Hologic, Inc. (NASDAQ:HOLX) Q1 2024 Earnings Call Transcript

Hologic, Inc. (NASDAQ:HOLX) Q1 2024 Earnings Call Transcript February 1, 2024

Hologic, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to the Hologic First Quarter Fiscal 2024 Earnings Conference Call. My name is Synthia, and I’m your operator for today’s call. Today’s conference is being recorded. I would now like to introduce Ryan Simon, Vice President, Investor Relations, to begin the call. Please go ahead.

Ryan Simon: Thank you, Synthia. Good afternoon, and thank you for joining Hologic’s First Quarter Fiscal 2024 Earnings Call. With me today are Steve MacMillan, the company’s Chairman, President and Chief Executive Officer; Karleen Oberton, our Chief Financial Officer and Essex Mitchell, our Chief Operating Officer. Our first 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 businesses 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 sales from discontinued products in Diagnostics; finally, any percentage changes we discuss will be on a year-over-year basis, and revenue growth rates will be in constant currency unless otherwise noted.

Now I’d like to turn the call over to Steve MacMillan, Hologic’s CEO.

Steve MacMillan: Thank you, Ryan. And good afternoon, everyone. We are pleased to discuss our financial results for the first quarter of fiscal 2024. For the quarter, total revenue was $1.01 billion and non-GAAP earnings per share was $0.98. Both revenue and EPS came in above the high end of our guidance. Before diving into our results, it is important to view our Q1 growth performance in proper perspective. Simply put, our first two quarters of fiscal ‘24 face incredibly difficult comps. Despite Q1 ‘24 having four fewer selling days compared to the prior year, and even against a prior year Molecular Diagnostics ex-COVID revenue growth of 24 .5%, and a Surgical revenue growth rate of nearly 15%, we grew total organic revenue, ex-COVID, a solid 5.2%.

Even more impressive, when adjusting four fewer selling days, our Q1 results stand taller. On an adjusted basis, we estimate the total company organic revenue growth ex-COVID was in the high single digits for the period. These are incredibly strong results against challenging comps as we continue to perform exceptionally well against our 5% to 7% percent ex-COVID long-term target. We continue to showcase our durability and broad strength across our divisions, both delivering on our short-term guidance and maintaining our long-term targets. Keep in mind that our long-term revenue targets are more impressive today, given we are growing off a much larger base than we originally contemplated. As we’ve said before, you can count on us to deliver.

During our call today, we will focus on building upon our messaging from the JPMorgan conference three weeks ago. During our presentation, we highlighted that we are a new Hologic bigger, faster, stronger, and poised for continued success. As part of our discussion, Essex will share more insights about our high confidence in our future success. He will also shed light on what we view as underappreciated elements of our growth strategy that are helpful to fully recognize the potential of our business. Before then turning the call over to Karleen to discuss our detailed financial results, we will share reflections from our participation at the World Economic Forum in Davos. While we continue to make progress elevating women’s health, it is clear we still have a long way to go.

Starting with our meetings at JPMorgan, we realize there are two camps of investors. There is one camp that understands our transformation and recognizes the drivers powering our current results and future growth potential. At the same time, there is another camp that, quite frankly, does not. That said, we certainly appreciate the complexity. Over the past three years, there have been many moving pieces clouding the narrative of the force we’ve become. From revenue still normalizing following the ups and downs of COVID, to moving past semiconductor chip supply challenges, to selling days dynamics, only naming a few, each has contributed to irregular comps that may be difficult to interpret, and also challenging tomorrow. We appreciate that each represents a layer of complexity that must be pulled back to fully appreciate the underlying strength of our business.

Looking beyond the quarterly nuances, our steady performance over time really shines. Above all, we are bigger, faster, stronger, and poised for further growth. We are a durable and diversified growth company with disciplined operations, peer group leading margins, an exceptionally strong balance sheet, and above all, a talented and engaged employee workforce. We are poised to continue to drive top-line growth while growing the bottom line even faster. To shed more light on what gives us high confidence in our future, I’ll pass it over to Essex.

Essex Mitchell: Thank you, Steve, and good afternoon, everyone. As we’ve commented over the past several quarters, we have dramatically transformed our business since 2019 through the challenges of the pandemic. More recently, as we move further away from the peaks of COVID testing and prevalence, we have posted exceptional ex-COVID results. These results back up our claim that we are much more than a COVID story, and without doubt build for the long term. At the same time, as Steve mentioned, there is a lot to unpack to fully understand our business. Many recognize that we are a new Hologic compared to where we were in fiscal 2018. Since then, we’ve grown our Molecular Diagnostics business approximately 80%, our Breast business nearly 10% and our Surgical business nearly 40%.

Yet there are still some on the fence and uncertain of our future growth potential. As some of our peers have also performed well over this time period, it’s not easy to see the throughway. The underlying assumption is that winner must be exclusively taking share. In reality, there was much more to it. In addition to competing and taking share, Hologic growth is centered on innovation, and making sure. We then drive this innovation to commercial execution by leveraging our world class sales teams. As we are positioned today, our future growth is much less about hand to hand combat in the trenches of the markets where we operate. Instead, our growth is derived from growing and expanding market through education, awareness, innovative new products, and tapping into under penetrated markets.

As an example, our three largest revenue product lines launched in 2019, excluding COVID are BV, CV/TV, Biotheranostics and Fluent. These three lines alone collectively delivered over 300 million in revenue in 2023. That was essentially nonexistent to start 2019. Moreover, each product line falls into one or more of our market creating strategies, and each is still in their earlier stages of growth. Similarly, outside of the top three, we have a number of other product lines and new since 2019 which could each individually represent $100 million revenue opportunities over time. And these lines are also still in their early innings of growth. To highlight a few are respiratory assays, GYN scopes, and laparoscopic surgical portfolio, each delivered to double digit growth rates for fiscal ‘23.

On top of our market expansion activity, we continue to drive further growth by leveraging our large installs in user bases of core products in each division. Through the Panther, our gantry and our hysteroscopic surgical portfolio, we have incredibly deep customer relationships in each of our unique channels. Post COVID, our call points around the world are stronger than ever. Customers associate Hologic with industry leading differentiated technologies, ongoing innovation, best-in-class workflow and automation solutions. Moreover, our strong reputation as leaders and champions for Women’s Health continues to open doors. Earning this advantage provide us a unique opportunity to supercharge growth from products introduced into our channel. While there are many out there that claim to be winners, even in categories, we continue to lead year-over-year, we are extremely confident in our ability to carve out a great opportunity for growth.

Similarly, we are equally confident in our demonstrated ability to gain and maintain market share across our core product lines. With our core businesses, incredibly healthy, and many of our growth driving products still in early innings. All-in, we believe we are well positioned for the future and well positioned to maintain our strong performance for the years to come. Steve?

Steve MacMillan: Thank you, Essex. To close out the discussion of our growth prospects. While we continue to make significant progress outside of the US, we still have tremendous opportunity to grow and build a much greater presence internationally. Shifting gears before turning the call over to Karleen, we’d like to share reflections from our time at the World Economic Forum in Davos. For a third year in a row we had the opportunity to participate at the forum, where we presented the results of our third annual Hologic Global Women’s Health Index. The Index, which is the largest study of its kind, examining the overall state of women’s health and wellbeing continues to generate tremendous support from major organizations dedicated to improving women’s health.

As we’ve said before, over time, we believe the Index may be the single greatest contribution to the world that we make at Hologic. This year’s results show that we all need to stand behind women more than ever. The harsh reality is that women’s health globally has not only stagnated over the past year, but is sadly moving in the wrong direction. The data shows that only 11% of women were screened for cancer and only 10% for STIs. Billions of women are not being screened, this must change. And we have a tremendous opportunity to lead the way with our women’s health portfolio. The key takeaway here is that in many ways, our markets are still in the early innings of reaching their potential. As we look ahead, we are even more inspired to live into our purpose, passion, and promise.

We continue to believe and we have proven that we can drive results through our unwavering commitment to women’s health. Our strong results come from our strong purpose. And finally, in late breaking news, we are incredibly proud to announce that just last night, our new Genius Digital Diagnostic system, with the Genius Cervical AI algorithm received clearance from the US Food and Drug Administration. This accomplishment is only made possible by the creativity, focus and dedication of our outstanding Diagnostics team. Continuing to trailblaze our path. Our system is the first and only FDA cleared digital cytology system that combines deep learning based AI with advanced imaging technology. It can help more accurately detect cervical cancer, improve psychology workflow, and ultimately enhance patient care.

We continue to deliver and at a time when women need it most. With that, let me hand the call over to Karleen.

Karleen Oberton: Thank you, Steve. And good afternoon, everyone. And congratulations again to our Diagnostics team. In my statements, today, I will provide an overview of our divisional revenue results, and walk down our income statement that highlights the broad based strong performance across our business. I will also touch on a few additional key financial metrics and finish with our guidance for the second quarter of fiscal ‘24 in the full year. Jumping right in, we are pleased to share that our first quarter financial performance was strong. We exceeded our expectations on both the top and bottom line. Total revenue came in at $1.013 billion, beating the midpoint of our guidance by about $40 million. As Steve mentioned, despite four fewer selling days in the quarter, we delivered organic revenue growth of 5.2% excluding the impact of COVID in line with our long term revenue growth target of 5% to 7%.

In addition, non-GAAP earnings per share was $0.98, exceeding the high end of our guidance. Overall, we continue to deliver robust performance on both the top and bottom lines. Before moving to our divisional results, we again want to emphasize that our balance sheet and willingness to deploy capital remain a core strength of our business in a macroenvironment that remains dynamic. As an example, in our first quarter, we initiated a $500 million accelerated share repurchase program, we purchased an additional $150 million of our stock and also pay down $250 million of floating rate debt with a cash balance of $1.9 billion, a leverage ratio well below our target range, and roughly $350 million remaining on our current share repurchase authorization.

We have significant firepower and flexibility to deploy further capital should the opportunity arise. Turning to our divisional results. In Diagnostics, first quarter revenue of $447.8 million declined 20.6%. Excluding COVID assay and related ancillary revenue, Diagnostics revenue declined 0.9%. Yet adjusted for selling days we estimate we grew mid-single digits compared to the prior year. As a reminder, Q1 ‘23 was a very strong quarter for Diagnostics, boasting 15.8% growth ex- COVID and Molecular Diagnostics 24.5% growth ex-COVID. And without a doubt, our Q1 ‘24 results were impacted by four fewer selling days compared to the prior year. Within Diagnostics, our molecular business continues to drive the divisions results, it will bring growth of 1.9% ex-COVID or mid to high single digits when adjusted for the impact of fewer selling days.

We continue to see underlying strength and BV, CV/TV which grew more than 20% in the quarter, and it’s still in its early innings of adoption by our customers. More than 95% of our BV, CV/TV revenue is derived in the US, representing incredible longer term opportunity internationally. In addition, non-COVID respiratory revenue delivered ahead of our expectations. As we experienced stronger than anticipated demand for our flu, RSV, and 4-Plex assays. Our responding with published CDC data on respiratory virus positivity. Sales ramped up and in the final weeks of the quarter. Finally Biotheranostics remains a positive driver of growth for our molecular business, and delivered accretive revenue performance in the period. Now moving to Breast Health, total first quarter revenue of $377.7 million increased 12.2% showcasing solid double digit growth.

Demand for our gantries remains robust and our interventional business also delivered a strong quarter. In our gantry business, we continue to benefit from a strong cadence of orders. And our elevated backlog continues to give us high confidence in the performance of this business going forward. Finally, as a reminder, Q1 ‘23 results were impacted by constrained supply. In interventional, we continue to see strong performance from our Brevera needles, as well as from our 2-Mark markers used for marking biopsy sites in suspicious lesions and pressed tissue. Leveraging strong performance in the quarter, we believe our Breast health franchise remains well positioned to deliver on its financial targets in fiscal ‘24. Continuing next to Surgical, our first quarter revenue of $162.2 million increased 4.6% or high single digits when adjusted for selling days.

The divisions growth continues to be fueled by MyoSure and the Related fluid system, with an increasing contribution from our laparoscopic portfolio. As anticipated, NovaSure declined in Q1 as we lapped the selling price contribution from the products V5 extension introduced just before fiscal ‘23. And finally, in our Skeletal business, first quarter revenue of $25.4 million declined 5.6% from lower capital placement and upgrades. Now let’s move on to the rest of the non-GAAP P&L for the first quarter. Gross margin of 60.8% was driven primarily by strong performance in our base business and higher than expected COVID revenues, which carries a favorable impact to our margin. However, as anticipated, our gross margin result remains temporarily depressed due to the ongoing amortization of semiconductor chips purchased at higher costs during the chip supply headwind.

As we continue to deploy gantries, we are moving farther away from this high priced inventory. And as a result, we expect margins to continue to benefit from this inventory cycling as we progress through the year. Shifting to operating expenses, total operating expenses of $327.3 million in the first quarter decreased by 3.6%. This decrease in the period was driven by lower marketing spend, lower cost from fewer days and less expense due to the recently divested SSI business. For Q1 ’23, this translates to a 28.5% operating margin in line with our expectations. While we continue to deliver a peer group leading operating margins, we continue to exercise operational discipline and continuously seek to improve where it makes sense for our business.

Below operating income, other income net represented a gain in our fiscal first quarter. As expected, we benefited from elevated cash balance and high interest rates, even though we deployed significant cash in the quarter. Finally, our tax rate in Q1 was 19.75% as expected. Moving on from the P&L, cash flow from operations was $220 million in the first quarter. In addition, as previously mentioned, during Q1 we repurchased 2.2 million shares for $150 million. This activity was above and beyond initiating a $500 million ASR showcasing our high confidence in our business and willingness to bet on ourselves, as well as our ongoing strategy to deploy capital. Now let’s move on to our non-GAAP financial guidance for the second quarter and full year fiscal ‘24.

For our fiscal Q2 ‘24, we are expecting total revenue in the range of %990 million to $1.01 billion and EPS of $0.95 to $1. For the full year ’24, our guidance assumes revenue of $3.99 billion to $4.065 billion and EPS of $3.97 to $4.12. With respect to foreign exchange, we are assuming an FX tailwind of $2 million for Q2 and $12 million for fiscal ‘24. Much of this tailwind was realized in Q1 and therefore we estimate that foreign exchange will remain neutral to marginally favorable throughout the remainder of the year. Turning to our divisions, we want to reiterate that we expect each business to grow at least 5% to 7% for the full fiscal ‘24, excluding the impact of COVID. Starting with Diagnostics, we expect the business to grow within our 5% to 7% long term framework for the remainder of fiscal ‘24.

While performance was below this level on Q1, primarily due to the impact of fewer selling days compared to the prior year period, we expect the division to return to more normal growth in Q2, and for the remainder of our fiscal year. We expect improving utilization and menu expansion on the Panther coupled with ongoing contributions from Biotheranostics to continue to drive molecular growth, losing out on non-COVID Diagnostics, we expect blood revenue of approximately $7 million in Q2, and $30 million for the year. In terms of COVID revenue, we expect COVID assay sales to be approximately $20 million in the second quarter of ‘24 and $60 million for the full year. COVID related items are expected to be slightly less than $30 million in the second quarter, and approximately $105 million for the full year fiscal ‘24.

Moving to Breast health, we continue to expect fiscal ‘24 to showcase strong demand for our portfolio products and services. While moving on it’s important to understand the top dynamics that will impact the Breast business through fiscal ‘24. As previously noted, Q1 ‘23 with a softer comp due to shift supply constraints. As a reminder in Q2 ‘23, we delivered a strong quarter gantry placement to meet pent-up customer demand during these earlier days of chip supply recovery. And deliveries in Q3 and Q4 of ’23 were both lower than Q2. We expect this dynamic to result in a lower Breast health year-over-year growth rate in Q2 that will improve in the back half of fiscal ’24. For the full year, we continue to expect to deliver more gantries in fiscal ‘24 than in ’23 as we move further from the chip supply headwinds, while maintaining excellent demand visibility.

Finally, in Surgical, we anticipate our full year fiscal ‘24 revenue growth to be at the high end of our 5% to 7% long term target. Although impacted by fewer selling days, Q1 started the year strong and we expect the business to perform well in Q2 in the remainder of the fiscal year. Moving next to margins, our guidance assumes a cadence of improvement throughout fiscal ’24 for both gross margin and operating margin. For gross margin, we anticipate Q2 levels similar to Q1 exiting the fiscal year in the low 60s. As well, our guidance assumes Q2 operating margins approaching 30% with the Q4 ‘24 exit rate around 31%. Continuing down the P&L, we expect Q2 operating expenses to step down from Q1. As a reminder, Q1 is typically our highest spend quarter seasonally.

As we kickoff the fiscal year with our internal global sales meetings, and major trade show events such as RSNA. For the balance of the year, we anticipate quarterly operating expenses to be about $300 million to $310 million. Although operating income, we estimate fiscal ‘24 other income net to be an expense of approximately $10 million in Q2 and an expense between $30 million to $50 million for the full year. Our current guidance assumes an increase in interest income relative to our previous guide, as we expect to have a higher cash balance throughout the remainder of the fiscal year. Our guidance is based on an annual effective tax rate of approximately 19.75%. And diluted shares outstanding are expected to be approximately 239 million for the full year.

To conclude Q1 was a strong quarter across each of our businesses and sets us up nicely for the rest of the year. As we close Q1, we move forward to Q2 in fiscal ‘24 with good momentum and as always remain focused on advancing women’s health around the world while delivering on our promises and commitments to our shareholders, employees, customers and patients around the world. With that, we ask the operator to open the call for questions.

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Q&A Session

Operator: [Operator Instructions] We will take our first question from Tejas Savant with Morgan Stanley.

Tejas Savant: Hey, guys, good morning. Sorry. Good evening, and congrats on the solid performance here. Steve, I want to start with the Molecular Diagnostics franchise. I want to ask you a little bit about Aptima there. You’ve talked in the past about the benefits of co-testing the time it will take for physicians to embrace any change. That said, if guidelines move to HPV testing alone, how do you think about the upside on Aptima? And what if any, should be the gating factors to transitioning those volumes? Is there any sort of differences in competitive dynamics for ThinPrep versus the HPV franchise?

Steve MacMillan: I think regardless of what happens with the guidelines, we see co-testing is being well entrenched. And if anything, it’s going to probably get stronger with the approval we just got last night of our digital cytology business, which I think is probably not as fully appreciated. But as we bring that to market, it’s going to dramatically improve the workflow for our customers. It’s going to improve the efficacy it just — it’s probably the biggest improvement step forward in cytology in 40 years. So, we remain very committed and believing incredibly strongly, by the way as a reminder to single collection device that is used both for our Aptima HPV, as well as cytology. So it’s no additional work for the doctor or the patient, and you get the results. So we continue to be very excited. And if anything, probably more excited about our cytology business combined with our HPV business going forward.

Tejas Savant: Got it. That’s helpful. And then Karleen, one for you on margin. So you talked about sort of exiting the [inaudible] at about 31%. Can you just help us parse out the dynamics from the gantry chips for the higher cost coming through the backlog here versus your network optimization plans? What are the relative impacts of those two drivers? And as we look to fiscal ‘25, should we be thinking of that 31% as a good jumping off point off of which you expect to see quarter-over- quarter expansion?

Karleen Oberton: Yes, so let me take it into part two on the gross margin line. The chips in the network optimization efforts are probably about a 50 to 75 point basis headwinds to gross margins. And again, we see have line of sight to that improving over the course of the year, as we mentioned in our prepared remarks on operating expenses. If you looked at just Q1, if you took out the impact of kind of the seasonally high Q1, operating expenses, operating margins would been close to that 30%. So just moving through the year as we see those dynamics of the gross margin. In the normal step down and operating expenses, we see line of sight to extend year 31%. I do think that is a good jumping off point, I think I would caution from significant improvement over the course of ’25 from there, given those are really, as we said, peer leading operating expenses.

And we always want to continue to make sure that we are investing the right amount back into R&D and innovation and see the benefits like we saw last night with the approval of digital cytology.

Operator: We will take our next question from Patrick Donnelly with Citi.

Patrick Donnelly: Hey, guys, how are you? Thanks for taking the question. Steve, maybe one for you on the Diagnostics business. It sounds like the rest of the year going to kind of hang around that 5% to 7% framework inside there. I think one of the reasons for the uptick was improve utilization. Obviously, that utilization piece has been a big focus as we come out of COVID. Now that we’re in a relatively, hopefully relatively stable environment on the testing side without COVID. Can you just talk about utilization metrics that you’re seeing? What gives you guys the confidence on that trajectory? Any metrics will be helpful there.

Steve MacMillan: Yes, sure. Patrick, I think the biggest metric obviously we track over time is just purely revenue. And I think we continue to feel good but the internals on that are, if you go customer by customer, we continue to grow our portfolio with a lot of our customers and not to be overlooked are our largest customers in the US, as they shift from Tigris to Panther, it is opening up additional menu opportunities for them to be adopting things like BV, CV and some of our other products. So we see really good growth with our largest customers in the US, we’re also continuing to see, and what we’re still in the early-ish innings is the international expansion and all those Panthers we placed internationally during COVID, as those are coming online.

And I think what I love about these businesses, frankly, is they bring on one or two assays at a time, they get more experience, and then they bring more. And so it’s not like a one off pop. That frankly might be better in the short term, but the harder to laugh. And so what we really have going on around the world, our customers all over the place, just gradually bringing on either additional assays or as we come out with new menu, being able to build that and that installed base of Panthers that we’re able to just drive more throughput through is what really makes us feel very good about the future.