'll be a little headline stuff, we still hope that frankly.
<unk> patient groups and the medical community.
Opinions will properly be listened to and then frankly the guidelines it shouldnt change much but even if they do I think very little impact to our business.
Over certainly a several year period.
Thank you.
We will take our next question from Vijay Kumar with Evercore ISI. Please go ahead.
Hi, Steve Thanks.
Thanks for taking my question.
Steve So maybe my first one on <unk>, just so I understand that fiscal 'twenty four commentary.
What's you are saying.
The base business ex co, which should be five to seven.
Inclusive of headwinds are Russia and China.
Headwinds to fiscal 'twenty four.
If they are could you perhaps give some color on how much if I had one they are and when you get that five to seven should we be perhaps thinking about the bottom half just given some of the macro commentaries you man.
Yes, the five to seven as we related to Russia, and China, which I answered earlier is there basically wiped that Russia is just a lack of growth opportunity. So it's not a headwind it's not a headwind its just the lack.
Of what could have been a tailwind in our strat plan. So I think we feel very good about being in that range, we will give guidance on our November call.
Alright, it's China headwinds do you.
For next year.
Not additionally to this year.
Normalized pro understood gap.
Thats it from guidance.
We feel very good I think that suggests that we keep trying to say here is we feel better and better about the growth of our base businesses in all of our core geographies today.
Understood Carlin one for your gross margin here sequentially it came down.
Talking about.
Okay.
Inventories flowing through the P&L.
So it looks like this could flow through to the first half of next year.
Harvey.
Just given given the P&L dynamics, yes, there are some cost controls any offsets to this at the Opex line item or how should we be thinking about margins.
Should we be expecting any expansion next year.
Yes, so I think as I had if you go from Q2 to Q3. The gross margin decline is primarily lower COVID-19 revenue. So again, we had over $70 million of Covid assay revenue in Q2, and just under $30 million in here in Q3, So that's probably the bigger as well as lower gantry revenue which are.
Gantries in our breast health business their gross margins are accretive to the corporate average so that that explains the sequential.
You had talked about operating margins.
We feel that here in the second half of 'twenty three this roughly 29% operating margin is probably the low point in.
As we move through 'twenty, four we should see improvement.
As we have one revenue growth in the base business, but also.
Some of those headwinds on higher costs will abate over the course of the year.
And again, we'll give guidance.
On the November call.
We will take our next question from Tim Daly with Wells Fargo. Please go ahead.
Great. Thanks.
In the prepared remarks, you called out tough comps along with macro factors as the reason to not raising the long term growth outlook. So just hoping to get a bit more color on this dynamic specifically to breath.
I think the guidance gets to around 350 million or so for the fourth quarter and just curious if that's like a clean run rate for quarterly revenues to think about or is that still impacted by the chip on the high end or maybe backlog work down I.
I guess on the upside case.
Curious about how we should kind of think about that moving forward.
Kind of our claim quarterly number we can grow from.
Yeah, I would say, it's not an unreasonable number it's probably still a little low from historical levels I think.
To the chip supply headwind, we would in.
In each quarter to roughly a 100 to 200 Gantries a quarter. This is below below that level.
Seem to Q3 and Q4.
I think as we look into 'twenty four I think we're still having recovery in the broth business as we believe our backlog.
We will be worked through over the course of 'twenty four.
Alright helpful. And then just wanted to touch on <unk>. So the write down acquainted with nearly a quarter of the acquisition price just rough calculation. So can you give us an update on you know either.
I guess, how the European dynamics are going or any update on the USA launch timeline.
Hello.
Yes.
Yes, I think overall as you know we did about.
Six acquisitions in Covid time, feeling really good that certainly five of them are delivering.
Good growth for US right now is just a little more work frankly to get it to the U S market as we dug in deeper.
A little more redesign is required of both the cartridge in the machine and what we got we still like the technology, but as we dug in it just can be further out and that just affected the cash flows combined with the interest rates and all of that but we still are very excited about what that will bring and frankly the positive isn't it weird way.
It's going to hit a little later in our Strat plan horizon and the growth for the next few years look so good anyway, but it will come in at a really good time for us.
We will take our next question from GE has survived with Morgan Stanley . Please go ahead.
Hey, guys good evening and thanks for the time.
So Steve Jack stole my question on on your side Hustle, becoming a full time hustle.
And I'm glad to hear you stay at GE.
My question is maybe one on M&A I know you guys mentioned being open to deals of all sizes in our prepared remarks, and then I think Colleen you called out the tuck in pipeline and also being pretty active here, but any color you can share on the pipeline for those larger needle moving assets and on a related note.
You've called out the success you had in <unk> optics, a bunch over the last few quarters.
Could that be a precursor for asking you're making a bigger push in cancer testing, perhaps not sort of the mgs based testing that people often think about but PCR based approaches.
Yes, T J I think the way to think about our M&A strategy, right now and carlene and I've been out with some of our largest shareholders over the last month ish and I think they are all reminded us that as you look at our fundamental growth rate.
And our margin profile reminding us that.
That alone it looks pretty damn good and it's hard to find deals that are really going to enhance either our growth rate as it's accelerated or our margin structure and so we are being cautious and I would tell you I think it's the beauty of a strong base business. So we are looking in those areas.
<unk>.
But we sort of have that luxury right now of time on our side because of the base performance.
More likely to just stay more cautious here continuing to drive the good deals that we've done.
Obviously with a bioterror gnostics in the portfolio. It opens up the aperture to look at certain things but.
Nothing nothing wildly dilutive by any stretch and I think we like things that already have a little bit of an established revenue base like a buyout. Their gnostics that we can then turbocharge with our operational efficiencies in our sales forces in our marketing in those areas. So.
I think it will be in those areas.
Got it makes sense.
And then a quick follow up on the <unk>.
Any any updates there on the hospital staffing situation just on a quarter over quarter basis.
Talked about sort of that low double digit growth moderating here in fiscal 'twenty four I mean outside of tough comps is there anything else to be thinking about I think Steve in the past you've talked about I think it was almost a quarter of that portfolio is now outside of my short and Novus sure.
And then presumably that that's growing better than 7% for you guys. So just curious as to any color you can share there.
Yes, I think clearly we figure there's probably earlier this year some catch up in procedures, this and that but overall I think theres still some of that to come hospital staffing is clearly tight but I think in general the hospitals are figuring out how to manage that we're figuring out how to manage it and help again.
Frankly, so many of our products.
Add efficiencies, including things like fluent.
And so we're really kind of a go to partner for the hospitals and I think just feel really good about having both a now a laparoscopic portfolio. In addition to the history of Scopic.
Yeah, I would just add on the surgical business, we've really seen probably over the last.
456 quarters International Turbocharge for the surgical business, a small base, but really starting to take traction.
We will take our next question from Puneet <unk> with Leerink partners. Please go ahead.
Yes, Hi, Steve.
Thanks for taking the questions.
Okay.
Great. Thanks.
So first of all on Panther utilization.
<unk> talked about quite a bit and I know you have given percentages for customers that are using to test versus three test.
Wondering what youre seeing today versus a year ago in terms of.
Customers are they are certain customers that are using it more aggressively.
Worse as those that are not maybe just help us sort of understand.
The landscape out there and reference labs versus hospital labs, where are you seeing some of the more utilization because I totally understand some of those percentage numbers as you broaden pass those are average, but I'm just trying to get a bit more color on where you stand today. Because this is more of a cleaner picture for utilization at this point in time.
As COVID-19.
It's pretty broad based between both our hospital customers the smaller labs and the Big labs.
It's remarkably broad based and also in terms of the menu and increasingly the geographic footprint that.
So many of the Panthers, we placed during Covid, we're also international.
So we're seeing that as well so.
It's hard to fully it's not like we can sit there and say hey, 50% of the additional has come from a few customers or just an area its really remarkably broad based.
Okay. Thanks, good to hear.
And if one if I may ask a bit of a broader question.
This is.
Regarding you talked a little bit about it.
Just given the some.
Some momentum that we're seeing in med tech essentially for AI technologies I'm, just trying to understand how do you expect to utilize AI where does yes.
<unk> <unk> products, maybe just walk us through a bit obviously, there is a quite a bit of discussion out there on the AI. So I just wanted to get a sense of.
<unk> is looking at that.
Yes, I think the simplest thing is we've had a number of I would go back to when we referred to really things as machine learning. When you think about both cytology as well as breast a lot of it is pattern recognition.
And that's what the technology, that's underlying some of the.
Computer aided design programs that we've got within our mammography system, but also our digital psychology that has now been approved in basically <unk> got that.
Mark for the EU.
And we're working to get that.
Cleared by FDA as well in the United States again, it's pattern recognition and doing the same thing really within the breast health space and I think it's where our installed base our knowledge.
Just the sheer sample size.
As big there is a lot of complexities clearly in terms of getting them through the agency in owning the data to be able to get some of those but I think we feel really good about the partnerships that we've been able to get and our ability to play a strong role, particularly in those two areas. Yeah. I would just add that we're also even in our field.
Predict.
Certain part failures that allow us to coordinate with our customers to prevent unscheduled downtime unscheduled visits which is great for the customers and creates operational efficiency for us.
Thanks Penni.
We will take our next question from Anthony Petrone with Zillow Group. Please go ahead.
Thanks, and maybe high level, one Steve in them.
Modeling question for choline, maybe Steve you mentioned aspirational topline, 7% to 9%, but you called out macro headwinds to some extent here, both geographically as well as operational to some of the businesses.
So if those if those were not there.
Is it feasible that.
Profile as a low double digit sustainable here right. The organic profile has been there excluding COVID-19. So just maybe thoughts on if we didn't have some of these headwinds here how could it have settled out in the next two to three years.
And then I'll have a follow up for choline on the model.
Yes.
I'd like to correct you there was no reference at all of an aspirational number.
We feel really good about the five to seven this year, we are delivering double that.
As what we said, but we feel great about the five to seven in this environment.
To be a company people can count on for that.
No. That's helpful. And then and then Carl Lee maybe just couple of quick ones on the model can you give us an idea of what the breast health backlog recapture was in the quarter and then when we think about.
Earnings growth do you need lower non operational costs.
To achieve the low double digit earnings profile. Thanks again.
Yes, so we haven't given specifics on on Q.
Backlog recapture I think what we have said is that the backlog continues to be high and something that we'll work through over several quarters to come I think we're always looking at operational efficiencies to drive earning results.
Think about 'twenty four I think will kind of hit the whole P&L between higher revenue growth, probably some improvement in gross margin and always looking at how do we best manage our operating expenses to deliver that earnings growth.
We will take our next question from Ryan Zimmerman with <unk>. Please go ahead.
Hey, Thanks for squeezing me in on the questions here I'll try and keep it as tight as I can.
Just a quick one.
And a clarification if you look at next year's revenue growth I think the street's looking at about four 1% and three.
Three 7% organic so so is it unreasonable to think that.
We would be below your long term guidance.
Again I appreciate what you said about the 5% to 7%, but I just wanted to make sure the street is clear.
At the low end.
2% to 7% or 5% excuse me is the right number relative to kind of where the street's at today.
Yes, we kind of run our business as opposed to the Street estimates my hunch is theres a lot more COVID-19.
Still in People's numbers for next year, I think what we feel really good about is the pace.
Okay.
Alright, I appreciate that Steve and then one last one for me.
Talked about M&A, we're mostly focused on diagnostics, but I'm a simple med tech analyst.
Doing well involved or youre doing well in laparoscopic, but.
Help us understand I mean with all of the shift to robotic surgery, particularly in women's health I mean is your aperture beyond say a laparoscopic tuck in.
That arena.
Is it unreasonable to think that there are robotic technologies that could one day make it into a whole.
<unk> portfolio on the surgical side.
We're looking at our surgical business, both within the <unk> World, but also things like Boulder have kind of gotten us into thinking about sort of more specialty surgery, because it's getting us into pediatrics in addition to.
Traditional guidance. So I think we're opening our aperture and to your point as I understand in the Med Tech World way I think about our company right. Now is we're able to generate a lot of cash flow out of diagnostics or med tech and the ability to spend it where it could possibly give the better return as we've done with things like Boulder in Med Tech.
There'll probably be some other areas in that space that we will be looking at weather.
And robotics as a a piece but.
Frankly, there's been a lot of money chasing robotics right. Now that's also every once in a while it reminds me a little bit of.
Some of the Nio spaces or other things. So we're going to continue to be looking for where the profit can be generated.
We will take our next question from Andrew Cooper with Raymond James. Please go ahead.
Hey, everybody. Thanks for the questions I know we're at the end here. So I'll try to be quick maybe just one on sort of the chip supply and the visibility here fully understand not going to guide for 'twenty for at this point, but when you sit here today on July 31 versus a quarter ago or a couple of quarters ago. When you think about how comfortable you are.
In out quarters can you just give us a sense for sort of where you are from that visibility perspective, what youre hearing from the suppliers.
How we should think about maybe the trajectory there and the sustainability of that backlog work down.
Over the course of the end of this year and next year.
Yes, we're incredibly comfortable with where we stand right now on that on the chip supply.
So feel really good.
Yes, we've deepened our does that safe to assume that that translates to.
Getting getting the applications that you are looking for.
Yes, yes, okay.
Thank you.
Great.
We will take our next question from Andrew Blackman with William Blair. Please go ahead.
And this will again.
Yes.
This question and one more to close out the call for today.
Okay. Thanks, I'll keep it one.
So maybe just going back to Jack's question around USD ft efforts for cervical cancer guidelines, Steve you mentioned mammography guidelines, but I believe the Acs updated their recommendations a few years ago, maybe just in the spirit of giving investors confidence around whatever USP FTF debt can you maybe just sort of talk about what you saw in the market following that decision.
What you saw from customers and their utilization better. Thanks.
Yes, I think all of these changes create headline much more headline noise that I know investors look at it I go back to even recently was it in may when.
The new breast health guidelines came out in our stock moves like 7% and 20 minutes.
At the end of the day these things have very little impact one way or the other over the short term and are really much more of a <unk>.
I've been in health care now for what 30, plus years moves happen glacially and even as any of these guidelines change they get the headlines but.
The reality in practice is very minimal minimal slow changes.
Thanks.
Great.
Okay final question.
We'll take our final question from Liza Garcia with UBS. Please go ahead.
Oh, thanks, so much for squeezing me in guys really appreciate it.
Was it just.
Just kind.
Kind of quickly touch on.
Since we are since I know that I just wanted to make sure I caught Steve comment that we're working through the backlog through fiscal 2024 and possibly beyond.
Just to kind of get some context, if that's correct what could be.
The beyond factors and how to kind of think about that.
And then if I could just parlay that into a bigger and broader modeling questions since I know that.
Now to 2024, but just to think about the long term algo.
Maybe and to think about segment mix and margins and how to think about that as we think about our models more broadly.
Yes, I think the big picture question on the backlog is I think we will.
We currently look we've got pretty much a year's plus worth of backlog.
And we will continue to get more orders in the meantime, so that'll keep pushing that backlog backlog well out. So that's the highest level piece and I'll hand, the harder part of that question over to Karl Yes. So I think when we think about the long term growth rate, we talked about the five to seven we've talked about that all the divisions on a worldwide basis would be in that range.
And think about breast health kind of to the lower end of the range diagnostics and surgical type to the higher end of the range and as we've talked about earlier molecular potentially even above that so.
Again, we feel good about all of the business as being in that growth range. We continue to see international being a bigger piece of the business growing faster than the U S.
And as I've talked about previously we havent given guidance for 'twenty four but.
We believe that.
Hitting the low mark of margins here back half of 'twenty, three and we will see improvements as we work through that backlog and some of the inflationary pressures subside.
Great. Thanks, guys.
That concludes today's question and answer session and this now concludes <unk> third quarter fiscal 2023 earnings conference call well good evening.